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New RFM: CRM Definitions and Metrics
Drilling Down Newsletter # 40: 12/2003

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

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Prior Newsletters:

In This Issue:
# Topics Overview
# Best of the Best Customer Marketing Links
# Question - New RFM: CRM Definitions?
# Question - New RFM: CRM Metrics?
# New RFM Metrics: Take 10 on Retention

Topics Overview

Hi again folks, Jim Novo here.

We've got a couple of great customer marketing articles to kick this issue off.  The first is a roundtable on the state of direct / database marketing the way the pros see it. The second is a survey of direct marketers with some great stats on what everybody is doing and what is working.  Following these article links are two CRM-related questions from fellow Drillers covering some favorite topics - how Relationship Marketing fits into the CRM picture, and the use of attitudinal versus behavioral data in marketing.  This last question includes the "mutual fund analogy" for managing customer value.  Nice timing, huh?

But first, do you know what the most asked question this month was?  "I need to hire a web analytics person.  Where can I find one?"  Not such good news for consulting business mind you, but good news for the web analytics category overall, I'm happy to see it, and I'm going to do my part.  If you have any openings for web analytics people, or you are one, send me a link to your online job posting or resume, and we'll try and do some matchmaking.

For example, Drs. Foster & Smith, the nationís leading pet supply cataloger, has an opening.  Check it out by clicking here.  This would be a great company to work for if web analytics "don't get no respect" where you work now.  The catalog culture lives and dies by analytics, and you'll get the respect you deserve.  The fact this company is one of the best at the catalog biz out there doesn't hurt either.

OK, enough on jobs, let's do some Drillin'!

Best Customer Retention Articles

This section usually flags "must read" articles about to move into the paid archives of major trade magazines before the next newsletter is delivered.  I highlight them here so you can catch them free before you would have to pay the fee.  This cycle there were no great articles from these particular magazines, but there were a couple of great articles from other magazines.  So check 'em out!

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 every 2 weeks before they expire by subscribing to the newsletter.

*** View From the Top
November 2, 2003  Direct Magazine
The "big guys" get together and talk about the state of direct / database marketing and the future.  Looks pretty bright to me, as more and more companies insist on targeting and accountability for their ad spending.

*** Annual Survey- People Power
December 15, 2003  Direct Magazine
Did you know that companies spending over 50% of their marketing budget on relationship marketing have higher margins?  How often the average B2C and B2B companies contact their customers?  Facts like these are in this annual survey of Direct subscribers.

If you are in SEO and the client isn't converting the additional visitors you generate, you can help them make it happen - click here.

Questions from Fellow Drillers
If you don't know what RFM is or how it can be used to drive customer profitability in just about any business, click here.

New RFM:  CRM Definitions

Q:  I am working on a project and analyzing the key variables of CRM and Relationship Marketing (RM).  After reading extensively the only main difference I see between the two is
that CRM involves systems (technology) which makes RM a part of CRM.  I am also in search of diagramatic models to simply explain the same.  Can you please advise me or recommend to me any sites.

A:  Well, I don't know of any sites with diagrams because I'm not sure many
people have come to this conclusion yet, which by the way, I think is correct and have said so.  I wouldn't use technology as the "boundary" though, because good RM programs make heavy use of technology.  To me, if you take RM and add Customer Service integration to it you have CRM, so RM is indeed a component of CRM.  RM itself is made of components, or is the outcome of adding enhanced technology and strategic purpose to previous efforts.

At the lowest end of individual customer contact marketing you have direct marketing, which simply means you have a "list" of people and you send them something, frequently the same thing to every person.  If you have more data than just the name and address, you can send different versions to different people.

Now , if you collect the results of this effort and attach them to individuals and change your mailings based on the activity of a customer over time, you have entered the "database marketing" world, which would include simple customer marketing models like Latency, Recency, and RFM.  

If you further modify your efforts by determining the LifeCycle of customer segments and change your marketing based on the LifeCycle stage of the customer, you have entered Relationship Marketing, at least according to the original definition of it.  

And I would argue, if you add the integration of Customer Service and Sales Force Automation on top of this (if either is applicable), you now have CRM, or CMR, or CVM, or whatever they are calling it this month.  I really don't care what they call it, for me it's simply about using data to increase profits.  The trades can call it whatever they want.  Specifically applied to customer marketing, it's all the same thing.  

Anybody / any company who uses rigid definitions of the differences between all these shades of gray to create a pitch on "expertise" probably doesn't have a lot of expertise in the first place.  It's easier to look like an expert when you create a microscopic market. 


If you are a consultant, agency, or software developer with clients needing action-oriented customer intelligence or High ROI Customer
Marketing program designs, click here

New RFM:  Managing Customer Value

Q:  I have been enjoying reading your tutorials.  I am interested in the financial planning market particularly and have developed an application for segmentation of market and clients by attitudinal factors.  Having provided my clients (advisers) with the tools to turn the qualitative data into quantitative measures and slice and dice their client base appropriately, the next question from them is "How do I use this and what
to do with the information?."

A:  You betcha, that's the hard part.  A common question when people get into analysis; the "what do I do with this" should really come first so the metrics produce an actionable outcome...

Q:  I would be interested in providing links on my web space to access your papers and content. Do you have any content or case study examples for marketing and client servicing for the financial planning industry?

A:  Well, I don't think I have a page on my site specifically on this area, but let's create one, OK?  I'll include this example in my newsletter and it will go up on my site next month.

Characteristics and attitudes are interesting but frequently not particularly actionable because they are not "behaviors."  When people speak of "doing something," they are typically thinking of increasing or decreasing a behavior of the customer.  If you are trying to figure out what to do about a behavior, you really need to use behavioral metrics, which will tell you "who" to do something to and "when" you should do it for best results.

These are the hardest parts of "doing" because "who" and "when" get to value of the customer, time management, resource allocation, and ultimately ROI.  The attitudinal stuff comes into play after you identify behavioral metrics and provides more insight into "how" you should approach the customer.

For example, from the prospective of a financial planner, let's say it is desirable to have customers buy and sell securities, and it is undesirable when they stop or slow down this activity.  First, you must come up with a measure of this behavior.  Then, you can connect this behavioral measure to certain attitudinal types.  If you find certain attitudinal types consistently behave in certain ways, then you can predict the behavior (buying and selling securities) based on attitudinal profiles.

And certainly, this is part of what planners and  brokers have always done intuitively.  They know which clients are prone to trade and so on.  The challenge occurs when the number of clients is too large to remember what these behaviors are, and also in the fact this intuitive system is backward looking - it does not "predict" anything, and a customer could one day defect to another planner without advance warning - even though the warning signs were there all along.  But the planner has no "system" to recognize these warning signs and act on them - the "who" and "when."

What kind of system?  Well, let's take the analogy fully into the world of securities trading.  There are dozens of different technical indicators that are commonly used in trading - 50-day moving average, MACD, On Balance Volume, Relative Strength (RSI), etc.  Now, think of customers as securities.

You can apply these technical indicators to whatever customer metrics you are looking at - volume of trades, balances on accounts, and so forth.  Customers can have "Relative Strength" against each other.  They can be engaged in a number of trades that are above or below their 50-day moving average, and above or below the 50-day moving average of the "index" - the entire customer portfolio.  Do you see where this is going?

With securities trading systems, you can set stops or trigger alarms based on changes in the behavior of the security that violate or penetrate certain indicators like the 50-day moving average.  You could also do this with the customer portfolio.  Much like in securities trading, if a customer's trade volume or balance drops below the 50-day average, there could be cause for concern.  

And what happens, for example, when a stock owned by a lot of mutual funds drops to the 50-day?  It is often "supported" by mutual fund buying at that level - as long as there isn't something "wrong" with the stock, in which case they just sell and abandon the stock.

If a customer drops to the 50-day in trading volume, they too should be supported, in the form of a phone call or other contact, to try and "lift" them off the 50-day.  To allow them to "plunge" below the 50-day without "doing something" is to accept the fact the customer is defecting and just abandon the customer.  If the customer has low value, you might want to let them go - especially if you also have high value customers dropping to the 50-day who need attention and this requires resources.  This kind of resource allocation increases revenues while at the same time reducing expenses.  The trigger is the behavior, the "how" or approach taken can be influenced by known attitudinal factors.

Is this making any sense to you?

So, let's say a large group of customers fall to the 50-day moving average in their trading volume (or commissions, or whatever).  This is unusual behavior versus the rest of the customers.   As a financial planner, you don't want this happening because it means you are losing out on income. 

You could then look at the attitudinal measures on this group and see if there are any similarities.  If there are, you can draw conclusions and do something about it.  Exactly what would depend on the metrics and attitudes used, but it is probably at least a contact of some kind.  But you now have the most critical part of the equation - "who"  needs attention and "when."

You can use a drop to the 50-day - or an On Balance Volume break through zero, or whatever.  And then you analyze the results of your contacts and see what worked the best with this behavior on customers with specific attitudes.  Further, you now know something about predicting the future behavior of
customers with this particular attitudinal set.  When you see customers with this set begin to fall towards the 50-day, you can be proactive and anticipate the move, using best practices learned from the past.

Finally, since you are familiar with my work, the Latency and Recency metrics are just two more ideas which happen to be particularly good at enhancing the power of other measures of human behavior.  For example, a customer who has dropped to the 50-day AND the last trade was less Recent than the average of all customers is somebody who is in a heightened state of probable defection.   Likewise with someone who trades on average every two days and both drops to the 50-day AND their trade Latency expands to a trade every 7 days.  If either of these customers is valuable, action should be taken immediately to try and save the customer. 

Hope I didn't go to far out of the world on this for you.  Customers can really be looked at as a portfolio of assets with differing future potential for returns, and as such, can actually be "managed" in the same way as a securities portfolio.  "Managing a portfolio of customer assets" is often talked about in CRM circles but rarely implemented in any meaningful way.  I find it to be one of the best "templates" for managing customer value out there.

Let me know if you have any questions!


New RFM Metrics: Take 10 on Retention

If you would like to know more about how to use the new RFM metrics to improve your profitability on the web, check out the free "Take 10 on Retention" package I wrote.  It includes a 10 minute presentation on the strategy and reporting behind increasing web customer ROI using simple predictive models.

Here's the idea in a nutshell: when you make investments, you expect the value of them to rise in the future.  You have web investment choices - media buys, ad designs, building out content, etc.  Retention metrics tell you which of these investments are the most likely to generate increased profits in the future.

Click here for the Take 10 on Retention


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 top and bottom of this page.

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 here.

'Til next time, keep Drilling Down!

- Jim Novo

Copyright 2003, 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 & when the material will appear. 


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