Jim answers questions from fellow Drillers
Hi again folks, Jim Novo here.
How do you handle the measurement of “likely to purchase” when there’s a built in cycle of purchase as a “member”, like in a book club or other auto-delivery scheme? And what if a member quits membership but keeps buying, what does that mean for predicting future buyer behavior? Oh, the complexity of it all! Let’s do the Drillin’ …
Q: I just ordered the book too, so I am eager to learn more about SIMPLE ways to implement RFM-based strategies.
A: Well, thank you for ordering! I hope it fulfills your expectations.
Q: In the continuity club (Jim’s Note: flower of the month, book of the month, beer of the month) club business though, a little of the RFM process looks tricky because everyone has a certain Frequency built-in, because of the “repeat” nature of clubs. Also, we’re starting to see a phenomenon where customers that drop out of our club continue to order from us.
A: This is quite normal, depending on how the club is set up and whether or not you make it “easy” for people to continue. In some clubs, you are either in or not (books, CD’s, credit cards). Most catalog-type clubs (pay a fee in exchange for ongoing discounts / added services) see continuation beyond club membership. It’s a volume-based thing and a “rational” decision by the consumer – if you need to buy a lot of stuff, joining the club makes sense, because the discount pays for the membership.
In your case, it might be more attached to education, for example – you join the club to educate yourself about the products, then quit when you can “do it on your own.” Or, you get lots of product to experience the variety, and settle into a specific usage pattern. This is the Customer LifeCycle at work. If you can recognize these patterns, you can use them to predict what customers are likely to do next. If you can predict behavior, you can create very high ROI customer marketing programs.
Q: This challenges our traditional thinking that club-lapse is the end of the LTV contribution. It leaves me wondering what really is the end of the LTV for any given customer. The end-all goal for me is to learn everything possible about customer lapse and how to influence it. I’ve been given explicit responsibility just recently to take charge of customer lapse and influence it to our advantage. I’m analyzing the scope of the problem and putting together a plan of attack.
A: Well, somebody has their thinking hat on at that company! In your environment (if I understand it correctly from a brief review of the web site), I don’t think the “club” really defines long-term behavior, it could be seen simply as a customer acquisition tool, which is also true of the catalog-type clubs I referred to above. You have to be careful with this kind of club, because you can end up creating negative value customers if they buy a lot of low margin goods with a membership discount and then just simply abandon you.
The bottom line is this: you probably should not define LTV by club membership length. It may be convenient to look at membership as the definition of a “customer,” but being a “member” is probably just the first stage of the customer LifeCycle. There is then a transition period where some stay members, some reject membership but remain customers, others quit entirely. You need to find out what variables – media source of customer, creative / offer used, first product purchased, etc. cause customers to end up in these buckets and optimize for highest value.
If you want to be proactive on this LifeCycle transition, you need to predict which members will transition and remain customers, which ones need promotional “help” doing this, and which ones you should not bother spend on. How? You can check out how we did this at Home Shopping Network in the book, it’s quite simple and works like a charm. Track the customer LifeCycle using simple metrics like Recency or Latency and act only when you have to, and when you do act, always act at the point of maximum impact.
Q: What sort of work have you done on customer lapse studies, retention marketing, or in club environments like mine?
A: I’ve done 100’s of customer retention programs over the past 20 years. Every one is different based on the industry, the business model, and the constraints of the specific business. You will find many examples in the book, and a case study is on the web site here. Unfortunately, companies are not very willing to let me talk openly about solving their customer retention problems; they consider this info a “trade secret” because of the financial implications and competitive issues involved. I can suggest you read the book first before hiring a consultant; it provides a ton of “how to” information and could keep you busy for quite some time!
Download the first 9 chapters of the Drilling Down book: PDF