digital alchemy - customer flow whitepaper

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Measuring Customer FlowUsing data to drive customer strategy is not a new idea - everybody talks about it - but practical implementation is more difficult than the actual concept. The reason is simple; whilst being an overwhelmingly logical thing to do, there are some practical limitations. For one thing, the sheer volume of information generated by the analytical process often creates more confusion than clarity. This generally leads to development of an experience driven strategy with a few analytically based gems thrown in for good measure.

Our data driven approach (through the application of our Customer Flow™ methodology), is a thorough way of using customer data to create a high level customer strategy. Customer Flow™ identifies product adoption pathways (e.g. from home insurance to mortgage, via credit cards or savings accounts), detailing both the rate of flow and expected potential of any pathway. As well as an historical analysis, it identifies cross-sell opportunities for each customer and differentiates between high and low value marketing opportunities.

Personal Bias

Comfort zones

Past activities Beliefs

Assumptions

Planning

Validation and prioratisation

Data collection and analysis

Business understanding

CVO modeling

Experience driven Experience driven

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Priority and focusMost companies have survived to date without the need to delve deep into the customer base and measure customer flow.

Why do it now? Customer FlowTM provides an opportunity and means to overcome challenges faced by many marketing organisations: An unfocused or disjointed marketing program Competing internal priorities with no common basis for choosing one over the other CRM implementations that have not lived up to expectations Marketing plan being driven by last past activity No cohesive plan for dealing with Cross sell Up sell Retention Acquisition opportunities Marketing is campaign driven not customer focused

In natural systems elements follow natural pathways: rivers flow downhill and around mountains, wind rushes through corridors not walls. Customers also follow natural pathways - they exhibit product preferences, purchase in sequenced patterns, and are most likely to “move” during discrete time windows.

Understanding customer flow is about finding the downhill runs and avoiding the walls.

Our research has shown that: There are nearly always entry products that customers buy first Unaided the conversion from single product to multi-product relationships is patchy and haphazard Some product relationships naturally lead somewhere valuable and others lead nowhere The path to being a high value customer is often through a series of intermediate low value products Combining products into one customer relationship often leads to combination profits, which are greater than the sum of the parts

Business Context

Logical FrameworkMeasuring customer flow



The underlying assertion in applying customer flow is that it is easier to leverage value from a customer base by applying stimulus (sales and marketing effort) to a pathway that customers naturally head down rather than one they do not.

Figure 1 is an example of a pathway node. There is an important point to be made from this node:

There is a natural pathway from Transaction account only to the Transaction,

Savings and Mortgage bundle

i.e. more customers move to the profit centre of the node through the intermediate sale

of a savings account

Natural adoption pathwayUnnatural adoption pathway TRAN

TRANSAV

TRANMORT

TRANMORTSAV

In estimating and evaluating opportunities it is necessary to understand the flow in terms of:

Rate: the speed at which customers move from feeder to target segment

Momentum: the strength and magnitude of the flow

Value: the financial value being created or destroyed by the flow



Experience as validationExperience is a key input to the strategy development process. We make most use of it at the beginning to create a context for the analysis and then at the end during the validation stage.

There is a fine line between creating working understanding of a business and maintaining an open mind on the outcome. To do this we question and test rigorously, separating facts from assertions.

We do not get paid to rehash ideas and experience. We create value by helping to create a new understanding.

Consistent metricsCustomer FlowTM is a mathematical model that: Applies the laws of natural systems and quantum mechanics to measure customer dynamics Measures the size and velocity of customer value flows Uses rate of flow not static segment size to identify opportunities Measures the value effect of up selling, cross selling and other activities Provides a uniform metric base for prioritising competing opportunities

Assumption reductionWhilst assumptions are unavoidable and necessary, it is important to rigorously reduce the number of assumptions being used and stress test the ones that are.

By driving insight directly from the data, Customer FlowTM has moved the application of assumptions to the validation stage of the strategy process. This allows us to minimise the number of assumptions used in building up the strategy, ensuring that the analysis at least has a solid foundation.

This approach helps to avoid the dangers of assumption layering where individual assumptions that are valid and logical in isolation fail when applied together.



Allocation of scarce resourcesInvariably, in marketing, the number of marketing opportunities far exceeds the capacity to execute them all.

The application of Customer FlowTM identifies opportunities and then provides an evaluation process prioritised based on the established uniform metrics.

Optimised Opportunity Matrix

A unique customer understandingEach customer base is unique. They are influenced by brand, acquisition strategy, channel structure, product and pricing, organisational culture and geographic spread.

Even organisations in the same industry will have customer bases with unique characteristics.

Competitive advantage is created by understanding the unique customer dynamics of your organisation and developing programs that leverage unique strengths and mitigate weaknesses.

Because Customer FlowTM is a method for understanding customer dynamics, with few underlying assumptions and constraints, it applies to all organisations uniquely.

About Digital AlchemyDigital Alchemy Limited (DA) is Asia Pacific’s leading Database Marketing Services Provider. DA’s team of professionals are dedicated to working with clients to improve their marketing efficiency and to capture latent customer value. Established in 2003 and operating in Sydney, Melbourne, Auckland, Bangkok, Hong Kong, Nanjing, and Singapore, DA has been contributing to the success of an expanding breadth of clients including leading companies in financial services, telecommunications, motoring services, media and other industry sectors.

“This document has been prepared for the purpose of providing general information and should not be relied on in substitution for individual professional advice. Copyright in this document is owned by Digital Alchemy Consulting Pty Limited, and except as permitted under the Copyright

Act 1968, no part of it may be reproduced by any process, electronic or otherwise, in any material form or transmitted to any other person or stored electronically in any form without the prior written permission of Digital Alchemy Consulting Pty Limited.”
