November 11, 2007

File Power

Folks who've been around the block a few times know that executives want to surround themselves with database marketing wizards who can predict the future.

With many businesses now struggling to post increases, executives are going to look to analytical folks, hoping to see evidence of a "turnaround".

A tool that is readily available to you is called "file power". It's not terribly hard to calculate, and should be run on a monthly basis. Let's calculate "file power" for an online business for November 2007.

Step 1: Identify all customers who purchased online from 11/1/2005 to 10/31/2006. Example: 100,000 customers.

Step 2: Calculate the average online spend, per customer, for this audience from 11/1/2006 to 10/31/2007. Many customers will have a value of $0, because they did not purchase. Example: $75.55 per customer.

Step 3: Identify all customers who purchased online from 11/1/2006 to 10/31/2007. Example: 110,000 customers.

Step 4: Multiply Step 2 by Step 3. This is called "file power". Example: 110,000 * $75,55 = $8,310,500.

This metric is re-run, every month, using the four steps listed above. The dates used in the analysis move forward by one month.

There are many ways to complicate this measure, to make the measure more accurate. Feel free to experiment.

Looking at this simple metric on a monthly basis will be telling.

At the end of my tenure at Nordstrom, this metric pointed south, month after month. In other words, the metric suggested we were running out of "file power". Comps were still increasing, year-over-year, but the customer file was running out of gas.

The metric is reasonably good at suggesting that a downturn will occur. The metric occasionally struggles to predict future upswings --- typically, great merchandise will inspire customers to purchase, fueling the customer file, causing "file power" to increase a month or two later.

Ok, your turn. What does your "file power" look like? Did you see this business downturn coming?