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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