January 06, 2020

A Constant State of Decay

Ok, one of your digital vendors acquires a customer on your behalf. You have a new customer. Congrats!!

For so many of the businesses I analyze, half or more of annual demand comes from customer acquisition efforts. There really isn't a lot of "File Power" because the brand is simply in business to generate transactions.

Depicted here is a business that both needs new customers, and migrates customers to reasonably loyal status over time.

The table evaluates annual repurchase rates by recency / frequency combinations. This table is the foundation of any/every business. You likely created a similar table for your brand, correct?

Let's read down the "Freq = 1" column. These are the customers you recently acquired.

In the first month the customer is with the brand, the customer has 34.9% chance of buying again in the next year. Let that fact sink in for a moment. Your vendor just helped you acquire 100 customers, and in the next year 2/3rd of them will not buy again. They're just dead weight. Sure, you'll spend a ton of money marketing to these customers, begging them to buy again. All that effort, and 2/3rd of them will be inactive this year.

A smart business professional will quickly begin thinking ... thinking about whether the "right" customers are being acquired or not. This moment of self-reflection is positive in the development of a career, and is especially valuable when managing vendors.

Back to the newly acquired customer. If a month goes by and the customer does not repurchase, the probability of a purchase in the next twelve months decreases ... from 34.9% to 32.6%. Then another month goes by, and the probability of a second purchase in the next year drops to 30.0%.

In other words, File Power is in a constant state of decay. There are only two ways to solve the problem of File Power.
  1. Constantly replenish your customer file with new customers.
  2. Improve the quality of your customers.

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