-Chapter 5 Drilling Down-

Customer Marketing Strategy: The Friction Model

You have probably heard or read references to the
“portfolio” approach to managing customers and their value.
I think it’s a sound idea and one I have used over the years
because it’s generally quite easy to understand in theory,
though the actual implementation is always left for you to
figure out on your own. So we’re going to take a look at
this portfolio approach for managing customers and I am
going to supply you with the implementation tools you need
to actually make it work. This is an important chapter,
because understanding these concepts will provide you with
the very foundation needed for developing all of your
Data-Driven marketing campaigns and programs.

The general idea behind the portfolio approach to customer
value management is this: your customer base is a business
asset. Businesses can have lots of different assets, for
example, real estate holdings, buildings, inventory, and
common stock, along with other financial instruments. Each
of these assets has a value to the business. This
collection of assets is an “asset portfolio,” just as you
may hold your own personal portfolio of stocks.

The assets in a portfolio have a current value, which is
what they can be sold for today. As we know, there can be
changes in the current value of an asset portfolio over
time, as what you can sell assets for changes almost daily.
Assets also have an “expected” or future value, which can
be rising or falling as well, depending on the market for
an asset and the type of asset it is. For example, real
estate generally appreciates in value over time, but
machinery generally declines in value over time. This
means at any point in time, an asset has a current as well
as a potential or future value.

The customer base can be viewed as such an asset as well,
and in fact, each customer has a current and a potential
value. The current value is whatever the customer has
created in value for the business as of today. Current
value could be the cumulative profits for the customer
since they became a customer, or the cumulative advertising
value of all the visits made to a web site since the first
one. Potential value is the future stream of profits
expected from the customer as long as they continue to be
a customer. If the customer terminates the business
relationship, the potential value of the customer drops
to near zero; this is the end of the customer LifeCycle,
the defection by the customer. The sum of Current Value
and Potential Value is equal to the LifeTime Value of the
customer; it’s the Total Value contributed by the
customer to your business.

If customers in your customer portfolio have both
current and potential value, then you can set up a 2 X 2
chart describing the value of your customer base in terms
of current plus potential value (LifeTime Value):

(click the link below to see chart)

Figure 1: The Customer Value Portfolio

Customers having both high current value and high potential
value (upper right corner of chart) are the “rocket fuel”
customers; these are the 10% – 20% of your customers
generating 80% – 90% of your profits. You very much want
to keep these customers and should be paying special
attention to keeping them happy; these are your best
buyers, heaviest visitors, and so forth.

In the lower left corner of the chart, you have the
opposite situation; these customers have low current and
low potential value. This group probably includes most
of your 1X buyers, accidental visitors to the web site,
and so on. For the most part, though it’s nice to have
these customers and they perhaps contribute to paying
overhead costs, you probably should not go out of your way
to spend a lot of resources trying to grow their potential.
In fact, this group likely contains every customer you have
already spent too much money marketing to – those that
never respond. This is also the group customer “win back”
programs often focus on.

The upper left and lower right corners of the chart hold
customers with a mix of current and potential values. In
the upper left, you have high current, low potential value
customers. This area is populated mostly by defecting best
customers – they were best customers at one time (by
current value) but for whatever reason have slowed their
profit-generating activity with you and are probably
destined to fall into the lower left corner of the chart by
defecting. If you’re smart, you’ll come up with programs
that drag them back across to the upper right corner.
Customer retention programs should be focused on this
group, but more often than not, are not really focused on
any group in particular, and that is why they have a
high failure rate.

In the lower right corner, you have customers with high
potential value and low current value. Who are these
people? It’s likely they are fairly new customers who
have not had a chance to create a lot of value for you yet,
but are expected to create value in the future. If they
do, they will rise into the upper right hand corner of the
chart and become “rocket fuel” customers. If they don’t,
they will fall back across the chart into the lower left
corner and contribute very little. Customers in this
corner should be the targets of programs designed to
increase customer value, though as with the retention
programs mentioned above, these “grow the customer”
programs are often not focused on this specific group
and tend to actually lose a lot more money than they make.

That’s the portfolio approach to managing customers and
their value, or at least my definition of it. There are
others, which for the most part use lifestyle or
demographic metrics to allocate the customers. But we’re
on to that charade, right? Demographics tell you nothing
about the current or potential value of the customer, and
if you’re in a real business, what you care about is the
money. For this reason, my approach uses actual spending
or value-generating behavior to allocate customers into the
quadrants of the customer portfolio.

You say, “Yea, but wait a minute Jim, you’re pulling a fast
one here. I get how current value is derived, I mean, it’s
the actual transactional value of the customer – sales,
visits, whatever behavior is monetized by the business.
But how do you do this “potential value” allocation, how do
you measure potential value? I guess future behavior will
create value in the future, but how do I measure behavior
that has not happened yet? What kind of behavior indicates
the potential value of the customer? I was with you until
now, but this idea sounds…”

Relax. Can you take the pebble from my hand, grasshopper?
When you can take the pebble from my hand, it will be
time for you to leave.

If you didn’t get the reference above, you’re not up on
your 70’s TV shows. Try a web search on “pebble
grasshopper Kung Fu” if you really need to know.

But you are right. This whole potential value measurement
issue is, of course, the big problem embedded in the
preaching you hear on LifeTime Value, CRM, and these
portfolio models of customer value. How do you deal with
this whole “potential value” question, how do you actually
measure it and act on it?

Well, fellow Driller, would it surprise you to learn that
the specific answers to those questions are what the rest
of this book is about? I’m not going to give you a
conference lecture about all these wonderful things you
should be doing with customer value management and then not
tell you how to actually do them. Oh no. You will find
out exactly how to measure potential value, and as a bonus,
you will be surprised how easy it is. In fact, there are
specific metrics for potential value and you will learn
what they are and exactly how to use them.

Recall this passage from the previous chapter:

It’s not nearly as important to know the absolute or exact
value of a customer as it is to know whether this value is
rising or falling over time. Customer behavior also
changes over time, and these changes in behavior typically
precede a change in customer value. That means if you
track these changes in behavior, you can forecast a change
in value, and if you can forecast a change in value, you
can get your campaign or program out there and do something
about it. This is the core idea behind Relationship
Marketing, and these changes in customer behavior and value
over time are called the Customer LifeCycle.

So the following may not surprise you: there are LifeCycle
Metrics you can use to forecast future changes in value by
tracking behavior in the present.

Pretty handy, huh? And just in time, it seemed like you
were getting kind of unruly…

These LifeCycle metrics are where the idea of Friction
comes into play. They measure Friction so that you can
track and manage it. And if you can track and manage
Friction, you can actually put the concept of the customer
portfolio management from above into action.

Friction is really about the likelihood a customer will
continue to do business with you. The actual causes of
friction are created on the business side, and manifest
themselves on the customer side as impatience, frustration,
and lack of loyalty. Customers encounter varying degrees
of this friction in their business relationships, and
become more or less likely to do business with you as this
friction changes. They already have low tolerance for poor
customer service, processes that don’t work as they should,
pricing that changes unexpectedly or is confusing,
interfaces that make it difficult to accomplish tasks,
communications that are sloppy, not delivered in a timely
way, or irrelevant. All of these friction points tend to
create increasing levels of frustration and ill will, which
over time mutate into dissatisfaction and defection.
Friction accumulates to the point the customer simply
decides to start seeking alternatives, and once
alternatives are found, the customer terminates the
prior business relationship.

Now, none of this may sound new to you, but here is
something that is new. The friction effect is especially
true and is more pronounced as “customer control” of the
business relationship increases. Customers are demanding
and taking more control of business relationships
themselves, as is true with web retail, or have been forced
to take control, as with the practice of pushing customers
to serve themselves though the web or a telephone interface.
As the ability for the customer to exert control in the
business relationship increases, customers become less
and less tolerant of friction.

And, as friction rises, the customer becomes less and less
likely to do business with you in the future. If a
customer is becoming less and less likely to do business
with you, the value you could realize from the business
relationship with the customer in the future has
to be falling.

In other words:

Rising friction = falling potential value;

Falling friction = rising potential value

So, if you can measure friction, you can measure
potential value. And measuring friction is exactly what
LifeCycle Metrics do. By measuring friction, these metrics
also measure the likelihood of a customer to do business
with you in the future, and so also measure the potential
value of the customer. Visitors and customers will
“signal” their friction levels through their own behavior;
LifeCycle Metrics organize and codify this behavioral data
for you, and allow you to create reports and trip wires
that flag increasing or decreasing friction.

And how do you reduce friction? By applying the grease, my
fellow Driller – your innovative selling and service
campaigns are the grease that will hopefully reduce
friction and increase the potential value of the customer.
Fortunately, you will have your LifeCycle Metrics to tell
you precisely who needs the grease, when it should be
applied, and even when it should be applied a second time.

Your potential value metrics will also tell you when your
relationship with the customer has already “seized up” and
it’s too late for the grease. You only have so much grease
and the grease is expensive, so you want to apply it only
when and where you think it is likely you can reduce
friction and prevent the relationship from seizing up.

By the way, customers are not the only folks who experience
friction, people trying to become customers experience it
also. An easy way to measure this want-to-be-a-customer
friction is to look at the visitor conversion rate on your
web site. Navigational design and layout determine
“physical” friction and copy elements determine “emotional”
friction. Design and layout testing will reduce physical
friction; persuasive copywriting will reduce emotional
friction. Success at reducing want-to-be-a-customer
friction is measured by an increased rate of visitor
conversion to goal on the web site.

But back to customers. With our first LifeCycle Metrics,
Latency and Recency, we’re going to be looking at the
tracking of potential value only, and how you can use
changes in potential value to trigger High ROI Customer
Marketing campaigns or programs. After the Latency and
Recency metrics we will cover the RFM model, which uses
both Current Value and Potential Value metrics to really
uice up your results and drive even higher profits to the
bottom line of your company.

 

-Chapter 4 Drilling Down-

Customer Marketing Basics

No question about it, the constant drumbeat of the CRM
machine over the past several years has confused the heck
out of people. I’ve been doing this stuff for almost 20
years now, and I can tell you it is not as difficult as it
is often portrayed. Sure, you can make it very, very
complicated if you want to. But if you don’t start with
the basics, you’re going to end up wasting a ton of money.

Let’s start simple, shall we?

In this chapter I’m going to explain in a general sense
how High ROI Customer Marketing campaigns and programs
are developed and implemented, and in particular, address
some of the misconceptions people have regarding customer
value-based and relationship marketing techniques. Much
of what is now called “CRM” from a marketing perspective
is based on these fundamental ideas. Remember, CRM is an
approach to managing a business, not a technology. You do
not need to live on the bleeding edge of technology to take
advantage of a customer-based management philosophy.

Generally, CRM / Relationship Marketing / Database
Marketing attempts to define customer behavior and then
looks for variances in behavior. When you hear people
talk about “predictive modeling” or looking for “patterns”
using data mining, they are essentially taking a behavioral
approach using the latest tools. Once you know how
“normal” customers behave, you can do two things with
your business approach:

* Formally document “normal” customer behavior and
internalize it systemically, leveraging what you know
o improve business functionality and profitability.

* Set up early warning systems, triggering events, or
“trip wires” to alert you to customer behavior outside
the norm. This variance in behavior generally signals
an opportunity to take action with the customer and
increase their value – online or offline.

What is most important to measure in CRM is change.
People spend way too much time worrying about “absolute”
numbers, like LifeTime Value – the cumulative value of
the customer now and in the future. What they should
really be looking at is “relative” numbers – change over
time. It’s not nearly as important to know the absolute
or exact value of a customer as it is to know whether this
value is rising or falling over time. Customer behavior
also changes over time, and these changes in behavior
typically precede a change in customer value. That means
if you track these changes in behavior, you can forecast
a change in value, and if you can forecast a change in
value, you can get your campaign or program out there and
do something about it. This is the core idea behind
Relationship Marketing, and these changes in customer
behavior and value over time are called the Customer
LifeCycle. Knowing and understanding the Customer
LifeCycle is the most powerful marketing tool there is;
you will learn how to track the customer LifeCycle and
use it to increase the ROI of your customer marketing
later in the book.

Segments of customers tend to follow similar behavioral
patterns, and when any single customer deviates from the
norm, this can be a sign of trouble (or opportunity) ahead.

For example, if the average new cellular customer first
calls customer service 60 days after they start, and an
individual customer calls customer service 5 days after
they start, this customer is exhibiting behavior far
outside the norm. Is there a potential problem, or
opportunity? Does the customer having difficulty
understanding how to use advanced services on the phone?
Or is the customer happily inquiring about adding on more
services? In either case, there is an opportunity to
increase the value of the customer, if you have the
ability to recognize the opportunity and react to
it in a timely way.

Understand, there is no “average customer,” and a
business will have many different customer groups,
each exhibiting their own kind of “normal” behavior.
The tools available to identify and differentiate
customer segments using behavioral metrics are
discussed at length in this book. For example, the
type of media or offer used to attract the customer
can have a dramatic effect on long-term behavior, and
customers who come into the business on the same media
and offer at the same time will tend to behave in
similar ways over time.

In the cell phone case above, number of days from sign-up
to the customer service call serves as the “trip wire,”
and detects a raising of the hand by the customer, which
should say to the marketer, “I’m different. Pay attention
to me.” It is then up to the marketing behaviorist to
determine the next course of action. Trip wire metrics
like these provide the framework for setting up the
capability to recognize the opportunity for
increasing customer value.

This raising of the hand by customers, and the reaction
by marketers, is the feedback loop at the center of
Relationship or LifeCycle-based Marketing. It’s a
repeating Action – Reaction – Feedback cycle. The
customer raises the hand, the marketer Reacts. The
customer provides Feedback through Action – perhaps they
cancel service, or perhaps they add service. The marketer
reacts to this Action, perhaps with a win-back campaign,
or with a thank you note. It’s a constant (and mostly
non-verbal) conversation, an ongoing relationship with the
customer requiring interaction to sustain itself. It is
not a relationship in the “buddy-buddy” sense. Customers
don’t want to be friends with a company, they want the
company to be responsive to their needs – even if they
never come out and state them openly to the company.

This relationship continues to cycle over and over as
long as there is value in the relationship for both the
customer and the marketer. If the customer takes an Action
and there is no Reaction from the marketer, value begins to
disappear for the customer, and they may defect. When
value disappears for the marketer (the customer stops
taking Action / providing Feedback), marketers should stop
spending incremental budget on the customer.

Notice I did not say “fire the customer” or any of the
related drivel thrown around in some of the CRM venues.
All customers deserve (and pay for) a certain level of
support. The real question is this: for each incremental,
or additional dollar spent on marketing to the customer,
is there a Return On the Investment? If I have the ability
to choose between spending $1 on a customer returning $.50,
and $1.00 on another customer returning $2.00, I would be
nuts not to choose the customer returning $2.00. I have
not “fired” the customer returning only $.50; I have just
chosen not to spend incremental money doing any special
marketing or service programs with them.

Do you see the difference?

In fact, much of the profitability typical of High ROI
Customer Marketing techniques comes from knowing who *not*
to spend on. Most of the decreased profitability in any
marketing program is a result of over-spending on
unsuitable targets with lowered returns. But because
marketers tend to look at results in the aggregate, or
they are looking at demographically-based segments to
measure a behaviorally-based outcome like purchases,
they miss important details. For example, certain
segments in the campaign or program may return $5.00
for each $1.00 spent while others may lose $5.00 for
every $1.00 spent, even though the campaign as a whole
may return $2.00 for each $1 spent. When you are trying to
encourage a customer to buy something, you are looking for
a behavior to occur. To measure the results of such a
marketing campaign using only demographic segmentation
without any behavior-based metrics is misleading at best,
and just plain lazy otherwise. If you are trying to create
behavior, use behavior as your measurement yardstick
to define success.

Why is all of this important to understand?

Customers who are in the process of changing their behavior
– either accelerating their relationship with you, or
terminating their relationship with you – are the highest
potential ROI customers from a marketing perspective. They
represent the opportunity to use leverage, to make the
highest possible impact with your marketing dollar. You
may make some money marketing to customers who are just
cruising along the LifeCycle, acting like an “average
customer.” But when you can predict the likelihood of an
average customer to turn into a best customer, and you
successfully encourage this behavior, or you can reverse a
customer defection before it happens, then there are
tremendously profitable longer-term implications for the
bottom line. You will discover these opportunities by
understanding behavior and setting up trip wires to alert
you to deviations from normal behavior by a customer.

What about all the rest of the customers, those who are
not either accelerating or terminating the relationship?
Leave ’em alone. Whatever background marketing you are
doing (advertising, branding, service campaigns, etc.) is
serving them just fine. High ROI Data-Driven marketing
techniques are best used (and create the highest returns)
when they are used to surgically strike at a trend in
behavior, not when customers are comfortably plodding
along. However, there are not nearly as many comfortable
plodders as you think; in fact, from 40% to 60% of your
customer base is either in the process of accelerating or
terminating their relationship with you right now. So the
real question is this: how do you find out who these
customers are, and take advantage of the situation?

Latency, Recency, RFM, and all the other customer behavior
metrics and models described in the Drilling Down book are
simply tools for recognizing the opportunity to take an
Action in Reaction to the customer raising their hand. If
you don’t have some kind of system to recognize customers
in the process of changing their behavior, you will miss
out on most of the highest ROI customer marketing
opportunities you have. And don’t count on the customer
to e-mail or call you when they’re thinking of changing
their behavior – we both know that is not typically going
to happen. A more likely scenario: they will just stop
taking Action and providing Feedback. And by then, it’s
too late for you to do anything profitable about it. Set
up your trip wires and predict the behavior, folks. It’s
the only way to sense when an average customer is ready to
become a best customer. And reacting to a customer
defection after the fact with a “win-back” campaign is a
truly sub-optimal way to “manage” a relationship.

For example, a win-back program is triggered when the
customer defects. Have you switched long distance or
cellular providers lately? Did you get inundated with
win-back calls begging you to reconsider? “Jim, we just
wanted you to know we have lowered our rates.” Yeah, well,
thanks for telling me after over-charging me for the past
six months! But could they have known I was about to
switch by looking at my behavior?

Sure. If they had looked at the calling patterns of
previously defected customers like me, they would have
seen a common thread in the behavior. These patterns
create the “trip wires” for initiating high ROI marketing
campaigns before the defection. The proper profit
maximizing approach is to wait until I look like I’m going
to defect, and then call me and offer a lower rate before
I defect. I would humbly submit marketing to the customer
after they defect is a sub-optimal approach; the decision
has already been made. If you can market to them when they
appear likely to defect, you optimize your marketing
resources by not applying them too soon or too late in
the Customer LifeCycle.

Based on a national survey, 50% of marketing managers do
not know their customer defection rate, and the other 50%
underestimate the true defection rate. After reading this
shocking statistic, I figured it was time write the book on
using Customer LifeCycles to both track customer defection
and define high ROI opportunities to retain customers
*before* they defect. If you understand the Customer
LifeCycle, you can predict the primary defection points
and react to them before customers leave you. This is the
highest ROI marketing you can possibly do; it’s much
cheaper than “win-back” (after the customer defects,
response is much lower) and preserves the investment and
profits you have in the customer already.

 

So CompLicated

Uh Huh, Life’s Like This
Uh Huh, Uh Huh, That’s The Way It Is
Cause Life’s Like This
Uh Huh, Uh Huh That’s The Way It Is

Chill Out Whatcha Yelling’ For?
Lay Back It’s All Been Done Before
And If You Could Only Let It Be
You Will See
I Like You The Way You Are
When We’re Drivin’ In Your Car
And You’re Talking To Me One On One But You’ve Become

Somebody Else Round Everyone Else
You’re Watching Your Back Like You Can’t Relax
You’re Tryin’ To Be Cool You Look Like A Fool To Me
Tell Me

Why You Have To Go And Make Things So Complicated?
I See The Way You’re Acting Like You’re Somebody Else Gets Me
Frustrated
Life’s Like This You
And You Fall And You Crawl And You Break
And You Take What You Get And You Turn It Into Honesty
And Promise Me I’m Never Gonna Find You Fake It
No No No

You Come Over Unannounced
Dressed Up Like You’re Somethin’ Else
Where You Are And Where It’s At You See
You’re Making Me
Laugh Out When You Strike Your Pose
Take Off All Your Preppy Clothes
You Know You’re Not Fooling Anyone
When You’ve Become

Somebody Else Round Everyone Else
Watching Your Back, Like You Can’t Relax
Trying To Be Cool You Look Like A Fool To Me
Tell Me

Why You Have To Go And Make Things So Complicated?
I See The Way You’re Acting Like You’re Somebody Else Gets Me
Frustrated
Life’s Like This You
And You Fall And You Crawl And You Break
And You Take What You Get And You Turn It Into
Honesty
Promise Me I’m Never Gonna Find You Fake It
No No No

Chill Out Whatcha Yelling For?
Lay Back, It’s All Been Done Before
And If You Could Only Let It Be
You Will See

Somebody Else Round Everyone Else
You’re Watching Your Back, Like You Can’t Relax
You’re Trying To Be Cool, You Look Like A Fool To Me
Tell Me

Why You Have To Go And Make Things So Complicated?
I See The Way You’re Acting Like You’re Somebody Else Gets Me
Frustrated
Life’s Like This You
And You Fall And You Crawl And You Break
And You Take What You Get And You Turn It Into
Honesty
Promise Me I’m Never Gonna Find You Fake It
No No

Why You Have To Go And Make Things So Complicated?
I See The Way You’re Acting Like Your Somebody Else Gets Me
Frustrated
Life’s Like This You
You Fall And You Crawl And You Break
And You Take What You Get And You Turn It Into Honesty
Promise Me I’m Never Gonna Find You Fake This
No No No

 

Chapter 1 – Laying Plans – The Art of War

[Ts`ao Kung, in defining the meaning of the Chinese for the title of this chapter, says it refers to the deliberations in the temple selected by the general for his temporary use, or as we should say, in his tent. See. ss. 26.]

1. Sun Tzu said: The art of war is of vital importance to the State.

2. It is a matter of life and death, a road either to safety or to ruin. Hence it is a subject of inquiry which can on no account be neglected.

3. The art of war, then, is governed by five constant factors, to be taken into account in one’s deliberations, when seeking to determine the conditions obtaining in the field.

4. These are: (1) The Moral Law; (2) Heaven; (3) Earth; (4) The Commander; (5) Method and discipline.

[It appears from what follows that Sun Tzu means by “Moral Law” a principle of harmony, not unlike the Tao of Lao Tzu in its moral aspect. One might be tempted to render it by “morale,” were it not considered as an attribute of the ruler in ss. 13.]

5. The MORAL LAW causes the people to be in complete accord with their ruler, so that they will follow him regardless of their lives, undismayed by any danger.

[Tu Yu quotes Wang Tzu as saying: “Without constant practice, the officers will be nervous and undecided when mustering for battle; without constant practice, the general will be wavering and irresolute when the crisis is at hand.”]

6. HEAVEN signifies night and day, cold and heat, times and seasons.

[The commentators, I think, make an unnecessary mystery of two words here. Meng Shih refers to “the hard and the soft, waxing and waning” of Heaven. Wang Hsi, however, may be right in saying that what is meant is “the general economy of Heaven,” includi ng the five elements, the four seasons, wind and clouds, and other phenomena.]

7. EARTH comprises distances, great and small; danger and security; open ground and narrow passes; the chances of life and death.

8. The COMMANDER stands for the virtues of wisdom, sincerely, benevolence, courage and strictness.

[The five cardinal virtues of the Chinese are (1) humanity or benevolence; (2) uprightness of mind; (3) self-respect, self-control, or “proper feeling;” (4) wisdom; (5) sincerity or good faith. Here “wisdom” and “sincerity” are put before “humanity or benevolence,” and the two military virtues of “courage” and “strictness” substituted for “uprightness of mind” and “self-respect, self-control, or ‘proper feeling.'”]

9. By METHOD AND DISCIPLINE are to be understood the marshaling of the army in its proper subdivisions, the graduations of rank among the officers, the maintenance of roads by which supplies may reach the army, and the control of military expenditu re.

10. These five heads should be familiar to every general: he who knows them will be victorious; he who knows them not will fail.

11. Therefore, in your deliberations, when seeking to determine the military conditions, let them be made the basis of a comparison, in this wise: —

(a) Which of the two sovereigns is imbued with the Moral law? [I.e., “is in harmony with his subjects.” Cf. ss. 5.]

(b) Which of the two generals has most ability?

(c) With whom lie the advantages derived from Heaven and Earth? [See ss. 7,8]

(d) On which side is discipline most rigorously enforced?

[Tu Mu alludes to the remarkable story of Ts`ao Ts`ao (A.D. 155-220), who was such a strict disciplinarian that once, in accordance with his own severe regulations against injury to standing crops, he condemned himself to death for having allowed him horse to shy into a field of corn! However, in lieu of losing his head, he was persuaded to satisfy his sense of justice by cutting off his hair. Ts`ao Ts`ao’s own comment on the present passage is characteristically curt: “when you lay down a law, s ee that it is not disobeyed; if it is disobeyed the offender must be put to death.”]

(e) Which army is stronger? [Morally as well as physically. As Mei Yao-ch`en puts it, freely rendered, “ESPIRIT DE CORPS and ‘big battalions.'”]

(f) On which side are officers and men more highly trained?

[Tu Yu quotes Wang Tzu as saying: “Without constant practice, the officers will be nervous and undecided when mustering for battle; without constant practice, the general will be wavering and irresolute when the crisis is at hand.”]

(g) In which army is there the greater constancy both in reward and punishment? [On which side is there the most absolute certainty that merit will be properly rewarded and misdeeds summarily punished?]

12. By means of these seven considerations I can forecast victory or defeat.

13. The general that hearkens to my counsel and acts upon it, will conquer: –let such a one be retained in command! The general that hearkens not to my counsel nor acts upon it, will suffer defeat: –let such a one be dismissed! [The form of this paragraph reminds us that Sun Tzu’s treatise was composed expressly for the benefit of his patron Ho Lu, king of the Wu State.]

14. While heading the profit of my counsel, avail yourself also of any helpful circumstances over and beyond the ordinary rules.

15. According as circumstances are favorable, one should modify one’s plans.

[Sun Tzu, as a practical soldier, will have none of the “bookish theoric.” He cautions us here not to pin our faith to abstract principles; “for,” as Chang Yu puts it, “while the main laws of strategy can be stated clearly enough for the benefit of all and sundry, you must be guided by the actions of the enemy in attempting to secure a favorable position in actual warfare.” On the eve of the battle of Waterloo, Lord Uxbridge, commanding the cavalry, went to the Duke of Wellington in order to learn wha t his plans and calculations were for the morrow, because, as he explained, he might suddenly find himself Commander-in-chief and would be unable to frame new plans in a critical moment. The Duke listened quietly and then said: “Who will attack the fir st tomorrow — I or Bonaparte?” “Bonaparte,” replied Lord Uxbridge. “Well,” continued the Duke, “Bonaparte has not given me any idea of his projects; and as my plans will depend upon his, how can you expect me to tell you what mine are?” [1] ]

16. All warfare is based on deception.

[The truth of this pithy and profound saying will be admitted by every soldier. Col. Henderson tells us that Wellington, great in so many military qualities, was especially distinguished by “the extraordinary skill with which he concealed his movemen ts and deceived both friend and foe.”]

17. Hence, when able to attack, we must seem unable; when using our forces, we must seem inactive; when we are near, we must make the enemy believe we are far away; when far away, we must make him believe we are near.

18. Hold out baits to entice the enemy. Feign disorder, and crush him.

[All commentators, except Chang Yu, say, “When he is in disorder, crush him.” It is more natural to suppose that Sun Tzu is still illustrating the uses of deception in war.]

19. If he is secure at all points, be prepared for him. If he is in superior strength, evade him.

20. If your opponent is of choleric temper, seek to irritate him. Pretend to be weak, that he may grow arrogant.

[Wang Tzu, quoted by Tu Yu, says that the good tactician plays with his adversary as a cat plays with a mouse, first feigning weakness and immobility, and then suddenly pouncing upon him.]

21. If he is taking his ease, give him no rest.

[This is probably the meaning though Mei Yao-ch`en has the note: “while we are taking our ease, wait for the enemy to tire himself out.” The YU LAN has “Lure him on and tire him out.”]

If his forces are united, separate them.

[Less plausible is the interpretation favored by most of the commentators: “If sovereign and subject are in accord, put division between them.”]

22. Attack him where he is unprepared, appear where you are not expected.

23. These military devices, leading to victory, must not be divulged beforehand.

24. Now the general who wins a battle makes many calculations in his temple ere the battle is fought.

[Chang Yu tells us that in ancient times it was customary for a temple to be set apart for the use of a general who was about to take the field, in order that he might there elaborate his plan of campaign.]

The general who loses a battle makes but few calculations beforehand. Thus do many calculations lead to victory, and few calculations to defeat: how much more no calculation at all! It is by attention to this point that I can foresee who is likely to w in or lose.

[1] “Words on Wellington,” by Sir. W. Fraser.

reff : www.kimsoft.com

 

Chapter Summary – The Art Of War

1. Laying Plans OCS explores the five key elements that define competitive position (mission, climate, ground, leadership, and methods) and how to evaluate your competitive strengths against your competition.
2. Waging War explains how to understand the economic nature of competition and how success requires making the winning play, which in turn, requires limiting the cost of competition and conflict.
3. Attack by Stratagem defines the source of strength as unity, not size, and the five ingredients that you need to succeed in any competitive situation.
4. Tactical Dispositions explains the importance of defending existing positions until you can advance them and how you must recognize opportunities, not try to create them.
5. Energy explains the use of creativity and timing in building your competitive momentum.
6. Weak Points & Strong explains how your opportunities come from the openings in the environment caused by the relative weakness of your competitors in a given area.
7. Maneuvering explains the dangers of direct conflict and how to win those confrontations when they are forced upon you.
8. Variation in Tactics focuses on the need for flexibility in your responses. It explains how to respond to shifting circumstances successfully.
9. The Army on the March describes the different situations in which you find yourselves as you move into new competitive arenas and how to respond to them. Much of it focuses on evaluating the intentions of others.
10. Terrain looks at the three general areas of resistance (distance, dangers, and barriers) and the six types of ground positions that arise from them. Each of these six field positions offer certain advantages and disadvantages.
11. The Nine Situations describe nine common situations (or stages) in a competitive campaign, from scattering to deadly, and the specific focus you need to successfully navigate each of them.
12. The Attack by Fire explains the use of weapons generally and the use of the environment as a weapon specifically. It examines the five targets for attack, the five types of environmental attack, and the appropriate responses to such attack.
13. The Use of Spies focuses on the importance of developing good information sources, specifically the five types of sources and how to manage them.

sumber : the art of war

 

-Chapter 3 Drilling Down-

Data-Driven Marketing and Service Drivers

I came up with the phrase “Data-Driven” because I needed
one name for the process happening in the background of
all the marketing and business optimization approaches
where customer data is used. As soon as you say
“Relationship Marketing” or “Loyalty Marketing” or
“1-to-1 Marketing” or “Permission Marketing” or “CRM,”
all kinds of extra ideas creep in, obscuring what’s
really going on in the background of all these concepts.

These approaches differ in how they are positioned to the
customer, and how they are communicated. But back in the
pits where the data analysts are, where customer profiling
and modeling take place, they’re much the same.

Data-Driven marketers and service providers generally have
two objectives with customer value management, which is what
the above approaches are all about:

1. Hold on to the most valuable customers

2. Try to make less valuable customers more valuable

So whether it’s relationship marketing, a loyalty program,
permission based, or 1-to-1, you still have to accomplish
these goals, and to do it, you have to create marketing or
service programs and execute them. This means you have to
know the value of your customers and their likelihood to
respond to a program, whether the program is customized
based on books already purchased, uses loyalty points, or
is service-oriented.

The marketing and service programs named above are all
“wrappers” around what is really going on – you want the
customer to do something, or perhaps not do something.
This means you have to reach out to the customer and
communicate your marketing and service programs. When
you’re going to execute the communication, you need answers
to 3 questions – WHAT will you say, WHO will you say it to,
and WHEN will you say it. It doesn’t matter what you call
your program, what “wrapper” you put it in for the
customer – you always have to answer these 3 questions
(and maybe a few more).

In addition, you probably care about how much you spend on
these marketing and service programs. Ideally, instead of
blasting out expensive stuff to every customer, you would
want to spend money on the customers most likely to do
whatever you want them to, and not waste money on those
who are not.

You want customers to do something, to take action. You
want them to visit your website, make a purchase, sign up
for a newsletter, add new services. And once they do it
for the first time, you usually want them to do it again,
especially since you probably paid big money to get them
to do this “something” the first time. You don’t want to
pay big money the second time. The data can tell you how
to accomplish this, no matter what kind of front-end
marketing or service program you are running or how you
“wrap it up” and present it to the customer. As long as
you have the data, you can interpret it for clues as to
what steps to take next, and how to save precious marketing
dollars in the process.

When you understand the fundamental ideas behind
Data-Driven Marketing and Business Optimization, you will
understand how to execute all of these customer
retention-oriented programs, no matter what they are
called. Here are the four primary ideas driving all of
these programs:

1. Past and Current customer behavior are the best
predictors of Future customer behavior. Think about it.
Any entity you can define as a customer – external,
internal, distributors, manufacturers, suppliers – they
all pursue certain routines, and changes in these routines
often indicate an opportunity or challenge is ahead in your
relationship with them. When it comes to action-oriented
activities like interacting with a web site, this concept
really takes on a very important role. You can predict
future behavior based on an understanding of past behavior,
and use this knowledge to improve the performance of
marketing or service programs.

We are talking about actual behavior here, not implied
behavior. Being a 35-year-old woman is not a behavior;
it’s a demographic characteristic. Take these two groups
of potential buyers who surf around the ‘Net:

* People who are a perfect demographic match for your
business, but have never made a purchase / subscribed
to a service online

* People who are outside the core demographics for your
business, but have repeatedly purchased / subscribed
to a service online

If you sent a 20% off promotion to each group, asking
them to visit and make a first purchase, response would
be higher from the buyers (second bullet above) than the
demographically targeted group (first bullet above). This
effect has been demonstrated for years with many different
Data-Driven programs. It works because actual behavior
is better at predicting future behavior than demographic
characteristics are.

2. Customers want to win at the customer game. They like
to feel they are in control and smart about choices they
make, and they like to feel good about their behavior.
Marketers and service providers take advantage of this
attitude by offering programs and communications of various
kinds to get customers to engage in a certain behavior and
feel good about doing it. Customers like to “win” through
these programs, whether they are consumer customers taking
a discount, B2B customers getting enhanced attention or
service, distributors receiving volume-based perks, or
manufacturers partnering on supply chain issues.
Communication programs encourage behavior. If you want
your customers to do something, you have to do something
for them, and if it’s something that makes them feel good
(like they are winning the customer game) then they’re
more likely to do it.

3. Data-Driven programs are about allocating resources.
All businesses have limited resources, even the dot-coms
(eventually). When you spend $1.00 on a program, you
are looking to make back more than $1.00 in PROFIT (not
sales). If you can’t make back $1.00, the dollar is
not worth spending. Given multiple places to spend the
program dollar, if you can get back $2.00 in one place and
only $.50 in another, wouldn’t you rather spend it where
you get $2.00 back? This approach is called Return on
Investment, or ROI, and is the reason why you want to do
Data-Driven programs in the first place. Data-Driven
marketing and service programs are among the very few
allowing you to accurately measure ROI.

It’s about knowing you will make a $2.00 for every $1.00
you spend. If you know this for sure, wouldn’t it be
foolish not to spend every $1.00 you had in the budget
to get $2.00 back? If you always migrate and reallocate
program dollars towards higher ROI efforts, profits will
grow even as the program budget stays flat. This idea is
at the center of ROI thinking – reallocating capital with
low return to higher return projects or programs,
generating higher profits in the process.

ROI is often a difficult concept to understand because
there are so many people using ROI in the wrong context
and measuring it incorrectly. You will learn the correct
way to calculate and use ROI later on in the book. If you
have a financial background, you probably know that what
people nowadays call ROI is really ROME (Return On
Marketing Expense), but I’ll use ROI to keep things
from getting too confusing.

4. Action – Reaction – Feedback – Repeat. Data-Driven
marketing and service programs are driven by creating
continuous communications and interactions between the
business and the customer, and analyzing these interactions
for challenges or opportunities. Marketing and service
programs are conversations, as the ClueTrain Manifesto
(www.cluetrain.com) and Permission Marketing
(www.permission.com) have pointed out (if you have not
read these books, do so, they are not just dot-bomb
fantasies). At a high level, service is just another
form of marketing – and an extremely important one.
Marketing and service provision using customer data
is a highly evolved and valuable conversation, but it
has to be back and forth between the program operator
and the customer, and you have to L-I-S-T-E-N to what
customers are saying through their actions and data
these actions create.

That’s why I will sometimes talk about the data
“speaking to you.” The data is, in effect, speaking
for the customer, telling you by its very existence
(or non-existence) that there has been an action (or not)
that is waiting for a reaction. An action or inaction
is a raising of the hand by the customer, and the
Data-Driven marketer or service provider not only sees
the raised hand, but also reacts to it, then looks for
the hand to be raised again by the customer.

For example, if a customer visits your web site every day
and then just stops, something has happened. They are
unhappy with the content or service, or they have found
an alternative source. Or perhaps they’re just plain not
interested in you anymore. This inaction on their part is
the raising of the hand, the flag telling you something has
happened to change the way this customer thinks about your
site. You should react to this and then look for feedback
from the customer. If you improve the content, e-mail
them a notice, and the customer starts visiting again, the
feedback has been given. The cycle is complete until the
next time the data indicates a change in behavior, and you
need to react to the change.

Let’s say this same customer then makes a first purchase.
This is an enormously important piece of data, because it
indicates a very significant change in behavior. You have
a new relationship now, a deeper one. You should react and
look for feedback. You send a welcome message, thank the
customer for the trust they have displayed in your site,
and provide a 2nd purchase discount. Then you await
feedback from the customer, in the form of a second
purchase, or increased visits. Perhaps you get negative
feedback, a return of the first purchase. React to this
new feedback and repeat the process over again.

The Data-Driven model of marketing / service provision
is 2-way, as opposed to the 1-way approach of media
advertising or “data-blind” service. It is give and take,
an exchange, a communication process. Using a lot of
customer communications can be costly in the offline world.
But communication costs are generally low on the Internet
so the Data-Driven model is ideally suited for use there.
That’s not to say this model doesn’t work offline; the
initial development and implementation of ideas has been
happening in the offline world for decades.

How is this exchange accomplished? Can the data really
“speak”? It can and does, but you need to know its
language and learn how to listen. It’s not very hard,
and I’m going to teach you how to do it. But first
we’re going to run through an overview of how these
four driving forces of data-driven marketing are
turned into actionable campaigns and programs that
drive your sales higher while cutting marketing expenses.

 

-Chapter 2 Drilling Down-

Customer Profile or Customer Model?

Many people think using your customer data for marketing
efforts is about creating a customer “profile.” It’s a hot
topic. Everybody wants to do it. But what is a customer
profile? Here are 2 kinds of customer profiles:

* Customer is married, has children, lives in an upscale
neighborhood, and reads Time magazine

* Customer visited the web site or business every day for
2 months, but has not visited at all in the past 2 weeks

The first profile is demographic, a set of characteristics.
The second profile is behavior-based, involving what the
customer is actually doing. It’s about customer activity.

Which seems more important to you?

They’re both important in their own ways. For someone
selling advertising, or deciding on content for a website,
the first profile could be important, because it defines
the market for ad sales and provides clues to editorial
direction. These are important considerations in
attracting customers and generating revenue in the first
stages of an online project.

The second profile is about action, behavior, and for
anybody concerned about what his or her customers are doing,
is more important than the first. Will they visit again?
Will they buy again? These are the questions answered by
looking at behavior. Customer behavior is a much stronger
predictor of your future relationship with a customer than
demographic information ever will be. You have to look at
the data, the record of their behavior, and it will tell
you things. It will tell you “I’m not satisfied.” It
will tell you “I want to buy more, give me a push.”
It will tell you “I think your service is awful.”

I’d argue the second type of profile is more important
longer term, because if the customer stops buying from
or visiting the site, you’re not going to have much of a
chance to serve up the customized pages or ads based on
any “profile” given to you. You could customize the heck
out of the site based on demographics or self-reported
survey data but customers would never see the results if
they never come back. So for the long haul, if you had
to choose the more important profile, the profile based
on action and behavior would be more critical to you than
a demographic one. Customer behavior profiling is critical
to a company interested in selling more to current
customers while at the same time reducing costs.

Marketers who use data often talk about “customer modeling”
instead of customer profiling. Modeling is kind of like
profiling, but it is action oriented. Models are not about
a static state, like “Customer is 50 years old.” Models
are about action over time, like “If this customer does not
make a purchase in the next 30 days, they are unlikely to
come back and make any further purchases.”

It sounds so mystical, and it is. To see a mathematical
model predict customer behavior is astonishing, to say the
least. The model says, “Do this to these people and they
will likely do this.” The marketer or service provider goes
out and does what the model says, and like magic, a good
bunch of the customers do exactly what the model said they
would. It works like a charm – usually.

Building heavy-duty models is expensive, because it
requires an awesome amount of talent and experience.
There are many mathematical techniques used to build models,
each with their own pitfalls and gotchas. Success depends
a lot on the type of business, the kinds of data available,
and the experience of the modeler / analyst in building
models for a particular business.

What is a model? Simply, it looks at customers who are
engaging in a certain behavior and tries to find a
commonality in them. The marketer might say to the
modeler, “Here’s a list of our very best customers,
and here’s a list of our former best customers. Is
there any behavioral signal a best customer gives before
they stop being a customer? What does the data say to you?”

So here’s what’s in it for you, what this book is about.
You can do your own models, based on the decades of
experience Data-Driven marketers and service provider
have already invested. And while they won’t be as good as
the heavy-duty models done by Ph.D. analysts, they’ll be
pretty darn good. Plus, they will help you increase
profits while cutting marketing and service costs. This
book will show you how to do it, with just a spreadsheet.

Ph.D. not required.

By the way, once you figure out your behavioral models,
you can use them in combination with demographics and
characteristics to produce an even richer picture of the
customer. But the behavior comes first, because it is
behavior you want to influence. Knowing the following
about a customer is not very actionable; there is not
much you can do with this information:

* Customer is married, has children, lives in an
upscale neighborhood, and reads Time magazine

But if you add behavior to this demographic profile:

* Customers who are married, have children, live in
upscale neighborhoods, and read Time magazine
appear to be disappointed with our site, because a
high proportion of them haven’t visited the site
in the last 30 days

you can start deciding what (if anything) you want to
do about it, because you know these customers are
engaging in a specific behavior.

The combination of behavior and demographics can be
very powerful indeed. But without the behavior,
demographic characteristics don’t tell you much.
You will learn how to use both in building your
models. First we’ll talk about customer behavior,
and then add customer demographics later on.

 

-Chapter 1 Drilling Down-

Welcome to Drilling Down, your resource for High ROI Customer Marketing Tactics!

Hi there! Jim Novo here. Thanks for subscribing to the Drilling Down
newsletter. We’ll be talking about High ROI Customer Marketing
models and methods driven by customer data tracking and analysis.

I will show you how to go beyond using simple customer demographics to
start looking at past customer behavior, the most reliable source of
data for predicting the potential value of a customer and their
likelihood to remain a customer. When you nail down these behavioral
metrics and start measuring their trends, you will be able to:

* Identify customer segments with the highest future potential
* Focus on growing the profitability of middle potential customers
* Stop wasting resources acquiring and marketing to low potential
customers

Once you identify these groups, you can manage their value by:

* Emphasizing the ads, media, and products creating long term
high potential value customers and downplaying ones that don’t

* Creating High ROI marketing programs that maximize customer
value by increasing sales while lowering expenses

* Predicting when best customers are about to leave you and
reacting with customer retention and save-a-customer programs

* Quantifying the profitability of marketing and operational
initiatives by linking them to potential customer value

The newsletter will provide background and descriptions of
techniques usable by both small and large businesses – it’s
the thought process that’s important, not whether you use
a spreadsheet or a rules-based CRM engine to manage your
customer data. The newsletter and the web site together will
provide you a roadmap for implementing some of the best techniques
CRM has to offer – without all the costs. This “CRM-Lite” approach
allows you to test out the most powerful CRM and database marketing
ideas using existing resources – low hanging fruit; High ROI.

These techniques are based on the work I have been doing for over
20 years for clients like Media One (cable), MBNA (credit cards),
Home Shopping Network (TV shopping/catalog/web), CBS/SportsLine (web),
Cellular One / Cingular (cellular), Barnes & Noble (on and offline),
Tupperware (consumer), SteelTorch Software (retail analytics) and
Retek Direct (multi-channel retail order management and distribution).

 

Table of Contents – Complete Book

Preface
Introduction About Jim Novo
Chapter 1 Jonesin’ for Some ROI
Chapter 2 Customer Profile or Customer Model?
Chapter 3 Data-Driven Marketing and Service Drivers
Chapter 4 Customer Marketing Basics
Chapter 5 Customer Marketing Strategy: Friction Model

Latency Metric Toolkit

Chapter 6 Trip Wire Marketing
Chapter 7 The Hair Salon Example
Chapter 8 The B2B Software Example
Chapter 9 Turning Latency Data into Profits

Recency Metric Toolkit

Chapter 10 Predictive Marketing
Chapter 11 The Ad Spending Example
Chapter 12 Turning Recency Data into Profits
Chapter 13 The Online Retail Example

RFM Scoring Toolkit

Chapter 14 Cash Flow Marketing
Chapter 15 A Tweak for Interactive Customers
Chapter 16 No Customer Database?
How to Set Up a Spreadsheet to Score Customers
Chapter 17 How to Score Your Customers
Chapter 18 The Commerce and Content Examples:
Turning Scoring Data into Profits
Chapter 19 Case Study: Non-Profit Scores
192% Increase in ROI using RFM Model

Advanced Data-Driven Marketing Toolkit

Chapter 20 Using Customer Characteristics & Multiple Scores
Chapter 21 Customer LifeCycles: Tracking Scores Over Time
Chapter 22 Customer LifeCycle Grids:
High Performance Behavior-based Modeling
Chapter 23 Straight Talk on LifeTime Value
Chapter 24 Lifetime Value,
I’d Like to Introduce You to the CFO
Chapter 25 Fellow Drillers at Work
Definitions and Background Information
Customer Loyalty and Retention
Customer Segmentation and LifeTime Value
Professional Services
Ad-Supported Content / Subscription Models
Online / Offline Retailing and Catalogs
Distribution / Operations / Channel Management
The ROI of Online Branding Efforts
Chapter 26 Predicting Campaign ROI: Set Up
Chapter 27 Predicting Campaign ROI: The Model
Chapter 28 Predicting Campaign ROI: Fine Tuning
Chapter 29 Expense and Revenue You May Not be Capturing:
Subsidy Costs and Halo Effects
Chapter 30 Some Final Thoughts: Seasonality, CRM,
Behavioral Inertia, Data-Driven Program Outlines
APPENDIX: Software Download and ReadMe