Match Cost of Effort with Value of the Customer

Jim answers questions from fellow Drillers
(More questions with answers here, Work Overview here, Index of concepts here)

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?

For example, if you have a small number of very high value customers who look to be defecting according to RFM then a call from sales is triggered.  If you have lots of medium value customers who look to be defecting, then a direct mail campaign is what you need, which is probably from marketing.  Low value customers, perhaps unlikely to repurchase, at least in the short term? Email, probably from marketing. Match the value of the effort to the value of the customer; this is how you get gigantic ROI’s (or since you are a finance guy, more accurately something like ROME’s – Return On Marketing Expense).

Q: We are a subscription service in which customers pre-pay for the service they expect to use.  Our sales (and I guess marketing to some extent) are responsible for driving customers to use their service throughout the year.  Usually if a customer uses more than they committed to then they raise the commitment the following year.  So I guess my question is this: Can RFM be used for a pre-paid subscription service?

A: Sure, perhaps not in the “classic” sense.  For many service biz, particularly subscription ones (telco, insurance, etc.) you profile activity other than billing.  Sounds to me like what you want to profile is usage – the more Recently and Frequently a customer has used the service, the more likely they are to continue using it.  So you could rank customers by likelihood to “continue using the service.”  High value customers with low likelihood (low or dramatically falling RF-M score) to continue to use the service get a sales call, mid to low value customers with low likelihood to continue get a direct mail piece from marketing.  Dramatic changes in score require the most urgent attention, in terms of allocating resources to the effort.

Q: As an FYI, we have customers who pay as they go and customers that sign a yearly commitment.  Would it be best to segment the two groups when developing the RFM model and tripwires?  As we have different size customers some spending more than $10K/year and some $1K, should we segment based upon dollar values as well? 

A: Yes, both these segmentation approaches would help you.  More on this below.  Payment method is a huge behavioral clue, there will be significant differences in behavior.  With a service, you hopefully know why people stop using it.  Find defected best customers (high value cancels) and look at why they stopped using it (or interview them if you don’t know, offer a free month or whatever to get them to talk to you) , and create sales / marketing – pitches / materials to address the issues they have.  Then when you see a client engaging in a defection pattern on usage (drop in RF-M score), engage the appropriate response (sales or marketing) based on customer value.

And sure, the more you segment your customer base, the better it works.  You should start at the bottom, however.  Don’t “out-think” the segmentation; let the data speak to you.  Try something at a very basic level and look for the hands to be raised; this will tell you what works and put you on the right track.

For example, let’s say (and I imagine it would be true) that SIC codes play a role in the quality / value of a customer.  So you do a campaign (sales, marketing, or both) to all customers who used to access the database Recently and Frequently, but have dropped off (RF-M score is lower).

What you see when the data comes back is certain SIC codes had a very high response and “activation” and start using your database again, and others do not.  The data has now spoken; it has told you where it is worth spending time / money on this particular idea.  

Perhaps you look at bit deeper, and find that an SIC code that looks to be a “bad idea” overall actually generates activation for you as long as the offer is made by direct mail in the South.  So you keep this particular segment of the “direct mail” campaign and reject the rest.

You can look for other segments by value, by region, by services subscribed to, by average transaction value, by location of their customer, whatever.  As you subdivide segments, you will find new pockets of profitability.  You could spend a LifeTime chasing down all the segments – I have never, ever finished this task on any particular engagement.  Clients call me years after they have stopped using my services to tell me they have discovered unique new segments that are extremely profitable and I appreciate that, because it adds to the knowledge base.

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