Retention and Relationships

Pandora Radio logo

I love Pandora.  Pandora rules.  I wish everything was like Pandora.  I don’t really have to think or do much, and an incredibly accurate stream of stuff I want to hear just appears like magic.  I can tweak it to get it dialed in to my tastes.  And I now buy MUCH more music than I used to, discovering new music and buying on Amazon so Pandora gets a little affiliate revenue.

The closest we see to this ideal today is Amazon and a few other online retailers.  Borders appears to be using my purchases (finally!) to tweak the email they send me, which is great.

This is the next frontier for retailers and manufacturers.  A whole generation has had their priorities reoriented, much as the Great Depression did 70 years ago.  Consumers will think a bit more before buying and will be much less willing to use credit to finance their lifestyle.  So selling will need to move to a more relevant, customer-specific mindset if a retailer wants to succeed over the long term.

There are already many companies focusing on this space, but it will be a long time before clear winners emerge.  I think the winners will likely be those who can distribute the experience wherever customers want to consume it – which means we still have a ways to go.

Over at VentureBeat’s Entrepreneur Corner I did a guest posting on how entrepreneurs should think about customer loyalty at different stages in their company’s development.  Click here to read it.

I had a conversation with a respected analyst a while ago where 90% of the time was spent on questions that were not part of the original list for the discussion.  Those were the questions that led to the most interesting dialog on her topic.

It led me to think more deeply on the nature of decision making and how asking the right questions leads to better decisions.  (Yes, I do think about this stuff for fun.)  With the coming explosion in data availability, the ability to ask good questions will only increase in importance.

What’s the problem?  Quantity vs. quality.  The underlying task of using information to generate insight and of using insight to making good decisions still takes skill and talent.  Many people have never had to think through how to enable good decision making, and more data won’t change that.

One way to solve this problem is a simple two-part test for any information gathering and decision making process.  It’s not rocket science.  But I see surprisingly few people pay this much attention to the process.

The basic approach has two components:

1. What is the form of the answer?
2. How will you use the answer to make a decision?

Applying these two tests to any inquiry help isolate useful and interesting questions from the merely interesting.  It’s not really meant for a casual conversation, but more for the preparation stage of a presentation or discussion.

Let’s take a simple example.  “Who is your core customer?” is a pretty typical question in my business.  But it’s not a terribly useful question, since the response will likely be a generic description of the largest customer segment, and there isn’t much you can do with the information, since the answer tells you nothing of why they are core or what the opportunity is among the group.

A better way to frame this is to work backwards.  I want to, for example, improve top-line revenue and profitability with minimal incremental spending.  So understanding core customers will lead to decision making around marketing targeting and allocation.  Based on that, what I really want to know is which customers have the highest potential for ROI given increases in marketing investment.  And since that investment will be different depending on their demographics and spending patterns, I really need to look at several segments, not just one. 

Given this need, a better way to ask the question is, “Which customer segments have the potential to grow with reasonable marketing investments?”  Which, of course, means you need to figure out your segments, not just your core segments…which leads to more questions.  You get the picture

Good piece at Harvard Biz Publishing today, but most of the community commentary misses the point.  Offering price promotions to all customers isn’t loyalty marketing, its price promotion.  Some customers respond only to this message, but many would be just as responsive to a different message (new product intro, local event, cross-sell to a recent purchase), to great service, or to the brand as a whole.

The authors rightly point out that usually only 20% of customers are profitable.  But its not that simple, since what matters is the marginal profitability of the last dollar sold.  You have to cover those fixed costs somehow.

A different interpretation of the tactic they criticize might be:

Resources are limited, so focus on the most profitable customers.  If you have the resources to focus on unprofitable customers too, go for it, since they help cover fixed costs.  But try to allocate your overall resources based on potential for future profitability, not evenly across all customers.  Only when you are totally out of time, creativity, and employee bandwidth should you shift to pure price promotion.

I try to help a non-profit ”international neighborhood micro-center for artistic and intercultural life in San Francisco” with operating and marketing advice.  They put on 120 events a year and I’d always advocated getting the word out about individual events.  We looked at email, and while it would probably work, the overhead for so many was relatively high.  (Almost everyone is a volunteer and resources are scarce.)

Enter Facebook Events.  Set up the event, send an invite, and voila, there’s your email notifications.  Its timely, professional, and useful.  Now I know what’s coming up and can make quick decisions to change my schedule.  It doesn’t feel obtrusive, since I joined the group of my own volition and can control messaging.  It shows the intersection of time-based content, opted in peer to peer communication, and user-controlled media streams (i.e. I still choose email over text) can and will be incredibly powerful.

I expect to see attendance max out going forward.

Its easy to get stuck applying the frameworks you know to new things. Or worse, to not know frameworks that work.

So when I saw this post at Buzz Canuck, I realized this was a pretty good way of collecting all of WOM into a cohesive framework.  And while I don’t agree with all of the details, looking at WOM in terms of its effective half-life is a good organizing principle, especially when you apply it all the way to customer evangelism.

Many people think of Viral as equivalent to WOM, and try to shoehorn a viral element into every initiative.  Sean’s emphasis on events and high risk ideas is right on – its nearly impossible to light a viral fire without a very, very compelling meme.  Green Day has been selling out their semi-secret local tour in minutes with just a couple emails and a few sentences on their website, powered by fans spreading the word.  Add a few key critics invited to the shows, and the band is building buzz without a whole lot of effort.

Do you think the fans that scored tickets have been evangelizing?  You bet.  And yeah, I went and it rocked.

Amazing how an app can tip so quickly. Maybe its the connectors that let you post to multiple networks, so you only need to write once. Regardless, once Twitter recast itself as a microblogging service (vs. a party/barhopping planning tool) its become the defacto communication standard. I figure it will last about 6 months, since the noise has quickly become deafening.

Facebook is already there. All the extra features that put additional information into the feed have crowded out the really interesting stuff – what friends and acquaintances are really doing and thinking about.

I remain convinced, however, that opt-in peer to peer communication will supplant email as the main communication medium within a couple years. This means the cheapest marketing medium will continue to implode, and marketers will need to keep innovating to stay up with their customers.

Yeah, its bad out there.  As a tech vendor, we’re out talking to a lot of companies.  One theme we’re seeing is companies applying unequal tests to evaluate spending on new versus existing efforts.  That’s normally fine, but now every dollar needs to perform. 

This is one of those times when the tide is going out.  (The reference is attributed to Warren Buffet and goes something like “When the tide goes out, we find out who’s been swimming without a bathing suit.”)

You need to inspect every dollar and challenge your assumptions.  Am I generating visits with my radio?  Am I buying too much TV?  Can I get a better deal on my direct mail by bidding out projects?  Because surely your budget has been cut.  And the first reaction is to cut new spending, instead of asking yourself, “Is this proposal a better expenditure than something I’m already doing?”

Nothing should be sacred.  Sports tickets, luxury boxes, or sponsorships – gone (very limited reach, especially geographically).  Television can pause for a while with minimal erosion of awareness.  Radio can probably get lighter for a while with minimal impact.  Newspapers will be extinct in a few years anyway, so might as well learn to live without them now.  Interactive campaigns are fun, but if they aren’t part of a long term engagement program, don’t bother.  Outdoor…uh, I hope not.  [And I won't get into Operations in general - I guarantee you have lots of dead wood.]

What’s on the flip side?  Email, SEM, SEO, Facebook, iPhone, basic customer segmentation, versioning, response modeling (i.e. don’t mail everybody!), PR, retention marketing (pretty much of any kind), etc.

In fact, it might make more sense to do zero-based budgeting where you fund these initiatives first, then see what’s left for the rest.

There’s a lot going on out there, as I noted cuts at Neiman Marcus, Barnes & Noble, Google, rumors of a Microsoft cut, and the Gottshalks bankruptcy filing in the last 30 minutes.

In addition to updating your resume, now is a really, really good time to examine the decisions you make during your work day.  Are you assessing each task for value creation?  Are you considering how to do a task better or cheaper?  Tweaking your mindset now will pay dividends very quickly, as your output produces more value and less busywork.  For example, if you don’t look at your website as though it is a conversion engine, you are missing the point.  Design is nice, content is nice, good writing is nice, but at the end of the day, are you measuring its effectiveness at meeting key objectives, namely leads and/or revenue?

Question your routine, and I guarantee you will quickly find ways to add more value, and make it that much less likely to be on the wrong list when the inevitable layoffs occur.

Its tough out there.  When Best Buy gets 1/8th of HQ staff to take a voluntary layoff that tells you most people there expect it to get worse – and want the severance instead of an involuntary termination.

So as everyone hunkers down, where do you cut?  If marketing expense as a percentage of revenue stays flat or goes down somewhat, those are real dollars that have to come out of the original plan.

Having lived through this on an 8 figure budget, its not a simple question.  Its tempting to either a) cut 100% from a couple of line items to make the number (easy to execute) or b) cut a couple % from every line item (easy to explain).  The real response has elements of both approaches, but what’s important is how they are applied.

Standard ROI Expenditures

These are marketing efforts where the return on investment is well described by classic economics, that is, an upside-down U.  The initial investment has a high return, then it eventually drops to 0, then it turns negative when saturation occurs.  Search engine marketing (SEM) and optimization (SEO), online marketing, CRM and direct marketing are all in this camp.  Good companies are already at the most efficient point of ROI on these investments.  Taking a few percent off these budgets leaves spending that is still very effective.

Discontinuously Effective Expenditures

This is the tricky part.  Some types of spending look like an S curve combined with an upside down U.  The initial investment has a low return, then it hits an inflection point and rises rapidly, then follows the classic upside down U.   For example, a rule of thumb for TV or Radio is that 100 GRPs per week is the minimum to be effective. So if you are buying media right around this level, you need to trim markets or weeks, not points per week.  Your choice of which markets to trim is influenced by your current awareness, maturity, other investments, and overall history.  You might offset this 100% cut by maintaining the other types of spending to maintain some presence in that market.  This is oversimplified, but hopefully you get the point.  You can extend this approach to verticals, partnerships, channels, and other areas where a continual, sustained effort must be maintained or effectiveness drops off quickly.