Measuring loyalty 101: know what your customers bought
What, when, how much
Workshop Predicting customer behaviour is an essential part of answering the vital question: will the business grow or shrink, swim or sink?
Marketers like to measure customer behaviour using “RFM” – recency, frequency and money, meaning value. These three dimensions should provide an accurate picture of past purchasing patterns and an indication of future behaviour.
To achieve this, the customer relationship management (CRM) or equivalent system has to provide the basic data of who purchases what, when and for how much.
When analysing customer behaviour, it is easy to be distracted by the biggest fish, the five-figure purchase that had the sales people standing on their chairs whooping when they closed the deal. But this may have been a one-off and bare monetary value tells you nothing about future behaviour.
Frequency – the repeat rate of purchasing – is a better indicator. A customer who repeats the same pattern over time is likely to continue to do so, says Jim Novo, author of Drilling Down.
Dicing frequency of purchase by product or service can also reveal whether that item is on the up (the number of repeat customers is rising) or going down (repeat custom is falling).
Based on that information, you may, for example, discount the dogs and bleed the stars for profit, or deploy more marketing wellie to revitalise the dogs. Later you can compare before and after to see whether your tactics have had the desired effect on sales.
"A five per cent improvement in customer retention will yield a 20 to 100 per cent increase in profits"
Dice frequency by customer category – say, businesses of a certain size – and you get to see which customers are most worth courting (provided you don’t lose sight of the cost of hosing them down with discounts, freebies and hospitality).
This information should be passed on to sales. Knowing how important a customer is to the business is not just about deciding how servile or surly to be on the phone. It tells sales people what a customer will be susceptible to buying.
But it’s surprising how few companies do this, says David Beard, Sage CRM evangelist. “Some businesses don’t know who their best customers are. They just work to sales targets. The data is often trapped in financial systems and not available to the sales front office,” he says.
“The trick is to expose who are the loyal customers – what they bought, for how much, how frequently – and then bring it up on a dashboard when the sales call is made. The important thing is to get to the bottom of how much an individual customer is really worth to the business.”
One business that gets this is Multisol, a family firm offering services to petro-chemical blue-chips such as BP, Esso, Exxon Mobil, Castrol and Total, as well as automotive giants such as Toyota and Vauxhall.
“Our sales people can now see everything they need for each customer: history, orders, account information, credit levels, technical information, and so on,” says Andrew Wilkins, Multisol operations director.
“All the information is live so everyone in Multisol can see it at the same time. This is really important, particularly as oil prices are constantly changing.”
Once you have a handle on frequency, you can get a little more sophisticated. For example: which product or service is most popular with first-time buyers who then became frequent customers? This can tell you what to advertise to new markets.
But according to Novo frequency isn’t king of the CRM hill. Recency is, never mind that it isn’t even a proper word.
How so? Frequency alone is a rear-view mirror. “Repeat customers who haven’t repeated recently are former best customers,” says Novo
He recommends an arbitrary cut-off time for examining repeat customers, because if they are not recent repeat customers sales may go soft in the future.
“A decline in recent repeaters means you have to readjust your customer acquisition plans. Just to stay even, you are going to have to start replacing these best customers who are defecting from the business,” he says.
The aim of all this behaviour modelling, of course, is to create brand loyalty, which is marketing speak for retaining customers.
According to Fred Reichheld, a US marketing strategist The Economist dubbed “the high priest of the loyalty cult” and author of The Loyalty Effect: “A five per cent improvement in customer retention rates will yield a 20 to 100 per cent increase in profits across a wide range of industries.”
It’s a statistic you may want to impress the marketing manager with at your next meeting.