Customer Life Cycle Grids - Part 2

Part 1 of this article series, The Customer Life Cycle, discussed how analyzing customer life cycle grids can help determine the best time to promote to your customers. By sending out your promotions at the point of maximum impact, you'll naturally increase your response rate.

In this article, we will look at the step-by-step process of actually running customer life cycle grids.

This is an advanced article and assumes you have read the 3-part database marketing series Intro to Strategic Database Marketing.

Here are the steps to take in order to understand and profit from your customer life cycle info.

Step 1: Select the Action You Wish to Monitor

Select the one specific action you wish to monitor. It can be the number of purchases, downloads, site visits or anything else that you can easily measure.

It's best to tie the action you have defined with a specific product type or product category. For example, the number of purchases of CD's or the number of ebook downloads. Pick your most profitable product or product category.

If you have a service business, you can group all your service options together as long as they serve the same target market.

Step 2: Select a Target Market or Specific Customer Group

If you don't have several defined target markets or customer groups, you will run your life cycle grid data over all your customers.

If, however, you do have several different target markets, select your most profitable market or customer segment. It's best to run a customer life cycle report on a group of customers that have very similar needs.

For example, if you have a set of customers that mainly purchase software products and another customer group that purchases mostly hard goods, you would not want to mix these two groups when defining your life cycle grid.

Step 3: Create Your Life Cycle Grid

Create a customer life cycle grid using the Recency and Frequency data from your customer database.

Your grid will have Recency data along the top horizontal axis and Frequency data along the vertical axis.

Before trying to determine how to set your Recency and Frequency intervals, take a look at the below example showing a business that sells mp3 downloads on a website.

As you can see, the number of downloads per customer (Frequency) is represented on the vertical axis. The number of days since the last download (Recency) is represented on the horizontal axis.

The above life cycle grid is looking at all mp3 downloads no matter the customer or type of music. This is a perfectly fine way to see the overall customer life cycle.

However, it would be interesting to analyze additional life cycle grids according to genre (classical vs jazz vs pop) as well as a specific customer demographic such as age.

You'll notice in the above example that the Recency and Frequency intervals were set based on the typical purchase patterns for this type of business. For low-cost consumable, downloadable or commodity-type purchases, your Frequency intervals will be much different than if you're selling more expensive and complex hard goods.

So how do you determine how to set your Recency and Frequency intervals that make up your grid? As you monitor your customer RF scores, look for the Recency and Frequency breaks where behavior seems to make a definite shift. This will help you fine-tune the intervals in your grid so that they best reflect your business.

Once you have defined the Recency and Frequency intervals, all you need to do is to query your database for the number of customers that fit into each cell.

For example, in our 30-60 day Recency column, we have 6 different cells relating to the number of downloads. They are:

30-60 Day Recency Column
16+ downloads
10 to 15 downloads
4 to 9 downloads
3 downloads
2 downloads
1 download

You will need to query your database to determine the number of customer to place in each of the above Frequency cells under the 30-60 Recency column. Likewise, you need to do the very same thing for the other defined recency columns. Make sure you attach a customer ID to these values you create. You want to be able to identify which customer belongs in a particular cell so that you can easily create mailing lists for marketing communications.

This can be a bit time consuming at first, but exporting your data into a spreadsheet program like EXCEL can make it much faster and easier to manage. If you have someone that manages the database in your company, see if they can write a database query using a program like Microsoft Access. Once it is set up, running a new customer life cycle grid can be as easy as a few mouse clicks.

Step 4: Look for Patterns

Now it's time to look at any patterns in your customer life cycle grid. Your most recent and frequent customers will be in the top right cell. These are the customers that have the highest Recency and the highest Frequency - your "Gold" customers.

As you move from right to left horizontally, customers become less recent in their download activity. As you move from the top towards the bottom, customers are downloading fewer files.

The middle cells contain customers that aren't your best, but certainly aren't your worst. Because of this, the middle cells represent your most profitable promotional targets. Your goal when promoting to these customers is to increase their purchase frequency. Customers in these middle areas that respond to your promotions will move to the right and upwards in the life cycle grid.

By running regular customer life cycle grids, you will be able to quickly monitor the overall health of your business as well as identify when to send out marketing promotions for maximum impact. Part 3 of this article will focus on practical applications using your customer life cycle grids.

Read Part 3 of this series, Customer Life Cycle Applications