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In order to develop Customer Intelligence, a business needs to be able to measure its
performance in the maintenance of profitable customer relationships. Customer intelligence
attempts to define customer behaviour and then look for variances in that behaviour. The
business rules which apply to the Customer relationship, need to be defined first. Based on these
rules relevant measurements & goals can be defined. Therefore, a business needs to
systematically answer the following questions:

When is a party (an individual or a business) considered a prospect ? (define the sales pipeline
stages for each Customer segment, e.g. lead, prospect, stage at which a proposal is submitted, an
order is placed etc).

When is a party a new customer ? (1 order, after 2 orders ?)

Which is the Customer lifecycle ? Which events mark stages of the lifecycle (1st order, 2nd order,
service call, billing inquiry, complaint, etc) ?

When is a party no longer a Customer ± when is the Customer lifecycle ended ?

What is a Customer LifeCycle? Customers begin interacting with a business, and over time,
either decide to continue this interaction, or end it. At any point in this LifeCycle, the Customer
is either becoming more or less likely to continue interacting.

If data from these interactions are captured (purchases, visits, complaints etc.) this data can be
used to predict where the Customer is in their LifeCycle. By predicting that, one can focus on
Customers most likely to buy, and try to "save" valuable (or profitable) Customers who have
declining interest (an info-driven focused approach), instead of wasting money on Customers
unlikely to continue interacting (µblind¶ unfocused approach).

In many cases the answer to the above questions (business rule definitions) is not so simple. How
can one be sure that a Customer is no longer a Customer, in the retail market. In subscription
based service markets the answer is probably easier to give: a party is a Customer, as long as a
subscription to a service is active.

Concepts like latency, recency, RFM (recency - frequency - monetary value) are applied many
decades, in order to identify the active Customers and achieve higher response rates to the
Customer retention & loyalty efforts.

In order to apply these techniques, one has to develop a database which stores all Customer
contact history on all channels (or CTPs ± Customer touch points).


Latency refers to the average time between Customer activity events (e.g. orders, use of services,
visit on web sites). There are alternative ways to estimate the average time between events in
order to determine latency. For example if one has captured the dates of a Customer¶s orders,
she/he can derive the intervals between orders:

Time between 1st & 2nd order : 70 days

Time between 2nd & 3rd order : 50 days,

latency can be determined to be 60 days (the average time between orders in this sequence of
three orders).

The trend in µtime between events¶, can also be analysed in order to evaluate the dynamics of a
Customer¶s behavior. An increasing µtime between orders or web visits¶ is not a good sign (this
type of analysis is equivalent to frequency analysis which shall be described below).

On the other hand if the event is related to customer dissatisfaction (e.g complaints), increasing
µtime between complaints ¶ is a good sign.

How can latency be used to develop a simple customer retention program. One has to estimate
latency for a Customer group and then measure the days since last event for each customer in
that group. When this measurement reaches the latency estimate or exceeds it for a specific
Customer, one has to act in order to influence that Customer¶s behavior. By offering a discount,
this Customer is encouraged to continue interacting with the business.

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It has been proven in practise that there is a recency effect in Human behaviour (relevant
theoretical studies have been performed in the past but the empirical evidence is also sufficient).
This effect viewed in the Customer behaviour analysis field, leads to the following concept:

The more recently a Customer has ordered a product or used a service from a certain Business,
the more likely it is she/he will purchase a product or use a service again from that Business.

In other words, Customers who have transacted with a Business recently are more likely to
transact with it again, than Customers who have transacted with that Business less recently.

The recency metric is defined as the number of days/weeks/months (the scale is relevant to the
business/product), since the last transaction occurred.

Central in this analysis is the dimension of time. µHow long since a Customer event happened¶, is
key to understand past and predict future customer behaviour. However the exact scale of time
which is relevant in each business/product has to be identified (e.g. in retail sales a second
purchase may take place a few months after the first purchase, while in the credit card or telecom
services, usage is expected to be quite frequent (almost every day)).
If the Customer Lifecycle is understood (for a specific Business / product), the recency effect can
be used to produce actionable ideas. Customer contact history can be used to identify standard
Customer lifecycle stages (identify types of milestone events, stages and average stage duration).

Given that a relatively more recent Customer is more likely to buy again, than a less recent one,
the former has relatively higher Customer value. This is strictly true if we compare Customers of
similar purchase value. We notice here the fact that we reach a comparative conclusion.

Recency is widely acknowledged as the most powerful predictor of future behaviour (85
thousand results on µall words included¶ search on µrecency predictor of future behaviour¶ June
2006).

The future behavior under analysis may be any of the following:

Subscriptions to services, purchases, usage of services, visits, complaints

In order to perform a simple recency analysis, you have to divide the recent past in few (2 or 3)
time periods. Each period should be relevant to the estimated lifecycle stage duration ( e.g.
estimated average time between 1st and 2nd purchase).

Example of a recency diagram analysis is shown in the  . We consider two Businesses in


the same market and for the same product. This product has similar Customer Lifecycles,
therefore recency periods also. Three non-overlapping periods are defined. Period 1 is the most
recent, while period 3 is the least recent.

We notice that Company B has a small percentage of total Customers in recency period 1, while
most are in period 3. This is a bad sign for Company B. Company B should take action
immediately to try to retain the less recent customers (e.g. period 2) with focused but aggressive
promotional strategy.

On the other hand, Company A has high recency in the majority of its customers. This means
that most Customers are likely to repeat purchases, and this is a sign of a very healthy Company.

Applications of recency analysis are:

p Customer retention programs (identify groups with decreased purchasing recency or


identify groups with very recent complaints)

p In a large product portfolio, identify products which achieve high customer loyalty
(high recency according to the defined cycle) and products that do not

p Management & optimization of campaign plans (adapt offers according to recency


groups e.g. with a discount ladder)

p Identify campaign response rates per used recency group, in a test campaign
p Adjust estimation of Customer value ranking, according to recency

p Identification of high value Customers

Recency concepts are applied in TV shopping or on-line shopping (e.g. on Amazon.com when
you buy one book, a message appears saying µIf you make a second order within 90 minutes
order shipment will be combined¶)

The concept of recency and its uses have only meaning and business value when adopted to the
specific context of a business and its products.

Recency metrics differ, since different products have different characteristics (customer
lifecycles, comparative product price (monetary value)). In order to analyse Customer value for
all products, more complex metrics are needed (see RFM).

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RFM is a technique analysing the three dimensions of Customer activity:

p Recency: when was the last customer interaction

p Frequency: how frequent was the Customer in its interactions with the business

p Monetary value of the interactions

The sort of interaction (or Customer contact event) can vary according to the market and the
analysis goals. Usually it involves Customer orders or service usage (e.g. usage of a credit card,
usage of telecom services), but it can also involve faults, complaints, web site visits, registration
to services, or any other event of importance to the business.

The RFM concept is the following:

p Customers who ordered recently are more likely to order again than those who ordered
in a less recent period

p Customers who ordered frequently are more likely to order again than those who
ordered less frequently

p Customers who ordered a higher monetary value (spent more) are more likely to order
again than those who ordered a lower monetary value,

and it has been tested heavily in the catalog businesses.

Recency, frequency and monetary value, form the basis of database marketing.
Frequency is often a powerful predictor of response, but it is seldom as powerful as Recency.
Recency is the most powerful predictor and the easiest to define. Many direct marketers segment
Customers, based solely on recency scoring. The sequence R-F-M reflects a decreasing series of
prediction power.

There may be alternative ways to measure frequency. One should test alternative measures to
figure out which is best suited. This can be done by testing the response on these alternatives.

Recency enables the prediction of future value, while frequency and monetary value enable the
estimation of the current value. The combination of the 3 dimensions (RFM) allows the
combined analysis of current and future Customer value.

In cases, where there is no monetary value attached to an interaction (e.g. a web visit or a
complaint), the analysis may be limited to recency & frequency (RF analysis).

The higher the RFM score, the more probable it is for a Customer to respond to a marketing
program. This fact has been clearly confirmed in practice.

Why is this fact actionable ? Because if one classifies Customers to groups according to the RFM
score, she/he can expect each distinct RFM group to have substantially different response to an
offer, from the rest (especially if the number of groups is limited). Therefore she/he can focus
only on certain Customer groups which are expected to respond highly, or adjust the offering in a
way to achieve high response from many targeted groups. This can be achieved by offering a
more attractive deal (e.g. a higher discount) to the lower RFM (or RF) groups (which are less
likely to respond), than to the higher RFM group(s), in order to achieve a satisfactory response
from more than one group.

An approach to use the RFM technique in the context of a Customer retention or value building
campaign, is the following:

1.Ê Classify Customers to 5 categories (quantiles) (or 10 (deciles) according to the available
budget) for each of the 3 dimensions R F M (or RF for less complexity ± the predictive
power of M is covered by F in many cases). This 3-dimensional classification creates a
number Customer groups (e.g. 125 RFM cells when using quantiles). The three scores
should be captured in a compound code, from which each dimension score could be
easily derived (e.g. a Customer classified in the top quantile in all three dimensions gets a
5-5-5 RFM score). According to the RFM concept, each category would have a different
response rate in a proposal.
2.Ê Conduct a test campaign on Customer samples (control groups) of all or selected
categories, in order to calculate the expected response rate of each category.
3.Ê Based on the findings of the test campaign (the response rate per RFM group), shape the
campaign and the relevant offering (e.g. discounts) to the selected RFM (or RF) cells, in
order to achieve maximum campaign effectiveness (Customer response).

The use of quantiles which are 5 Customer groups of equal size (group size is defined by
dividing the total number of customers by 5), is somehow compatible to the Pareto principle
(often called the 80/20 principle: 20% of customers produce 80% of the revenue of a business).
However this method creates arbitrary cutoffs on percentages of Customers. Customer with same
behavior (e.g. a single purchase may exceed 20% of total and be classified in different groups).
An alternative method groups Customers by similar behavior (e.g. all Customers with 3 orders
are grouped together)

The trend in RFM scoring of Customers can signal changes in their level of dissatisfaction.
Therefore RFM scoring can be used to target Customers, about to stop activity.

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Customers with systematically higher RFM scoring (measured in orders, or service usage events)
are the higher value Customers. Therefore RFM can be used as a comparative ranking of the
value of Customers, which is much easier to estimate than the absolute Customer Lifetime value.
This is an important finding since the Business only needs to know which is the Classification of
Customers according to their value (group of best Customers, second best group, etc), in order to
try to retain the profitable Customers. The estimation of the absolute Customer Lifetime Value,
would not produce any additional business value (well, this is not absolute correct, since the
absolute value could be used as an indicator to the money limit spent to retain each Customer).

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Recency can be monitored by producing a report depicting:

Subscribers sorted by last event date / per segment / per service or package / per CTP on which
the event took place / geography / per type of event (Telecoms: order, service call, complaint)
(banking: new deposit, new loan)

Frequency can be monitored by producing a report depicting:

pÊ Subscribers sorted by number of usage events (CDR or IPUDR (in telco), banking: credit
card usage) in a given period
pÊ Monetary value can be monitored by producing a report depicting subscribers sorted by
revenue produced in the same given period

The selection of suitable measurements for recency & frequency, is not always obvious, as can
be seen in the case of continuity services (e.g. a telephone subscription is used every day,
therefore µlast time used¶ cannot normally be the basis for a recency measurement). Moreover
the selection of the appropriate division of time into recency time periods, can affect the
effectiveness of the prediction (it is related to the Customer lifecycle).

Any R or F measurement can be tested on its validity, with a test campaign. The best
measurement is the one that produces the best response rate prediction and substantially
differentiates response rates between most quintiles.
The application of RFM techniques can focus on specific business goals. For example a telecom
business trying to defend its share of international calls, should monitor all international call
events and based on this information produce RFM (or RF) scoring per subscriber on these
events. The reduced recency (last international call event) and/or frequency (number of
international call events in the last period) and/ or monetary value (total charge of international
call events in the last period) score of a Customer, should alert the business to try to steer the
relevant behaviour of that Customer towards the desirable direction (more international calls).

RF analysis can also be used in an effort to predict & proactively reduce an undesirable
Customer behaviour (e.g. reduce complaints by making a value proposition to a Customer with
high RF or R ranking in complaints). Higher RF in complaints means higher levels of Customer
dissatisfaction.