Neal Freeland

Engineering/marketing manager, family guy. My personal blog with a few work thoughts mixed in.

Don’t just be a marketer, be a loyalty marketer

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The job of marketing is often defined as creating demand: communicate to a target audience the company’s value proposition, and bring in customers. It’s about sales. While this is certainly an important company goal, I prefer a more challenging definition: drive value for both the company and its customers. This more expansive definition of marketing, often called loyalty marketing, requires a complete understanding of how value is created and distributed among the participants in the company’s ecosystem. Here’s how we did it at Platrium.

1. Value creation in the Content Economy

Platrium’s vision was to create a vibrant Content Economy, supporting four groups: consumers, advertisers, content creators, and web site publishers. Platrium gave consumers free access to media content (like games, videos, and ways to personalize email) in exchange for downloading a toolbar. We then sold this audience to advertisers, and shared the resulting revenue with content creators and small web site publishers. In turn these publishers helped us grow our consumer audience. It was a virtuous circle for all the participants.

2. Value hierarchy

A vision of how value is created is great starting point, but to be useful for loyalty marketing it needs to be made really specific and detailed. To do this at Platrium, we created a hierarchy of value drivers, decomposing each key metric into sub-metrics, and then monitored them closely.

  • Audience Size. The primary driver of our business was the size and tenure of our consumer audience, measured by toolbar downloads. As we acquired and engaged more and more members, our business grew. We did this through our direct marketing efforts (D2C), a network of partners, the quality of our product experiences and the organic word of mouth they generated, and robust engagement efforts (including a rewards program) that reinforced the value of participation in these product experiences. We also closely tracked activity metrics that showed engagement and were correlated with longer lifetimes.
  • Monetization. The second driver was the revenue we generated per member. This depended on the quality and quantity of our advertising products, as well as the depth and quality of our advertisers.
  • Efficiency. The final driver was the efficiency by which we ran our consumer acquisition campaigns, the amount we paid for content, and the amount we shared with consumers via loyalty sweepstake prizes and charity campaigns.

Once we knew the value drivers, we needed a way to track how we were doing. The next three sections show how we did this: we created a value balance sheet and a value flow statement, and then implemented a regular process for tracking performance.

3. Value balance sheet

As noted above, the size and tenure of our audience was critical to driving value, so we needed to take stock of this asset. Here’s a simplified version of what we used. The actual reports tracked more acquisition channels and accounted for differences in geographical regions.

Our audience was so dynamic and relatively transient that we did not find it useful to track raw defections or churn rate. Instead, we focused on the size of our audience. But lifetime was still a key value driver, so we invented a metric called Lifetime Mass Index (LMI). Instead of looking at our entire audience, we looked at the members we acquired on a given day (a cohort), and tracked their retention over time. LMI was simply the sum of the area under the retention curve. We found that after just three days we had a pretty good idea of how the cohort would behave over its’ full 180 lifetime (we chose to end our value analyses after 180 days: many members remained longer than this but represented less than 10% additional value).

We could then pick a point in the cohort’s lifecycle (day 3 in our balance sheet), and track the performance over time. This enabled us to identify problems and see if our attempted solutions were effective in resolving.

Finally, on the balance sheet we tracked our spend acquiring new members and supporting our content creators. Since each install cost us money, it made sense to track it here, and this was a key input to finance.

4. Value flow statement

In a successful business value flows in two directions: from the company to customers, and from customers to the company. At Platrium, we tracked how active our members were with our offerings (our value to them), and how they were interacting with our advertising (their value to our advertisers and therefore to us).

For the value to members, we used Google Analytics to track several site metrics. We knew from custom studies by our business intelligence team that driving up activity resulted in longer lifetimes and higher revenue. We therefore tracked how much content – videos watched, games played – our members consumed, how often they visited us, and how long they stayed. We also promoted our content through engagement marketing offers, using internal tools to track how many members received our offers (reach), how often they received them (frequency, we didn’t want to overdo it and annoy them), and how compelling they found the offers (CTR, or click through rate).

For the value to the company, we used a detailed analysis called the Cycle Report (cycle was short for lifecycle). We took a full month’s cohort of new members, watched how they behaved for 20 days, and then used algorithms to predict what they’d do for the next 160 days. This allowed us to calculate the value of each new member, compare it to the cost (CPA, or cost per action, is industry term for what we paid a partner to send us a new member), and calculate our gross profit and gross margin. From the per unit economics it was relatively straightforward to scale up to business level view by multiplying by the volume of new members or installs.

The Cycle Report allowed us to track the return on our marketing efforts, and make sure that were always driving value for the company. We decomposed these metrics into very granular detail, looking at the return by partner, offer type, geography, channel, and brand. This allowed us to constantly fine tune our efforts by eliminating under-performing segments of the marketing mix and investing more heavily where performance was strong.

5. Process

The final step was to turn these reports into an ongoing process that would allow us to note important trends and take action as necessary. We set goals for all the metrics noted above, and put our bonuses on the line to meet them. Then we monitored our performance on the following rhythm:

Summary

Marketing can and should be more than just driving demand. The best marketers know that they are responsible for helping drive value for all the partners that participate in their company’s business ecosystem. Every business is different, but hopefully this case study can help drive some ideas on how to improve your business by using techniques from loyalty marketing.

Notes:

  • All data in this entry is illustrative. In other words, I made it up to help demonstrate the points.
  • For more on how to think like a Loyalty Marketer, try The Loyalty Effect by Frederick Reichheld. Though it was written in 1996, it’s still applicable as the Platrium case study shows.

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Written by nealfreeland

May 14, 2009 at 11:45 pm

Posted in Uncategorized

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