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Retention is the New Aquisition

July 23, 2009

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.

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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.


TV Commercials 2.0 – revisited

May 29, 2009

This post was first published on the Canadian Marketing Association blog on January 29,2009 and recently revisited (Let’s Vote) by Hollie Shaw at the National Post.

In between there have been several venerable print/newspaper properties succumb to declining ad revenues as business models adjust themselves to changing competitive and economic conditions.

Over at Millward Brown – Nigel Hollis has also been asking questions (see here, here and here) regarding TV commercials making the point that despite media fragmentation it remains a leading, powerful and current weapon in the marketer’s arsenal.

But I ask that as you read through the rest, to wonder aloud…. if advertisers had to compete for audiences (and not simply buy access to them), whether the competition wouldn’t  unshackle the advertiser’s craftsmanship – to make one stop and engage with the communication instead of reaching for the fast forward button.

One might argue marketers best interest is to create sales generating ads from the outset…perhaps … but that doesn’t explain why so many commercials are being zapped. The only answer is to have marketers, advertisers, broadcasters and consumers working together  learning  how to create better value for each other. No doubt these ideas need further refinement – but the point remains the status quo is quickly becoming an ineffective option.

Here’s the original post:

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For some time now parts of the marketing world have been wondering if the growing problem advertisers are having getting their commercials seen by their intended targets is not a problem of their own making.

One only needs to look at the Clio awards to see some great commercials being produced that stop traffic (and drive sales?), but these are the showcase creative executions that do not reflect the main stream advertising that is broadcast day in and day out. And that’s part of the problem, its push based advertising and some of it is not as good as it could/should be. This started me to wonder if we might see greater success (on many levels) if we adopted a google customer voting approach to TV commercials.

So here’s the idea:
What if we allowed consumers to come to the program/station website to preview and select which commercials they would like to see? They’ld have an opportunity to pick from a pool of let’s say 10 commercials from which they select their final 5. The “Top 5” commercials with the most votes get aired, the rest…

Now the financial model for the networks would be based on 3 streams.
1. A fee from advertisers who wish to be submitted into the pool, plus a second fee for each commercial viewed and voted on.
2. A subsequent fee for the airing of the winning commercials.
3. Free analytics for the winners while losers would have to pay.

The station/program have an opportunity to wrap a contest around the voting event, spike program interest with teasers and get important viewer data in advance of the airing. Those ads that don’t make the cut, can try again – but if it fails to solicit a customer following then the advertiser has learned something about their commercial execution. Consumers could be encouraged to watch the aired commercials by participating in some on-screen promo/QR code event.

If you think this is a little far fetched – have a read of a similar approach being taken by Pepsi for the Super Bowl as they seek to get consumer input on which spots consumers will get to see. Pepsi Tries Super Bowl Spot Selection 2.0

So what do you think?
If consumers could pick which commercial they would see, would that:
1) Raise the level of commercial entertainment/communication value of the ads
2) Provide additional value to advertisers and revenue for broadcasters
3) Increase the % of viewers that watch and retain the messages being broadcast to them
4) Give consumers a sense of ‘programming control’ that would help broadcasters ‘engage’ their audience

Or do you feel it’s too little, too late.

In case you haven’t had your fill of TV commercial, this links to my collection of favorite commercials like Apple 1984 and others…

Is it time we fired our Shareholders? revisited

May 25, 2009
This article was orignally posted on the Canadian Marketing Association blog on June 25,2008 to speak to the financial crisis besetting the economy. Since then, we have had various parties pointing the fingers of blame on all of us, the media,  business, government.

CNN’s Anderson Cooper ranked the consumer as  first on the top 10 list of culprits for the collapse. Michael Useem writing in the Washington Post (The Officer Should Eat Last) places the blame on an absence of (corporate) leadership. Others point to the media as this watershed  exchange between Jim Cramer (MadMoney) and Jon Stewart on The Daily Show – Thursday March 12,2009 (official clip, unedited clip)

In truth, the ultimate culprit IS us and our tendency to pursue short term solution paths because of our constrained ability to measure/predict beyond the near-term and perhaps impatience brought upon by the accelerating pace of change around us as illustrated by Ray Kurzweil.

Until we become better forecasters, the only ‘answer’ is a set of higher guiding principles as the logical pursuit of short-term can result in unintended consequences as illustrated in this seminal article (The Tragedy of the Commons) by Garrett Hardin.

Which ultimately raises the question of cause and effect – if we acted with one set of beliefs – then our assumptions for the future would be made easier because of our appreciation/understanding of those  implicit underlying assumptions…believing in long-term allows us to better at long-term.

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The Problem:
Peppers & Rogers call it Short-termism. (Rules to Break and Laws to Follow)
A condition so dire they rank it as their #1 rule to break for a company to succeed. It speaks to the pressure the stock market places on meeting short-term profits and expectations – sometimes culminating in truly tragic consequences as evidenced by; Enron and Arthur Anderson, the $300+Billion US sub-prime mortgage crisis and even reaching into allegations of fraud:

SEC Commission charges that Adelphia, at the direction of the individual defendants: (1) fraudulently excluded billions of dollars in liabilities from its consolidated financial statements by hiding them in off-balance sheet affiliates; (2) falsified operations statistics and inflated Adelphia’s earnings to meet Wall Street’s expectations”

Ironically, the quest for trying to meet the short-term profit goals of the stock market (perhaps also spurred on by a desire to merit contracted bonus targets) actually wiped out more shareholder ‘value’ than ever would have happened otherwise had but a modicum of fiduciary responsibility prevailed.

“…But along with the goal of accountability, there’s an unintended consequence since it effectively tells CEOs that their continued employment depends on meeting short-term goals. That’s because Sarbanes-Oxley has made boards less hesitant to dismiss CEOs, and the boards themselves serve at the pleasure of shareholders and their institutional fund managers, who are increasingly looking at short-term results.” according to Jagdish Seth, Professor of Marketing at Emory University: Are U.S. Companies Doomed to Keep Planning for the Short Term?

While dramatic and extreme, these aren’t isolated cases. Consider Southwest Airlines, often sited as a leading customer-centric organization (Ranked #2 on Fortune’s 2003 Top 10 Most Admired Companies in America) and their fall from grace in 2007 as reported by CNN:

“Discount air carrier Southwest Airlines flew thousands of passengers on aircraft that federal inspectors said were “unsafe” as recently as last March, according to detailed congressional documents obtained by CNN.”

While the airline claimed flight safety was never an issue that message was not heard judging by responses to the story from readers.

“…..Once trust is broken, it is hard to hand over the lives of my family to a company that does not have our best interest and safety at heart.” Phil – March 10, 2008

“I’m a retired airplane mechanic.…Thank de-regulation for your cheap tickets, but the excessive competition in the industry means cost controls eventually get a stranglehold on every part of an airline, except executive compensation…The next time you buckle in, remember that you are only getting as much airline safety as you were willing to pay for, and have a nice flight.” JC March 7, 2008

There’s a sizable concern that things just aren’t right. When Bain completed their 2007 global survey they found a ratio approaching 2:1 of managers (43 percent agreed while 25 percent disagreed) who felt their companies would have better long-term results if privately owned.

Some companies have intentionally avoided a stock exchange listing for that very reason.

“Certainly one of the advantages is being able to manage for the long term without having to become obsessed with quarterly results. When a company like ours (Bechtel) is taking on major projects with long-term risks, it is certainly advantageous to have that longer-term perspective.” Jonathan Marshall – Bechtel Source

Others purposely engineer their ownership structures to protect their ability to thrive in the long term. Google’s IPO submission read in part:

“The standard structure of public ownership may jeopardize the independence and focused objectivity that have been most important in Google’s past success and that we consider most fundamental for its future. Therefore, we have designed a corporate structure that will protect Google’s ability to innovate and retain its most distinctive characteristics.” Source:

Some point out the short-termism problem is “contained” to certain stock markets.

“…Other than London, the European stock exchanges and especially their Asian counterparts tend to have limited liquidity because of family ownership and bank holdings. … So the biggest stock owners don’t see their shares as commodity items. Instead they’re something to be developed and passed on to the next generation.”
Source: Professor J. Seth, Are U.S. Companies Doomed to Keep Planning for the Short Term?

Others still, may feel the current situation simply requires better risk management practices, management oversight and/or a realignment of compensation practices (see Rotman’s “The Risk Issue” Spring 2007 for an excellent overview). Perhaps they’re right, but I think we need to consider that these are all symptoms of the same underlying short-termism problem. For those who agree the short-term focus is “wrong” – shouldn’t we do something about it?

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An alternate view of the purpose of an enterprise:
The prevailing view (for many) that customers exist to create profit for the enterprise’s shareholders is in contrast to an emerging alternate vision which notes that the purpose, indeed the very existence of the enterprise is to profitably serve its customers. Without them, there is no enterprise….there are no shareholders. In this new paradigm we come to see that the ultimate stakeholders that define the success of the enterprise and to whom the enterprise is ultimately “accountable” to are its customers… not the shareholders.

So if we come to recognize that:

1. having a short-term focus does not have a privileged profit generating status
2. the enterprise’s profits are created by the will of customers, and
3. profit streams typically require some investment to ensure their continuation,

then we need to ask ourselves the final question…

IF we have shareholders demanding short term profits that will come at the expense of the long-term value of its customers, shouldn’t the enterprise seek to “fire” those shareholders? …Just as surely as it would fire an employee or supplier that was working at cross purposes . Just as surely as it ‘fires’ customers that aren’t profitable by minimizing interaction expenses and/or realigning fees.

If the pressure for delivering near-term profits puts the brand on a path that exposes the enterprise to greater risk, then surely the C-suite and the Board of Directors must take a stand and uphold their fiduciary responsibility. As noted earlier Boards may be afraid of being exposed to lawsuits from shareholders for not maximizing profits – but with this emerging viewpoint, they may face a similar legal threat from the other side (although I am not a lawyer). Shareholders after all, are free to select other enterprises or financial instruments benefiting as they do from their capital liquidity if they wish to maximize their short-term profitability objectives. Shareholders with a short-term investment horizon ……are not stakeholders.

This doesn’t mean the enterprise isn’t held accountable for meeting profit and other objectives. Quite the contrary, it places an even greater premium on identifying, developing and implementing sustainable value. Short term profits and time to market pressures don’t have to win out over the long term investment decisions since it is not any less profitable if it is done right (if over the slightly longer term).

Collins & Porras (See: Built to Last) spoke of the need to have a BHAG (Big Hairy Audacious Goal), a long-term vision that is supposed to be so daring in scope that is seems almost out of reach. What is needed is a willingness to pursue this path led by the CEO adopting the mantle of responsibility of the Chief Brand Officer. (see Ted Matthews) The resulting realignment of systems, people, skills, program implementations and performance compensation will provide a stronger balance of what is good/better/best for the maximum accumulation and retention of profitable customers and the realization that retention is in fact the new acquisition.

For those interested in more, this clip starts off Niall Ferguson’s The Ascent of Money series

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