"Pre-CRM" Testing Techniques -
Determining the Potential for
Marketing ROI Before You Buy
First Published 2/28/01
If you're looking to measure ROI on an
existing CRM project, see this article.
The following article is from the advanced topics section; you
might want to take the tutorial Comparing the Potential Value
of Customer Groups before reading it. If
you would rather see a general description of the Drilling Down
method and specific benefits first, go to the home
CRM can generate increased profitability for your business in two
1. Reducing costs, usually in the call center or distribution
system (operational CRM). The analysis of ROI benefits here is
usually pretty simple if you understand current operating costs in
2. Increasing customer value (LifeTime Value) through smarter marketing
(analytical CRM). ROI analysis in this area is
usually a bit more complex, particularly if the company lacks
experience in really using customer data to increase customer
It's possible to determine in advance
whether the "customer marketing side" of a CRM initiative has the
potential to increase the value of your customers. Doing this exercise will also help identify any special needs
you may have to consider when choosing a CRM package, and serve to
educate participants in some core issues on customer
You can use the following methods "pre-CRM" to estimate the
potential for the marketing side ROI of CRM investment, or
use them to prove plain old database marketing will be as
effective as the marketing / analytical side of CRM when trying to
increase customer value.
If you have already implemented CRM and are looking for a way to
measure the ROI of the implementation from the customer marketing
side, see the "how to" details in this article.
There's been a lot of CRM commentary on having a
"relationship" with your customers. Personally, I
think this idea is a bit of a stretch. How many companies do you want to have a
"relationship" with? CRM shouldn't mean playing
"buddy-buddy" with customers. You're in business to
make money, not to fawn over customers. You have to provide
good service, of course - that's a minimum requirement.
The fact is, many high-end CRM analytical
packages rely on existing database marketing techniques in use for
decades, but the techniques themselves have been lost in the
CRM shuffle. You can easily use these same proven techniques to
model your likely success with analytical CRM before you buy.
Relationship Marketing, the
foundation strategy behind One-to-One and CRM, is not about having a relationship with the
customer, it's about having a dialog
This dialog is not a speaking conversation, it is about
understanding the customer LifeCycle and
responding proactively to it. The LifeCycle is defined by the
customer's behavior from the first day of business with you until
they stop doing business with you. It's the LifeCycle of the
customer that determines LifeTime Value.
The concept of LifeTime Value without the LifeCycle is meaningless;
if you don't know what the LifeCycle is, how do you determine the
"LifeTime" to calculate a "Value" for?
If you understand the customer LifeCycle, you can react to
changes in customer behavior, and these reactions to their actions
are your dialog with the
customer. It's this action-reaction, back and forth, give and
take dance that is Relationship
You can increase LifeTime Value by affecting the LifeCycle, in
one of two ways:
1. Extend the LifeCycle, creating more time
for the customer to increase in value. This is usually
accomplished by concentrating acquisition efforts on known long LifeCycle,
high future value customers.
2. Increase average value
within the existing LifeCycle. This is usually accomplished by
knowing when customers are most likely to engage in
revenue-generating activities with you, and taking action to get the
The implementation of "anti-defection" campaigns
can be used to address both of the above issues. The following
tests should give you a good idea if you have the kind of customer
base that will respond in a profitable
way to these techniques for increasing customer value.
Requirements of Tests
You need a customer database, with all possible transactions with
the customer included in it. "All transactions" is
not a requirement; it's nice to have. If your shop does not
have this capability, focus on the highest value transactions,
usually sales (perhaps page views or visits).
If you're multi-channel and have
data in different databases, it would be best to combine the data at
the customer level. If this isn't practical, do the following
tests on each database separately.
You need an analytical tool, a software program you can use to
query the database and produce reports (and someone who knows how to
use it). And you need a little bit of marketing money to do a
test e-mail or direct mail promotion.
The first test, customer acquisition, addresses your ability to extend
the LifeCycle. The second, Customer Retention, addresses your
capability to increase average customer value during the LifeCycle
and the potential effectiveness of anti-defection campaigns.
Combined, they should give you a good idea if CRM (or database
marketing without CRM) will work in a profitable way for you.
Test 1, Customer Acquisition - Pick a start date, say one year
ago, and calculate the current value of each customer who
started with you in this month one year ago (you could use gross sales or total visits as a proxy for customer value in this case).
Sort customers by this current value.
Look at the top 10% best (most profitable) customers,
and the bottom 10% worst (least profitable) customers. Other
than the revenue / profit variable, are they different? Are they from
different places, were they acquired by different methods using
different offers, do they tend to buy certain products? If you
can find any significant differences between your best and worst
customers, you have a shot at improving customer retention
(increasing LifeTime Value) by fine-tuning customer acquisition
The idea here is twofold: If you can identify high and low
value customers by some data element, you can allocate a larger
share of budget to acquiring high value customers, and automatically target follow-up
programs to "fix" low value customers. If you have
the data, look closely at elements of the first transaction
(product, media, price, offer); the first experience of a customer
heavily influences the LifeCycle / LifeTime Value.
Test 2, Customer Retention - Pick the highest value generating
activity in the database. It's probably product sales, but it
could be page views or other ideas. Sort your customers by their
last date of this activity. Label the top 20% (those who
engaged in the activity most Recently) of customers 5, the
next lowest 20% 4, and so on, so the bottom (least Recent) 20% is labeled 1.
equal sized random sample of people from each 20% group, say 10%. Send them a
promotion with broad appeal; don't be overly restrictive in your
offer. You don't have to give away the store, just make sure
the offer isn't "targeted" to any particular group.
For commerce, this offer might be "10% off anything in the
store." For content, it might be a free day of access to
normally paid content as a "trial period."
When you look at response rates to
the promotion by the "scores" 5 down to 1, they should
appear similar to the following:
You won't see these numbers specifically, but the pattern should
be evident. The customers who are "5" should have a
response rate anywhere from 5 to 40 times higher than the customers
labeled "1," and response should noticeably decrease at
If you see this pattern, CRM marketing techniques, or what we
used to call Relationship Marketing (using the customer LifeCycle to
determine marketing strategy), will be able to
increase the average value of a customer within the existing
LifeCycle. This kind of response pattern also indicates
anti-defection campaigns will be a profitable way to both extend the
LifeCycle and increase customer value within the existing LifeCycle.
The next test would be to try and manage customer value -
to make money by creating very high ROI customer marketing
campaigns and site designs. If you can make money with simple
database marketing techniques, you will have "proof of CRM
ROI" and will be able to estimate your return on the CRM
The Drilling Down book
describes step by step how to do this. You will learn how to create
future value and likelihood
to respond scores for each customer, and how to
use these scores to continuously increase the value of your customer
base. Or I can do it all for you.