Differential Marketing for Direct Mail Retention
A detailed analysis of any mailer's internal house file presents numerous opportunities for improving the ROI of customer retention marketing campaigns. This is especially true when looking to classify existing customers into meaningful sub-groups and peer groups using insights from past purchase behaviors. One approach for matching key customer targets with relevant offers and promotions is to apply a differential marketing strategy.
Reading Customer Footprints
The idea of differential marketing comes from the 1990's-era book All Consumers Are Not Created Equal, where Garth Hallberg introduced the concept of "differential marketing pyramids"—a category value segmentation that quantifies the differences in value between key consumer groups. Even though the practice of differentiating customers on the basis of past and future profit value has been around for some time, direct mailers need to remember the benefits of implementing such a strategy.
Think of differential marketing as the science of identifying changes in individual consumer purchase patterns—largely as a result of the passage of time—compared to a relevant benchmark. In other words, how different is a customer's spending, purchase behavior, transactional activity, etc. compared to an expected norm? What types of marketing activities should be initiated as a result of these differences?
Differential marketing is a systematic way to check for irregularities in customer purchase behavior, either positive or negative, that can signal an appropriate marketing action to reinforce or change the behavior. The marketing action could be a buy-one-get-one offer to reward loyalty and continued product usage, or a promotional offer to stimulate trial in a new category. Design elements of the associated mail piece should also take advantage of the customer's peer group.
A differential marketing strategy helps direct marketers get out of the rut of saying the same things and repeating the same undifferentiated offers over and over again. What works best is to design a mail piece with offers, promotions, key message themes, and creative elements that make the most sense for the target audience. Combining these factors should also help drive a specific call to action or behavior that you are trying to influence.
Consider the behavior of catalog shoppers where expenditures are spread over multiple product categories for a select set of product items. As time goes by, customers will establish some form of a purchase footprint. The footprint will reveal certain tendencies that are characteristic of a customer's purchase activity.
The trick is to determine whether the purchase footprint has changed significantly. When a customer begins to stray from their footprint this could be a precursor of negative consequences. Differential marketing in this context might call for some type of marketing intervention to mitigate the impact of undesirable behavior.
Leveraging Peer Groups
It sounds relatively simple in practice but is it really? Using a differential marketing strategy requires that your customer database is in order and can provide timely and updated views of your customers that can be compared to prior snapshots in time.
When applying a differential marketing strategy to your customer retention mail plan, you need to take into consideration two primary dimensions:
- How does the customer's recent behavior differ compared to the transactional history? Have they recently purchased an item from a product category for the very first time? Was the total spend for their current transaction well above their historical average? Was the time gap between their current transaction and the most recent transaction significantly longer than expected? These factors can be quantified using metrics derived from the current transactional details compared to a summary of past transactional snapshots.
- What does the customer's peer group look like? A peer group is a collection of customers with similar demographic and lifestyle characteristics. Using Mosaic USA as an example, possible peer groups could include New Suburbia Families (young, affluent working couples with pre-school children concentrated in fast-growing, metro fringe communities) or Ethnic Urban Mix (ethnically diverse, young and middle-aged singles and families living in older inner-city neighborhoods).
Here is a scenario for implementing a differential marketing strategy that takes both of these dimensions in mind:
If a customer from the New Suburbia Families segment has purchased an item from a particular product category for the very first time, you could examine the purchase behaviors of other customers within this peer group to develop an offer for a complimentary item that has been shown to have wide appeal within the peer group.
This would be similar to building a recommendation engine. If at the same time you notice that the time gap since this customer's most recent purchase has been exceedingly long, you could craft the offer with a redemption date that provides an immediate incentive for this customer to make a subsequent purchase within a shorter period of time.
Other design elements in the mail piece could take advantage of the fact that this customer is likely to be relatively affluent, married and have pre-school aged children.
This is important because, with differential marketing, a you can take a proactive stance for developing product offers and related marketing communications. It provides a valuable framework for getting the most out of your customer retention marketing initiatives.
When thinking about your current customer retention strategy, where does the concept of differential marketing fit into the mix?