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Jim Novo on Unlocking Your Data’s Hidden Profits

Jim Novo on Unlocking Your Data’s Hidden Profits

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Today, on the Early-Stage Founder Show, I’m talking with Jim Novo, founder of The Drilling Down Project, a collection of articles, tools, and services you can use to take control of your customer data and use it to improve profitability.

Jim spent 10 years as VP of Marketing and Programming at the Home Shopping Network and over that time he carefully developed this methodology and since leaving HSN, he has refined these methods while helping other companies improve their bottom line.

Startups obsess over data today and this often leads them to have more data than they know what to do with. This is a better starting point than having no data at all, but without knowing what data to focus on and how to act on it, it still doesn’t get you anywhere.

This chat is a deep dive into everything segmentation. Jim covers why it matters, how to approach the segmentation problem, and lays out the step-by-step process any startup can follow to use segmentation to improve their bottom line.

If you feel like you have too much data and not enough insight, then this is the episode for you.

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Topics covered:

  • (0:00:09) – Jim describes the background to his expertise

    • (0:02:00) – The difference between traditional TV marketing and interactive, 2-way online marketing
    • (0:03:27) – The history of Jim’s book
    • (0:04:01) – The impact of human psychology on marketing4
  • (0:06:46) – The importance of differentiating between simple active user counts and new-vs-retained active user counts (i.e. churn)

    • (0:08:25) – The impact of churn on income
    • (0:12:29) – Ascribing a different amount of value to different customer segments
  • (0:14:15) – Segmenting customers, and customer behavior

    • (0:15:44) – Segmenting into cohorts based on behaviors
    • (0:17:55) – Predicting customer behavior
    • (0:18:49) – The psychology of ‘recency’
  • (0:21:20) – Reverse engineering your best customers’ behaviors

    • (0:22:20) – Start with a timeline of what they did
    • (0:23:45) – Reverse-engineering the worst customers
    • (0:25:19) – Using reverse-engineered data to predict when to intervene
    • (0:32:08) – Learning lessons about how to grow your product
    • (0:38:40) – How to avoid paying attention to the wrong type of customer’s wishes
    • (0:41:55) – Defining a best and a worst customer

Resources mentioned:

Where to learn more:

To hear more from Jim, check out his blog at


ANDY: Jim, thanks so much for joining me today.
JIM: Great to be here, Andy.
ANDY: Can you share a bit of your story and how the Drilling Down project came about?
JIM: [0:00:09] Well, I came… I came down here to Florida in 1989 to work for a home shopping network, and what they were looking for is they kind of had all these different channels going. They have television, they have catalog, they’ve got a call center – all these different things, and they’re trying to figure out ‘how is it that we actually make money from all of these different channels? What’s the best mix of marketing to optimize each of these channels?’ and that kind of thing, and so about 1994 or so they added an additional channel, which was online. They bought a small online retailer, and it’s like, ‘Okay, so how do we integrate this?’ right? And so fast-forward… After leaving home shopping around 1997 or so, I was one of the few people who kind of had experience with online marketing, and particularly the idea of how do you mix online and offline, how do you optimize that combination and so forth. So that’s when I wrote the book, because the book kind of outlines what we discovered about how people behave when they’ve got this always-on access to shopping, in particular. You know, of course that’s what they had with television, only they couldn’t really control it, if you know what I mean, right? It’s a one-way broadcast. They can call up and it’s interactive in its own way, right? They talk to the host, and they have fun, and it’s a big enjoyable experience – very social, if you will, right? At least with the technology available at that time. [0:02:00 Jim describes what’s different about online shopping] And so then you mix in online where not only do they have access to it all the time but they can actually control it, and that changes the behavior. That changes the way people respond and there are certain types of ideas that start to come forth from psychology and so forth that allow you to kind of map how you think people are going to behave. And so that’s why I wrote the book. I just kind of wanted to say, ‘Here’s what we found out about online and when you give people immediate access to fulfil their demands and so forth,’ and so that’s how that all came about. That just turned into a consulting business. You know, I started working with the Digital Analytics Association, and helping build that organization, and became sort of in charge of education for them, and so it all just kind of was a big mix of stuff going on with the whole development of digital.
ANDY: Yeah, because one of our mutual friends, Drew Sanocki, he had introduced me to your work. He just kept always referencing it because when he was getting into e-Commerce especially, he said that he would study a lot of catalog marketing, and he kept referencing ‘Jim Novo… Jim Novo…’ and your book, so I picked it up. When did you originally write the book, Drilling Down?
JIM: [0:03:27 Jim tells the history of the book] The first version came out in 2000, and it was kind of, sort of a hacked-together thing, and then it was targeted towards a real do-it-yourselfer type market, and then I worked with a publisher and he was saying, ‘Well, you know, maybe you should try to blow it out a little bit more, like, tell more of the story and provide more detail,’ and so it turned in from a kind of how-to-hack all of this into a more complete story, and that was published in 2004.
ANDY: [0:03:59 Talking over each other Yeah, because when…
JIM: But because…] [0:04:01 The impact of human psychology on marketing] The thing is, I mentioned psychology and that ends up being really important, because even despite the fact that the tools change, and the environment changes, and all that, you know, software and applications, and now you have a phone and so forth, humans tend to have certain psychological traits that they behave in certain ways, and so a lot of what is behind what we’re going to talk about, and what’s in the book, is this idea of how do you take these known behaviors and tendencies of people and turn them into, like, a measurement framework that you can use to improve your marketing?
ANDY: [0:04:43 false start – Yeah, and… Because…] I’ll be honest, when I first was looking at the book, or at least checking it out, I was a bit hesitant, because in today’s day and age I feel like marketers, especially, are just constantly putting out content. They’re constantly putting things out there, and it makes it seem like with this new growth hack or whatever they’re talking about nowadays that even what was working last quarter won’t work any more. So I picked up the book and was going through it, and was just blown away because it seemed like everything you were talking about, the framework for it, it all still applied fully. I remember there was something you were saying, I believe in the book, maybe it was in your blog, about kinda the higher-end custom solutions that maybe you weren’t saying ‘machine learning’ at the time but that are trying to get more predictive about what metrics matter, and all this and that, and it ultimately doesn’t need to necessarily be that complex, and in today’s day and age if you look at some of the venture-backed companies that are entering the space, you see the same thing. You see machine learning startups that are trying to find all these crazy predictive signals for churn, for when customers are defecting, those types of things. Ultimately, like you said, humans don’t change. There’s a few reliable metrics you can look at to get you at least 80% of the way there, and so by the end of reading the book I was like, ‘Wow, this guy is someone I need to talk to,’ and here we are. And so to dive in a little bit, what we were talking about before we started recording was just about how the market [0:06:11 false start – is trying to get] is getting a bit more sophisticated when we think about customers. If you have a freemium business, it’s the difference between the number of signups and the monthly active users. If you have a more traditional SaaS company where it’s a free trial, you’re looking at who’s actually converting, what different plans there are, and the lifetime value of each different segment. So, can we just start by talking about how you think businesses should be thinking about each of their users?
JIM: [0:06:46 – Differentiating between simple active user counts and new versus retained active user counts] Well, this kind of idea… And I was kind of wondering how long it would take the industry to move from this idea of, you know, ‘We’ve signed up all these people to a concept like monthly active users,’ right? [0:07:00 false start – Because I never understood… I mean, so…] That’s great that you have all these users, right? I mean, you spent a lot of money to go out and get people to sign up, but here’s’ the thing – how do they generate revenue for you if they’re not, you know, engaged, right? If you haven’t engaged them and they’re not using your application, or your, you know, SaaS, what is the value of that? Just to prove that marketing is doing something? [0:07:33 false start – you know, I just…] You know, I come from that world – like you mentioned Drew was talking about, the catalog business – I come from the world that’s more like when you spend a dollar you should figure out how to make a dollar, right?

ANDY: Right!

Jim: It’s not just, ‘I keep spending money and hoping things are going to work out,’ so what I want to do is figure out which of the dollars work and which ones don’t work so well, right? So that’s when it becomes important to move from this sort of aggregate level where you’re looking at, you know, logins or, you know, ‘Whoa, we had 40,000 logins.’ Hey, that’s great. How does that… Who logged in? You know? Is it first-time people who had just barely signed up? Is it people who’ve been using for a long time? Is it our best customers? Right? 
ANDY: Yeah.
JIM: [0:08:25 – The impact of churn on income] That’s where you start to think to yourself, okay, right? And so this move from, you know, ‘We’ve got this many signups,’ to, ‘What are our monthly active users?’ is an extremely important idea, because now you’re starting to talk about, ‘Okay, here’s how we make money,’ right? [0:08:43 false start – Because, you know, or at least, you know, if you’re sort of in, like,] If you’re doing a freemium model and you’re in the free stage, at least you know that they’re engaged, right, and that’s finding value, right? And that’s the important thing. If you’re ever going to get them paying for the service, you have to know that they’re finding value. But, so that brings up a really interesting sort of fundamental question, doesn’t it, right? It’s just like, ‘Okay, so our monthly active users this month were X,’ right, and hopefully that’s better than last month. That’s good, right? So, but, what I want to know is, ‘What is the composition of that?’ I mean, is it the same people as the previous month plus a bunch of new people, or is it, you know… and that’s clearly part of it but then the next question becomes, ‘So, let’s say we added 5,000 but monthly users went up 2,000. Doesn't that mean we lost 3,000 last month?’ And then a marketer who’s maybe interested in, you know, diving a little deeper into it says, ‘Well, what the hell happened to those 3,000 people? Why did they stop using?’ And so you get into this area that I like to think of as disengagement, right? So everybody talks about engagement. ‘Oh, we’ve got this many engaged users,’ and I’m more likely to ask, ‘Well, how many disengaged users do you have,’ right? Because that is the beginning of saying, ‘Okay, so for this group of people, we have lost them somehow. Shouldn’t we do something,’ right? I mean, wouldn’t most people sitting around, you know, in the office say, ‘Shouldn’t we do something?’
ANDY: And so I think you hit on a great point, is that it’s breaking down the composition of your growth. Just because you have more customers this month than last month, obviously that’s trending in the right direction, but it could be hiding a bigger problem, and you see in a lot of early stage startups that are growing quickly, especially in the SaaS world, is that just because revenue is higher, if your marketing efforts are putting a ton of people in there, that can be hiding some other issues with retention. You could be churning through a ton and be fighting an uphill battle, and there’s a lot that can be hiding in those numbers. So, how do you start breaking down – drilling down – into this data to figure out what these characteristics are, and start making some predictive assessments?
JIM: [0:12:29 – Ascribing a different amount of value to different customer segments] Well churn has become, you know, very appropriately a big topic, particularly, like, in, you know, the venture [0:12:40 inaudible]  have, sort of, grabbed onto it and started talking about it a lot, and you’re absolutely right about that. In fact, one of the things that often happens is that a lot: you have a lot of low-value customers (who maybe don’t have a lot of intent to continue with you) can really mask underlying best-customer kinds of things, and so, in a lot of ways, you know, not only do you have, sort of, this activity or ‘engagement variable’, if you will, you also have a ‘value variable’, and this is something that gets lost all the time, you know, because you have people, you know, ‘Yeah, we signed up all these people,’ but, you know, ‘How many, sort of, long-time customers that have been with us and, let’s say, paying for months do we have, and how many of those did we lose, and how much of that activity is being obscured by, like, a huge marketing campaign that we ran that brought in all these free guys?’ Do you follow what I’m saying?
ANDY: Yeah.
JIM: Right? And so if you’re just looking at this very top-line activity stuff, a lot of times it can hide all kinds of stuff underneath that, if you got down into that and started breaking it apart a little bit, then you could begin to start looking at that and begin to take action to correct some of these things. [0:14:15 – Segmenting customers, and customer behavior] So that’s kind of the different between looking at this very top-level activity versus looking at customers. And so when you go down a little bit and you start looking at customers, one of the important things to do that I think most marketing people are aware of is the idea of segmentation, right? But instead of segmenting them by intangible kind of stuff like, you know, maybe what time of the month they came in, or things like that, what you find when you do enough of this work is that the actual context of how they came into the company is very predictive of how long they’ll stay, and how satisfied they’ll be, and how engaged they are, and so forth. So, for example, one of the old things that’s been around for a long time is a lot of times the higher a response rate is to a campaign, the lower the quality of the customer you’ll bring in.
ANDY: Okay.
JIM: Now, that sort of comes out of that catalog world, and direct mail and so forth, but you find that the same thing happens in online, and kind of in a more amplified way, so a lot of times when you’re bringing in people that have a low level of commitment, they're less likely to stay, would be a simple explanation for that. [0:15:44 – Segmenting into cohorts based on behaviors] And so you begin to segment people like that, and one of the things that is talked about a little bit right now is this thing called ‘cohorts’, right, where they’re measuring… they’re segmenting people by start date.
ANDY: Right.
JIM: And that’s an effective… Let's put it this way. It’s a great first step.
ANDY: Okay.
JIM: You know, so for anybody who’s interested in this kind of thing, you know, there are various plugins for different platforms and so forth that are out there, or even a lot of the sort of… I mean, even Google Analytics will do some simple cohort stuff, and so one of the things people look at is, ‘Okay, the people who started in January, they stuck around on average for 5 months, and the people who started in February, they stuck around for only 4 months. What’s the difference? What did we do – right, in theory – what did we do that caused that difference to happen?’ So, if you can get yourself, and your team, and the people who are supporting the company to start thinking about this measuring over time thing, right, this is where it becomes extremely important. [0:17:04 false start – It’s the idea of, sort of, you know.] So, you can have a monthly report on active users, right, it’s like, ‘Oh, how many… our monthly active users are rising! Okay, great!’ but what I want to know is how long have those different groups of people that make that up been with you?
ANDY: Yup.
JIM: Right? Are they all brand new people? Because if they're all brand new people that have driven up the count, right, then that's not as valuable as, you know, ‘Wow, we had these people came back, we have other people who’ve been with us for 6 months, we have a good solid base, right, and then we’re adding new guys on top. Or are we just churning out the old guys and then adding new guys on top?’ Do you follow what I’m saying?
ANDY: Yeah, because one of the-
JIM: There’s a huge difference between those two ideas.
ANDY: [0:17:54 false start – One of the interesting things… So I was…] [0:17:55 – Predicting customer behavior] Rob Walling, who founded Drip, which is an email marketing platform, he was talking about – in a speech a couple of years back – about when he really started drilling a little bit deeper beyond just looking at the overall churn number, and started looking into how that was spread across the customer base, because he saw that if a user in their first 1-2 months, their churn was way higher than someone who had made it over 2 months, and that a lot of times, even just getting that first glimpse into some of these analytics, some of these metrics like churn, if you don’t go the next step and try to break it down into seeing how it changes over time, seeing how it changes for different cohorts, different segments of the customer base, you can be missing some big issues.
JIM: [0:18:49 – The psychology of ‘recency’] Right, and that is in fact what – the example that you gave – is one of those classic human behavior traits, right? That the longer that you stay with something, the more likely you are to continue, and that is, you know, in various forms, called – at least in psychology – it’s called ‘recency’, right? Which means that the humans and the way that they think, it’s just a known thing and it doesn't matter whether you're talking about SaaS applications online or you’re talking about going to a restaurant, okay?
ANDY: Right.
JIM: The more recently you’ve done something, the more likely you are to continue doing it, and that is just a fundamental idea in human behavior. So what you can do, then, is you can start to look at people in terms of this idea like, for example – and you see this all the time in, you know, certain… Sometimes you get an email that says, ‘Hey, you haven't been back for a while, you haven’t logged in for a while, you haven’t done this or that for a while.’ That’s that idea of recency, and those companies that are sending out those kind of emails – at least at some level – have this fundamental recognition that if you haven’t logged in for a while, you’re becoming less and less likely to login again. And so that is one of those trigger type things, right, where if you’re working in a SaaS platform, and God, you’re collecting everything, right? When they logged on, when was the last time they logged in, what features did they use, you know, what bandwidth did they use (if that’s applicable), and so forth, right? I mean, you could just – depending on your particular application – you could sit down and probably at least come up with a dozen things off the top of your head that are kind of indicative of engagement, right? First they got to log in, then they got to…
ANDY: What do you look for when you’re analyzing that? Because with the modern SaaS startup, there are so many tools out there that do make it easy to track just about everything, but for a lot of founders out there, I know that can be a double-edged sword because they'd just don’t know how to begin. So, how would you recommend that someone just goes about – even in a basic way – trying to figure out what some of those key points of contact, those key actions, really are?
JIM: [0:21:20 – Reverse-engineering your best customers’ behaviors] Well, I think, in the world that we’re talking about, I think one of the things that might be the most important, and for me, what I’ve seen is that it also has other implications throughout the company and product development, user interface, you know, because in some ways when you’re talking about customer – when you’re measuring down at the customer level instead of the traffic level – you’re kind of invoking other ideas. You're bringing in product development. You're bringing in user interface, right? There’s a multitude of things going on that keep customers engaged. So what I’d like to do if possible, and this is a really tangible exercise for people who are familiar with data and so forth, is take your best customers, right? People who you know are best, and kind of reverse-engineer what their behavior’s been since they started. 
ANDY: I see.
JIM: [0:22:20 – Start with a timeline of what they did] Just create a timeline. [0:22:22 false start – Now, some people would call this another interesting, you know,] Because people come at these problems from all kinds of different directions, but somehow they never unify them and so customer journey, for example, is another way people talk about this, but when I find that people, you know, ‘Oh, we’ve got to map the customer journey,’ they don’t really have any metrics around it, you know? They don’t make it tangible enough to do anything with it, really, so this idea of taking your best customers and kind of reverse-engineering, and saying, ‘What did they do the first month? What did they do the second month? What did they do the third month?’ type of thing, right? And looking at that, now you’ve got what I would call a customer journey, right? A very tangible kind of customer journey thing that says, ‘Here’s a profile of what our best customers look like, what they do, and when they do it,’ right? Now you can start to say to yourself, ‘Oh, well wait a minute, then. So when we see this kind of behavior, it’s essentially predictive of them becoming a best customer, and when we see the lack of this behavior then it means they’re probably not going to become a best customer,’ do you follow?
ANDY: Right.
JIM: [0:23:45 – Reverse-engineering the worst customers] And so you could also reverse-engineer your worst customers, let’s say, right? And you compare the best and the worst, and what you end up with are these milestone kind of things, right? ‘So, what our best customers do is…’ you know? And all of these SaaS models are different, and I don’t claim to be saying this is a particular thing, but let’s say when you look at best customers, what you find is that the time between signing on as a freemium customer and starting to pay, right, deciding to go ahead and upgrade, on average for the best customers is 3 weeks, right? So that gives you a milestone, right? And it says, ‘Jeez, when people get past 3 weeks they’re becoming less and less likely to become a paid customer, so that’s when we should kick in our marketing.’ But it doesn’t have to be that. I mean, it could be anything. It could be, [0:24:47 false start – you know, ‘So let’s sign up a…’] You know, you sign up a company and you see a certain amount of traffic into the application that’s using, you know… so when you look at best customers, what you find is that they use 5 different tools within the SaaS thing, but when you see… when you look at customers that don’t ever become best customers, they use an average of only one option within the SaaS product. [0:25:19 – Using reverse-engineered data to predict when to intervene] So, you can see how you could take something like that and trigger, right? You could say, ‘Okay, so if they get to 3 weeks and they haven't started using a second area, let’s make sure that they understand what the different options are and if they need help we can help them,’ and so forth, right? And then you decide as a company is that an email? Do we have someone in customer service call them? Do you follow what I’m saying?

ANDY: Yeah.

JIM: So you build up profiles like this and then you can actually automate a lot of this stuff because you are the SaaS company, right? You’ve got all the data, right? So it doesn’t become that difficult. So, you set up really simple milestones, you know. ‘If they haven’t started using a second area of the product by 2 weeks after they sign up, then let's give them a call.’
ANDY: I think the way you broke it down honestly made so much sense to me, and the examples are pretty spot-on. I’ve seen, looking at different companies, that integrations. If your SaaS company integrates with other tools, the best customers are almost… they’re going to have more… they’re going to use more of those integrations and that is something 1) that’s probably good to price on, but 2) if you're noticing that people aren’t setting up these integrations early on, that is typically a very strong signal. Obviously it doesn’t apply across the board, but that’s something to look into, and it’s just finding out what these sort of sticky factors are. What these things are that the best customers do that the worst ones don’t. And I like how you called it a milestone – I know that you’ve also referred to these sorts of things as ‘tripwires’, where if someone doesn’t do or take one of these actions for… in, like, the average period of time that a best customer would, that’s when you trigger one of these marketing efforts. I know a lot of SaaS companies, especially at the earlier stages, are going to automate absolutely everything and do this with email, low-touch, which can work, but a lot of times getting on the phone, sending something in the mail, those tactics work as well as just figuring out what you can do to actually get them to take those steps and move towards becoming a better customer. Is that a fair way of putting it?
JIM: Sure, absolutely, and I mean there’s no silver bullet, right? Because every company’s different. Every scenario's going to be different, so that’s where you test, right? And I’m sure one of the first things everybody’s going to do is they’re going to test email, right? But let’s say you have identified a certain kind of behavior, right? Let’s say a customer is on their… shows in the early days, right – in the first 30 days, let’s say – a customer shows that they have all of the makings by their behavior of becoming a best customer. They've integrated with 5 other applications, right? They’ve got, you know, 40 users – they’ve gone from, like, 5 users to 40 users in the first 30 days, right – all these kinds of positive signs. And so they’re on their way to becoming a best customer, right? And all of a sudden, the pattern breaks, right? This reverse analysis that you’ve done on your best customers – you’ve got, like, several months of behavior – this group of customers comes in and they behave just like that, but then they break the pattern. They stop, right? These are potential best customers. Is that customer worth a phone call?
ANDY: Absolutely.
JIM: Do you follow what I'm saying?
ANDY: Yeah.
JIM: [0:29:04 false start – And so it’s not about sort of….] Again, it’s not in the aggregate because that’s not how you find out anything, right? And so, like, in artificial intelligence stuff that will… you know, that we briefly touched on earlier, it’ll come back and say, ‘Here's your problem,’ but it’s not going to give you a solution, right? You’re going to have to figure that out! When you’re approaching it this way then what you're doing, actually, is building up the really critical data that you need to then feed into artificial intelligence, if you understand what I'm’ saying. I mean, one of the things that always happens with AI, you know the people who are actually down in the trenches running it, is they’ll tell you, ‘We can’t… I mean, our algorithms are beautiful, but if you don't have the right kind of data then how am I going to do anything with this?’ Do you follow what I’m saying? 
ANDY: Yeah.
JIM: So, you know, when you do things like you build out the scenarios of ‘what do my best customers look like in the first 6 months and how do they behave?’, you know, the idea of going from 5 users to 40 users, or 1 integration versus 5 integrations, or whatever it is, right, that’s the kind of information you want to feed into AI. You don’t want to just, you know, ‘Here’s all our data!’ and then hope that the AI’s going to come back and say, ‘Here’s my brilliant idea.’ It just doesn't work like that. You’ve got to give it ideas that it can then come back with more intelligence for you on.
ANDY: And so these ideas – are you saying a lot of them are going to come from this type of research? From, sort of, reverse-engineering the best type of customers? Is that where you recommend some of these – or most of these – ideas come from?
JIM: [0:30:53 false start – That is the way that I…] That is the most tangible way to start. If you’ve got… As you build experience in these kind of things, when you sit down and you look at a business model and you understand how everything works, you can begin to – almost from second nature – say, ‘I bet you this is important,’ or, ‘I bet this is important.’ But, you know, you’re a small group of people, you’ve just started up this SaaS thing, it seems to be going well but, you know, we’ve just got to go to the next level kind of thing, right? This idea of reverse-engineering your best customer, and maybe reverse-engineering your worst customers kind of thing, right, that is the fastest, most tangible way to get to something you can take action on, and even if it’s really- I mean, this always starts like a very simple thing, right? [0:31:47 false start – It’s like if they haven’t signed up for…] ‘If they haven’t done 3 integrations within the first 60 days, let’s give them a call.’ Right? 
ANDY: Yep.
JIM: I mean, how difficult is that? Do you know what I’m saying? That that’s not complicated, it doesn’t take a lot of resources, it’s… right? And you don’t have to, you know… [0:32:08 – Learning lessons about how to grow your product] Let’s say you grew unbelievably, and this is, like, thousands of people or something, right? You don’t have to with all of them. Just call a few of them and see what happens. Can you discover things that you can, you know… And you’ll hear back,’ [0:32:22 false start – You know, I’m, you know… My, you know…] My back room is full of this type of equipment and I’m trying to integrate- do this integration, and I wasn't able to do it, right? And so that’s why I haven’t gone from 1 integration to 3 integrations.’ And so then that person that’s made the call turns around to development and says, ‘Hey,’ you know, ‘do you guys… have you heard about this? Can you fix this?’ or whatever, and see now, all of a sudden, now you’re in product development.
ANDY: Exactly.
JIM: You’re taking what was a marketing idea, and because you're doing it at the customer level, you’re pin-pointing people who, you know, this could be a future best customer, but for some reason they’re not becoming a best customer, so let’s call them and find out why they’re not becoming a best customer, and all of a sudden, you know, you have 6, or 7, or 8 of the 10 people that you called bring up a certain thing and, you know, heaven help you that it’s like an easy fix. Do you know what I’m saying?
ANDY: Yeah.
JIM: Right? ‘God, we can fix this in 2 days,’ right?
ANDY: Right.
JIM: And so what happens is because people are so high up in their analysis, sort of at a gross traffic or activity level, or whatever, they miss these opportunities to make so much more money than they’re making by just doing a very simple analysis, right? You don’t have to haul in any kind of real sophisticated software to do this. It’s just, you know, you’re just saying, ‘We know how our best customers behave. This person looks like they could be a best customer but they’re not becoming one. Why don’t we contact them and find out why?’ You know? It’s just not that complicated.
JIM: But, for some reason, people just don’t get to that part. I think it’s because of this idea of measuring… You know… Everybody thinks that the overall activity is more important rather than going down, and so in that way you can see what I’m saying. It’s kind of the same thing as going from counting all the users that have signed up, moving from there to monthly active users, right? It’s the same kind of idea. You’re going a little deeper and you're saying, ‘Hey, you know, there is a huge difference between a user and an active user, and let’s find out what the difference is and see if we can leverage that.’
ANDY: Yeah, I mean, I think honestly, a lot of the focus on the top-line activity is just because it’s easier. Again, especially with tools that are out there nowadays, it’s relatively easy for us to get these metrics, and get them in a pretty chart and say, ‘Look, things are going up. We’re doing great,’ and just put our heads down and get back to work, and I know a lot in the startup community right now, in the startup sort of echo chamber, we keep hearing about doing customer development, talking to your customers. ‘Get out of the office and talk to your customers; see what their problems are.’ But founders struggle with that, 1) because it’s uncomfortable – they’re not used to doing that, and they don’t like doing that, but 2) they don’t necessarily think they have the time to do it, and what you said-
JIM: Absolutely.
ANDY: -and what you said really made me think because it’s not as though you want to talk to absolutely every customer, because you’re not going to get the same level of insights from doing that. If you truly do have a restricted amount of time, talk to the customers who could become best customers, because those are the ones who you’re going to learn the most from, and those learnings are going to have the biggest leverage point because preventing someone who could become a best customer from becoming one is costing you a ton of money. So, if you’re only going to focus on a certain area of the business, that’s one place to definitely get those insights.
JIM: Sure, and you don’t… I mean, I understand. I mean, I’ve been involved with enough of these kind of operations. I know what sort of a wild-ass thing it is, right? [0:36:22 So, I mean, but… You could… I mean…] You could trigger an email that says, ‘We’d love to talk to you.’
ANDY: Yeah.
JIM: Right? And see who responds. And now you’ve… You know, ‘Call this number,’ Right? Or… I mean, you don’t have to have the CEO call them, right? You could have a customer service person call. Whatever. You figure out whatever works for you, right? The point is that you try it and see what happens, because, I mean, 9.98 times out of 10 people are blown away that they’re just, like, ‘God, we never knew that this was happening!’ Right? And the reason they didn’t know is because they’re up too high. They’re looking at it not at the customer level, but sort of at the activity level, and as you pointed out earlier, you know, certain kinds of activity often mask other kinds of activity, right? [0:37:21 false start – We grew, but what we don’t… you know…] ‘We grew last month!’ ‘Well, that’s great, but how many people did you lose?’ ‘Well, we don’t know that.’ Well, isn’t that important, or… right? So, right? And so it's just a little bit of additional focus and it’s… The thing is I think that a lot of people think, ‘Yeah, I get this. I’ve heard about this, you know, some people would call it ‘customer retention’ or whatever,’ but that’s hard, that’s expensive and that’s complicated, and that’s kind of the message, I think, is that actually it’s not very hard, it’s not very complicated, and it’s not very expensive, right?
ANDY: Right.
JIM: To at least get involved in it a little bit and sort of probe around and see what you find, because most people, when they just do a simple probe on this kind of stuff, they start to discover things that they never knew were there, and they become important not just for marketing and bringing in customers and customer retention, but also for product developments or interface design; for everything that is your product, right, that goes into your product. So, it’s not just, like, ‘Let’s make marketing better.’ 
ANDY: Yeah.
JIM: Right? It’s not just about that, although there’s some huge impact there. It's also about getting in early and ferreting out… [0:38:40 – How to avoid paying attention to the wrong type of customer’s wishes] So, I’ll give you a great example, right? People do these surveys all the time. You know, ‘How do you like our..?’ Right? Popping stuff up, right? ‘How do you like it?’ Right? So here’s what happens, is that let’s say 80% of the user base is sort of casual, and they’re not really that engaged. They’re kind of trying to decide, ‘Do I like this or not?’ Right? And then the other 20% of the user base is, you know, hardcore, right? They really love it, right? So, when you pop up this survey, do you know who you’re popping it up to? How do you know that the answers that – and I’ve seen this happen so many times – how do you know that the answers that you’re getting from these pop surveys doing reflect the kinds of people that you really want to help and make changes for? And what you sometimes see is that, actually, you know, the sort of low-value casual users or whatever or the ones whose voices are heard because there’s so many more of them, and so you take the project off in that direction. Meanwhile that particular direction is not a direction that your heavy, valuable users would want you to go. So now you’ve all of a sudden done exactly the opposite of what you should have done because when you pop in the survey you don’t understand the customer level of people that you’re asking. It’s fine to ask everybody, but the question is do you know who’s giving you what answers, right? What kind of customer is giving you the answers? 
ANDY: That’s huge.
JIM: So, it’s another example of the same kind of idea where, you know, ‘Whoah, our survey results say…’ you know? Okay, but what I want to know is what they say by customer value, right? Because I want to do the things that attract valuable customers, not so much the things that attract people who are just trial sample, casual user types. 
ANDY: I mean, that is so huge, and like you said before, it applies to so much more than just marketing at first. Even though it makes a big difference there to product development, but also, I’m thinking to myself about the way that the sophisticated companies that are doing content marketing by trying to figure out what their customers actually care about – so many of them are doing surveys to try to understand what are the pains of their customers, but I’ve never heard of any of them really getting narrow in figuring out, ‘Alright, what do our best customers actually care about?” and creating the content towards that, and it just seems like this idea, these concepts, can apply in so many different ways, and you definitely have my mind running a million miles an hour, so thank you for that. But for some of those founders out there who haven't gone deep, yet, and who are excited as well and want to get started, what is a good sort of first step for them to make some progress into drilling down into their customer data?
JIM: [0:41:42 false start – Well, the idea of actually figuring out who your best customers are and getting a grip on this sort of…] [0:41:55 – Defining a best and a worst customer] So, if we sat around a table right now and I said to you, ‘Define our best customers,’ what kind of answer would I get, right? [0:42:02 false start – So that’s… you know…] And sort of poking around and saying, ‘Does anybody have any…’ you know, and one of the best places to do this, in fact, is, you know, in customer service or the sales force or related. However it is that you do your business, but where you have a lot of interactions with customers, and start with that sort of definition. ‘If we were going to call people ’best customers’ and ‘not so good customers’, what do we mean by that?’ Right? Because you have to define that first. Then you could get into some of this reverse engineering thing. If people want to do a lot more research on this kind of stuff and sort of get a better idea, you could… if you go online and you search about ‘cohorts’ you’re going to find different kinds of discussions around some of these ideas, and some of the applications that are available to do some of this work. You know, a lot of people just do it in spreadsheets and things like that. It’s not that difficult. 
ANDY: Right.

JIM: But, you know, it depends on what your setup is, right? It depends on how easy it is to, you know… you might want to just build it into your own applications and so forth, or… So there’s plenty of stuff out there about it. My own site, or my own blog – – has a lot of the bigger-picture marketing implications of these different things. One of the things that I sort of talk about a lot is, you know, let’s try to pull a lot of these kind of ideas that are drifting around out there like ‘customer journey’, and ‘engagement’, and all of these things that people talk about – ‘Oh yeah, we need more of that!’ but nobody seems to want to join them all together into a framework, right, that says, ‘Okay, here’s an actual business model that we can use in marketing that talks about how do you organize all these ideas into one thing that we can actually measure and generate a monthly report on?’ Right? I mean, if you talk to people for example about engagement, right? It’s like, ‘Well, how do you measure engagement?’ Right? Is there a standard, you know? But that’s one of these kinds of ideas, right, is what you're really doing is you’re defining engagement, right? 
ANDY: Yeah.
JIM: If somebody is using one integration, are they engaged or not? When do they become engaged? Do they become engaged once they use 3? They’ve integrated 3? Right? It’s the same kind of idea we were talking about before. So, now I’ve got, ‘Okay, so that guy’s engaged,’ right? ‘3 integrations? They’re engaged. 1 integration? Not engaged.’ 
ANDY: But it’s figuring that out for your business and getting to the point where you can actually answer that question. 
JIM: Yeah, and that’s where you sort of… why I like this idea of best customer modeling. You just, you know… ‘Okay, let’s decide who our best customers are, and then let’s try to create some kind of map or model that says, ‘Here’s what happened. Here are the things that happened in order for that person to become a best customer.’.’ And I guarantee you that when you start looking at them as a whole – a group… you know, a segment of best customers – what you will find is that they have very similar behaviors, and incidents, and circumstances. So that’s when you find out. It’s like, ‘Oh, so this thing is important to creating a best customer,’ and now you’ve started on your way to turning it into a marketing program.
ANDY: And I think, honestly, you gave so much in that answer, and so for listeners what I’m going to do is I’m going to make sure to link up to as many of the resources as Jim mentioned, but also some others that he’s sent over to me. I’ll link up to his blog. Check out some of those tools that he talked about. But, at the end of the day, it doesn’t need to be too complicated. It doesn’t need to be this crazy effort that isn’t sustainable. Find what works for you and for your business, and just get started to answer some of these questions about who are your best customers, and what do they do differently from the rest? You can see just how much value you can add to businesses by breaking down to ultimately what matters, and that’s getting to the customer level and focusing on that rather than a top-line activity. And so, like I said before, I’ll link up your blog, I’ll link up a bunch of those resources for users to check out, and that blog is for the website, and his book is Drilling Down: Turning Customer Data into Profits with a Spreadsheet. Jim, thank you so much for taking the time today. It was a lot of fun chatting with you.
JIM: Alright, great! Thanks for the opportunity!