Using RFM Scores to Predict Profits

Analytics Education, Customer Experience, DataBase Marketing, Driller Q & A, Marketing thru Operations, Measuring Engagement, ,

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.

Subsidy costs. You’re just starting to hear people talk about these ideas in online marketing, but they’ve been around for years offline in direct marketing. The basic idea is this: sending a discount to someone who is very highly likely to make a purchase without the discount is a waste of margin dollars best spent elsewhere. And you can measure this effect quite easily using Control Groups, another concept starting to get some recognition with online marketers.

Discussing / implementing these topics can be a bit difficult, though the Finance people will get it immediately and love it if you go in this direction. A plus for fellow Drillers out there is you can start to see some of these ideas in action BEFORE you start going deep using the RFM & Lifecycle data we’ve been talking about and using for years.

Below is a great example using RFM data from a fellow Driller. You ready to go ?

Q:  Since our last conversation few months ago, we went ahead and tested 3 different promotions using the RFM model.  

The 1st promotion was the test for RFM method itself to see what patterns emerge for response rate, incremental sales, etc.  The next 2 promotions targeted the customers from RFM cells with the highest incremental lift from the 1st test promotion.  Here is what we saw.  Since the targeted audience were our loyalty card members, they transact and spend at a fairly high level (the data below is modified but the trend is maintained).  For the response rate, we saw a sawtooth pattern:

(Jim’s note: RFM is the 3 digit score, Rate is Response Rate.  More on RFM here and here.)

A: Yes…

Continue reading Using RFM Scores to Predict Profits →

How Long is a Customer LifeTime?

Analytical Culture, DataBase Marketing, Driller Q & A, Marketing Research, Marketing thru Operations, Measuring Engagement, ,

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.

There’s always two questions about the topic of Lifetime Value – how do you quanitify value, and how long is / how do you measure / decide what a Lifetime is? For now we’ll leave the value question unanswered, because a lot of that depends on company culture and what question you are trying to answer. Plus, it depends on how you measuree a Lifetime.

So let’s do the Lifetime thing first, shall we? To the Drillin’…

Q:  First of all thanks for an excellent web site – I often visit it to learn and / or get inspiration in my work.

A:  Thanks for the kind words!

Q:  Anyway, I work in a telco retention department and I’m trying to calculate a true and fair value for customer life time answering the question : “How long do we on average have a customer?”.

A:  A both noble and useful pursuit!

Q:  I have data on when customers signed up and when they left (or of course whether they are still here). My first problem is whether to include both lost and existing customers in the calculation.  If you only include the customers you lost you are only able to answer the question for those.  If you include existing customers you don’t know what life time to use for them.

A:  Well, yes, that’s correct.  But you’re really trying to accomplish several things at the same time, so you can break the analysis into different parts and then apply some business logic to get your answers. 

Continue reading How Long is a Customer LifeTime? →

Using Multiple, Related Customer Models Across the LifeCycle

Analytics Education, Customer Experience, DataBase Marketing, Marketing thru Operations, Measuring Engagement, ,

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.

So you have all these simple but powerful customer models – Recency alone, Latency,  RFM, or LifeCycle Grids – how do you know which one (or ones) are best to use for your business? Guess what – it depends on the specific features of your business and also how you run the business. Now, while that might sound a bit scary, it’s really not that big a deal and in the end, the great news is you’ll end up with an approach customized to your business. So how do you accomplish this? Just segment and analyze your customers; they will tell you, my fellow Driller, which direction is the best to follow. You dig? Let’s go ahead and see what that looks like …

Q:  We recently purchased your book

A:  Thanks for that!

Q: and we are ready to start building some RFM analysis.  We are a search marketing business – we have a large customer /prospect base.  We have limited knowledge about them and we are keen to start on the journey.

A:  OK…let’s see what you’ve got.

Q:  We are hoping to extract database (approximately 25k names) of the last 6 months records and do some RFM analysis on key customer groups.   Specifically:

TEST GROUP A – people who initially purchased one of our trial products – we want to know what is their RFM score.

TEST GROUP B – subscribers to our “tool kit” product at $50 / month – we want to know what is their RFM score.

Q:  What kind of data are we talking about?  Is it web site visits, clicks on emails, transactional / subscription data, all of the above?

A:  Before setting up the model we have a couple of questions we hope you can shed some light on:

1.  How do we treat subscription – our business has a mix of one-off and subscription business – if someone “buys” every month with a subscription, is that included in Recency & Frequency?  Any insight you can provide us would be great – we found some info on this in the book but unsure given ours is a mix of subscription and one off.

Continue reading Using Multiple, Related Customer Models Across the LifeCycle →