Relationship marketing or CRM, and the money spent on it, is
founded on the belief that it is more profitable to keep your
customers for as long a time as possible. Research, published as
far back as October 2000, refutes that.
I’m referring to a learned article by Drs.Werner J Reinartz & V
Kumar, published in the Journal of Marketing, with a subsequent
and more recent paraphrase in the Harvard Business Review.
At the outset I need to clarify that what I’m about to say here
relates only to industries where there is no contractual
relationship with the customer, eg. department stores, mail
order operators and charities. For industries with a contractual
relationship, eg. magazine subscriptions and mobile phones, the
principles of CRM do hold true.
Typically marketing managers use RFM scores (recency, frequency
and monetary value) to determine how much marketing money to
spend on different segments of a database.
Three related principles underpin the argument for and
methodology of CRM systems, these are:
1. Lifetime duration and profitability show a positive
relationship.
2. The costs of serving customers decrease over time.
3. Long-life customers pay higher prices.
Surprisingly there is no empirical evidence to support any of
these premises. Yes, that’s right, zero empirical evidence.
There are plenty of articles written in support of these
principles, and let’s face it they all sound plausible enough,
but no one’s actually sat down to test whether these principles
hold true or not. Until Reinartz & Kumar did with 9167 mail
order customers over a 36 month period.
Their results are remarkable.
They tracked the transaction history of two similar groups of
mail order customers over similar lengths of time but at
different times, so that any time-related bias was eliminated.
Quite frankly I don’t want to bore you with the analysis but
they show that the nature of the relationship is more complex
than most people think. The current thinking is that you want to
keep all your customers for as long as possible. Not so.
Reinartz & Kumar show that customers split themselves
behaviourally into two groups; short-term and long-term.
These two groups can then be further sub-divided into high and
low revenue groupings. What the study shows is that revenue (ie.
Do they spend a lot?) is much more important a factor than life
(ie. Do they hang around a long time?) In fact, in the study the
most profitable group was short-term, high revenue customers,
closely followed by long-term, high revenue customers.
Reinartz & Kumar suggest that the best thing to do is segment
your customers by short and long term behaviours (we can show
you how to do this) and then assign appropriate strategies to
each group.
Now, what are the implications of this research?
1. If you are in an industry which has a non-contractual
relationship with its customers, eg. mail order, or any business
relying on repeat sales, you may need to rethink your CRM
strategy – short-term high revenue customers may in fact be your
most profitable customer group.
2. If you are using RFM analysis, (recency, frequency and
monetary value) as a way of allocating your marketing spend, you
are likely to be wasting c. 40% of your money. RFM is 60%
accurate, the Reinartz Kumar method is up to 97% accurate.
3. If you have a marketing strategy which says,“we need to get
and keep all our customers for as long as possible”, you now
know there is a way to refine that strategy further.
There’s also a fundamental lesson here. It shows, once again,
how essential it is to base marketing decisions on
1. an open mind and
2. empirical evidence.
The existing arguments for long-term CRM strategies are logical
and appear to be common sense but in fact they don’t reflect
hard reality.
Source: Bill Fryer link
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