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Combating Promotional Proneness
Drilling Down Newsletter #92 9/2008

Drilling Down - Turning Customer
Data into Profits with a Spreadsheet
*************************
Customer Valuation, Retention, Loyalty, Defection

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-------------------------------

Hi Folks, Jim Novo here.

Is your mission to increase Sales or Net Margin dollars this selling season?  Worth getting some clarity on if you're not sure, and if it's Margin dollars you are after, check out the question and answer session with a fellow Driller on "promotion proneness" below.

Over on the blog, we've been trying to solve the problem of under-investment in Online Marketing and Analytics.  Is the current Online Marketing Model broken, and if so, how do we fix it to attract more Marketing investment?

It's that time of year again...on to the Drillin'.

Sample Marketing Productivity Blog Posts
==========================

Onliners Return to Start
August 14, 2008

The current Social movement is simply a lot of people realizing those before them had Interactive wrong from the beginning, and now the next generation is trying to fix that.  Letís hope this generation of Socials doesnít make the same mistakes over again, if by chance they still donít understand why Interactive is different from a Business perspective.

New Online Marketing Model First?
September 30, 2008

I think vast parts of the current Online Marketing Model are broken; we seem to continually Repeat Past Mistakes.  If we made the case for why Online is different than Offline  instead of trying to copy the Offline Models, Marketers would have more reasons to invest in Online.  Perhaps we need to clearly define why Online is different?  How about using the difference between Awareness and Interest?  Will fully recognizing this difference lead to building better Marketing Technology for the web?  Leave me comments.


Questions from Fellow Drillers
=====================

Combating Promotional Proneness

Q:  I really have enjoyed your book.

A:  Thanks for buying it, and for taking the time to tell me you enjoyed it!

Q:  I've created a first draft of a customer retention strategy that outlines proposed offers at various trip wire stages, and based on your order frequency.  So, if you are a one time buyer, and you are 8 weeks over your average buying frequency, you get a certain offer, and this would differ if you were a 4-time buyer, and are just one-week over your average buying Frequency.  As you suggested, the offers increase in value the longer it's been since you've purchased.

A:  So you are segmenting by Frequency and Latency and then using Recency as a trigger.  You must have really learned something from the book, I don't think I ever covered that one specifically!  But it makes a lot of sense to use Latency instead of Recency to segment in a category with a high percentage of consumable products (office supplies), since there is some expectation for re-supply and the purchase rate should be relatively constant for paper, toner, pens, etc.

Q:  But how do you prevent teaching behavior that causes the customer to wait until the better offers come?  These offers would only be sent to people that hit the trip wire (not individuals buying on their own).  How do we not teach a behavior that encourages the customer to wait for the better offer?

A:  Well, this is a very smart question, and shows you really understood the material and customer behavior.  The short answer is many promotions work until they don't, and when they don't work any more, you have to go ahead and test changes to them.

The longer version goes something like this: if by creating a certain "rhythm" to your promotions people start to catch on and change their behavior to match this new rhythm, then you have to change your triggers to account for this new pattern in customer behavior.  The more complex your triggering system, the longer it will take for people to catch on and outwit the system.

If you simply drop the same monthly e-mail offer to all customers on the 14th of the month, they catch on to that pretty quickly, maybe in 2 - 3 months.  This is the biggest problem with calendar-based e-mail promos out there; if people were using control groups they would see how much margin they are leaving on the table by using this approach.  I have a sneaking suspicion using control groups might become a lot more popular if the economy softens going forward...

A scoring system like you have developed should keep them off the trail for 9 months to a year at least, due to the complexity of the trigger.  For example, as people move up into different Frequency bands or change Latency, the offer is going to be triggered differently, so the pattern is more difficult to recognize.

How do you know when targets are catching on?  With control groups.  When you start to see very little or flat sales lift over control, the gig is up.  At first, you may be able to start modifying offers and keep it going for a while.  But then you need to modify your scoring to throw people "off balance" and put a stop to the "rhythm" of the behavior they develop.

Sometimes you can do this with finer segmentation, for example, add another "rule" to the Frequency / Latency / Recency matrix you have that has something to do with category or average order size.  Fortunately for us Drillers, this chase never really ends, and you just keep working it, testing new ideas and finding where the profits lie.  Segment, then sub-segment, then sub-segment again.

Q:  Another quick question is, from an ongoing management perspective, what is the best way to run these campaigns based on the trip wires?  Is it daily?  Weekly?  Monthly?  There are potentially 30 different trip wires (depending on Recency and Frequency), and that's a lot of campaigns to manage moving  forward.  Any suggestions?

A:  By "run the campaigns", are you talking about how often you drop them, or how often you score them?  Either way, the answer probably has to do with the smallest component of time in the scoring algo you have developed.  If the smallest time slice is a week, you need to score and drop weekly - at least for any segment that potentially could be affected by a week passing by.  For example, if you really want to hit the 4-time buyer just one-week over the average Latency, then you have to score and drop every week.  That said, I don't know your business, but I will say in general I think a time slice as small as a week is really pushing it for merchandise sales.  If you have not tested these triggers yet, it would be worth actually studying where peak behavior is.

So for example, with the 4X buyer, do a test drop that hits people who are 1 week over the average Latency, 2 weeks over, 3 weeks over, 4 weeks over, etc. and find out where  the "peak" profitability is.  These peaks will be different for every segment, and regarding the earlier question on promotional proneness, this is where you will see the evidence of people "expecting" a promotion.

If you start to see flat sales versus control, run a test like the one described above (1 week over trigger, 2 weeks over trigger, etc.) and you will probably find the old "peak" profitability is now flat and has moved to a different week - customers are gaming the system.  So then you reset the timing on the triggers to wherever the new peak is.

Great questions, and good luck with the program!  If you have any other questions, just let me know, you're a customer now!

Jim

-------------------------------
If you are a consultant, agency, or software developer with clients needing action-oriented customer intelligence or High ROI Customer
Marketing program designs, click here
-------------------------------

That's it for this month's edition of the Drilling Down newsletter.  If you like the newsletter, please forward it to a friend!  Subscription instructions are top and bottom of this page.

Any comments on the newsletter (it's too long, too short, topic suggestions, etc.) please send them right along to me, along with any other questions on customer Valuation, Retention, Loyalty, and Defection here.

'Til next time, keep Drilling Down!

- Jim Novo

Copyright 2008, The Drilling Down Project by Jim Novo.  All rights reserved.  You are free to use material from this newsletter in whole or in part as long as you include complete credits, including live web site link and e-mail link.  Please tell me where the material will appear. 

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