Your Customers: Who Are They and How Do You Find More of Them?

And How Do You Get Them to Part With More Money? The March 1st edition of this newsletter, “Declaring War on The New York Times: Smart or Dumb?” described Manhattan restaurateur Jeffrey Chodorow’s distress at the review by Times food cri

March 2007 By Denny Hatch

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“Never compete with China on cost,” said guru Tom Peters, “and never compete with Wal-Mart on price.”

Ever since 1962, when Sam Walton opened the first Wal-Mart store in Rogers, Arkansas, the company has operated on a one-size-fits-all marketing philosophy: offer good merchandise at the lowest prices to all customers. And it worked just fine.

In its 45th year, Wal-Mart’s $345 billion in sales is more than the GDP of Austria.

Now Wal-Mart is coming around to the way direct marketers think—that if you know who your customers are, you can serve them better and make more money.

According to Michael Barbaro’s New York Times story, the giant chain is dumping its 200 million customers into three silos:

There are “brand aspirationals” (people with low incomes who are obsessed with names like KitchenAid), “price-sensitive affluents” (wealthier shoppers who love deals), and “value-price shoppers” (who like low prices and cannot afford much more).

Will Wal-Mart’s investment—in the new strategy of stocking and advertising new lines of upmarket merchandise—win it a larger share of market and share of wallet?

My bet is that doing it the old way is better.

A Bang & Olufsen Story
At some point in the 1970s, when we were living in Connecticut, I sold the screen rights to a novel and blew some of the money on a gorgeous Bang & Olufsen (B&O) stereo rig—the one that was in the Museum of Modern Art’s permanent collection.

(Let me add that I wrote and had published three novels; all garnered a number of movie options over the years, but no film was ever made, alas.)

Many years later, I heard or read a story—somewhere—about B&O that resonated in my head. It seems that for years this Danish high-tech electronic company was operating on the premise that its products were being bought by upscale yuppies in the 25- to 40-year-old age group in the income range of $30,000 to $50,000.

Somewhere along the way, the company inserted warranty cards with survey forms in its packaging. A number of these were returned and promptly sent to headquarters where they were consigned to shoeboxes in a storage room.

Several years later, a new marketing person came across these surveys and, on a whim, sent them into one of the big direct marketing service bureaus to find out some information about the people that had filled them out. While many of the forms were out-of-date—people move, die, get married, etc.—enough matches were found to give B&O a picture of its customers.

It turned out that a huge majority of the ultra sleek Bang & Olufsen radios, turntables, tape decks and speakers were being bought by people that were 50+ years of age with $100,000+ incomes.

As a result, the company fired many of its distributors (including the guy around the corner from us in Philly), opened its own stores in malls and upscale shopping centers that matched the demographics of its buyers, and completely redirected its advertising to reach older, wealthier prospects.

Meanwhile, how much money did B&O leave on the table worldwide over the years with its old cockamamie “gut” approach to marketing that assumed its customers were yuppies when in fact they were not?

Never assume anything in business, as the old saying goes, because when we “assume” we make an “ass” out of “u” and “me.”

So who are YOUR Customers? The Catalog Model.
I cannot think of any industry that is more in tune with its customers than catalogers. Using the RFM benchmark (Recency-Frequency-Monetary Value), they know the purchasing history of their customers and can rank them in quintiles or deciles.

A Seattle marketing guru once told a cataloger whose business was struggling, “You want to make money this quarter? Don’t mail your bottom quintile.”

In other words, the cataloger would spend more money on the mailing than he would take in from these poor-performing customers. Therefore, the money saved by not mailing would go directly to the bottom line.

Quite simply, a smart cataloger will mail the best customers a lot more often than the worst customers.

Ranking customers is only part of the catalogers’ bag of marketing tricks:

* They have a record of every transaction, customer-by-customer, purchase-by-purchase. These data are aggregated so that the catalog marketer has an electronic dossier on every customer and—from the merchandise that has been shipped—can discern behavioral patterns: sports enthusiast, presence of children, loves high-tech gadgets, dresses casually, etc.

* Some catalogers go so far as to employ the technology of selective binding, tailoring each catalog to the buying history to specific customers and not wasting time on money making, irrelevant offers.

* With the advent of co-operative databases, a cataloger’s entire customer file can be modeled and matched against those of a thousand or more other catalogs in order to find new customers. He can then rent these “clones” of his existing customers and get far better results than blowing a buck on a book mailing to perfect strangers.

This is database marketing at is most elegant, efficient and profitable.

Can Other Businesses Benefit From the Catalog Model?
Having been the president and editor of Target Marketing for several years, I know something about trade magazines. Here is where they derive revenue:

* Print editions of the magazine as well as on the Web—bring advertising revenue.

* Paid subscriptions to magazines by those that do not qualify to receive them free (usually small revenues if any).

* Other Web products—also paid for by advertising—such as e-letters and e-zines.

* Trade shows and conferences that generate revenue from paid attendees and exhibitors.

* Paid products such as books, special reports and white papers.

* List rental income, which is free money. A 100,000 list at $100/M results in $10,000 revenue simply for flipping a switch on the computer and delivering names electronically or, occasionally, on printed labels. Rent the list once a week—or 50 “turns” a year—and you have made a tidy $500,000 for basically doing nothing.

At many publishing companies, these various products and services are run by different departments that do not share with one another the information about the subscribers and customers, but rather keep all the names and transactions in separate databases.

Every time a new company is acquired, another series of databases is added to the mix.

The trouble is that many of the names are often duplicated in these different databases.

What Is a Customer Worth?
The late circulation guru J. Wendell Forbes came up with a formula that can put a snapshot dollar value on a customer:

Take the total revenue of the publication—subscription and advertising revenue plus additional paid products and list rental—and divide by the number of subscribers.

That would mean in a company with a revenue of $10 million and has 100,000 subscribers, each subscriber would be worth $100 at this moment in this year.

Logic dictates that a subscriber to a magazine that also has bought two books and a white paper, subscribed to an e-letter and has attended four conferences is worth more far more than $100. The lifetime value might be $1,000. This active customer is a prime candidate for up-selling and cross-selling and the name should be worth more on the list rental market—just as hotline names go for a premium.

The reader of the magazine that bought nothing or attended nothing is probably worth less than $100.

But taking the $100 average, is it worth it to spend an extra buck or two a name every year with a company that specializes in data processing and analysis to find out who is gold and who is dross?

It seems to me a no-brainer. If nothing else you can:

* Charge more for list rentals of multi-buyers.

* Know the behavior and interests of your customers, which, in turn, will guide you in the creation of new products and services.

* Acquire companies that have real synergy—in effect, make 2+2=5 or even 6 or 7.

* If a customer moves elsewhere in the company—or gets another job somewhere else—the change might be noted in one of the databases, but marketers using the other databases will keep on trying to contact this departed person and will not only look stupid but will also waste money.

But some publishers—and executives in other industries—seem reluctant to spend the money for the creation of one large database that details the actions and involvement of each customer across the entire spectrum of the company. The ROI might take a year or two when American business wants instant gratification.

It seems to me this concept of finding out specifically who each customer is cuts across the entire spectrum of business and consumer marketing.

It may cost a few bucks to put the system in place, but once it is up and running, you know who your best customers and worst customers are and how to most efficiently spend time and money marketing to those segments that generate the most sales and profits.

Will Wal-Mart’s New System Work?
Of the three groups of customers that Wal-Mart identified, the “price-sensitive affluents” (wealthier shoppers who love deals) seem to be the main target of its efforts—those that want a deal on, say, 500-thread count sheets.

If Wal-Mart installs a separate boutique within the store that stocks designer merchandise at big savings, it might attract wealthy bargain hunters that are not regular customers. But if these 500-thread count sheets are stocked with all the other sheets and people have to spend time searching for a specific advertised product among hundreds of shelves and many thousands of items, my bet is they will try it once and not come back.

Compared to the detail and precision of customer analysis by catalogers, Wal-Mart is in the dark ages.

It is an interesting experiment and worth watching.