February 05, 2020

So Many Factors Go Into File Power ... How Do I Combine Them All?

About ten years ago I introduced a concept called "Digital Profiles" ... I used a Factor Analysis to reduce a whole bunch of customer attributes into just two dimensions ... and then segmented customers based on the values of two dimensions.

I've been using the methodology ever since. You might not see it directly referenced in the projects I work on with you, but it's there, lurking behind the scenes. It's one of the primary ways I figure out why your business is changing.

Well, if it is one of the primary ways to figure out why a business is changing, then it should be a good way to figure out how File Power is changing over time, right?

In the geeky plot above, I enter two dozen merchandising (MR variables) and marketing channel (CH variables) variables into a Factor Analysis. Points that are far away and in any of the outside edges of the four quadrants represent customer attributes that are driving customer behavior.
  • Root12 and Root24 represent the square root of 12-month and 13-24 month spend. Turns out that customers who spend more behave differently than everybody else. Who knew?
  • MR15 / MR19 / New / Bel represent customers who buy new merchandise from merchandise categories 15/19 at prices below the historical average for the item. In other words, these categories release new items that are either included in promotions/discounts or are quickly liquidated.
  • MR13 ... customers who buy from merchandise category 13 behave different than other customers.
  • CH09 / CH11 ... customers who buy from these two marketing channels (which were Paid Search and Natural Search, FYI) behave different than everybody else.
Now that I know this, I score the customer file every three months going back three years, and I look to see how customer behavior has changed. 

In addition, I score the file a year ago, segmenting customers into 25 unique segments based on the factors above. This allows me to measure future value (next 12 months) by segment. Guess what? I now have a measure of File Power that I can consistently evaluate over the past three years.

Now I have something!!

More on that topic tomorrow.

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