Inflow segmentation – measuring new customers by value not volume

On , wrote in CYBAEA Journal:

Do you have accurate and timely analysis of the quality of the customers you are acquiring? Most companies carefully track the quantity of new customers by the hour, day, or certainly the week, but it is still less common to track the quality of the inflow as it happens. It is interesting to know that we have acquired, say, 1000 new customers today, but so very much more informative to know that this inflow will bring in £22,000 of revenues over the next year at 35% margin. Break it down by channel and product to see who is performing and who is not, and I as a marketing manager get really excited: I have the tools to do my job!

Monitoring the quality of the inflow and understanding the reasons for change is essential. After all, if your new customers are of lower quality than your existing base, then you are setting your company up for difficulties over many years to come.

Considering how much companies typically spend acquiring each new customer, this really should be a no-brainer. And yet many companies are completely unnecessarily stuck at reporting sales by volume instead of value.

We usually advocate a relatively simple segmentation of the inflow that allows you to track the quality in business-meaningful language. We want to do this segmentation very quickly after the acquisition but—at least for industries with a usage element as well as the base subscription—we also want to know something about the customer behaviour, not just the products. For mobile telecommunications customers we can usually segment the inflow about 6-8 weeks after the joining date into a dozen or so groups and predict each segment’s future annual spend to a few percentage points, which is fine for marketing and channel management purposes.

The segments will typically have meaning to the business. At one company we developed segments including Promo-Junkies (who just sign up for the initial promotion and never really use the product after the promo ends), DOAs (the dead-on-arrivals who sign up but never use the product), Champions (the high spenders), and so on.

We can track the inflow segments over time. The slightly annoying animation in the margin shows 15 months of inflow segments. Here the size of the bubble is the number of customers acquired, and we have projected the segments to two dimensions: a spend metric along the abscissa and a usage metric along the ordinate. (Yes, that really is a whole lot of customers at zero spend which may be the subject of another article.)

We clearly see an important seasonal effect which tells you a lot about your business and, in this case, especially about the effect of your seasonal promotions. For this particular client we saw that the Christmas promotion substantially increased the inflow of Promo-Junkies and DOAs, as the sceptics had predicted, but also both the number and the spend of the Champion segment which amply justified the promotion.

For another customer we saw that the quality of customers acquired by a particular reseller channel was very low, both compared with other channels and in absolute terms: these customers were not profitable. We tried hard to work with the channel but, when that ultimately failed to bring about change, we dropped our relationship with what was one of the largest independent reseller of mobile phone contracts in the country, significantly increasing the overall profits of the business while reducing revenues.

If the quality of new customers is dropping, then you want to know about it quickly to determine if you have a problem and where the issue lies. Maybe you have an under-preforming channel or a new product or marketing message are driving a different customer mix to you. Conversely, if the quality increases you want to understand why so you can encourage more of that behaviour.

Other industries will be different in the details, but if they have data then they can apply the same approach. For the Insurance business it depends a lot on the market and how much information you get about the customer when he joins, but there you can usually develop good models for very shortly after the joining date if you can get Marketing and Underwriting to work well together (no mean feat). For Retail Banking we usually need 2-3 months until all the direct debits and standing orders have moved across and we have seen a couple of pay-cheques.

If you have customers and you have a regular usage and subscription element to your relationship with them, then you can and should use inflow segmentation to monitor the value of your customers, not just their volume.

Let us know how you manage the value of your new customers in the comments below.

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