Short Tail of Customer Value
Drilling Down Newsletter #91  7/2008

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

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Hi Folks, Jim Novo here.

Short and sweet for the mid-summer month is this Drilling Down newsletter.  Kind of a family reunion, with 3 interrelated concepts.

First up, we have a couple of Blog posts looking at the topics of Measuring Customer Friction and the manifestation of this concept in Path Analysis - only in this case, the Paths are offline.  Then, we engage with our old friend George Kingsley Zipf, father of the model that enables the "Long Tail" concept, on how interactivity affects Customer Value.

Three related concepts for your mid-summer Drilling consideration.  I promise you won't have to work too hard...

Sample Marketing Productivity Blog Posts
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Friction Model
July 16, 2008

Friction is the force that causes the opposite of Engagement; it’s the reason Engagement ends, causes dis-Engagement.  Friction is really about the likelihood a customer will continue to do business with you.  The actual causes of Friction are created on the business side, and manifest themselves on the customer side as impatience, frustration, and lack of loyalty.

Offline Path Analysis
July 11, 2008

I’m sure most people have heard about Path analysis as it applies to product placement in retail.  You know, the reason grocery stores put the milk coolers in the back.  That’s not a random decision.  Neither are decisions about the height of the shelves certain products are placed on - eye level for adults, eye level for kids.  This is Path; an understanding of how people react with the environment they are in.

Questions from Fellow Drillers
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Short Tail of Customer Value

Q:  Have you done any work using Zipf's Law?  Looking at customer value segments, they seem to follow the same distribution.

A:  I'm not sure in what context I would use Zipf's "law" in a mathematical sense, though I see manifestations of the general idea in my work, and recognize the principle embodied in
it as well as the weaker cousin, Pareto.

I think most people recognize the operational version of Zipf's Law (1935) known as the "Long Tail" - the idea that the web is uniquely qualified to take advantage of niche business ideas, a fundamental in database marketing.

I rank and compare customer value within a business, then try to determine the source of  differences in value.  Once you know these differences, you can optimize the entire system to increase customer value through reallocating resources towards highest return.

In my experience, businesses have different  customer "slopes", which defies creating any common mathematical expression for relative customer value across different businesses.  In general though, I can tell you the more interactive the business is, the steeper this  slope.  For example, the ratio of value between the most valuable customer group and the 2nd most valuable is much higher in an interactive business than an offline business, and this effect carries on down in the ratio of value between 2nd and 3rd, 3rd and 4th, etc.

In other words, the slope of the curve is much steeper online, much flatter offline.  Good customers online are really good, and bad customers are really bad; Pareto 80/20 becomes more like 90/10 or 95/5.

Personally, I believe this has to do with what I would call transactional "Friction", meaning the more friction there is, the flatter the curve.  Interactivity reduces friction and results in good customers becoming much better, and bad customers becoming much worse.  Reducing friction compresses the LifeCycle, resulting in the relative value of the customer being "exposed" more rapidly.  People who offline normally buy 1 book a month, when introduced to online, buy 12 books in 3 months, then stop buying for 9 months.

You end up with a "barbell" shaped customer base when looking at aggregate value - very few customers will be extremely valuable, very many customers have almost no future value, and harnessing the value of customers in the "middle" is where all the incremental profits (or losses) are to be made in marketing.

This is why my method stresses customer LifeCycle analysis - the profit or loss of a campaign very much depends on "time" (the LifeCycle) as a variable.  You have to drive as many of the "middle" customers in the barbell to the extremely valuable side as you can before they fall into the no value side, and make money doing it.  Once the LifeCycle starts moving against you, it's almost impossible to make money changing the direction, and the customer falls rapidly in LifeTime Value as more and more unsuccessful attempts are made to increase the value of the customer though Marketing.

This effect is of course good and bad news for "CRM" and all the variants; do it right, and you can make a ton of money; do it poorly, and you could very well amplify the Friction effect and make matters worse.

I hope this answers your question!

Jim

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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 2008, 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 credits, including live web site link and e-mail link.  Please tell me where the material will appear.