What's a Customer Model?

Jim's Intro:  The difference between a Profile and a Model is the element of time, making models more powerful predictors of behavior.

Marketers who use customer data often talk about "customer modeling" instead of customer profiling.  Modeling is kind of like profiling, but it is action oriented.  Models are not about a static state, like "Customer is 50 years old."  Models are about action over time, like "If this customer does not make a purchase in the next 30 days, they are unlikely to come back and make any further purchases with our company."

This kind of model sounds so mystical, and it is.  To see a mathematical model predict customer behavior is astonishing, to say the least.  The model says, "Do this to these people and they will likely do this."  The marketer goes out and does what the model says, and a good bunch of the customers do exactly what the model said they would.

What is a model?  Simply, it looks at customers who are engaging in a certain behavior and tries to find a commonality in them.  The marketer might say to the modeler, "Here’s a list of our very best customers, and here’s a list of our former best customers.  Is there any behavioral signal a best customer gives before they stop shopping?  What does the data say?"

Building models is usually expensive, because it requires an awesome amount of talent and experience.  There are many mathematical techniques used to build models, each with their own pitfalls and gotchas.  

So here’s what’s in it for you, what this site and the Drilling Down book is about.  You can create your own models based on the years of experience other marketers have with customer data.  They won’t be as accurate as the "real" models done by Ph.D. analysts costing $50,000 - $100,000.  But they’ll be  nearly as good and are proven to work.  

This site and the book will show you how to build these models with a spreadsheet (or use the business rules to write a simple program).  Ph.D. not required.  You will learn how to build a potential value of customer groups model on the next page of this tutorial. 

You can use your models to answer some basic marketing questions about your customers.  Questions you no doubt have asked many times, such as the following:

• Who do I e-mail offers to?  When do I e-mail them?  How often?

• Should I promote to some customers more often than others?  (Yes.)

• How much incentive should I provide to get a customer to do something?

• How can I tell when I’m losing a customer?

• How can I put a value on my customers and the business as a whole?

• Is my business strong and healthy, or becoming weaker?

• What can I expect in future sales from my existing customers?

And you can also use these behavioral models in combination with demographics and characteristics to produce an even richer picture of the customer.  Which of the following seems more useful to you?

• Customer is married, has children, lives in an upscale neighborhood, and reads Time magazine

• Customers who are married, have children, live in upscale neighborhoods, and read Time magazine appear to be disappointed with our site, because a high proportion of them haven’t visited the site in the last 30 days

This combination of characteristics with behavior can be powerful.  But without the behavior, demographic characteristics don’t tell you much about the future profitability of a customer to the business.

Next in Tutorial:
Comparing the Potential Value
of Customer Groups