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.