Is your business losing momentum?

Do you even know it?

This week, I was meeting with a client who was struggling with implementing the company’s first customer segmentation — finding a way to change the business model to focus on customers as individuals, not just as a group  (which they aren’t).  The key, he believed, was to find a way to make segmentation immediate — to show  value right away, rather than as a slow-moving effort that demonstrated value over time.

I pointed out to him that he had already identified his most valuable customer segment, and that better care of that segment would yield increased cross-sell and customer retention.  When he insisted that such an approach was still not dramatic enough, I thought back to a core database marketing approach and asked him a  question that helped bring things into light:

Which Best Customers have fallen off their behavior patterns?

This simple approach, called “RFM Velocity,” can help companies quickly see the value in a segmentation without having to conduct extensive statistical modeling or hire teams of analysts.  RFM refers to:

• Recency (the time since a customer made their last transaction)
• Frequency (how often they make transactions in a time period, usually a year)
• Monetary Value (profit, gross margin or revenue, depending on available data)

RFM analysis has been used since the early catalog days, to understand the performance of a catalog and select customers for future mailings.  The usual way RFM is used is to select customers with the most frequency purchases, who bought most recently and have a large annual value to receive more frequent, more expensive mailings, which yield a higher response rate and a greater return on investment for the mailing.

But here is another way to use RFM, one that can be used to help companies mobilize around specific high-value customers:  Figure out Best Customer frequency and then identify which of those customers have “fallen off their pattern.”  For example, a customer who makes 4 purchases a year averages 1 every three months.  If that customer does not make any purchases in 4, 5 or 6 months, then they have fallen off their pattern (in general).  You might want to check to make sure that they do not make all their purchases during holidays, but you get the idea.

Once you have found customers who have fallen off their patterns, then you work to get them back in the store.  You treat them like customers who have attrited (left you for good), and provide special treatment, offers and service to get them back on their patterns.  When they come back, their purchases are largely incremental to the business (after all, they probably were not coming back anyway!)

Keep analyzing RFM velocity and bringing customers “back in the fold,” and what do you get?  Increased short-term revenue, increased customer retention and an expanding profitable customer base — all the keys to measurable business results, the holy grail of marketing today.

So don’t let your customers wander off like Hansel and Gretel.  Follow the trail of breadcrumbs and help them back.  And then build a fortress of superior customer experience to keep them safe and sound.  You will sleep sounder, just like Hansel and Gretel did when they finally came home.

Related articles by Zemanta

• Applying the science of measurement to the art of advertising – 6 may 2010 v.2 (slideshare.net)
• Data-Driven Social CRM (thecustomercollective.com)

Tagged as: Best Customer, best customers, Business model, Consulting, customer segmentation, Customer service, customer value, frequency, monetary value, Organizational Change, Rate of return, recency, RFM, segmentation