Retention and Relationships

There’s a natural tendency to panic the first time retention metrics turn the wrong way.  Don’t.  Start by looking for the outliers in performance right away.  That way you can focus your limited budget and resources on the segments of customers most under threat.  Don’t spread your dollars evenly – focus on the biggest opportunities.

The easiest segment erosion to spot is usually geographic.  If you find regional problems, examine the economics and competition in the region.  Economic issues should be addressed very differently than competitive ones.  That is, determine if the pie is shrinking, or if your share of the pie is shrinking (or both, yikes!)

If you have the information, see if there are differences based on lifespan (vs. historical).  That is, how has retention changed among long time customers(>1yr), relatively recent customers (3mo-1yr), and new customers (<3mo).  Some other areas to explore are cross-category engagement, non-revenue engagement, and net promoter score (if you have it). 

If you have demographic information, great, use that too.  But not many companies have enough to do meaningful data mining with this.

Once you have a sense of where the problem is, you can really focus on the strategy and tactics to reverse the trend.  Remember that small changes have large results, so set your initial goals to maintain your current retention levels and move to improve once you’ve stabilized your business.

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

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.

Knowing which individuals are your customers is a crucial task for every company.  It’s easy to do in business-to-business companies, but can be quite difficult for consumer-focused companies. 

There are two parts to this problem – who is the customer, and what did they buy?  While you can solve the first part of the problem without the second, that’s not recommended.  You will have no way to calculate customer value, making future optimization decisions much more difficult.

So the best approach is to tackle both parts simultaneously.  In retail, loyalty programs and credit cards were the traditional way to gather customer identities and connect them to individual transactions.  This approach still works.  The other major approach, data appends, now depends mostly on reverse appending phone numbers, which is much tougher due to rising cell phone penetration (which can rarely be appended).  In certain circumstances, email can be used as the tracking mechanism outside of a loyalty program.

Companies can reduce the barriers to identification with newer technology (such as new point of sale systems) which can be expensive, or with great relationship programs and a great brand.  The former increases the capture rate at the point of purchase, the latter increases a customer’s willingness to raise their hand and be tracked voluntarily.

The mix that makes the most sense for your business depends on your current capabilities, budget, and overall objectives.

If you have nothing today, I’d start with a relationship program with soft benefits, requiring an email address.  If you have a high-throughput point of sale/interaction, think about using phone number as another identifier.  Bar coded cards are the most accurate, but not all consumers are willing to carry them, so you will need a ubiquitous backup identifier, and phone number has the benefit of being reverse appendable (no, its not a word, but it should be).  So at minimum, you could connect multiple purchases over time to a specific phone number, even if you can’t identify the individual.

Down the road, you will end up with more records than customers.  At that point, bring in a professional data hygiene firm to help with merge purge.

My latest at Chief Marketer.

I see 7 key elements in best customer management.  This first column focuses on the 3 basic ones:

Identify – Understanding who an individual customer is and what they have done and bought.

Communicate – Messaging an individual customer with relevance to their needs and prior actions.

Reward – Providing and promising incentives and benefits based on their activities.

I’ll spend time over the next few weeks exploring each of these areas in depth before the second column is published with the other four elements.

Its now time to find out how effective everyone’s relationship efforts were throughout the year. Confronted with a blizzard of offers, catalogs, ads, and products, consumer choice will come down to who can cut through the clutter.

The first test is Thanksgiving weekend, where companies are pouring email and direct mail into the hands of key customers (well, lets be serious, everyone is getting something).  I count inbounds from 46 different companies on personal accounts on Monday-Tuesday alone, plus direct mail inbounds from another 33 on the same days.  While deals still influence visitation if someone offers just the right item, nowadays the choice is heavily influenced by our relationship with the destination.  Its nice that some companies are reaching out to me now, but trying to relate to me once a year just has little impact on my decision.

The second, and more interesting, test is the email and direct mail they deliver in the 3rd and 4th weeks of December.  Who will try and relate to the gifts I bought last year, and point me towards similar categories?  Who see that I respond to coupons?  This is the fun part of holiday…I’ll come back to it in January and analyze.

My latest article for Chief Marketer is one that influences everything we do at Loyalty Lab.  The idea of reserving substantal resources for hidden programs is key to long term success in relationship programs, especially for companies where a small number of customers account for a substantial portion of revenue and profits.

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.