“We don’t use consultants, so you better get us payback from your visit, right away… “ Arthur Crowley, Sr., Founder, Garon Products – B2B Catalog
When I started consulting, mainly for catalog companies, most had the idea that they should mail as much as possible to both their customers and prospect lists. One very successful catalog client admitted to mailing even their mere 1-time buyers every six weeks for 10 years. At the time, I was giving speeches suggesting different levels of cost/contact marketing for different value customers. When clients listened, we often improved their company valuations 500 to 1000% or more. I have 33 documented turn-arounds.
In the ‘80s, RFM became very popular, but the most common scoring was equal groups. Often, the 12-month buyers were the top Recent score (5) and F & M were divided into quintiles (1/5th of the file). This meant that the worst groups were meaninglessly separated – so one-time-buyers (Frequency) would often fill the bottom 1, 2 and half of 3 scores. At the same time, the very best customers were all given 5 scores, even though this probably represented 80% or more of client sales. Since annual sales is a continuous variable across each customer, we could use it to refine the customer grading, but since everyone wanted to mail every buyer for the past 12-24 months, sales value was relegated to evaluating the older customers.
This simple approach endures to this day. Drew Sanocki recently wrote about Direct-to-Consumer (DTC) struggling brands, “They give equal marketing attention to whales and minnows. They create loyalty programs that reward transactions, not customers.”
Using the wrong scoring method (or applying it thoughtlessly) can lead to terrible consequences. Cabela’s, for example, mainly mailed catalogs to every customer… but only for 12 months. When we modeled their mailing, Recency was almost missing entirely. I called other modelers and was told, “You must be doing something wrong.”
Context is crucial. We were modeling for their fishing season and realized that pulling names in the Fall would yield hunters (if we focused on Recency). The model was working but we didn’t see it until our eyes were opened. It turned out Cabela’s RFM meant they were mailing fishing catalogs to hunters (and vice versa) which was their number one customer complaint.
Even worse is treating everyone the same. While working at a general ad agency, Cub foods invaded our client’s (Dominick’s) market area, Chicago. Cub built big stores, undercut competitors 6% and at their store’s entrance, marked up competitor’s ‘sale’ fliers showing customers what they would save. We stopped Dominick’s sale fliers and instead created full-page ads featuring beautiful produce about their attention to quality. Their computer system was capable of 3-tier product pricing by zone (proximity to Cubs). Close stores matched Cub on commodity items. On specialty items, Cub actually raised prices slightly. Distant stores continued unchanged. Chicago was the first market where Cub was defeated and left. This illustrates the advantage of treating some customers – those close to Cub – very differently than those far away. It also shows that when you’re in a price war… brand building might be the preferred strategy. We also explained to Dominik (he was still in charge) that coupons erode margin with customers who would shop with you anyway, while not enough incentive for prospects to move to you from a competitor.
One of the great benefits of direct mail was the ability of further adjusting individual customer support. Nevertheless, most companies I was invited into, like Cabela’s, had ridgid rules for either mailing a customer frequently or stopping entirely. If they were using the ‘quintile’ RFM mentioned above, and treating every customer the same, their marketing cost to sales might look something like this. The ‘A’ 20% of customers generated 80% of Sales. You can only mail (or email) so often, so they are treated basically the same as each group. Here, you would be drastically underspending on your best customers while dramatically over spending on customers you had little reason to retain.
I built this one-page spreadsheet in 1981 to evaluate Amoco gas stations TBA buying. Corporate (and NBL) told me that all gas stations were basically the same size. We didn’t have powerful scoring software yet, so I just sorted all the stations by annual sales and categorized the top 1%, 4%, 15%, 30% and bottom 50%. It turned out that even with gas stations, the 80/20 Pareto principle applied… huge truck stops on I-80 showed up in that 1%. Their profile looked something like this…
It was about this time of year when I flew into Garon Products (see above). I spent the day with Art Crowley, Jr. who was handling day-to-day operations. I asked about their Marketing arsenal. Catalogs only, no field sales, no out-bound telemarketing (no email in those days either). I suggested to Art “You really should be calling some of your customers because not all customers are of equal value.” Art replied, “We don’t have an out-bound call center.” I looked him in the eye and repeated (with emphasis). “YOU really should be calling some of your customers.” To get this started (and since I was on the hook to insure payback from my visit), I asked Art, “How many of last year’s top 1% customers did NOT buy in 1st quarter?”
They generated a printout of their best customers. It turned out that 80% had not re-purchased. After Art assured me that he would indeed make some calls, I headed to my flight. It turned out people loved hearing from him. About 75% of those non-1st Qtr-buyers simply had changed jobs. This person was no-longer buying roof repair but was more than happy to share the name of the new person who was handling that. Needless to say, that small change in customer contact more than paid for my ‘expensive’ consulting fee… and Garon is still going strong today.
In case I wasn’t clear enough… THE Secret is:
Customers are DIFFERENT, Do NOT treat them all the same.
If you have further questions, you might enjoy my book, “Spinning Straw Into Gold” (I have a limited number of the paperbacks but will sign the book for you. Otherwise available on Amazon.com.
“For this hour, satisfied are we to proffer the mysteries of the wizard’s art. What marvel verily,
if we can indeed bedevil thee to spawn gold
beyond the aspirations of avarice.” …the Wizard
Also, I’m still doing Customer Database Audits, mainly for DTC&B companies. Click to schedule a short conversation.