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Drilling Down Newsletter # 16 - January 2002

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

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Now also available online through
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Prior Newsletters:

Drilling Down Newsletter # 16 -  December 2002

In this issue:
# Topics Overview

# A Short 2002 "Predictive" Rant

# New Site Design - sort of

# Best of the Best Customer Marketing Article Links

# Tracking the Customer LifeCycle: Real World Examples

# Questions from Fellow Drillers
Hi again folks, Jim Novo here.  A meaty (but not too long) issue to kick off the year.  Some very quick bits on the year ahead, improved navigation (I hope) at the site, and the usual sifting out of the best recent Customer Marketing article links.  Then we press on with the Latency topic, and take a question from a Driller on using simple Recency / Frequency behavior scoring in a services business.

Let's do some Drillin'!

A Short 2002 "Predictive" Rant

Welcome to 2002 - the "year of analytics", or so it's beginning to look like.  I have been force-fed so much "now that you have the data, you need to analyze it" stuff coming out of the trades, the research houses, and the consulting groups I'm choking on it.  

I have just one comment: duh.

Want an honest admission?  In the CRM beginning (1997? some would say 1995, if you include SFA), I always thought CRM was about the analytics.  I mean, they were included, integrated, and so forth.  How else could one be customer-centric?  Looks like I was wrong, as a mad scramble has begun to buy analytic packages, integrate them, and so forth.  Got data?  Get analytics.  That's the ticket.  Oh yeah.

But as you folks know, you can do some very meaningful, quite useful, action-oriented analytics with nothing more than a spreadsheet, a good report writer, or a little custom code.  We'll see if that approach gets any traction this year, as opposed to shelling out yet even more money for an "analytics package".

My advice?  Figure out what you really need first, by just doing some simple behavioral modeling.  You may find out it is really all you need.  And if you would like some help, Do-IT-Yourself types need only to check out this book.  Those needing more than a "How To" book - let me do it all for you.

Let's be careful out there!

New Site Design - sort of

Those of you who have been around here for a while know I love to get into the log files and look at traffic - who are they, what are they doing, what value do they have, and so forth.  (If you missed them, check the articles on Visitor Conversion, the Engagement Calculator, or the Value of Paid versus Free Search Visitors).

The short point I wanted to make here is this: based on testing I did for about 3 months last year, I changed the navigation on my site.  I immediately got a 30% drop in one page visits and books sold per visitor doubled.  I have a feeling (and I know anecdotally from direct contact with you) that the original navigation was really "hiding" a lot of material on the site.  The new "nav box" as I call it opens the content up wide, and really showcases the tremendous number of free resources on High ROI Customer Marketing available there.  And you heavy users (you know who you are) - tell me what you think of the "nav box" - it's not hard to miss.  Of course, that's the point, isn't it?  Mea culpa, Double Duh on me.

Best of the Best Customer Retention Articles

Let me just take a minute here in the first newsletter of the year to describe what this section is about.  There is an offline database and direct marketing trade mag called DM News.  They publish a ton of case studies with lots of metrics on the topics we discuss every month in the newsletter.

When DM News puts these articles on the web, they set them up so they "expire" and move into a paid archive after 30 days.  This section of the newsletter, and the very short "Article Links Update" that goes out between the monthly newsletters, serves as a reminder that certain "must read" articles are about to expire and move into the paid archives.  This gives you one last chance to read them and copy out any stuff you need at no cost.

As happens every year, publishers go to sleep during December and don't publish much of the "good stuff" because they know people are not paying attention.  So there are no "expiring articles" to point out to you in this newsletter. 

All is not lost, however.  A slew of great stuff on other sites has come out the past couple of weeks.  You will find these links on my "Fresh Articles" page with quality rankings and a brief (frequently sarcastic, sometimes joyous) overview of each.  I sift out the best stuff (case studies, metrics) from all over the web and post links to it on this page two or three times a week.  So on this round, just check out the Fresh Articles page.

I don't think you will be disappointed.  We'll start up the "expiring articles thing on the next cycle - if DM News puts up anything worth reading, that is.  I'm sure they will.  They always do. 

Tracking the Customer LifeCycle: Real World Examples

Note:  If you are new to our group and want to know more about the following ongoing discussion, the background is here.

Recall, you folks voted to continue the series on Latency. Gluttons for punishment, I tell ya.  Latency is a metric you can use to harness the power in these two fundamental rules of High ROI Customer Marketing:

1.  Don't spend until you have to
2.  When you spend, spend at the point of
     maximum impact

We finished off the first run at Latency with considerable complexity; I'd like to step back now and provide some examples of how all this works in the real world.  I think this approach will help cement some of the concepts and provide a platform for going forward.  It always does when I do speaking work, so I don't see why it would not work here in the newsletter. 

There are three main activities in a successful High ROI Customer Marketing program: Measure, Manage, and Maximize.  We'll tackle each of these components one at a time in the Real World Examples I present.  

First up: Tale of Two Hair Salons - Measure

Two hair salons operate in the same town, Salon A and Salon B.  Both are equally competent, one person operations and charge similar prices for similar services and products.  And both salons practice CRM.

There is a difference though - Salon A does not use customer data to track and manage the CRM effort, but Salon B does.  Salon B's CRM toolset consists of a paper appointment book and a PC with a spreadsheet program.  Salon A has only a paper appointment book, and can't really track anything about customers. 

One day the owner of Salon A is thinking:

Where has Mary Lou been?  She's a high value customer who comes in to get the whole job done - hair, nails, massage, the works.  Seems to me she hasn't been in the Salon for a while.  She's tardy in scheduling her session.  I should call her and find out when she is coming in.

The owner of Salon A is practicing CRM.  High value customers have been identified, and a change in the behavior of one of these customers has been detected.  This situation has been evaluated, and an action to take has been decided on. 

But the owner of Salon A is very busy that day, and forgets to call Mary Lou.  What's more, the owner has no system for classifying the fact Mary Lou has not been in "for a while".  How long is a while? Part of why the owner forgets to call Mary Lou is there is no real urgency, she's just "tardy".  But how tardy is tardy?  When should the call be made?  If there was a rule about "tardy", perhaps there would be more urgency to make the call.  But there isn't, so it may seem like a waste of time.  The owner thinks later on: 

She'll come in sometime soon.  I'm too tired to make the call tonight.

As we sit here gazing into Salon A, some other thoughts probably come to mind.  How many Mary Lou customers are there?  And how "tardy" will they get before the owner calls them?  When you are making money cutting hair all day, it's probably hard to face calling Mary Lou customers, right?

Time spent on the phone calling customers or sending them postcards is time not spent cutting hair, and the owner of Salon A can't afford to not cut hair.  If the owner had only the time or energy to call just three Mary Lou customers, which three would it be? 

If the owner has to give up time cutting hair to make calls, these calls better result in more business than was lost by not cutting hair to make calls.  This potentially negative outcome is called "opportunity cost".  If resources are allocated away from an income producing activity towards another activity, you better make sure these resources create more value than they did before re-allocation.  If they do not, an opportunity cost has been created.  The two fundamental rules of High ROI Customer Marketing are designed to avoid these opportunity costs: 

1.  Don't spend until you have to
2.  When you spend, spend at the point of
     maximum impact

Over at Salon B, the owner has been thinking along the same lines as the owner of Salon A, about a High Value, tardy customer named Angela.  The owner thinks:

How many Angela customers do I have?  If I keep forgetting to call my Angela customers, I may eventually lose them.  But they always come back.  Or do they?  I'm going to start Measuring Angela customers.  I'm going to start tracking "tardy" customers and find out exactly what this issue is about.  If it's a real issue, I'll worry about it then.  If it's not an issue, I can forget about it once and for all, and spend my time cutting hair.

So the owner of Salon B sits down with the paper appointment book, looks through the customer names, and enters all the "High Value" customer names into the spreadsheet, one to a line.  The owner reasons the choice to track high value customers in this way:

If there is anything to this "tardy Angela" customer thing, I get hurt the most financially by losing High Value customers.  If it's ever going to be worth spending time on this instead of cutting hair, if I am going to divert my resources away from cutting hair, then it will be most worth it with high value customers.  If it's not worth it for them, it won't be worth it for any customers and I can forget all about the whole thing.

Once the high value customers are entered into a spreadsheet (about 20% of the customers are considered high value), the owner of Salon B then enters the all the appointment dates for each high value customer into the columns of the spreadsheet, next to each name.  To keep this project manageable, the owner decides to enter only appointments for High Value customers for the past 6 months. 

The owner also creates columns to subtract the dates from each other for each customer and find the average number of days between visits for each customer.  The spreadsheet (nothing special, off the shelf software) is smart enough to know these entries are dates and is able to easily subtract them and convert the result into days, so all these calculations are easy and take less than an hour to create. 

The owner of Salon B is then astonished to discover these customer facts:

A significant number of high value customers have not had an appointment in 6 months, about 20% of them.

The average number of days between appointments is very similar across all the high value customers.  It is, however, not the 30 days the owner expected, but 40 days.

The owner then assumes a high value, supposedly loyal customer who has not been to the salon in over 6 months is a lost customer - at least for the near future.  The owner then calculates the value of the lost business for the 6 month period by multiplying the number of customers lost by the average sale of $150 per trip.  Needless to say, the resulting number is a very big one, representing many days of total sales for Salon B.  The owner of Salon B then thinks:

I must be crazy for not looking at this before.  I would make more money by not cutting hair for a couple of hours a week if I could get back even one of these high value customers.  I'm going to do something about this right away - before I lose even more high value customers.  Now that I have Measured this effect and know how much money it is costing me to not address the tardy Angela customers, I need to Manage the process somehow.  How can I set up some kind of "system" that will help me figure out what to do with this data I have discovered?  How can I turn the data into an action plan

Next month, we'll check back in with the owners of Salon A and Salon B and see what happens.  Will the owner of Salon A ever Measure?  Will the owner of Salon B figure out how to Manage?  Only the data knows...

Go to Part 2 of the Hair Salon Example

I can teach you and your staff the basics of high ROI customer marketing using your business model and customer data, and without using a lot of fancy software.  Not ready for the expense and resource drain of CRM?  Get CRM benefits using existing resources with Simple CRM. -------------------------------

Questions from Fellow Drillers

Q:   Hi Jim, Happy New Year!!
A:   And to you as well!

Q: I stumbled across your Web site some time ago and have been a regular visitor since.  I receive your regular emails and find your information very useful.  You will be pleased to know that I purchased your book (Drilling Down) just before Christmas and have just finished going through it.  It all sounds so easy!  Your explanations and examples were wonderful and easy to understand. 

A:   Well, thanks for the kind words.  Would you mind if I used the paragraph above as a testimonial on my web site

Q: Now I will attempt to put it all into practice for two businesses - a Natural Healing Centre (massage, natural medicine etc.), and an Accounting practice. 

A: The healing centre is a pretty straight-up situation; should work very well for them just as described in the book.  The accountant, as a service business with a built-in "forced" cycle (the tax year), a little more complex.  More on this below.

Q:   I have 2 questions though, if I can.

A: Sure!  The two questions below are related, so I will answer them as one.  Only one to a customer!  Just kidding...

Q1: Neither business has a Web Site, so a visit to the workplace, usually means a purchase.  I was intending to have R = last visit, and F = visits over past 12 months.  Will this work?

Q2:   Should I put a timeframe on F?  The way I see it, if I don't, F will continue to grow for each customer as long as they are a customer.  Whereas if I put a timeframe it will give a better picture of behaviour patterns.

A: The RF behavior scoring model described in the book was developed offline first, so yes, it works very well offline using visits to a store, or deposits at a bank, or for that matter, to predict the likelihood of someone to commit a crime!  The likelihood of any human behavior to occur again can be predicted by past Recency and Frequency.  The very first studies of this effect: it was used to predict the likelihood of a man to stand when a woman entered the room!  And it worked.  Goes all the way back to Pavlov and those drooling dogs of his.

Putting a time frame on F is a more advanced application of the RF idea; usually you would only do this after you proved to yourself that customers who have not visited in over a year were not worth scoring.  This may very well be the case for many businesses.  It will indeed give you a more focused picture of behavior but may also eliminate desirable data on customers with last visit > 12 months. 

Remember, the RF scheme is a ranking, comparing customers to each other.  So even though the raw number of visits (F) continues to grow as long as they are a customer, the ranking will always be a 5, 4, 3, 2, or 1 as you are comparing customers to each other.  The customer with the very most visits, even if there are 1000's, will have a rank of 5, and the customer with the least visits will have a rank of 1, no matter how long a time period you are measuring This is the benefit of using a "relative" rather than "absolute" system; it "self-adjusts" to any kind of business because it's based on comparing customers to each other , not to fixed external benchmarks.

So bottom line - if it was me, I'd score all of them first, then score just past 12 months, and test your marketing to see if you get a better result with one or the other.  Unless of course you are already sure (and you may be) that customers who have not been customers for over a year are not worth marketing to.  As I said, for many businesses, this is true.

Now, with the accounting business, you have "interference" in terms of behavior.  Very strong external forces - the tax year, monthly financial statements - dramatically impact customer behavior.  I don't know what kind of business it is (are customers businesses or consumers?  do they engage in non-year end tax business?) but you have to consider these forces when looking to predict behavior.

A specialized version of Recency - called Latency - is often more appropriate in an environment where there are powerful external forces like mandated cycles.  Latency is about "how long it has been", usually relative to a fixed date or fixed length of time. 

For example, if someone has their year-end taxes done every year for 5 years in February and always makes an appointment by February 15th, and then the next year has not called by February 25th, the customer in "Latent" or their Latency has exceeded the norm for the customer.  This tardiness is a signal something may be wrong, and the customer is in fact lost.

Can you see how Latency is more important than Recency for this business?  So what if you have a bunch of customers who are Latent (and probably in danger of defection), which ones would you concentrate on?  The most valuable ones, the high "F" customers probably.  So you can set up an "LF" rather than "RF" type score and still rank customers by how Latent and how Frequent they are.  The more Latent they are, the less likely they are to respond or be "recaptured" by any marketing effort.

It is much easier to ring up the guy in the above example on Feb 25th and perhaps get the business before he defects than it is to ring him up a month (or a year!) later and ask for the business - he has probably already switched accountants, right? 

If you haven't seen these articles on the site, more on behavioral  scoring in a service biz:  Utilities, Telecom, Insurance - Behavioral and LifeCycle Profiling in Service Businesses

More on Latency (this was covered in the newsletter, but here it is "all together" for ease of reading):  
Trip Wire Marketing - Tracking Behavioral Change

Hope the above answered your question!  Make sure to let me know if I can use your words above as a testimonial on my web site (Jim's note: she did).  Any more questions, feel free to ask.


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.

If you're in a tight spot on a customer marketing program or CRM initiative (it just doesn't pay out / can't prove it makes money) and need some help making it profitable, check out my project-oriented services

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

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