Wednesday, December 30, 2009

thought-starter # 3, loyalty versus frequency

Thought-starter # 3: Loyalty versus frequency

“At the core of any successful enterprise, enabling its very existence is the value creation process. Value creation generates the energy which holds the business together… The forces of loyalty are measurable in cash flow terms

because of the linkages between loyalty, value and profits. Loyalty is inextricably linked to the creation of value.”

-Fred Reichheld, Bain

Examining the historical purchase behavior, captured in our marketing database, we can define the value our customers have had in prior years. We can also project out what these same customers might be worth over the next five to ten years. Most of us know this projection as lifetime value (LTV). As we examine

the value of our customers to make the decision to establish loyalty bonds, it’s essential that we recognize three things:

1. LTV is a projection based on historical behavior.

2. LTV has more to do with how we treat our customers after

we have acquired them than how we acquired them.

3. LTV is most effectively measured by measuring the re l a t i o n s h i p

we have with our customers, not with measuring transactions.

Frequency Programs vs. Loyalty Programs

This brings us to frequency programs. Frequency programs are usually transaction-focused, non-selective and often destructive. Most of us participate in a multitude of them. Initiated in the early 1980s by the airlines to entice business travelers, many companies have successfully replicated these once highly successful programs.

All too often, however, frequency programs are created as me-too administrative programs, programs that merely respond to competitive offerings, programs that shift-the-burden away from a true loyalty solution. Following this logic, a poorly conceived or executed frequency program will not help us select the best customers for our business. A frequency program may cause us to acquire customers we cannot service adequately or, even worse, diminish the perceived value of our product offering. In short, frequency programs and loyalty programs are two distinctly different animals.

Executed as relationship-welding, relationship-enhancing efforts, loyalty programs must be derived from the strategic corporate mission. The best loyalty programs aim to create value-based relationships with our best customers. The determinant variables in this equation are:

1. How well do your external service values align with your customers’ needs?

2. Do your external service values align with your core competencies?

3. Do your core competencies rest on a foundation of loyal employees?

Let us offer this simple comparative matrix to allow you to evaluate the purpose of your own loyalty effort.

Loyalty Focus Frequency Focus

Recognizes… • Heterogeneity • Homogeneity

• Employee contribution • Responses to mailings

• Value-added • Transaction-based

• Customer-focused • Competitive-focused

• Needs-based • Incentive-driven

• Relationship-focused • Payout-focused

• Two-way dialog • One-way communications

• One size fits one • One size fits all

• Needs-based • Mailing list bias

• Outside-in focus • Inside-out focus

• Focused targeting • Indiscriminate targeting

Measures… • Share of customer • Response rate

• Share of requirement • RFM

• Duration of relationship • Cost per response

• E:R for customer • E:R for mailing

Loyalty Management and Customer Experience Management at their foundation use the best tools and practices of the data-based, integrated, direct marketing practitioners to build, develop and foster relationships and loyalty where appropriate. Always based upon the delivery of value. Data-based relationship marketing affords you the opportunity to redefine the traditional “value chain.” Today’s loyalty-based marketer is more about building community: mutually interdependent alliances of stakeholders including employees, customers and vendors. All predicated on delivering value to the relationship and relevance in each and every individual contact. Fully recognizing that value changes with each new touch, or contact, between your customers and your company.

Customer Retention Strategies and Tactics

Thought-starter # 2, the calculus of loyalty

Thought-starter # 2: the calculus of loyalty

There is a calculus of loyalty. Experience, coupled with the latest findings published by Bain and TARP, now demonstrate this. In business, as in our personal lives, loyalty (etymologically related to the Latin lex or “law, faithfulness”) has definite rewards. The single most compelling reason for a business to exist is to create value for its customer community. If your purpose in life (for your business) is to create value, you’ll prosper and grow and loyalty will be the single largest contributing factor. If not, you’ll be out of business in the next five to ten years.

Until recently, the rewards of business loyalty were understood only intuitively. It made sense to us as marketers that loyal customers bring with them greater profit over time. In fact, the original frequency programs were designed to capitalize on, and are direct evidence of, this intuitive knowledge.

Frequency programs and frequency measures may be destructive, however, unless the economics of loyalty are taken into account.

Loyalty reliably measures whether superior value has been delivered. Most of

us now recognize that “value” is completely customer-defined. The equation might look something like this:

your customers’ expectations for the experience – “the actual”

VALUE = ____________________________


When our customers experience continuous, reliable, and increasing value we know that they will be Loyal. Loyalty brings with it a series of second-order economic effects, which cascade through the business system:

1. Revenues and market share grow through repeat sales,

purchase of other products and referrals.

2. Costs to acquire and to serve existing customers shrink.

3. Profits go up.

4. The company culture change.

A self-renewing, continuous improvement process installs itself. Employees have increased job pride and satisfaction. Employees stay longer while customers come back.

In achieving customer loyalty, the single most important decision any company can make is selecting its customers. We can neither serve every customer well nor be all things to all customers. It’s a costly istake, a diminishing of our resources and skills, to try to retain each and every customer because, quite simply, not every customer is worth retaining. In fact, we need to learn how to identify and disengage with customers who are not profitable to serve.

To wrestle with the subject of loyalty, it’s vitally important that we define who a customer is and then define their lifetime value, expressed in net potential value (NPV) terms.

Then, we must understand how much of the customers’ “share of wallet” belongs to us today and how much of their wallet we can earn. We can then make intelligent decisions about how to invest in our current and potential customer audiences based upon their reciprocal commitment to us (as demonstrated by their pocketbooks).

What Variables Do We Me a s u re ?

We define a customer by at least two variables; e.g., a customer is someone who buys X number of dollars worth of my products over Z period of time. We can add dimension to this definition by expanding the definition;

e.g., someone who buys X number of dollars of Y number of products over Z period of time. Finally, we would want to add the contribution margin of that customer and/or net profit dollars.

Share of Customer and Lifetime Value

While this is an important step in all forms of marketing, in the business-to-business environment we further need to understand how much our customer spends on competitive products That is, the share of wallet (share of customer). For example, if Sue Ann buys $400 of our widgets and a total of $600 of widgets, her loyalty coefficient to us is much higher than if she buys a total of $7,500 worth of

widgets. (Note, however, that some buyers may have constraints on having a single source for any product family; the realization of this “truth” and including this variable in our understanding helps flesh out the calculus.)

In addition to understanding the value of our customer, it is essential that we define the rate at which we lose customers — the defection rate — as well as how many customers we acquire during a given year. Caution is called for here: a greatly skewed picture of the value of our customer community will result if we average the defection rate out, e.g., over 10 years. That’s because most companies report their defection rate is highest over the earlier years of a customer’s lifetime. Any loyalty valuation must recognize this.

I know that many of us see the admonition to “define who a customer is” and laugh or belittle the maker of the statement. But keep in mind the fate of IBM — while IBM touted the fact that everybody was their customer, millions of dollars of replacement parts and add-on business went elsewhere.

A customer, then, is someone who buys X-number of dollars of Y-product offerings in Z-period of time. That is, we define a customer by the dollar amount, the penetration or depth of products purchased, and the factor of pertinent recency.

thought starter #1: define your customers & measure the value of your marketing database

Thought-starter #1: define your customers & measure the value of your marketing database

One issue organizations often struggle with is “how to measure the value of investments made in its marketing database”. Let’s see if we can build a simple, yet practical, evaluation framework for the marketing database in your company. This approach I believe focuses more on process, information management and outcomes, and this approach is more actionable than traditional ROI measures

In today’s business environment, the highest deliverable value of your contact marketing database is the ability it gives you to target, segment and grade[1] your existing customers. Ideally, this repository of facts, through efforts to enrich the data, is transformed into a customer knowledge platform. The insight given from studying the database then is used to direct our customer[2] loyalty and retention efforts.

In the 21st century marketing world, cutting-edge business-to-business marketing database efforts will measure at least these four dimensions:

a. external service values: i.e., what are the 3,4, or 5 primary reasons customers buy

b. why we lose customers (defection analysis)

c. operational database performance

d. social interaction and customer insight

The best of the best marketing databases in the ’80s and’90s demonstrated their excellence when measured against operational deliverables and measurements. Today, the world-class marketing database looks at why our customers buy (external service value), where/how we stand to lose them, its operational performance, and, finally, real-time, actionable research into the customer’s mind-set and definition of value.

Today we have richer information: for many of us an overwhelming richness of data & information. Our data mining tools are incredibly sophisticated. Overlay upon overlay of data can give us greater insight than ever before. In general this approach is given the umbrella title of “business intelligence”.

Easier said than done? Not really. You can gather this information initially through investigative research, and then subsequently maintain it through the ongoing contact your customer management center has with your customers, prospects and defectors, using phone, email, and social media. You can then interpret this marketing data to target, to segment and to grade your customers, sharing the data synthesis both inside your organization and with your channel partners to ensure you’re making needed improvements.

In order to add the greatest power to these efforts, you first must define your customer. Yes, define a customer, your customer! The definition of customer is the touchstone upon which all else rests. Without the definition, none of the other steps can take place, and none of this theory can touch ground and add value to your operations and its success.

[1] Grading does not refer to assigning customers “grades” as our teachers did; rather grading is a valuation process, which allows you to optimize your market coverage approach and to manage the limited resources your firm has in direct proportion to the expected returns on that investment. At its center, this approach looks at customer, prospects, & defectors as the portfolio of assets that must be managed proactively.

[2] Essentially the same holds true for partner management initiatives as well.

Friday, December 18, 2009

"Sustainability", a distinctive definition

“A new and distinctive definition of sustainability.”[1]

How do you feel about how the Health Care Debate and health care reform have been handled so far? Personally, I’m fed up with, and a bit confused by, the “public conversation” over Health Care Reform. Personally, I can’t help but believe that the public is being too confused to decide, and the roots of the confusion were the words chosen by certain groups in order to make their point. The next public debate is going to be about creating a sustainable future. The multiple threads of the conversation are already glistening, popping out for examination. Among the threads we can already identify: global warming, carbon emissions, cap and trade, waste, water, soil, food, and so on. And so, as with many people, I am trying to wrap my head around the term “sustainability”.

I do not want to fall victim to lobbyists, or industry positioning, or vitriolic posturing by a faction with an axe to grind. I’ve seen how damaged the public conversation can be after witnessing the debacle over Health Care Reform. Believing that, if I read enough and talk to enough people, I can come away from these educational moments with a more balanced, more rounded, and a more thoroughly informed understanding, I set out to investigate the challenges that accompany the theme of sustainability, and how to guarantee a safe, prosperous world for our children and their grandchildren.

My educational journey has permitted me to experience the poetry of Wendell Berry and the anti-Capitalist rantings of Vandana Shiva. I’ve allowed myself to be captivated by Al Gore’s visuals; and, I discovered that I don’t have patience for the alarmists who produced Food Inc. I found E.O. Wilson too ephemeral, too “airy-fairy” for action; and I found Peter Senge’s The Necessary Revolution challenging me (and each of us) to make a difference and to help the wave move out from its center.

I was drawn to John Ehrenfeld’s deeply philosophical book, Sustainability by Design, for his definition of “sustainability. Ehrenfeld is an industrial ecologist, a systems thinker, and, philosopher. Throughout the book he makes use of the now-familiar-to-many causal loop diagrams, system archetypes, and mental maps made popular in Senge’s phenomenally successful book, The Fifth Discipline.

Ehrenfeld throws down the gauntlet by offering provocative assertions, while continuously using Senge’ Causal Archetypes as framing images, metaphors, and mental maps: Fixes that Fail, Shifting the Burden, & Limits to Growth in this profound questioning of our current situation, which he labels “the global crisis”.

“To create sustainability, we must first adopt new meanings for the words we use to tell our stories.” I certainly agree that language and the metaphors by which we live (write and speak) are more powerful than we normally realize. And, in our use of language we do have the power to shape the future. Just think for a few minutes about the language sales and marketing uses to talk about the people who buy and use your products and services. “Campaigns”, “account penetration”, - we display our cultural values through the language we choose.

Storytelling will have an important role in the public debate. We will have to decide as “The People” how we want to, and will, shape the future of our planet. Ehrenfeld points out “in the environmentalist’s conversation, we almost always speak only in terms of problems to solve, and rarely in terms of nurturing possibility.” He goes on to say: “Something is missing here. Better, many things are missing here.” Using words and causal loop diagrams, Ehrenfeld’s mantra is we need to create a new future (italics mine) because what we have been calling “sustainable development” is just painting the pig, dressing up a problem with a fix but never solving the problem with a creative solution.

His definition of “sustainability” is “the possibility that human and other life will flourish on the planet forever”. He then goes on to add that “flourishing is the key to a vision of a sustainable future, and this way of conceptualizing sustainability connects to every kind of audience.” In other words, this definition works for marketing, for sales, for scientists, etc. as well as for solving such issues as creating a sustainable future. Does it connect with you?

[1] Sustainability by Design, pg. 6, John Ehrenfeld, Yale Press, 2008

Wednesday, December 9, 2009

Marketing Madness : Steps to recover

Recovery in a world gone mad

For the last 40 years, B2B marketing professionals have created program rules intended to cause results. From steps-to-the-sale programs, to dealer-loader initiatives, to programs aimed at directing the behavior of the parts counter guy, to frequency programs: the list is seemingly endless. "Incentives" have brought a kind of destructive madness to marketing. Rather than creating a holistic solution, these programs - in the language of systems - have "shifted-the-burden", become "fixes-that-fail", and highlighted why our channel partners should be thought of as "the commons" in the "tragedy of the commons" archetype. it is time to create sustainability in our marketing programs. that will require a kind of recovery for marketers.

“Recovery programs”, in the form of the multitude of 12-step programs that have proliferated since Bill W. and Dr. Bob, made profound contributions to living and the wisdom literature of the 20th century, is a radical paradigm shift in attitude and in living. Its two primary drivers — powerlessness and acceptance — are characteristic thoughts counterintuitive to the marketing imagination.

The reality of marketing today is that we must acknowledge our need for recovery. Over the past decade we have watched the power shift 180-degrees into the hands of our customers. We must all realize and embrace our powerlessness, and understand that accepting this brings greater power. In marketing, as in life, we need to become focused outside of ourselves and allow that others —our customers — hold the power and the key.

The power in the marketplace is held by our customers. No one can doubt this in the twitter-age of social media. Many of us erroneously believe that we own this power. Many of our dealers believe they own it. The truth, however, is that the customers have redefined value and the ways they want to buy our products, and, as such, hold the power over us. Moreover, through the power of social media, our customers now “hold sway” over our reputations and the success of our customer experience management initiatives. To not accept this power and to ignore what our customers tell us is to guarantee that we will be out of business in the near future.

One of the most powerful and pervasive movements of the 20th century has been the movement to heal the individual. Wherever we turn we are confronted with healing the inner child, dysfunction, codependency, etc. In the business arena, we’re being told to listen to our customers, to empower our employees and to develop a sense of community in the workplace, and this whole process is a journey.

Suppose we were to take the wisdom of self-knowledge, responsibility, acceptance, doing things one day at a time, easy does it, etc. and apply them to our marketing lives. Where would these musings take us? Perhaps it will lead to a paradigm of healing to make up for the marketing damage we have done. Let’s call it 12 Steps for Marketing Recovery.”

The Twelve Steps for Marketing Recovery

Step 1. We admitted that we were powerless over people, places, things, and situations, and that our sales and marketing lives were unmanageable.

Step 2. We came to believe that a power greater than ourselves could restore our focus and us to sanity.

Step 3. We made a decision to turn our wills and our lives over to the care of a power greater than ourselves: to our customers.

Step 4. We made a searching and fearless moral inventory of our sales and marketing selves.

Step 5. We admitted to our customers, and to ourselves, the exact nature of our wrongs.

Step 6. We were entirely ready to remove all our defects of sales, marketing, and customer experience.

Step 7. We humbly asked our customers to guide us as we remove our shortcomings.

Step 8. We made a list of all those we had harmed and became willing to make amends with them all.

Step 9. We made direct changes to our treatment of customers and to our processes wherever possible.

Step 10. We continued to take an inventory of our sales and marketing practices and when we were wrong we promptly admitted it.

Step 11. We sought through a quest for continuous process improvement and purging of our database to improve our conscious contact with our customers, seeking only to assimilate, to cultivate, and to retain them.

Step 12. Having had a spiritual awakening as a result of these steps, we tried to carry this message to others and to practice these principles in all our affairs.

Twelve-step programs hold many points of enlightenment for us as business people since their principles define behavior, communications and ethics in a world driven by openness, honesty, willingness and responsibility. The opposite behavior in

the language of “recovery” is codependency.

In agribusiness, codependency takes the form of entitlement programs, programs which rob our businesses of integrity, strength and self-reliance. Entitlements and the incumbent expectations of payments from manufacturer to their channel partners ultimately serve to destroy the marketplace and the covenants/relationships between manufacturer, dealer and grower. Entitlements hurt business because they cause loss. Loss of credibility, loss of price stability, loss of support, and loss of profit for all.

Reversing the codependency of entitlements is just one way the 12 Steps for Marketing Recovery can offer a road to marketing recovery. The solution requires detachment and tough love, but the end result is healthier, more profitable business relationships.