Drilling Down Newsletter - June 2001 -
One-Time Buyers, Direct Marketing

In this issue:
#  Best of the Best Customer Retention Links
#  Drilling Down Book Available at 
     Amazon, bn.com
# Marketing to One-Time Buyers
# Practice What You Preach: Online Advertising
   Effectiveness?  Tell Me About It... (Part 2)
# Questions from Fellow Drillers
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Hi again folks, Jim Novo here.  This month we've got great customer retention article links and some information on marketing to One-Time buyers.  Also, the online advertising mystery continues with a little behavior-based (of course!) visitor analysis, and a subscriber wants me to explain some commentary I wrote on the web site (cyber-accountability!) 

Let's do some Drillin'!

Customer Retention Links
====================
These articles are on the DM News web sites and will move into their paid subscription archive 30 days after the date of publication listed below, so check 'em out soon!

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 each month 2 weeks before they expire by subscribing to the newsletter.

What to Do About Low Response
May 23, 2001   iMarketing News
This article has some great stats on the number of remote shoppers in the US and some interesting ideas about using e-mail.  And then he tosses RFM into the ring.  Are you using RFM yet to maximize profits yet? 

Promotions Can Drive Full Life Cycle
June 4, 2001   iMarketingNews
Yes, if you know how to use them correctly; otherwise, they can drain profitability.  Long term customer value is a function of what brought them to you in the first place, but as far as marketing using the LifeCycle, hey, you know I'm all for that approach. 

Make Sure That the Prize Is Right
June 4, 2001   iMarketingNews
If you run sweepstakes to attract new customers, you need to read this article.  The biggest mistake people make in customer marketing is to not fully understand the cardinal rule: the future value of a current customer depends very much on how they became a new customer. 

Drilling Down Book Available 
at Amazon, bn.com
=====================
Thanks to you good people (well, those of you who bought a book anyway) the Drilling Down book has been picked up by Ingram for distribution.  Making this happen was about as enjoyable as getting a root canal, but I survived to tell the story.  Ingram supplies  most offline bookstores around the world, along with amazon.com and bn.com (Barnes & Noble), so you should now be able to order  the book most anywhere offline or online.  Ask your favorite bookstore if they can order one for you!  Or in the online stores, just search for "Drilling Down."

Note: the fastest way to get the book is from the publisher,  Booklocker.com.

Marketing to One-Time Buyers
=====================

Ah, the One-Time buyer, my companion (but not a friend) all these many years of database  marketing.  You have them, right?  Maybe 40%, 50%, even 60% of the customer base?  Seems like such a waste.  You went out and spent a bunch of money to reel these people in, only to find they buy or visit once and that was it.  Then you pound them with all kinds of targeted promotions and they still don't buy or visit.  Your boss (if you have one) is pulling out all his/her hair, and is starting on yours.  Convert those people to multi-buyers, darn it!

Not going to happen, folks, at least not at a rate that will make it profitable for you to spend a lot of time and money on it.  Years of direct marketing history and testing come to one conclusion - it's just not worth it.  The One-Time buyer problem is tough to solve in the catalog world, but even tougher in the interactive world.  If the online customer wanted to buy or visit again, they would have!

In fact, many database marketing companies don't even call One-Time buyers customers, because it's highly likely they are not customers any longer.  If you are going to spend precious marketing dollars where you get the highest payback, there are many targets much more profitable than One-Time buyers to address. 

Does that mean all is lost in One-Time buyer land?  No.  The solution is to create less of them.  One-Time buyers are created by the circumstances surrounding their first purchase (or visit), and if you minimize the types of activity known to generate One-Time buyers, you'll save a ton of money over time. 

What do I mean by circumstances?  The media used to bring in the customer and the offer  usually play a big role, as does the product itself.  Between these three variables, you capture 80% of the forces creating One-Time buyers.  Some products just naturally encourage One-Time purchase, as do certain kinds of offers and types of media.  Your task is to find out which combinations create a high percentage of One-Time buyers, and minimize the use of these combinations.

Gather up all your One-Time buyers, and see if you can find any commonality in them.  Do the majority of them come from one particular media or offer, or have they bought the same items or categories of items?  If so, then you can reduce your reliance on this media or item and put the money you save into media or items you know tend to generate multi-buyers.  By going through this process, you will automatically raise the long-term ROI of all your marketing and merchandising.

For example, let's say you feature your most popular item on your home page.  What if this item generates 90% One-Time buyers? You would be much better off using a less popular item that generates only 10% One-Time buyers.  The real estate this featured item occupies is very valuable, and you want to get the most bang for the buck you can out of it.

Sometimes, if you find a particular item is generating a lot of One-Time buyers, you can fix it.  Reasons for One-Time purchase generation may be linked to poor quality, bad instructions, shipping difficulty (item often breaks), or other physical reasons.  So hunting down One-Time buyer products can be helpful to product sourcing efforts; the customer is telling you by making only one purchase the product has failed. 

If you go behind the One-Time buyer products and find a common vendor (especially a drop-ship vendor where you never see the  merchandise), they may be shipping something different from what you approved.  For example, the packaging may be different and substandard or the color is different from the photo you are using.  For expensive items, these problems usually shows up in returns  analysis, but for items under $30, the problem shows up as One-Time buyers.

OK, so much for reducing One-Time buyers as a fix.  But what if you are getting all kinds of pressure to convert them anyway?  All I can say is you are going to have one heck of a long road to walk down, so be prepared.  The best way to go about it is through a qualifying test.  Don't try to second guess it, let the customer and the data show you the way.  Customers are self-selecting One-Time buyer status, and it is best to let them self-select a solution, if there is one.  Let the behavior play out and look for commonality in the customer.

Take a random sample of your One-Time buyers (or all of them, if there are under 5,000 and you can afford it) and mail them a good solid offer, say 20% off.  Anything less and you will get weak response.  You might as well "load it up" for a test - if they don't respond at 20%, they aren't going to respond at 10%. 

Then look at the responders and see if you can find any commonality.  Did they buy the same first item or category?  Come to you from the same offer or media?  Make the first purchase a certain number of days ago?  Have customer service problems? Return their first purchase?

You may find a couple of segments, usually quite small, where you can create profitable One-Time buyer programs.  Then it becomes a question of scale - is it worth all the time, effort, and resources required to reduce One-Time buyers by 1/4 %?  You would be better off creating less of them in the first place by reducing the factors creating them.

Generally, the more Recent the One-Timers are, the more likely they are to respond.  If you don't know what this means by now (you must be new to this newsletter), you should take the Recency tutorial.

Even though the more Recent One-Timers are most likely to respond, the response rate may not be high enough to pay the cost of mailing and discounting to them.  You have to get right on them, immediately after the first purchase.  This approach causes a problem of a different kind - subsidy costs.  Subsidy costs are the discounts given to customers who would have bought anyway, without a discount.  If you discount a second purchase to every new buyer, you will undoubtedly be handing out discounts to people who would have bought a second time anyway, and this can ruin your margins.  A Recency approach can also create discount proneness (customer will not buy unless they get a discount).  You end up teaching them early on to wait for your next offer, which is not a good thing (trust me, I've seen some very bad discount proneness cases, and it is not a pretty sight).

So it's a very tricky proposition to create a One-Time buyer program like this; you have to be on top of measuring the true ROI.  A high response rate could mean you are simply giving the store away to people who would have become multi-buyers anyway.  If you don't know how to create and use control groups to measure the subsidy cost and discount proneness, you would be better off not doing this kind of Recency-based One-Timer program at all.  If you would like to find out how to create and use control groups, may I humbly suggest the purchase of my book with step-by-step directions.  

So, no easy answers in One-Time buyer land, are there?  If you wait too long, they will ignore you.  If you act too quickly, you could ruin your margins.  The best answer is really this: focus your budget on multi-buyers, and determine how to reduce the number of One-Timers you create in the first place.  You will grow your profitability without any increase in your marketing spending.

Practice What You Preach:  Online Advertising Effectiveness?  Tell Me About It... (Part 2)
=====================
OK, is Jim getting ripped off on his online advertising or not?  The only advertising I buy is highly targeted to search terms, primarily through GoTo and the Google AdWords program.  This means I get two kinds of traffic from the same search engine - paid and unpaid - for the same search terms!  Last month, we looked at a chart comparing the value of these visitors by source:


Metric           |  Ad Visitors  |  Search Visitors
_________________________________
Avg. Visit Length      7:43         9:12
% 1 Page Visits      38%         51%
% Downloading Book Sample
                                2.2%     10.2%
% Bookmarking Site
                                2.2%     11.0%
% Newsletter Subscribes
                                3.7%       5.1%

The page viewing activity seems to indicate the ad-driven visitors are of higher quality (lower 1 page visits) but the other behavior of the search-driven visitors (average visit length, downloading, bookmarking, subscribing) is far more valuable, as these visitors are most likely to turn into book buyers.  What's going on here?  Should I pay for ads or not?

Because I'm a Drilling Down kind of guy, I took these numbers down to the next level.  I wanted to see if there was variation by the search phrase used, not just an average of all search phrases.  So I took my top 3 search terms (relationship marketing, customer retention, customer loyalty) and did the same break out.  The following is a chart of visitor behavior for the 3 search terms above, broken out by whether they clicked on an ad displayed in response to the search term or clicked on the search engine listing itself.  By the way, in many cases both are displayed at the same time (if I rank high enough for the search term in the engines involved):

Metric           Ad Visitors  |  Search Visitors
_______________________________
Avg. Visit Length      8:75            3:53
% 1 Page Visits      22%            20%
% Downloading Book Sample
                               6.0%           2.2%
% Bookmarking Site
                               9.8%           3.8%
% Newsletter Subscribes
                               3.8%              .6%

Well, I'll be darned.  Now the visitors from ads are of better quality - higher rates of downloading, bookmarking, and newsletter subscription.  The variation is really not best understood by the method of arrival (ad or free search), but by the search term itself!  Or some other yet undiscovered combination of variables.  If there can be this much change just by looking at search term, then I must have some paid ads keyed to search terms that generate very poor quality visitors. 

I know what you're thinking - he's going to Drill Down some more, take it down another level in next month's newsletter... 

And you would be right!

--------------------------------
If you'd like to see more on web log analysis
in future newsletters, let me know
--------------------------------

Questions from Fellow Drillers
=====================

Well, this newsletter is getting a little long, so only one question from the curious out there.  This three part question refers to a comment I made when reviewing an article recently written by Seth Godin and posted to the "fresh articles" list.  If you want to keep track of the latest in customer marketing articles around the Web, I post links to them every few days on this page.

Hi Jim,

Q1: When you say that the Web is a direct marketing machine, do you mean that brand doesn't count? 

A: No, brand always counts.  The term "machine" was meant to reflect the Internet as a medium is the most efficient and effective direct marketing medium, relative to all other media.  Successful direct marketing depends totally on the ability to collect data and analyze behavior, and the Internet is the mother lode of this capability compared to any other medium available.

Q2:  Do you attribute Amazon.com's success to their direct marketing efforts or to their strong brand? 

That's a hard question to answer; branding is not exactly my area of expertise.  I attribute  most of their awareness to being first, and any brand success to being focused and following through with the execution of the brand "promise."  This is why personally, I think they have wrecked their brand with all the new products and lengthened delivery  times.  Amazon's brand always meant "fast" to me.  I don't think they have ever been successful "back end" direct marketers.  Their attempts at it appear random and unfocused.  They use their data in a very shallow fashion compared to what goes on at a catalog or TV shopping channel, for example. 

Q3:  Could you please explain to me your (and Seth Godin's) point of view on this?

Well, I can't speak for him, but I'll tell you what he might be thinking, and what I am thinking.  Seth is a direct marketer and he realized the same thing I did - the Internet is just a higher tech version of what we've been doing for years, only faster, cheaper, and with more data.  Permission Marketing has been practiced for decades by direct marketers, though in a messy way due to a lack of the proper technology.  The Internet gave us the right technology.  When I place a direct marketing ad in an magazine, and ask you to fill out a coupon or call a number, am I not asking for your permission?  When I run an infomercial and you click by and stop to watch, am I not asking your permission? 

Messy, awkward, expensive technology.  But the same fundamental idea.  The customer self-selects what they are interested in, and this selection starts the relationship. 

But now, you can put up a web site for almost nothing, get listed in search engines, and customers will come to you, just like surfing TV channels and seeing an infomercial.  Then you try everything in your power to "get permission" and ease the customer into a sale, just like you do on an infomercial, or in a mail piece, where I get your permission when you open the letter (I know, a messy and annoying way to do it, but it works). 

Seth's article was about this same direct marketing process, and is based on his new e-book The Big Red Fez, where he explains how to take advantage of direct marketing ideas to improve the "front end" - getting the first sale.  I concentrate on the "back end" - getting the next sale.  Both are parts of the same direct marketing discipline, and depend for success on analyzing customer behavior.  As usual, in this book he takes a complex idea and turns it into a simple "object" people can more easily understand.

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That's it for this month's edition of the Drilling Down newsletter.  If you like the newsletter, please forward it to a friend!  Subscription instructions are at the top and bottom. 

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 to me.

'Til next time, keep Drilling Down!

Jim Novo

Copyright 2001, 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 tell me where and when the reference will appear.