Customer File Health Check: Use this simple analytical approach to gage the health of your business

The health of your customer file is the key to future growth and profits

A few weeks ago I wrote about utilizing the Generic RFM equation in finding the break-even point for more efficient promotion execution.  One suggestion I made in the article, for which I have received many comments and questions, has to do with “freezing” the score ranges for the deciles.  In doing this you have a view of how your customer file is changing (in terms of the percent change in each decile) across time.  This dynamic view can tell you a great deal about the health of your file.  In this article I will show some of the most common file dynamic patterns along with how to interpret what the changes mean for future sales and profit growth.  

Keep in mind that the transactions included in calculating the RFM score should include all channel activity.  If you are not including all channel activity when you calculate the score the observations made in this article will probably not be applicable.  As the score can be calculated back to any point in time this analytical technique is easy to employ.  Just be sure there is sufficient time between the freeze date and the end date (my experience has been at least one year) such that file migrations are occurring in sufficient quantity to be projectable to the whole file.

When you run the scoring for your customer file and get the decile counts you will have a report that looks something like the table below:

Decile	Freeze	Later	% Change
1	5,000	7,000	40.0%
2	5,000	6,500	30.0%
3	5,000	6,000	20.0%
4	5,000	5,750	15.0%
5	5,000	5,500	10.0%
6	5,000	5,500	10.0%
7	5,000	5,600	12.0%
8	5,000	5,700	14.0%
9	5,000	5,900	18.0%
10	5,000	6,500	30.0%
Total	50,000	59,950	19.9%

From this you can see that the file grew by about 20%.  Also the deciles at the top grew faster than the deciles in the middle, and the bottom decile grew at a rate lower from the top decile.  So what would this mean for your business?

First is the good news, you are building value in your customers as the top decile is growing faster than your bottom decile.  In other words, your best quality customers are growing faster than your poorest quality and typically this means your customers are purchasing more than defecting.   Some of the middle deciles are not growing as fast as the top or bottom deciles.  This can mean that customers are migrating quickly either to the top or bottom of the file.  This suggests that the life cycle of customer may be short and you should know quickly if new customers are connecting with your brand or not.  In this case you may want to focus in on a sample of new buyers who are sinking to the bottom and contrast with customer floating to the top.  What are the differences?  Does a product category or price point differentiate the two groups?  Can anything be done to prevent the customers from sinking to the bottom?

If you see that the top three deciles are larger and growing faster than the bottom three deciles then you can conclude that the file is fairly healthy.  If on the other hand you observe that the bottom three are larger and growing faster, then you have a problem.  You need to understand what your brand is missing or has the competition begun to offer some product or service that you might have missed?

Understanding how the customer is migrating through deciles tells a lot regarding how the customers are reacting to your brand and offers.  This type of analytics is critical when answering the questions regarding the health of your customer file.

Improve your Brand’s Perception and Position now; don’t wait for the “storm’ to pass.

Some simple steps to improve and enhance your brand using some straight forward Direct Marketing Metrics.

While speaking with many business owners over the past months I have heard too many stories of the business “hunkering down” and waiting for the storm to pass.  This is the best time, in fact, to spend a little time and resources to understand why your customers do business with you as opposed to your competitor and what could you do now to take more share.  Such activity is not expensive, yet it has potential to pay off handsomely if executed and followed up in a methodical manner.  So what am I talking about?

 What could you do now to ensure your business retains and expands its leadership position in the marketplace?   

My recommendation would be to first profile your customer base.   This requires answers to a few key questions including:

• ·         Why do your customers buy from you? 

• ·         What do customers think your brand stands for? 

• ·         Why did the customer purchase from you as opposed to one your competitors? 

• ·         How many of your customers intend to purchase from you in the future?

These profiling questions would best be answered at your customer segmentation level (i.e. Best Customers versus Marginal Customers).   To create such segmentation please refer to my article on the Generic RFM Scoring methodology.  

If you already have this kind of information from customer primary research studies you are well on the way to securing your position in the marketplace.  If not, I have the expertise to get this process moving for you if you wish.

Having years of experience analyzing customer transactions in marketing databases I would then want to analyze the following marketing metrics for the buyers profiled above:

1. How many customers purchased from you in the last 12 months?
2. How many times did they order and what was the average order size?
3. How many new customers did you acquire last year? 
4. How many of last year’s new customers are you expecting to buy this year?
5. How have these metrics changed in the past few years?
6. What marketing programs have the most impact on these metrics?

Answers to these metrics questions coupled with the customer profiling above would give your brand a clear road map of how to grow the customer base at rates much greater than your competitors.  While at the same time you would have improved information on key metrics driving your business.  The metrics are critical in setting appropriate benchmarks for ROI goals on your marketing programs.  In that way you will have a better and timelier understanding of what is working and what is not.  Then you can expand the programs that work and fix or stop programs that are not working.

Doing these things now is critical, especially if your competitors are “hunkering down” and waiting for the storm to pass.  For when the competitors raise their heads again you will have secured a more defensible position in the marketplace from which they will be required to play catch up, which almost always is a more difficult and costly exercise.