Retention and Relationships

…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.

There’s a lot going on out there, as I noted cuts at Neiman Marcus, Barnes & Noble, Google, rumors of a Microsoft cut, and the Gottshalks bankruptcy filing in the last 30 minutes.

In addition to updating your resume, now is a really, really good time to examine the decisions you make during your work day.  Are you assessing each task for value creation?  Are you considering how to do a task better or cheaper?  Tweaking your mindset now will pay dividends very quickly, as your output produces more value and less busywork.  For example, if you don’t look at your website as though it is a conversion engine, you are missing the point.  Design is nice, content is nice, good writing is nice, but at the end of the day, are you measuring its effectiveness at meeting key objectives, namely leads and/or revenue?

Question your routine, and I guarantee you will quickly find ways to add more value, and make it that much less likely to be on the wrong list when the inevitable layoffs occur.

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.

OK, love is a strong word here.  But gaining insight into share of wallet, especially when it can be cross-tabbed with other data, is one of my favorite ways to learn how customers are engaging with your company.

I looked at a simple data set from Marketing Charts in a post elsewhere which rekindled my love for the metric.  I used this extensively as a direct marketer in a past life, because it told us so much about where there was opportunity for additional revenue.  Plus I tracked it over time, which made it a great leading indicator of softening or strengthening demand.

Lets take a simple example.

Lets say your customers report they spend $200/year at your store, and $1000/year total in your category.  6 months later, they report $250/year at your store, and $750/year total in your category.  You have 2 things to figure out – is my share of wallet increase from 20% to 33% real, and is the 25% decline in category spending real.  But you have good information from which to continue to explore.  In this case, if they are real, then you can get excited about the successful increase in market share, and be terrified by the decline in market size.

Another example is similar to how I looked at the Marketing Charts example – what if top 10% customers spend $1000/year with you and $1500 total, while next 10% customers spend $400/year with you and $1200 total?  The opportunity in the next 10% is actually greater than the top 10%, although the downside risk of not retaining top 10% is higher.  Knowing the difference, however, lets you craft strategies that best accomplish your objective(s) in each segment.

My latest at Chief Marketer.

uTANGO has a business model built on a 30-year time horizon.  What if all companies took a longer view of their customer relationships?  Lifetime value would be more heavily influenced by retention, leading to changes in the allocation of marketing resources.  Plus acquisition spending would eventually come down, as revenue from existing customers begins to grow more quickly.

I’ve seen a flurry of metrics-related articles recently that generally show direct marketers and other data driven marketers don’t track their metrics closely enough.  They don’t follow lifetime value, or don’t measure churn, or don’t know conversion rates of email, or one of a million different KPIs that we could manage our businesses with.

Well, that’s OK.  As long as you track something that relates to your basic assumptions about why your customers care about your company, you’re ahead of the game.  Don’t get me wrong…all of the metrics mentioned above are incredibly important (especially the changes over time) but ultimately they are resultants and trailing indicators.

Have a point of view about why your customers care about you and do business with you, then measure the things that tell you the most about your point of view.  Anything else is nice, but not the end of the world if you don’t track it.

One company I know was very interested in average sales per customer in various relationship marketing programs.  Some programs worked better than others, and their efforts were focused commensurately.  However, it wasn’t until months had gone by that they realized the underlying cause of the sales differences was the presence of certain big-ticket category purchases.  Suddenly their understanding of the business changed, and they tracked % of activity in key categories by program, plus which campaigns drove the big ticket purchases.  This focus has transformed their business and their metrics now focus on the long term drivers of value, namely activity in a select few categories that best predict larger lifetime value.

There’s a fascinating study going around from the CMO Council that looks at how marketers are interacting with their customers.  To summarize, they’re not.

49% named CRM or database systems as their main information source on customers.  75% don’t have advisory boards or online communities.  30% don’t develop their own customer segmentation.  Plus, there are plenty of other insights on the CMO Council website.

From my perspective, every marketer should talk or listen to customers every week.  Whether that means walking onto a sales floor as a retailer, reading customer satisfaction survey responses, listening in to a call center, or participating in weekly account manager conference calls, keeping up to date on customer needs, concerns, and input is crucial.  Qualitative input helps balance the tendency to rely solely on quantitative input, which many of us practitioners have tended to fall back on.

I had an interesting call with a company a week ago that has incorporated Fred Reichheld’s net promoter score deeply into their operations.

While I can’t comment on the strength or weakness of using NPS as a KPI, it showed how focused an organzation can get when it isolates one KPI and tries to maximize it.

Technology choices are based on impact on NPS.  Champion/challenger tests focus on NPS.  In fact, it seemed everything focused on NPS.  It was actually quite refreshing, because everyone there knew the most important goal of company, and every decision was made to improve result son one dimension.

This company has been very successful over the last five years, and I will guess its because they focus in on one thing, and everyone works their tail off to make it better. They don’t get distracted by the latest shiny object to cross their path…and just relentlessly optimize their single most important KPI.  Hard to compete with that.