An ancient Chinese proverb says “Study the past if you would divine the future.”
We as direct marketers look to the past every time we plan a campaign. How did our search, list rental, e-mail, catalog (insert marketing tactic here) perform last time? And what assumptions can we make about how performance will vary in the upcoming campaign?
But shouldn’t we apply the same process and logic to our customers? After all, campaigns don’t buy from companies, customers do.
By understanding customer activity, we can develop a better understanding of where we are and where we’re headed. Most important, a nameflow model can help develop a roadmap outlining what levers need to be pulled to get us where we want to be tomorrow.
This is not an afternoon project – it takes time, planning and a deep understanding of your business and customer metrics. But the impact it can have is tremendous. In one example, a company reallocated marketing spend among customer segments in such a way that spend was reduced 30%, while only 5% of revenue was affected.
At its most basic level, a nameflow model includes the following:
- Number of existing and new customers for the last complete year – the total will equal the number active customers that you will have at the start the next year.
- Retention rate for those customers –how many of these customers purchased over 12 months. The retention rate for existing customers and new customers should be very different. Existing customers will have a full 12 months to purchase, whereas new customers will have less than a year to repurchase.
- Revenue, average order and marketing cost by customer for the same period – Marketing cost should include the total marketing spend, not just that associated with a specific transaction or campaign. If it takes four campaigns to drive a transaction, the cost of those four campaigns needs to be tied to that customer.
By using last year’s performance you can establish a baseline understanding of where your customer file, revenue and marketing cost will perform in the coming year—if nothing changes. This becomes the first pass at next year’s plan. It also gives you a bottom-up validation to the typical top-down corporate planning process.
There are two things that are certain in marketing: doing the same thing next year will yield lower results, and your company wants you to drive improvements over last year’s performance.
Using this model, you can start applying assumptions and developing scenarios to understand how you should reallocate your marketing spend, where you need to drive efficiency improvements and where you need to grow your customer file.
Once you’ve built and validated a basic nameflow model you should expand it to include more advanced features:
- Segmentation. Break customers down into deeper segments such as acquisition source, RFM or your own customized customer segmentation, testing tactics, and so on.
- Financial metrics. Move beyond the revenue and marketing cost model to include margin, contribution and ultimately profit. This change can establish the link between marketing and financial metrics that will increase your CFO’s understanding of marketing spend impact.
- Past performance. By building this model backward (for instance, building it for four, three, two years ago), you can show trends to ensure that assumptions are realistic. If you’ve only been able to increase marketing efficiency by 5% in each of the past three years, is it realistic to expect a 20% improvement in the coming year?
- Future value. The process outlined above looks out over the coming year, but by looking at different time increments (i.e. six months or 24 months) you can tailor this model to your current business circumstances and help layout a longer term marketing strategy for your company.
Every day we face decisions regarding how to allocate marketing spend, drive efficiency into our efforts and maximize customer value, both today and tomorrow. A nameflow model is yet another tool that you should have at your disposal to help guide these decisions.
Tim Hoerrner (email@example.com) is the chief customer economist at Carmot Marketing, which advises clients on profit-driving customer communication strategies.