Retention and Relationships

I’m starting a fairly long series of tips for retention and loyalty program managers on the corporate blog over at Loyalty Lab.  The first discussed program fund rates and is a good starting point for someone thinking about putting a program together.

With a day to think about it, I underemphasized the impact of program design on fund rate.  The art of design in this case is finding a balance between perceived fund rate (what the customer sees as the fund rate) with the actual fund rate (the resultant rate after breakage) while still meeting program objectives and staying fair to the customer.

A lot has to do with whether a redemption is a good thing or a bad thing.

In retail, you have to assess how much incremental revenue a redemption will generate, either through incremental spend during the visit (i.e. customers typically spend $50 when redeeming a $5 reward) or through incremental visits (i.e. overall member frequency increases by 0.75 visits/year when they reach a minimum spending threshold).  For many retailers, generating visits is so expensive that they want redemption, since that generates a visit.  In this case they want a low breakage rate.

In airlines, a redemption is pure cost, albeit low (the incremental cost of filling another seat is very low, so as long as they leverage existing capacity effectively, costs are not high).  The main benefit to the airline is share of travel wallet, so there is little benefit on the back end other than keeping customers happy and maintaining positive brand image in the social sphere.  Breakage here is a good thing, since it keeps costs down.

Other industries have similar considerations.

I’ve always visualized this as a multi-dimensional optimization problem, meaning the real challenge is framing the problem properly.  That’s why we’ve always spent a good amount of time understanding the behaviors that matter, the revenue generation possible, and the sources of cost in order to drive towards a set of solution options to consider.

I listened to an Invisible Hand podcast today with Douglas Hubbard on How to Measure Anything, and was struck by the similarities between his methodology and how we have to approach modeling of client businesses in relation to customer loyalty.  Topic for another day…

If there’s one unexpected mental shortcut I’ve learned from examining dozens of corporate loyalty efforts and customer databases, its that just about any idea will work for 20% of customers. The problem for marketers? You can’t predict which 20% with a lot of certainty, and there’s only partial overlap between any particular 20%.

Price promotion? 20% (probably more, but you get the point)
Loyalty program? 20%
Recognition? 20%
Special event? 20%
Early access to new releases? 20%

The list goes on. A few get more, many get less, but 20% is a good rule of thumb. Why 20%? Hard to say, but that’s what the data says.

The takeaways?
1) Incorporate as many interesting ideas as you can manage effectively, since each will produce results. But don’t stretch too thin, or all of them will drop off.
2) Choose ideas that do not overlap, to ensure maximum return and responsiveness.
3) Budget has an impact, no doubt. Stack ranking from cheapest to most expensive isn’t a bad idea.

There’s a whole separate group of initiatives that only 1% will respond to…that’s for a later post.

Did an interesting interview with the CMO Council as part of their loyalty research initiative at loyaltyleaders.org, which will show up in their report in a few months.

As with most interviews, some stuff comes out that wasn’t planned ahead of time. But what stuck with me were my comments to focus on just a few social media/marketing options vs. going after many. So I wanted to expound a bit.

Many companies are paralyzed by social media and how it relates to customer retention. Like anything else, start simple. Pick one area and start, learning more and determining how to incorporate the results into daily operations. Over time, the relationship between actions and results will become clearer, and you can make the business case for increased (or decreased) investment.

Once you master one, add another and go through the same process. It doesn’t have to be difficult. What seems to cause so much uncertainty is the proliferation of options that all appeared at once. So my guidance is to simplify, start narrow, and expand over time.

My latest article for the web channel at Multichannel Merchant.

I think my point didn’t really get across, but its mostly my fault.  The bigger point here is the separation between loyalty and value, and that customer experience is a great driver of loyalty, which in turn improves value.  Since this is part of a longer series of columns that will eventually tie together, I’ll back and rethink this one.

…is my latest article at Chief Marketer.  Here’s an excerpt:

“It’s inevitable that customers leave.  Your customer base is constantly evolving, and your customer loyalty and retention metrics likely hide that natural dynamic. Traditional measures look at full attrition and ignore shrinkage, maintenance, and growth. Savvy companies look deeper and respond to incremental behavior changes within their customer base.

The two measures presented below, dollar retention rate and replacement rate, let you spot issues in your retention and customer development efforts early and focus your decision making on the results you really want – revenue and profit.”

Read the full article at Chief Marketer.

This was prompted by internal research we’ve been doing to identify trends in customer behavior that can help predict larger shifts in revenue in the future.  We’ve found a lot of interesting stuff and spun off many ideas, of which this was one.

Good piece at Harvard Biz Publishing today, but most of the community commentary misses the point.  Offering price promotions to all customers isn’t loyalty marketing, its price promotion.  Some customers respond only to this message, but many would be just as responsive to a different message (new product intro, local event, cross-sell to a recent purchase), to great service, or to the brand as a whole.

The authors rightly point out that usually only 20% of customers are profitable.  But its not that simple, since what matters is the marginal profitability of the last dollar sold.  You have to cover those fixed costs somehow.

A different interpretation of the tactic they criticize might be:

Resources are limited, so focus on the most profitable customers.  If you have the resources to focus on unprofitable customers too, go for it, since they help cover fixed costs.  But try to allocate your overall resources based on potential for future profitability, not evenly across all customers.  Only when you are totally out of time, creativity, and employee bandwidth should you shift to pure price promotion.

2008 has been a brutal year for most businesses.  Interestingly, there’s a sudden upswing in interest in customer retention.  I guess even the solid, predictable customers aren’t spending as much as they were.

A good first lesson in retention ROI is to understand that the first chunk of investment will have a high ROI, pretty much no matter what you do.  After that, channeling investment into the right interactions with the right customers is the key.  And unlike most marketing expense, you can figure out the right way to manage this second chunk of investment pretty quickly.

One of the really smart people in the customer retention space is a guy named Luc Bondar at Carlson Marketing. He did a presentation a couple of years ago that quoted academic work from 2001 on the value of customer retention. It is on slide 7 in this presentation, and essentially states that a 10% improvement in customer retention leads to a 30% improvement in overall customer value. This is contrasted with a 10% improvement in acquisition cost (which adds about 1% in customer value) and a 10% improvement in margin (which adds about 11% in customer value).

Now this is very apples-to-oranges, since the investment needed to achieve these 3 different 10% improvements vary widely. But the basic point that translates a 1% retention improvement to a 3% customer value improvement is the important one. Generally if your company has not put much effort into customer retention, you can see big improvements without a large investment. So do the math – what would a 3% improvement in customer value do for your company’s bottom line? And compare that with the cost to deliver the first 1% improvement in retention. Chances are that ROI looks pretty impressive.

So its time to get something off my chest.  Why in the world doesn’t every company make its customers the number 1 priority every day?  Its really mind boggling, actually.  In a prior life, whenever I saw activity rates drop in a location or region, I made sure to search out the appropriate regional manager to assess what looked like a growing problem.  I watched retention rates like a hawk – celebrating when it improved, and in despair when it suffered.  Our clients today see great results across the board from paying attention to the actions and behavior of their current customers.  So why isn’t it on the top of every marketer’s list?

I’ll explore this some more in the coming days, including some investigation of where the dollars and attention are going today and why.  My goal is to build the case for investing in customer retention before ANYTHING else.  Stay tuned.

I’m completely biased, of course, but the release of Virgin America’s point purchasing capability for Elevate members is a truly exciting step forward in customer retention.  Customers can use points to buy flights, with point prices based directly on the underlying flight price.  Just think about what that could mean to the traditional yield management approach for the airline industry.

Check it out: http://www.virginamerica.com/va/home.do