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Drilling Down Newsletter # 20 -  May 2002 - B2B Software Modeling

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

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Prior Newsletters:

In This Issue:

# Topics Overview

# Best of the Best Customer Marketing Links

# Tracking the Customer LifeCycle: B2B #1

# Questions: Customer Retention Metrics

Topics Overview

Hi again folks, Jim Novo here.

This month we've got the usual "best of" Customer Marketing article links, the first installment of the B2B Software Real World Example, and a fellow Driller looking for some advice on measuring Customer Retention that ends up with a High ROI Marketing program!

Let's do some Drillin'!

Best Customer Retention Articles

This section flags "must read" articles moving into the paid DM News archives before the next newsletter is delivered. If you don't read these articles by the date listed, you will have to pay $25 to DM News to read them from the archives. The URL's are too long for the newsletter, so these links take you to a page with more info on what is in the article and a direct link to the article.

Note to web site visitors: These links may have expired by the time you read this.  You can get these "must read" links e-mailed to you every 2 weeks before they expire by subscribing to the newsletter.

Milk House File to Create Growth
April 18, 2002   DM News
What do you do when 1% of your customers represent 65% of your net profits?  Do you even know what percent of your customers equals 65% of your profits?  Better do what Charles Schwab did, and use RFM to figure it out.  A loyalty program wouldn't hurt either.

Measure Cost Per New Customer for a Stronger Profit
April 19, 2002   DM News
This article is written for catalogers, but onliners should pay heed.  Virtually nobody (except me) ever talks about merchandising on the web.  Learn from the pros - catalogers - and understand how it works.  You can make a dramatic difference in sales per visitor following good merchandising techniques and understanding visitor traffic patterns.  Managing contacts with your e-mail list a little more intelligently wouldn't hurt either. 

Relevant Beats General Every Time
April 19, 2002   DM News
All of the endless talk about the demise of banners and online in general fails to recognize a basic fact - if you make them relevant (targeted), they work.  You can talk about branding all you want to, but if branding is what you are doing, then why make the darn banner ad click-able in the first place?

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 theory is here.  The prior example, Hair Salon, is here:

Latency: The B2B Software Example # 1

A B2B software company has an appealing pitch to business - their software makes a company more efficient and saves more money for the company than the software costs.  The software is modular, with a base application and additional add-ons that are specific to certain business challenges.  The selling strategy is to underprice the base application to get market penetration and them make a higher margin on the add-ons.  The add-ons drive the profitability of the business, as does the installation and customization of these add-ons.

The company has been quite successful with this selling strategy.  But at a point, the CFO notices sales of the base application have risen but revenue from add-ons has not risen in the same proportion.  In other words, the company is further penetrating the market but getting less revenue from each customer.  The CFO thinks:

I can't understand this.  Sales of the base application are rising according to plan but overall company revenue is not growing at the same rate.  The only thing I can think of that would create this particular situation is fewer basic application customers are buying add-ons.  How can I figure out why this is situation is happening? 

The CFO calls the heads of business development and marketing to ask about the situation.  They both report they are aware of slowing add-on unit sales per customer, but cannot attribute it this to anything specific.  The company is simply penetrating the overall market more deeply they say, and as we penetrate further and further, add-on sales seem to have slowed.

The CFO is not particularly satisfied with this answer, and thinks: 

If it shows up in my financial statements, it has to be measurable.  I'm just seeing this from too high a view.  All the sales of the different base applications and add-ons roll up to total sales, so the data I need to better understand this must be somewhere. 

The CFO picks up the phone to call the CIO, and then hesitates.  The IT people are going to want to know specifically what I am looking for, the CFO thinks.  Do I really know? 

Jim says:

What is needed here, fellow Drillers, is quantification, some framework for analyzing the situation.  What is the real question to be answered here?  The CFO knows IT has limited resources to apply to this kind of ad hoc work - if the request just generates information that leads to another question, precious time and resources are wasted. 

The CFO could ask for monthly product sales percentage by type over the past year.  In a lot of ways, this information would simply confirm what the CFO already knows - sales of add-ons have gone soft.  But does it answer  the core question of *why* they have gone soft?  That is the real question at hand.  It does not.  Customers do in fact have different LifeCycles to them:

so any monthly sales data will contain customers in various stages of being likely to buy an add-on.  Raw monthly financial data - the kind the CFO is used to working with - is not going to answer the "real" question.  

The CFO thinks:

Customers buy the base package and once they get it integrated and tuned up they start to buy the add-ons.  During any one-month period, we have customers who just bought the base package, customers who are in different stages of integration, and customers who are buying add-ons.  What I really need to know then is this: what is the average number of weeks between the purchase of add-ons, this year versus last year?  If this number of weeks is rising, that is where the softness in add-on sales is coming from - customers are simply taking longer to make the purchase decision.  If this number of weeks is constant or falling, something else must be going on.

With a more concise definition of the answer required in hand, the CFO picks up the phone and calls the CIO. 

Does the data exisit to do the required analysis?  Are there staffers who can run the query?  Will the CIO tell the CFO that since the CFO cut staff, there is nobody left to run the query, and the CFO needs to hire people to run ad hoc queries?  Next month, we'll check back with the CFO of the B2B software company and find out how the call with the CIO goes.

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 by scheduling a workshop

You can read the 2nd installment of the
B2B Software Example by clicking here.

Questions from Fellow Drillers
Q: Hi Jim,

I am here choosing all the metrics I will use in the coming days to evaluate the health of my business and learn a little bit more about it.  I will begin analyzing some basic metrics and then (just after being completely comfortable with the "basic metrics" I will do some more sophisticated analyses like LTV and RF Grids. (Jim's Note: RF Grids are advanced customer LifeCycle tracking tools described in my book).

Now I am trying to decide which is the best metric to measure my site's ability to retain customers.  There are three metrics that come to my mind. Customer Retention Rate, Customer Churn Rate and Hurdle Rate.

Customer Retention Rate would be the easiest to measure but the least precise. I could be doing a great job retaining customers but if I am attracting a lot of new customers this metric could give the wrong impression that we are doing more poorly than the last time we measured.

Customer Churn Rate is very easy to calculate when you have a "subscription model business".  If the customer cancels the contract it means a defection.  But in my case there is no contact.  We sell products.  If the customer does not purchase in 30 days it doesn't mean necessarily that he defected. 

The Hurdle Rate based on Recency (45 days for purchase seems to be a good number for the products we sell- natural supplements, based in Brazil) seems to be the best metric I can choose to measure our ability to retain customers over time.

What metric do you think I should be using to measure our ability to retain customers?

A: I think you are one of the smartest IT guys on the subject of database marketing that does not do database marketing for a living I have ever met (?) ! Where did you learn this stuff?  Did you read a book or something? ;)

Your analysis is absolutely correct on every point, and the approach is on target.  If you start simple and work towards more complexity, you will learn more about your customers.  And assuming most of your products are roughly a 30 day supply, 45 days is an excellent cut-off for a Hurdle Rate analysis.  Simply track the percentage of customers who have made a purchase in the past 45 days over time, perhaps monthly to start.  If the percentage is rising, you are getting better at retaining customers.  If it is falling, you should be looking for reasons why this is so.

Once you establish this metric, the second "cut" I would take is by product.  What percentage of customers have made a purchase in the past 45 days - by product category or product line?  This will be very revealing to you, and will suggest which products you should put the most marketing effort into and which products perhaps you stock but don't "market".  For example, all other considerations equal, the product you should feature on the home page is probably the one which has the highest 45 day repeat purchase percentage.

By including this tracking by product, when your overall percentage of 45 day buyers drops or rises, you can tell why.  For example, if you sell a lot of products in one month that have a low 45 day repeat percentage, in the following month, you can expect your overall 45 day repurchase rate to drop, which means sales will drop. 

With a system like this, you are now into forecasting sales, and can do the appropriate promotions to make sure you hit sales targets.  For example, you promote products with high 45 day repeat in the following month to counteract a lot of sales in products with low 45 day repeat prior month.

You may find that when setting up to track the overall Hurdle Rate, it's easy or convenient to do this same tracking by product category or line, depending on how your systems are organized.  If so, it might be worth the extra effort, because it can be frustrating to see the 45 day percent buyers drop, but to not have any idea why.

Q: Setting Hurdle Rates for each product and product category is an excellent idea.  If we notice that the "muscle mass" category has a higher Hurdle Rate than the "fat loss" category we would advertise the muscle mass category more that "fat loss"?

A: Absolutely.  Now you have both the response rate to ads *and* the longer term Hurdle metric to help you decide where you are really making the most money.  Make sure you keep track of the source of the customer on first purchase, because the next level down is looking at Hurdle Rate by product category by ad source.  You will find different ads generate different Hurdle rates for the same products.

Q: Before this idea my partners and I were always "arguing" which products should be advertised on the index page and the main category pages.  Now we will have a scientific approach to choose the products!

A: Yes, no question. When you start to operate the business using these kinds of measurements you can spend more time on running the business to make the most money and less time arguing about "feelings" people have about products or design changes.

Q: This metric is so important that I will ask my programmers to create an automatic Hurdle Rate for each product and category so I will not have to analyze the database every time I need this information (I will need this information very frequently).  For most of the other information I will analyze them using a spreadsheet (like it's explained in your book).  I will copy the SQL tables and paste them into the spreadsheet.  I did some tests and it worked just fine.

A: Yes, these are longer term ideas that don't need to be visited as often.  And when you execute promotions based on them, you will see your other, more short-term Hurdle metrics move, allowing you to measure the success of the promotion by category, for example.  You would see the 45 day Hurdle percentages jump, say from 30% to 40%, but there would be a wide variation among categories.  This in itself tells you which categories are most profitable to promote to.

Q: Thanks a lot for your great advice...

A: No problem - you're a customer!


If you are a consultant, agency, or software developer with clients needing action-oriented customer modeling or High ROI Customer Marketing program designs, click here.  If you are in SEO and the client isn't converting the additional visitors you generate, 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 - why don't you do this now while you are thinking of it? Subscription instructions are at the top and bottom of the newsletter for their convenience when subscribing.

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 right here.

'Til next time, keep Drilling Down!

- Jim Novo

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