Making Money with the Customer LifeCycle: Extending
First published 12/07/01
Jim's Intro: So you did the trip
wire promotion and you made a ton of money. Congrats!
But are there longer term effects (what, a 114% ROI isn't enough?) to
anti-defection campaigns like this on the Customer LifeCycle, and can
you take credit for them? You bet. This article is Part Five in a series of articles on Behavioral Marketing techniques.
Part 1: Trip Wire Marketing
Part 2: Customer Latency
Part 3: Latency Profiles
Part 4: High ROI Latency Promotion
Last month, we looked at how to execute a Latency-based
promotion and execute the two rules of
High ROI Customer Marketing:
1. Don't spend until you have to
2. When you spend, spend at
the point of maximum impact
By focusing your resources squarely on the problem, each
dollar you spend works much harder. By waiting for the trip wire
you narrowed the population you were promoting to, weeding out
people you would normally waste money on. And by acting when
the wire was tripped, you spent at the point of maximum impact. This approach let to a 114% return on the promotion, as result
of the "found profits" you generate when you surgically prevent
customer defections with ultra-targeted promotions.
We were left with a question, though. This promotion was not
designed to extend the customer LifeCycle, but to add value
to the LifeCycle. Did we actually extend the LifeCycle,
and how would you measure this effect?
Recall you made $8000 in 90 days after paying back an
investment of $7000 with this promotion. You generated a
bottom line profit of $1.60 per customer - without even looking
at what happens to the customer after the 90 day promotional
period is over.
But it is very likely you did something else with your
promotion - you extended the LifeCycle of the customer -
and this is how you track these "LifeCycle extension" effects.
All the customers in both the test (received promotion) and
control (did not receive promotion) groups were 3x buyers who
failed to make a 4th purchase by 180 days after their first
purchase. This was the Latency "trip wire" selected to trigger the promotion.
So let's look at tracking these two groups for another 90 days,
and look at continuing purchase activity using what I call the
Hurdle Rate method.
A Hurdle Rate is simply the percentage of customers in a group
who have "at least" a certain amount of activity. You define the
behavior hurdle they have to reach, and measure the percentage
of customers who have achieved this "threshold" (rate). If you
track these percentages over time, you can use them to compare
the actual and potential value of customer groups as a whole.
At the point of the promotion, 0% of both groups had made a 4th
purchase. Recall we measured the profitability of the promotion
over a 90-day period after we sent it to the test and control
To track the Hurdle Rates for each group, we ask, "What percent
had made at least 1 more purchase at 30 days, at 60 days, and
at 90 days after the 90-day promotion was over, in both the test
and control groups?"
We know some percentage of both groups made a purchase
during the promotion, because there were revenues generated
in both groups. We made a profit in the first 90 days because
the revenues were much higher for the test than control group.
So at the beginning of this "post promotion" tracking, we see 1%
of control and 3% of test have made 4 or more purchases. For
the following 90 days, data might look like this:
% 4 or more purchases
End of 90-day Promotion
30 Days After Promotion End 1%
60 Days After Promotion End 2%
90 Days After Promotion End 2%
Realize this: we have already made money on this promotion, a
114% ROI. We have already added value to the LifeCycle,
increasing LifeTime Value - no matter how long a "LifeTime" is
(does it really matter, as long as you are making profits?)
But as you can see from the chart above, we also extended the
LifeCycle itself, because the percentage of customers exceeding
the "4 or greater Hurdle" in the test group is far higher than
the percentage of customers over the same Hurdle in control,
and it appears to be growing over time.
There is a group of customers in the test group who just keep
on keeping on - and this percentage (10% at 90 days after
Promotion End) is much higher than both the initial group
who responded to the promotion and made a 4th purchase
(3%) and the test group. What's going on with that?
It's called the Halo Effect. It represents customer activity
stimulated by the promotion which did not occur within the
promotional period. Now we don't know exactly where it's
coming from, and we can't show any measure of profit
from it (we defined our promotion period as 90 days) , but
it is clearly there, plain as the nose on your face.
Recall when describing the original
promotion, I stated, "Response Rate doesn't matter in the
measurement of profitability (it matters a lot in other cases).
When you use control groups, you pick up buying behavior you
never could have measured by just looking at response."
This "buying behavior you never could have measured" is the Halo
Effect, working it's magic during the promotion. People you
have no way to track will respond to the promotion. They
want to make a purchase but forget the coupon, for example. So they
go ahead and make the purchase anyway - because the
promotion "woke them up" to a need for something you sell.
After the promotion is over, the same thing continues. It's the
Halo Effect again, working after the promotion. For example,
people think about participating in the promotion but
wait too long. They've missed it. But they're now in a new
state of awareness about your company because of the
promotion, and so are more likely to make a purchase given
any random positive stimulus. Perhaps some product
appears on a TV show. Maybe a competitor promoted a
product to them, the customer remembers you sell it
also, and prefers your store.
It doesn't really matter. Fact is fact, and because of your
promotion, you extended the customer LifeCycle. You created a
situation where people became more likely to purchase from your
company in the future, as demonstrated by the chart above.
Not bad for a beginner. In the first 90 days, your promotion
created present value - real bottom line, measurable ROI - which
adds Value to the customer LifeCycle (LifeTime Value). In the 2nd 90 days, your promotion
created future value - accelerated
repeat purchase rates - by extending the LifeCycle.
CFO sings your praises! At last, somebody who can prove they
are making more money than they are spending with marketing!
There is an important lesson here: you will never know how much
money promotions really make without using control groups.
Well, I hope you've learned some actionable ideas on this trip
through a Latency-based promotion. The plain fact is, this stuff
works, it is simple to implement, and it makes money hand over
fist. But Latency is only the beginning. It's the least
effective, lowest ROI predictive behavioral metric you can
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!