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The New RFM 
Drilling Down Newsletter # 36: August 2003

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

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Also available online through Amazon and Barnes & Noble
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Prior Newsletters:

In This Issue:

In This Issue:

# Topics Overview

# New RFM Metrics: Take 10 on Retention

# Best of the Best Customer Marketing Links

# Question - New RFM: Snapshot or Movie?

# Question - New RFM: Academics Approve


Topics Overview

Hi again folks, Jim Novo here.  

This month every article and question has to do with the "New RFM" approach being used to evaluate the potential value of customers and visitors to a web site.  RFM is an offline predictive model that is simple to understand and use - and works even better online, with a few modifications.

In 2000 I begged people to track all the way through to conversion to get at ROI.  In 2001 I stumped for tracking of visitor and customer sources to reduce acquisition costs, knowing that source significantly influenced the conversion of a visitor.  Both of these ideas have now become mainstream, and people are really starting to drive down costs and increase the profitability of their web sites.

Am I some kind of a genius or futurist?  No.  I've just been through all this before, and I know what works.  And I'm telling you now the next step is to tag your visitors with their potential value to you over time if you really want to start printing money, and the New RFM is the biggest bang for the buck tool you will find for doing it.

Are we together?  Let's do some Drillin'!

Overview of the New RFM

If you would like to know more about how to use the new RFM metrics to improve your profitability on the web, check out the free "Take 10 on Retention" package I wrote.  It includes a 10 minute presentation on the strategy and reporting behind increasing web customer ROI using simple predictive models.

Here's the idea in a nutshell: when you make investments, you expect the value of them to rise in the future.  You have web investment choices to make - ad design, media, building out content, etc.  Retention metrics tell you which of these investments are the most likely to generate increased profits in the future.

Click here for the Take 10 on Retention

Best Customer Retention Articles

This section usually flags "must read" articles about to move into the paid archives of major trade magazines before the next newsletter is delivered.  I highlight them here so you can catch them free before you would have to pay the fee.  This cycle there were no great articles from these particular magazines, but there were a couple of great articles from other magazines.  So check 'em out!

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.

Long Time Gone
No Expiration   Direct Magazine
This is a really fascinating study on the use of LifeTime Value metrics - apparently, those companies that use LTV are more bullish on the future, report better financial results, and are more likely to increase their marketing budgets in 2004.  Geesh, not a bad crowd to be running with...would you like to join them?

Which customers Are Worth Keeping and Which Aren't?
Managerial Uses of CLV
No Expiration   Knowledge@Wharton
This is a great academic article, and useful from a strategic position.  Show it to your boss or CEO.  And then tell them business is "messy", and rarely conforms to academic ideals, but you have a solution.  Tell them you can use some very simple techniques to accomplish the same objectives, and you can start right away if you can buy one book.

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

Questions from Fellow Drillers
If you don't know what RFM is or how it can be used to drive customer profitability in just about any business, click here.

New RFM:  Snapshots versus movies

Q:  Thanks so much for your reply.  I should have clarified that I am in catalog circulation.  We currently use RFM to segment the file and then roll the RFM cells into more manageable segments (this is a new technique to me, I am new to this company, in my former company we mailed by RFM segment).

A:  Hmm...this sounds like a "dumbing down" approach to it, but hey, if it works, why not.  Sometimes this is done because the customer base is not really large enough to support 125 segments, and the differences between the segments can become unstable and less predictive unless they are aggregated.

Q:  Because we are in a niche market and we saturate it pretty well, I would like to see which customers are on the edge or falling off (the Latency stuff) and which ones we can "reward" for being the best.  I do not think the RFM analysis shows me that amount of detail.

A:  Well, it can, and that is essentially what the Drilling Down book is about.  RFM as it is traditionally used - as a "snapshot" of behavior - is pretty dumb compared to how it can be used.  If you start looking at scores over time, you have a much more robust kind of tool - a "movie" of the Customer LifeCycle.  In this scenario, you aren't as concerned with the score at any one time, but what happens to it over time.  Falling score indicates a move towards defection, rising score is an acceleration in loyalty.

Since you seem to be familiar with this area and are likely to understand this statement, the final part of the book, "Customer Scoring Grids", is where you really see the Customer LifeCycle emerge.  Grids are a combination of Latency and RF(M) that produces a visual "map" of customer retention and defection across your customer database.

Q:  Your explanations about your books were great!  I could have used the E-Metrics one in my last job.

A:  At least you have a job!

Q:  One other question for you.  We operate our computers here at work on a shared network (where we do not have boxes at our desks).  This means that I would not easily be able to load up any software that I could either download or get by disk.  In my mind this simply means that I buy the book for my own personal use and use the customer scoring software at home -- are the "results" I might find easily e-mailable?

A:  Sure, as long as you can e-mail an Access .mdb file, you can mail it to work.  One thing to note, the software produces RF scores, which may or may not be what you want.  They are more "sensitive" than RFM scores when predicting behavioral change, which is really what the book is about.  If you are mailing a catalog, RFM may be more important because of the cost involved.  You might use them together, as in perhaps RFM says you don't mail to a certain segment, but within that segment RF has identified customers who appear to be accelerating and they should be mailed.  You'd have to test it.

Q:  Thanks so much!  I have turned my friend (in the tennis ball machine business) on to you and we have had some great conversations based on your e-mailed chapters!

A:  Well, thanks for that, and have fun Drilling!

If you are in SEO and the client isn't converting the additional visitors you generate, you can help them make it happen - click here.

New RFM: The academics approve

Q:  What do you make of the following article published by The Wharton School of Business?  They seem to be far less confident in the use of RFM and the other techniques you promote.  I'm interested in your take.

Jim's Note: The article is called "Which Customers Are Worth Keeping and Which Ones Arenít?  Managerial Uses of CLV".  Yes, the same one promoted as "must read" above.  If you didn't already read it, click here.

A:  That's interesting, I viewed it as validation and proof my system works from a 3rd party academic source.  In fact, I linked to it with an
explanation on my web site!

The key paragraph is this one:

"simple statistics such as Frequency and Recency can in fact offer valid estimates of future lifetime values, i.e. "that a limited amount of summarized transaction data, when viewed the right way (emphasis mine), can yield CLV forecasts that are just as accurate as those generated from the entire highly-detailed purchase history.  The challenge for practitioners is knowing which summary statistics to use, and how to use them correctly.  "Many common 'rules of thumb' don't lead to very effective managerial policies".

The Drilling Down book explains how to "view it the right way" based on 20 years worth of experience.  The fact people abuse RFM by using it like they did in the 50's ("common rules of thumb") is really not an issue for me; people are forever doing stupid things with customer data.

Fader et all never say "less confident", in fact, they state the opposite.  In an earlier study (1999, I think) based on Amazon and CD Now data they proved the most esoteric part of the Drilling Down method, that is, rate of change is the most accurate predictor of future behavior in interactive environments.  This idea is really beyond the scope of the book but it is hinted at quite a few times in the book and is really what is going on behind "customer scoring grids" / "customer retention mapping", the centerpiece of the Drilling Down method.

Am I misreading your question?  Have you read my book?



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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