“Hey, it’s not rocket science!” Yes, that was a common phrase a few years ago when I started in direct marketing. I have since come to the realization that rocket science is a very useful background in today’s technology driven marketing profession. Let me illustrate through a simple law of physics:
Mass times velocity equals momentum
Before we apply the thought to your business let’s ask the boss - Mr. CEO how much momentum do you have in your business? Is it strong forward momentum that will carry you through the next economic slowdown? Or is it “downhill baby!” and look out below? Although the economy is strong you’re struggling to turn the ship.
As you think about your own company consider these big players and ponder the size of their customer list: Amazon, Yahoo!, Dell, Hewlett-Packard, CDW, Insight, Southwest, Delta, Wal-Mart or Sears.
Now let’s return to the physics law and combine it with the basics of recency, frequency and monetary value in order to gain valuable insight into the health of each of these companies. Mass = how many customers you have in your active file. Let’s use trailing twelve months as the time frame by which to identify the number of customers. Next, velocity – the number of purchases your customers make, in aggregate across the entire active customer file. Ok - the raw number is useful but we want to make a calculation in order to create a usable velocity number. So let’s compare the order counts of one time frame against a second time frame and divide by 1,000. Example Jan-Dec – 10,000 orders compared to Feb – January with 15,000 orders. 15,000 – 10,000 = 5,000/1,000 yields a velocity number of 5.0. I like to divide by a thousand simply for ease of use.
As we finish our calculations let’s keep in mind that the velocity calculation encompasses all types of orders: Acquisition, Retention, Reactivation, etc. I refer to this as frequency velocity. This is an important concept when making a judgment about the momentum of a business.
Okay so here’s the formula: customers X frequency velocity = momentum
1,000 x 5.0 = 5,000
10,000 x 5.0 = 50,000
100,000 x 5.0 = 500,000
1,000,000 x 5.0 = 5,000,000
I think you get the idea – when company ‘A’ (e.g. Dell) has a very positive velocity calculation and a large active customer list, their momentum in the marketplace is tremendous. They look like and act like a juggernaut. Conversely if company ‘B’ (e.g. Hewlett-Packard) has a negative velocity calculation and a comparably large customer list – they have tremendous downhill momentum. In either case momentum is a powerful force and it needs to be understood. In fairness to Dell, HP and others, I don’t have the customer number or the frequency velocity number for either company, I’ve simply used their names in order to make the point about momentum in the marketplace. I’ve only shown positive momentum above – but I’ve also seen very large companies with negative momentum using this formula.
Mr. or Ms. Marketer – it’s time to understand the physics of marketing so your CEO knows how much momentum your company has and whether it’s positive or negative.
By the way, if you missed it – your customers buying habits dictate the momentum and the direction of your company. It’s your job to move and motivate your active customers so they exert positive momentum on your company.
The Physics of Marketing© 2006
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