How to use recency/frequency/monetary modeling to identify your most valuable customers.
In an earlier column, I introduced a very simple segmentation model that relies on observed behavior. Any marketer tracking basic e-mail metrics will be able to use this model to better target content and, hopefully, improve performance. It's not that this model is better than others that segment by interest, industry, or another differentiator.
It's that this model relies on information that should be available from even the most basic e-mail marketing program. Here's an overview:
In this column, we'll talk about engaging group five, those who open, click, and convert. If you're selling directly via e-mail, a conversion would be defined as a purchase. If you're looking to generate leads, it might be defined as a person providing contact information via an online form. These are the most common types of conversions.
People in this group are already doing what you want them to do -- converting. But that doesn't mean your work is done. Many companies focus on getting customers who aren't buying to buy as a way to increase revenue. But another way to increase revenue is to focus on those who are currently buying -- and get them to buy more. By either increasing their average order or increasing the frequency with which they order, you can improve your bottom line. This is where transactional messages and reach, frequency, and monetary (RFM) come into play.
You might also look to these good customers to recommend you to others who are interested in your products. This can take the form of a referral, a testimonial or a product review.
I've written about my client work on transactional messages in the past. Transactional messages, like order and shipping confirmations, are more likely to be opened and read by recipients, which makes them a perfect place to include marketing messages.
The key is relevance to the transaction. If someone just bought a gas grill, he may be interested in related products, like a grilling cookbook, or add-ons, like a rotisserie or smoking attachment. Including relevant cross-sells here is an inexpensive way to turn one sale into two. Adding an incentive, like free shipping, a discount, or a gift with purchase, will help motivate recipients to come back and make an additional purchase.
The RFM Model
If you're not using an RFM model to analyze your customer base, now is the perfect time to start. It requires gathering some additional information beyond e-mail metrics, but the effort will be well worth it. The key data points are:
By scoring customers on these three attributes you can subsegment this group and indentify your most valuable customers (those whose orders are most recent, most frequent, and of the highest dollar value), less valuable buyers (those whose orders are least recent, not frequent, and of low dollar value), and those in between.
Since these are the people who are taking the action you want (conversion), think about how you can both reward them and encourage them toward more of the same behavior. Your goal should be to shift people toward the "most valuable" subsegment. Special VIP clubs with benefits are a good tool to consider here. Nine West, for instance, offers free shipping to its best online customers. You might also look at increasing your e-mail frequency to people who purchase infrequently, or offering cross- and up-sells to buyers who have low monetary values.
RFM modeling is an intriguing and powerful marketing tool; I could do a whole series of articles on it. But in the meantime, there's lots of free information available on the Internet if you want to learn more.
Referrals, Testimonials, and Product Reviews
Peer-to-peer communication, a form of user-generated content, is another valuable marketing tool. It's not something you can buy, but it is something you can encourage.
Referrals are the most straightforward. Simply ask your best customers to recommend your company or products to their friends and colleagues. A personal appeal from someone at your organization, delivered via e-mail, is much more effective at this than a simple "forward this e-mail to a friend" link. Offering an incentive to the referrer if the person they refer takes an action (signs up to receive e-mail from your company, agrees to take a demo, or makes a purchase) can be an effective way to encourage referrals and reward customers who take the time to make them.
Testimonials are another good way to leverage your best customers. In a recent column, I divulged my six-step method for getting great testimonials. A great testimonial goes beyond "I was very happy with the product I purchased" and focuses on the benefits and advantages of the purchase.
Product reviews are another great tool for leveraging happy customers. Amazon does a good job of sending an e-mail post-purchase with a link for the recipient to review the product on its Web site. This is inexpensive and simple to do. And it's a great way to create two-way communication that benefits you and potential clients.
Take some time this week to think about how you can reward customers who aren't only opening and clicking on your e-mail but also converting. Then think about how they might help you increase your bottom line.
Until next time,
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Jeanne Jennings is a 20 year veteran of the online/email marketing industry, having started her career with CompuServe in the late 1980s. As Vice President of Global Strategic Services for Alchemy Worx, Jennings helps organizations become more effective and more profitable online. Previously Jennings ran her own email marketing consultancy with a focus on strategy; clients included AARP, Hasbro, Scholastic, Verizon and Weight Watchers International. Want to learn more? Check out her blog.
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