Recency: Not for Everyone? - Drilling Down Newsletter #
26: October 2002
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In This Issue:
# Topics Overview
# Best of the Best Customer Marketing Links
# Tracking the Customer LifeCycle: Recency
# Questions: RFM in a Subscription Business
Hi again folks, Jim Novo here.
This month we've got the usual "best of" Customer Marketing
article links, the third installment of the series on Recency, and a
fellow Driller (a finance guy!) looking to increase profitability
using simple customer models in a subscription-based business.
But first, a gift for you. If you celebrate a holiday this
time of year, you can consider it a holiday gift, if not, just
consider it a gift. It is a gift of hard-earned sweat
equity, testing, attempts at development, failures, and knowledge which some of you will find extremely important and very
valuable, because it will save you a lot of time and money, and
you have my word it is everything it promises to be.
Order Management for Remote Retailers
Those of you who have been with me for a while know I don't take
advertising in the newsletter, and this isn't an ad or a CPA
deal. It's an all-out, unpaid endorsement of a product we just
set up for our retail "lab site," where retail-oriented
Drilling Down concepts are developed and tested. If your biz
involves taking orders and directly shipping products to consumers,
you have to check out the very affordable Order
Manager by Stone Edge.
I have literally looked for a program like this for years.
There is really no point in going through the details here, but know
this - we cut the time it takes to process and ship orders by 50%,
customer service hassles by 75%, and we now have total control over
all customer messaging. Just for starters.
Plus, if you want to have a functional customer database, one where all
your customer orders are aggregated at the customer level so you can easily
do customer scoring and modeling, you get that in Order Manager -
without all the data entry and import / export issues. And it's
an open system - written in Microsoft Access - so customization is
easy, either on your own for small issues or from the gang at Stone
Edge for larger issues. Folks running a business with this
Easily shipped 300 packs a day
Maintained 40,000 SKU's
Had 150,000 total customers in the database
But it is affordable enough to be extremely useful to 1 person
shipping 10 packs a day, ramping quickly and planning for the
future. Direct interfaces to VeriSign and UPS WorldShip (import
of total order weight !), the ability to...oh, forget it, I said there
is no point in going into the detail, & I won't. Check it
out yourself here
and ask Barney Stone any
questions you might have on the product.
Now let's get right to it and do some Drillin'!
Best Customer Retention Articles
This section flags "must read" articles moving into the paid archives
of trade magazines before the next newsletter is delivered.
If you don't read these articles by the date listed, you will have to pay
the magazine to read them from the online archives.
The URL's are too long for the newsletter, so these links take you to a page with more info on what is in the article and a direct link to the article.
Note to web
site visitors: These links may
have expired by the time you read
can get these "must read" links e-mailed to
every 2 weeks before they expire by subscribing to the newsletter.
Loyalty Techniques to Improve CRM
Expires October 30, 2002 DM News
People seem to forget that "CRM" has been around for
decades, in the form of loyalty programs and smart database
marketing. Here are 5 solid tips from the experience base.
It's All About Communication
Expires November 3, 2002 DM News
If you really want to get down to brass tacks, CRM is all about
communication, and you don't need a lot of fancy software to do that,
just some smart marketers and a plan.
Tracking the Customer LifeCycle:
Real World Examples
If you are new to our group and want to review the previous
LifeCycle metric - Latency - that discussion is
along with the Real World examples Hair Salon and B2B
Software. The previous piece on Recency is here.
Recency: Not for Everyone?
"Now hold on just a minute, Jim," you say. "Recency is a very cool
concept, but I can think of some specific instances where it can't possibly work.
A person who just filed a tax return 30 days ago is not more likely to file
one than a person who filed one 60 days ago, and the same thing is true for people who
bought a new car. Explain yourself!"
Recency is a very powerful metric, but there are times when it simply
is not appropriate to use without some adjustments.
There are two issues to consider when using Recency - external forces
and time frame. If there are powerful external forces shaping behavior - like the April 15th tax deadline -
these forces may overcome the Recency effect and you should use a Latency trip wire
instead. An accountant trying to manage customer relationships would
probably look more to Latency and set this trip wire: I will call best
customers who don't schedule an appointment by March 15, for example.
The tax deadline is simply too powerful a force and overcomes normal Recency behavior; Latency then comes into play.
One also needs to consider Recency in light of the LifeCycle of normal
customer behavior. It is unrealistic to think of Recency for new car
buyers in terms of 30 and 60-day periods, when the normal purchase cycle may be 4
years long. It's not rational to use the Recency metric under these circumstances, knowing the LifeCycle.
However, Recency can be used in combination with Latency to create
extra-powerful simple customer models in both these cases.
For example, up until the April 15th deadline, the accountant is really operating in the world
of Latency. If customers don't call by a certain day, they are unlikely to be using the
accountant for their tax return. Once the April 15 deadline passes though, the accountant is in the
Land of Recency - the longer it has been since the deadline, the less likely it is the
customer will be using the accountant next year. The accountant needs to get on the
phone with these high value customers and find out what happened right away if the
customer is to be recaptured.
The new car dealer is in a similar situation. Let's say the average
customer trades in every four years. Up to four years after the new
car purchase, the dealer is in the Latency world - there is a trip wire at 4 years, and any
customer who has not purchased again at the 4-year point is in danger of being lost.
After the 4-year point passes, the more time passing, the less likely it is the customer will
come back - the Recency effect. As time goes by after the trip wire triggers, it becomes more and more urgent the
customer be contacted and made an offer. And don't forget this: the more time that passes, the higher the offer will
have to be to get the customer to come back - the Discount Ladder
Also, please remember Recency (and Latency) are about relationships, not products.
If I sell home appliances and I profile my customers, someone who bought a stove 30 days ago is
not more likely to buy another stove than someone who bought a stove 90
But 30-day old stove buyer is more likely to buy a dishwasher from
me than the 90-day old stove buyer. That's what the customer LifeCycle is about, the relationship of the
customer and the business, not about individual products purchased.
And Recency is a relative measurement, a comparison, a ranking of customers.
Neither one of these customers may buy a dishwasher from me; but one is more likely
to and so deserves more of my attention if I am allocating precious resources and looking at ROI.
Got it? Good. Now that you have some background in the theory, next
time we will get into some hard core "How To" on setting up Recency-based analysis and what you actually
do with the information to increase the profitability of your business, on- or
off-line. Yes, it is time to Return to some Real World Examples, this time with Recency.
I can teach you and your staff the basics of high ROI
customer marketing using your business model and
customer data, and without using a lot of fancy software. Not ready for the expense and resource drain of CRM?
Get CRM benefits using existing resources by scheduling
Questions from Fellow Drillers
Q: My boss (VP of phone sales) is really looking to try out some
new ideas and RFM is one he has latched
onto. He actually has explored this concept for a few years but
never acted upon it. Anyway, he just purchased your book and
after finding that he did not have time to read it he gave it to me.
My job was to read and understand at a high level and to lead a
discussion with the marketing group to get them excited about the
concept. I am a finance guy by trade so this concept was very
A: That's funny, the people who really "get it" the most
are finance people and IT people, because it is kind of "black
and white," very numbers driven. Stuff either works or it
doesn't - did you make money or not? ROI is the name of the
Q: Obviously I either did not do a good enough job explaining RFM,
Latency, tripwires, etc. or they just are unwilling to have someone
from their team tackle the concept. The question they always
wanted answered was "We don't know why the customer behaved as
they did. Thus a sales call needs to be made not a marketing
A: "Why" is not really the issue; defection is
happening. Depending on the biz, a sales call might be exactly
what is needed. These models are always about allocation,
putting scarce resources to the highest and best use. Per
customer, sales calls are expensive; direct mail is not. If you
have a formal "wall" between sales and marketing, usually
the "whose responsibility is it" issue is decided by
"degree of pain" e.g. how valuable is the customer to the
For example, if you have a small number of very high value
customers who look to be defecting according to RFM then a sales call
is triggered. If you have lots of medium to low value customers
who look to be defecting, then a direct mail/ telephone campaign is
what you need, which is probably marketing. Match the value of
the effort to the value of the customer; this is how you get gigantic
ROI's (or since you are a finance guy, more accurately something like
ROME's - Return On Marketing Expense).
Q: We are a subscription service in which customers pre-pay for the
service they expect to use. Our sales (and I guess marketing to
some extent) are responsible for driving customers to use their
service throughout the year. Usually if a customer uses more
than they committed to then they raise the commitment the following
year. So I guess my question is this: Can RFM be used for a
pre-paid subscription service?
A: Sure, perhaps not in the "classic" sense. For
many service biz, particularly subscription ones (telco, insurance,
etc.) you profile activity other than billing. Sounds to me like
what you want to profile is usage - the more Recently and
Frequently a customer has used the service, the more likely they are
to continue using it. So you could rank customers by likelihood
to "continue using the service." High value customers
with low likelihood (low or dramatically falling RF-M score) to
continue to use the service get a sales call, mid to low value
customers with low likelihood to continue get a direct mail piece from
marketing. Dramatic changes in score require the most urgent
attention, in terms of allocating resources to the effort.
Q: As an FYI, we have customers who pay as they go and customers
that sign a yearly commitment. Would it be best to segment the
two groups when developing the RFM model and tripwires? As we
have different size customers some spending more than $10K/year and
some $1K, should we segment based upon dollar values as well?
A: Yes, both these segmentation approaches would help you.
More on this below. Payment method is a huge behavioral clue,
there will be significant differences in behavior. With a
service, you hopefully know why people stop using it. Find
defected best customers (high value cancels) and look at why they
stopped using it (or interview them if you don't know, offer a free
month or whatever to get them to talk to you) , and create sales /
marketing - pitches / materials to address the issues they have.
Then when you see a client engaging in a defection pattern on usage
(drop in RF-M score), engage the appropriate response (sales or
marketing) based on customer value.
And sure, the more you segment your customer base, the better it
works. You should start at the bottom, however. Don't
"out-think" the segmentation; let the data speak to you.
Try something at a very basic level and look for the hands to be
raised; this will tell you what works and put you on the right track.
For example, let's say (and I imagine it would be true) that SIC
codes play a role in the quality / value of a customer. So you
do a campaign (sales, marketing, or both) to all customers who
used to access the database Recently and Frequently, but have dropped
off (RF-M score is lower).
What you see when the data comes back is certain SIC codes had a
very high response and "activation" and start using your
database again, and others do not. The data has now spoken; it
has told you where it is worth spending time / money on this
Perhaps you look at bit deeper, and find that an SIC code that
looks to be a "bad idea" overall actually generates
activation for you as long as the offer is made by direct mail in the
South. So you keep this particular segment of the "direct
mail" campaign and reject the rest.
You can look for other segments by value, by region, by services
subscribed to, by average transaction value, by location of their
customer, whatever. As you subdivide segments, you will find new
pockets of profitability. You could spend a LifeTime chasing
down all the segments - I have never, ever finished this task on any
particular engagement. Clients call me years after they have
stopped using my services to tell me they have discovered unique new
segments that are extremely profitable and I appreciate that, because
it adds to the knowledge base.
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That's it for this month's edition of the Drilling Down Newsletter. If you like the newsletter, please forward it to a friend - why don't you do this now while you are thinking of it? Subscription instructions are at the top and bottom of the newsletter for their convenience when subscribing.
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 right here.
'Til next time, keep Drilling Down!
- Jim Novo
Copyright 2002, The Drilling Down Project by Jim Novo. All
rights reserved. You are free to use material from this
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