I think my point didn’t really get across, but its mostly my fault.  The bigger point here is the separation between loyalty and value, and that customer experience is a great driver of loyalty, which in turn improves value.  Since this is part of a longer series of columns that will eventually tie together, I’ll back and rethink this one.

I like writing for them since they have a very different approach to content than other places I’ve published.  They are on a high volume, short attention span schedule, so content must be punchier, tighter, and very focused.

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

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.

The easiest segment erosion to spot is usually geographic.  If you find regional problems, examine the economics and competition in the region.  Economic issues should be addressed very differently than competitive ones.  That is, determine if the pie is shrinking, or if your share of the pie is shrinking (or both, yikes!)

If you have the information, see if there are differences based on lifespan (vs. historical).  That is, how has retention changed among long time customers(>1yr), relatively recent customers (3mo-1yr), and new customers (<3mo).  Some other areas to explore are cross-category engagement, non-revenue engagement, and net promoter score (if you have it). 

If you have demographic information, great, use that too.  But not many companies have enough to do meaningful data mining with this.

Once you have a sense of where the problem is, you can really focus on the strategy and tactics to reverse the trend.  Remember that small changes have large results, so set your initial goals to maintain your current retention levels and move to improve once you’ve stabilized your business.

Now this is very apples-to-oranges, since the investment needed to achieve these 3 different 10% improvements vary widely. But the basic point that translates a 1% retention improvement to a 3% customer value improvement is the important one. Generally if your company has not put much effort into customer retention, you can see big improvements without a large investment. So do the math – what would a 3% improvement in customer value do for your company’s bottom line? And compare that with the cost to deliver the first 1% improvement in retention. Chances are that ROI looks pretty impressive.

I’ll explore this some more in the coming days, including some investigation of where the dollars and attention are going today and why.  My goal is to build the case for investing in customer retention before ANYTHING else.  Stay tuned.

I looked at a simple data set from Marketing Charts in a post elsewhere which rekindled my love for the metric.  I used this extensively as a direct marketer in a past life, because it told us so much about where there was opportunity for additional revenue.  Plus I tracked it over time, which made it a great leading indicator of softening or strengthening demand.

Lets take a simple example.

Lets say your customers report they spend $200/year at your store, and $1000/year total in your category.  6 months later, they report $250/year at your store, and $750/year total in your category.  You have 2 things to figure out – is my share of wallet increase from 20% to 33% real, and is the 25% decline in category spending real.  But you have good information from which to continue to explore.  In this case, if they are real, then you can get excited about the successful increase in market share, and be terrified by the decline in market size.

Another example is similar to how I looked at the Marketing Charts example – what if top 10% customers spend $1000/year with you and $1500 total, while next 10% customers spend $400/year with you and $1200 total?  The opportunity in the next 10% is actually greater than the top 10%, although the downside risk of not retaining top 10% is higher.  Knowing the difference, however, lets you craft strategies that best accomplish your objective(s) in each segment.

I look at the difference between discovery – information and insights about the client – and strategy – what to do with the client to effect change.  It was prompted by the common question I get asked, which is “what should I do?”  So I tend to ask back, “what do you need?” and so on.  Enjoy

So if a hypothetical sporting goods store was set up where Criterion A is Private Label Credit Card Holder = {Y,N} and Criterion B is Activity Type = {Outdoorsman, Weekend Warrior, Family Sports}, there would be 6 boxes in the grid.  (Resemblance to a company where I once ran marketing is completely coincidence.  Besides, that company no longer exists.)  For each box, provide an objective and develop the strategy to accomplish each objective. 

For example, the Outdoorsman PLCC Holder has a lot of Open To Spend and lots of big ticket items in his typical wish list.  So the objective might be to generate big ticket purchases.  The loyalty strategy here might be to focus on long-term accrual, so that he can save up benefits to use on his one big purchase.  Or you might assume he has already made at least one big ticket purchase (a possible third criterion for your grid) and your objective is to maintain his spending level.  The loyalty strategy here might be to provide point acceleration on key consumables or accessories throughout the outdoor departments or provide increased accrual rates when a spending threshold is met.