Measuring Potential Value with LifeCycle Metrics
This whole potential value measurement issue is, of course, the big problem embedded in the preaching you hear on LifeTime Value, CRM, and these portfolio models of customer value. How do you deal with this whole “potential value” question, how do you actually measure it and act on it?
Well, fellow Driller, would it surprise you to learn that the specific answers to those questions are what the rest of this book is about? I’m not going to give you a conference lecture about all these wonderful things you should be doing with customer value management and then not tell you how to actually do them. Oh no. You will find out exactly how to measure potential value, and as a bonus, you will be surprised how easy it is. In fact, there are specific metrics for potential value and you will learn what they are and exactly how to use them.
Recall this passage from the previous chapter:
It’s not nearly as important to know the absolute or exact value of a customer as it is to know whether this value is rising or falling over time. Customer behavior also changes over time, and these changes in behavior typically precede a change in customer value. That means if you track these changes in behavior, you can forecast a change in value, and if you can forecast a change in value, you can get your campaign or program out there and do something about it. This is the core idea behind Customer Retention, and these changes in customer behavior and value over time are called the Customer LifeCycle.
So the following may not surprise you: there are LifeCycle Metrics you can use to forecast future changes in value by tracking behavior in the present. Pretty handy, huh? And just in time, it seemed like you were getting kind of unruly…
These LifeCycle metrics are where the idea of Friction comes into play. They measure Friction so that you can track and manage it. And if you can track and manage Friction, you can actually put the concept of the customer portfolio management from above into action.
Friction is really about the likelihood a customer will continue to do business with you. The actual causes of friction are created on the business side, and manifest themselves on the customer side as impatience, frustration, and lack of loyalty. Customers encounter varying degrees of this friction in their business relationships, and become more or less likely to do business with you as this friction changes. They already have low tolerance for poor customer service, processes that don’t work as they should, pricing that changes unexpectedly or is confusing, interfaces that make it difficult to accomplish tasks, communications that are sloppy, not delivered in a timely way, or irrelevant. All of these friction points tend to create increasing levels of frustration and ill will, which over time mutate into dissatisfaction and defection. Friction accumulates to the point the customer simply decides to start seeking alternatives, and once alternatives are found, the customer terminates the prior business relationship.
Now, none of this may sound new to you, but here is something that is new. The friction effect is especially true and is more pronounced as “customer control” of the business relationship increases. Customers are demanding and taking more control of business relationships themselves, as is true with web retail, or have been forced to take control, as with the practice of pushing customers to serve themselves though the web or a telephone interface. As the ability for the customer to exert control in the business relationship increases, customers become less and less tolerant of friction.
And, as friction rises, the customer becomes less and less likely to do business with you in the future. If a customer is becoming less and less likely to do business with you, the value you could realize from the business relationship with the customer in the future has to be falling.
In other words:
Rising friction = falling potential value;
Falling friction = rising potential value
So, if you can measure friction, you can measure potential value. And measuring friction is exactly what LifeCycle Metrics do. By measuring friction, these metrics also measure the likelihood of a customer to do business with you in the future, and so also measure the potential value of the customer. Visitors and customers will “signal” their friction levels through their own behavior; LifeCycle Metrics organize and codify this behavioral data for you, and allow you to create reports and trip wires that flag increasing or decreasing friction.
And how do you reduce friction? By applying the grease, my fellow Driller – your innovative selling and service campaigns are the grease that will hopefully reduce friction and increase the potential value of the customer. Fortunately, you will have your LifeCycle Metrics to tell you precisely who needs the grease, when it should be applied, and even when it should be applied a second time.
Your potential value metrics will also tell you when your relationship with the customer has already “seized up” and it’s too late for the grease. You only have so much grease and the grease is expensive, so you want to apply it only when and where you think it is likely you can reduce friction and prevent the relationship from seizing up.
By the way, customers are not the only folks who experience friction, people trying to become customers experience it also. An easy way to measure this want-to-be-a-customer friction is to look at the visitor conversion rate on your web site. Navigational design and layout determine “physical” friction and copy elements determine “emotional” friction. Design and layout testing will reduce physical friction; persuasive copywriting will reduce emotional friction. Success at reducing want-to-be-a-customer friction is measured by an increased rate of visitor conversion to goal on the web site.
But back to customers. With our first LifeCycle Metrics, Latency and Recency, we’re going to be looking at the tracking of potential value only, and how you can use changes in potential value to trigger High ROI Customer Marketing campaigns or programs. After the Latency and Recency metrics we will cover the RFM model, which uses both Current Value and Potential Value metrics to really juice up your results and drive even higher profits to the bottom line of your company.
This article is taken from the book Drilling Down: Turning Customer Data into Profits with a Spreadsheet. The first article in this series can be found here.
Jim Novo has nearly 20 years of experience using customer data to increase profits. He is co-author of The Guide to Web Analytics and author of Drilling Down:Turning Customer Data into Profits with a Spreadsheet. If you want more visitors to take action on your web site, try using the free conversion metrics calculator, downloadable here. If you need to sell more to customers while reducing marketing expenses, get the first nine chapters of the Drilling Down book free at http://www.drillingdownbook.com.
