Blockbuster

Sometimes I think about how I would improve companies I see around me. I dream up advertising campaigns, I figure out how to improve user experience on their web sites, and sometimes I consider possible alternative revenue streams that leverage existing assets. Yes, I am already aware of the fact I think too much and over-analyze things.

If I don’t talk to anyone about these ideas or post them online, it seems as if the thoughts have gone to waste. Generally, the ideas are specific to one company and do me little or no good keeping secret. The purpose of writing about the ideas would not be to get through to the target company, but to share with others my thought process and possibly provide inspiration for others who may have similar opportunities.

I received a coupon in the mail from Blockbuster a while back, and it got me thinking. The coupon was part of a promotion they were running for an upcoming motion picture award event (Oscar, Emmy, or Academy). It was pretty obvious they blasted this bulk mailer out to just about everyone. This type of bulk mailing seems to be a shotgun approach to get people into the stores. Aren’t there more efficient ways of doing it? I go to Blockbuster a couple of times per year, and that coupon didn’t seem to be enough to inspire me enough to increase my patronage.

There are, however, people who rent movies regularly and thus would be more likely to participate in a promotion like that. Realizing this difference in behavior between me and a movie aficionado, I thought about different ways of increasing activity in each group. The mailer I received was likely to be more effective on the active movie aficionado group than on the group I fit in.

The key to grouping people by behavior is right down my alley. You’re dealing with abundant data (millions of customers’ rental habits) and identifying trends. I would imagine a rental behavior graph would look something like this:

Expressed in that graph is a common philosophy recently promoted as the “long tail.” I am going to blindly speculate that out of 50 million households renting from Blockbuster, less than 1 million rent an average of two movies per week (100+ movie rentals per year). A larger segment is likely to rent an average of two movies per month (25 movie rentals per year). The largest segment, or the long tail, probably rents zero to ten movies per year.

In a mailer targeted on the upper two percentile (the 100+ crowd), if it results in one additional movie rental, it will increase sales with 2% of your customer base by 1%. Now, if you target the sixty to eighty percent of customers who rent less than ten movies per year and focus on increasing their rentals by one per year, you will increase sales with 60-80% of your customer base by an average of 50%.

One additional rental per customer in the lower sixty percentile is much more valuable than one additional rental per customer in the upper two percentile. It may take a more significant discount to get those less active customers to go out of their way to rent from Blockbuster, but there are two very important factors at play.

First, the most obvious, if you discount something enough to eliminate 90% of the profit and sell it to 30 million people (lower sixty percentile), you are still making more money than you would if you reduce 10% of the profit and sell it to 1 million people (upper two percentile). Second, if you double someone’s yearly activity, you are taking a step toward forming a habit (like weekly or monthly “movie night”).

Beyond targeting segments of people with bulk mailers, Blockbuster should be able to react to behavior changes. There is no reason why they shouldn’t notice and react when a customer who rents movies every month misses a month. Why not drop them a coupon in the mail to make sure they haven’t forgotten about you?

There are tools and people available these days for any company to perform intensely detailed behavioral analytics on their customers. Reacting to a specific customer’s behavior is traditionally some a small, agile business owner would do. Today, large corporations have the ability to be agile on a per-customer basis. They will need to perfect the art before their competitors do.

And again, I already know I think too much!