Divorce From Theory and Practice, Part VI

Quantitative Definition of IPAK

6 factors are used to define IPAK.

T1) Customer Lifespan – Customer Lifespan is defined as the difference between today and first purchase date. In terms of Excel, it can be expressed as TODAY() – First Purchase Date(). Customer Lifespan is often neglected by enterprise, but it is an important factor affecting touchpoint experience. From the customer’s perspective, the longer the lifespan, the better the deliverable expected from the enterprise, regardless of the contribution that customer gives to the enterprise. Loyal customers are those with long Lifespan and Margin. Customer with long Lifespan but no Margin is At-Risk User (I1).

T2) Recency – Recency is defined as the difference between today and last purchase date. In terms of Excel, it can be expressed as TODAY() – Last Purchase Date(). The more recently a customer has done something, the more likely they are to do it again. Recency is a factor in database marketing used for analyzing customer behavior and defining market segments, the other twos are Frequency and Monetary.

T3) Frequency – Frequency is defined as the times of purchase over the last 12 months. If customer lifespan is less than 12 months, then the denominator will be customer lifespan. In terms of Excel, the formula is Number of Months with Purchase/12 or Lifespan, whichever is smaller. For example, if today is December 2006, and the customer made the first purchase in March 2006, then again in June, July and November, Frequency expressed in terms of percentage equals 30%. Frequency is the repeat rate of purchase, and is another strong indicator of customer loyalty. The higher the frequency, the more likely the customer will return or purchase again.

P1) Average Purchase – Average Purchase is sale over past 12 months. Why should enterprise use average? The highest purchase segments do not always outperform the low purchase segments, but segment with the highest average purchase often outperforms the segment with the highest purchase. The Excel formula is SUM(Purchase over 12 months)/12.

P2) Margin – Margin is profit. Enterprise needs to understand which product generates the highest profit. Keep selling low margin product to customer yields low return on investment (ROI). Enterprise should focus on selling high margin product. Discount is a crucial factor affecting revenue.

P3) Brand share – Brand share is the number of brand the customer has purchased from the enterprise. Take Coca Cola as an example. If the customer has only purchased Sprite and Fanta throughout his or her Lifespan with Coke, then the Brand Share is 2. Brand Share can also be used to represent product category. The higher the brand share, the higher the share of wallet. Market share is a macro strategy, and often involves keen competition. Wallet share is about up-selling and cross-selling, and the competition is relatively less severe. Since the cost of acquiring a new customer runs 8 to 10 times more than the cost of keeping existing customer, enterprise should allocate resources to enhance share of wallet instead of share of market. The Excel formula is COUNT(Brand Share).

These 6 factors in 2 categories, time and profit, are used to define IPAK. For example, customer will be classified as K1 if the customer has below characteristics.
* Lifespan of greater or equal to 13 months
* Made a purchase last month
* With over 75% repeat rate of purchase over the past 12 months
* With a Margin of over 3,000 in the past 12 months
* An average purchase of greater or equal to 150 over the past 12 months
* Brand share is greater or equal to 2

In order to define IPAK based on six-dimensional segmentation, enterprise has to solve questions such as why Lifespan has to be 13 months; why Frequency has to be 75%; why Margin has to go over 3,000? It is not possible to define how the line is drawn for each factor using Excel, and it has to be performed manually. In fact, no statistical tools can segment the clientele due to market change. Criteria defined in day one will be different in day two. The criteria have to be reviewed regularly in order to ensure that the IPAK segmentation is relevant.

During the range setting process, it helps enterprise review existing customer segments and re-define business objectives according to IPAK segmentation.

Marriage of Theory and Practice

The concept of IPAK has been applied to the largest local beverage company in Hong Kong. IPAK enables that company to more accurately identify the best, most profitable customers (K) to whom to allocate resources. That company used cultivation to improve I, acquisition to turn P into A, retention to enhance customer loyalty for AK, and expansion through up-selling and cross-selling to maximize CLV for AK. When resources are allocated optimally, revenue is maximized and cost is under control. This results in ROI maximization.

The concept has also been used for companies in advertising, cosmetics, logistics, office automation and telecom sectors.

See Part I.