A Better Way to Target One-Time Buyers
Let's consider a cataloger that acquires 200,000 customers yearly. To get the maximum number of these new customers to convert to multi-buyers, the cataloger mails 17 catalogs to them in their first year on the file and nine in the second year to all new customers who do not repurchase. New customers who place a second order get upgraded to a more aggressive contact strategy for multi-buyers.
Let's focus, however, on the marketing dollars invested in the many one-time buyers who fail to place a second order.
A typical retention rate for new customers over two years is 40 percent. More than half of one-time buyers defect or fail to place a second order. So in this example, 60 percent, or 120,000, of the new buyers will defect.
These defectors receive 26 catalog mailings in their first two years on the buyer file. Assuming an average cost of 50 cents per mailing, this results in an investment of $1.56 million in the group of defectors, or $13 per customer. Since none of them will place a second order, 100 percent of this investment is wasted. This represents a terrible use of your company's capital resources.
Your marketing team will tell you they use the most sophisticated modeling and segmentation methods and, therefore, your results are not this bad. Well, the example above assumes this cataloger is using the most powerful house-file scoring techniques. This inefficient use of capital results simply from the low response rates found in our industry. Yet in today's difficult environment, we cannot continue these wasteful ways. We need new, more effective methods to manage our marketing investments.
The traditional approach outlined above relies on the mailing of expensive catalogs over long periods of time to sort out the best customers from the worst. After two years of frequent contacts and heavy investments, the best customers will place multiple orders and the worst will place no orders.
After two years of investment in people who place no orders, catalogers either stop mailing these people or send them very few catalogs. But the new customers who become best customers are a small percentage of the total, and those who defect are the majority. This is why using expensive catalog mailings to sort out the winners from the losers is so wasteful.
Statistically, with low customer retention rates, the odds of identifying which customers are less likely to respond are actually in our favor. The newest, most effective techniques for identifying which customers are more likely to respond are based on a new approach to the process. Rather than spending $13 on every new customer over two years, the latest techniques require catalogers to invest a small amount of money on each new customer upfront to identify which have the potential to become best customers and, as importantly, which do not.
The key drivers of customer potential are not on your database after a customer places only one order. Customer potential is determined by the same factors in every business. The best customers are high overall spenders in your category, high spenders in your distribution channel and have a high affinity toward your brand. The opposite is true of your worst customers.
The new approaches to segmentation involve identifying these key drivers of customer potential and developing techniques to acquire information related to these variables. Having this information early on, catalogers reduce wasted spending on low-potential customers and increase their sales from high-potential customers. These new techniques even improve targeting capabilities on multi-buyers as well.
Wouldn't it make more sense to spend an additional 25 cents on every new customer upfront to avoid wasting $13 on every one of the 60 percent who will not place a second order?
I find it hard to comprehend why catalogers accept all of this wasteful spending, particularly when profit margins are under so much pressure today. All that keeps catalogers from reaping the benefits of these new approaches is resistance to change. If we challenge our traditional methods and think differently about how we invest in customer relationships, we can achieve much higher profitability.