Posts Tagged ‘RFM Migration’

The 4-Hour Customer Retention Workweek

August 17th, 2010

Timothy Ferriss, in his runaway bestseller The 4-Hour Workweek, describes how he transformed himself from being a miserable, unhealthy, workaholic, into a globetrotting, cage-fighting, tango-dancing, best-selling author. While most of us will never get to work 4 hours or less each week, we can learn a lot from some of the steps Ferriss took, specifically with regards to how we manage our customers.

Ferriss is the founder of BrainQuicken, who according to their website is the “leading developer and distributor of bioactive and pharmaceutical-grade neural acceleration products.” Before his short-week transformation, Ferriss worked around the clock, waking up at all hours to call on overseas customers, sacrificing his health and personal life in an effort to make his business succeed, until one day he realized he was miserable and depressed.

Being abused by your customers isn’t worth it

Begging bad customers to stay is a
bad strategy that many companies follow.

Once he reached rock bottom, he decided he had to change how he did business. Success simply wasn’t worth the price he was paying. He started by analyzing where his business was actually coming from, and realized that over 90% of his orders came from about 5% of his customers, and that the customers in the top 5% required very little maintenance. He was killing himself by trying to milk every last dime out of the bottom-feeders and complainers, customers that weren’t adding much to the bottom line. He quit calling on them, and most of them continued to order, but he didn’t care if they left. They weren’t contributing enough to count anyway.

Of the top 5%, a few of the customers were extremely squeaky wheels. Ferriss describes having “taken their browbeating, insults, time-consuming arguments, and tirades as a cost of doing business.” He let these customers know that if they wanted to fax in their orders, he would be happy to fill them, but that he would no longer tolerate any abuse. About half of these customers left, but the other half played by his new rules. He describes immediately feeling 10 times happier with minimal revenue loss.

Ferriss had about 120 wholesale distributors that he was dealing with, so he was able to analyze his data without sophisticated tools. The steps he followed:

  1. He organized his customers’ data
  2. He segmented his customers
  3. He decided how to treat each segment
  4. He acted on his decisions

Customer retention for customer files with millions of customers

If you have hundreds of thousands, or millions of customers, you can follow the same basic steps he took, but you will in fact need the help of data warehousing, analytical tools, and predictive models. Even so, the steps themselves are simple, and very similar to the steps Ferriss followed:

  1. Organize your customers’ data
  2. You will need to identify the different sources for customer data, including marketing, sales, and support databases (frequently several of each). If you have different divisions or have recently acquired another company, you’ll need to merge and deduplicate the records in these databases.

    Trying to run reports against your operational systems won’t work. You’ll bog down the systems that are needed to run your business, and you will be frustrated and confused by data that is designed for computers and not for humans.

  3. Segment your customers
  4. Once you have the data moved into an analytical application, you’ll need group them into meaningful segments. RFM Analysis is a great way to do this, and involves assigning a score to each customer for how recently (R) they have purchased, how frequently (F) they purchase, and how much they spend, or monetary value (M) of their transactions. Learn more about RFM Analysis for customer segmentation. Note that the segment a particular customer is in will change over time — this isn’t a one-time exercise.

  5. Decide how to treat each segment
  6. Most companies treat all of their customers the same, meaning they spend way too much time, energy, and money on bad customers, and not nearly enough on their good customers. If you have properly segmented your customers, you can do much better.

  7. Identify churn-ready plum customers
  8. Predictive analytics, when applied to your customer segments, can help you understand which of your best customers are going to leave before they leave. This is critical. If you reach out to these customers before they leave, you have a much better chance of addressing whatever issues they have. If you reach them after they have already gone, they will probably have a new supplier, and are probably too irritated with you to go back anyway.

  9. Act
  10. Execute the strategies you created in steps 3 and 4, communicating appropriately to each segment. Make sure that you A/B Test as you go, trying different approaches on subsets of each segment, identiying which of your actions has the greatest positive effect, and continuously refining your approach.

  11. Rinse and Repeat

The steps described here are not a one-shot fix. They are a process, and as each cycle of interactions takes place with your customer, if you continously measure what is happening, customer satisfaction, and consequently your profits and employee morale, will continously improve.

I’ve got 2 bonus steps for you, that aren’t customer retention steps, but that are low-hanging fruit if you are following the 6 steps above:

  1. Acquire more customers that look like your best customers
  2. Once you have properly segmented your customer base, profile the kinds of customers that make up your best segments, and target similar prospects for your customer acquisition efforts.

  3. Migrate unprofitable customers into your top segments

By applying the scores you’ve assigned to your customers historically, you can see what your best customers looked like years or months before they became your best customers. Find customers that you have today that match what your best customers used to look like, and cultivate these into your better segments.