Return on Behavior Magazine
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Customer Experience

December 15th, 2011

Where Measurement Begins

where measurement begins

Proof that you are changing customer behavior has to start somewhere.

How do you measure a relationship? It sounds awfully complicated to quantify. But you don’t have to measure everything at once. If you choose your measuring sticks thoughtfully, you’ll have results that not only keep the gears greased in the short term but propel your big-picture marketing goals as well.

So what will you measure? That should depend on which quantifiers are most important in your company. Somewhere in your office, there’s no doubt a list of objectives that includes phrases like “strengthen customer relationships,” “grow revenue,” or “reduce marketing costs.” Ask yourself which of those yardsticks your CEO, CFO, board and other powers-that-be tend to fixate on. Take the top two or three, and you’ll have the basis of measurement tasks you can tackle — and results you can leverage to bring that big picture into focus.

If your priority is to reduce marketing costs, focus on:

  • Measuring direct savings. If ABC Investment Company builds a Web site that lets clients track investments online rather than through a live customer service rep, it saves the costs associated with staffing and overhead for those CSRs.
  • Gathering customer information. The more you know about your best customers — interests, wants, needs, demographics, even media preferences — the better you can target your marketing dollars. So instead of mailing a sweater offer to everyone, Susie’s Sweater Shop can e-mail it to the customers most likely to respond.
  • Quantifying productivity/efficiency. If a quality-improvement initiative helps your staff do its job better, faster and more efficiently, that initiative will contribute to the bottom line. Let’s say Joe’s Jeans improves its custom jeans ordering process, making it more detailed. The end result: jeans that fit better, translating into fewer returns.

If your priority is to grow revenue, measure overall ROI:

Everyone wants to see ROI in the form of bottom-line dollars and cents. If you spend X amount on your program, then it returns X percent in incremental sales. A typical formula looks like this:

  • Contribution ÷ Cost = ROI

For example, a retailer has a margin of 40% after cost of goods and overhead. If the program cost $500,000 and the incremental sales gain equaled $1.5 million, the contribution (at 40%) would be $600,000, yielding a 120% ROI:

  • $600,000 (contribution) ÷ $500,000 (cost) = 120% Return on Investment

One caveat: If you’ve implemented a broad-based CRM program, measure ROI semiannually to allow time for offsetting one-time program launch and implementation costs. Though you should measure individual program components, the strength of any CRM program is the sum of its parts.

 

If your priority is to retain customers and grow your customer base, quantify:

  • Customer reactivation. The number of inactive customers who’ve been enticed to purchase again.
  • Customer repurchase rate. The percentage of existing customers who have made a repeat purchase within a specified period of time.
  • New customer acquisition rate. The rate at which new customers are being acquired — usually expressed as the ratio of first-time buyers to repeat buyers during a specific timeframe.

If your priority is to increase customer spending and profitability, calculate:

  • Monetary value. The cumulative amount spent by a customer over the life of the relationship.
  • Transaction frequency. The cumulative number of transactions completed by a customer over the past quarter or past year of the relationship.
  • Cross-sell/upsell. These measure the relationship across all product lines. How many products/departments and add-on services are being used?

If your priority is to strengthen customer relationships and enhance loyalty, measure:

  • Channel penetration. Many believe that accessing and buying from a variety of channels is an indicator of loyalty. Customer penetration tracks the number and types of channels used.
  • Customer profitability. This measures the value of the total customer relationship over time across all product lines and channels, after the cost of servicing the customer.
  • Customer lifetime value. LTV uses current per-customer profitability to forecast the customer’s value over the predicted life of the relationship.
  • Customer satisfaction. This is the percentage of existing customers who say they are “extremely satisfied” or “satisfied” with your product or service offering. Customer satisfaction scores can be derived from telephone surveys, mailed questionnaires or face-to-face intercept interviews.

Knowledge Is Power, Data Is Not

Morphing metrics into money isn’t as insurmountable as it seems, but you need to have a game plan. Start by pinpointing what you want to prove. Then the people you get to help you prove it will be generating knowledge — not just data — that speaks your company’s language. Once that happens, people start listening.

Translate That Into Dollars, Please

Telling CFO-types that your CRM program resulted in 2,000 new customers will likely be met with a big “So what?” They want to know what those 2,000 customers mean to the bottom line. Some examples:

Example #1: To show the impact of customer reactivation

Let’s say you sent a mailer extolling the benefits of balance transfer. Based on that mailing, 2,000 previously inactive cardholders transferred balances to your card.

  • Total dollars transferred $400,000 (minus) promotional costs $100,000 = net incremental revenue* $300,000

* This example provides the revenue impact immediately after the mailing. For simplicity, other revenue sources such as interest and fee income are not included.

Example #2: To show the impact of channel penetration

You’ve decided to incent your customers to use all available channels for their shopping needs. And it worked: The typical customer used to shop only in your stores, spending an average of $100 every visit. Now he’s shopping online, in your catalog and at the kiosk in the grocery store, spending $100 on each purchase. That’s $300 in incremental spending. Here’s how that might look on paper:

  • Incremental spending per customer $300 (minus) overhead per customer $100 = equals net profit per customer $200

About the Author

David Slavick

There’s no two ways about it: David Slavick knows retail. Whether he’s pursuing a big-picture loyalty strategy for a multi-billion-dollar company or secret shopping a mall or big- box retailer store to glean valuable customer-level insight

— David has a unique skill for identifying and capitalizing on weaknesses and strengths to lift business metrics.

It is that skill — sharpened by decades of on-the-job wisdom and tried-and-true best practices — that allows David to tackle marketing challenges with a been- there, done-that confidence. David’s extensive background makes him a true pioneer in loyalty program innovation, CRM strategies and tactics, social media, website development, data governance, and project management. To top it off, he’s a hands-on leader driven by honesty, integrity and the proven ability to turn a high-level vision into precision-measured, sustained success for his clients. 






 
 

 

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2 Comments


  1. “But you don’t have to measure everything at once”

    I think a lot of companies are guilty of doing this. They get so swamped in the data that they lose the forest for the trees. It’s important to keep the big picture in mind, even when you are figuring out the small details.


  2. I like the simple ROI examples. Sometimes we get too caught up in engaging and educating, and forget to do simple math and calculate the fruits of our labor. Nice post.



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