The Web Retailing Example - Drilling Down
Newsletter # 32: April 2003
Drilling Down - Turning Customer
Data into Profits with a Spreadsheet
Customer Valuation, Retention,
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In This Issue:
# Topics Overview
# Best of the Best Customer Marketing Links
# Tracking the Customer LifeCycle: Recency
# Questions: Recency to Manage Discounts?
Hi again folks, Jim Novo here.
This month we've skipped the usual "best of" Customer
Marketing article links and put more time into the Recency case and
the question from a fellow Driller, who is about to launch a version
of the Recency-based discount program the owner of IMissAsia.com
tested last month! Amazing coincidence, eh?
My favorite topic lately is this one: why are companies so afraid
to call an end to the customer LifeTime? If you can't peg the
LifeTime, you can't measure LifeTime Value, and if you can't measure
LifeTime Value, you leave the majority of CRM ROI off the table.
Sound interesting? If you want to find out how to attack this
issue and bring home the ROI bacon using simple customer models, check
out my searchCRM interview and webcast:
(on-demand, ignore "start time")
OK, let's do some Drillin'!
Best Customer Retention Articles
This section flags usually flags "must read" articles moving into the paid archives
of trade magazines before the next newsletter is delivered. But
I didn't come across any real winning articles in this cycle, and
since the rest of the newsletter is a bit long, let's just skip this
Tracking the Customer LifeCycle:
Real World Examples
If you are new to our group and want to review the previous
LifeCycle metric - Latency - that discussion is
along with the Real World examples Hair Salon and B2B
Software. The previous piece on Recency is here;
this series on Recency starts here.
Recency: The Web Retailing Example
Recall last month, the owner of IMissAsia.com discovered how to lower discount costs while increasing response rate by using the Recency metric to modify offers.
Testing the 91-120 day Recency bucket (last purchase 91-120 days ago), the owner found it was more profitable to offer a 15% discount than the standard 10% discount to customers in this bucket.
You can see the test results here.
The owner had learned a lot in the past few months, from understanding how to define an "active" customer to predicting the likelihood of a customer to respond to a
promotion; from improving the profitability of newsletter promotions to actually being able to
predict the profitability in advance based on the Recency buckets.
Despite all this, the owner of IMissAsia.com still had not answered the original question that started it all: why was the response rate to newsletter promotions falling while sales remain flat month to month?
The owner started packing boxes, thinking about how Recency had proved to be so significant a factor in customer behavior.
While packing, the owned recognized the names of best customers, and also the names of some of the new buyers.
Why were these new buyer names familiar?
While pondering this question, the owner realized where the names had appeared before - on the daily new subscriber list to the newsletter.
Then an idea struck the owner like a bolt of lighting: since Recency
of purchase predicted the likelihood to purchase again, is it possible
that Recency of subscription could predict the likelihood to
make the first purchase? Again with this Recency thing?
The owner's head was now spinning, this was too much, too fast.
It was a struggle just to go into the subscription records. Figuring out when Newsletter Responders had joined the newsletter seemed like an insurmountable obstacle.
The owner was sweating, looking out at the spreadsheet with barely one eye open, murmuring "too much, too
The owner's hand trembled on the keyboard, as the last table join came into view.
And there it was.
Looking at Only Buyers, they subscribed to the Newsletter How Many Days Before
they made a First Purchase?
|Days before First Purchase
|| Percentage of Buyers Subscribing
The owner gasped aloud. How long ago someone subscribed to
the newsletter predicted whether they would respond to the newsletter
with a purchase! And how long ago someone responded to the
made a purchase predicted if they would respond to the newsletter and
make a purchase again! It was like a chain of events, a
sequence, with the likelihood of a customer to move to the next step
in the sequence at any point in time ruled by the Recency of the
customer for the prior step.
It's that whole "cycle" thing showing up again -
customers seem to pass through "stages" and these stages are
predictable based on the previous behavior of the customer - as long
as you know how to measure and track the behavior. If you are
using the wrong metrics, the owner thinks, you simply can't see or
take advantage of these cycles.
Well, fellow Drillers, we know what the owner of IMissAsia.com is
talking about, don't we? It's the Customer
LifeCycle, the most
powerful tool you could possibly have to increase the ROI of a
marketing campaign and increase the profitability of a customer.
If you understand what a customer is likely to do before they do it,
then you can plan for and customize offerings and campaigns
Marketing based on the Customer LifeCycle is
"event-driven" marketing. You use LifeCycle metrics
like Recency to mark or define customer events, and then spend only
when you have to, and always at the point of maximum impact.
This creates extremely high ROI marketing and service programs,
because the targeting mirrors customer behavior.
Most of the buying activity was coming from people who Recently
joined the newsletter. Since the number of new people per month
joining the newsletter was flat, sales are flat month to month.
But as the newsletter list keeps growing each month, this "new
blood" - new subscribers who are likely to respond and buy -
becomes a smaller and smaller percentage of the total newsletter list.
So sales remain flat as response rate is falling.
Newsletter response riddle solved.
But how can you increase profits knowing this? Well, if you
offer discounts to people who have just signed up for the newsletter -
the people already most likely to purchase - then you probably
are giving away margin you don't have to give away. Save your
discount budget for those less likely to purchase, customers who are
deeper into the LifeCycle, the ones who are "less
The owner continues to ponder these cycles, with the likelihood of
a customer to move to the next step in the sequence at any point
in time ruled by the Recency of the customer for the prior step.
The owner had read some stuff about CRM and wondered if this
"sequence" was what all that CRM noise was about.
Maybe the owner should see if the rep who called yesterday
"stands in awe" of IMissAssia.com. Perhaps, the owner
thinks, I could learn "how to keep customers front and
center" without hearing "Five Hundred It Is" from this
No, "CRM" would have to wait. It now appears increasing new subscribers to the newsletter is the most important thing that can be done to increase sales, because Recent newsletter subscribers are the most likely to buy.
And after all these discoveries about Recency, the owner wondered if Recency
could have something to offer on the newsletter subscription challenge.
What do you think?
We'll get the answers next month, as only the data knows for sure.
To read the next installment of Recency: The Web Retailing Example,
If you are a consultant, agency, or software developer with clients needing action-oriented customer modeling or High ROI Customer Marketing program designs,
If you are in SEO and the client isn't converting the additional
visitors you generate, click here.
Questions from Fellow Drillers
If you still don't know what RFM is and how it can be used to drive
increased profitability in just about any business, click
Q: Hi Jim! I purchased the Drilling Down book
and just love it.
A: Well, thanks for your kind words! Always good
to hear people are "getting it."
Q: We're a lab supply company. I'm getting ready
to do a web promo based on Recency ratings (we're starting with just
doing Recency ratings until we get our feet wet). What we plan
on doing is to rank our web customers based on Recency and put them
into quintiles as you suggest. We will then offer a sliding
discount promo and will then measure the ROR and ROI versus the
customer Recency score.
A: I take it you mean Recency of purchase, not
visit...since you're a customer now, I'll
give you some background on a "Recency Only" approach.
Recency is about Response, RF(M) is about profit. So doing
"Recency Only" on the web, where communication cost is low,
probably works. If you were mailing one of those big ol' lab
supply catalogs, I don't think I would drop the FM - those catalogs
are too darn expensive.
The crux of the matter is usually 1x buyers - they can be very
Recent, but they are less likely to respond than multi-buyers.
It would be instructional (if you can) to do a basic Frequency select
by creating two groups - 1x buyers and everybody else. Score
each for Recency separately and then do your sliding scale promo as
planned to each group. You will probably find it works very well
for multi-buyers, but results by Recency are a bit random for 1x
buyers, with perhaps product of first purchase being more predictive
of the discount needed to optimize profits.
Do you follow what I mean? If you divide the groups
initially, it should be pretty easy to see these patterns. If
you rank them all together on Recency only, your ranking will be
skewed with 1x buyers and might not be optimal. This approach is
discussed under the "Hurdle Rate" idea in the book pg 94 -
Q: I'm concerned about the situation where several
people within the same company get drastically different e-mail
promotions because one person has a "5" Recency rating and
another has a "2" Recency rating. Do you have any
ideas on this potential problem? Of course, if a customer called
and complained, we would certainly give them the higher discount, but
I don't want to have to do this on a wide-scale basis. On the
other hand, maybe most customers within the same company won't
notice and I'm worrying about nothing...
A: Well, you've got your thinking cap on, and it is a
minor concern. Two areas:
1. My experience is this: it is much more of a concern in the
call center than with the customer. It is critical all customer
service agents understand what is going on and understand the policy
of granting the discount a "buddy" is offered. If you
keep track of who gets what discount, you can audit on the back end
how much "noise" gets into the system. It is typically
quite low, maybe 1 - 3% of total response (not of total mailing), and
with e-mail being such a personal thing, it's even lower.
E-mail is different than dropping catalogs with a "15% off any
order over $500" dotwack on the cover into the same place you
mail catalogs with no offer. If the customer is treated
"matter of factly," they don't care and the issue
disappears. If they are treated to a "hell no"
experience, then they start talking about it with other people in the
lab and then you get them all on alert to share info and all of them
order using the best offer.
2. It really is more of a concern when you have duplicate
customer records and the same customer gets two different
offers. So to the extent possible, try to de-dupe the list.
But it really isn't a big deal. I get two catalogs from Dell
Computer every few weeks and they both have different offers, one
better than the other. I buy from the one with the better offer
- but I still buy. Then I become more Recent with the one
catalog and the offers get better in the other. But I still buy
- from Dell.
Ultimately, that's the mission, and if you consider the
"company" as a customer, this kind of stuff evens out in the
end. After all - they could buy their equipment elsewhere, and
as long as you are making money on the promotion, I wouldn't get too
wrapped up in the dynamics of offer profitability at the individual
buyer level, especially when you are just starting out.
Get the "gross" picture moving in a positive direction,
then go back and see if maybe you can tweak for specific
situations. In other words, this stuff works on the
"aggregate" level. There will always be individual
customers who you lose out on and beat you on the offer, it always
happens. But in the aggregate, you make a lot more money.
Just make sure your customer service people understand the game -
which does NOT mean giving away the best discount, it means giving the
customer the discount they ask for, as long as they have the correct
Let me know if I have explained this well enough for you to go
ahead and execute!
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 with Simple CRM.
That's it for this month's edition of the Drilling Down newsletter.
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other questions on customer Valuation, Retention, Loyalty, and
'Til next time, keep Drilling Down!
- Jim Novo
Copyright 2003, The Drilling Down Project by Jim Novo. All
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