Pareto Rules

The Netflix Paradox: Are loyal customers sinking your stock?

What happens when some loyal customers actually turn out to be a drain on corporate profits? That was the situation Netflix was facing. Heavy renters — those $17.99/month subscribers who ordered upwards of two-dozen DVDs per month — were causing the company to lose money. It’s not hard to fathom, considering that postage alone costs 78 cents per DVD.

Okay, I admit that the loyal-customers-don't-always-equal-profitable-customers argument isn't entirely new. A number of business thinkers — notably, Larry Selden and Geoffrey Colvin in their 2003 book Angel Customers and Demon Customers — have done a reasonably good job of articulating the issue. Nonetheless, it's one that the loyalty marketing enthusiasts still often tend to overlook in their incessant efforts to "lock in" any and all customers.

Besides, I figure it's always a good thing if you can take a conceptual idea and frame it in the context of real business. The Netflix story provided such an opportunity, and I think it helps bring the topic to life.

In this article, I also explain why customer value measurement is easier said than done when it comes to multi-channel, multi-product enterprises. And I touch on the role of customer data integration and analytics in determining customer profitability.

Important stuff for any company that doesn't seek to establish a charitable arm for unprofitable customers.

When precision marketing meets product placement

"Firewall," a universally-panned thriller about a bank security expert who goes ballistic after his family is kidnapped by a criminal mastermind, opens today in theaters everywhere. I, for one, can hardly wait to see it.

It’s not that I’m a huge Harrison Ford fan (poor guy hasn’t had a decent role since he hung up Jack Ryan’s CIA badge) or that I’m in the habit of knowingly subjecting myself to formulaic, dull-witted action flicks (although I’m also not nearly as discerning as I should be, considering the half million or so DVD titles available from my online rental service).

Instead, my keen interest in "Firewall" relates to the performance of the movie’s other bonafide star, and perhaps its most riveting character: the Chrysler S300.

You’ve probably seen the magazine ad, with Harrison Ford featured alongside his four-wheeled, 340-horsepower buddy movie co-star. Of course, it’s hardly the first time the forces of product placement and branded entertainment have catapulted a car to such cinematic heights. Other examples that come readily to mind include "The Italian Job"’s Mini Cooper and "Minority Report"’s Lexus convertible, a futuristic car that, with the movie set in the year 2054, isn't scheduled to roll into a dealership for almost fifty years. (Maybe the idea is to start saving now to buy it for your great-grandchild.)

The magazine ad for "Firewall" points readers to a Chrysler-hosted landing page. There they can access movie-related content, including trailers. Or better yet, from Chrysler’s perspective, they can advance to the C300 microsite, where they can view photos of different car models, compare specs and download brochures. Everything but test-drive.

The online component of this integrated campaign is notable only in that it’s completely unimpressive. There’s no exclusive content that might compel anyone to visit more than once nor any interactive features to customize the experience. Not even a “tell a friend” viral utility. The mediocrity of the site is surprising, considering what the print ads must’ve cost.

Anyway, the offline-to-online campaign for "Firewall" prompted me to give some thought to how precision marketing might be used in the context of movie product placement to measure outcomes in terms of actual revenue growth, and even track consumer interest (and purchases!) at an individual level. Cristel Russell, a professor at San Diego State University who has done extensive research on the topic, told me the industry still lacks suitable methods for determining ROI, so it seems there's plenty of opportunity for improvement.

One idea was sparked by my last visit to Fandango. (By the way, am I the only one who despises those brown paper bag puppets?). I received a pop-up stating: “Hollywood wants to hear from you!” and an invitation to take "a brief online survey about one of the movies you may be considering for this weekend.” The pop-up asked for my e-mail address, the name of the movie I’m likely to see ("Firewall," of course), and a promise that I’d receive an e-mail link to the survey shortly after seeing the movie on the day I selected.

Fandango Research Services promises not to share my e-mail. But maybe I’d be okay with them sharing it with some of the brands that appear in the movie, provided I indicate an interest in learning more about those particular products or services - or if I tell 'em I’d be willing to receive product info in exchange for free movie passes or some other incentive.   

By partnering with brands that participate in product placement, online ticket services (as well, for that matter, as DVD rental services) could enable companies to precision market to consumers who actually saw the movies. For all I know, it’s already in the process of happening (although the Fandango survey would only ask me questions about which trailers I recalled, which of those movies I'd likely see, and whether I'd recommend "Firewall" to a friend; nothing about the brands that showed up in the movie). In any case, it’s bound to happen long before that Lexus goes on sale.

Inviting "math geeks" to the marketing table

I was a liberal arts student. Never a math whiz. Algebra and calculus weren’t my thing. That’s why a career in marketing held a certain appeal. After all, marketing is all about creative selling. Right? It’s all about what Phil Kotler (who kindly wrote the foreword to my last book) called the "Four Ps": Product, Price, Promotion and Place.

Sure, I could see that determining the optimal price for a product or service might involve some quant skills beyond the multiplication table. But I could handle all the other Ps. These were right-brain activities. No need for a scientific calculator when all you’re trying to do is brainstorm creative ways to make potential customers aware of the benefits of whatever it is you’re trying to get them to buy.

Fast forward to today - and forget about marketing being a “soft skill”. Today marketing is starting to feel more like mechanical engineering. According to last week’s Businessweek cover story, "companies are hitching mathematics to business in ways that would have seemed fanciful even a few years ago.” That definitely includes the marketing function.

I saw it coming. It's one of the reasons I joined Fair Isaac, which is bursting at the seams with Ph.D. statisticians immersed in genetic algorithms, neural networks and predictive models. No wonder the company is leading the charge on next-generation marketing.

Of course, some people continue to view marketing as an art, pure and simple. Wrapping it in the cloak of mathematics, they say, is to suffocate the whole creative process. To which I say: hogwash. The creative spark that drives the process ought to be met at every turn with fact-based decision-making. There’s no way around it, given the pressures of the marketplace and the benefits of the “scientific approach” in terms of increased marketing effectiveness.

True, by treating marketing as an art, companies can achieve the Super Bowl ad ideas we saw yesterday that sometimes capture the popular imagination. The problem is that when the art drives the allocation decisions, you’re probably not spending the money where you need it most.

Ideally, science should empower the art. Campaigns should combine the science of modeling, segmentation and analytics with the art of branding and creative development. The right brain and left brain should work in tandem. By marrying their creative endeavors with the reality of business economics, marketers can make sure they’re targeting the right individuals with the right messages.

As the Businessweek article notes, the “rising flows of data give companies the intelligence to home in on the individual customer.” It talks about how Harrah's Entertainment has built millions of individual customer profiles - which include gamblers' ages, gender, and Zip codes, as well as the amount of time they spent gambling and how much they won or lost. The data enables Harrah's "to study gambling through a host of variables and to target individuals with offers, from getaway weekends to gourmet dining, calculated to maximize returns. In the last five years, Harrah's has averaged 22% annual growth, and its stock has nearly tripled.”

Harrah’s was smart to place its bets on the power of customer data.

By the way, the "4 Ps" still matter. But just as important are what I call the "4 Rs": Right Customer, Right Message / Product, Right Channel, Right Point in Time. Of course, this new Holy Grail of marketing has already become something of a cliché. But like most clichés, it holds an awful lot of truth.

It's sort of like the movie "Crash"

With Oscar season upon us (my pick for Best Picture is “Crash”), there's no better time to recall the words of Jack Valenti, who retired last year as head of The Motion Picture Association of America--although they're probably not the words for which he would hope to be remembered.

The year was 1982. Standing before the House of Representatives, Mr. Valenti was providing testimony on why the VCR should be made illegal.

“I say to you that the VCR is to the American film producer and the American public as the Boston Strangler is to the woman home alone,” he exclaimed, referring to the serial killer who dominated the news that summer. He called the VCR an "avalanche" and a "tidal wave". He said it would cause the film industry "to bleed and hemorrhage". 

Of course, as we now know, Mr. Valenti’s fears were misplaced. His dire prediction--that audiences would no longer flock to the movie theaters--failed to materialize. In fact, the number of theaters has more than doubled over the past two decades. Rather than render the movie theater business obsolete, the VCR created a new market that complemented it, by giving people alternative viewing occasions.

Turns out that new technologies often become complements, not substitutes, to old technologies. The conventional oven and the microwave. Landline phones and cell phones. Analog watches and digital watches.

Mass marketing and precision marketing.

As the long-reigning approach for attracting and retaining customers, mass marketing correlates to the old technology. Precision marketing, on the other hand, is the new technology. And indeed, "real" precision marketing is predicated on the convergence of several new technologies, including dynamic survey engines, rules-based decision management solutions and campaign management tools.

Precision marketing will never replace mass marketing, despite the predictions of some pundits. And the online channel will never replace the mass media channel. Instead, to maximize value, the different channels should work hand in hand, each doing what it does best.

Consider the new Mercedes 2007 “S” Class campaign. While the 30-second spots, including one that aired following President Bush’s State of the Union Address on Tuesday, aim to raise brand awareness, the campaign boasts an equally strong print and online component - e.g., a microsite that provides a tour of the new S550 and an "online portfolio" to save info about the vehicles you configure and modify.

Okay, forget about luxury cars. What about consumer packaged goods? Do people really want to have an online relationship with products as mundane as, say, ketchup, paper towels and diet sodas? In fact, a recent report by Forrester Research indicates that more than half of all consumers visited a CPG website last year - to enter a contest, print a coupon or get product info. Or, in some cases, to access exclusive content and be part of a virtual community.

According to Gartner, 65% of all business-to-consumer relationships involve three or more channels.

It’s sort of like the movie “Crash”. Multiple storylines, each one delivering a different stand-alone experence. But in the end they all come together to tell a coherent story.

Getting scientific about marketing improvement

That annual event known as the science fair happens today at my kids’ elementary school. The gym is crowded with tables strewn with experiments (volcanoes are always popular). Poster boards explain each experiment’s hypothesis, the process for testing the hypothesis, and the final results attained.

It’s all about the “scientific method.”

Kids get it. Most marketers, on the other hand, have yet to fully embrace the scientific method. Instead, they stand around their whiteboards and play out hypothetical scenarios by making gross assumptions about TV-versus-radio-versus-print-versus-website marketing responsiveness. Rarely are these assumptions steeped in the kind of deep, scientific understanding that can be derived only from the integration and analysis of all available data.

At what point does an incremental dollar spent on TV advertising become less effective than an incremental dollar spent on other types of advertising? At times, it’s anybody’s guess.

This view was validated last April in a survey conducted by the Association of National Advertisers. Consider the fact that 61.5 percent of respondents said it was important to them to define, measure and take concrete steps in the area of advertising accountability. But only 19 percent said they were satisfied with their ability to take those steps. Meanwhile, 73 percent of respondents were NOT confident that they understood the effects that an advertising or marketing campaign could have on sales.

Stuart Elliott, advertising columnist of the New York Times, has reported on this topic extensively. In today’s issue, he writes about how some TV ads are getting an afterlife on websites. “With the fragmentation of media outlets, segmentation of audiences and shrinking ad budgets," he writes, "marketers are increasingly determined to get their money's worth.” This is particularly true when ads cost $83,000 a second, as is the case with Super Bowl XL. I guess making the spots assessible on the Web helps marketers rationalize the expense as something more than just a one-shot deal.

To be fair, the scientific method goes only so far when brand awareness is the name of the game. It's a different story, however, when it comes to direct-to-consumer marketing programs, where little things like "incremental sales lift" can be readily measured. Yet, even database marketers running interactive campaigns still tend to operate on an intuitive, ad hoc, see-what-sticks basis.

Isn't it high time marketers get serious about the scientific method - which, after all, dates to the Renaissance? Sir Francis Bacon described it as the development of a hypothesis, the design of experiments to test it, the analysis of the results and the subsequent rethinking of the original thesis. In the 1950s, W. Edwards Deming argued that companies could achieve better quality control by recording the number of product defects, analyzing why they happened, instituting changes, recording how much quality improved, and then refining the process.

When it comes to precision marketing, the four stages--now commonly known as the Plan-Do-Check-Act cycle--go something like this: 1. Collect customer data; 2. Segment customer profiles; 3. Execute, by delivering targeted messages and offers; 4. Measure effectiveness and refine the process for the next go-round. I wrote a white paper about this conceptual framework - the Precision Marketing Cycle - for Marketing Advocate (registration required).

Anyway, it's good to see kids talking about the scientific method. Maybe they'll grow up to become great marketers.