Customer-base Audit
The starting point for a Progency implementation is by building a data foundation. Within data, the first step is to have the past transaction data available to be able to do the Best-Rest-Test segmentation based on forward-looking LTV to be able to plan out the Progency implementation.
Peter Fader, et al call this a “customer-base audit.” Explains Michael Ross:
The first one would be the customer cohort chart: the C3. That really is, I would say, the number-one analysis. It highlights and breaks down how your revenue in each year builds up from customers acquired in every previous period. It gives you a very clear view of the extent to which your growth is being driven by your existing base versus new customer acquisition.
Number two for me is looking at the distribution of customer value. When you look at a distribution of customer value, you will often see that a high-value customer—what we’d call a top-decile customer—can be worth 40 or 50 times a low-value customer. The notion of an average customer may be mathematically true, but it doesn’t really exist in practice or is extremely unrepresentative of a customer base.
That’s a very, very powerful analysis because it motivates a business to think about the decisions and actions that they’re currently taking based on the idea of an average customer, whether those are marketing decisions, operational decisions, service decisions, etcetera. How do you reorient decisions that are better aligned to customer value?
The third most important analysis for me, and this is a hard one, is the time between first and second purchase. Understanding the time between first and second purchase is incredibly helpful. It is a very good discipline to understand, “Why do customers only buy once? How can we get them to come back? How can we get them to come back faster?” That drives a lot of very good behaviors.
… The data set we started off with is amazingly simple. It’s a list of transactions with a date, an amount, and a product ID.
From a related HBR article:
The starting point is a list of transactions for each customer (date, time, products purchased, total spend, etc.). This will reside somewhere in your company’s operational IT system.
Traditional reports will summarize performance by product. Think of an Excel worksheet where the rows correspond to individual products and the columns correspond to time (e.g., quarter).
Now, imagine an alternative summary table — again, think of an Excel worksheet — where the rows now correspond to individual customers and the columns correspond to time (e.g., quarter). The entries in the table report each customer’s total spend with the firm in that particular time period. Another table tells us how many transactions each customer made with the firm. (For most firms, these tables will contain lots of zeros.) If you’re lucky, you’ll also have an equivalent table that summarizes the profit associated with each customer in each period.
How do we approach the task of gaining insight from such a customer-level summary? As we reflect on the various questions that are asked when leaders seriously engage with the idea of understanding the performance and health of their business using the customer as the atomic unit of revenue and profitability, five broad themes appear, which we call the five lenses of a customer-base audit.
With the audit, it becomes possible to identify the Best, Rest, and Test customers – and thus plan the Progency interventions.
