How to Keep It Simple in Data Driven Marketing
In data driven marketing, your customer profitability calculations aren’t intended to be used as a basis for your company’s annual report and SEC filings. Those are essentially legal documents and follow very strict accounting standards. The main purpose of customer-level profitability is to differentiate more profitable customers from less profitable ones. Doing so gives you some freedom to make simplifying assumptions. Simplicity yields stability and consistency over time.
One decision you have to make has to do with the time period you include in a profitability calculation. It doesn’t make any sense to try to calculate customer profitability based on short time periods. Daily or weekly calculations would bounce around from negative to positive based on what the customer is doing, or more likely not doing, on any given day.
The time period you settle on depends a great deal on the nature of your business and your data. In the case of banks, a monthly calculation based on information from monthly statements might be the shortest time period that is even practical for a profitability calculation. But even monthly calculations could turn out to bounce around quite a bit.
You want to track customer profitability over time. In order for profitability measures to be meaningful from one time period to the next, they need to be consistent. You want changes in customer profitability over time to reflect changes in customer behavior. You don’t want those changes to be artifacts of changes in cost allocations.
In many cases, the most useful profitability calculation reflects a whole calendar or fiscal year. One advantage of using a whole year is that it you eliminate fluctuations due to seasonal purchase patterns. Another is that it simplifies cost allocations that may fluctuate throughout the year as well.
Perhaps the biggest advantage is that you won’t be bouncing customers around from one marketing strategy to another based on short-term changes in profitability. A year lets you be consistent in your messages.