Retention is the New Aquisition
This article with a few select gentle edits was co-written with Phil Olivieri as part of the July’09 issue of Direct Market see here for a PDF of the entire issue.
Retention is the New Acquisition
by Miro Slodki & Phil Olivieri
Ask any business today and it will profess to be both customer-centric AND long-term focused. Whereas the past practice of customer acquisition at any cost has become too costly, it has given rise to the pursuit of new forward-thinking customer retention initiatives that in effect create value. Some even say that this is the underlying principle of Alfred Rappaport’s famous dictum that
Without customer value there can be no shareholder value.
As any marketer will attest, the calculus of the Life Time Value (LTV) metric encapsulates many of marketing’s most important customer behavioral outcomes – the value stream (revenue/margin/profit) and the costs associated with the acquisition of new customers, the retention growth of next best customers (as a function of response rates to up-sell and cross-sell offers), the reactivation of lapsed customers, the loss of customers, the impact of word of mouth referrals and finally the discount rate to reflect the inherent risk/volatility premium of the financial value stream all of which provide an ongoing tally of that customer/segment anticipated retained present value.
Still, there are some things LTV doesn’t accommodate very well, beginning with the basic formula where the use of a single average discount rate runs the risk of leading to under spending on existing customers and overspending on new customer acquisition efforts. Others have also noted shortfalls accommodating the social multiplier-network effect reflecting a brand’s incremental advantages as it crosses threshold levels of scale/community (see Gupta, “Value of a Free Customer”). Hogan et al (2002) also speaks to underlying drivers of purchase continuity like quality and service satisfaction as well as competitive effects.
So how do we define retention? It’s actually a trickier question that it seems. At the most basic level, everyone will agree that retention can be validated at the last instance of purchase. What about the time in between, especially for those who buy infrequently or irregularly? Consider as well that many view retention to be both a state of mind AND a state of being.
Not surprisingly then, our definition of retention will form the cornerstone not only of one’s brand strategy (catering to buyers at one end or partners at the other) but of the company itself. How the company/brand chooses to interact with customers (and visa versa) along the Push Vs Pull continuum in an increasingly interconnected world through experience, word of mouth and reputation can literally transform retention into a powerful acquisition channel.
In fact Gupta, Lehman & Stuart showed that improved customer retention had the largest impact on customer value, followed by improved margins with reduced acquisition cost having the smallest impact. The results show that a 1% improvement in customer retention enhances customer value (and, in turn, firm value) by approximately 2.45% to 6.75%, whereas a similar decrease in the discount rate increases customer value and thus firm value by only .5% to 1.2%. In other words, the retention elasticity is almost five times the discount rate elasticity. (see “Valuing Customers”).
If keeping customers creates superior value, then it follows that greater success will come to those better able to establish not only a value-differentiated brand, but also actively engaged partnerships. Support for this comes via McKinsey which noted that consumers tended to have one of three types of relationship orientation;
1) emotive (strong brand attachment),
2) inertial (habitual brand buyers either uninvolved or don’t feel need to change) or
3) deliberative (frequently reassess and recommit to the brand)
(See McKinsey, “Customer retention is not enough”).
Moreover, McKinsey suggest the greater opportunity lies not in trying to mitigate against outright customer defection, but in seeking to influence expenditure shifts between competing offerings. In their calculations, managing the upward migration of a brand’s share of requirements (with engaged customers) could have as much as ten times more value than concentrating on defections alone. The quality of active engagements is further corroborated by an IBM retail sector study which reports that at (any) given level of spend, a greater proportion will come from brand advocates than non-advocates. (see “Why advocacy matters to apparel retailers”)
We are all familiar with the fabric of social connectivity first studied in Milgram’s Small World experiments. Since then we have seen many popularized models (Gladwell’s Tipping Point, Duncan J Watt’s Big Seed – one can even include the field of Behavioral Finance) recognize the influence of those around us in our decision making. Add to this the evolution from linear to scale power laws made possible by our new found global social network connectivity and one quickly realizes that the pendulum of marketing is swinging bringing us full circle to the realization that retention is both behavioural and attitudinal.
Armed with that knowledge some marketers eagerly embrace the chance to engage one’s customers in co-creational activities across all elements of the brand while others pursue a traditional behavioral relationship orientation. In either event, from a CRM practitioner’s perspective, there are several best practices companies can adopt and implement to realize retention as the new acquisition.
First, it is important to identify best, next best and the worst customers. A mutually beneficial business relationship requires that we identify best and next best customers and collaborate with them through a dialogue to create new value that will benefit both parties over the long term. Deciding which customers to focus on and invest in for growth and which to simply maintain, and in some cases neglect, is the first and most important strategic decision toward intelligent customer retention. It is important to recognize that value creation is a joint experience between the brand and the customer and consequently, value will vary with each. Basic CRM analytics and simple business rules allows companies to indentify and flag these customers in their data warehouse.
Curiously, many companies often overlook the fact that managing customer retention is both proactive and reactive and both need a plan to succeed. Proactive management requires businesses to be able to anticipate customers’ needs based on past and current behaviour, i.e., lifecycle (products or services that customers need throughout their lives), life stage (student, younger independents, older independents, families, retirees) and attrition propensity. One might also consider some form of customer appreciation retention bonus to customers for having graciously supported the brand in the last year. In fact those proactive measures may play a significant role in any reactive retention management plans the business puts into action since it has some foundational goodwill investment to draw against its account with the customer.
Straddling the proactive/reactive management of customer retention are event detection triggers which can be set up in the customer data warehouse using business rules and operational processes to trigger a heads up notice to customers that some aspect of the brand promise has been below expectation, but that the brand is aware of the situation. That ‘simple’ notice not only avoids unnecessary customer enquiries, but also signals the sanctity to which the brand upholds in terms of consistent service delivery.
A best practice is to develop a master contact management plan and strategy (CMP) that will serve as a communications roadmap and optimize interactions, both proactive and reactive, through appropriate channels. The CMP is a multi-dimensional matrix that assigns appropriate messages and treatments by customer across their life stage and life cycle also taking in to account, propensities for cross-sell, up-sell and attrition. Within the CMP, companies can assign relationship investment thresholds based on the value of the customer, which translates into richness of offer, optimal channel selection, etc. The CMP can be operationalized using campaign management technologies for both outbound and inbound channel interactions.
Campaign management applications (CMA) help companies to evolve by shifting to a more customer-centric strategy that delivers consistent and superior experiences to more savvy and demanding customers; it leverages the increasing proliferation of addressable attention channels – including inbound (call centre, retail locations, branches with treatment prompts) and outbound (direct mail, statement/invoice with personalized messages); and strives for responsiveness to individual customer behaviors leveraging real event detection in near real time.
CMA functionality also helps companies achieve the transition to customer-centricity by:
- being customer-aware: the ability to capture what a buyer is saying both explicitly, i.e., leveraging existing warehouse investments) and implicitly (to process that information to determine what to say next);
- providing centralized decision making with optional decentralized execution and co ordination : to determine the best marketing message to extend in outbound and inbound marketing channels, online and offline;
- enabling cross-channel execution: to help drive message and treatment consistency as well as a synchronized seamless experience as customers interact with the enterprise;
- integrating marketing operations: to help marketers improve collaboration and facilitate cross-channel planning, design, execution, and measurement;
- anticipating new customer insight and channel capabilities: attitudinal fusion, mobile channels, social networking relationship channels.
In addition, what’s managed also needs to be measured to ensure the success of all customer retention efforts. Performance measurement is a business imperative and key performance indicators (KPIs) must be created to depict the current state of the customer and generally include such metrics as retention rate, incremental value (revenue/margin/profit), engagement index, etc. And while there is much excitement about the promise of social media channels, there is also uncertainty about the measurement of conversations and the application of any learning to everyday customer management practices. To do nothing is the worst decision, to test and learn the wisest.
So then, perhaps the most important learning of all is that, as marketers and CRM practitioners, we need to challenge the comfort of our data warehouse defined universe to include additional ‘truths’, acceptance of which, will bring one back to the beginning and excel in a connected social world where increasingly, retention is the new acquisition.