January 08, 2020

File Power Relationships

Recall that a first-time buyer (in our example) had a 34.9% chance of repurchasing on an annual basis (with one month of recency).

Who else possesses this level of file power??
  • 2x buyer, recency = 6 months.
  • 3x buyer, recency = 9 months.
  • 4x buyer, recency = 13 months.
  • 5x buyer, recency = 15 months.
  • 6x buyer, recency = 15 months.
  • 7x buyer, recency = 16 months.

Here's another way to think about the issue. Look at the curves for annual response by recency, for 1x / 2x / 3x / 4x buyers below:

We have an uneven relationship, don't we? A first-time buyer keeps losing file power, and then if the customer purchases the customer quickly gains file power, a lot of file power. Moments later, customer value "depreciates" ... it's like owning a car ... the car depreciates a ton the first year and then keeps depreciating thereafter.

But ... but!  If the customer purchases, the customer "appreciates" in terms of file power.

That's what we sign up to manage ... we're constantly losing file power, then BOOM the customer purchases and we ramp-up file power ... and then we're constantly losing file power once again.

Here's where things get interesting. When you mess up file power (acquire the wrong customer, sell the wrong merchandise, destroy gross margins via discounts), you don't generate the same file power illustrated above. This means that everything that happens downstream is "discounted" ... file power depreciates and the value of the customer is lowered due to mismanagement. The future health of the business suffers.

Think about this issue today ... when you see your favorite brand selling at 40% off plus free shipping, your favorite brand is playing a game of "tradeoffs" ... choosing the increase in the curves (above) to increase file power while losing gross margin dollars. If the net of the two relationships yields positive file power, the tradeoff is worth it.

Hint - the tradeoff is seldom worth it.

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