Want to see the answers to previous questions?  Here’s the blog archive; the pre-blog newsletter archives are here.

Q: I have recently purchased your book Drilling Down and going through the many interesting concepts.

A: Thanks for that!

Q:  I work for a membership Organization and we would like to conduct some analysis into who we may lose and approach them even before their membership lapses.  But the only problem here is that we carry data only on the purchases made (though many of our members do not purchase our products and stay a member) and web site visits.

A:  Are you *sure* that’s all the data you collect?  I once worked with a professional membership org that thought they only had one data source, but turns out they had 8 – from 8 different areas of the org – that nobody really knew about.

Q:  How do I know if a particular member is going to resign and lapse soon with this limited amount of behavioral data.  Recently it’s been a concern that we are losing members who have been with us for more than 10 years and who are in their mid career profession (aged between 30 to 45) and indicated no specific reason for resignation. 

This has been going on for the last few months and now we would like to strategically target these customers and approach them even before they react negative.  What concepts could help me to do this? Your guidance would be much appreciated.

A:  OK, my answer will be in two sections: if you (hopefully) find you have more data than you think, and if you really don’t have any other data to fall back on.

The first thing you should do is make sure you don’t have any other data sources.  Purchases and web sites visits might be the most obvious, but do you have:

Membership Campaigns
Conference registrations
Customer Service incidents
Local or regional meetings
Training sessions
Speakers
Orders for training materials

and so on.  In some orgs a lot of this is siloed  or even outsourced, but the data is still there – it’s a question of whether you can access it.   Think through the business model, and think about any possible interaction points with a member.  Then ask, Where would this data be?  You might be surprised at what you have.

Once you have more data, subscription relationship analysis of this type and predicting churn come down to three main thrusts:

1. Number of activities – similar to banking customer analysis, we often find that the number of different areas a member has tangible contact with is predictive of retention or defection.  For example, some members attend the annual conference and others do not.  Some members participate in local meetings and others do not.  Some buy training materials and others do not.  Some members do all three, some two, some one.

On average, the members engaged in all three activities are the most likely to remain members relative to those engaged in only two.  And members engaged in only two activities are the most likely to remain members relative to those engaged in only one.  This is a “run rate” kind of retention, an expectation.  From a Marketing perspective, this means you want to always be adding to the number of activities a member engages.

2. Change in number of activities – when you see a member drop from 3 to 2 activities, this is a clear signal that there is a problem of some kind, it’s a dis-engagement from the org.  You want to take action when you see these events, find out what is happening and if there is anything you can do to correct this.

The reason driving this downgrade may be a soft incident, say a content problem, or may be a hard incident, like payment problems. Either way, the org needs to find out if the issue can be addressed.  If you start to see “clustering” of these kinds of downgrades in relationship quality, it’s likely something more systemic is going on.  Often you will see certain segments who exhibit similar problems.

For example, members acquired through a certain publication may exhibit similar downgrade behavior at roughly the same interval from joining.  This is evidence of a systemic problem – something about folks from this source is unique, and for whatever reason, the org is not satisfying their needs.

3. Predicting change in activities – if you want to go further down this road and actually *predict* a change in the number of activities before it happens, you can look at the Recency within that activity.  A member who goes to conferences on a regular basis who then skips one is in danger of defecting from that activity – for some reason, the conferences are not providing the value they used to.

Or, something has changed with the member, their position in the LifeCycle has moved.  The conferences still provide the same value as they did before, but this value is shrinking for the member who (perhaps) needs more challenging or different content.

The same could be said for attending local meetings or buying training materials, etc.  For a known user of a specific activity, how long has it been since they used it?  Does this non-usage break an established pattern of usage?  If so, you have a triggering event for a marketing / membership intervention.

OK, so what if you really don’t have any more data?  You can create it.  One of the easiest and least intrusive ways to do this in a member org is with surveys.

Why?  Membership orgs have embedded permission to interact with members; it’s the nature of being part of such a group. What I mean by this is asking members to take part in a survey is not only quite natural, it’s often expected and perhaps even appreciated.  After all, what could be more aligned with a membership org than asking the members where the org should be headed and where they would like to see it go?

By thinking through and properly crafting such a survey, one should not only get a sense of potential friction points in the org overall but also get a sense at the individual level of which members are becoming dissatisfied and more likely to defect.  Implementation of a program like this means, of course, that the survey responses are tracked at the individual level so that action can be taken at the individual level. You can’t just do a random popup on the web site to make this work.

Moreover, in the out years, one can reverse engineer the reasons for defection.  Each year, analyze the population of members who defected in the previous year, and ask yourself, How are these people similar?  Do they come from similar backgrounds or industries?  Did they join in the same year? Come from the same marketing source?  You may already have such survey data and simply had not thought of using it for analyzing and predicting which members would defect.

Finally, I am fully aware that often, bringing these kinds of issues to the table can be painful for a membership org.  In my experience, many of these orgs are highly politicized and there is a certain “we’ve done it this way for 100 years” attitude.  When you present data that contradicts long-held beliefs there can be tension.  And this is fine - when the org is on board with the project.

So my final advice would be this – whether you have the data or generate it, the success of a project like this can revolve around the strong commitment of the org to actually do something about member defection. Ask this question of management first:

If we find members are leaving because of something we are doing or not doing, will we change this, even if the problem contradicts long-held beliefs?  The answer will show you how committed the org is to fixing member retention.

“It depends” is not the answer you want to hear from these senior players, because this means they don’t have a retention problem, they have an acquisition problem.

Unless they are willing to change, they need to recruit more members that are not like the members they have if they want to decrease defection in the membership.

Hope that helps!

Jim

Have a question on Customer Valuation, Retention, Loyalty, or Defection? Go ahead and send it to me here. If on the topic above, you can leave a comment on the post:

Member Retention in Professional Orgs

Want to see the answers to previous questions?  Here’s the blog archive; the pre-blog newsletter archives are here.

Q:  I am hoping you can help answer a question for our team.  By way of introduction, I am the CEO of XXXX.  We are a specialty retailer / restaurant of gourmet pizza, salads and sandwiches.  We would like to know  restaurant industry averages (pizza industry if possible) for customer retention – What percentage of customers that have ordered once from a particular restaurant order from them a second time?  I am hoping with your years of expertise and harnessing data you may be able to assist us with this question.  Look forward to hearing from you.

A:  Unfortunately, in those said years of experience, I have found little hard information on customer retention rates in QSR and restaurants in general (if anyone has data, please leave in Comments).  It’s just the nature of the business that little hard data, if collected, is stored in such a way that one can aggregate at the customer level.  The high percentage of cash transactions doesn’t help matters much; there’s a lot of data missing.

Over the years, sometimes you see data leak out for tests of loyalty programs, and of course clients sometimes have anecdotal or survey data, but this is not much help in getting to a “true” retention rate.  More often than not you discover serious biases in the way the data was collected so at best, you have a biased view of a narrow segment.  Often what you get is a notion of retention among best customers, or customers willing to sign up for a loyalty card, but not all customers.  And the large “middle” group of customers is where all the Marketing leverage is.

What to do about this predicament?  

There are really two issues in your question; the idea of using industry benchmarks when analyzing customer performance, and the measurement of retention in restaurants.

As far as industry benchmarking, two things:

1.  Annual reports for publicly traded eateries may be of help.  Customer loyalty info may be disclosed in these documents or conference calls with Wall Street.  Still, it will probably be of the quality referenced above – narrow in scope or behaviorally biased.

Sometimes you can put snippets of different conversations into an equation that allows you to guess at repeat purchase rate; hospitality analysts often want to understand repeat behavior and do this kind of forecasting.

2.  Ignore the industry benchmarks.  If you have the capability to track repeat rates, simply establish what they are now and use them as internal benchmarks to not fall below or create programs to improve against them.  

Frankly, I tend to discourage using “industry benchmarks” because the kinds of businesses that can really leverage repeat behavior and retention (customer-centric model) are usually *different* from the industry, so using a benchmark (say, from Domino’s) is probably low-balling your potential.  

Not that Domino’s is a “bad” operation, mind you, but they are what they are, they tend to be more on the operational excellence side of the game than customer intimacy (that’s what we called the customer-centric / social approach back in the early 90’s). 

Product leadership, the 3rd value discipline, is pretty much table stakes for anyone in the restaurant biz, and I assume from your business description you just might consider this a primary focus which you then leverage to create power in the intimacy area.  This is essentially the Apple Strategic model.  If the product is not great, the love will not come.

My point is this: without understanding the value discipline and Strategy of a competitor, you can’t know if any benchmark is something you want to compare to, because the business may have a completely different focus than yours.  Worse, using industry averages simply hides any real information you might gain that is actionable for your business.

For example, even though Walmart and Nieman Marcus are in the same business, I don’t think anyone would say they have the same Marketing Strategy or core value proposition.  Walmart is of course the poster child for operational excellence with the end result being value pricing, which flows to the advertising content.  There’s nothing “wrong” with this approach, it simply is what it is, and customer intimacy / relational / social marketing simply doesn’t really fit here.  You certainly can try to be as intimate as possible; but it must be done within the constraints of the model and not reduce operational excellence.  Importantly, this is a “mass” concept, so Push media is the most effective.

Sam’s Club is an example of how one might accomplish this mix.  A “membership” is certainly more customer intimate and allows customized communication, a key component of customer intimate execution.  Again, this flows into the advertising content.  Sam’s gets to leverage the Walmart infra, so they can at the same time maintain a decent level of operational excellence.  Remains to be seen if they could do so without Walmart.

Nieman Marcus on the other hand uses a customer intimate value proposition, and their execution reflects that.  Value pricing is traded off for a high level of customization and personal service, where repeat business is very important since the number of customers this proposition attracts is smaller than the “mass” approach;  you have fewer, but each more valuable, customers.  In this model, mass media is not very effective because the audience is not mass; instead, you rely on the intimacy to Pull customers in, and much more of the Marketing budget is invested not in Advertising, but on in-store (employees, fixtures, locations) and individual communication. 

This relational or customer intimate model is the root of  ”social marketing” and why any attempt to turn online social activity into some kind of mass media advertising opportunity is a complete Paradox.  A step by step example of optimizing the relationship marketing / social model is here: Marketing Bands Series.  To optimize the social model, you divert Marketing budgets away from Mass Advertising and Push into Pull areas like Usability / Store / Interfaces / Packaging, Customer Service, and Customer Retention.

Given the above, would Nieman Marcus ever consider using Walmart’s customer retention rate as a benchmark?  I think not; this approach would make no sense at all.  The mass model can’t leverage customer retention because it’s not intimate; if you can’t act on the metric, why measure it?  This is not to say Walmart “doesn’t care” about repeat business, of course they do.  But they can’t really lever it because it’s more operationally efficient for them to use the mass approach.

That’s a very long explanation for why I dislike using industry benchmarks but many, many people don’t realize how important this idea is; it’s why on a core business model basis some companies will not be able to realize significant benefits from “going “social”.  So on the whole, I would much rather use internal benchmarks that I can improve on that are aligned with the business drivers and are controllable through my own execution.

From looking at your web site, I’d judge you a Nieman as opposed to a Walmart, so customer retention can be a powerful tool for you.  So let’s talk about measuring retention.

“Retention” is a very time-specific concept – over the course of 3 months?  A year?  Five years?  A 20% retention rate over a 5 year period and a 60% retention rate over a 3 month period might both be stunning achievements, if you know what I mean.

So, if you are able to do the analysis, I would pick some marks – 3 month, 6 month, 1 year, etc. – and see what you get for repeat buyer or retention rates.  The slope of that curve will determine where any danger points are that you might take action on.  

For example, if retention falls dramatically from 3 to 6 months, then you know that you should be watching for people who have not transacted in over 3 months, and for  those people you should craft mail / e-mail promotions designed to bring them back.

As often happens with restaurants, there’s probably a good chance that if the person is still living in the area (more on this below), the reason they are not coming back is probably  controllable – they had a bad experience.  A promotion like “We’ve missed you” or “Give us another chance” that is tightly targeted to known defectors will usually pay back quite handsomely in both the short and long term. Defected customers not only visit once on the promo but also (hopefully) have a better experience and re-engage as a repeat visitor.  If your value prop is customer intimate / social, you absolutely must invest in superior customer experience so repeat experiences are rewarding.

If you see some success with this approach, you could then fine tune the analysis to find out if the dropout has a peak in month 3, 4, or 5.  This fine tunes timing of your drop; the closer you can get to the behavior with the message the more effective the campaign will  be.  There is a “peak profitability” timing in one of these months.  

Then the program can be automated, for example: if we don’t see a transaction from this person for 120 days, drop the message.  This way, you end up mailing every month but the audience is completely different and very highly targeted each and every time.  You will find this “right message, to the right person, at the right time” approach is much more profitable than mailing all customers because it directly leverages the customer intimate value prop.

Speaking of mailing all customers, the people who are still active within this 4 month time frame are probably still loyal and you can improve overall margin by not sending these special promotions to those people until they “slip” out of the 4 month window.  There’s no reason to discount to people who are highly likely to purchase anyway.  This is the Pull part of a relationship or social  execution.  What you should be really concerned about are the people who are dis-engaging, where there has been product or service failure.

In fact, in a relational marketing scenario, there is no real need to market to these people at all, you’re basically “preaching to the choir” (example) and doing so is a waste of resources (and often margin).  You will be far better off taking the money you used to spend marketing to the choir and allocating it to in-store, core value proposition ideas.

Many marketing people (especially of the Push variety) find this difficult to understand, but there no more powerful Marketing tool than your value proposition when communicating to the active customer base.  It’s why they are coming back, your Pull is already strong with them.  Why beat them over the head with messages when they are telling you by continued transacting that they like what you are doing?  Wasteful.  (more detailed example)

Finally, in a location-based scenario such as restaurants (and since you are the CEO and not running a single store), you might consider factoring in local uncontrollable churn into any metrics you create as internal benchmarks.  

Households in different areas have different natural churn (move) rates.  Since you have stores in different states, for example, one would expect a lower retention rate from stores that have a higher natural household churn rate.  These stores might be doing very well with controllable churn (product, service) but without the household churn adjustment, they could be unfairly benchmarked “bad”.  HH churn numbers are generally available free from city / state government or the Census.

Hope that helps!

Jim

Note to blog readers: Do you see the parallels above to a lot of what is going on in online publishing / advertising / marketing?  If not, see Jonathan Mendez’s Reaping the Ads You Sow for a more direct analysis of the same concept online.  The strength of the web is in Pull, in converting demand, not Push or creating it.  Use offline for Push; that’s what it’s good at, and synch the two to optimize the entire Marketing ecosystem.

Have a question on Customer Valuation, Retention, Loyalty, or Defection? Go ahead and send it to me here. If on the topic above, you can leave a comment on the post:

Relational vs. Transactional

I say weakest because Advertising cannot fix a poorly thought out Product, Pricing Strategy, or Distribution system.  It just can’t.  Yet huge amounts of money are wasted trying to do exactly that.

Perhaps this why someone feels they need to publish a book that tells people Product is important in Marketing.  To me, that’s the most circular or redundant idea for a Marketing book I’ve ever heard.

Marketing starts with Product, which should include all the audience or market segmentation studies (People) that drive the creation of the Product - defining the need.  If you do this first and develop a Product which truly fills the need, AND you get the Pricing and Distribution right, the Product will literally sell itself to the core audience.

If you can make it that far, THEN the Product can perhaps be sold to the next segment out from the core through Advertising.  All “Marketers” should know this.

So why is the online Marketing space so focused on Advertising?  I can think of a few reasons:

1.  Most online Marketers don’t really have a Marketing background, they come from Advertising or the Technology work closely tied to online Advertising.  Since all they do is online Advertising, the distinction doesn’t matter.

2.  In some companies, Marketing has been “downgraded” as a Strategic function to become “Marcom”, which isn’t really Marketing, but Communications - Advertising + PR.  So the people working in “Marketing” simply are not required to have Marketing skillsets.

3.  Many people just have no idea that Advertising and Marketing are different; they simply don’t know.  This often creates confusion, because concepts that seem brand new to Advertising people are often well understood by Marketing people, even though Advertising is a part of Marketing!  Examples would include any concept or activity considered “customer centric”.

I have in the past encouraged people in online Marketing to audit some Marketing classes and find out what the bigger picture is, because if you understand how all the pieces fit, you end up being a much better Marketer.  This is especially true with online where there is so much integration and measurement.  And when we get to real offline –  online integration, understanding the more global concept of Marketing becomes really important.

No time for classes?

If you’re interested in broadening your understanding of Marketing, there is a book that provides a framework for understanding the Marketing issues you are not familar with but skips over a lot of detail you probably do know about Advertising.  It came out a few years ago and I think it was largely missed by the online community whose primary focus was (is?) Advertising.

Now that the web is coming together nicely as a channel, perhaps it would be a good time for online Marketers who lack a Marketing background to pick up a copy of Marketing Champions and learn what’s ahead for you: owning the customer relationship, company-wide.

That is, if you decide Marketing is the career path you wish to follow.

There is so much more to Marketing than Advertising.  If you really want to change the outcome, transform a company, Marketing is the medium.  Advertising is just the message.

Note to Web Analysts: You will find Marketing Analysis – Customers segmented by Product Affinity, Channel Preference, Service Experience, etc. at least as exciting as Traffic Analysis!

Thoughts?  Any other reasons why the online Marketing space is so focused on Advertising and ignores the rest of the P’s?

Have a question on Customer Valuation, Retention, Loyalty, or Defection? Go ahead and send it to me here. If on the topic above, you can leave a comment on the post:

The Other 3 P’s

This area of  Psychology is more generally referred to as Cognitive Dissonance.  Along with Norms of Reciprocity, Dissonance is one of the most important pieces of Psychology for today’s Marketing folks to understand.   This is doubly true if you are serious about using a two-way Social model in Marketing.

Here’s why:  The Social sword has two edges.  If you are going to use a two-way Relationship Marketing approach, you will create higher expectations with those who Engage.  If you fail to perform, or just act like an Advertiser would, then you will end up creating more damage than if you had simply ignored the two-way idea.

For Marketing, the important idea to understand is the human brain always questions actions taken, however briefly, and tries to resolve conflict.  Any unresolved conflicts tend to taint the action, they create Friction, and drive down the Potential Value of the experience.

The important action item for Marketers is to know this will happen beforehand, and take steps to counteract the Dissonance.  The result will be customers who have generally better experiences, and you know what that means, right?

In other words, by planning for Post-Action Dissonance you are using a Prediction that increases Profits or cuts Costs down the road.

For example, in the early shopping carts, there was rarely any “confirmation” of a successful transaction.  Merchants found over time this made customers uncomfortable and caused additional customer service load.  When the confirmation was added, a lot of these service problems went away and satisfaction rose.

A “discovery” of sorts, but totally Predictable, if you understood the concept of Post-Action Dissonance and planned for it.  Other examples from the Lab Store, including the increased Profitability that comes from Predicting Dissonace, can be found here and here.

In fact, think about this: many of the online “discoveries” that have to do with Marketing usability and performance - use of headlines, copy treatments, landing pages, pathing / navigation, button layouts, location signaling, all of it – are rooted in the Psychology of Post-Action Dissonance.  And the web is full of these opportunities, because it’s a remote environment, often lacking a feedback loop.

Post-Action Dissonance tells you these lessons can be applied offline as well.  It’s not about the channel, it’s about the receiver – humans.

Humans must, they have a drive to resolve the outcome of an action taken with their expectation of taking the action.  This is an incredibly powerful idea to know.  Next time you are designing a Campaign, Interface, or System, keep Post-Action Dissonance in mind.  Why?

Just think about how much proft will be lost when Post-Action Dissonance has to be “Discovered” rather than being Predicted.

Have a question on Customer Valuation, Retention, Loyalty, or Defection? Go ahead and send it to me here. If on the topic above, you can leave a comment on the post:

Post-Action Dissonance

Brand is what you do, not what you say. 

Marketing Alignment.

Here are 3 free webinars you might want to take advantage of.  You might not agree with these opinions, but hey, it’s a good idea to get out of the echo chamber once and awhile, don’t you think?  Try these online sessions for a little brain stretching:

———

Moving Marketing From “The Money Spenders” to The Money MAKERS
April 15, 2009  noon ET    Jonathan Salem Baskin, Jim Sterne, Jim Novo

With 10% of marketing executives being perceived as strategic and influential by the C-suite there’s clearly a crisis of confidence.  I’ve mentioned Jonathan’s blog and book before and here’s a chance to hear a bit of the inside story.  You’ll learn how to exceed expectations of both C-suite executives and customers, neutralize political feuds by organizing cross-departmentally, and how to stop thinking like a reporter and start acting like an advisor

———

Everything They’ve Told You About Marketing Is Wrong
April 21, 2009   1pm ET  Ron Shevlin

Are you sick and tired of reading the same old blah, blah, blah, from the so- called marketing experts who just tell you stuff you already know? Then you need to attend this session as the grumpy old man cuts through the morass of bad advice and introduces you to the must-dos in the new world of marketing.  I know Ron personally (as in offline) and even if you disagree, you will be entertained.

——— 

What Online Marketers Can Teach Offline Colleagues (and vice versa)
May 19, 2009  noon ET     Kevin Hillstrom, Akin Arikan, and Jim Novo

A WAA event, open to both members and non-members.  Web analysts are not the first to grapple with multiple channels.  Traditional marketers have always had to illuminate customer behavior across stores, call center, direct mail, etc.  So, rather than reinventing the wheel in each camp, what proven methods can you teach each other?  Three different but aligned approaches on solving the multichannel puzzle, should be something for everyone here.

———

Take your brain out for some exercise, will ya?

Have a question on Customer Valuation, Retention, Loyalty, or Defection? Go ahead and send it to me here. If on the topic above, you can leave a comment on the post:

Marketing Jump Ball

Want to see the answers to previous questions?  Here’s the blog archive; the pre-blog newsletter archives are here.

Q:  Do the principals in the Drilling Down book apply to manufacturing?  I was first introduced to Relationship Marketing in an MBA course years ago.  I have been looking for an opportunity to test these ideas and now find that chance in this job (I was and still am a foot soldier, but now have more responsibility in these areas).  

Manufacturers typically look at the highest revenue-producing customer, then pull out the manufacturing directory and start calling every company in the same business.  Not really marketing.  Can CRM be used to mine the data we need to be predictive and focused on the value of customers and retention?

A:  Sure, same core issues and metrics apply:

1. Retention: Identify best customers, determine order cycles, set up a report that tells you who “should have” ordered but did not based past on past history, either market to them or send this info to sales, depending on the value of the customer.

2. Recapture / Defection: Identify best customers who have stopped purchasing and find out why, take action aligned with the value of the customer.  You may not get these customers back, but you will learn critically valuable information that will help you retain customers in the future – is there reason in common why these customers left you?  Was there a common Salesperson?  A common Product line?  A common type of Machine used?  A common Material?  Take these findings back into Operations and find out if the issue can be corrected.

Sometimes the correction may be needed in Sales or Marketing, e.g. improper machine specs in brochures or overselling of capabilities. Other times, it’s an Operations problem.  If the issue cannot be corrected, the question is this: does the company want to expend Marketing or other resources driving this kind of business, if other lines are more profitable and customers of those lines tend to stick with the company for longer periods of time?

In manufacturing, sometimes there can be somewhat of a dispute relative to defining the value of customers, which leads to a faulty definition of “best customers”.  As you said, it’s commonly done on sales volume but special promotions and freight deals and so forth can erode margin, and leave some customers who look profitable as not so profitable.  So if you are going to base a Marketing program on customer value, you first get with the appropriate folks (Finance, Operations) and come up with a common definition of customer value for the company.

Is sales the best metric?  Perhaps, but only if Gross Profit is the same across all lines.  Then what of discounts for volume or special deals? What about freight?  What about cost of dies / tools for customers who keep ordering new specs instead of repeating the same specs? And so forth, this has to be thought through.

The effort doesn’t have to be complex.  You want to end up with a simple spreadsheet formula, the equivalent of “When customer A places an order, 24% of sales is Gross Profit, when customer B places and order, 36% of sales is Gross Profit” and so forth.  If you have tons of customers, who might want to run this at the segment level, “If an aircraft manufacturer places an order for a coatings process, 23% of sales is Gross Profit, if a tool company places an order for heavy stamping, 18% of a sale is Gross Profit”.  Or segment by SIC codes.

Your finance people may want to use a different performance metric other than Gross Profit, like Contribution to Overhead, Cash Flow, or taking into account depreciation of machines unique to certain customers, or who knows what.

No problem with that.  The important thing is to get a formula for the goal that lines up with the way the company is run and the particular business the company is in, and that you understand the implications of this number. Knowing this, you can make the kind of bold Sales, Marketing, or Service decisions that really make a difference to the bottom line.  Not just “buying advertising” or “making phone calls”, but Strategic decisions on which customers get what level of service, which business segments to align with and invest more in capabilities for, that kind of thing.

At the same time, don’t get lost in the data / systems work and end up not taking action because you can’t screw down the exact profitability of every customer.  Go with a measure of profitability your Finance / Ops folks think is the most consistent and precise measure, which is not necessarily the one that’s the most accurate. 

If this value measure starts out with something like just taking discounts and freight into account, then you are much better off than you were, and you can always get better in the future.  This is why it’s important to engage other areas in this “value of a customer” discussion, so that everyone is clear and the actions you take line up with the  expectations for programs you create.

The Customer Marketing process, whether you call it CRM or Relationship Marketing or Loyalty or whatever, all starts with understanding the value of customer segments or individual customers, before for any kind of Action plan is discussed.  This is the step many CRM implementations leave out, and it can be fatal.

Once you understand customer value, all of the decisions regarding the allocation of resources to Sales, Marketing, or Service efforts become much easier to understand, and the value of the different programs and options much easier to evaluate.

And finally, use what you have learned with all this customer analysis to fine-tune your prospecting; rank the SIC code targets by some measure of Profitability or Productivity first and then move down the list.  You will be surprised how much the bottom line can improve given a fixed set of resources when you focus on acquiring customers from segments you already know will be the most profitable.

Hope that helps!

Jim 

Have a question on Customer Valuation, Retention, Loyalty, or Defection? Go ahead and send it to me here. If on the topic above, you can leave a comment on the post:

Relationship Marketing in Manufacturing

First, you have one of the largest Ad Agencies in the world admitting their business model is broken, because agencies are not in charge of the fundamentals of Branding – service, innovation, engagement, and execution.  I would add the same thing could often be said of the client side; MarCom people spend way too much time on ”Com” and not enough on ”Mar” – is it time for a realignment?

Then, in an even more spectacularly unexpected move, you have C-Level folks at 2 gargantuan Advertising Agencies (though both part of WPP) co-writing an article declaring that Brand and Response are the Same.  Here’s the opener: “the value that brands bring to a company’s total business value is exaggerated.”

Holy Branding Batman, that’s one heck of a thing to say for an Ad Agency, know what I mean?  But they are absolutely right, the nature of a Brand has changed, this ain’t the 1960’s.

This is how they get to “the singularity”:

“What was once sales is now enhancing the brand expe­rience, because through direct marketing technology and strategies, a brand can reinforce its ability to listen, customize and learn from the consumer. This is not just direct marketing, its direct engagement with every potential customer, sometimes at the moment they’re introduced to the brand.  In fact, in a world of compressed consumer decision-making, direct response is now a potent form of brand­ing.”

I love it when you talk that way.

Let’s be clear on this.

Nobody is saying Brand doesn’t matter; it matters a lot and perhaps more than it ever has.  Nobody is saying that creating Awareness through Advertising is not important; it is.

Here are the two main points:

1.  Brand is what you do, not what you say; it is customer experience that is Brand.  This means everything from packaging to product design to distribution and customer service, and these are the new (for some people) Marketing disciplines that Direct brings to Brand.  Direct has always cared about these experience and execution issues.

2.  Spending money on Advertising that does not move product is a waste of money.  Perhaps you have noticed fast food advertising lately talking about food and price, not about Kings, Subservient Chickens, Chihuahuas, and so forth.  Features and Benefits, not blurry images and associations that are irrelevant.

Just to be crystal clear, there is ”Brand Done Right” advertising around.  How do these folks know it’s done right?  Because they test and measure actions; you don’t need a “call now” ad to get people to buy tons of household items, right?  Do you own a Swiffer?

Here is what I expect to happen as a result of these Off the Marketing Richter Scale events taking place as we speak:

1.  There is an enormous Gap to be filled between the “MarCom” model and Marketing as business Strategy.  The Ogilvy piece is addressing this situation head on.  We are talking about marketing gaining or regaining a Strategic Seat at the C-Level table, which means Marketers on the rise will need to understand the Operations side of the business and take action on customer experience issues.  Or the agencies will gladly do that for you, leaving you to issue press releases and chat on the social networks.

2.  The money to fund these efforts will come from the budget formally wasted on excessive Brand-ing programs found to not generate actions.  It will take a lot of data analysis and some cross-functional business SWAT teams staffed by specialized players to make this merger of Brand and Direct work.  

If you are looking for an example of how this works, it is already happening in many of the cultures driven by web analytics.  Look to how your online unit (if they are using web analytics) is executing and how the cross-functional (Marketing, Service, Finance, IT) teams work.

You might ask, OK, what do I do first? 

One suggestion for each of the Off the Marketing Richter Scale events:

1.  Regarding the Experience as Brand issue, you have to see how this works first hand.  One of the fastest, least expensive, and quite frankly thrilling ways to do this is to Optimize your web site.  You have 2 options here: either join / observe the teams already doing this for your site, or hire resources to do it for you.

For a super fast, inexpensive execution you can be intimately involved in without technical knowledge, I highly recommend taking a look at Future Now’s OnTarget.  This service was designed by Marketers and you will “get it”.  You know what you need to know already – demographics, psychographics, maybe geographics, segments, messaging.  The system documents experience issues and then you are advised by the human staff on ways to improve experience.

Of course, you will need the web team to implement / test changes to the web site, but you will be able to give them solid direction.  I’d even go as far to say even if you don’t implement, this will be the cheapest education (starts at $1,000 a month) you will find on how experience can impact Brand.  Only with a web site, you can actually do something about it for a change.

 Readers, do you agree or disagree with:

 1.  How important these 2 events are?

Have a question on Customer Valuation, Retention, Loyalty, or Defection? Go ahead and send it to me here. If on the topic above, you can leave a comment on the post:

Off the Marketing Richter Scale

The category was made for TV shopping – the demonstrations were killer, and with all the new-fangled automation on board, “anybody can play the keyboard”.  In HSN language, “keyboards screamed” and you always got a call center “whoosh” – the sound you hear when inbound calls ramp from 100 to 1000 in 30 seconds.

So I’m talking with the keys merchant, and he says they’re having a supply disruption, and there will be challenges keeping the keys in stock because they sell so well.  This is a problem for me, because I’m publishing the monthly customer (offline) magazine and we’ve got some layouts and articles on the product.

I ask for a simple merchandising run on the SKUs to get a feeling for product in pipeline, to see if maybe I have to kill the spread.  We’ve sold 45,000 of the little beggars, which is pretty good for (what was then) a $500+ item.  It averages about $1,000 a minute in Margin, which is great versus network overhead cost of $300 per minute.

Problem is, we’ve only ever purchased 17,000 of them.

That’s right.  Each unit has been sold an average of 2.7 times.  These boards come back so fast from customers they’re always in stock, despite the “supply disruption”.

Now, from an Advertising perspective, I could ignore this little tidbit and just run the layout in the magazine.  You know, create “Demand”, to hell with the customer service / experience issues created by a product like this.

But from a Marketing perspective, I just can’t do it.

I’m in charge of Customer Marketing, for crying out loud.

I don’t need to run an analysis to figure out the customer value destruction going on here, the risk versus reward.  I can just see it.

I’d bet 30% of the current customers that buy this board never buy another product from us.  I’d bet 95% of the new customers buying this product never buy again.  Products like this kill the Customer Metrics I care about – % 1x buyers (down is good), %  Customers Active (up is good), Net Annual Value (up is good).

That’s just the customer economics.

Then you have the fact it costs $20 to process a returned product like this one - they’re heavy and packaged for retail, not for shipping; a lot of them probably come back damaged (I find out later this is the Root Cause of the Return problem).  Add in the calls to customer service at $3 a pop, probably 3 or 4 of them per customer.

Then you have the air time, the opportunity cost of not selling something else during the time you’re selling the keys.  In other words, every minute this keyboard is on the air I’m losing money, because virtually every one of those sales will be a return.  

So total, you have the “cost” of profit given up because I’m not selling another product plus all the ops costs in returns processing and customer service from above.  Stupid, from a Marketing perspective.

I will catch grief for killing the keyboard spread, but I’m going to kill it.

There is no way I’m going to be a party to what clearly is a customer value-wasting exercise, not to mention a complete waste of operational resources.  The merchant is going to scream bloody murder about “no support for my product”, and I’m going to end up in the head merchant’s office with my boss on fire, all that.

Screw them, I’m not going to run it.  I’ll show up with the numbers, and we’ll see just how far they want to take this.  Let’s trot right on up to the Boardroom and see how they feel about a merchant and a merchant’s boss who didn’t know (I guess?) they’d sold almost 3x as many units as they had ever owned.

That’s the difference between Marketing and Advertising.  Advertising people walk around claiming “I’m not responsible for what happens after the conversion” or worse, “after the click”.  Marketing people have a larger Company or more Strategic view of the world.

Do you know the Return Rates of your “best sellers”?  Are you wasting precious resources promoting a product that is not as profitable as everybody thinks it is?

Are you are Marketer, or are you really just all about Advertising?

Have a question on Customer Valuation, Retention, Loyalty, or Defection? Go ahead and send it to me here. If on the topic above, you can leave a comment on the post:

Best Seller Gone Bad

We spent about 5 years and $100 million dollars trying to prove offline media would drive new customer acquisition and sales.  We tried everything.  Billboards.  TV.  Radio.  Newspapers.  TV Guides – local, national, and cable.  Flyers,  Shoppers, FSI’s.  Spot cable.  All of it, in just about every combination you can think of.

Each time we did these tests, we set up control markets and looked for Incremental sales in the media markets versus those with no media, based on revenue per household.  We found incremental sales in just about every case. 

The problem was this: even though the media created incremental sales, these sales were never enough to pay back the media on a net basis, meaning (roughly) (Gross Margin - Campaign Cost) – Variable Overhead was negative – even when you took into account the LifeTime Value of a new customer.  Even when you looked at the test markets versus control 3 months, 6 months, and 12 months later, for those who might be thinking about “Brand” or “Awareness”.

If you’re thinking perhaps the campaigns were weak or light on exposure, I offer you this: when the campaigns included coupons, the redemptions were absolutely huge.  That’s good, right?

Well, in a word, No.  Think about it.  There was barely any lift in sales at all, yet huge numbers of coupons were redeemed.  Meaning?

This means that virtually all the coupons were redeemed by current customers, and the coupon / response did not change their behavior.  They bought at the same rate as they would have without the coupon.  It means we gave a ton of margin away in addition to the cost of the Campaign, and generated no increase in Sales.  We literally would have been better off (financially) by doing absolutely nothing.

So, we’re talking through all this and thinking, we have to be missing something.  I mean, you just can’t possibly buy a 100 showing in Boards with saturation TRP bombing on radio and 1/2 page ads in the Weds shopper section of the daily newspaper, along with FSI’s on Sunday and get no effect on sales.  That breaks all the rules of Marketing.  You know, Reach and Frequency and all that.  Awareness and so forth.  Branding.

Unless, of course, the rules have changed, for us, for this Interactive thing.  Maybe it’s, you know, different.

OK, so let’s reverse engineer the question.  Let’s find the markets where we have the best revenue per household, and compare them with the markets where we have weak revenue per household, and see if we can find any differences.  You know, demographics and such.  Household income.  Presence of children.  All that stuff.

Nothing.  No correlations.

Then we’re analyzing the results of some spot cable testing, where we were running heavy rotations on the local cable systems carrying the HSN signal, again with test and control systems.  Sometimes, it seemed to make a huge difference.  Other times, nothing.

We boosted investment in the cable testing to try and replicate the positive outcomes.  Nothing.  In fact, the cable systems with above average revenue per household seemed to stay that way, with or without ads.  The poor performers stayed that way, with or without advertising.  You would normally attribute a result like this to demographics.  But we already knew demographics didn’t matter.

OK, what do the high performing systems have in common?  What do the weak performing systems have in common?

Then it hits us.  Channel position.  The high performers tend to carry our signal on a low channel number, the low performers tend to carry us on a high channel number.  But that doesn’t make any sense, what could ”channel number” do to affect sales?

Then we get the 2nd smack to the upside.  The major broadcast networks are almost always carried by the cable system on low channel numbers, typically the Frequency (local TV 8 on channel 8).

Oh, man.  $100 million in advertising spend to find this out?

It can’t be.

So, we go down to the cable affiliate area and find some cable systems that might want to play ball with us on a test.  We’ll pay all the costs of them moving our signal from up in the 40’s down to the single digits, where the major networks are carried.  We’ll pay for customer notification letters, new channel cards, all that, if they’ll just try it.

It worked.  Almost every time.  And it made sense.  Think about it.

The HSN TV program itself (the “user interface” for you web analytics folks), the interactive nature of the real time presentation, the games, the bargains, pulls people in, gets them hooked.  But they have to see the program to get hooked, they have to experience the Interactivity of it to really “get it”.  ”Advertising” can’t do that, can’t provide or describe what the experience is like.  So we can’t Push them to the signal.  We have to Pull them, and to do that we have to go to where the eyeballs already are – on the major networks.

If we move our channel next to where all the eyeballs are, then we dramatically increase the number of times the average person passes over our channel as they search for entertainment using the remote, which increases the likelihood they will see a product they are interested in, which causes them to watch the show and experience the Interactivity of it.

In other words, we get a higher ranking in the “TV Search Engine” by being close to the broadcast networks.

This play was so consistent, we built a predictive model off the results, and could estimate the increase in profits from doing this for each cable system.  This means we can calculate how much we could spend to make it happen.  The ROI was enormous, just huge.

So we took the Mass Media budget and spent it on cable channel realignments, which involved no Advertising at all.  Because it was the right thing to do – there was no more efficient way to optimize that piece of the Marketing budget for the Company.

Sometimes, Marketing isn’t about Advertising.  It’s about understanding Behavior.  When you add the word “Interactive” to the mix, this Behavior issue becomes much, much more urgent to address.

Will you do the right thing?  Perhaps invest in analyzing customer behavior, so you can allocate your media budget more efficiently?  Maybe try some control groups in your e-mail program?

Or will you buy Advertising just because you have an Ad budget?

Have a question on Customer Valuation, Retention, Loyalty, or Defection? Go ahead and send it to me here. If on the topic above, you can leave a comment on the post:

SEO for Cable TV

I’m talking about making sure all the Operational interfaces to the customer have Marketing input, that the messaging and interactions with customers reflect the Marketing Strategy.

Marketing Alignment is making sure Marketing as a discipline is always facilitating Demand Fulfillment across the entire enterprise.  If Management is looking for a “big idea” during these times of change, a new way to approach the business as opposed to simply cutting budgets, Marketing Alignment just might be the ticket.

This Marketing Alignment issue can be a particularly important for growth companies.  When you started out, it was all about the customer – when there was less than 10 of them.  Now that you have 1,000 or 100,000 customers, you have probably created processes, procedures, and goals that unintentionally create barriers to closing new customers and fostering repeat business.

Here’s the basic argument for the Marketing Alignment idea:

Marketing is primarily responsible for generating Demand, and Demand is typically measured by final Sales.  But what if there exist corporate impediments that keep Demand from turning into Sales?  This means Marketing is not being judged fairly on the job they are doing with Demand; there is Friction working against them.

I’m sure many Marketing folks are aware of the various glitches that occur in Sales, Service, or Operations that cause Demand not to materialize into final Sales.  But you’re not responsible for what happens in those areas, so you can’t do anything about this, right?

Here’s the Marketing Alignment deal with the CFO and COO:

Marketing will accept more Accountability for final Sales if it is given the Authority to influence final Sales through any Operational area.  Meaning, the manager of any process or contact that could be considered a Customer Touchpoint in Operations has to at least listen to the input of Marketing on how it could be improved, including a plan for measuring the impact of the improvement as part of the deal.

In other words, Marketing Alignment formally gives a role to Marketing in the Operations side of the business.  It’s about Optimizing the business to increase the Productivity of Marketing efforts.  And with all the talk about Customer Centricity and related ideas floating around out there, there certainly is a backdrop that makes sense for an initiative like this.  It’s a big idea.  Could be your big idea.

Why would Management want to do this Marketing Alignment thing? 

Simple.  Higher Sales throughput without raising Marketing Spend.

I survived in the Senior Marketing role during the turnover of 4 CEO’s at HSN largely because I used Marketing as a platform to help other silos accomplish their goals.  By doing this, I was able to:

1.  Create a continuous improvement process across the entire company that drove increased profitability for Marketing programs as well as the company overall

2.  Insulated Marketing from being singled out for budget and personnel cuts when times got tough.  This kind of Marketing work and end product is embedded in the core processes of the company.  As the Customer Experts (not just the Advertising pukes), we were in fact internal consultants to IT, Customer Service, and Operations, helping them optimize their Customer Touchpoints.

Ultimately, we did this not because we were benevolent, mind you.

We did it because we knew that some portion of the success of any Marketing program relied on the execution by these Operational players.  From initial response rate to net profitability of a program, these operational folks controlled the Customer Experience, and this Experience was crucial to maximizing Marketing success.

The best time to reach out and grab the Marketing Alignment ring is when companies are thinking about capital and expense re-allocation.  These relationships you form with other areas of the company during economic transitions can pave the way for increased stability and success in the future.

So, how do you go about pursuing this kind of effort?

It starts with Finance.  You have to establish a basis for these cross-functional initiatives, and that basis is increased Financial performance.  As part of this effort, you accept additional Accountability  as long as you also get increased Authority over anything that looks or smells like Marketing, no matter where it is.  Call center scripts.  VRU’s. Web site copy.  Packaging.  Anything that touches a customer.

This is a key deal component.  No Authority, no deal.

You’re thinking, I don’t have the skills to do this, what do I know about Operations?  Listen, can you differentiate between badly written copy and great copy?  That’s the only skill you need to optimize about 50% of the customer interface problems you will run into.  Do you understand the customer and have empathy for her?  That’s the only skill you need to solve the other 50% of the problems.  Seriously.

I’m not saying it’s easy, I’m saying you have the skills to do it.

Because many of these Demand Fulfillment issues are essentially about copy and presentation, about understanding the customer and then turning an interface or process created by an Operations person into something more customer friendly.  Just like Optimizing a web site.

Next, you need the right people.  Who are they?  Let’s say there’s a 10% across the board staffing reduction on the table.  Programs are being killed and people with them.  There are always very bright people who are on the table with these budget initiatives.

Reach out to Sales, IT, Customer Service, Operations and find out who the brightest stars are that might be let go in those areas.  How would they like to bring their functional knowledge and skills to Marketing, to become part of the Marketing Alignment team?

Then get busy cleaning your own stall first.  Here’s an action plan.

Need cases for Management?  Large company: The Check Shredding Example, Listen Up, Nice to New Customers (surprise ending).  Small company: New Customer Kits and Managing Customer Experience.

All of these cases include the financial impact to the company.  Yes, the financial impact of these kinds of efforts can be measured.  Analysts, perhaps you should talk to the Marketing folks about this idea?

If you’re a web analyst, you already know how to do this: Goal, Action, Metric, Test, Repeat.  Playing the same game with much bigger toys!

Have a question on Customer Valuation, Retention, Loyalty, or Defection? Go ahead and send it to me here. If on the topic above, you can leave a comment on the post:

Good Time for Marketing (Re)Alignment