Customer Magic Quadrant - the golden pot for the digital commerce engagement

Customer Magic Quadrant - the golden pot for the digital commerce engagement

Learn how to create an easy and powerful way to "clusterize" your customer database by using the DORO and AOV KPIs to build a unique view of the Customer Magic Quadrant.

Are you a marketing manager or a data scientist and want to create clusters to improve your marketing campaign by engaging your clients in a different way?  How to define what clusters to create? The secret towards sustainable online retail rests on the ability to increase two KPIs: the DORO - Direct and Organic Recurrent Orders and the AOV (Average Order Value)

Phase 01 - Let's start with the DORO

You can calculate the DORO by applying numerous methodologies. You can use the LTV as an indicative of DORO. If the average DORO of a company is 4, that means in average after the first order, customers come back 4 times over the next 12 months through organic and direct traffic channels (without marketing acquisition spent). Besides margin and profit, the combination of DORO and AOV are the most valuable KPIs for a digital operations valuation.

How to calculate the DORO:

1. Take your customer data base and aggregate from the orders database a column that shows how many orders each customer made in the last 12 months when coming from organic or direct channels(A). Important: Only pick clients that made orders in the last 12 months. If a client made an order 12 months + 1 day ago, you should discard him.
2. Create a new column (B) that shows the total quantity of orders minus one (A-1). You will end with a lot of customers with “0” (clients that  bought once only - which from a recurring point of view aggregates to 0)
3. Make the the average of all customers that have 1 or more on column B, then you will get you DORO average number

You might use the example below to guide you:

Now let's add a chart. Plot from 0 to the highest DORO value. Example:

You will expect a curve like the one below.

It is also good to check how many customers (%) you have below and above the average.

Phase one of the quadrant is done. Now we have the vertical line of the quadrant. Let's go for the next dimension.

Phase 2 - Calculate the AOV    

Would it be fair to treat your customers differently by only considering the DORO? Do loyal clients receives better customer care attention, better promotions, etc? Maybe not. Imagine you have Customer A with DORO 11 (meaning they made one order per month) and Average Order Value of USD 20,00 and Customer B with the same DORO 11 and USD 80,00 as AOV. It is obvious that you cannot engage them with the same approach.  So let's create the second dimension of the chart.

How to calculate the Average Order Value:

1. Take your customer data base and aggregate from the orders database a column that shows the average basket for each customer (B). Important: Only pick clients that made orders in the last 12 months. If a client made order 12 months + 1 day months ago you should discard him.
2. Make the  the average of all customers, then you will get your AOV (e.g. AOV = USD 45,00).

Now plot on the vertical line all the customers average order values grouped by ranges of AOV. Draw 9 horizontal lines from zero to your max Average Order Value (e.g. Min AOV as 40-> $50, $50->$60, so on, until ->120 max value). Note that the range value should be with the same gradient (like a simple analytical projection). To do this, you can easily pick your max average data (e.g. 120 max value) minus the min average data (e.g. 40 max value)  always good to discard .5% outliers - and divided by 8, and then you will define the first range edge:

e.g. USD 120 / 8 = USD 100 - this is your range gap

Draw on the chart the gap lines.

Highlight the DORO average and draw a vertical line. Also, highlight the AOV median and trace a horizontal line on that.

Why the median? The Magic Quadrant is an engagement tool so we need to distribute the customers in a way that we can avoid wrong interpretation. Mediana gives you 50% of customers in each side of the quadrant. This will create a better-distributed chart.

Now it is where the magic appears! You will have something like this.

Let's put now the numbers of customers in each quadrant.

The CMQ defines four groups that you can engage in a different way. The customers in this quadrant are the creme de la creme asset of your company.

Remember: For the Customer to be here in the quadrant means that he buys only through Direct or Organic channels and buys more than once a year. So all the groups are highly valuable.

1. The Q1 defines your best customers (the ones that are loyal and buy high values) - let's call them “Champs”
2. The Q2 defines the ones with high organic recurrence rate but small sized baskets, let's call them “Birds”
3. The Q3 defines the ones with lower organic recurrence and lower basket size, let's call them “Dogs”
4. The Q4 defines the ones with lower organic recurrence but with big basket size, let's call them "Cats"

Customer Magic Quadrant - evolution analysis

To facilitate the understanding of your companies evolution, you can check the CMQ every quarter populating the data as a planet in the space and comparing the mediana from AOV and DORO you will be able to really understand if your company is evolving or not.

Pick the DORO average and the AOV mediana per quarter and plot it in the same chart.

Then you can draw a line linking the dots of the same year and you will see clearly if you your company is evolving or not in the Customer Magic Quadrant

This evolution lines might be a very good indicator or even be a correlated curve with the companies valuation curve.

Conclusions:

This article has the objective to drive your attention to the two main KPI's of a digital commerce company. The retails used to manage the organization by antique parameters. The DORO average and the AOV median combined gives you a sense of what your company represents in the minds and share of wallet you detain of your customers.

This article, on purpose, is ignoring the customer's data that comes from paid traffic. This data is as important as the direct and organic data but naturally, it should be part of the daily analysis of the company. By embracing the DORO KPI, you are giving your company a chance to really play as a brand in the digital market. Brands that value customers with a pure loyalty relation. If your DORO and AOV numbers are good that means that you really are a customer-centric company. If your numbers are not so good, that shows you are more a product-centric company with "buying revenue" strategy.  This is not sustainable. To be in your customer's minds and improve your share in their share of wallet is the only way to thrill in the digital commerce market.

Mariano Gomide de Faria

More articles in: https://blog.vtex.com/author/mariano-gomide-de-faria/