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Monday, November 15, 2010

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.

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