When most organizations think of CRM, they think of Sales Force Automation. Looking beyond the tactical sales force management side of CRM, strategic CRM can establish practices for optimizing investment across the customer base considering different values and preferred contact channels for each customer.

A basic, but often overlooked, benefit of CRM is to measure and monitor the size and potential of the customer base as a strategic corporate asset. Yet it is surprising that many companies, while embracing CRM, do not have an application or tool in place for monitoring their most valuable asset: customer inventory. This is where customer migration models have proven to play a valuable role.

Customer migration models (or name flow models) are applications that provide a systematic, recurring view of the size and potential of the customer asset or inventory. The following diagram shows customer flows that would be monitored in a model consisting of 6 strategic customer segments:

The segments shown above represent a straightforward segmentation based on recency. These segments differentiate well in terms of value and sales potential. Let’s review:

• New-To-File Prospects and New-To-File Buyers are customers identified for the first time through either a buy or non-buy activity.
• One-Year Buyers are customers that purchased within the 12 months; this is usually the highest value segment.
• Two-Year Buyers purchased 13 to 24 months prior. This group is also referred to as lapsed customers.
• Three-Plus-Year Buyers are often also referred to as lapsed customers.
• Prospects are customers that are in the customer file but have never purchased.

Even a simple 6-segment model that represents the entire customer universe like the one shown can be very powerful as a strategic planning and forecasting tool. If customer segments are underperforming or exceeding expectations, they will have a corresponding impact on sales. Sales goals will reconcile with the performance of each segment; this reconciliation is very useful for pressure testing any forecast or strategic plan. Assigning accountability for forecasting and monitoring each segment makes the model even more effective as a planning tool.

There are several other powerful aspects of these customer based planning models. The entire starting customer inventory for the next period can be calculated by segment based on the purchase rate for each segment. This new inventory then becomes the source of demand for the next year when combined with an estimate for new-to-file customers. Using this over several years turns the model to into a multi-year strategic planning tool based on managing performance at the customer segment level.

Breaking the performance period into the key metrics that drive demand brings a cross-functional aspect to migration models. Sales is a function of 5 major components as shown in the formula below:

Sales = Beginning of period customer count x purchase rate (unique buyers divided by beginning of period customer count) x orders per purchaser during the performance period x units per order x average unit value

Many functional areas of the company can impact these core drivers of demand. For example, marketing can influence purchase rate by increasing marketing spend. Pricing strategy can impact average unit value. Discount and special offers like free shipping can affect purchase rate and units per order among others. New product introductions can also impact purchase rate.

Functional areas of the company should provide input into the planning process on how their area will affect each of the five core metrics. An experienced marketing manager can look at any one of the core drivers of demand and derive an unreasonable assumption quickly. Without an ongoing migration model integrated into the planning process, this opportunity may not exist and forecast accuracy suffers.

The example used in this discussion only has six customer segments. It is likely, in practice, there will be a desire to subdivide these by other dimensions. The ones that get implemented will depend on the specific characteristics of the company, but common candidates are:

• Rewards or loyalty card members vs. non-members
• Retail only vs. direct only vs. retail and direct customers
• More defined recency breaks
• One-time customers vs. multi-frequency customers
• Affinity clusters

Keep in mind: simply subdividing the original 6 segments by loyalty card members vs. non-members doubles the number of segments. The application can suffer if it is made overly complex by creating too many segments. Complexity does not equate to accuracy or usefulness; it can actually hurt adoption of the model and the ability of a marketing manager to apply their intuition and judgment as they test the forecasts produced by the model. As a general rule of thumb it is good to limit the number of segments to 25 or less.

Summary

A customer migration model (or name flow model) is a fundamental strategic planning tool for CRM providing a multi-year view. Settling on a manageable number of segments is important for keeping the model understandable and being able to apply judgment. A general rule of thumb is to limit the number of segments to 25 or less. A migration model is a valuable tool for pressure testing forecasts and strategic plans when integrated into the formal planning process. It also serves as a framework for assigning accountabilities to achieve growth and profitability goals in a customer focused organization.

About Dick Hodges

Dick Hodges serves as VP, Customer Insight Solutions at Clario Analytics. He has over 20 years experience on the business side in database marketing and has implemented migration models for a number of companies. He has been a returning lecturer on CRM topics for MBA programs at Boston College, Dartmouth and MIT. He has also served as an adjunct professor of CRM for the Boston College Carroll School of Management MBA program.