The Five Laws of Velocity Marketing
By Mark Klein, Arthur Einstein & Amy Grainger
Why the rate of change in your customers' behavior can be vital to the pace of your business's growth
A few years ago, Bill Gates, in his book, "Business @ the Speed of Thought," wrote, "If the 1980s were about quality, and the 1990s were about re-engineering, then the 2000s will be about velocity."
Good point. Today, only six years since the book was published, the speed of business has accelerated as he predicted. But velocity is a measure of both the rate and direction of motion or change. And the business person who isn't conscious of the direction in which his or her customers are moving can be in for a rude awakening.
A New Way to Look at Customers
Savvy marketers continually have tried to divide their customers into logical groupings to make their campaigns more efficient and productive. Over time, the demographic and psychographic tools at their disposal have become more and more sophisticated. However, velocity marketing, as we call it, is rooted in a new and different premise: that customers can (and should) be segmented based on their activity and the rate of change of their activity.
Here's an example of why the rate of change is so important. Imagine two cars traveling east on a freeway at 65 miles per hour. Their speed and direction are the same, so they have the same velocity. But suppose that a few moments before, one was traveling at 70 mph and the other at 60 mph. Obviously their velocity is changing in different ways. Now imagine two customers who each made purchases of $1,000 in the recent quarter. But, one of the customers spent $2,000 in the previous quarter while the other's purchases totaled only $500. The velocity of their purchasing is changing at different rates—one is accelerating and the other decelerating. These changes in the velocity of purchasing, including changes in non-monetary metrics such as the time between purchases, reveal much about customer behavior.
Velocity marketing starts from the point of view that traditional demographic segmentation is irrelevant if customers are motionless, sitting on the sidelines. Active customers are the ones making the purchases—they're the ones who matter. Therefore, the first law of velocity marketing states that customers who are on the move, whose velocity is changing in a positive direction, are more likely to buy. After analyzing many companies' housefiles, Loyalty Builders found that typically more than 75 percent of accelerating customers will continue to accelerate in the next period. The more they accelerate, the more revenue they generate. They are prime targets for smart marketers. Some of them may be your oldest and best customers; some may be brand new customers. What they share is velocity.
A Radar Gun for Speeding Customers
One way to spot accelerating customers is to map customer behavior, a visual technique that clearly identifies the accelerators. The chart in Figure 1 is a map of velocity behavior. Three metrics are plotted for each customer: changes in revenue (along the horizontal axis), changes in loyalty score (along the vertical axis) and the loyalty segment in which each customer falls (the color of the dot representing that customer). A loyalty score is a proprietary metric that is highly predictive of more purchases in the near future, and loyalty segmentation is based on this score. But there are many other metrics, such as the change in inter-order purchase time, that can be useful tools in velocity marketing.
In this map, the accelerating customers are in quadrant II and the laggards are in quadrant IV. Every customer in quadrant II spent more money in the recent quarter than in the previous one, and their loyalty score increased as well.
The highest ranked customers are in Loyalty Group 6 (dark red) and the lowest are in Loyalty Group 1 (darkest blue). Since loyalty is influenced by longevity, many customers with low scores have great potential but simply haven't been around that long. More lower ranking customers (dark, medium and light blue) are shown than higher ranking customers only because higher loyalty groups are plotted first, so lower rank dots hide some high-ranking customers. Customers in lower loyalty groups who show big changes in their loyalty score usually are new customers showing rapid growth.
If customers in motion are prime targets, the most active ones hold the greatest promise. Active customers, those who are ready to buy (i.e., the "low hanging fruit"), exist in all loyalty segments, as shown by the many blue dots in quadrant II. These are the promising "newbies," a great source of near-term revenue who often are ignored by companies that focus exclusively on their best customers.
Hence the second law of velocity marketing says that low-hanging fruit often are not in your top marketing segments. The table below, created from a recent analysis, shows the percent of customers in the lowest three loyalty groups who purchase in the next period in which velocity marketing is used to select prospects.
Purchase probability analysis will identify what these new and promising customers are planning to buy, so that marketing campaigns can be directed at them.
Don't Let Potential Defectors Escape
Many of the customers in quadrant IV are in danger of defecting, but they aren't yet lost causes. Velocity marketing spots them well before they defect, and they shouldn't be written off (and handed over to a competitor) without a fight. Analytics that predict what they will buy next, combined with offers that take advantage of that information, can be used to bring potential defectors back into the fold. The third law of velocity marketing is that customers going south often are waiting for a reason to head back north.
What About the Steady Eddies?
Not every customer has a changing velocity. Many stick to a more regular rate of purchasing, at frequent or widely spaced intervals. These customers are clustered at the center of the velocity map in Figure 1 and can be hard to discern. To get some visibility into behavior, use a different behavior map—one that plots current level of activity against historical level, as shown in Figure 2.
Customers along or near an imaginary diagonal line running from lower left to upper right have the same current and historical purchase patterns; these are the "Steady Eddies." Those in the off-diagonal quadrants are customers with changing velocity. Many of the Steady Eddies are excellent customers, leading us to the fourth law of velocity marketing: Covet your steady customers; they are the backbone of your business. Data shows that two-thirds or more of the Steady Eddies will buy in the near future. In the battle for growth, customer acquisition can divert attention from regular buyers who are the foundation of every business.
Given a group of customers in motion, what can a marketer do to maintain its activity and keep it on a growth path? Our analyses of customer behavior indicate that active customers tend to stay active, and if for some reason they are lost to a competitor, they'll remain growth prospects. Therefore, the fifth law of velocity marketing asserts that customers in motion tend to stay in motion—provided they're marketed to effectively. This means they should be segmented, analyzed and marketed to based on their behavior. Again, customer analytics strongly support this result.
Customers in Motion … What to Do?
The analytics marketplace now offers sophisticated tools to spot customers' state of motion. By first segmenting customers into loyalty groups, then mapping their behavior over time and monitoring changes in their revenue, their movement can be determined, and their next actions can be predicted. This gives a marketer the power to:
• Spot new customers who are likely to become better customers.
• Use marketing strategies and campaigns that take advantage of their activity state. (It's obvious that contact strategies for new customers and potential defectors need to be different. One size does not fit all.)
Velocity marketing works because it is rooted in an essential reality—customer behavior, the most predictive measure a marketer can have of what's likely to happen next. Demographics, psychographics and satisfaction surveys all have their place in a marketer's arsenal. But experience has shown us that analysis of customer behavior remains a marketer's most effective weapon in the battle to build a business.
Dr. Mark Klein is CEO and founder; Arthur Einstein is vice president of marketing; and Amy Grainger is a mathematician/analyst of Loyalty Builders LLC. Located in Portmouth, N.H., Loyalty Builders is a marketing service company that specialize in tracking customer behavior. You can reach Klein, Einstein and Grainger at (603) 610-8800.