October 04, 2011

Death Spiral: Divergent File Behavior

Your business was growing at 10% for each of the past two years.  Life was good.  You earned a healthy bonus.  And then, this year, something changed.  You're still growing, you're up 5% to last year, but something doesn't feel right.

One of the first queries I run is a simple one.  I run a rolling-twelve month file count of customers in five segments.
  • Customers purchasing 5x+ last year.
  • Customers purchasing 4x last year.
  • Customers purchasing 3x last year.
  • Customers purchasing 2x last year.
  • Customers purchasing 1x last year.
Run this table as far back as your database will allow you to run it.  I like to run the table at the start of every month.


When a business is about to struggle, two things often happen.
  1. Management tries to squeeze as much volume as possible out of best customers.
  2. The "bottom of the file", infrequent buyers, begin to disappear.
Your table might look something like this:




5x+ 4x 3x 2x 1x Total
October 1, 2011 926 1,511 1,930 4,198 11,478 20,043
September 1, 2011 925 1,506 1,926 4,239 11,503 20,099
August 1, 2011 922 1,502 1,933 4,293 11,541 20,191
July 1, 2011 916 1,493 1,910 4,314 11,572 20,205
June 1, 2011 914 1,481 1,902 4,361 11,593 20,251
May 1, 2011 909 1,477 1,897 4,388 11,608 20,279
April 1, 2011 910 1,470 1,890 4,422 11,613 20,305
March 1, 2011 907 1,467 1,898 4,429 11,608 20,309
February 1, 2011 906 1,460 1,891 4,426 11,637 20,320
January 1, 2011 902 1,448 1,886 4,391 11,618 20,245
December 1, 2010 893 1,436 1,882 4,380 11,559 20,150
November 1, 2010 887 1,427 1,867 4,362 11,530 20,073
October 1, 2010 883 1,438 1,849 4,337 11,493 20,000


In other words, you'll see that the 3x, 4x, and especially 5x+ segments may exhibit increases in customer counts, as your marketing team squeezes as much as possible out of that audience, in an effort to grow a business that is stalling.


Meanwhile, your less frequent buyers ... those who purchased twice in the past year, and those who purchased once in the last year, began to decline somewhere between January 1 and February 1.


This is one of those early signs that a business is about to struggle ... think of it like a blood test where you have high sugar levels in your bloodstream ... high sugar levels are a harbinger of diabetes ... here, increases in the 3x/4x/5x+ segment coupled with decreases in the 1x/2x segment are like high sugar levels in your bloodstream.


Run this query each month.  Look for this trend, it is a leading indicator that your business is about to struggle.  When I left Nordstrom in March 2007, our customer file exhibited this behavior, and we all know what happened to the economy, beginning in October 2007.