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Marketing into a Downturn
Drilling Down Newsletter #85 12/2007

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

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Prior Newsletters:

Hi Folks, Jim Novo here.

Will the US economy go into Recession?  Is it there already?  If we're headed into a slowdown, how should Marketing Strategy and Tactics change?  That's the question a fellow Driller has asked, and as a veteran of a few of these slowdowns, I provide some guidance from the customer marketing perspective.

CIO's seem to be having some of the same problems CMO's are with getting a seat at the strategic table, and this month's marketing  article addresses what they are doing about it.  Plus, we have a blog series on control groups, the gold standard of customer marketing campaign measurement techniques.

Best Marketing Productivity Articles

Step Up or Step Back

There seems to be a lot parallels between what is going on with CIO’s and CMO’s; both are looking for a seat at the strategic table. And both need to become more business oriented to do it.  I think “business oriented” here is probably just a code word for “more accountable for what you contribute”.  In the case of CMO’s, this includes reaching out into the operational side of the business and finding out how operations affects the success of Marketing - the same task facing CIO's.

To access these and other reviews of recent articles on Marketing Productivity with links to the original articles click here.

Sample Marketing Productivity Blog Post

Control Group Series
December, 2007

Seems like there is a lot of confusion around what control groups are and why you should care about them, and I’m hoping this post helps to clear some of that up!  But before I lose you in the details, here is why you should care about this topic: If you are not using controls, then your customer campaign results are always suspect...Read Posts

Questions from Fellow Drillers

Marketing into a Downturn

Q:  I have been asked to create a whitepaper on marketing strategy and tactics for a down or recessionary market.  In your studies and travels have you come across literature or have thoughts of your own that I may quote?

A:  Well, I suppose someone has written something about it somewhere.  The trades write about it for every downturn!  But I don't know of any primary work on the topic - case studies, research, etc.

I do know that when we get into a down / recessionary market my phone rings more and I work a lot harder.  The "new client" customer retention business is counter-cyclical; people always wake up during the soft times and say,  "Hey, if we can't drive new customer volume, maybe we can sell more to existing customers!".  

You know, the CEO or somebody read that somewhere...

The problem with this kind of thinking is, in most cases, it's already too late to do anything about customer retention.  That's not something people generally want to hear.  I then say, "The economy is cyclical.  Do you want to be prepared for the next downturn?"

The people who answer yes to that question will often become clients; those looking for the "quick fix" generally won't become clients - but they call again into the next downturn...

It's a strategy thing, you know?  Long term thinking?  But I digress...

The insidious thing about customer defection is that it's always there, eroding the asset base, wasting away the hard work.  But people don't see it until the flow of new customers shrinks, and then all of a sudden, the defection issue is laid bare.  This is why the retention business is so counter-cyclical; why "discovery" comes in  the downturns.

What you normally find is whatever business change / policy / product is causing customer defection, it takes as long to build up the customer asset again as it did to destroy it. Here is a real-world example.

A retailer makes a significant change in the types of products it sells, because it wants to "attract more new customers".  For existing customers, revenue per customer starts to fall.  This fact is masked on the revenue side by the attraction of new customers to the new products - for a while.  But it ends up these new customers, in terms of revenue per customer, have a value about 30% less than the old customers.  

So even though new customer adds remain consistent, sales start to drop, and over time drop by 30% as old customers defect and are replaced by the new  customers worth 30% less.

Two years into this process, a downturn in the economy causes more attention and analysis of the customer base, and this issue is exposed.  Surprise!  The newer kind of customers defect at a higher rate and in a shorter time than the old type of customers.

New management is brought in, and they decide to go back to selling more of the "older" product to attract the higher value customer.  Once they make the switch, it takes just as long for sales to get back to where they were as it did to create this problem in the first place - 2 years.

And that's why it is so tough to deliver a "quick fix" to these kinds of problems.  They are systemic in nature and because you are talking about the value of a customer over time, take time to fix.

So, it may well be that your advice should ultimately be "use this downturn to prepare for the next one", if you know what I mean.  Investigate, learn, and understand what happens this time, so you know what to do next time.  In terms of action items, a few:

1. Analyze the customer base, to understand the source of customer value.  Who are the best customers, where do they come from? Which media, sales persons, product lines, services, geographies, etc. create the "best  customers" for the business?

2. Analyze these best customers, and understand their behavior.  What would be a warning sign that these best customers - who are probably responsible for the lion's share of your profits - are cracking into the downturn?  Slowdown in orders per month, average order size, number of contracts, whatever the right metrics are in the business.

3. Track a handful of these customer metrics and see how they change as the economy slows.  These metrics will be a map for predicting actual trouble the next time - predicting trouble even before everyone is already talking about "a downturn".  This gives you the extraordinary advantage of lead time over your competition in reacting to the downturn in business.

4. Complete the same 3 steps above for medium value customers and low value customers, if you have the resources.

5. Now, fully understanding what you have to work with (perhaps for the 1st time?), what is the strategy for a downturn?  Generally, it would consist of a reallocation of resources away from lower productivity to higher productivity activity, in order of importance:

a. For best customers, how do we keep them?
b. For mid value customers, how do we grow them?
c. For low value customers, how do we reduce costs?

What a lot of folks don't understand is there is almost always a truly remarkable difference between these customer groups, and any "one size fits all" edict or direction is bound to screw up the business,  just like the example of the "new customer" effort from the retailer above.

For example, we know that marketing spend generally softens in a downturn.  Companies cut back on marketing because they feel like they are "pushing on a string".  They cancel or don't buy advertising, they fire salespeople.  This is the wrong move.  The old saw about buying more marketing into a downturn to "grab share" can also be the wrong move, though it has some "accidental" positive effects.  The company should invest in more marketing, but not across the board.  They should buy the right marketing, the marketing that generates the best quality customers.

They should reallocate marketing resources away from generating "c" customers towards generating "a" customers.  If you know trade shows generate leads which turn into "a " customers and online ads generate leads that turn into "c" customers, you take the money you spend online and book more trade shows.  You let go of salespeople that generate "c" customers and use that salary to bonus salespeople generating "a" customers.

Of course, this analysis and planning is an exercise that should be done all the time, not just into a downturn.  A business should always be trying to understand where customer value comes from and how it is created.  But unfortunately, this issue most often comes up going into a downturn.

You'll have to excuse me now, I have to get the phone, it's ringing again...

Let me know if you have any questions!


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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 2007, 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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