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Recency: It's all Relative - Drilling Down Newsletter # 24: September 2002

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

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Folks, something a little bit light-hearted to close out the summer and before what could be a stressful time period for many around the world.  I hope you enjoy the 24th newsletter.

We're kicking off the Recency metric as promised, but with a bit of a twist.  Those who care to, read between the lines - there are a lot of lessons in this piece, which we will dig into next month full steam.

OK - Let's do some Drillin'!

Tracking the Customer LifeCycle:
Real World Examples 

=====================
Hope you enjoyed the series on Latency.  You might like to know that portions of that series have now appeared all over the world, in both online and offline forms.  Just wanted to let you know people are watching what we do next, and what we are doing next is Recency.  So start talking about Recency with your boss now and you'll look like a genius (maybe even a marketing psychic) 6 months from now.

If you are new to our group and want to review the previous LifeCycle metric - Latency - that discussion is here, along with the Real World examples Hair Salon and B2B Software.

Recency: It's all Relative

It was a day just like any other day.  The Customer Retention Clinic was open, yours truly at the helm.  Both offline and online marketers trudged through, with the same old issues.  One is drowning in data.  The other has reports that provide no actionable information.  Still others have fancy models and profiles but don't know how to use them to make money for the company. 

I became aware of a fresh-faced marketer, waiting eagerly in line.  Something seemed different about this one.  Untouched by CRM.  Never been to a Business Intelligence demo.  

"Your question?," I said.

"Jim, how can I tell if a customer is still a customer?" was the reply.

I stood there, floored by the question.  I knew this marketer was special.  How elegant, I thought: the summation of 20 years of my work in a single question.  Nobody had ever asked it before.  They always want to know about the money, you know - how can I make more money, show me the tricks.  Addicted to ROI.  They start off innocent enough, maybe a simple model or two.  Before you know it they're into data mining.  But they don't make any money for the company.  Devastating. 

Then they show up at the Clinic, looking for the magic bullet, the secret to ROI.    But not this one.  Nope, this one was special.

"Why do you want to know?" I asked.

"Because I want to calculate the retention rate and track it over time" was the answer.

"You can't put a retention rate in the bank, you know" was my cynical answer.  "What you  really need is a formal, widely accepted definition of when a customer is no longer a customer in your company.  Then you will be able to get at your precious retention rate."

Silence from the fresh-faced one.  Then:

"In customer service, they say only 10% of customers complain and state they will stop doing business with the company.  They say customer satisfaction is 90%.  Does that mean customer retention is 90%?"

Well, it's all well and good to be fresh-faced, but now we're getting into naive.  Still, I think, maybe there is something here, something worth saving for the marketing future.

"Are you saying the only defected customers are ones which you have documented?" I sneer.  "Ones who told you they will never do business with you again?  Look, a customer is a person or company you sell stuff to, who pays you for a product or service.  You have identified 10% who are not going to buy from you; they are defected customers."

"But the word customer implies some kind of "future" doesn't it?  I mean, if you know they will never buy from you again - as in the above complaint example - you don't call them customers, so the opposite must be true: to be a customer, there must be expectation they will buy again.  If you know they will not buy again, they're former customers, correct?"

"So a customer definition would be:

1.  Purchased from you in the past.
2.  Is expected to purchase in the future."

"Just because somebody bought from you in the past and didn't tell you they hate your guts does not mean they are a customer.  A customer is somebody you expect to buy from you in the future; otherwise they are a former customer, by definition."

Not a bad sermon, I think.

"Wait a minute" says fresh-face, "what about customers who purchased in the past that we have no expectations for?  We don't have any idea whether they are likely to buy or not; there is no "expectation."  What about them?"

Oh, so fresh-face is going to play tough with me, I think.  Probably an MBA.  Wait a minute, I'm an MBA.  Is it getting hot in here?

"Listen, you know the answer to that question, don't you?  Because you don't know jack about your customers and their likelihood to buy, you simply call them all "customers."  You have no more reason to call them customers than to call them former customers, but of course, you "default" to calling them all customers.  They didn't tell you they are not customers, so they are, right?  Is that what you are saying?"  It is hot in here...phew.

I go on.  "What if they didn't tell you they hated your guts, but they told 10 other people they would never buy from you?  Are they still a customer?  Do you know how many there are?  How many have had a bad product or service experience and never said anything?  Is it 10%, 20%, 40% of your customers?"

No reply.  Floor staring.  I have caused hurt  feelings.  But I have got to move on, there are people waiting for the magic bullet.

"Look, I'm sorry" I say half-heartedly.  "Let's come at this from a different direction that will perhaps be more helpful.  Let's take all the customers who you think are customers, and ask just one question - when was the last time you had contact with this customer?"

"For example, the last time you had contact with the customer was 3 years ago.  Are they still a customer?  With no activity for 3 years?"

"Maybe" says fresh-face.

"OK, fine.  What about if the last contact with the customer was 5 years ago?  Is this person or business still a customer?"

"Maybe" is the reply.  

"10 years ago?" I ask, sweating.

"Maybe."

That worked like gangbusters, I think.  No wonder nobody knows how to sell more to current customers while reducing costs.  All customers are customers for life - unless they tell you they aren't anymore.  These people have no sense of reality.  They are treating every person or business that ever bought something as a customer!

"All right, one more try" I say impatiently.  

"Take two customers - last contact with one was 10 years ago, last contact with the other was 2 years ago.  Would you be willing to go out on a limb and say the "customer" you last had contact with 2 years ago was more likely to still be a customer than the customer you last had contact with 10 years ago?"

"Yes," says the face.  

"Finally," I gasp.  "And if the contact 2 years ago customer is more likely to still be a customer than the contact 10 years ago customer, the contact 2 years ago customer is more likely to purchase from you than the contact 10 years ago customer?"

"Sure."

"More likely to purchase now, and in the future, from you?" I wheeze expectantly.

"Yes" is the reply. 

"So, let me get this straight - when comparing two customers, the customer you have had contact with more Recently is more likely to purchase, relative to the other customer?"

"I would think so" is the answer.

"What???" I gurgle, starting to lose my balance, eyes becoming glassy...

"I mean yes, Jim..."

"Then, if I was to define a customer as someone who:

1.  Purchased from you in the past, and 
2.  Is expected to purchase in the future,

you would say that the customer you last had contact with 2 years ago was more likely to still be a customer than the customer you last had contact with 10 years ago?  Would you say that?" I ask breathlessly.

"Yes!" the face shouts triumphantly.  "I get it!"

"So for any two "customers," the one you had contact with more Recently, relative to the other is more likely to still be a customer and keep buying from you, now and in the future?"

"Yes!!!" fresh-face screams.

"And so you would treat these two customers equally, spend the same amount of money marketing to them, even though one is more likely to still be a customer and purchase than the other?" I ask.  The trap closes.

"Yes!!" face blurts out.  "That's what we do!"

"I know, you and 95% percent of the companies out there.  The question is why, when it is so darn easy to tell which customers are more likely to buy relative to the others?"

To be continued...
 -----------------------------------------
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
-----------------------------------------
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

Copyright 2002, 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 attribution, including live web site link and/or e-mail link.  Please let me know where & when the material will appear.

 

 
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