Techniques - Determining the Potential for
Marketing ROI Before You Buy
First Published 2/28/01
If you're looking to
measure ROI on an existing CRM project, see this
CRM can generate increased profitability
for your business in two ways:
1. Reducing costs, usually in the call
center or distribution system (operational CRM)
2. Increasing customer value (LifeTime
Value) through marketing
to determine in advance whether your "marketing side" CRM
initiative has the potential to increase the value of your
through this process will also help identify any special needs
you may have to consider when choosing a CRM package, and serve to
educate participants in some core issues with customer valuation. If you don't have a background in
Relationship Marketing or Customer
Retention techniques, you might take this
site's concept tour and then
return to read this article.
You can use the following methods
"pre-CRM" to estimate the potential for the marketing
side ROI of CRM investment, or use them to prove plain old
database marketing will be as effective as the marketing / analytical
side of CRM when trying to increase customer value.
If you have already implemented CRM and are looking for a way to
measure the ROI of the implementation from the customer marketing
side, see the "how to" details in this article.
There's a lot of CRM commentary about having a
"relationship" with your customers. Personally, I
think it's a bit of a stretch.. How many companies do you want to have a
"relationship" with? CRM shouldn't mean playing
"kissy-face" with customers. You're in business to
make money, not to fawn over customers. You have to provide
good service, of course - that's a minimum requirement.
The fact is, many high-end CRM
packages rely on existing database marketing techniques used for
decades, but the techniques themselves have been lost in the
CRM shuffle. You can easily use these same proven techniques to
model your likely success with analytical CRM before you buy.
Marketing, the foundation strategy behind one-to-one and CRM, never talks about having a relationship with the
customer, it's about having a dialog
This dialog is not a speaking conversation,
it's about understanding the customer LifeCycle
and responding proactively to it. The LifeCycle is defined by the
customer's behavior from the first day of business with you until they
stop doing business with you. It's the LifeCycle of the customer
that determines LifeTime Value. The concept of
LifeTime Value without the LifeCycle is meaningless; if you don't know
what the LifeCycle is, how do you determine the "LifeTime" to
calculate a "Value" for?
You can increase LifeTime Value by
affecting the LifeCycle,
in one of two ways:
1. Extend the LifeCycle, creating
more time for the customer to increase in
value. This is usually accomplished by concentrating acquisition
efforts on long LifeCycle customers.
2. Increase average
value within the existing LifeCycle. This is usually
accomplished by knowing when customers are most likely to engage in
revenue-generating activities with you, and taking action to get the
The implementation of
"anti-defection" campaigns can be used to address both of the
above issues. The following tests should give you a good idea if you
have the kind of customer base that will respond in a profitable
way to these techniques for increasing customer value.
Requirements of Tests
You need a customer database, with all
possible transactions with the customer included in it. If you're
multi-channel and have data in different databases, it would be best to
combine the data at the customer level. If this isn't practical, do
the following tests on each database separately.
You need an analytical tool, a software
program you can use to query the database and produce reports (and someone
who knows how to use it). And you need a little bit of marketing
money to do a test e-mail or direct mail promotion.
The first, customer acquisition, addresses
your ability to extend the LifeCycle. The second, Customer
Retention, addresses your capability to increase average customer value
during the LifeCycle and the potential effectiveness of anti-defection
campaigns. Combined, they should give you a good idea if CRM (or
database marketing without CRM) will work in a profitable way for you.
1. Customer Acquisition - Pick
a start date, say one year ago, and calculate each customer's value
from then until the present (you could use gross sales as a proxy
for value in this case).
customers by value. Look at the top 10% best (most
profitable) customers, and the bottom 10% worst (least profitable)
customers. Other than the profit variable, are they different?
Are they from different places, were they acquired by different methods
using different offers, do they tend to buy certain products? If you
can find any significant differences between your best and worst
customers, you have a shot at improving customer retention (increasing
LifeTime Value) by fine-tuning customer acquisition methods to acquire
highest value customers..
The idea here is twofold: If you can
identify high and low value customers by some data element, you can spend
more money on acquiring high value customers, and automatically target
follow-up programs to "fix" low value customers. If you
have the data, look closely at elements of the first transaction (product,
media, price, offer); the first experience of a customer heavily
influences the LifeCycle / LifeTime Value.
2. Customer Retention - Pick the
highest value generating activity in the database. It's probably
product sales, but it could be page views or other ideas. Sort your
customers by their last date of this activity. Label the top 20% (those
who engaged in the activity most Recently) of customers 5, the
next 20% 4, and so on, so the bottom 20% is labeled 1. Take an equal
sized sample of people from each 20% group. Send them a promotion
with broad appeal; don't be overly restrictive in your offer. You
don't have to give away the store, just make sure the offer isn't
"targeted" to any particular group. For commerce, this
offer might be "10% off anything in the store". For
content, it might be a free day of access to normally paid content as a
When you look at response
rates to the promotion by the "scores" 5 down to 1, they
should appear similar to the following:
You won't see these numbers specifically,
but the pattern should be evident. The customers who are
"5" should have a response rate anywhere from 5 to 40 times
higher than the customers labeled "1", and response should
noticeably decrease at each level.
If you see this pattern, CRM marketing
techniques, or what we used to call "Relationship Marketing",
will be able to increase the average value of a customer within the
existing LifeCycle. This kind of response pattern also indicates
anti-defection campaigns will be a profitable way to both extend the
LifeCycle and increase customer value within the existing LifeCycle.
The next test would be to try and manage customer value -
to make money by creating very high ROI customer marketing
campaigns and site designs. If you can make money with simple
database marketing techniques, you will have "proof of CRM
ROI" and will be able to estimate your return on the CRM
The Drilling Down book
describes step by step how to do this. You will learn how to create
future value and likelihood
to respond scores for each customer, and how to
use these scores to continuously increase the value of your customer
base. Or I can do it all for you.
What would you like to do now?
the book with Free customer scoring software at:
Out Specifically What is in the Book
Marketing Models and Metrics (site article