Customer Relationship Management for IM Dummies
Posted on 09. May, 2011 by Daniel Levis in Articles, Blog, customer, intelligence, logic, pareto, relationship, resource, Small Business Internet Marketing, Small Business Marketing, spending, spreadsheet, system, tracking
The Pareto Principle says 20% of your customers produce 80% of your sales and profits. This has profound implications to the wealth and wellbeing of ANY business…
Resources are finite. There is only so much time, money, and energy to invest.
One of the keys to increased conversion, customer value, and retention — and the increased profits they bring you — is the strategic application of your resources.
If you can deploy them with surgical precision… obtaining the highest possible return on resources invested… while avoiding their squander in places where they have negligible or negative contribution to your bottom line, you have a decided competitive advantage.
So why do so many online marketers pursue the quick fix, churn and burn school of marketing that treats all customers alike? Chalk it up to ignorance… temporarily too easy pickings… shoddy products that are anathema to repeat business… laziness… stupidity… pick your poison…
Despite the obvious logic and benefit of the surgical, systematic strike, few entrepreneurs have even considered it… still fewer pursue it. And as a result, billions of dollars are left on the table. Worse, businesses that flourished in cushier times are now floundering on the rocks of extinction.
The first step to avoiding this fate is to start tracking the behavior of your customers… and using that intelligence to take specific actions that encourage continued and increased spending…
Doesn’t it make sense to spend more money marketing to people with a proven propensity to buy from you?
What do you think might happen on your next product launch or promotion if you were to separate your best buyers from the great unwashed? What if instead of just sending them a series of emails you send these VIPs a series of print pieces as well?
What do you think might happen if you were to send your very best buyers a surprise gift in the mail once a year? Or your bread and butter buyers a free printed catalog once a quarter?
Do you think that might increase sales far and above your mailing costs?
Do you think it might also make these customers more responsive to your regular email promotions?
Does the Pope wear a beanie?
But here’s the real million-dollar question:
How do you know which customers are likely to respond enthusiastically to this special attention?
Here’s what I told one of my brightest coaching students who asked this question just the other day…
Your first step is to create an RFM value for each record in your customer file.
R stands for RECENCY (customer purchased within the last x days). F stands for FREQUENCY (customer purchases on average every x days). M stands for MONETARY VALUE (customer’s total purchase volume).
So let’s say Jill Customer made her first purchase a year ago. Her most recent purchase occurred 7 months ago. In between she made 2 additional purchases. And her total spend with your company is $2,780.
How do you compute Jill’s value in order to make a resource-leveraged decision about how much you should be willing to spend to convert her into a customer for your latest offering?
First, you need to create a few simple rules that make sense for your particular business. DISCLAIMER: Every business operates around different purchasing patterns and customer lifecycles so this is a purely an illustrative example…
Recency Rules:
- Customers who last purchased within the last 30 days get an R value of 5.
- Customers who last purchased within the last 30 to 60 days get an R value of 3.
- Customers who last purchased within the last 60 to180 days get an R value of 1.
- Customers who have not purchased within the last 180 days get an R value of 0.
Frequency Rules:
- Customers who purchase every 60 days or less on average get an F value of 5.
- Customers who purchase every 60 to 180 days on average get an F value of 3.
- Customers who purchase every 180 to 360 days on average get an F value of 1.
- Customers yet to make their second purchase get an F value of 0.
Monetary Value Rules:
- Customers who have spent $2,500 or more with your get an M value of 5.
- Customers who have spent between $1,500 and $2,500 get an M value of 3.
- Customers who have spent between $500 and $1,500 get an M value of 1.
- Customers who have spent less than $500 with you get an M value of 0.
You now have a system for ranking the relative value of your customers on a scale of 0 to 15. So what kind of customer is Jill?
Well she hasn’t purchased for 7 months. That pegs her R value at 0.
During her 1-year history as a customer she made 4 purchases. That gives her an F value of 3.
And her total spend with your company is $2,780. That gives Jill an M value of 5.
You now add these figures together to determine Jill’s RFM value — 8. This is Jill’s relative value as a customer.
Your next step is to decide what action you will take in order to maximize that value. Maybe you sub-divide your buyer’s list into three groups — 0-5, 5-10, 10-15. And on your next product launch you send all three groups a couple of postcards inviting them to consume your pre-launch content online.
The 5-10 and the 10-15 group have proven by their past buying behavior that they are quite responsive to your offers. So in addition to the postcards, you send them a sales letter and a couple of follow up reminders by mail counting down to the deadline.
And the 10-15 group — your most responsive and therefore highest value customers — also receives an amazing shock and awe package that includes all of the launch content on DVD, an audio CD they can listen to in their car, and beautifully printed transcripts.
Result: More sales, more profits, more loyalty and retention!
Parting comment. This is not rocket science to pull off. You don’t need high priced consultants or fancy pants CRM software to do this.
Anybody with elementary school math can download a .csv file from their shopping cart and perform the above calculations in a simple spreadsheet.
Will you give it a try?
Until next time, Good Selling!
Customer Relationship Management for IM Dummies originally appeared on The Michel Fortin Blog. Please visit to subscribe to it, or Tweet This.
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