New RFM: Customer Value Scoring
Drilling Down Newsletter # 43: 3/2004

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

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Prior Newsletters:
http://www.jimnovo.com/newsletters.htm
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In This Issue:
# Topics Overview
# Best Customer Retention Articles
# Question - New RFM: Customer Perks?
# Question - New RFM: Interaction Scores?
# New RFM Metrics: Take 10 on Retention
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Topics Overview

Hi again folks, Jim Novo here.

We're a little light on customer retention article links this month, with only one I thought worth the read.  But to make up for it, we have two excellent "CRM" style questions from fellow Drillers.  If you're wrestling with customer segmentation issues, you might want to give these two questions a read.

But first, these two jobs are still open for you web analytics mavens:

Drs. Foster & Smith, Wisconsin

Karta, Los Angeles

If you have a job in web metrics / customer analysis you'd like to get to this newsletter audience of about 4,000 send me a link.  No charge to promote your analytics job.

Second, the free Website Conversion and Web Analytics Suite of Calculators is now available in business Spanish, courtesy of the bi-lingual folks at Future Now; click here.

OK, now let's do some Drillin!

Best Customer Retention Articles
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This section flags "must read" articles moving into the paid archives of trade magazines before the next newsletter is delivered.  If you don't read these articles by the date listed, you will have to pay the magazine to read them from the online archives.

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.

*** Halt Customer Defection
March 31, 2004  Target Marketing
This is a well-outlined and argued support of customer retention marketing, the kind of thing you would get your boss to read if he / she just doesn't "get it".  But it's short on the "how to", though you don't have to go far to find out exactly what to do.

Questions from Fellow Drillers
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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:  Promoting Customer Perks

Q:  Jim, do you have an opinion on overt versus covert customer benefits?  What I meant by overt vs. covert... have you seen clients do programs where they TOLD their customers they are a valued (Gold, Platinum) customer and provided tangible benefits, vs. others who have just covertly treated these customers specially in some way (i.e. priority routing, better reps, thank you calls, etc.)

A:  Well, a program won't be very effective if everything is completely covert.  I mean, it's nice to get great service and that certainly contributes to customer retention, but recognition is much more powerful.  The customer needs to know they are being treated specially at some level.

Something like call routing is a good example.  If a customer is getting priority call routing and they don't know it, they may think the service is good.  If you tell them they are going to get it and then they get it, it's an entitlement they earned.  More powerful, and more effective in keeping the customer.  Let's say they are thinking of defecting.  If they don't know they are getting priority routing, they could suspect the service might be as good at the competition.  If they know they are getting priority routing, the question becomes "Does the other guy do this to?  And if so, will he give it to me?"  See what I mean?  It's much more powerful for the customer to know they are getting special treatment than not to know.

Generally, a "surprise and delight" approach or philosophy is the most effective and highest ROI way to treat customers.  Putting them in a program where they know all the benefits, aka "Gold Member" is fine, and may be a surprise and delight the *first* time, but wears out.  If you go with a program like that you have to constantly refresh it and add benefits to it or it gets stale.  This is what happens to most loyalty programs.  Have you read my case study on loyalty?  This program was about as "anti-stale" as you can get.  252% ROI in the cell phone business, about as tough a biz for loyalty as you can get.  If you want to read the case study, click here.

But you can do surprise and delight as one-off ideas, they don't have to be "programs"; it's the timing that is critical.  You want to do the events near life-cycle events.  Certainly the first one is the initial order - what is in the box, how is it packed, how easy is it to put together, etc.  After that, things like just calling a customer to tell them you appreciate their biz, sometimes silly stuff like "1st purchase anniversary" cards - which can also be used to smoke out customer service / product problems - are effective.  Anything you think will "surprise and delight" the customer.  Use control groups and look for lift in sales or a slowing of defection, just like you would with any direct marketing program.  If you can synch these promotions to known LifeCycle issues, all the better, because your marketing actually surprises and delights the customer.

For example, lets say you have a segment of top 20%, very valuable customers.  You notice there is a pattern, probably Latency or Recency based, in this type of customer.  So you anticipate and make some kind of offer which really lines up they what he would do anyway - but with a twist.  

Say people in this segment typically upgrade service 6 months after initial purchase.  You anticipate this and send a promotion that says "if you upgrade XXX to ZZZ you can also add this related service or product for 25% off".  This way you don't subsidize the planned purchase, but you augment with related service / products and drive the transaction ticket higher.  Or you give something really soft, like extending the warranty or months of service by a year if they upgrade - but they have to upgrade to a higher level than what is normal for the segment.  

Surprise and delight  - for the customer.  Not for you, because you knew the upgrade was going to happen anyway, you made it a surprise and delight for the customer - and made a couple bucks at the same time.

Jim
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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.
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New RFM:  Customer Interaction Scores

Q:  We were preparing customer profiles for our company and I happened to search your website.  Is there any format that we could follow?  Please let me know.  We need to prepare profiles that will speak to / show / identify the nature of a customer at a glance and that all employees can relate to.

A:  Well, that's a pretty broad question and difficult to answer without more information.  Assuming the reason you want this "employees can identify the  nature of a customer at a glance" profile is so you can
differentiate the profitability of customers and potentially treat them differently based on this profile, I would use a 2-digit score, based on Value to Date and Potential or Future Value.  This allows you to hide the actual data from employees but provides a very specific view of the Current and Future value of the customer.

For example, take your customers and sort them by Total Sales, Net Profit, Number of Visits / Downloads, or whatever Current Value financial metric you have.  The top 20% of customers get a score of 5, the 2nd 20% get a score of 4, etc, down to the bottom 20% who get a 1.  This is the first digit of the 2-digit score and represents Current Value.

Create the second digit of the score using a Potential Value metric you feel is appropriate, probably something to do with either Recency or Latency.  Generally, this would involve the amount of time that has passed since the last event contributing to the current profitability metric created above - Total Sales, Net Profit, Number of Visits / Downloads, etc.  If you are using Total Sales, it would be Days since last Sale.  If you are using Number of Visits, it would be Days since Last Visit.

Then sort and score customers as above.  For example, last event less than 30 days ago gets a 5, last event 61 - 90 days ago gets a 4, last event 91 - 120 days ago gets a 3, etc.   This score represents the Potential Value of the customer.  The lower this Potential Value number, the less likely it is the customer is going to engage in profit generating activity or events in the future.

A customer with a 55 score is a very best customer, they have high current value and high potential value.  A customer with a 52 is a  current best customer with low likelihood to create value in the future - a customer who is defecting.  A score of 35 is a customer with medium current value but high potential value - an "up and coming" best customer.  You can establish interaction rules for employees based on these scores and manage customer relationships based on the scores.  For example, an employee interacting with a 52 customer (defecting best customer) might be given the authority to grant special discounts or otherwise treat this customer uniquely.  Likewise, a database with these scores available can drive automated interactions and customized content on a web site.

Jim
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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.
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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

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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 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 2004, 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.