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Improving Marketing Effectiveness by Enhancing Long-term Customer Value
 

Improving Marketing Effectiveness by Enhancing Long-term Customer Value

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    Improving Marketing Effectiveness by Enhancing Long-term Customer Value Improving Marketing Effectiveness by Enhancing Long-term Customer Value Document Transcript

    • wns.com – Insights – Blogs – Research & Analytics Services OutsourcingImproving Marketing Effectiveness by Enhancing Long-term Customer ValueBy Shravan PaiCan a car be driven by looking only in the rear-view mirror? The answer is an obvious ‘no’! You drive a car by focusingmostly on what lies ahead. In the same vein, would you market to your customers based on how they have performedhistorically, or, based on how they could potentially perform in the future?Although past performance is a very good indicator of how customers might behave going forward, it does not paint thecomplete picture. In particular, there are two key areas that don’t get addressed using this approach: • It underemphasizes customers who could potentially move up the value chain in the future. • It does not give adequate importance to the Incremental impact of marketing activities on different types of customers. For example, the incremental impact of marketing spend on a low-value customer could actually be higher than that on a high-value customer.I have noticed, in my discussions with marketing professionals, a very good understanding of the fact that customers arelike financial assets and the real value of a customer is based on the revenue a customer would potentially yield in thefuture. However, when it comes to the actual campaign execution, this understanding is often dulled by the challenges inquantifying the effect of a campaign on the Future Value of customers. Consequently, a lot of models used for campaignexecution end up focusing more on historically high-value customers.Different approaches could be considered to better capture the impact of the Future Value of customers depending on thetype of industry. It could be a simple qualitative cognizance, or a better segmentation scheme. It could even be aquantitative Future Value model as highlighted in the example below. The example would best resonate with firms whichsell non-commoditized products / services to a member base.Consider a firm XYZ that works on a membership based business model. As with any membership based business model,all customers are not equal. The customers vary in terms of the frequency and value of transactions, the length of theirengagement with XYZ and their understanding of XYZ’s offerings. To get the biggest bang for its buck for its marketingcampaigns, the firm uses predictive models to evaluate which of its customers are most likely to transact andsubsequently prioritizes marketing spend based on this understanding. The financial effectiveness of the marketingprograms is evaluated after the campaigns, using standard ROI models. Even after taking into consideration the impact ofincrementality, the model regularly shows that targeting members with a higher likelihood to make transactions providesthe best return on marketing investments.But is this really the best business strategy? Based on the observations we made at the start of this article, we know it isnot. For example, in XYZ’s case, by focusing its marketing spend on its top members, it ends up under-marketing to itslower members. Many of these lower members are often relatively newer and are not fully conversant with the benefitsthat XYZ offers, and hence their transaction volumes are relatively lower. These small transactions do not justifymaintaining the membership and over a short period of time many of these members attrite. With the right marketingstimuli, many of these low performing members could have graduated to high performing members in the future. Thesecond aspect of many models used in businesses is that they do not adequately account for the halo effect of theactivities. Going back to firm XYZ’s example, not only did it lose out on potential high transactors, it also ended up losingout on the membership revenue that the attrited members would have brought in had they continued as members.How could XYZ have improved the effectiveness of its marketing campaigns? • Recognize the fact that every activity has long-term effects on consumer behavior. Even though in the short term every transaction has the same value, when considered from the long-term perspective, every transaction does not. For example, a transaction that makes a relatively newer low-value member more familiar with XYZ’s offerings could, in the long term, make her a high-value member. • Incorporate halo effects. For example, in XYZ’s case, the loss of transaction revenue among lower tier members could also result in a loss of their membership revenue. 1
    • • Increase the time-span over which campaign ROI is calculated. Many of the high transacting members would have transacted even if they had not received a particular marketing campaign. Often in firms, incremental revenue is measured by holding out control groups among members belonging to similar segments and looking at difference in transactions pre- and post-campaigns. Part of the reason for higher incremental revenue observed among higher tier members is due to a demand pull forward because of a particular campaign. When looked across multiple campaigns and over a longer time period, the impact of demand pull forward is reduced and the true incremental increase in transactions is better captured.How did an experienced analyst service provider help a client address these issues?The service provider helped develop a Transaction Propensity model, and a Future Value model using a combination ofSurvival and Logistic techniques. The Future Value model could estimate the change in Lifetime Financial Value ofdifferent members for different transactions (for example, it would estimate that the change in Lifetime Financial Value formember A, making transaction type M would be $X).As expected, the change in Lifetime Value was not the same for all members for a particular transaction. It was observedthat for certain groups of lower tier members the incremental Lifetime Value of making a transaction was significantlyhigher than those for the higher tier members. The different Lifetime Values of the transactions for different members werethen used in association with the member Transaction Propensity model. Whereas, earlier the Transaction Propensitymodel would rank-order members based on propensity to transact only, the new approach could rank-order membersbased on a combination of the Transaction Propensity and incremental value of each transaction.Thus, using this approach it was possible to place more focus on the value different customers would give in the future(rather than in the past) and better gauge the true incremental financial contribution of marketing activities.http://blogs.wns.com/tabid/127/Category/9/research-and-analytics-services-outsourcing.aspx 2