Retention and Relationships

Yeah, its bad out there.  As a tech vendor, we’re out talking to a lot of companies.  One theme we’re seeing is companies applying unequal tests to evaluate spending on new versus existing efforts.  That’s normally fine, but now every dollar needs to perform. 

This is one of those times when the tide is going out.  (The reference is attributed to Warren Buffet and goes something like “When the tide goes out, we find out who’s been swimming without a bathing suit.”)

You need to inspect every dollar and challenge your assumptions.  Am I generating visits with my radio?  Am I buying too much TV?  Can I get a better deal on my direct mail by bidding out projects?  Because surely your budget has been cut.  And the first reaction is to cut new spending, instead of asking yourself, “Is this proposal a better expenditure than something I’m already doing?”

Nothing should be sacred.  Sports tickets, luxury boxes, or sponsorships – gone (very limited reach, especially geographically).  Television can pause for a while with minimal erosion of awareness.  Radio can probably get lighter for a while with minimal impact.  Newspapers will be extinct in a few years anyway, so might as well learn to live without them now.  Interactive campaigns are fun, but if they aren’t part of a long term engagement program, don’t bother.  Outdoor…uh, I hope not.  [And I won't get into Operations in general - I guarantee you have lots of dead wood.]

What’s on the flip side?  Email, SEM, SEO, Facebook, iPhone, basic customer segmentation, versioning, response modeling (i.e. don’t mail everybody!), PR, retention marketing (pretty much of any kind), etc.

In fact, it might make more sense to do zero-based budgeting where you fund these initiatives first, then see what’s left for the rest.

Its tough out there.  When Best Buy gets 1/8th of HQ staff to take a voluntary layoff that tells you most people there expect it to get worse – and want the severance instead of an involuntary termination.

So as everyone hunkers down, where do you cut?  If marketing expense as a percentage of revenue stays flat or goes down somewhat, those are real dollars that have to come out of the original plan.

Having lived through this on an 8 figure budget, its not a simple question.  Its tempting to either a) cut 100% from a couple of line items to make the number (easy to execute) or b) cut a couple % from every line item (easy to explain).  The real response has elements of both approaches, but what’s important is how they are applied.

Standard ROI Expenditures

These are marketing efforts where the return on investment is well described by classic economics, that is, an upside-down U.  The initial investment has a high return, then it eventually drops to 0, then it turns negative when saturation occurs.  Search engine marketing (SEM) and optimization (SEO), online marketing, CRM and direct marketing are all in this camp.  Good companies are already at the most efficient point of ROI on these investments.  Taking a few percent off these budgets leaves spending that is still very effective.

Discontinuously Effective Expenditures

This is the tricky part.  Some types of spending look like an S curve combined with an upside down U.  The initial investment has a low return, then it hits an inflection point and rises rapidly, then follows the classic upside down U.   For example, a rule of thumb for TV or Radio is that 100 GRPs per week is the minimum to be effective. So if you are buying media right around this level, you need to trim markets or weeks, not points per week.  Your choice of which markets to trim is influenced by your current awareness, maturity, other investments, and overall history.  You might offset this 100% cut by maintaining the other types of spending to maintain some presence in that market.  This is oversimplified, but hopefully you get the point.  You can extend this approach to verticals, partnerships, channels, and other areas where a continual, sustained effort must be maintained or effectiveness drops off quickly.

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.

At Starbucks of all places.

I’m used to going to Flora Grubb out in Bayview for my Ritual Coffee from their awesome coffee machine.  Works out well, since my wife drags me there to shop for interesting house plants.  Even trade.

Now suddenly the same machine (a Clover, I guess) shows up in Starbucks.  Kudos to Schultz and crew for remembering why people started going to Starbucks in the first place.  (I even heard some electronic music in there for the first time in  years – good to see less pandering to the mean.)

Let that be a lesson…while its easy to coast on reputation (as Bucky’s did for a long, long while), staying focused on what made you successful and continuing to innovate will keep you in front.

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

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.

Catching up on past articles – here’s my August 2007 column at Chief Marketer.

I look at the difference between discovery – information and insights about the client – and strategy – what to do with the client to effect change.  It was prompted by the common question I get asked, which is “what should I do?”  So I tend to ask back, “what do you need?” and so on.  Enjoy

Last month’s column for Chief Marketer.  I’d planned on covering the first three elements in more detail before publishing this article, but we’ve been very busy at the office for the last couple of months.

This column touches on the power of recognition, the value of real interaction, the retaining power of collaboration (and the low cost content it can provide), and includes a push to enable advocacy by your customers.