Fixing Marketers’ Profit & Loss Dilemma: Reactivate ‘Lapsed’ Customers
CMOs know the scenario all too well: The metrics offer irrefutable proof that digital advertising campaigns are working. Same with direct marketing campaigns. This is the kind of presentation they love to give. But more and more, the presentation is interrupted by the CEO asking, “Great, but then why do we have a flat (or shrinking) bottom line?”
This dilemma has CEOs and marketers rethinking how they let profit-and-loss statements guide their marketing and their customer relationships. Some are realizing that it is a dated, inflexible approach that is costing their organization dearly at a time when they can least afford it.
The mission is to grow the businesses’ portfolio of active customers that make purchases and contribute revenue. What is an active customer? Most brands say it’s anyone who has purchased in the last 12 months, a benchmark they use to report progress to stakeholders and shareholders every year. But portfolio revenue isn’t getting bigger as they keep scooping up new customers; in many cases, it is shrinking.
The culprit? There are too many lapsed—but rescuable—customers escaping without being noticed, ignored by the business’s P&L statement.
The P&L Dilemma
The standard P&L sheet makes no mention of customer metrics. We use customer metrics to measure and optimize our digital advertising and direct marketing efforts, but there is no visible connection to the P&L. So as marketers put more money into acquisition tools like advertising, digital ads, paid search, and Facebook ads, the metrics state that it’s working.
They spend less money on direct marketing and CRM to engage existing customers. And because of constrained budgets, direct marketers are forced into a narrow focus related to the customers they market to. They spend the least amount of money and attention on growing and reactivating customers they already have. Customers that fail to purchase within 12 months are dropped from marketing lists and simply fade away, as does the incremental revenue they represent.
Traditional direct marketing metrics like Return on Ad Spend (ROAS) drive the marketer to buyers who are already most likely to buy again when they really need to go deeper into the house file.
What if marketers adjusted their metrics to emphasize incremental revenue and growing active customer counts across the buying life cycle? Combined with incremental revenue metrics, ROAS can still be helpful in terms of keeping marketing efforts profitable.
Let’s say they know that anything better than 3x ROAS is profitable. Marketers can reset their ROAS number, test going deeper into the inactive house file, and aim for a 5x instead of 8x ROAS. Testing these so-called inactive customer segments will help grow incremental revenue.
Customers aren’t obliged to buy every 12 months. It’s time to move this arbitrary line in the sand to market to more customers that have purchased before.
Metrics That Matter
Marketers are starting to smarten up, though, turning to metrics that make them step back from their spiraling acquisition costs.
Take acquisition through paid search. One brand thought they were mostly reaching new customers, but when they matched back to their database, 65 percent were existing customers.
Because the house file is not linked to the digital side, the brand treats existing customers the same as prospective customers, targeting them with digital advertising and retargeting. Since 90 percent of retail purchases are still in brick-and-mortar stores, many of these customers have already purchased in the store. More money wasted, more customers alienated, and no increase to revenue.
Meanwhile, executives demand more revenue and marketers respond by banging away harder to sell more, do more, etc., etc.
These marketers don’t have the right tools. Without the right metrics, the problem is not yet in focus. They’re scratching their heads because they have campaign-level metrics like response and conversion rates, and that’s great—the tests are all working. But the CEO is still saying there’s no revenue gain.
Reversing this trend demands that marketers focus on incrementality with metrics like active customer counts, revenue per customer, average order value, lag time—dynamic information gleaned from expanded customer journeys and life cycle campaigns. They need to create bigger reactivation “win-back” programs that don’t stop soon after a customer’s purchase anniversary.
Redefining Active Customers
Marketers are giving up on customers too soon because of ancient accounting rules. If a 2017 customer skipped buying in 2018, try to win them back in 2019. With the right data and customer profile, you can see if the culprit was life changes, different patterns, college tuition, or a host of other factors.
It’s cheaper to drive repeat purchase behavior than it is to continuously acquire new customers. The only solution is to expand the definition of active customers, then use a single customer view of them all to better market to their timing and motivation.
It’s time to challenge the revenue model’s “buy within a year or you’re dead to me” dictate, especially now that marketers can look at metrics to understand what it means to move someone through the life cycle and retain them. That’s where they will find incremental revenue. And that’s what it will take to fix marketers/ profit & loss dilemma in 2019.
Augie MacCurrach is the CEO of Boston-based Customer Portfolios, a marketing technology leader that uses insight and analytics to increase customer value. You can follow Customer Portfolios at @CustPortfolios on Twitter.