Confessions of a Catalog Diva

Mar 26, 2006 10:34 PM  By

As a high-maintenance catalog shopper, I can be a customer service nightmare—although I prefer to think of myself as a “catalog diva.” I’m the type of customer who buys three of one item in different sizes, planning to return the ones that don’t fit. I’m the customer who calls 18 months after ordering a peach blouse in the desperate hope of finding another one in blue, but I’ve since thrown away the catalog, so I don’t know the item number.

I’ve been making my way through the world of catalog shopping like this for years. Until last week, that is, when I tried to order from a ripped-out catalog page stuffed in my to-do pile. The CSR insisted I have a catalog number, which I didn’t have, to place the order. The episode shook me to my diva core.

The premise of Larry Selden’s and Geoff Colvin’s book “Angel Customers, Demon Customers” suggests that companies use data and analytics to discriminate between customers who really deserve extraordinary service and those who simply drain profits from the bottom line. Companies such as Royal Bank and Fidelity Investments have taken note and are instituting stricter policies.

Though companies often choose an all-or-nothing customer service approach, they have a great opportunity to institute true customer yield management policies. Catalog and Internet merchants especially have a wealth of data on individual customers including history of purchases, spending, product returns, complaint calls, and service failure. That’s a lot more than your average bricks-and-mortar retailer.

How can all of that rich data drive a more profitable—and effective—customer service strategy?

First, determine a customer’s true profitability using a customer equity model that goes beyond segmenting customers by spend. It examines each customer’s revenue, then allocates the cost of servicing each customer.

Service costs fall in one of two categories: direct and indirect costs. Direct service costs include the cost of goods sold, shipping and handling costs, order and service call costs, and those costs that can be tracked to specific individuals. For simplicity, many companies calculate an average cost for each order call. That average assumes that all customers spend roughly the same amount of time on the phone. More-advanced techniques apply a variable cost per call based on the nature of the call.

Tracking indirect service costs, such as call center overhead and general advertising costs, are trickier. How much of your budget for these costs should be allocated to each customer? The art in the customer equity model is finding the optimal metric to drive indirect cost location; total dollars spent may not be a good metric. Does servicing an order for one $250 jacket, for example, take as much time and effort as it does to service as an order for ten $25 sweaters? Probably not.

In the case of general advertising costs, it’s possible to refine the allocation further by market or another general grouping of customers. For example, if the Cincinnati market has a general advertising budget of $1 million, and Cincinnati customers purchase 100,000 units, then each Cincinnati customer should be allocated $10 of the marketing budget. But if the Dallas market has a budget of $5 million, and Dallas customers purchase 1 million units, then each Dallas customer should be allocated $5 of the marketing budget. Why allocate the same costs per customer over extremely disparate markets? Tailor them instead.

The end result of this detailed customer equity modeling effort is that you calculate each customer’s profitability. Then you can rank and segment customers by how much annual profit they contribute.

The second step is to score customers by their attrition risk. How likely are you to lose each customer?

Third, estimate each customer’s untapped potential spend with your company. This step isn’t for the faint of heart, but techniques exist to help you gain enough insight into this $64,000 question to make smarter budget allocations.

The fourth and final step is to create a segmentation strategy matrix on all three dimensions: profitability, attrition risk, and potential spend. Once this step is complete, the strategy for your approach in the customer care center comes into focus.

For these high-value, high-potential, high-risk customers, toss out talk time as a measurement metric. Replace that metric with total average sales and total repeat sales. Use your interactive voice response (IVR) to route these true divas to your very best CSRs. Customize your screens to alert your CSRs of their status. Train them to handle this elite group of customers. Ensure that this segment receives your most aggressive trial offers to entice them to shift spend to your brand. If they need a little wiggle room in a return policy or other customer service approach, give it to them.

In contrast, consider the strategy for retaining customers. They’re high value, but they’re already giving you most of their spend. Do you want to lose them? No way. But, when tough budget choices beckon, it’s better to divert some of the customer care budget to the real upsell customers instead. And what’s the best way to handle these divas? Two words: kid gloves. Route them to the best available CSRs. Don’t rush them off the phone if they require special service. But you don’t need to dazzle them with the hottest offers, because they’re already spending as much with you as they can. Contact center performance metrics for this segment, therefore, will be total average sales and longevity.

Now consider those customers you may want to ignore. There’s a lot of noise in the marketplace about “firing your customers” who aren’t profitable. While we don’t advocate this scorched-earth policy, we do advocate the wise allocation of scarce resources. Simply spend less on these particular segments. Encourage them to use self-serve channels such as the Web and IVR. You might require these segments to adhere to your published return policy. And you most definitely won’t give them advance notice of your hottest offers or newest products.

Kelly Hlavinka is director of Colloquy, a provider of loyalty marketing publishing, research, educational and consulting services. She can be reached at Kelly.hlavinka@colloquy.com.