Short Tail of Customer Value
Drilling Down Newsletter #91 7/2008
Drilling Down - Turning Customer
Data into Profits with a Spreadsheet
Customer Valuation, Retention,
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Hi Folks, Jim Novo here.
Short and sweet for the mid-summer month is this Drilling Down
newsletter. Kind of a family reunion, with 3 interrelated
First up, we have a couple of Blog posts looking at the topics of
Measuring Customer Friction and the manifestation of this concept in
Path Analysis - only in this case, the Paths are offline. Then,
we engage with our old friend George Kingsley Zipf, father of the model that
enables the "Long Tail" concept, on how
interactivity affects Customer Value.
Three related concepts for your mid-summer Drilling
consideration. I promise you won't have to work too hard...
Sample Marketing Productivity Blog Posts
July 16, 2008
Friction is the force that causes the opposite of Engagement; itís the reason Engagement ends, causes dis-Engagement.
Friction is really about the likelihood a customer will continue to do business with you.
The actual causes of Friction are created on the business side, and manifest themselves on the customer side as impatience, frustration, and
lack of loyalty.
July 11, 2008
Iím sure most people have heard about Path analysis as it applies to product placement in retail.
You know, the reason grocery stores put the milk coolers in the back.
Thatís not a random decision. Neither are decisions about the height of the shelves certain products are placed on - eye level for adults, eye level for
kids. This is Path; an understanding of how people react with the environment they are in.
Questions from Fellow Drillers
Short Tail of Customer Value
Q: Have you done any work using Zipf's Law? Looking at customer value segments, they seem to
follow the same distribution.
A: I'm not sure in what context I would use Zipf's
"law" in a mathematical sense, though I see manifestations
of the general idea in my work, and recognize the principle embodied
it as well as the weaker cousin, Pareto.
I think most people recognize the operational version of Zipf's
Law (1935) known as the "Long Tail" - the idea that the
web is uniquely qualified to take advantage of niche business ideas, a
fundamental in database marketing.
I rank and compare customer value within a business, then try to
determine the source of differences in value. Once you
know these differences, you can optimize the entire system to increase
customer value through reallocating resources towards highest return.
In my experience, businesses have different customer
"slopes", which defies creating any common mathematical
expression for relative customer value across different businesses.
In general though, I can tell you the more interactive the business
is, the steeper this slope. For example, the ratio of
value between the most valuable customer group and the 2nd most
valuable is much higher in an interactive business than an offline
business, and this effect carries on down in the ratio of value
between 2nd and 3rd, 3rd and 4th, etc.
In other words, the slope of the curve is much steeper online, much
flatter offline. Good customers online are really good, and bad
customers are really bad; Pareto 80/20 becomes more like 90/10 or
Personally, I believe this has to do with what I would call
meaning the more friction there is, the flatter the curve.
Interactivity reduces friction and results in good customers becoming
much better, and bad customers becoming much worse. Reducing
friction compresses the LifeCycle, resulting in the relative value of
the customer being "exposed" more rapidly. People who offline
normally buy 1 book a month, when introduced to online, buy 12 books
in 3 months, then stop buying for 9 months.
You end up with a "barbell" shaped customer base when
looking at aggregate value - very few customers will be extremely
valuable, very many customers have almost no future value, and
harnessing the value of customers in the "middle" is where
all the incremental profits (or losses) are to be made in marketing.
This is why my method stresses customer LifeCycle analysis - the
profit or loss of a campaign very much depends on "time"
(the LifeCycle) as a variable. You have to drive as many of the
"middle" customers in the barbell to the extremely valuable
side as you can before they fall into the no value side, and make
money doing it. Once the LifeCycle starts moving against you,
it's almost impossible to make money changing the direction, and the
customer falls rapidly in LifeTime Value as more and more unsuccessful
attempts are made to increase the value of the customer though
This effect is of course good and bad news for "CRM" and
all the variants; do it right, and you can make a ton of money; do it
poorly, and you could very well amplify the Friction
effect and make matters worse.
I hope this answers your question!
If you are a consultant, agency, or software developer with clients
needing action-oriented customer intelligence or High ROI Customer
Marketing program designs, click
That's it for this month's edition of the Drilling Down newsletter.
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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
'Til next time, keep Drilling Down!
- Jim Novo
Copyright 2008, The Drilling Down Project by Jim Novo. All
rights reserved. You are free to use material from this
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