Loyalty — I’ll be back! Strategy Magazine December 13, 2007

Everywhere you look it seems someone is talking about building customer loyalty and using database marketing. What I don’t see is very many people doing anything meaningful about it from a consumer point of view.

Recently, I experienced an example that gave me new hope.

But, first, scene one…the flip side.

I have been a faithful customer of the same hair salon for at least a decade. But, I’ve been faithful in physical form only because, in one way or another, I’ve left after almost every visit feeling irritated. It always took several hours. Everybody moved at a snail’s pace. The place was rampant with prima donnas. Not to mention that they had the worst and oldest selection of magazines with which to kill the inordinate waiting times! And, it seemed as though just about anything was more important than serving customers…talking to friends who happened by, taking the dog for a walk, finishing lunch, going outside for a cigarette…believe it or not, I’m not exaggerating, these things actually happened. Complaining had no effect.

And, in all that time, not once did I receive anything in the mail, not once did I receive any special treatment, not once did anybody ask whether the service was satisfactory.

So, why did I keep going back for so long? Habit…inertia…procrastination…masochism…who knows?  But, aren’t those all wonderfully positive loyalty-building attributes?

So guess what finally happened? I switched to another salon.

Scene two: first visit to the new salon. I was asked to fill in a form with my name and address which were entered into the computerized appointment system. I was told how long I might be waiting. The stylist brought me a choice of beverage and a selection of recent magazines to look at while he worked on my hair. Every hour an attendant came around selling snacks for those (like me) who might have missed lunch to fit in a hair appointment. But, all that is not the best part. My appointment was on a Thursday afternoon. The following Tuesday I received a mailing from the salon. All black and white. Good quality paper but nothing fancy. The note inside was dated the preceding Friday: Dear Mr. de Gruchy: I would like to thank you for visiting our salon recently. I trust that your service and experience was a pleasant one. We welcome any comments, positive or negative and hope to see you again in the near future. I am enclosing a scale of charges for you indicating the range of services and prices we offer. Also, if you present the enclosed business card on your next visit, you will receive a free bottle of MK shampoo. “The note was hand-signed by the owner. It was enough to make me think they valued my business and really wanted me to come back again! And, guess what? I will.

I use this simple example to illustrate that building customer loyalty and using a database in a marketing mode requires neither rocket science nor alchemy.

Let’s look at the elements:

  1. Timeliness: My experience at the salon was still fresh in my mind and within less than week I was reminded of it and pleasantly surprised by the speed of the communication.
  2. Acknowledgement and appreciation of the customer’s business: Thank you is such a simple thing.
  3. Request for feedback: Remember, the average business never hears from 96% of its unhappy customers and the average customer who has a complaint will tell 9 or 10 people about it. 13% of them will tell more than 20 people! On the other hand, 95% will return if they feel the complaint is resolved quickly and they’ll tell an average of 5 people about that. And, asking your customers for feed back doesn’t mean you formulate a self-serving questionnaire that only gives you the news you want to hear. Recently, I examined the feedback survey used by a major hotel chain. My conclusion was that they didn’t want to know what I really thought otherwise they would have asked different questions. Be careful your questionnaires and surveys don’t just tell you what you’re prepared to hear.
  4. Invitation to re-purchase: Turning a one-time buyer into a two-time buyer is a direct marketing adage is as old as the hills and twice as enduring. Not to mention that the only way to finance the cost of constantly acquiring new customers is by having sufficient profitable repeat customers.
  5. Suggest additional products and services: Every communication with a customer is a selling opportunity. There are those who may have trouble with the notion of constantly selling customers, but keep in mind that today’s consumers are looking for information and, in the case of my salon story, they were simply letting me know something that I wouldn’t have known otherwise. The result is that I am now a better informed customer.
  6. Incentive for re-purchase: Keep it simple. Make it relevant. Give it value. A bottle of shampoo for a salon visit. Bingo.
  7. Accountability: Here’s one that many forget. Untold dollars are spent writing glowing customer service letters which are then signed by a non-existent, made-up person. The president or owner doesn’t have to answer all customer correspondence personally but it sure leaves a warm fuzzy feeling when he/she cares enough to personally endorse the outgoing message to the customer.

 Charles de Gruchy remembers how it was

What is Direct Marketing. Direct Marketing Strategy, August 15, 1993

Like opening Pandora’s box (http://en.wikipedia.org/wiki/Pandora%27s_box), putting the question “What is direct marketing?” to those who call themselves “direct marketers” unleashes myriad definitions and points of view. In fact, is it an industry? Is it a strategy? Is it a marketing tactic? Just what is this “thing” that takes the various shapes and methods of traditional mail order, catalogues, outbound and inbound telemarketing, computer bulletin boards, TV shopping channels, late-night infomercials etc., etc. In contemplating the question, it seemed the best way to come up with a definitive answer was to ask those people who work with “it” every day.

John Gustavson (http://www.the-cma.org/newsroom), President of the Canadian Direct Marketing Association says ” Direct marketing is a marketing technique that allows the consumer or business to respond directly to the supplier of goods or services from offers presented by mail, telemarketing, direct response print or broadcast advertising.” His answer flagged one of the key ingredients of direct marketing–“respond directly”.
A more succinct definition came from Brent Hollister (https://ca.linkedin.com/in/brenthollister), Vice President, Catalogue for Sears Canada Inc. “A selling technique designed to generate an immediate response from a customer for a product or service.” Yes, direct marketing is definitely a selling technique and one that is growing quickly as a look in your mailbox will illustrate.

Had we reached a true definition, yet? There was the reply from Dave Taylor (http://strategyonline.ca/1997/07/21/16736-19970721/), Chairman of Taylor-Tarpay Direct Advertising, “In my opinion, direct marketing is rewarding, frustrating, misunderstood, misused, too often misdirected, complicated, simple, challenging and fun!” Yes, and so is training ducks to walk on water., but had we’ve yet to reach a consensus Taylor then went on to add, “Direct marketing is, above all, an approach to marketing communications that has to involve the objective of producing immediate, measurable response to a communications message in one or more media.” That’s better, “measurable response”, the one element totally unique to the discipline of direct marketing.

But the conundrum continued when Brian Fetherstonhaugh (http://www.ogilvy.com/About/Ogilvy-and-Mather-Board/Brian-Fetherstonhaugh.aspx), President of Ogilvy & Mather Direct quoted from Drayton Bird’s book “Commonsense Direct Marketing” Acknowledging that common sense is the most uncommon thing of all…according to Drayton Bird direct marketing is “any communication or marketing activity which creates or exploits a direct relationship with your customer as an individual”. Finding notions of exploitation a little controversial, let’s choose the key words–“relationship” and “customer as an individual”.

What happens when you put these key words together? Direct marketing is a selling technique that produces a direct, measurable response and forms a relationship with customers as individuals.”

At the end of the day, it would appear that we were close to answering the question, until Peter Case (http://strategyonline.ca/1999/10/25/27041-19991025/), Vice President, Advertising, Royal Bank of Canada decided to throw a spanner in the works, when he said, “Maybe direct marketing is the commercial equivalent to a dating service!

When all is said and done, it would seem that what my colleagues, collectively, are saying is that direct marketing is a method of marketing, using various media, that matches products or services with appropriate customers who have an identified need for the product or service in a manner that the customer will respond to directly and that the marketer can use to collect information about that customer’s behaviours in order to offer continued, personalized communications and form a longer-term mutually satisfactory relationship.

Sound like a marriage made in heaven? You bet. Does it also look as though the answer to the question is long-winded, complex and about as easy to explain as why you left your car in the airport parking lot and took a taxi home? Right, again!

Bryan Weaver, Director, List Management, Harlequinn Enterprises Ltd., summed it up  best when he said, “Direct marketing is the marketing idea for the future. While it is an old form of marketing dating back, at least, to Benjamin Franklin’s time, modern technology and the terrific time pressures on today’s consumers, combine to make “it” the ideal method of selling for the ’90’s!” We should add to Bryan’s reasoning the high costs of mass advertising for ill-defined returns on investment, increasingly knowledgeable  and demanding consumers and the ever-present desire of human beings in an over-crowded world to be treated as distinct individuals. And, however difficult to define “it” might be, it would appear that the time for direct marketing has come.

The CD ROM Magazine Strategy Magazine February 4, 1994

And we  thought we were so sophisticated!!

I’m sitting here at my computer, ‘reading’ the world’s first magazine on cd-rom.

Called Nautilus, it is published by Metatec, located at 7001 Discovery Blvd., Dublin, Ohio 43017-3299, and costs US$137.40 for 12 issues.

Nothing to fear

Despite the usual hoohah about the death of print, I can assure you publishers of The New Yorker and Vanity Fair have nothing to fear.

A magazine on cd-rom is a different kind of medium from the print-heavy magazines that offer lengthy, juicy reads while riding on the subway, or propped up in bed.

You do not flip the pages of Nautilus; you boot it up on your computer. A couple of minutes pass, while the computer absorbs the basic startup data. Graphics slowly form on the screen, and you hear an announcer giving you highlights of what is inside.

Elements

There is a ‘table of contents,’ and there is an ‘index.’ And, once you get the hang of it, you will find there are articles and pictures, just like in a printed magazine. But that is where the similarity ends.

With a multimedia/interactive ‘publication’ such as Nautilus, there are also music videos with cd-quality sound and visuals that run in a kind of stop-motion animation.

A roundtable ‘article’ about computers and the automotive industry features the participants as talking heads that can be seen and heard.

There is an ‘electronic new car showroom,’ which provides information about 19 of the 1994 models.

If you want more information on something in particular, you point your mouse and click, and another window opens with more details.

There are computer games, and there is even free computer software. There is a sample language lab tutorial, a children’s field trip to the Columbus, Ohio zoo, and a few dozen other features.

The biggest difference between Nautilus and ordinary print magazines is the amount of data it contains.

Storage capacity

The magazine takes advantage of the enormous information storage capacity of the cd-rom – about 650 megabytes per issue (a cd-rom disc can store the equivalent of 360,000 pages of text.)

That capacity permits the editors to create a grab bag of contents, as well as using the computer memory-intensive tricks of animation, color pictures and music.

What’s missing from this picture? A few ads, perhaps?

Jeffrey Wilkins, the founder of Metatec, says in a computer magazine interview last July:

‘I really believe that people who use information services do not want intrusive advertising, but they do want access to advertising.

‘As time goes on, we will provide more and more access to advertisers, but only if users choose to look at it,’ Wilkins says in the interview.

‘You could say that the software demos we include on Nautilus are advertising, but there are no pitches about why to buy the product,’ he says.

In reality, of course, Nautilus is a marketing tool. It does market software directly, and offers free samples/previews of computer games, and demonstrates other computer software products that are for sale commercially.

Marketing the medium

More importantly, for the moment, what it is marketing best is the medium of cd-rom.

For a concrete example of what this mysterious thing called ‘multimedia’ is all about, Nautilus is an excellent place to start.

There is, of course, audio and video and text. And there is the sheer tonnage of information that can be stuffed into it. What makes it really different is the power of the computer.

You point and click, and things happen. You can ‘use’ the magazine, ‘play’ with it, and you can extract software to put on your computer and use after you have removed the Nautilus disc.

But, most important, you can learn from it – and it is a powerful communications tool. And that is, after all, what we, as professional marketers hope to do – reach an audience, communicate with it, and impart something that it can use, or absorb, as a ‘call to action.’

Nautilus is also just the tip of what is turning into the biggest communications iceberg any of us may ever live to see.

Right now, as Wilkins says, Nautilus is a special product for a special audience – what he calls ‘early adopters.’

They are mostly upscale computer users at job and home, ‘very male,’ and well-educated.

But competition from the mass market consumer publishers is already here.

Newsweek is offering quarterly editions of current affairs material on cd-rom. And there is advertising on its cd-rom editions.

Admittedly, it is just tv spots for at&t, ibm and Lincoln/ Mercury, reprocessed for the limited quality of video animation available on cd-rom.

But there are plans for custom cd-rom advertising on the Newsweek discs; and that should be just around the corner.

Any visit to a computer store these days would also reveal a heavy new marketing push on cd-rom software, especially from companies such as Sony, Warners, and Microsoft, who have introduced a new brand, Microsoft Home, to market a growing line of sophisticated cd-rom programs.

These include everything from a tour of the National Gallery in London, and an elaborate program on dinosaurs that includes video from the pbs dinosaur series, to such highly regarded reference tools as Encarta, an audio/video/interactive encyclopedia.

There is Microsoft Bookshelf, which includes seven key reference books, from the Concise Columbia Encyclopedia to Bartlett’s to the Hammond Atlas.

All of them feature random accessibility of information through a cross-indexing system. Pick a topic and the computer searches the mass of data and instantly tells you, for example, the history of Afghanistan, shows you a map, gives you pictures, reproduces its flag, and even plays its national anthem for you.

The bottom line is that here is a medium people are getting excited about. And yet….

The marketers who seem to understand this medium and choose to take advantage of it are still extraordinarily rare.

Early adaptor

Last month, I described the case of one such ‘early adaptor,’ the Canadian branch of Searle Pharmaceuticals.

Drug companies are frequently leaders in the marketing arena, and Merck in the u.s. is now issuing its Physicians’ Quarterly Reference Journal on cd-rom.

To help its salesforce demonstrate it, it bought 3,000 Sony TIX-100 portable mmcd (multimedia cd) players.

These come with a monochrome liquid crystal display (lcd) screen, but have a video output, so they can be plugged into an ordinary tv set, for a much better picture.

For them, it almost seems self-evident to take advantage of a new medium whose strong suit is the ability to store huge amounts of information and make it instantly accessible.

Surely, there must be somebody besides the drug companies, and in the case of the November issue of Nautilus, the car companies, who have products to market that are information-intensive, and can benefit from a multimedia presentation, with sound effects, music, narration, color pictures, animation, video and text.

Well, there are. For starters, how about the real estate industry? We will review an example in next month’s column.

And how about direct marketing? There is an exciting field trial in the u.s. of multimedia/ interactive catalogue shopping through cd-rom.

Next issue, we will check in on preliminary results as we continue to explore what the future holds for marketers in this strange new world of multimedia and interactive communications

Charles de Gruchy is President of Salter de Gruchy, a Toronto and  New York based direct marketing agency

 

What price loyalty? Strategy Magazine July 16, 1995

While marketers can always come up with a brilliant rationale for their strategies, I was particularly intrigued by the following quote from a Globe and Mail article on Zellers’ Club Z loyalty program

“While Zellers hasn’t put a number on how much Club Z has boosted sales, they know that a great deal of business would be lost if the program was discontinued”.

So, let me get this straight. They don’t know whether the program is delivering additional business but they do know that if Zeddy the bear (the ClubZ mascot) went into permanent hibernation tomorrow sales would decline dramatically.

Call me simplistic, but I still have trouble understanding how my loyalty is supposed to be inspired by giving away (in one form or another) a percentage of the sale every time I make a purchase or, in another example, a free book every time I buy 10 books no matter who I am or how much I buy.

Maybe I’m just not a typical consumer. Or a typical marketer. It seems the objective of most loyalty programs is still simply to drive traffic, build market share or move inventory rather than delivering profit to the bottom line by changing (for the better) pre-existing customer behaviour.

Since I travel fairly often to Ottawa, a year or so ago I joined the Westin Hotels Premiere Club by filling out an application left in my room. Many weeks later I received a splendiferous oversize Cadillac quality mailing package complete with plastic membership card and an extensive questionnaire asking me to select a variety of preferences such as what type of pillow I prefer. Pillows in hotel rooms happen to be an issue with me as I’m highly allergic to feathers. Now, I don’t know about you but when I’m away on business and crawl, exhausted, into my hotel room at the end of the day, the top thing on my mind isn’t whether the pillows are feather or not. But, inevitably, the subject comes up. Usually about the time I start sneezing. After that, unless in a hotel thoughtful enough to leave a synthetic pillow somewhere in the room, it’s a matter of calling housekeeping and waiting for twenty or thirty minutes until someone shows up. I have a few stories about that experience, too!

In any event, I was most impressed by the Westin wanting to know what kind of pillows I like and entertained visions of walking into my room next time and finding that the pillows had already been changed in anticipation of the visit of me, a repeat customer. Not so. In fact, since receiving that beautiful package, absolutely nothing whatsoever has happened. No communication, no recognition. No benefits. No delivery on my stated preferences. Nada!

Would it cost the Westin hotel any more to pre-select my room prior to check-in and have synthetic pillows waiting versus having to bring them later anyway at my request? And, think what I’d be saying right now if they did! I can only conclude that the purpose of the questionnaire was nothing more than glorified market research. Not to mention, membership in the Premier Club is available to anyone able to fill out the application…from small children to once-in-a-lifetime travelers. I wonder how clean their membership database is!

How about some genuine benefits in belonging, collecting, repeat buying, card carrying or whatever? Delivery on promises, even implied ones and impeccable delivery at that has to be the minimum performance level to maintain customer loyalty. Why? Because meeting consumer expectations (especially if you’ve raised those expectations in your communications and promotions) is merely the price of entry in the market today. Now, where are your unique points of difference going to come from?

Once upon a time, about 1981 to be exact, American Airlines launched the AAdvantage program , the granddaddy of frequent flier programs, as a temporary promotion to identify frequent travelers and keep them brand loyal.  According to Inside FlyerI magazine, airlines in North America have now accumulated more than a trillion award miles in liabilities, equivalent to about 50 million free domestic flights. In fact, award miles have grown more quickly than overall traffic thanks, largely, to the many “partnering” programs with hotels, rental car companies, phone services, cruise ships and credit cards. That means it’s possible to accumulate all the “rewards” of using the brand without ever having purchased one single solitary product! What’s wrong with this picture?!
A recent article in Direct magazine stated “financial benefits for these programs are pretty much intangible. To ask airlines what these promotions have meant to their bottom line is to be met with silence, or remarks along the lines of ,”We don’t track it, but we know it’s successful.”” Huh? There’s a lesson to be learned from frequent flyer programs and too few have paid attention.

It’s called long-range planning. Too often programs are launched with great hoopla and fanfare, loaded up with all the possible benefits, tangible and otherwise! But there’s nothing left for an encore to keep the program alive in subsequent months and years., let alone a plan for true reckoning of the ongoing return on investment, if any.

Admirably, the intent of many loyalty programs is to target best, most loyal customers and reward that loyalty. In practice, over and over again, I see reward programs broadcast holus bolus to the masses with warm and breathing being the extent of membership criteria. And the results? Everyone warm and breathing is eligible to take advantage of the rewards without having to do anything whatsoever to deserve special treatment. Net, net the more things change the more they stay the same.!

Leonard Lee  founder of Lee Valley Tools, a cataloguer of woodworking and gardening products has a simple philosophy based on treating people fairly and honestly. For example, when Lee was first starting his company he had some difficulty keeping inventory in stock on a particular item. He responded to the situation by writing customers a cheque for the interest they would have earned on the money tied up waiting for the back order to be delivered. And now, seventeen years later, customers still talk about how impressed they were by that small gesture. Those cheques probably amounted to only a few dollars. But, think of their loyalty value!

In the end, I believe, building genuine loyalty is not about giving away what you’ve already got. It’s more about keeping what you don’t have yet!

Charles de Gruchy remembers the way it was

The evolution of customer based analytics Direct News November 6, 1992

Many hard-headed chief executive officers fear half of all money spent on direct marketing to woo new customers is wasted.

Not anymore, say proponents of direct marketing!

Measurable results are possible as techniques evolve

To tally up the effectiveness of individual campaigns, the value of a long-term relationship with a customer or the overall impact on business is becoming a must do.

The bottom line, say proponents, is calculating what a customer is worth over time which opens the door to a profitable, long-term relationship.

Put aside traditional measurements such as cost per order, or cost per lead jump into sales per customer, or customer valuation.

The importance of segmentation

A new word has emerged in the vocabulary of marketers — segmentation!

Our field has moved on to adopting segmentation as a baseline for understanding customer value.  Marketers segment their database to identify key pockets of customer value  and to evaluate the worth of those segments to their portfolio.   Return on investment analysis, which calculates returns on specific campaigns, has evolved to include better targeting of different customer segments; and measuring lifetime value.

Measurement of direct marketing campaigns is becoming more sophisticated for a host of reasons.

For starters, computer technology, hardware and software, has advanced to a point at which marketers can collect, sort and manipulate customer database information with greater effectiveness and reward.

What is more, hard times means marketers want more from each dollar spent on pampering existing customers and securing new ones – precisely the point of interest from which direct marketers start.

The reasoning is, if you do not know what a customer is worth, you cannot be sure how much money to spend to acquire one.

And you certainly cannot decide which media are best in capturing new customers: the mail, tv or a sales force.

Even so, proponents of direct marketing today battle against ceos who remember doling out money during the go-go 1980s to test or start a program, only to get scant returns.

Smart marketers are today coming round to the importance of establishing life-long relationships with their customers. They must develop the science of building relationships with people.

If you look at customers as worth far more to you over time, you will do more to bring them to your side.

And because the future value of customers determines their current worth, measuring that lifetime value analytically helps marketers decide how much they should spend today to turn one-time buyers into lifetime customers.

Objectives lead the way

Of course, successfully measuring direct marketing campaigns, say proponents, calls for establishing key objectives beforehand.

Virginia Greene, direct marketing manager with Go Direct Marketing in Vancouver, says direct marketing exists precisely to build long-term customer relationships.

For this reason, Greene’s clients aim at developing a business strategy and not simply holding a campaign or two.

‘If you want to do a simple mailing, go somewhere else,’ she says.

Much depends on whether companies are looking for immediate results from direct marketing approaches – in the case of fundraising groups, for example – or whether companies are only looking for leads they can follow up, as with an automaker.

Much also depends on whether marketers are focused on developing a product, a market, choosing media or a host of other variables.  Whatever the objective, measurement tools help establish whether it can be attained at the end of the campaign. Moreover, they help decide how those objectives might be altered to increase profits should the effort be repeated.

For example, a telephone company might see value in looking to secure three-year contracts for cellular phones from new customers during a campaign.

If so, Greene says she can employ tools to measure the return to the client at the end of the campaign, indicating, for example, $10,000 was spent to bring in $100,000 worth of new business.

Do not fail to know your customers

Of course, objectives are only meaningful if marketers know who their customers really are.

Steven Shaw who runs our analytics effort at Salter, de Gruchy is very straightforward in his view of customer metrics.  He starts with Recency and goes from there. ‘So many agencies start with demographic or psychographic segmentation then become lost trying to establish customer value.’

Using segmentation as a customer valuation process to develop a useful and exact customer profile serves this task.

Salter.

Your best customer is in front of you right now!

Marketers, for the most part, know their own customers are their best prospects for future sales, that is, if they know how to take advantage of prospect responses and mapping high value customer behavior.

Despite this fact, most companies have marginal capture rates and limited systems for managing their customer data  – containing names and home addresses, for example – and generally not one they can sort, track and manipulate for greater impact.  They have little idea what their lists contain, what to do with them, or whether they work for the company.

‘If you don’t have the right names on your database, or have rented a bunch of random names, you might as well use broadcast media,’ Shaw says.

Segmentation and the value of the top 20%

Segmentation entails organizing your customers based on their recency of purchase, frequency of sale and monetary value identifying the best value segments to respond to a particular product or offer.

Using this kind of analysis marketers can then buy outside lists, build alliances with strategic partners and optimize results  by picking out only those segments that are predicted to work.

Marketers in packaged goods, faced with declining brand loyalty in hard times, recognize the key to survival may be a matter of focusing on the top 20% of customers who buy 80% of products.  If a company can identify them through segmentation, and succeed in keeping them a customer for only a year or so longer by pampering them, that could well mean increased profits and future sales.

Elsewhere, a specialized financial publication might be mailing to a national weekly magazine’s list and find few responses.

It could then use segmentation to pick out only those names reflecting a preferred set of customer characteristics. Or it could use Statistics Canada data to find only those households with above-average incomes.

Better targeting during mailing opens the way to better response and retention rates around the corner.

But it’s not just about customer retention

Of course, no wise marketer will pamper his/her best customers without going after new ones!  Dave Taylor, Toronto-based chairman of Taylor Tarpay Direct Advertising, put it this way:

‘The danger is you will end up reaching to the converted, and deal with an ever-narrowing market niche because you gradually penetrate that entire market. If so, you won’t be bringing in the heathen.’

At some point, Taylor warns, marketers have to assume the risk of going after new customers that are not as productive as are ‘hot names’ early on.  Establishing which customer value groups are more prone to buy your products through segmentation may also help decide which media to use when choosing advertising channels.

Dave asks, ‘Why not use in the future what has made your products profitable in the past?’

And, there is value in the middle of the file

As managing partner of Salter de Gruchy Direct, I am consistently making a single point to our clients that, ‘short-sighted marketers are missing cross-selling and up-selling opportunities’ every day in their customer file.’

I strongly believe that while ‘It’s fine to be well-positioned,’ if you ignore deciding how to retain customers, then you might well go out of business in time.’ Direct marketers are indeed throwing away money if they profit from a new customer and then let them slip away.

The fact is, loyal customers deliver a useful income and profit stream that far exceeds the value of their original purchase. There is much to be gained from retaining a customer and selling to them for years to come.  But these customers are created.  They don’t just walk in the door!

Record and book club marketers know this lesson well. One of the ways they woo new customers is by offering six books for one dollar. Initial responses may well lose them money. But profit will come on purchases club members make down the road.

So Where’s This All Going?

Direct marketers everywhere act in a similar way. Scarce resources are used to get customers in the first place. The profit comes from future relationships with customers they have successfully brought on board.

Once marketing objectives are set, and customer lists are productive, companies are increasingly using return on investment analysis to project paybacks from specific campaigns.  They do this by taking the total dollars spent, and total revenue received, and figure the total return on the program.

This is key because, for all the hoopla surrounding direct marketing, bottom line CEOs want to know whether the job can be done, within budget, and when they can expect a payback.

John Wright, director of direct marketing at Toronto-based Promanad Communications, argues companies are also measuring marginal returns on investment, or the profits possible from pursuing different audiences.

As Wright puts it: ‘Let’s say you ask whether to send 100,000 pieces of mail or 75,000 pieces during a campaign.

‘Traditional return on investment analysis calls for costing both efforts and calculating the likely response rate overall to figure out the return,’ he says.

Wright says in a profitability analysis, what is considered is how much profit is wanted from each person approached, adding what is then determined is how many people will be marketed to based on that calculation.

‘You can decide between sending mail to 45,000 people and 45,001 people because you know the incremental profit possible from each person you approach.’

Greene says she can tell a fundraising client how much money the company will bring in at the beginning of a fiscal year, within a 5% margin of error.

The fundraiser will know the cost of bringing in new donors, and of getting past donors to repeat their generosity.

‘With that type of data, you can say if you mail to 1,000 people, 18% of them will respond by each giving you $37.50 on average,’ Greene says. ‘And if you mail yet again later on, you will receive so much from them.’

Likewise with credit cards for department stores.

Greene says an in-depth study of customer relationships can identify how much existing cardholders spend annually, and how many years they have held cards.

Using various calculations, the department store can then estimate how much each new cardholder recruit will spend on average over how many years.

What’s this Lifetime Value thing?

Shaw notes that an ‘analytical tool gaining in popularity is measuring lifetime value of customers.’ This allows marketers to measure how many responses they might gain from a campaign, how many they might retain over time, and how they might estimate the current worth of future profits.

Ted McGregor, the Toronto-based direct response manager at Radio Shack, says the electronics retail chain has a mainframe computer in Barrie, Ont. capable of tracking responses and calculating the lifetime value of customers.

But why is measuring lifetime value specifically useful? Most marketers rely on using profit or loss per response to decide which mailing will solicit the most prospects.

But this approach overlooks future profits from repeat customers. Nor, unless you measure marginal returns on investment, does profit or loss per response employ scarce marketing dollars to best effect.

In the insurance business, calculating the lifetime value of a policyholder is crucial to drumming up new business.  The exercise calls for defining the present value of a future stream of net contributions to overhead and profit expected from the new policyholder.  The lifetime value model focuses on the future, that is, spending behavior and the cost of retaining customers, and reselling to them over their entire projected lifetime.

Keeping in mind that future dollars are worth less than what they are today, the future value of a customer must be discounted to arrive at an equivalent present value owing to inflation and the cost of capital.  Of course, proponents of direct marketing caution that lifetime value calculations are not for everyone.

A case in point: the Lexus division of Toyota Canada runs an upscale direct mail campaign to lure prospects for its luxury car models.

Wayne Jefferey, general manager at Lexus, says developing and refining the car maker’s customer database is key to the success of the campaign in finding exclusive car buyers.

‘Most people send out direct mail and hope for the best,’ Jeffery says. ‘You can’t do that.’  He says the car maker spent a lot for software to measure the effectiveness of the direct mail campaign, but found response rates did not climb as a result.

Jefferey puts this down to the small size of Canada’s luxury car market. Only 45,000 luxury cars were sold in the country last year, and 3,900 were sold by Lexus.

‘We get to know our customers by name,’ he says.

I argue only larger, established companies are looking to lifetime value calculations with seriousness.

I’ve often asked who ‘In the real world, who is doing lifetime value?’  ‘Not many. Most companies are not even to the point of operating an electronic database let alone implementing a standardized customer valuation tool like CLTV’

And in the end?

Measuring the effectiveness of direct marketing is made easier by thinking of one’s long-term relationship with a customer as a brick wall.

Each effort to make that relationship is a brick. And the foundation of that relationship is the product on offer – that attracts customers in the first place.

As more and more companies come to lay the foundations for future relationships with their customers, the worth of measuring progress along the way grows.

Companies are coming slowly but surely to see the worth of measurement tools. And as their popularity grows, so, too, do the efforts of direct marketing practioners to make those tools ever more sophisticated and accessible.

Interview with Steven Shaw, Analytics Consultant The Hudson’s Bay Company and Salter, de Gruchy, Inc., Toronto. Direct Marketing Magazine, April 04, 1997

Salter.

Steven Shaw has been cited by Dave Taylor, Bob Stone, Mona Goldstein and others as the biggest back room boy in the direct marketing business in Canada. No this is not an article on politics.  What they mean is that he is never in the front but pushes from behind.  He is the guy that develops marketing analytics strategy for most of the major direct agencies in Toronto and they all thank him very much for the privilege.

Charles: Good morning. What do you have to say for yourself?

Steven: I was up late last night and I’m still waiting for your coffee.

Charles: Sorry about that. I’ll fix it right now.

Pause

Charles: Is that better?

Steven: Much

Charles: You and my partner Brian Salter have played in the technology business together several times. What’s the connection between technology and marketing analytics?

Steven: To be honest not much.  I think technology just gets in the way of clear thinking.  Success in marketing analytics rests on having a point of view, clean data, clear objectives and a testing plan.  Manipulation of the data into a segmentation, for example, is easy and can be done on a desktop, mainframe or an excel spreadsheet if needed.

Charles:  So why is analytics shrouded in mystery? It all seems so complicated.

Steven:  Well that’s how the big guys charge so much money for so little.  In my world a robust monthly report suite that includes data migration, strategy, design and automation is a $5K to $20K proposition each month even on large data sets.  It shouldn’t be more.

Charles: I now see why the agencies love you.

Steven: Mmmmm

Charles: what do you think of the state of marketing analytics today vs. when you started out in the 70s?

Steven: Access to information captured and made manageable by data management systems today is becoming the business equivalent of the scientific breakthrough.  In my day it was the Business Intelligence department that everyone went to.  People like me were largely ignored.  It wasn’t until about 10 years ago that a real interest started in what the customer was doing at a segment level.

Charles: So what do you do with all this data?

Steven:  That answer hasn’t changed in the past 20 years and won’t change in the future is my bet.  We calculate customer value. We build loyalty.  We build models to predict future business and to identify potential attrition. We target to increase response and reduce cost of sale.

Charles: And the challenges?

Steven: That hasn’t change much either…companies still think about products not customers, capturing customer data still seems difficult, systems don’t talk with each other, a standard of customer value is elusive, customer lifecycle strategy is largely unknown outside the direct marketing community, marketers are bad at analytics and analyst don’t get marketing.  Is that comprehensive enough?

Charles: Whew!  So what do you think are ‘good’ analytics?

Steven: Interesting question.  Good analytics are objectives based. In other words they are driven by the business leader not by IT.  Success is based on building a strategy that guides process change and investment and, most importantly, sticking to it.  Technology is just the enabler of the business vision. Even so it more often than not gets in the way of a successful outcome.

Charles:  So what drives the data strategy?

Steven: The data strategy must be driven by an understanding of how information can enable or improve a business process. For example, increasing cross-sales (the business value) requires data about your current customers and the products they own (the data). Establishing some early, visible benefits is important to launching the data strategy and giving it momentum and credibility.

Charles: what is “good” data? Is all data “good”?

Steven: There are many answers to that question. Here’s mine…Not all data is business critical. Data that is critical to the business typically has two characteristics: (1) Association with something of long-term value to the business, e.g. the customer. (2) Relevant across multiple systems, processes and stakeholders. Marketing uses an end-to-end view of the customer loyalty ladder the marketing touch points required to make the sales funnel effective. These touch points and the process around them reveal critical data assets and associated attributes that are segmented, ranked and prioritized by statistical manipulation to optimize sales and engagement. If this information is siloed and inconsistent, customers will get inconsistent messages and service, process owners will have difficulty measuring their effectiveness, analyses will not reconcile, and implementing new controls or improvements will require changes within each process step. Improvements to these critical data assets will yield important business benefits. By identifying and improving critical data assets tens of millions of dollars in benefit will result that will justify millions of dollars of investment in implementing a data strategy.  I’ve run a little off topic here.

Charles:  All good stuff. How can we avoid confusion? How can we focus?

Steven. It’s important to keep the set of critical data assets as small as possible.  That’s tough and needs a strict manager to oversee.

Charles: Can we go back to how data is managed?

Steven: Sure…Flows of data across systems and processes must be organized in a coherent way.  It’s business architecture, not technology architecture that must define core data capabilities.

Charles: Are you saying that the business must lead?

Steven: No question, yes.

Charles: Has this been true in your experience?

Steven: Yes, and No. I’m a bit selfish and simply won’t work on a project where the business isn’t setting requirements.

Charles: What is the business actually defining?  What is the business responsible for?

Steven: Here’s my list…To organize technology platforms and business processes based on their function in the ecosystem, to capture and create data cleansing and organization, to mine business insights from it, and to use those insights to drive intelligent actions in the business. By capturing data that measures the outcomes of our actions, we create a closed loop that allows companies to use their data to test, learn, and improve their processes.

Charles: As you know I’m on board and that’s what we’ve been focused on at Salter, de Gruchy.

Steven: You’re right but it’s not the main stream.  Most marketing leads just haven’t made it there.

Charles: I seem to be onto questions associated with ‘lists’ but I would like to ask what is the checklist you would follow that would tell you an organization has a high quality enterprise information strategy?

Steven: Standard data management capabilities such as data sourcing and integration, quality and metadata management, data modeling and data governance. Insight capabilities including tools, data, and processes for management reporting and advanced analytics. Action capabilities provision data and business intelligence to applications, business processes and business partners, and capture responses to interactions.

Charles: We are just about out of time. One more question…What is data governance best practice?

Steven: Because data is so ‘present’, the governance structure must be collaborative, with a central governing body addressing most of the important and common data, and most of the data managed locally in the lines of business.  Company policy, staffing structure and resources need to be aligned behind this to ensure success.

Charles: Steven, a big thanks for doing this.

Steven:  My pleasure

Charles: See you in email

 

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