Simple strategies for analytics success

Heeding the 80-20 rule, metrics that matter and changing customer behaviors

Larry Filler November 22, 2016

We have entered the “big data” generation with vast quantities and varieties of data available for “data geeks” to solve many different kinds of business problems. While this is all very exciting, it is important that we not lose focus on things that matter most. Whether your organization is just starting its analytics journey or has been doing data analytics for years, focusing on the following three essentials will help you achieve analytics success.

1) Identify Your Best Customers
In 1906, Italian economist Vilfredo Pareto advanced a mathematical precept to explain the unequal distribution of wealth in his country. His observation that 20 percent of the people owned 80 percent of the wealth led to what is commonly known as the Pareto Principle or the 80-20 Rule, which is evident in almost all organizations. Conduct a customer analysis of any industry or company type—financial institutions, retailers, restaurants, consumer packaged goods, not-for-profits, sports teams—and you will find specific consumer segments contribute significantly more to the bottom line than their size. The ratio is not always 80-20 (I have seen extremes where 1 percent of customers account for 95 percent of the revenue and more moderate cases where 40 percent of customers represent 60 percent of revenue), but almost always a high-value or best customer segment will emerge.

Organizations anecdotally know about this group, but many do not conduct the necessary analytical work to identify these specific customers so they can treat them differently from their less-valued brethren. This type of work, often referred to as value segmentation, is the foundation of good marketing analytics. It helps you identify your best customers and provides marketers with insights into strategies that make sense based on a customer’s value versus all customers getting treated the same.

These high-value customers are the most important to retain, they have a higher probability of purchasing other products or services offered by your company and, perhaps surprising to many, they also have greater capacity to purchase more of what they are already buying from your business. These high-value customers are often not just high value to your brand, but are high-value category shoppers who represent an opportunity for marketers to acquire a larger share of wallet.

2) Evaluate Your New Customers: Who do I acquire and how do I maximize their value?
My colleagues and I were recently meeting with an insurance industry client who said his organization did not have any difficulty retaining customers. When we explored the company’s overall book of business, we found it was pretty much true; the overall renewal rate was around 95 percent–a healthy rate that many organizations would envy.

But the overall rate wasn’t the complete story. As we drilled further down and looked at renewal rates by tenure cohorts, we found significantly different results. First-year renewal rates were only 65 percent and second-year renewal rates were 85 percent. Basically, 50 percent of all newly acquired customers had defected after just two years. However, this fact was being disguised because the majority of their book of business had been with the company for well over three years; the average renewal rate was not reflective of all segments within their business. To make matters worse, the largest portion of their marketing dollars (as with most organizations) was being spent on acquisition.

If this company could improve their first-year renewal rate by even just 5 percent, it would have an incredible impact on the profit and growth of their portfolio.

The above example is about renewal or retention, but examining new customers and their “early” behaviours should be a mainstay of your analytics tool kit. This scrutiny will lead to better acquisition targeting that allows you to identify those consumer segments with low future potential or high probability not to renew, allowing you to remove them from your acquisition activities or reduce your marketing investment in them. Another opportunity is to develop a better onboarding strategy to help these new customers discover the value of your company’s products and services, and to turn that first transaction into long term habit.

3) Monitor any Change in Behaviour or Migration
Many companies produce good standard reports that look at customers by value. As stated earlier, this is probably the single most important practice from an analytics standpoint. However, these reports are static and don’t reflect how the makeup of your customer base changes over time. And we all know that change is the only constant in life.

Conducting analytics on customer change can be relatively simple. By comparing customers’ value over two periods of time–for example, year-over-year or quarter-over-quarter — you can get additional insights that could be extremely valuable to your marketing efforts. The comparison reflects two things: 1) what was the customer’s value segment in period one and 2) how did this customer’s value change between periods one and two. For example, you might have a High Value Stable segment containing, obviously, high-value customers whose behaviour has stayed the same. You might also identify a High Value Decliner segment made up of customers who were high value in period one, but whose value has declined significantly in period two. You may even discover a Low Value Grower segment of customers whose low value in period one had grown significantly in period two.

Once these segments have been created, you can quantify the value of the segment and the impact that their change of behaviour has had on the business. This work allows marketers to identify a few key segments that could benefit from future marketing initiatives. An analytics-driven organization will typically profile these segments to gain greater insight about these customers and develop programs to encourage or discourage future behaviours.

The world of analytics can be complex and diverse, but if you remember these three types of analyses, you’re well on the road to successful marketing analytics.

Larry Filler is is senior vice-president of the Boire Filler division of Environics Analytics