Measuring & Managing Visitor / Customer Retention, Part 3
Trip Wire Marketing: The Latency Metric
An easy to implement and proven powerful potential value LifeCycle Metric 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 campaigns.
Many small business people naturally use Latency in an intuitive way, for example: "Gee, it has been a while since Mary Lou had her hair styled." What the stylist really means is this: Mary Lou 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 Lou and finds either a customer who appreciates the reminder or a customer who has defected to another salon. The longer the stylist waits to contact Mary Lou after the average Latency trip wire has triggered, the more likely it is she has already defected, and the lower her potential value is to the salon.
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 examine your customers and find the average time between the second and third purchase is 2 months, you have found "third purchase Latency." Any customer who goes more than 2 months after the second purchase without making a third purchase is diverging from the norm, and a likely defection candidate. 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 about the relationship with this customer has changed; friction is rising. This particular customer's LifeCycle has become out of synch with the average customer LifeCycle, and this condition is a trip wire for a High ROI Customer Marketing event.
On average, if you divert marketing resources away from customers who have made a 3rd purchase within 2 months after the second purchase, 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 (the grease) right at the time in the 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. But the ones that do generally become active, loyal customers again, and those that don't may not 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 expect, 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 3rd purchase Latency be different when comparing software with hardware customers? You betcha. On further analysis, you find 3rd 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 you 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 software (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.
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.
What if you were to look at an entire series of Latencies? The average number of days between the first and second purchases, the average number of days between the second and third purchases, third and fourth, fourth and fifth, etc. You don't have to use purchases; you could use contacts with customer service, visits to a web site, any behavior important to your business. What would that look like, and more importantly, what can it do for you?
It would look like a snapshot of the customer LifeCycle. And what it can do for you is start you on the path to predicting customer behavior and increasing the value of your customer base. Any type of event can be used - purchases, downloads, site visits - but the event must be one that repeats or be a series of events with an established "action sequence," like B2B sales processes.
This article is taken from the book Drilling Down: Turning Customer Data into Profits with a Spreadsheet. The first article in this series can be found here.
Next Article: Using Latency to Map the Customer LifeCycle
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About the Author:
Jim Novo has nearly 20 years of experience using customer data to increase profits. He is co-author of “The Guide to Web Analytics” and author of “Drilling Down:Turning Customer Data into Profits with a Spreadsheet”. If you want more visitors to take action on your web site, try using the free conversion metrics calculator, downloadable here. If you need to sell more to customers while reducing marketing expenses, get the first nine chapters of the Drilling Down book free at http://www.drillingdownbook.com.
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