Issue #21 - Tuesday, August
28, 2018
Posted by Denny Hatch
Don’t Coddle Lousy
Customers. Redline!
117th Street, New York, 10035. Circa 1937
Redlining has been a fact of
life in direct marketing for 100 years. For example:
Many years ago, the
Book-of-the-Month Club received a phone call from a new member in New York
City. The person said she had replied to an introductory New York Times ad
offering "5 books for $1" and had heard nothing.
The club's telephone rep asked what ZIP code the caller lived in.
"10035," was the
reply.
"Oh, we're not filling
orders from that ZIP code."
The result: outraged screams
of discrimination by media and consumer action groups.
The policy was based on a ZIP
code analysis of customers in inner city neighborhoods where buyers kept the
five premium books, never paid the $1 and never ordered additional books.
Best Buy’s Problem
Back in 2003, Best Buy’s CEO Bradbury H.
(Brad) Anderson analyzed his customer file and discovered out of the 500
million customer visits a year, 20 percent—or 100 million—were unprofitable.
Imagine! 100 million money-losing customers!
Anderson hired as a consultant Columbia
Business School Professor Larry Selden, author of Angel
Customers and Demon Customers.
Selden divides customers into
"angels" and "devils."
Angels are the desirable customers who buy lotsa stuff, keep it and pay their bills.
Devils are the worst customers who…
• Order 3 party dresses from an upmarket catalog, wear one to a gala and return all three the next day.
• Order 3 party dresses from an upmarket catalog, wear one to a gala and return all three the next day.
• "… buy products, apply for rebates,
return the purchases, then buy them back at returned-merchandise discounts.
• “… load up on 'loss leaders'—severely
discounted merchandise designed to boost store traffic, then flip the goods by
selling them on eBay.
• “… research rock-bottom price quotes from
Web sites and demand that Best Buy make good on its lowest-price pledge."
— Gary McWilliams, The Wall Street Journal
It was Selden who came up with a revolutionary
theory:
A company is not a portfolio of product lines,
but rather a portfolio of profitable customers.
Duh.
Best Buy carefully analyzes its customer base.
It cannot keep these sleaze balls out of retail stores. But it can make life
difficult for them, such as a 15% restocking fee for bad actors.
Who Are Your Good Customers?
The marketing 101 formula for good customers
is Recency, Frequency, Monetary Value (RFM).
The most recent customer who frequently spends
the most money with you is your best customer.
Savvy retailers and direct marketers divide
customers into 5 quintiles. In Quintile #1 are your best customers. In Quintile
#5 are the poorest performers.
Seattle marketing guru Bob Hacker’s advice to
his clients:
“Wanna make a profit this quarter? Don’t mail
your 5th quintile.”
Takeaway to Consider
• If you don't have a precise list of customers—angels and devils—you don't have a business.
Takeaway to Consider
• If you don't have a precise list of customers—angels and devils—you don't have a business.
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Count: 455
Hi Denny,
ReplyDeleteFirst off, it's been a very long time, I hope you are doing well.
Second, I really enjoy your marketing blog! It is always a very good read (which is a lot more than I can say about most blogs!)
May I reproduce the blog below for an upcoming free direct marketing (mostly direct mail) newsletter I send out each month?
I will give you credit and a link to your blogspot.
Michael,
DeleteThank you for taking the time to write... and for your kind words.
Delighted you want to send my blog to your readers. Yes, do so! This post as well as any past— or future—posts!
Would very much like to receive your newsletter.
If you would like to make your newsletter available to my readers, reply to this reply and tell them how to get it.
Thank you again.
Cheers.
Great reminder of an old truth. And analyzing at the customer level ( not zipcode)and digging a bit beyond RFM can provide even more insights. Great story. I worked for a large cataloger some years ago. We investigated the folks that had very high return rates. We found several "customers?" that purchased recently, frequently and at high volume, yet returned at a rate of 100%. The number of these cases was not trivial. Upon looking carefully at a listing of these offenders, I recognized the name three lines down...an acquaintance of mine that worked in marketing research, We had discovered a list of competitive research hacks. They were likely ordering from us to track fulfillment processes, marketing strategies, and customer service issues, etc. To fix the "problem",we simply stopped fulfilling orders from these people. What response did we get? Crickets. I am sure that the issue popped up again elsewhere, but now we were aware of it and on the lookout for the same pattern.
ReplyDeleteRichard,
DeleteThank you for your long and thoughtful comment. A sidebar:
When I first got into the direct marketing business, several hundred companies used to send the names and records of their worst customers to the Hooper-Holmes data center. This information was aggregated into a giant file of poor performers.
When orders came into a Hooper-Holmes member company as the result of a direct mail promotion, those names and addresses would be immediately forwarded to the credit co-op to be run against the giant deadbeat file. The matches were sent back in a printout. Some names had dozens of hits as premium bandits or non-payers. Certain addresses showed dozens of fictitious names. Other names showed dozens of fictitious addresses and P.O. boxes.
It was then up to the product manager to decide which orders to fulfill and which to ignore. For example, once in a while a name would have a single hit, say from the Shell Oil credit card file. Was this person a deadbeat? Or was this simply a fight between a car owner and a Shell mechanic that was not going to be paid until satisfactory work was completed?
Thanks again for writing. Do keep in touch. Cheers!
EMAIL FROM JERRY BELLUNE POSTED WITH JERRY’S PERMISSION, AS HE IS UNDER DEADLINE:
ReplyDelete= = = = = = = = = = = = = = = = =
Denny: Terrific article.
In a coaching session with a real estate agent this morning, she complained about showing a prospetive buyer 16 houses. The woman would not sign an exclusive agreement and she finally told the women she could not help her.
Lesson: Make the price of entry high enough that you weed out the tire kickers.
A 15% restocking fee is a good start. Signing agreements is another.
In advertising, we require a retainer: The first month upfront like a landlord charging a month's security deposit. That gives us time to check their bank and credit rating.
We also require payment by credit card. No one has - yet - cancelled their card to get out of paying us.
Jerry Bellune
Lexington County Chronicle
& The Dispatch News
Lake Murray Fish Wrapper
LexingtonChronicle.com
The Marketing Ad-Visor
The #2 Small Business Authority
Yes, like Avis, we try harder
www.JerryBellune.net
Jerry,
DeleteFabulous letter!
In a mere 117 words, you dropped 5 nuggets of valuable information.
Would love it if you would share your wisdom with my readers.