Becoming Chief Profitability Officer

Published May 26-June 3, 2020

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“There are decades where nothing happens; and there are weeks where decades happen.” – Lenin

In the US, e-commerce penetration as a percentage of retail sales grew from 5% to 16% in the ten years from 2009 to 2019. And then came coronavirus. In 8 weeks, the 16% rose to 27%. A decade of change repeated in 8 weeks.

We are living through extraordinary times. In India, we have seen four successive shocks in the past two months. First came the pandemic. Then, the lockdown. This led to a complete demand collapse for many industries and businesses. And finally, the government actions (or lack of them) which have compounded the problems.

Now, two months after the lockdown, there is no sign of “flattening the curve” as cases keep rising across many parts of India. Much of economic activity remains shut down even as efforts are finally being made to open up the economy. (For the record, I had written about the urgent need to Unlock India early in April.) Migrants who had come to cities in search of a better life have been making their way back to their villages. Layoffs are now starting to happen. Work from home has become the new normal for many employees. Even as medical challenges overwhelm cities like Mumbai, the full horror of the coming crisis is slowly becoming apparent.

For business leaders, there is no playbook which could have prepared them for these times. The post-Covid future is now revealing itself. Capital is going to be constrained, profits are coming under severe pressure, marketing budgets are being minimised and the customer is going digital in the wake of social distancing norms. A new normal is emerging – one which is here to stay.

For Chief Marketing Officers (and in fact all CxOs), it is time to think of the 5th P of Marketing. To Product, Price, Promotion and Place, they all need to think of Profit. Because without profits, there will be no business. In the post-Covid world, we all must become Chief Profitability Officers.

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The path to profits runs through marketing. For most companies, marketing is the largest cost after wages and salaries. Hence, the pressure to cut marketing budgets is going to be intense. It is in this context that marketing needs to be re-imagined for the post-Covid future for the increasingly digital customer.

There are three themes around which the new marketing can be re-organised to drive profits based on the customer segments:

  • Velvet Rope Marketing for the top 20% (Best Customers)
  • Median Customer Marketing for the middle 30% (Rest Customers)
  • Long Tail Marketing for the bottom 50% (Test Customers)

Velvet Rope Marketing (VRM) is the most important because the contribution of Best Customers to revenues is much higher than the other categories. My earlier series and webinar on VRM discuss the ideas in greater detail. In this context, the four most important jobs for a Chief Profitability Officer are:

  • Identify Best Customers
  • Give them the Velvet Rope Experience
  • Acquire more like them
  • Help them become Best Customers faster

In this series, we will also dig deeper into how to implement VRM using the ideas of CDP (Customer Data Platform), CLV (Customer Lifetime Value) and BCG (Best Customer Genome). We will also expand on ideas for marketing to the Rest and Test Customers via Median Customer Marketing and Long Tail Marketing, respectively. While their relative contributions to revenue and profits are likely to be lower, they can serve as a fertile ground for identifying future Best Customers.

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Velvet Rope Marketing is about identifying and marketing to the Best Customers of a business. (For some businesses, it could be adapted to doing the same to incoming leads.) Let’s begin with the process of identifying Best Customers:

The first step is to collect data at every touchpoint. In the online world, this is easier since access is via a website or an app. In both cases, all customer actions can be captured. If a customer is logged in, then it becomes possible to link to a unique personal identifier (email ID or mobile number). If not, then it has to be tied to a cookie (on a browser) or a device ID (on the mobile). In the offline world, this is a much harder problem to address since a customer may not be identified until the point-of-sale. In the future, face recognition systems may allow tracking of customers from entry to exit, thus providing better insights into the customer’s interests. In the near-term, stores could use smart cards or mobile apps to identify repeat customers at entry to create an assisted or personalised experience.

The second step is to store all the data in a customer data platform (CDP). A CDP thus becomes the repository of all of the customer’s demographic data (name, gender, location), behavioural data (app and web interactions) and transactions. It thus becomes possible to create a unique profile for every customer.

The third step is to calculate customer lifetime value based on the transaction data. My earlier post on CLV explains this process. It is important to note that the CLV described here is a forward-looking, predictive measurement.

The fourth step is to segment the customers based on their CLV. A possible approach can be to consider three segments: Best (top 20%), Rest (middle 30%) and Test (bottom 50%). This 20-30-50 split may vary based on actual numbers for different companies but is quite indicative of the 60-20-20 revenue contribution.  If companies measure profitability, they will find that the biggest contribution comes from their Best Customers, followed by some from the Rest Customers.

The Test Customers are likely to result in losses if one factors in the cost of acquisition and servicing. (I call them Test Customers because they are ‘testing’ the brand and are not likely to do repeat transactions. They came in once, ‘tested’ the brand and then went away. We will discuss more about them in the section on Long Tail Marketing.)

The next two steps involve calculating the Customer Genome and from there decoding the Best Customer Genome (BCG), followed by the final step of using AI-ML to create a continuously evolving and learning process for analysing customer data.

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What exactly is the Customer Genome?

Here is an initial overview from a 2016 article in The Drum based on work done by Accenture:

According to Jeriad Zoghby, Personalization Lead at Accenture Interactive, the genome technology excels is in its ability to “imprint” a customer’s DNA and go into not just more depth, but width as well. Looking at the map of a customer’s DNA leads to much more meaningful insight than the “you bought this, you might like this” or “you bought this, other people bought this” conundrum facing marketers.

“My DNA defines who I am. The idea of the customer genome is the DNA that defines my preferences, passions and needs — things that decide why I choose things,” said Zoghby. “If you took every interaction and exploded it into its DNA, the DNA is actually the product DNA — that goes beyond its title or its product name. Every (marketing) email has DNA, for example. Subject lines, offers, products that were recommended, creative in the background for the imaging or messaging.”

Using baby shampoo as an example, Zoghby outlined how the genome process reveals itself.

“Every time you buy it, view it, consume it — it would then type to your genome — in different ways, because viewing a product is not the same as committing to buying it,” explained Zoghby. “When I’m viewing it I’m putting in my wish list, I’m voting with my time. But when I vote with my dollars by buying it I’m saying, ‘Yeah, I buy Burt’s Bees baby shampoo.’ Same thing for dish detergent, laundry detergent, cleaning supplies, whatever, we start to see the common attributes that are starting to form there whether it’s about organics, whether it’s about certain scents, hypo-allergenic, Burt’s Bees, whatever. This is true across anything.”

Here is more from Michael Buckley, Accenture, written in 2016:

Customer genomes – the detailed digital DNA of customers – are the next generation of market and customer segmentation that organisations need to consider in order to keep up with evolving customer needs. Customer genomes focus on using traditional data (such as demographics, purchase history and loyalty programs), alternate data (from sources such as social media profiles and community-based data) and derived data (including insights describing an individual obtained from analysis of the selected data sets) to create digital DNA that includes the information every organisation should know about each of their customers.

This organically derived data includes distinctive markers that organisations can apply to create targeted approaches to high-value customers and prospects. By effectively leveraging all of this data, organisations can evolve from personalisation to hyperpersonalisation of data, which is tailored to each individual customer.

Put simply, the Customer Genome provides a distinctive digitally encoded representation of a customer. It allows us to compare different customers, predict what a specific customer is likely to do next and create personalised experiences. The innovation I want to discuss next is the idea of a Best Customer Genome.

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To summarise the story so far:

  • Brands should collect customer data at every touchpoint and store it in a CDP
  • Transaction data can be used to determine CLV
  • CLV can then be used to segment customers and identify the Best Customers
  • All the other data (behavioural, demographic) about customers can be used to build the Customer Genome

By looking at the Customer Genomes of the Best Customers as determined by their CLV, it now becomes possible to identify the Best Customer Genome (BCG) – those attributes and actions common to the most valuable customers of a brand.  (As far as I can tell, this is a new idea.)

The BCG is important because a small fraction of the customers account for a disproportionate share of revenues and profits of a brand. Knowing how these customers are different lets us replicate their attributes in acquisition and behaviour in the onboarding process to ensure that brands can manufacture more Best Customers.

BCG is not a static set of attributes. Like in the real world, there is continuous evolution. In this case, it is AI-ML that can help with this process. The models keep learning about what makes a Best Customer by looking for patterns in various types of data made available through CDP, and thus keep improving on the definition of the BCG.

These twin ideas of CLV and BCG lay the foundation for Velvet Rope Marketing as can be seen in the graphic below:

CLV and BCG are the anchors for doing VRM right, which in turn is the key to growing profits. A martech platform integrated with adtech is the best friend of the Chief Profitability Officer to help in executing the four key jobs we had identified earlier:

  • Identify Best Customers
  • Give them the Velvet Rope Experience
  • Acquire more like them
  • Help them become Best Customers faster

 

This is the essence of Velvet Rope Marketing: using data to create a differentiated experience for the Best Customers to ensure maximum wallet share via smart cross-sell and upsell, and churn elimination.

The idea sounds surprisingly simple, and yet very few companies actually do it right. In the post-Covid future, CxOs who can get VRM right can look forward to a profitable future.

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As discussed earlier, there are three tracks to grow profitability:

  • Velvet Rope Marketing for the top 20% (Best Customers)
  • Median Customer Marketing for the middle 30% (Rest Customers)
  • Long Tail Marketing for the bottom 50% (Test Customers)

We have discussed VRM and how the combination of CDP, CLV, BCG, Martech and Adtech can help brands identify Best Customers, provide them a Velvet Rope experience, acquire more like them and help the newly acquired customers to become Best Customers faster.

Let us now turn our attention to the middle 30% — what I have termed as the “Rest Customers.” These are customers who have a lower CLV than the Best, are still profitable for the brand, but perhaps not as loyal or valuable as the Best. These can also be termed as “median customers” – not at the top or at the bottom of the CLV pyramid. Hence, I have used the term “Median Customer Marketing” to identify the initiatives for this segment. What can be done with these customers?

There are two activities that can help grow profitability from the Rest Customers – nudging them to the “next best action” and identifying future Best Customers by analysing the genomes for each of them.

Here is a brief on next best action marketing from NGData: “The concept of delivering the right message to the right customer, at the right time, and via the right channel has been around for some time. Next best action marketing can best be described as an evolution of this concept, evaluating the customer’s past behaviour, recent actions, interests, and needs in the context of the organization’s marketing goals to identify the most effective action (making an offer, a promotion, reaching out by phone, sending an email, etc.) to achieve desired outcomes.”

Here is additional info from Optimove: “Next best action marketing (NBAM) is a customer-centric approach to marketing in which the goal is to address each customer with the marketing treatment most likely to generate the desired result. NBAM differs from other marketing approaches in two key respects: (1) it is customer-oriented instead of being product-oriented, and (2) it aims to approach each customer within the context of their unique behaviours, needs and preferences instead of by assuming all customers (or large subsets of a customer base) will respond similarly.”

What needs to be done is to identify where a customer is along the journey and use a martech solution to nudge the customer with a specific action. This action can be identified by looking at genomes of similar customers and identifying what they did next.

A similar genome analysis can help identify customers who could have the potential to be moved to a higher spend with the brand. This is important because there will always be some churn from among the Best Customers so creating a pipeline of future Best Customers becomes important.

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The Best Customers make up the head of the CLV curve. The bottom 50% or so of customers in most circumstances make a negative contribution to profitability. These ‘Test Customers’ make up the long tail. While the easy solution could be to think that a brand may be better off without these customers, it is not as simple as that. This is where Long Tail Marketing comes in.

We can think of the long tail of customers as comprising of one or all of the following:

  • The bottom 50% of customers
  • Leads who have not yet matured into customers
  • Offline customers who are unknown to the brand

Each requires a different strategy.

Here are some ideas for the bottom 50% of customers:

  • Generate more transactions and reduce service costs via ‘multiple and wide nets’
  • Possible segmentation: value customers (coupon/discount) or niche buyers
  • Capture additional data at time of (first) transaction
  • Use martech to ensure tech-led engagement to reduce service costs
  • Capture engagement data and work towards replica of BCG

For better conversion of leads (relevant for brands which are freemium, subscription-based or driven by 1-time purchases), Long Tail Marketing can be thought of as Conversion Rate Optimisation (CRO). Here are some ideas for leads:

  • Analyse past data to build Ideal Customer Profile (ICP) – which will be similar to BCG
  • Same BCG and VRM ideas are applicable by tweaking model
    • Customers 🡪 Leads
    • Transactions 🡪 Engagement
    • CLV 🡪 Lead Conversion Score
    • Best Customers 🡪 Ideal Leads

For the offline customers who are unknown to the brand, there needs to be an activation process by which these customers can identify themselves to the brand. This process necessarily is via an opt-in. It is even more important in the post-Covid world when brands will need to shrink their marketing budgets. An idea I had thought about many years ago is that of “invertising” – where customers invite advertising from brands into their lives. It is an idea worth revisiting in today’s context.

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Here are some excerpts from a post I had written in 2008 about the idea of “invertising” (invited advertising):

Let us think about marketing today. Companies advertise across multiple media to reach their target audience. Every time they have something new to tell their target segment, they re-advertise. Advertising is thus a continuous process. Media companies love this because they make money every time companies need to reach their audience. Some companies try and get past this by creating loyalty programmes and newsletters which they then send out regularly. Now, with an increasing number of users having mobiles, sending SMSes is another extension of the marketing campaign.

What is wrong with this picture?

First, the whole process of discovery and re-discovery. Existing media companies have little or no incentive to enable the creation of a relationship between the customer and the vendor – because that threatens their role as an intermediary. They want the customer to be ‘discovered’ via their media vehicle – each time.

Second, the lack of knowledge of what marketing works. In today’s media campaigns, it is not easy to track the actual impact on sales (or even customer footfall in the store). Internet-based campaigns do enable tracking – but that only works for online stores.

Third, the lack of an emotional connection. It has been said that marketing is a conversation with the customer. But hardly anyone seems to be doing this. There is no bond being created. The question a brand must ask: how can I become a daily utility in the life of my customers?

Fourth, there is no easy way for the customer to convert advertising that is seen into information that he wants. There are many occasions when customers want to stay updated on specific things, but businesses have no easy way of providing them that info. Newsletters can be done, but they are not personalised – and do not necessarily guarantee anonymity from the customer’s viewpoint.

Fifth, it does not take into account that pretty much everyone capable of buying has a mobile phone. Our estimate is that 80-90% of customers today are likely to carry a mobile phone. The mobile is a two-way interaction device, but companies are not using this appropriately.

Finally, the customer can be a champion, and facilitate viral marketing. The customer can be a connector – sharing things that are useful with others in the social network. This is because all of a customer’s contacts are accessible near instantly via the mobile phone’s contact book.

It is clear that marketing and business-to-customer interactions are likely to undergo a sea change in the coming years. In the developed world, perhaps the most important change in the past few years has been brought about by the Internet and pay-per-click (pay for performance) advertising. This advertising is contextual – either linked to search or the content on a page. In the UK, 12% of advertising spend is now being done online (the PC Web). In India, the same is unlikely to happen for two primary reasons: the computer penetration is still quite low (coupled with limited connectivity options), and the rapidity of innovation is making the mobile as the primary access device for people. Thus in India, the levers for shifts in marketing are likely to be centred around the mobile.

As we look ahead and address the limitations of today’s marketing methods, the mobile will emerge as the fulcrum for the new options. Companies which recognise and adopt mobile marketing are likely to see significant early benefits – and lock their competitors out in the customer attention game. Tomorrow’s world of mobile marketing is going to be built around three tenets:

  • Publish-Subscribe: Companies will publish and continuously update various information streams (think of them as ‘feeds’). Customers can subscribe to any of these streams and then receive updates as soon as new items are published on the feeds. Customers can also stop subscriptions to the feeds anytime. Publish-subscribe ensures a spam-free world for customers.
  • Multi-Modal Viewing: Customers can chose to view the content in any manner – via SMS, email, voice, desktop browser or mobile browser. The experience is seamless.
  • Instant Sharing: Customers can themselves become publishers, choosing to share what they have received with their social networks.

Taken together, the three will create the platform for seller relationship management (SRM) and invertising.

Invertising, appropriately modernised for the smartphone world, can be a very useful idea for getting customers to activate relationships with brands – and thus identify themselves to the brand. The unknown and anonymous customer becomes known and familiar. Brands now have a hotline to their customers – and can thus reduce the frequency of advertising for repeated purchases.

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We began this series with a simple premise: in the post-Covid world, Profit will become the fifth and most important P of marketing. Not just the CMO but every CxO will need to become the Chief Profitability Officer.

These timeless words by Peter Drucker reinforce the need for innovation in marketing: “Because the purpose of business is to create a customer, the business enterprise has two–and only two–basic functions: marketing and innovation. Marketing and innovation produce results; all the rest are costs. Marketing is the distinguishing, unique function of the business.”

A new set of marketing ideas can help drive profitability. The starting point for all these ideas is the customer data platform (CDP) – which collects customer data at every touchpoint and stores it for easy access, analysis and action for the marketer. By applying data science and determining Customer Lifetime Value (CLV) and mapping the Best Customer Genome (BCG), brands can enter the world of Velvet Rope Marketing (VRM) to maximise revenue from their Best Customers. This is the surest path to growing profits.

We also discussed two additional marketing approaches: Median Customer Marketing and Long Tail Marketing. Both can augment VRM to add incrementally to profits.

Here is an overview of the ideas discussed:

Profits are oxygen for a business. In the new world that is being created, companies that are on the path to profitability will be the winners. The new marketing ideas that we have discussed in this series can help businesses lay a solid foundation to emerge victorious in the new future. Are you ready to don the title of Chief Profitability Officer for your business?