Match Cost of Effort with Value of the Customer

DataBase Marketing

Jim answers questions from fellow Drillers

Topic Overview

Hi again folks, Jim Novo here.

Sure, you can do a ton of analysis and find out all kinds of cool things about the behavior of your customers. But what about implementation, how do you execute on all this info? There are some universal rules, and one of them is to match up cost of effort to customer value. That way the ROI monsters in Finance will always be giving you a smile. Ready for the Drillin’ ?

Q: My boss (VP of phone sales) is really looking to try out some new ideas and RFM is one he has latched onto.  He actually has explored this concept for a few years but never acted upon it.  Anyway, he just purchased your book and after finding that he did not have time to read it he gave it to me.  My job was to read and understand at a high level and to lead a discussion with the marketing group to get them excited about the concept.  I am a finance guy by trade so this concept was very interesting.

A: That’s funny, the people who really “get it” the most are finance people and IT people, because it is kind of “black and white,” very numbers driven.  Stuff either works or it doesn’t – did you make money or not?  ROI is the name of the game.

Q: Obviously I either did not do a good enough job explaining RFM, Latency, tripwires, etc. or they just are unwilling to have someone from their team tackle the concept.  The question they always wanted answered was “We don’t know why the customer behaved as they did.  Thus a sales call needs to be made not a marketing campaign.

A: “Why” is not really the issue; defection is happening.  Depending on the biz, a sales call might be exactly what is needed.  These models are always about allocation, putting scarce resources to the highest and best use.  Per customer, sales calls are expensive; direct mail is not, email even less so.  If you have a formal “wall” between sales and marketing, usually the “whose responsibility is it” issue is decided by “degree of pain” e.g. how valuable is the customer to the business overall?

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LTV of Car Buyers

Customer Experience, DataBase Marketing, Measuring Engagement

Jim answers questions from fellow Drillers

Topic Overview

Hi again folks, Jim Novo here.

The car business is interesting because the Customer Lifecycles can be so long and the value of a customer beyond just the car (service, etc.) is a huge factor. Can this industry use Lifecycle ideas? You betcha, Drillin’ is Drillin’ …

Q: Do you happen to know approx. calculations of LTV for the car-industry? I wonder what this might be for a person that buys every a new car every 3 – 5 years, including service profits, etc.

A: The only published, verified study I know of on this was done by General Motors for their Cadillac division. To quote:

“Each new customer that comes through the door of a Cadillac dealership represents a potential LTV of more than $322,000. The figure is a projection of the number of automobiles the customer is likely to purchase over his or her lifetime, as well as the services those automobiles will require over a lifetime.”

Take that number and extrapolate based on the average margin on sales and service for any other car, and you should get pretty close. Looks to be somewhere around 6x – 8x the original purchase price, perhaps?

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RFM and Customer LifeCycles

Analytical Culture, Analytics Education, Customer Experience, Digital Analytics, Measuring Engagement, ,

Jim answers questions from fellow Drillers

Topic Overview

Hi again folks, Jim Novo here.

Today we have a bit of confusion between RFM modeling and tracking Customer Lifecycles. Each has benefits and downsides, but the most important idea is to make sure you know what each is best at. Make sense? Let’s do the Drillin’ …

Q:  I have a small sampling of the RFM scores that correspond to the various lifecycle stages.  For instance, 111 & 112 correspond to the acquisition stage, 333 & 443 to the growth stage, etc.  However, I’m looking for a complete listing of all 125 possible RFM scores and their corresponding lifecycle stages.

Can you please send this my way?

A: Wow, I certainly hope you didn’t get this idea from me; if you did, I have done a terrible job of explaining something somewhere. I would be very interested in the source of this idea, that a LifeCycle stage can correspond to a single RFM code or score.

An RFM code or score is the ranking of a single customer against all other customers for likelihood to respond and future value at a specific point in time. High scores equal high future value; low scores equal low future value.

A single RFM score represents this ranking at a fixed point in time – the day the scores were created. There is no “cycle,” which implies “over time,” inherent in an RFM code. Only if you knew the previous RFM code or sequence of codes could you imply a “LifeCycle stage”. This is, of course, what my book is about – using a modified version of RFM to track and profitably act on customer LifeCycle behavior. If you know the LifeCycle, you can predict behavior. If you can predict behavior, you can dramatically improve marketing ROI.

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