The One Number To Predict Revenue (Part 5)

Before we discuss the power of Net Predicted Revenue (NPR) as marketing’s magic number and the one number which according to me ‘solves marketing’, let’s start with the basics.

A company has customers. What it knows for sure are its past transactions with these customers.

Aggregate all these transactions in a specific period and you have the revenue for a day, month, quarter or year.

Just by looking at these numbers it is not easy to predict the future. One could extrapolate based on growth. So, if revenues have grown by 20% for each of the past three quarters, one could expect future revenues to also grow by 20%. But that does not tell the marketer who will spend how much and which customers are at risk of churning. This is where the concept of customer lifetime value (CLV) comes in. It is the present value of the future revenues from a customer. (The calculation is akin to the discounted cash flow model that companies use to calculate current valuation.)

Once we are able to calculate the CLV for each customer, we can get an aggregate view of future revenue from all customers – think of this as the Predicted Revenue. This is at a single moment in time. It is simply the area under the CLV curve, where the Y-axis has the CLV numbers, and the X-axis sorts all the customers from the highest CLV to the lowest.

So, by using CLV for each customer, we are able to calculate the forward-looking revenue for the business. What we then have to factor in is that some customers will be lost (churn) and new customers will come in (acquisition). Taking both these changes leads us to Net Predicted Revenue (NPR).

Tomorrow: The One Number To Predict Revenue (Part 6)

The One Number To Predict Revenue (Part 4)

It was then that I re-read an article by Daniel McCarthy and Peter Fader in the January-February 2020 issue of Harvard Business Review about Customer-based Corporate Valuation (CBCV). This excerpt stood out:

Recognizing that every dollar of revenue comes from a customer who makes a purchase, CBCV exploits basic accounting principles to make revenue projections from the bottom up instead of from the top down. Although this may seem like a radical departure from traditional frameworks, that’s not the case: CBCV simply brings more focus to how individual customer behavior drives the top line.

What do we need to implement CBCV? In addition to the usual financial statement data, two things are required: a model for customer behavior (what we call the customer-base model), and customer data that we feed into it. The model consists of four interlocking submodels governing how each customer of a firm will behave. They are:

  1. the customer acquisition model, which forecasts the inflow of new customers
  2. the customer retention model, which forecasts how long customers will remain active
  3. the purchase model, which forecasts how frequently customers will transact with a firm
  4. the basket-size model, which forecasts how much customers spend per purchase

Bringing these models together enables us to understand the critical behaviors of every customer at a firm—who will be acquired when, how much they’ll spend over time, and so on. Summing up all the projected spends across customers gives us our quarterly revenue forecasts. Together, these models can produce much more precise estimates of future revenues streams—and from that, one can make much better estimates of what a company is really worth.

As outlined by McCarthy and Fader, CBCV is an excellent metric for measuring performance of public companies who can be expected to disclose the data. What I needed was similar but also simpler – which CEOs could easily track. And that is where the idea of Net Predicted Revenue (NPR) came up – a way to estimate the revenue from all future customers, factoring in churn and new acquisition. Could NPR do for a business what NPS did for customer loyalty? Could NPR be the one number that “solved marketing” the way Jim Simons of Renaissance Technologies solved the market?

Tomorrow: The One Number To Predict Revenue (Part 5)

The One Number To Predict Revenue (Part 3)

For me, the search for the magic number for marketing started with the presentations on Velvet Rope Marketing (VRM) that I started doing to CMOs a couple months ago. (As an aside, this is one place where the lockdown has proven very effective. I would probably have not travelled as much for the meetings in India, South East Asia, Middle East and Africa. But here I was, working from home, meeting CMOs and their teams all across diverse geographies. Over the past two months, I have done over 60 VRM presentations with Netcore customers and prospects.)

As I dug deeper into VRM and improved on my pitch with the feedback that I received, I realised I had developed a whole new vocabulary:

  • Power Laws in Marketing: a small percentage of customers account for a large chunk of revenues and an even greater share of the profits
  • Velvet Rope Marketing: to emphasise the focus on the Best Customers
  • Best-Rest-Test Customers: to segment their customers based on CLV (customer lifetime value)
  • Long Tail Marketing: to improve returns from Rest and Test customers
  • Best Customer Genome: the DNA of the Best Customers
  • Chief Profitability Officer: what the CMO and every CxO needed to become

Yet, there was something missing. I was unable to show how the improvements brought about my VRM could be quantified. While I spoke about an increase in profits, I realised that there were many contributors for profits and it would be hard for VRM to be recognised as the main component.

While CMOs liked the idea, I realised that I struggled to show how the VRM approach could be more effective than the marketing techniques they were using internally. I needed a number that could show a before-after impact of VRM. While CLV was good at an individual customer level, it did not help in capturing the overall impact across all customers. Perhaps, the trick lay in aggregating CLV across all of a company’s customers? I had to dig deeper.

Tomorrow: The One Number To Predict Revenue (Part 4)

The One Number To Predict Revenue (Part 2)

The one number that has attracted a lot of attention in the past few months is R0 – the reproduction number, which tracks how contagious an infectious disease is. If it is less than 1, it means that each existing infection causes less than one new infection and hence the disease will eventually die out. An R0 greater than 1 leads to an epidemic, as we have seen with the coronavirus.

Single number performance measures are all around us. A country’s economic performance is measured by GDP (gross domestic product) growth rate. A student’s performance is assessed by a rank or a grade. A company’s business performance is captured by its PAT (profit after taxes). A fund manager’s performance and pay could be tied to the alpha – the difference compared to a benchmark index. For high-growth software companies, an interesting metric is what is called the Rule of 40 which says that the company’s revenue growth rate and its profitability margin should be at least 40.

In all cases, a whole array of numbers is distilled down to a single number that can be tracked over time and compared with others. In this context, it is instructive to look back to the Harvard Business Review article in 2003 by Frederick Reichheld which sparked the Net Promoter Score (NPS) revolution.

It took me two years of research to figure that out, research that linked survey responses with actual customer behavior—purchasing patterns and referrals—and ultimately with company growth. The results were clear yet counterintuitive. It turned out that a single survey question can, in fact, serve as a useful predictor of growth. But that question isn’t about customer satisfaction or even loyalty—at least in so many words. Rather, it’s about customers’ willingness to recommend a product or service to someone else. In fact, in most of the industries that I studied, the percentage of customers who were enthusiastic enough to refer a friend or colleague—perhaps the strongest sign of customer loyalty—correlated directly with differences in growth rates among competitors.

… By substituting a single question for the complex black box of the typical customer satisfaction survey, companies can actually put consumer survey results to use and focus employees on the task of stimulating growth.

So, what can the equivalent of NPS be to give a forward-looking view on what customers will spend with the business? What is the one number that can predict future revenue?

Tomorrow: The One Number To Predict Revenue (Part 3)

The One Number To Predict Revenue (Part 1)

A year or so ago, a friend recommended “The Outsiders.” It is a book by William Thorndike about eight of the most successful CEOs as measured by the increase in their company’s per share price. As Thorndike explains: “The metric that the press usually focuses on is growth in revenues and profits. It’s the increase in a company’s per share value, however, not growth in sales or earnings or employees, that offers the ultimate barometer of a CEO’s greatness…In assessing performance, what matters isn’t the absolute rate of return but the return relative to peers and the market. You really only need to know three things to evaluate a CEO’s greatness: the compound annual return to shareholders during his or her tenure and the return over the same period for peer companies and for the broader market (usually measured by the S&P 500).”

I liked the fact that one could distil performance down to a single number. I was reminded of this recently when Fortune had an article recently about the success and popularity of the Net Promoter Score (NPS). Wrote Fortune: “All this devotion for a particular measure of customer sentiment? It may seem bizarre, but the phenomenon is real and growing. At least two-thirds of the Fortune 1000 use the Net Promoter Score, including most or all of the financial service companies, airlines, telecom companies, retailers, and others. Quietly, steadily, without anyone much noticing, NPS has moved into the C-suites of most big companies and the owners’ offices of thousands of small ones—extending its reach deeply and broadly through the global economy. Skeptics and enemies have largely been vanquished. It is now used in every developed economy and many emerging ones. It’s pored over in all types of organizations, not just businesses; in Britain, the National Health Service uses it. As organizations everywhere obsess over the customer experience, NPS’s advance across industries and countries is, if anything, accelerating.”

This set me thinking. Just like a CEO’s performance over time could be measured via the increase in the company’s per share value and consumer sentiment could be assessed via NPS, could something similar be done to predict revenue?

Tomorrow: The One Number To Predict Revenue (Part 2)

Exchange4Media Interaction

I had a 30-minute conversation with Annurag Batra of Exchange4Media discussing Velvet Rope Marketing, Proficorns and much more. Some of my quotes from a report published by Exchange4Media:

  • On Velvet Rope Marketing: In every business, there are certain customers who are disproportionately more valuable than the others. We need to take care of these customers very well. But before you do that, you need to identify these customers and see who is the largest contributor to your revenues. Then, it is about creating an experience that ensures that they don’t churn away. When the best customer goes, it’s a big loss for any business, B2C or B2B. It is about creating VRM experience to essentially make sure that they stay on. Then comes the long tail of customers. There are some among them who have great potential to be best customers. It is about identifying them early and reading signals from the data customers leave for brands. Then apply the same ideas by taking data from the attributes of the best consumers. Ensure that the acquisition of new customers is also optimized
  • On Proficorns: “Now there is a post-COVID world and consumer behaviour is going to change significantly. CEOs and CMOs in a world, where profits are under pressure, need to look at creating a new path to profitability. That is where I coined the word Proficorn. The mindset of a Proficorn is differnt fom a Unicorn. The definition for Proficorn is a company that is profitable, private and is promoter-funded not public so they have actually built the business with the profits of the business reinvested. In this scenario, there are three key differences in the mindset of a Proficorn and a Unicorn. The first is, at times, a lot of Unicorns tend to fire people. Whereas, Proficorns tend to hire because you got to go against the conventional wisdom. This is a great time to build businesses. If you have the capital to invest right now to make the right decisions on growing your team, you’ll come out very strong.”

I also spoke about Customer Lifetime Value (CLV), Best Customer Genome (BCG), the skill sets required to breakthrough in the VRM space and some of the tech trends going forward.

Becoming Chief Profitability Officer (Part 9)

We began this series with a simple premise: in the post-Covid world, Profit will become the fifth and most important P of marketing. Not just the CMO but every CxO will need to become the Chief Profitability Officer.

These timeless words by Peter Drucker reinforce the need for innovation in marketing: “Because the purpose of business is to create a customer, the business enterprise has two–and only two–basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs. Marketing is the distinguishing, unique function of the business.”

A new set of marketing ideas can help drive profitability. The starting point for all these ideas is the customer data platform (CDP) – which collects customer data at every touchpoint and stores it for easy access, analysis and action for the marketer. By applying data science and determining Customer Lifetime Value (CLV) and mapping the Best Customer Genome (BCG), brands can enter the world of Velvet Rope Marketing (VRM) to maximise revenue from their Best Customers. This is the surest path to growing profits.

We also discussed two additional marketing approaches: Median Customer Marketing and Long Tail Marketing. Both can augment VRM to add incrementally to profits.

Here is an overview of the ideas discussed:

Profits are oxygen for a business. In the new world that is being created, companies that are on the path to profitability will be the winners. The new marketing ideas that we have discussed in this series can help businesses lay a solid foundation to emerge victorious in the new future. Are you ready to don the title of Chief Profitability Officer for your business?

Becoming Chief Profitability Officer (Part 8)

Here are some excerpts from a post I had written in 2008 about the idea of “invertising” (invited advertising):

Let us think about marketing today. Companies advertise across multiple media to reach their target audience. Every time they have something new to tell their target segment, they re-advertise. Advertising is thus a continuous process. Media companies love this because they make money every time companies need to reach their audience. Some companies try and get past this by creating loyalty programmes and newsletters which they then send out regularly. Now, with an increasing number of users having mobiles, sending SMSes is another extension of the marketing campaign.

What is wrong with this picture?

First, the whole process of discovery and re-discovery. Existing media companies have little or no incentive to enable the creation of a relationship between the customer and the vendor – because that threatens their role as an intermediary. They want the customer to be ‘discovered’ via their media vehicle – each time.

Second, the lack of knowledge of what marketing works. In today’s media campaigns, it is not easy to track the actual impact on sales (or even customer footfall in the store). Internet-based campaigns do enable tracking – but that only works for online stores.

Third, the lack of an emotional connection. It has been said that marketing is a conversation with the customer. But hardly anyone seems to be doing this. There is no bond being created. The question a brand must ask: how can I become a daily utility in the life of my customers?

Fourth, there is no easy way for the customer to convert advertising that is seen into information that he wants. There are many occasions when customers want to stay updated on specific things, but businesses have no easy way of providing them that info. Newsletters can be done, but they are not personalised – and do not necessarily guarantee anonymity from the customer’s viewpoint.

Fifth, it does not take into account that pretty much everyone capable of buying has a mobile phone. Our estimate is that 80-90% of customers today are likely to carry a mobile phone. The mobile is a two-way interaction device, but companies are not using this appropriately.

Finally, the customer can be a champion, and facilitate viral marketing. The customer can be a connector – sharing things that are useful with others in the social network. This is because all of a customer’s contacts are accessible near instantly via the mobile phone’s contact book.

It is clear that marketing and business-to-customer interactions are likely to undergo a sea change in the coming years. In the developed world, perhaps the most important change in the past few years has been brought about by the Internet and pay-per-click (pay for performance) advertising. This advertising is contextual – either linked to search or the content on a page. In the UK, 12% of advertising spend is now being done online (the PC Web). In India, the same is unlikely to happen for two primary reasons: the computer penetration is still quite low (coupled with limited connectivity options), and the rapidity of innovation is making the mobile as the primary access device for people. Thus in India, the levers for shifts in marketing are likely to be centred around the mobile.

As we look ahead and address the limitations of today’s marketing methods, the mobile will emerge as the fulcrum for the new options. Companies which recognise and adopt mobile marketing are likely to see significant early benefits – and lock their competitors out in the customer attention game. Tomorrow’s world of mobile marketing is going to be built around three tenets:

  • Publish-Subscribe: Companies will publish and continuously update various information streams (think of them as ‘feeds’). Customers can subscribe to any of these streams and then receive updates as soon as new items are published on the feeds. Customers can also stop subscriptions to the feeds anytime. Publish-subscribe ensures a spam-free world for customers.
  • Multi-Modal Viewing: Customers can chose to view the content in any manner – via SMS, email, voice, desktop browser or mobile browser. The experience is seamless.
  • Instant Sharing: Customers can themselves become publishers, choosing to share what they have received with their social networks.

Taken together, the three will create the platform for seller relationship management (SRM) and invertising.

Invertising, appropriately modernised for the smartphone world, can be a very useful idea for getting customers to activate relationships with brands – and thus identify themselves to the brand. The unknown and anonymous customer becomes known and familiar. Brands now have a hotline to their customers – and can thus reduce the frequency of advertising for repeated purchases.

Tomorrow: Becoming Chief Profitability Officer (Part 9)

Becoming Chief Profitability Officer (Part 7)

The Best Customers make up the head of the CLV curve. The bottom 50% or so of customers in most circumstances make a negative contribution to profitability. These ‘Test Customers’ make up the long tail. While the easy solution could be to think that a brand may be better off without these customers, it is not as simple as that. This is where Long Tail Marketing comes in.

We can think of the long tail of customers as comprising of one or all of the following:

  • The bottom 50% of customers
  • Leads who have not yet matured into customers
  • Offline customers who are unknown to the brand

Each requires a different strategy.

Here are some ideas for the bottom 50% of customers:

  • Generate more transactions and reduce service costs via ‘multiple and wide nets’
  • Possible segmentation: value customers (coupon/discount) or niche buyers
  • Capture additional data at time of (first) transaction
  • Use martech to ensure tech-led engagement to reduce service costs
  • Capture engagement data and work towards replica of BCG

For better conversion of leads (relevant for brands which are freemium, subscription-based or driven by 1-time purchases), Long Tail Marketing can be thought of as Conversion Rate Optimisation (CRO). Here are some ideas for leads:

  • Analyse past data to build Ideal Customer Profile (ICP) – which will be similar to BCG
  • Same BCG and VRM ideas are applicable by tweaking model
    • Customers 🡪 Leads
    • Transactions 🡪 Engagement
    • CLV 🡪 Lead Conversion Score
    • Best Customers 🡪 Ideal Leads

For the offline customers who are unknown to the brand, there needs to be an activation process by which these customers can identify themselves to the brand. This process necessarily is via an opt-in. It is even more important in the post-Covid world when brands will need to shrink their marketing budgets. An idea I had thought about many years ago is that of “invertising” – where customers invite advertising from brands into their lives. It is an idea worth revisiting in today’s context.

Tomorrow: Becoming Chief Profitability Officer (Part 8)

Becoming Chief Profitability Officer (Part 6)

As discussed earlier, there are three tracks to grow profitability:

  • Velvet Rope Marketing for the top 20% (Best Customers)
  • Median Customer Marketing for the middle 30% (Rest Customers)
  • Long Tail Marketing for the bottom 50% (Test Customers)

We have discussed VRM and how the combination of CDP, CLV, BCG, Martech and Adtech can help brands identify Best Customers, provide them a Velvet Rope experience, acquire more like them and help the newly acquired customers to become Best Customers faster.

Let us now turn our attention to the middle 30% — what I have termed as the “Rest Customers.” These are customers who have a lower CLV than the Best, are still profitable for the brand, but perhaps not as loyal or valuable as the Best. These can also be termed as “median customers” – not at the top or at the bottom of the CLV pyramid. Hence, I have used the term “Median Customer Marketing” to identify the initiatives for this segment. What can be done with these customers?

There are two activities that can help grow profitability from the Rest Customers – nudging them to the “next best action” and identifying future Best Customers by analysing the genomes for each of them.

Here is a brief on next best action marketing from NGData: “The concept of delivering the right message to the right customer, at the right time, and via the right channel has been around for some time. Next best action marketing can best be described as an evolution of this concept, evaluating the customer’s past behaviour, recent actions, interests, and needs in the context of the organization’s marketing goals to identify the most effective action (making an offer, a promotion, reaching out by phone, sending an email, etc.) to achieve desired outcomes.”

Here is additional info from Optimove: “Next best action marketing (NBAM) is a customer-centric approach to marketing in which the goal is to address each customer with the marketing treatment most likely to generate the desired result. NBAM differs from other marketing approaches in two key respects: (1) it is customer-oriented instead of being product-oriented, and (2) it aims to approach each customer within the context of their unique behaviours, needs and preferences instead of by assuming all customers (or large subsets of a customer base) will respond similarly.”

What needs to be done is to identify where a customer is along the journey and use a martech solution to nudge the customer with a specific action. This action can be identified by looking at genomes of similar customers and identifying what they did next.

A similar genome analysis can help identify customers who could have the potential to be moved to a higher spend with the brand. This is important because there will always be some churn from among the Best Customers so creating a pipeline of future Best Customers becomes important.

Tomorrow: Becoming Chief Profitability Officer (Part 7)