My brother Ryan and his wife Monica were in town from LA for Memorial Day weekend. We took the kids to EMP today to see the Jim Henson exhibit. They loved the stage and puppets.

Watch out for this video - very addictive song.

It's been a wet and windy start to the race season: with winds over 20 knots we got 1160 (our sail number) up to 12.1 knots boat speed, planing like crazy and throwing such much water up it was hard to see.

Starting to plane...

One of our fleet's best sailors dumps just behind us as we approach the leeward mark and start to douse the 'chute.

Rounding the leeward mark

Thanks to Bruce Sherman for the photos.

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.

Marketing for online businesses often feels like trying to fill a bucket with a hole in the bottom: new customers come in, but at the same time old ones leave. Many days it feels like no progress is being made. Even Twitter, with incredible viral growth powered by free promotion from celebrities like Ashton Kutcher and Oprah Winfrey, has a retention problem. According to a recent Nielson study, an astonishing 60% of Twitter users do not return the following month, a group Nielson calls the “Twitter Quitters.” The typical response from marketing when faced with low retention is often to increase acquisition efforts to replace the customers who leave. But when faced with a leaky bucket, instead of pouring in more water wouldn’t it make sense to at least plug a few of the holes?

They best way to solve a retention problem is to think about the end to end customer experience. Acquiring a new customer is not the finish line of marketing, it’s the starting line. What happens after acquisition is really critical to creating long term relationships with customers.

In my marketing experience, we’ve used a simple framework – we call if Lifecycle Marketing – to guide our engagement marketing efforts. We don’t just have “users” (the typical industry term) of our products. Rather, we think about helping to create active members of a community, and look for ways to guide them through the process of becoming more involved and vested in their community. We do this as follows:

• Identify member segments. It is important to have as much data as possible. Generally behavioral data is most valuable as it is concrete and actionable. Try to find activities that predict loyalty: members who watch a video, send an email, or invite a friend usually have longer lifetimes and create more revenue than those who don’t. Here’s a simple version of a segmentation framework:

 

As your marketing efforts expand, these segments can be made richer and encompass more detail about member activity. For example, gaming businesses might find it makes sense to distinguish between core and casual gamers, or within core between war gamers and sports gamers.

• Engage each segment. Each segment is assigned specific, targeted actions designed to drive deeper levels of engagement and membership. In executing these actions, there are three considerations: first, it’s important to develop content and offers that match the member segment. For new members this might simply be a checklist of three things they should do right away, or for loyal members it could be a sweepstakes offer with clear call to sign up for an additional service. Next, content and offers must be communicated effectively and as widely as possible, using email, blogging, web site promotion, or contextual hooks in the product itself. Members have different preferences for receiving information, and repetition of a message is valuable to drive action. Finally, seek ways to communicate interactively with members. Don’t just broadcast your messages, get out where your members are active and collaborate with them.
• Learn and improve. When starting engagement marketing programs, don’t try to be perfect. Instead, be open to learning. The best way to learn is to try lots of different types of offers and content, and allow feedback (via activity data) from your members to determine which ones work best. While retention rates are critical, they are an outcome of driving increased activity, so be sure to look at all the steps leading to more activity. Then draw lessons from those successes and create a list of best practices to guide future program development. Remember to keep a control group (~10% of total members) which receives no marketing treatments so you can measure lift and calculate the return on your investment. And once you think your programs are all set, go back and review the lifecycle all over again.

Following these basic guidelines of Lifecycle Marketing will help drive deeper engagement with your product. Since engaged members are loyal members, revenue will improve and the positive word of mouth will lower acquisition costs, creating a virtuous cycle for your marketing efforts.