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Five steps to understanding customer retention December 4, 2007

Posted by Elana Anderson in Customer Analytics, Database Marketing, Marketing, Marketing Measurement, Marketing Strategy.
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 I recently responded to a question from a network that I participate in.

What is achievable customer retention and is there a level of customer retention that is not profitable to reach?

I’ve talked with a lot of marketers about this question and, frankly, there is no easy bake answer. It’s easy to look for a quick published statistic or benchmark and call it a day. But, how much does knowing that your retention rate is better than your competitor’s really help your business? It may help CYA, but it doesn’t help your bottom line.

IMO: marketers rely way too much on benchmarks (open rates, click rates, retention, etc.). Rather than rely on industry benchmarks (I don’t even know of a comprehensive source for retention by industry), I encourage marketers to:

  1. Establish a baseline for current average retention. Examine your customer base to understand average retention. Better yet, do it by customer segment if you can.
  2. Understand the timeline to customer profitability. Every business has different acquisition and services costs so if you don’t already know how long it takes for a new customer to become profitable, then you need to figure it out. Subtract your costs to acquire and serve the customer from average customer revenue over time. Companies that are really good at this use individual customer revenue and get into cost minutia to attribute costs at an individual level and even include costs like physical plant and electricity. But, if you’re just getting started, keep it simple and stick with averages.
  3. Set a target retention rate. The longer it takes to become profitable, the higher the retention rate needs to be. Establishing and monitoring a retention KPI will tie retention directly to business performance.
  4. Define marketing tactics to improve retention. If current retention is not at the target level, then set improving retention as a key business objective and drill down into a series of tactics aimed at moving the needle. Don’t shoot in the dark though. Engage a statistician to do some data analysis to better understand what key factors that correlate to longtime customers or customers that attrite. Then, establish marketing and customer service practices and campaigns that are specifically focus on encouraging the factors that are correlated with long-term customers.
  5. Measure results consistently. Periodically, reevaluate the retention rate to see how what you are doing is impacting customer retention. Make sure you are also considering metrics that help you tweak your programs at a tactical level too. Specifically, are the tactics you have implementing really encouraging those factors that correlate with long-term customers?
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Comments»

1. Suzanne Obermire - December 4, 2007

I like your ideas around retention, Elana.

I also encourage folks to delve deeper into retention–don’t just measure how many customers you’ve saved, look at WHO you are saving. For example, only focus retention dollars on customers with highest profit-potential. Sounds like a no-brainer, but in my experience, the norm is to treat every customer the same–they ALL need to be saved.

When, in fact, there are some that you’d probably be better served if they moved to your competition. You know, the folks who are bad credit risks, those who spend WAY too much time needing customer service, etc, etc.

Then, there’s the other angle–there are some good customers who will NEVER leave you. They either are highly loyal or they’re too lazy to make a move. If you can identify this sector, there’s definitely no need to focus retention efforts here.

Retention is a tricky thing. I agree with your focus on analytics and measuring. Thanks for starting this discussion.

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2. Elana Anderson - December 11, 2007

Suzanne – I couldn’t agree with you more. In the Telecom industry, for example, I’ve witnessed this amusing (from the outside anyway) scenario in which acquisition groups are running programs that ultimately end up acquiring customers that are likely to churn the second they get a better deal elsewhere. The same thing is true in the credit card industry. To try to retain those customers, we then invent costly retention programs. If we focused more up front on understanding what makes a good profitable customer and customer relationship, seeking those customers, and creating incentives to encourage the “right” behavior we’d be much better off in the long run.

Unfortunately, so much of the marketing behavior we see today has its roots in poorly structured metrics and siloed organizations. Solving these issues is what the CMO job should be about.

3. Tom Lutzenberger - June 13, 2008

Bravo! You just managed to merge the concept of statistics/metrics and marketing into one common sense approach! The two fields generally dislike each other. Marketing wants to be fluid and focus on ads, concepts, demographics, promotions, etc., while statistics is about as dry as accounting. It is the record of being (unless of course you get into probability). But the two really go hand-in-hand when developing a good, tight marketing plan and realistic expectations. And customer retention is a key part of a good plan for success. We’re going to crosslink your post so our readers can enjoy this piece as well.

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