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Making Money with the Customer LifeCycle:  Customer Latency

First published 8/22/01

Jim's Intro: Latency is one of the very simplest to implement "trip wire" metrics, and you can use it to make more money marketing to customers whether you are using a CRM suite or a spreadsheet to run your business.  This article is Part Two in a series of articles on Behavioral Marketing techniques.

Part 1: Trip Wire Marketing
Part 3: Latency Profiles
Part 4: High ROI Latency Promotion
Part 5: Extending the LifeCycle


Based on a national survey, 50% of marketing managers do not know their customer defection rate, and the other 50% underestimate the true defection rate.  After reading this shocking statistic, I figured it was time to do a series on customer LifeCycles, which can be used both to track customer defection and define high ROI opportunities to retain customers before they defect.

If you understand the customer LifeCycle, you can predict the primary defection points and react to them before customers leave you.  This is the highest ROI marketing you can possibly do; it's cheaper than win-back (after the customer defects, response is much lower) and preserves the investment and profits you have in the customer. 

So we're going to take a little tour through LifeCycle-based marketing land in this article, and take a look at one of the simplest customer LifeCycle metrics - Latency.  

At the core of a LifeCycle-based marketing approach is (shocker) customer behavior.  Customers tend to behave in certain ways unique to your business and products, and if you can discover these patterns, you can use them to predict customer behavior.  If you can predict customer behavior, you can make a ton of money marketing to your customers, because you can anticipate their behavior and take appropriate steps to try and modify it. 

Many approaches to customer marketing rely on customer behavior "trip wires."  For example, a win-back program is triggered when the customer defects.  Have you switched long distance or cellular providers lately?  Did you get inundated with win-back calls begging you to reconsider?  "Jim, we just wanted you to know we have lowered our rates."  Yea, well, thanks for telling me after over-charging me for the past six months.  But could they have known I was about to switch?

Sure.  If they had looked at the calling patterns of defected customers like me, they would have seen a common thread in the behavior.  These patterns create the "trip wires" for initiating high ROI marketing campaigns before the defection.  The proper profit maximizing approach is to wait until I look like I'm going to defect, and then call me and offer a lower rate before I defect.

I would humbly submit marketing to the customer after they defect is a sub-optimal approach; the decision has already been made.  If you can market to them when they appear likely to defect, you optimize your marketing resources by not applying them too soon or too late in the customer LifeCycle.

An easy to implement and proven powerful LifeCycle trip wire is called Latency.  Latency refers to the average time between customer activity events, for example, making a purchase, calling the help desk, or visiting a  web site.  All you have to do is calculate the average time elapsed (Latency) between the two events, and use this metric as a guide for anti-defection campaigns.

Many small business people naturally use Latency in an intuitive way: "Gee, it has been a while since Mary had her hair styled."  What he really means is this: Mary is taking longer than the average customer to schedule a "refresh" on her hair.  In database marketing terms, her Latency is exceeding the norm.  So the stylist calls Mary and finds either a customer who "forgot" and appreciates the reminder or a customer who has defected to another stylist.

In database marketing, we don't rely on "remembering" the habits of thousands of customers; we measure the behavior and react based on these measurements.

When you see a particular customer's behavior diverge from the average customer behavior you have calculated above, you get a trip wire event.  Since the calculation of Latency is very simple, and the diverging behavior is easy to spot, this type of anti-defection campaign is an ideal candidate for "lights-out" or automated rules-based customer retention campaigns.

As an example, let's take purchase behavior in a retail scenario.  If you were to examine your customers, and find the average time between the second purchase and the third purchase was 2 months, you have found "third purchase Latency."  Any customer who goes more than 2 months after the second purchase without making a third purchase is diverging from the norm, and a likely defection candidate. 

It's simple logic.  If the average customer makes a third purchase within 2 months of the second purchase, and a particular customer breaks this pattern, they are not acting like the average customer.  Something has changed.  This particular customer's LifeCycle has become out of synch with the average customer LifeCycle, and this condition is a trip wire for high ROI customer marketing.

On average, if you divert marketing resources away from customers who have made a 3rd purchase within 2 months after the second, and apply these resources to customers who are "crossing over" the 2 month LifeCycle trip wire without making a third purchase, you will end up spending less money and generating higher profits for any given marketing budget.  You are applying your limited resources right at the time in the customer LifeCycle when they create the most powerful impact - at the point of likely customer defection.

Now, will all these customers respond?  No, of course not.  But the ones that do become  active, loyal customers again, and those that don't are probably not going to be good customers in the future.  The behavior of the rest of your customers tells you so.  These non-responding customers may not be worth spending money on to "win-back," and in fact, will have much lower response rates to a win-back campaign.  They have already demonstrated their lack of interest with their behavior, and you could be better off financially by just letting them go and focusing on more responsive, more profitable customers.

The above example is a relatively crude approach to Latency.  As you might suspect, different customer segments will have different Latency characteristics, and the more you fine-tune a Latency campaign, the more profitable it will become.

For example, let's say you execute the Latency campaign described above, and succeed in retaining 30% of the defecting customers, making a tidy profit.  But you really have two major product lines, software and hardware, each 50% of sales.  Could the Latency be different between software and hardware customers?  You betcha.  Upon further analysis, you find third purchase Latency for software is really one month, and for hardware it's three months.  The average 3rd purchase Latency of all customers is 2 months, but the Latency by product line is specific to each line.  So you bust the two groups apart, and run separate Latency-based campaigns, one for each product line.  

In your original third purchase Latency campaign, you promoted to customers who did not make a third purchase within 2 months of the second purchase.  This means you were "late" for software (because the average Latency is really 1 month) and early for hardware (because the average Latency is really 3 months).  When you realign the timing based on the line of merchandise, you find instead of retaining 30% of customers, you retain 50% of the customers, because you have synched-up the marketing effort with the true customer LifeCycle more tightly.

And that, folks, is what LifeCycle-based marketing is all about - using your own customer's behavior to telegraph to you the most important (and profitable) time to market to them.  The customer, through their behavior, raises a hand and asks you to take action.  If you synch up your marketing efforts with the natural customer LifeCycle, you can't help but being more successful.

If the above makes sense to you, then you are on your way to designing the highest ROI customer marketing campaigns of your career.  The Drilling Down book teaches you all of the proven LifeCycle-based marketing techniques step-by-step, gradually building up from simple ideas like Latency to full-blown visual customer LifeCycle mapping techniques.

If you want to start returning profits of 2 - 5 times the money you spend on a customer marketing campaign, you need this book!

 

 
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This is the original Drilling Down web site; the advice and discussion continue on the Marketing Productivity Blog and Twitter.

Download the first 9 chapters of the Drilling Down book here: PDF
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