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Latency: The B2B Software Example: Upgrade Cycles

The CFO reluctantly picks up the phone to call the CIO. At least this time, the CFO thinks, I have thought the question out all the way through, and I know what action I can take with the information once I get it. Shortly after a slightly heated exchange involving resource allocation, budgets, and a hiring freeze in IT with the CIO, the CFO gets this report:

(Click the link below to see report)

http://www.drillingdownbook.com/chartpop1.htm

Fellow Drillers, it would be nice if the pattern were a bit more clear, yes? It appears customers are ordering their first and second add-ons more rapidly than last year, but as they get to the third, forth, and fifth add-ons, they are ordering more slowly than last year. What could this possibly mean? The CFO thinks:

Well, I answered my question, but I've got another. The reason why add-on sales appear soft is a longer purchase cycle for the average add-on, and the reason this is happening is the later add-ons are taking much longer to be purchased than they were last year, even though the first add-ons seem to be cycling much more quickly. What does that mean? I promised the CIO I would be able to act on this information, and I simply do not know how.

Fearing another phone call right away to the CIO, the CFO thinks:

What I have here is change. There has been a significant change in the way this business works for some reason. Change doesn't happen in a vacuum though; something must have caused these changes to happen, a significant event now being reflected by these average weeks between add-on purchase numbers. What could it be?

The CFO remembers the heads of business development and marketing saying the company was "penetrating the overall market more deeply, and as we penetrate further and further, add-on sales seem to have slowed." Was this the change the CFO was looking for? What did it really mean, in terms of how the business may have changed?

Getting the heads of business development and marketing on the phone again, the CFO asks if this market penetration situation had created any changes in the way the company does business. The CFO hears for the first time about a new trade campaign and a new sales person hired to address a particular market segment. This is most assuredly the change the CFO has been looking for!

Gingerly, and most humbly, the CFO calls the CIO once again. This time, the CFO wants to see average number of weeks between add-on installs by add-on by salesperson. After a promise to review the hiring freeze is extracted from the CFO, the CIO delivers the following report:

(Click the link below to see report)

http://www.drillingdownbook.com/chartpop2.htm

And there it is.

Clients of Salesperson # 1, # 2, and # 3 are purchasing add-ons at the same rate they did last year. The clients of the new salesperson # 4 are purchasing in a dramatically different pattern, with much shorter purchase cycles in the beginning and much longer cycle purchases later on. Literally, the LifeCycle of the customers in this market segment are different from the LifeCycles of the average customer from previous years, and dramatically so.

It takes these customers on average 14% longer to purchase any add-on - 9.8 weeks versus 8.6, or 1.2 weeks. Over the entire purchase LifeCycle of the add-ons, this increases the purchase cycle by 4.8 weeks (1.2 x 4). If this new segment is doing a lot of dollar volume compared with the old segments, this could significantly affect sales and make add-on purchases look soft - even though they are in fact getting purchased!

At this moment, the head of business development appears in the door with another person who turns out to be new Salesperson 4. The CFO looks up and the head of biz dev, somewhat sheepishly, introduces the new salesperson.

"Glad to meet you," the CFO says. "By the way, can you tell me something? Do the customers in your new segment purchase and install our add-ons in the order we suggest in our operations manuals?"

"No, they don't" said Salesperson # 4. They install them in a different order, because they are having some difficulty installing a couple of the add-ons, and usually delay those to the end of the purchase cycle when they have more experience with the applications. Is there something we can do about that?"

The CFO just smiles, and thinks:

Looks like I just found the money to pay for unfreezing some hiring in IT.

"I think so," the CFO tells new Salesperson #4, calculating the improvement in cash flow on the fly if these add-ons were installed faster. "I really do think so."

Next Article: Recency: Online Retail Example: Newsletter Response

This article is taken from the book Drilling Down: Turning Customer Data into Profits with a Spreadsheet. The first article in this series can be found here.

Jim Novo has nearly 20 years of experience using customer data to increase profits. He is co-author of The Guide to Web Analytics and author of Drilling Down:Turning Customer Data into Profits with a Spreadsheet. If you want more visitors to take action on your web site, try using the free conversion metrics calculator, downloadable here. If you need to sell more to customers while reducing marketing expenses, get the first nine chapters of the Drilling Down book free at http://www.drillingdownbook.com.
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