Creating Effective Retention Campaigns
Drilling Down
Newsletter
# 66: 4/2006
Drilling Down - Turning Customer
Data into Profits with a Spreadsheet
*************************
Customer Valuation, Retention,
Loyalty, Defection
Get the Drilling Down Book!
http://www.booklocker.com/jimnovo
Prior Newsletters:
http://www.jimnovo.com/newsletters.htm
========================
In This Issue:
# Topics Overview
# Best Customer Retention Articles
# Creating Effective Retention Campaigns
--------------------
Topics Overview
Hi again folks, Jim Novo here.
Over the past 5 years or so, we've moved on from "Drowning in
Data" to having lots of reports on the data. Still, people seem to be having problems
translating these reports into action. What exactly should be
done and when? How do
we approach defecting customers in way that turns around their
behavior? What kind of marketing should we do? Some
version of the same old?
No. You now know the behavior, and that allows you do create
the most targeted and effective marketing on the planet. Stir in
a little knowledge of psychology and the customer Buying Process, and
you have a winning formula (almost) every time.
We've got a great example of this for you in this month's
newsletter, along with a couple of supporting customer marketing
links.
So let's get to the Drillin'!
Best Customer Marketing Articles
====================
Unraveling
Complexity
April 23, 2006 Knowledge@Wharton
Complexity causes friction. How can you go about optimizing your
products and services, just like you are optimizing your web
site? This set of 3 articles provides some leadership on the
issue. The core idea behind reducing friction is a focus on the
customer's Buying Process rather than your Selling Process.
Take action on data
April 27, 2006 Multichannel Merchant
You've got the data, now what do you do with it? Some classic
strategies that always seem to work, online or off - if you understand
the psychology
of the customer.
Questions from Fellow Drillers
=====================
Creating Effective Retention Campaigns
Q: Hi Jim,
Love your newsletters. Do you have a
tip jar I can use to donate to the cause?
A: Hmmm...maybe I ought to start one...nah. It all
works out in the end!
Q: Take a look at this chart I did of cumulative customer
purchase Recency (actual numbers changed but the relationships are
same):
http://www.jimnovo.com/attrition.jpg
** Jim's Note: How to read the chart:
"In the past 3 months, ("3" on horizontal axis), 30%
of our customers have made a purchase ("30%" on vertical
axis). In the past 7 months, almost 40% of our customers have
made a purchase. Because the last category is "last
purchase 36 months ago or longer", the chart includes all
customers - 100%.
Since each customer can have only 1 "most Recent"
purchase, each customer is on the chart only once. Therefore, if
40% of customers have made a purchase in the past 7 months, 60% have
not made a purchase.
Q: What does this pattern (the % of total by group)
tell one generally about the attrition in the business model?
It's interesting, I've never looked at this kind of diagram before.
For our business (wine retailer with "club" option), I
generally consider anyone with a transaction in the past 12 months to
still be a customer.
A: Wow, that is some set of numbers. If it
mimics reality, that's one smooth curve, which is typical of online.
What you are seeing is a clear demonstration of what happens when you
take "friction" out of the customer interaction equation.
Offline, the curve is usually "lumpier" than this due to
higher transactional friction. I would love to use this in a
case study....or maybe the next newsletter...would hide the source, of
course.
Anyway, there is nothing very surprising here for your type of
business, customers roll off on a regular, gradual basis. I seem
to remember a sub-segment from previous conversations that cancels the
"membership" but still buys from the store. Now that
you have this info, it might be worth it to make a segment
there.
In other words, the "start" date for this sub-segment
would be cancellation of membership, then look at last purchase date
as was done here. It's quite likely the two segments behave
differently. In your initial test, you might want to look at
"last purchase date as a member" if you can.
So you get two curves, one for "members" and one for
"ex-members". Kind of gnarly from a query-writing
point of view, but there probably is a significant difference in
behavior, meaning an opportunity for higher ROI. They are on one
curve as a member, with one "highest ROI promotion point",
then when they quit and become a "store buyer", they are on
another curve, with a different High ROI promotion point. See
what I mean?
Q: Now I just need to think of a really attractive
promotion I can use to reactivate some of these defected customers
:-)
A: Ah yes, the "how to act correctly" on the data.
This is the single largest challenge folks have now. After 5
years many finally have the data, but simply don't know what to do
with it.
Since you were generous enough to share this data, I'll give you
some ideas. Keep in mind I really don't understand your business
other than looking at the web site, so I have a pretty good idea (love
the home page copy, BTW) but I don't know margins, distribution
costs, etc. For that kind of analysis, you gotta
"donate" something ;)
Generally, you first need to define your true defection point; the
number of months beyond which it makes no sense at all to spend
on the customer. Then you can fine tune from there.
This process is really about defining "economic
defection" - regardless of whether the customer has
"actually defected". To me, that whole discussion
about whether the customer has defected or not and how to define it
that the CRM navel-gazers are always having is pointless. It
doesn't matter.
And the reason is this: if I can't increase the profits from a
customer, then there is no reason to spend anything on them or to even
consider them a customer at all. Right? So whether they
"really defected" or not is not an actionable piece of
information, there is no profit in knowing the answer.
First, I would exclude anybody who bought in the past 3 months.
The attrition rate here is pretty slow, and you don't want to promote
to people who have a good chance of buying anyway. You can
always go back and retest them later after you study the buying patterns of this group in more
detail. Early on, things like media source can dramatically
affect continuation, so "brand new" or active customers are
a different game.
Second, you don't want to make it "too easy", you want
real proof any responders from a particular Recency segment still have
potential value, you want them to
work a bit to get the reward. The first time you do something
like this, you are bound to lose money, it's the cost of gathering the
data now that will later allow you to be more profitable.
I don't know what other promotions you do on a regular basis
(e-mail?) but you want to go above and beyond that "usual
fare" when base testing for economic defection. If you
offer 20% off certain products in a regular e-mail, this promotion
should offer 40% off, that kind of thing. If you don't already
do any regular promotions, you can go easier, say 25% off, free
shipping, etc.
Either way, you also want them to engage in some kind of
affirmative behavior, not just chase price, so you toss in a kicker -
if you re-activate membership, for example. You want them to
take some concrete action, that is the point. "Response
rate" is not the goal here, this is a test of potential value and
the data generated feeds longer-term strategy. You don't want
high response, you want the response **from the right people**.
Third, consider jumping "outside" the web. When an
online business sends a postcard or a letter, it has a dramatic
initial effect. In your business, I'd guess the impact would be
even higher, given the product. Good thing about the web is it
is easy to start a relationship, bad thing is it's just as easy to
drop one. So going with a postcard or "personal"
letter will really load up your guns.
The idea behind #2 and #3 is to "throw the book at them"
so when you get to a Recency segment that has no response at all, you
are very confident they are defected. At the same time, you
structure the offer so that you screen out low potential value
participants.
Side story: I once sent out a "$100 off anything" coupon
to a new customer segment I knew had defected but nobody believed me
because I was declaring them defected at 30 days. Zero
redemptions. End of argument, and end of that product as a
"featured item" because it "drives new customers".
Right, drives new customers of such high quality that they can
basically order anything from us free using this offer and they don't.
How about offering something that creates new customers that are also
repeat buyers? Duh.
Something wrong with that picture...
Fourth, I'd make the offer product-based in a big way - a
"special" wine, best you have seen for the price, category,
whatever it is. Even though they "have not ordered in a
while", you thought they would "really want to know about
this wine" etc., that's why you sent them "a personal
(offline?) note". You dig? Don't go for stuff like
"2 for the price of one" and that kind of thing.
That's not the "real" customer, I don't think. You
want to reactivate customers who are going to continue, not who are
going to "buy and run".
Designing the right offers is the trickiest part of the retention
business. Think about the kind of person you are willing to
"invest in" - a persona, if you will - and then design an
offer that appeals specifically to that customer and not broadly to
other customers.
So, to review the suggestion above, you want the offer to be
product-focused because you want to attract "true
believers". You want it to be a "special wine"
for the same reason; it has a "story" you can use to
personally reconnect your business with the customer. And you
don't want to "2 for 1" or other strictly price-driven
offers because that's the wrong audience, they have low potential
value, they probably take the offer then never buy again. You
can use price, but if you do, include a "kicker" of some
kind that shows intent - you have to rejoin, you have to buy over $200
worth, you have to make 3 purchases in the next 6 months, etc.
So, for example, "We want you back as a member. If you rejoin
today, I will send you a bottle of this special wine, absolutely
free. You pay only shipping and handling".
See? Psychology of the offer. Design it so it attracts
the right kind of person, and make sure they have to put some skin in
the game (buy a membership and pay shipping) to ensure you are buying
potential (future) value.
Then drop the campaign across all the Recency segments after 3
months in your chart. Use a 10% sample of each segment, for
example. Chart where breakeven is, and that segment represents
economic defection. Take any money you are spending on customer
marketing out past the defection point and plow it into customers with
a Recency before the defection / breakeven point.
Fifth, watch the store. An advantage to focusing on the
product is even if you don't get them to reactivate membership, you
may sell them some bottles of your special wine anyway - at full
price. Hey, nothing wrong with that. That starts a
"second LifeCycle", if you know what I mean, with it's own
attrition rate, it's own marketing program, etc. Don't forget to
include the profit from these "side sales" in your breakeven
- they are paying for the campaign too, even if not for membership.
In the end, what you probably find is that there is a logical,
sequential LifeCycle that you can take advantage of, something like:
1. Customer signs up for "membership". There
is marketing that goes along with this, which you seem to do quite
well already.
2. Customer cancels "membership". This is a
critical juncture, you want to tell them you "still love
them" and they are welcome to buy in the store, let's say, under
a new kind of plan, a different type of "membership".
"As a former member, you will get 10% off on any store
purchases, you get the e-mail update with "Top Picks", etc.
They have to take some kind of affirmative action to get this though,
a "sign up", again, you want "continuers", not the
"buy and run" types that cost you money.
3. Customers who fail to sign up for #2 or sign up and then
quit are offered a "Store Specials" kind of thing that
basically (I'm guessing) is more self-serving, helps you manage
inventory, gooses sales when you need to, and so on.
4. Customer defects economically. At some point, say
the 15 month block, you simply get no response to anything you do, or
the response is so weak that the campaign does not create enough
profit to pay for itself. That's economic defection of the
customer.
Virtually all customers will eventually defect, that's just the way
it is. The key to improving profits is nudging that one or two
extra purchases per customer into the system. You multiply that
by 100,000 customers and you're talking real money.
Good luck with it!
Jim
-------------------------------
If you are a consultant, agency, or software developer with clients
needing action-oriented customer intelligence or High ROI Customer
Marketing program designs, click
here
-------------------------------
That's it for this month's edition of the Drilling Down newsletter.
If you like the newsletter, please forward it to a friend! Subscription instructions are top and bottom of this page.
Any comments on the newsletter (it's too long, too short, topic
suggestions, etc.) please send them right along to me, along with any
other questions on customer Valuation, Retention, Loyalty, and
Defection here.
'Til next time, keep Drilling Down!
- Jim Novo
Copyright 2006, The Drilling Down Project by Jim Novo. All
rights reserved. You are free to use material from this
newsletter in whole or in part as long as you include complete
credits, including live web site link and e-mail link. Please
tell me where the material will appear.
| 
