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Auditing a
Catalog:
How to Evaluate Customer
Acquisition, Retention & Operations
First Published in Operations & Fulfillment
Christmas and early spring are traditionally the best seasons for
catalogs. By now, most cataloguers know if they have had a successful
season. This is the best time to evaluate the overall health of the
company and identify key areas for improvement. The three steps to this
process are: check the pulse; conduct a complete physical; and develop a
plan to improve the health.
Checking the Pulse
The heartbeat of the company is customer loyalty. A
relatively quick and easy way to check the pulse is to evaluate customer
retention and acquisition. Marketing usually conducts all analysis of the
customer file to determine the effectiveness of circulation and
merchandising. The results should also be reviewed operationally since
service is the most critical factor in determining customer retention.
Service is also a factor in acquisition since satisfied customers provide
the best referrals.
To evaluate acquisition and retention, first sort the customer
file by first purchase date and subtotal each year to determine customer
acquisition for that year. Next, sort the file by last purchase date and
subtotal by year. These counts are then used to calculate acquisition,
attrition, and active customer carryover. For example:
**Note: Go to TOOLS for more
acquisition and attrition information!
In this example, acquisition is strong 1991 through 1994, but
in 1995 & 1996 it begins to decrease. This is very normal for niche
markets, because there is a limited universe. The problem lies in the
attrition. Every customer file will have some natural attrition.
Lifestyle changes can eliminate the needs for specific products or a
companys ability to market to those individuals. Normally, this will
account for 3 - 5% of the attrition.
This companys problem is that attrition has been trending
upwards from 1992 until 1995 when attrition exceeds acquisition. They are
in serious trouble even though their financial report may indicate that
they are thriving. By the time the financial statement is impacted, it
may be too late to save the business.
Conducting a Physical
Once the pulse is checked, a complete fulfillment audit of
service, productivity and costs must be conducted to determine if any
insidious diseases are threatening the health of the company. Even if the
pulse indicates a healthy, thriving organization an audit may identify
unforeseen threats to retention and profitability.
If a company has been audited before, then they will have a
baseline for comparison. If not, then the initial audit will provide a
baseline for future audits. Historical data for the customer file
analysis is readily available, because marketing utilizes that information
to determine circulation plans and projections. Data for the fulfillment
audit is often obscure, so an initial audit will be time consuming and
tedious. If a complete audit seems overwhelming, begin with the basics
(i.e. timely delivery; accurate processing) and expand the magnitude with
each new audit.
Beyond the basics, the best service meets or exceeds the
customers expectations. Customizing service to correspond with specific
customer expectations will increase retention and profitability. Too
often companies define their customer service by other companies
standards and fail to provide the service needed by their customers. For
example, same day shipping is critical for the customers of some business
to business catalogs but not for most business to consumer books. If the
cost of providing a service exceeds the return of customer loyalty, then
providing that service is detrimental to the long term success of the
company.
The first stage of a complete audit is to project the
companys growth for three years in dollars and units. Growth will have a
definite impact on service levels, staff and costs. Planning for the
impact will minimize the strain on resources and morale. Estimate the
volume of order/customer service calls and mail; warehouse receipts and
shipments; and returns. Identify specific order characteristics such as
lines and pieces per order; single versus multiple line orders; and stock
versus dropship orders. Order characteristics will be used to determine
the most efficient methods for processing orders. Volume will be utilized
to anticipate staffing, space and budget requirements to maintain or
improve service levels.
Service levels include call management, turnarounds, accuracy,
inventory ratios and any specialized functions unique to the company.
After itemizing the categories and analyzing the data to determine current
service levels, define realistic goals to be accomplished by the next
audit. Some of the categories, such as call management, need to be
monitored daily; others may be weekly, monthly, and/or quarterly. Once
the service levels are defined and analyzed, the results may be weighted
to establish an overall service index.
The next stage in the audit is productivity. This includes TSR availability, mail order entry, average length of calls, and
comparable warehouse statistics. Initially the productivity information
will be utilized to determine costs and staffing, but ultimately, it may
become the foundation for a standard and bonus program. The format for
the productivity audit is the same as the service level: Analyze the data
to determine the current statistics, then define realistic goals to be
accomplished by the next audit.
The final stage in the audit is defining the cost of
fulfillment. This area includes: Direct and indirect labor; benefits;
space and equipment; information and telecommunication systems; and any
other expense associated with operating a fulfillment center. Each
expense category should be divided into applicable sub-categories. For
example: Customer service direct labor may have inquiries, complaints,
outbound calls, returns, and cancellations as sub-categories. Each
category or sub-category should be presented as a total cost and a cost
per order. The cost per order will be the benchmark for measuring
fulfillment costs as the company grows. It is critical that the sum of
the categories match the expenses on the financial statement. Often,
fulfillment costs are under or over stated. Tying them back to the
financial statement will identify any discrepancies.
Developing A Plan
After the pulse is checked and the physical completed, a plan
for improving service and profitability must be developed. Notice that
the financial objective is to increase profitability, not reduce costs.
Increased profitability and cost reduction are usually synonymous in the
short term, but contradictory in the long term. For example, reducing
call center staff may immediately increase profitability, but the reduced
service may ultimately increase customer attrition. The goal is to
balance service and risk to maximize service and profitability.
During the physical audit, specific goals were established to
improve service. Now, the objective is to outline the process for
accomplishing the goals and calculate the corresponding costs and expected
return on investment. For example, if the current service level is eighty
percent of the calls answered in twenty seconds and the goal is ninety
percent, then the staffing and resources of the call center must be
reviewed. Low call center service levels are usually attributable to
inefficient scheduling and under staffing. Review the service daily peaks
and valleys to determine whether scheduling or staffing is the most
critical issue. If the range is fifty to one hundred percent, then
adjusting the scheduling will improve service without increasing costs.
If the range is seventy-five to eighty-five percent, then the call center
is understaffed. Often, the staffing can not be increased without
increasing space and equipment resources. This can be very costly and the
return on investment must be evaluated to justify the expense. Sometimes
a goal that initially appeared reasonable must be altered to become
practical for a growing company.
The process of outlining and evaluating goals must be
completed for each item included in the audit. When the final goal is
determined, then it is critical to document the plan for achieving that
goal. The documentation would include an outline of the plan, cost
projections, any revised procedures and a schedule for implementation.
Probably the largest problem in implementing new procedures or
systems is employee resistance. Hundreds of staff hours and thousands of
dollars can be invested in the development of an improvement plan that is
never fully implemented because of employee objections. The best method
for avoiding this pitfall is to create a team of the employees involved to
work with management to develop the plan. This not only creates employee
ownership, it improves the accuracy of the initial evaluation.
Invariably, procedures evolve from their original format over time. Once
this evolution has occurred, the best source for current procedures is the
staff implementing them. If these employees are not involved in the
process, the very foundation of the plan can be erroneous. The trick is
to balance the level of ownership so that the changes are implemented, but
not cast in stone. Do not create so much ownership that future change
will be resisted.
The final step in developing and implementing the plan is to
schedule future audits. The best schedule will have individual areas
reviewing their progress on a daily or weekly basis and an overall audit
on a quarter, semi-annual, or annual basis. The timing of the overall
audit will depend on the growth and goals of the company. If the company
is high growth with aggressive goals, the numbers should be reviewed
quarterly. If the company is established with steady growth and goals,
the numbers should be reviewed annually. Find the timing that is best for
the individual company.
Evaluating the health of a company is challenging, time
consuming, and requires commitment throughout the organization. The
process is as important as the results because it requires a review of
procedures and personnel to identify issues. The internal focus on the
company can improve morale and management/staff relations if teamwork is
emphasized.
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