Marketing: Disrupted and Simplified (Part 21)

Three Teams

At its simplest level to get as close to the ideal, businesses (and marketers) need to do three things: keep the Best customers forever, migrate the Rest customers to becoming Best, and acquire Next customers with the potential to become the Best. In other words: Retain the Best, Rest to Best and Next like Best. Each of these three functions are distinct and need to be run by different teams for Best, Rest and Next customers.

Best: The goal of this team is to imagine the most amazing experiences for the top 20% customers. While they view the brand positively and don’t need much prompting to return to the brand’s properties, the question marketers must ask is: how can one go beyond just loyalty programs and treat these customers like royalty? This is where the ideas of “Velvet Rope Marketing” come in. Exclusivity, ease and access are three axes to define new customer experiences.  Further reading:

Rest: For the other 80%, the number one challenge is to get engagement going with the marketing messages being sent by the brand. These customers are not yet loyal to the brand and tend to ignore the emails, push notifications and SMSes sent. Brands have limited data about them thus making it difficult to do segmentation and personalisation. Without actions on the messages, it is very difficult to bring the Rest customers to the brand properties. And without them visiting the website or opening the app, it is almost impossible to get them to do transactions. Also, loyalty programs (in case they exist) don’t work with them because they never earn enough points to garner the rewards and benefits. So, the key challenge is to ensure the Rest customers engage with brand communications. Push messages are the only way to reach out to the Rest. They need to be lured back. This is where the ideas of Microns and Mu come in – to get customers to pay attention, pay for attention. Think of this as “Attention Rewards Marketing” (ARM) – messages with goodies to begin  a lifelong relationship with customers. This is the starting point for migrating Rest to Best. Further reading:

Next: Brands have been focused on new customer acquisition since time immemorial. The only change that needs to be done here is to acquire new customers based on the Best Customer Genome (BCG) rather than indiscriminately. Instead of relying on only Google and Facebook, brands should persuade their Best customers to refer others like them – and that is only going to happen when the Best customers have experiences they can talk about and share on their social networks. Each Best customer is a micro-influencer. This is the best way to acquire Next like the Best. This team thus needs to focus on cloning the attributes and behaviour of the Best for new acquisition and onboarding.

Three teams, each with clear objectives: protect the Best, persuade the Rest, prospect the Next. One common theme: get existing customers to pay for attention. How can marketers make it happen?

Marketing: Disrupted and Simplified (Part 20)

Profipoly

If we were told to design the ideal business with no resource constraints, what would we do?

The goal would be to maximise industry profits, thus leaving no surpluses (“oxygen”) for competition to invest and grow. As we have seen, not all customers are profitable if acquisition and servicing costs are factored in. So, the first task would be to identify the sector’s most profitable customers and acquire them.

Once acquired, the next objective would be to ensure to keep them forever and get 100% of their spend in that category. This would necessarily mean providing them with the best possible experiences (“velvet rope marketing”) and perhaps combined with a loyalty program that keeps the goodies coming as they keep spending. Airlines do this amazingly well with their loyalty programs. The “loyalty lock-in” ensures that travellers want to stick to the same airline, accumulate miles, move up the tiers, and get rewarded with better experiences. The perfect business would do the same – design experiences to ensure customers never churn and maximise their spend with the business.

The next stage would be to turn customers into advocates – thus dramatically reducing acquisition costs for the Next (Best) customers. Best customers are likely to know other potential Best customers in their friends and family network. Incentivising them to get more like them can create a continuous supply of new customers with similar characteristics in terms of spending and profitability. Once a new customer is acquired, the business then has to accelerate that customer’s journey to profitability by enabling them to follow in the footsteps of the Best customers – this is where the Best Customer Genome comes in by suggesting what products or services to recommend at each stage of the customer journey.

If all of this can be made into a repeatable process, the flywheel kicks in – and that’s the secret to super-normal growth and profits. It is what the best businesses do. Look at Amazon and Costco and you will see this growth flywheel at work. Amazon Prime and Costco’s Membership program are the cornerstones of building businesses that suck out the oxygen of growth from competition and create a “profits monopoly” (profipoly).

As I wrote previously in Best Customers and Velvet Rope Marketing: “By building a double moat of getting the industry’s Best Customers and then maximising revenues from them, it becomes possible to create a profits monopoly (profipoly) which can cut off the oxygen that competition needs to grow.”

This brings us to the next set of questions: How does one create such a business? How can the marketer help in designing such a business? What impact will all the recent privacy-linked changes by Google and Apple have on the design? Is marketing really that simple? If so, why isn’t everyone doing it this way? How can marketers get started on this journey?

Marketing: Disrupted and Simplified (Part 19)

Building Blocks

Marketers need to start thinking like CEOs – or at least like Chief Profitability Officers for the business. Their goal is not to optimise campaigns and journeys, but to drive business growth. To make this happen, marketers need an Attention Stack. The starting point is to understand who the Best Customers are and what’s common to them. The three building blocks for this are customer data platform (CDP), customer lifetime value (CLV) and Best Customer Genome (BCG).

The CDP is the repository of all customer data across all touchpoints. In the non-digital world, customer data was very hard to collect – this is why retail stores introduced physical cards which shoppers could scan at checkout allowing the store to connect customers to their buying behaviour. In the digital world, this is much easier: all actions done on the website or app can be captured and stored in a database. I have discussed the CDP in my How Velvet Rope Marketing can transform Customer Loyalty series.

As defined by the CDP Institute, “A Customer Data Platform is packaged software that creates a persistent, unified customer database that is accessible to other systems…The CDP creates a comprehensive view of each customer by capturing data from multiple systems, linking information related to the same customer, and storing the information to track behavior over time. The CDP contains personal identifiers used to target marketing messages and track individual-level marketing results.” More from the Hubspot blog: “CDPs build customer profiles by integrating data from a variety of first-, second-, and third-party sources. This includes your CRM and DMP, transactional systems, web forms, email and social media activity, website and e-commerce behavioral data, and more.”

With the data in a single store, it becomes possible to calculate CLV for every customer and decode the BCG.

As I wrote previously in the Velvet Rope Marketing series quoting Peter Fader: “CLV is a forward-looking, predictive measurement that is calculated by modelling and projecting the following: how long the customer relationship lasted (for churned customers) or is likely to last (for active and future customers), number of transactions, value of the transactions, and other non-financial activities the customer may engage in. Eg. visits to website, willingness to try other products, posting ratings and reviews about the company’s products, and/or referring other prospective customers.”

I also explained BCG in the Becoming Chief Profitability Officer series: “The Customer Genome provides a distinctive digitally encoded representation of a customer. It allows us to compare different customers, predict what a specific customer is likely to do next and create personalised experiences… By looking at the Customer Genomes of the Best Customers as determined by their CLV, it now becomes possible to identify the Best Customer Genome (BCG) – those attributes and actions common to the most valuable customers of a brand… Knowing how these customers are different lets us replicate their attributes in acquisition and behaviour in the onboarding process to ensure that brands can manufacture more Best Customers.”

With this foundation in place, it becomes possible to focus on the business outcomes.

Marketing: Disrupted and Simplified (Part 18)

Money on the Table

Let’s dig deeper into the impact of the power law of marketing.

We can segment customers into Best (top 20%) and Rest (remaining 80%). Another way is to think of them as High, Medium and Low value customers – H, M, L. The following calculations are very simplistic but they will make the point that marketers are leaving a lot of money on the table by not getting  customers to pay attention to their marketing messages.

  • Top 20% customers [H] = 60% revenue; average for each 1% = 3%
  • Next 30% customers [M] = 20% revenue; average = 0.67%
  • Bottom 50% customers [L] = 20% revenue; average = 0.4%

Now, let’s assume that with better marketing, revenues from H and M customers can be increased.

  • Revenue from H customers increased by 10% = 60 à 66 units
  • Revenue from M customers increased by 20% = 20 à 24 units

This will lead to a total revenue increases by 10%. The marginal costs will not increase substantially and much of the extra gross margin will flow straight to the bottom line resulting in an increase in profits by at least 25-30%.

If marketers can play the attention game right, the impact can be even greater. This is the money marketers are leaving behind. Therefore, it is critical for marketers to get customers, especially H and M, to pay attention to their messages.

But as we all have experienced, this does not happen. Here is the reality of attention:

  • Emails: open rates 5-15%
  • SMS: open rates 10%
  • PNs: blocked / undelivered to ~50% of base

The net result is that a very large majority of customers are ignoring incoming messages. What if most of these are H and M customers? Have marketers done a correlation between CLV and engagement? If a brand’s valuable customers can be persuaded to open more messages, can that lead to more transactions? These are the questions that marketers should be asking – rather than figuring our whether they should be spending more on Google or Facebook!

To ensure “No Money Left Behind”, marketers need to work on the following:

  • Get H and M customers to pay attention
    • Else they are leaving a lot of money on the table (for competition)
  • Change customer mindset from delete to delight
    • How to train customers to never ignore messages?
    • How will they buy if they don’t know what is on offer?
  • Convert 1-off engagement into continuous relationship
    • Make opening and acting on messages a habit
  • Segment customers based on value
    • H (Best) more valuable than M who are more valuable than L
    • Selectively incentivise customers for specific actions
  • Do all this without any new budgetary allocation

This is marketing’s greatest challenge – and opportunity. And the simple truth that marketers have missed is: “To get customers to pay attention, pay for attention.” In fact, marketers know this very well – they are just paying the wrong entities for attention. It is time they stopped fattening the profits of Google and Facebook, and instead consider a rewards program to incentivise their existing customers for attention and action, the upstream of transactions. This is the secret to ensuring there is no money left on the table – for competition. The next question: what do marketers have to do differently to win their customers’ attention?

Marketing: Disrupted and Simplified (Part 17)

Power Law

Marketers for the most part have missed the “power law of marketing” – that a relatively small percentage of customers account for a big chunk of revenues and make an even bigger contribution to profits. For many non-subscription brands, an analysis based on customer lifetime value (or even past transactions) will show that 20% of the customers contribute 60% of revenues and more than 100% of profits. What this also means is that 80% of the customers contribute 40% of revenues and are a net cost to the brand if one factors in acquisition and servicing costs.

The power law of marketing (which can also be interpreted as the 80-20 rule or the Pareto principle) is core to the idea of simplifying marketing. I have discussed this in a previous blog series  The One Number to Predict Revenue. Here is how it looks:

The X-axis sorts customers while the Y-axis is the CLV. The area under the curve is the net predicted revenue – the aggregation of the CLV of each customer. The Best customers are towards the left of the X-axis (their revenue represented by the green shading) while the Rest customers make up the long tail (their revenue represented by the yellow shading). As I explain in my series, power laws are all around us. Most marketers have not opened their eyes and seen their customers in this context.

The complexity in marketing has arisen because of a lack of understanding of the fact that all customers are not equal and some are more valuable than others. By not differentiating between the Best (top 20%) and Rest (remaining 80%) customers, marketers have complicated their own lives – having to focus on a much larger base than they actually need to. Instead of providing amazing experiences for the most profitable customers, marketers have gone down the path of trying to provide a “lowest common denominator” experience to their entire base. This is ineffective and results in the churn of the Best and continuous re-acquisition of the Rest. No one is happy with the outcome.

What marketers need to do is to actually create two internal business units to focus on the Best and Rest customers. Their needs are different, the approaches to be followed are different. The same team cannot address the top 1% and the bottom 1%. And yet, I have not seen brands do this – outside of a few industries like airlines where a single transaction itself enables the segmentation and experience differentiation.

The reason for this is that most marketers do not think about customer lifetime value (CLV). Ironically, marketers are awash in customer data and the CLV calculation and identification of Best Customers is much easier now that it ever was. Marketers tend to think of the more immediate past (which customers have been active in the past 30/60/90 days) rather than analysing the long past (2-3 years) to predict the near future. The right CLV model needs to be used to factor in recency and frequency to calculate CLV for each customer and then segment them into Best and Rest. Without bringing in CLV and just looking at transactions from a narrow lens, all customers will look the same. As a result the focus ends up becoming on the trees (campaigns) rather than the forest (experience).

The power law of marketing is the big foundation idea for simplifying marketing. Understanding that the 20% Best Customers are many times more valuable than the 80% Rest Customers is the big insight that can remake marketing.

Marketing: Disrupted and Simplified (Part 16)

Anyone Listening?

Ajay Row had this to say in a LinkedIn post about the cost of inattention:

You are a smart marketer with a 10% open rate on your emails and a 20% click-through rate, so effectively 2% (10% x 20%) of your audience respond to you in our (overly-simplistic) example.

Let’s understand this.

First, your 10% open rate means you have a 90% non-open rate — which means 90% of your database ignored you. For these folks, nothing bad happened. Life did not dramatically change for the worse. So they have been taught that ignoring you has no downside. So they will continue to ignore you, and keep getting reassured afresh with every email they ignore, till your emails no longer even register in their brains, become a blind spot and with that, eventually, your brand in the Inbox. Until of course an ever-helpful inbox prompts the customer to unsubscribe, and they do, never to feel the loss.

Now to the 10% who do open your emails. Lovely people. Bless them. Let’s say your CTA is really cool and 20% (!) click on it and the remaining 80% delete your email without clicking. Which means 80% of 10% (8%, we are now at 98% of your customer base and counting) have been educated that to open your email is a mistake. Some, optimists, will open more emails, others have learned to ignore you. Optimism is a rapidly degenerating function in the email world though.

The worst part, last. The 20% of the 10% (2% in all) who clicked on your link, all eager to move ahead. Let’s say you have not figured out your landing page strategy (I know we said you are smart but even the smartest don’t think through the post CTA journey sometimes) and 80% of these folks are unable to do whatever it is that you want them to do and they want to do. Ouch! They rapidly join the ranks of the “let’s ignore this smart marketers’ brand”; except, with a vengeance.

This cost is not measured on a P&L and hence does not total into a balance sheet. But to my mind it is a real cost of incompetent and uncaring marketing that impacts a brand and its ability to communicate with its customers.

And think: what if a significant portion of a brand’s more valuable customers are ignoring it? This is revenue loss that brands don’t even factor in.

Attention must become the new Acquisition. Without attention, there is no engagement. Without engagement, there is no transaction. In the trees of continuous new customer acquisition, brands and marketers have lost the joy of the forest of customer attention, delight, and engagement. It is time to go back to the basics. It is time to simplify marketing. But to do that, we have to first understand the big idea that marketing has largely missed.

Marketing: Disrupted and Simplified (Part 15)

Customers, Ignored and Ignoring

A brand’s most profitable customers end up with experiences not too dissimilar from the others. We have all experienced it. Except in airlines, hotels and some banks, there is little differentiation in how brands engage with their customers. In the pre-digital days, it was understandable because there was no way to tell one customer from the other – except if a brand had a loyalty program and therefore the points could mirror the customer spend and generate tiers for customers. But in the digital world, this is unforgivable because so much more can be done for creating customer-centric organisations. And yet, click after click, opportunities are lost. The means (acquisition, journeys, campaigns, mailers, notifications, retargeting) overwhelm the end (maximising growth with profitability).

The most profitable customers do not get differentiated experiences and hence can be tempted away, ending up as an increase in the “churn” column of the marketer. At best, there is a transaction-based loyalty program with tiers to retain them. Points are stored in a black hole and redemption is made almost impossible. At some stage, customers even forget they have some points and soon end up forgetting about loyalty also. All that still holds them back is a mix of habit and inertia.

The rest of the customers are less attached to the brand. They were in a relationship once with the brand, but the lack of friendly engagement distances them from the marketer. A little signal here, some TLC there, and who knows what love could have blossomed. But alas, it was not to be. No attempt was made to make them feel welcome, no effort was spent on asking what they liked. Instead, all they got was the same stream of messages day after day. And at some point, they stopped opening the mails, clicking on the SMSes, actioning the notifications – and no one even noticed. A performance statistic declined by a few basis points, perhaps they were the third or fourth decimal after the point.

They drift away – and guess what! They get targeted for re-acquisition after some time. They are now in the vast pool of “new customers” – meaning more money can now be spent on them to bring them back into the fold. The irony is not lost. Thinks the customer, “I was once yours. We went out for a date. I could have fallen in love. But you were too busy, with all your data and dashboards. I waited and waited for the right move and message. I kept signalling you – by not opening your messages. It didn’t matter. I left. It still didn’t matter.” And now the marketer is back to paying Google and Facebook – paying for attention that was once available for free.

And so the cycle of life continues. Acquire, lose, re-acquire, lose, re-re-acquire. A vicious spending loop in the ever-increasing new customer acquisition budget. Thinks the customer, “Only if you had taught me to not ignore you, we could have both lived together, happily ever after.”

Marketing: Disrupted and Simplified (Part 14)

Marketing Today

I will begin by first focussing on a brand’s relationship with existing customers and then consider how this can help with new customer acquisition. Let’s first take a look at the current state of digital marketing and engagement.

Most brands (I mean B2C businesses) tend to treat all customers the same; there is one huge bucket into which all customers fall. Segmentation is done more on recent behaviour than on future lifetime value. Some brands use loyalty programs to create tiers and different rewards. “Experience” is spoken of a lot but the reality is quite different; differentiation of experience is the exception rather than the norm. Very few brands take the trouble of getting to know us; they don’t even ask us about our preferences. Martech platforms are used to do the obvious: some standard journeys, the obligatory cart abandonment mail in ecommerce, the bland confirmation when a transaction is done.

The reason for this is that retention and growth is not the exciting part of marketing; it is the stepchild. The darling department is new customer acquisition. That is where the bulk of the budget is spent – the shiny new numbers that can be presented in management review meetings and shown to investors. After all, it is a land grab out there. So why not grab as much territory as possible even if those are deserts, mountains or uninhabited waste land? In fact, to show the infinity of the market, knowingly or knowingly, many customers are re-acquired after being allowed to go dormant.

I had a conversation with a friend recently who had just joined a hot new startup. His traditional market sense was shocked when he saw the spends on acquisitions. VC money was being spent on Google and Facebook to prop up the DAUs and MAUs (daily and monthly active users) so that the next funding round could be at higher valuations. There was little attention being paid to retention. So what if 75% of the app users weren’t even active after a month? There were always new users to acquire to keep the hockey stick curve intact.

With 90% of the monies being spent on acquisition via adtech platforms, very little money is left for customer engagement, retention and growth (the domain of martech). Even this money gets invested in a variety of point solutions – “the next new thing” disease is contagious! The result is that integrating these tech solutions becomes a nightmare and data is siloed. The perfect state of a single customer view never happens. The daily campaigns continue, various numbers are tracked, and whichever looks good are presented to top management. If the going gets tough, it’s time for the marketer to move on – another shiny new startup is waiting with a better compensation package and a bigger acquisition budget.

And so the journeys continue – marketer and customer, the hunter and the hunted, moving ceaselessly, from one brand to another.

Marketing: Disrupted and Simplified (Part 13)

India Adtech and Martech

India’s digital advertising market is about Rs 28,000 crore – 35% of the total Rs 80,000 spend, according to Group M’s ‘This Year, Next Year’ (TYNY) report. The charts below from Business Standard based on report provide the full picture:

Denstu’s Digital Advertising report offers a slightly different set of numbers but the broad trends are similar:

Across both these reports, we can estimate the digital advertising spend in India to be about Rs 25,000 crore. Revenues of Google and Facebook in India for the year ended March 2020 were about Rs 18,000 crore, as per Exchange4Media. “Google accounted for lion’s share of digital advertising in India with gross ad sales of Rs 11,442.3 crore in FY20 compared to Rs 9,203 crore in FY19. Facebook has seen a massive jump in its gross ad billing at Rs 6,612.6 crore in FY20 compared to Rs 2,253.7 crore a year ago.” Their duopoly accounts for over 75% of the India digital ad spends and is rising.

Most of this spend is towards performance marketing (primarily new customer acquisition). Startups flush with VC and PE funds, along traditional companies racing to go digital by investing their profits, are fuelling the arms race for new customers.

In contrast, the spend on engagement with existing customers is puny. There are 4 primary digital channels to engage with existing customers:  SMS, Email, Push Notifications (PN), WhatsApp. (PNs are not priced on a transaction basis, but come as part of the capabilities offered by martech platforms.)

  • SMS: Total spend is about Rs 4,000 crore, of which about 45% (Rs 1800 crore) can be considered as marketing spends. The rest is transactional messaging (15%) and spam (40%). (Unit cost of an SMS is 13 paise, with government entities paying much lower.)
  • Email: Total annual spend is about Rs 175 crore. ((Unit cost of an email is about 1-3 paise.)
  • Martech platforms: This market is about Rs 500 crore
  • WhatsApp: This is still nascent and about Rs 50 crore. (Unit cost of a WhatsApp message is about 30 paise.)

Thus, the aggregate annual spend on martech is about Rs 2,500 crore. This is a tenth of what is spent on digital advertising of Rs 25,000 crore. In other words, brands spend about 10X more on new customer acquisition as compared to engagement with existing customers. (One could quibble over whether the entire digital advertising spend is for acquisition or not, and how much of it is for B2B marketing. Whether the adtech:martech split is 90:10 or 85:15, the fact remains that only a small fraction of the Indian marketer’s budget is spent on customer retention and growth.)

Enlightenment (and change) needs to start with a simple fact that most marketers have forgotten as they have sought to focus on every customer with equal enthusiasm: “All customers are not equal.”

Marketing: Disrupted and Simplified (Part 12)

The Real Problem

For the past decade, cookies and various other tracking methods enabled the adtech industry to grow. As our digital lives have grown, the blowback is now coming as the desire for privacy rises. Browsing, apps and emails are all going to get impacted in this privacy-first world. What should digital marketers do? To answer these questions, it is important to look at the real soup that brands have gotten themselves into because of lazy marketing over the past 10-20 years.

Google and Facebook generated $250 billion in revenue in 2020. Where does this money come from? Businesses, spending on targeting past, present and future customers. Let us understand this better.

Because businesses have not built deep relationships with their customers, their customers do not listen to them. Businesses have either not captured adequate data from their customers or do not even know who their customers are. As a result, what do they do? Spend money where the eyeballs are – Google and Facebook. Both have also accumulated plenty of detailed data on individuals thus enabling sharper targeting. Even after the recent changes by Google and Apple, the reality is that the only entities that will emerge stronger are the ones who have the attention, first-party data and targeting technologies – Google and Facebook. Brands seem helpless, but are they really?

Brands attract customers, and then instead of building deeper two-way relationships, they do what? Let many of them go! Best customers are not given differentiated experiences, and others are flooded with generic push messages which get ignored. And then? Brands are back to doing what they know best – spending money with Google and Facebook for new customer acquisition! Little wonder then that Google and Facebook have erected the toll gates on the brand-customer pathway. It is only because brands have let them do it.

At least $100 billion of the money spent by brands on Google and Facebook can be freed up by businesses if they make building direct relationships with their customers a priority. Businesses can invest this money for building better experiences for their Best, rewarding the Rest for their attention, and smarter targeting for the Next.

The key point is this: unless brands prioritise existing customer growth and retention and back it up with a budget reallocation, they will be permanently trapped in the acquisition “doom loop” and always be vulnerable to the changes inflicted by Google and Facebook. The big mistake brands have made is to let these two giants get in between them and their customers. It is time to reclaim the direct relationship and exit the arms race of ever-increasing new customer acquisition costs. This is the key to simplifying marketing.