Customer Life Cycle Applications - Part 3

Part 1 of this article series discussed the concept of the customer life cycle.

Part 2 described the steps necessary to construct your own life cycle grid.

The final part of this series will discuss practical customer life cycle applications applications for increasing business profits.

Before we start, I'd like to give credit where credit is due. As far as I can determine, the concept of life cycle grids was developed by database marketing expert Jim Novo. If you haven't already, check out Jim's wonderful book Drilling Down: Turning Customer Data into Profits.

Let's start by pinpointing rough areas of customer value within any life cycle grid. The below diagram shows the general boundaries relating to four important customer groups.

Every business that has developed any sizeable customer transaction data through their database will find these same four customer value groups.

Most small businesses have a tendency to promote and market to all four of these groups the exact same way. I think you'll agree the life cycle grid shows that some customers will need a different marketing strategy than others.

Before we get into a few customer life cycle applications, let's briefly look at each of these four customer groups.

Customer Group 1: Profitable Customers
These are the customers in the top right area of your customer grid. The marketing goal with this group is retention. You want to keep these folks happy and communicate to them 6-8 times per year using low-cost marketing methods. Because these customers are already behaving as you want, they are typically not the group to extend discounts.

Customer Group 2: Frequent but not Recent
This group, located in the upper left area of your grid, represents a problematic customer group. They used to be good customers, but haven't made a purchase recently. They are most likely in the process of defecting or have already done so. The marketing goal with this group is reactivation techniques.

Customer Group 3: Low Value Customers
This group is located at the bottom left quadrant of your life cycle grid. They are typically unprofitable and it's questionable whether you should spend any promotional dollars on them. Except for customers located more towards the top right of this quadrant, you're better off funneling the your marketing dollars elsewhere.

Customer Group 4: Recent but not Frequent
This customer group is located in the lower right of your grid and represents good potential for growth. With this group, you want to promote to them in order to get that 2nd and 3rd order.

In actuality, you want to take some customers from each of these four groups and promote to them. Which customers? The customers centered around the middle of your grid. These folks are "middle of the road" customers and represent your best marketing opportunity. See the below chart for clarification.

Now that you know more about life cycle grids and how to run them, let's look at a few practical customer life cycle applications.

Life Cycle Application #1: Monitoring Life Cycle Change

Once you have the hang of constructing your life cycle grids, try taking any two consecutive grids and subtracting the contents cell for cell. This is known as a Life Cycle Delta Grid.

For example, if you run a new life cycle grid each week, subtract the week one data from week two. When you do this, you will be left with both positive and negative numbers within the individual cells of your new delta grid.

For a healthy business, your weekly number changes should trend more positive as you move upwards and to the right, and more negative as you move down and to the left.

Each week (or month) when you run a new grid, you again subtract the numbers from the preceding grid. Looking at these delta grids on a regular basis allows you to see if overall customer value is increasing or decreasing.

Here's an example of a delta life cycle grid for our fictional web business that sells mp3 downloads.

So what is this delta grid telling us over this three-month interval? It's telling us there is a serious issue here. See the negative delta values towards the upper right and positive values toward the lower left? There overall customer value is trending from "recent & frequent" to low value. This company needs to seriously evaluate their marketing initiative and to identify why customers seem to be defecting.

A healthy and growing business should see their delta life cycle grids trending the exact opposite, with positive numbers in the upper right and negative numbers in the lower left. This type of trend would show that customer value is flowing towards more recent and frequent purchases - a very healthy sign.

Start monitoring delta life cycle grids and uncover the overall health of your business!

Life Cycle Application #2: Customer or Product Groups

In the Integral Marketing System™, I recommended coding customer types into your database. Doing this allows you to run customer life cycle grids (and delta grids) by customer type.

If you can determine that a particular customer group responds 50% better to promotions than other groups, you can shift your marketing budget accordingly and increase the frequency you communicate to this profitable group.

You can run life cycle grids on any customer attribute you code into your database. In our mp3 example, we might gain valuable purchase information by running grids segmented by customer age.

Another valuable exercise is to run your grids by product category. For example, life cycle grids based on software purchases will look much different from those based on equipment purchases.

Life Cycle Application #3: Deciding When to Promote

In this final example, we'll go back to our mp3 download example and see just what the data in the life cycle grid is telling us to do. Take a look at the life cycle grid below. The most recent customers are shown in the very last column. These folks have all made at least one mp3 download within the last 30 days.

If the time between an average customer download is 30 days, then any customer that moves beyond this 30 day window without downloading again is not behaving like the average customer.

Look at the grid example below. This column represents customers that have made no mp3 purchases over the last 30 days. They are still valuable customers, but they are sliding down the recency scale.

The more customers migrate to the left in your life cycle grid, the more likely it is that you have lost them. The less recent a customer is, the less likely they are to respond to a marketing promotion.

Let's look at a specific series of cells and see what we can determine about customer behavior. Look at the below grid. The cell circled in red represents customers that have purchased two mp3 files within the last 30 days.

If we know that the average customer makes a 3rd purchase within 60 days of their last purchase, we would monitor this 60-day boundary to determine the customers that move into this area without making this 3rd purchase. See the grid below for clarification.

As you can see from this brief and simple example, your customer life cycle grids will help determine the best time to promote to your customers. Sending the right promotion to the right customer at the right time is the entire key to high-response marketing.

By using your customer database to run RF and customer life cycle grids, you will be well on your way to a high ROI marketing program that is perfectly matched to your unique customer purchase behavior!