Making Money with the Customer LifeCycle: Customer Latency
First published 8/22/01
Jim's Intro: Latency is one of the very simplest to implement "trip
wire" metrics, and you can use it to make more money
marketing to customers whether you are using a CRM suite or a
spreadsheet to run your business. This article is Part Two in a
series of articles on Behavioral Marketing techniques.
Part 1: Trip Wire Marketing
Part 3: Latency Profiles
Part 4: High ROI Latency Promotion
Part 5: Extending the LifeCycle
Based on a national survey, 50% of marketing managers do not know
their customer defection rate, and the other 50% underestimate the
true defection rate. After reading this shocking statistic, I
figured it was time to do a series on customer LifeCycles, which can
be used both to track customer defection and define high ROI opportunities to retain customers before they defect.
If you understand the customer LifeCycle, you can predict the
primary defection points and react to them before customers leave you.
This is the highest ROI marketing you can possibly do; it's
cheaper than win-back (after the customer defects, response is much
lower) and preserves the
investment and profits you have in the customer.
So we're going to take a little tour through LifeCycle-based
marketing land in this article, and take a look at one of the simplest
customer LifeCycle metrics - Latency.
At the core of a LifeCycle-based marketing approach is (shocker)
customer behavior. Customers tend to behave in certain ways
unique to your business and products, and if you can discover these
patterns, you can use them to predict customer behavior. If you
can predict customer behavior, you can make a ton of money marketing
to your customers, because you can anticipate their behavior and take
appropriate steps to try and modify it.
Many approaches to customer marketing rely on customer behavior
"trip wires." For example, a win-back program is
triggered when the customer defects. Have you switched long
distance or cellular providers lately? Did you get
inundated with win-back calls begging you to reconsider?
"Jim, we just wanted you to know we have lowered our rates."
Yea, well, thanks for telling me after over-charging me for the past
six months. But
could they have known I was about to switch?
Sure. If they had looked at the calling patterns of defected
customers like me, they would have seen a common thread in the
behavior. These patterns create the "trip wires"
for initiating high ROI marketing campaigns before the
defection. The proper profit maximizing approach is to wait
until I look like I'm going to defect, and then call me and offer a
lower rate before I defect.
I would humbly submit marketing to the customer after they
defect is a sub-optimal approach; the decision has already been
made. If you can market to them when they appear likely to
defect, you optimize your marketing resources by not applying
them too soon or too late in the customer LifeCycle.
An easy to implement and proven powerful LifeCycle trip wire is
called Latency. Latency refers to the average time between
customer activity events, for example, making a purchase,
calling the help desk, or visiting a web site. All you have to
do is calculate the average time elapsed (Latency) between the
two events, and use this metric as a guide for anti-defection
Many small business people naturally use Latency in an intuitive
way: "Gee, it has been a while since Mary had her hair
styled." What he really means is this: Mary is taking
longer than the average customer to schedule a "refresh" on
her hair. In database marketing terms, her Latency is
exceeding the norm. So the stylist calls Mary and finds either a
customer who "forgot" and appreciates the reminder or a
customer who has defected to another stylist.
In database marketing, we don't rely on "remembering"
the habits of thousands of customers; we measure the behavior and
react based on these measurements.
When you see a particular customer's behavior
diverge from the average customer behavior you have calculated above, you get a
trip wire event. Since the calculation of Latency is very simple, and the
diverging behavior is easy to spot, this type of anti-defection
campaign is an ideal candidate for "lights-out" or
automated rules-based customer retention campaigns.
As an example, let's take purchase behavior in a retail scenario.
If you were to examine your customers, and find the average time
between the second purchase and the third purchase was 2
months, you have found "third purchase Latency." Any
who goes more than 2 months after the second purchase without
making a third purchase is diverging from the norm, and a likely
It's simple logic. If the average customer makes a third
purchase within 2 months of the second purchase, and a particular
customer breaks this pattern, they are not acting like the
average customer. Something has changed. This particular
customer's LifeCycle has become out of synch with the average
customer LifeCycle, and this condition is a trip wire for
high ROI customer marketing.
On average, if you divert marketing resources away from
customers who have made a 3rd purchase within 2 months after
the second, and apply these resources to customers who are
"crossing over" the 2 month LifeCycle trip wire without
making a third purchase, you will end up spending less money
and generating higher profits for any given marketing budget. You are applying your
limited resources right at the time in the
customer LifeCycle when they create the most powerful impact - at the point of likely customer defection.
Now, will all these customers respond? No, of course not.
the ones that do become active, loyal customers again, and those
that don't are probably not going to be good customers in the
future. The behavior of the rest of your customers tells you so.
These non-responding customers may not be worth spending
money on to "win-back," and in fact, will have much lower
response rates to a win-back campaign. They have already
demonstrated their lack of interest with their behavior, and you
could be better off financially by just letting them go and
focusing on more responsive, more profitable customers.
The above example is a relatively crude approach to Latency. As
you might suspect, different customer segments will have different
Latency characteristics, and the more you fine-tune a Latency campaign, the more profitable it will become.
For example, let's say you execute the Latency campaign
described above, and succeed in retaining 30% of the defecting
customers, making a tidy profit. But you really have two major
product lines, software and hardware, each 50% of sales. Could
the Latency be different between software and hardware
customers? You betcha. Upon further analysis, you find
purchase Latency for software is really one month, and for
hardware it's three months. The average 3rd purchase Latency
of all customers is 2 months, but the Latency by product line
is specific to each line. So
bust the two groups apart, and run separate Latency-based
campaigns, one for each product line.
In your original third purchase Latency campaign, you promoted to
customers who did not make a third purchase within 2 months of
the second purchase. This means you were "late" for
(because the average Latency is really 1 month) and early for
hardware (because the average Latency is really 3 months). When
you realign the timing based on the line of merchandise, you find
instead of retaining 30% of customers, you retain 50% of the
customers, because you have synched-up the marketing effort with
the true customer LifeCycle more tightly.
And that, folks, is what LifeCycle-based marketing is all about -
using your own customer's behavior to telegraph to you the most important (and profitable) time to
market to them. The customer,
through their behavior, raises a hand and asks you to take
action. If you synch up your marketing efforts with the natural
customer LifeCycle, you can't help but being more successful.
If the above makes sense to you, then you are on your way to
designing the highest ROI customer marketing campaigns of your
career. The Drilling
Down book teaches you all of the proven LifeCycle-based marketing
techniques step-by-step, gradually building up from simple ideas like
Latency to full-blown visual customer LifeCycle mapping techniques.
you want to start returning profits of 2 - 5 times the money you spend
on a customer marketing campaign, you need this book!