Customer Retention

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Arthur Middleton HughesVP / Solutions Architect
Customer Retention how to measure it, build it
and keep it.
San Francisco DMA March 16, 2006 300 500
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How a Modern Database Works
Customer Transactions
Marketing Campaigns
Marketing Staff -Access By Web
Analytic Campaign Software
Marketing Database
Inputs from retail, phone, web
Modeling Analytics
Data Cleaning Standardization
Appended Data
Website
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Why retention is important long term
loyal customers

• Buy more per year
• Buy higher priced options
• Buy more often
• Are less price sensitive
• Are less costly to serve
• Are more loyal
• Have a higher lifetime value

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How to retain them

• Recruit the right customers to begin with
• Once you have them, segment them by lifetime
  value
• Communicate with them to build loyalty

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What proves that communications work?

• Manufacturer of indoor lighting products
• Catalog sent to 45,000 contractors
• Previous policy wait for the orders
• Test pick 1,200 customers, split into test of
  600 and control of 600
• Two person pilot program build relationship with
  test customers to see the results

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Change in the number of orders
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Change in the Average Order Size
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Total revenue gain 2.6 million dollars
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Communications work!

• Building a relationship with customers can be
  highly profitable
• Using a database to recreate the old family
  grocer is a winning strategy
• Relationship marketing is the way to go

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But, with millions of customers

• Which ones should you spend resources on?
• If you communicate with everyone, you will not
  have enough resources to retain the very best.
• To select the best, you need to compute customer
  lifetime value

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Lifetime Value
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Why we need Lifetime Value Analysis

• We need to know the value of our customers, so as
  to properly target our sales and retention
  efforts
• We need to discriminate among our customers to
  acquire and retain the best

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Lifetime Value Analysis Goal Determine...

• where to put your retention dollars
• the value of each retention strategy
• where to put your acquisition dollars
• how much to spend on acquisition

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What is lifetime value?

• Net present value of the profit to be realized on
  the average new customer during a given number of
  years.
• To compute it, you must be able to track
  customers from year to year.
• Main use To evaluate strategy.

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Examples of Profitable Strategies

• User Groups
• Newsletters
• Surveys and Responses
• Loyalty Programs
• Customer and Technical Services
• Membership cards and status levels
• Event Driven Communications

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Event driven communication
Ridgeway Fashions Leesburg, VA 22069
Dear Mr. Hughes I would like to remind you that
your wife Helenas birthday is coming up in two
weeks on November 5th. We have the perfect gift
for her in stock. As you know, she loves Liz
Claiborne clothing. We have an absolutely
beautiful new suit in blue, her favorite color,
in a fourteen, her size, priced at 232.00. If
you like, I can gift wrap the suit at no extra
charge and deliver it to you next week, so that
you will have it in plenty of time for her
birthday. Or, I can put it aside so you can come
in to pick it up. Please call me at (703)
754-4470 to let me know which youd prefer.
Sincerely yours, Robin Baumgartner Robin
Baumgartner, Store Manager
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Lets look at a retail operation

• Before and after a loyalty program

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LTV Before New Strategies
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Discount Rate Basic Formula

• Market Rate of Interest...5
• Assume Risk (Double rate)...10
• Years n Interest i
• Formula D (1 i)n
• Calculation of rate after 2 years
• D (1 .10)2 (1.10)2 1.21

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New Retention Strategies

• Provide all customers with a card or register
  their credit cards
• Birthday Club
• Communicate with them
• Give them premiums if they shop a lot
• Lets see what could happen

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With New Strategies
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Effect of adoption of new strategies
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What is the proper computation period?

• Which is the correct lifetime value? 1, 2, 3, 4,
  5 or more years?
• They are all correct. Which you use depends on
  your product or service.
• Long lifetimes banks, insurance, utilities.
• Short lifetimes discount houses, package goods,
  catalogers.

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Five Ways to Boost LTV with Database Strategies

• Increase the retention rate
• Increase the referral rate
• Increase the spending rate
• Decrease the direct costs
• Decrease the marketing costs

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How to use lifetime value

• Compute a base lifetime value
• Dream up a new strategy. Estimate the benefits
  and costs
• Determine whether your new lifetime value goes up
  or goes down
• Dont undertake any new strategy until you can
  prove it will be successful

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Using lifetime value to get budget approval

• Database marketing budgets are usually carved
  from somewhere else
• You have to prove that you will make better use
  of the funds than the others
• Lifetime value can supply testable numbers that
  CFOs can understand
• Base your budget on solid numbers backed up by
  valid tests

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What your new budget will buy
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How you got there
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Using lifetime value to get budget approval

• Database marketing budgets are usually carved
  from somewhere else
• You have to prove that you will make better use
  of the funds than the others
• Lifetime value can supply testable numbers that
  CFOs can understand
• Base your budget on solid numbers backed up by
  valid tests

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Who is going to defect?

• Besides LTV, you can develop a model that
  predicts which customers are most likely to
  leave.
• Putting that model with LTV you can refocus your
  entire retention strategy
• You create a Risk Revenue Matrix

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Focus on A and B 44 of your customers.
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Who uses LTV in marketing?

• DMA survey shows 52 of Consumer Only marketers
  use LTV.
• 25 of B to B use LTV.
• 49 Larger companies (100 million or more) use
  LTV. 32 smaller companies use LTV
• 65 plan to use LTV more extensively in 2006
• 70 use LTV to decide when to reactivate a lapsed
  customer.
• 68 determine promotions by LTV

DMA Survey 2005
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Conclusion you can do this

• Create a lifetime value table for your customers.
• Put LTV into each customer record
• Use LTV to determine your marketing strategy
• Use it to improve retention, cross sales, and
  profits

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Break
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Why you need customer segments

• Customers are usually very different
• College students, senior citizens, families with
  children, empty nesters
• The same message to all may not work so well.
• Solution create segments, and design a program
  for each segment.

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How one retail store created 9 customer segments.
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Segments differ from status levels
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Segment Strategy
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An ideal segment

• Has definable characteristics in terms of
  behavior and demographics for example, Retired
  Couples
• Is large enough in terms of potential sales to
  justify a custom marketing strategy with
  appropriate rewards and budget
• Has members who can be motivated by cost
  effective rewards to modify their behavior in
  ways that are profitable for your company
• Makes efficient use of available data to support
  segment definition and marketing efforts
• Can be measured in performance, with control
  groups
• Justifies an organization devoted to it can be
  a single person, or part of a persons time, but
  there should be someone who owns each segment.

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A valid segment strategy involves

• Communications to the segment (direct mail,
  email, on-location personal attention)
• Rewards designed to modify behavior
• Controls to measure the success of the strategy
• A budget for implementation of the strategy
• Specific goals and metrics for engagement for
  behavior modification
• An organization that accepts responsibility for
  the segment

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Segment action plan

• A roadmap showing what will happen when. Send
  each policyholder a birthday card and a policy
  review 45 days before their policy renewal date.
  
• A budget for the infrastructure and for the
  segment marketing plans
• An organization chart that shows who is
  responsible for each segment
• Specific goals to be achieved with milestones for
  measurement of success

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Using Clusters as segments
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How one non profit measured success by cluster-
Their best
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Their worst in terms of response and
contributions
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Success from mailing only to the best, and not
mailing the worst

• 5 Million more in net gross revenue.

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Multi-channel users are more loyal
Illustrative numbers from several case studies
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Why the web is important to retention

• Web customers are more affluent
• Their average order size is 12 higher than phone
  orders.
• The cost of the web order is 16 lower than phone
  orders.
• Typical incentive offered is 5 off on any order
  over 50.
• Result 11 of non web customers shift to the web
  every year.

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Creating a club on the internet

• A company selling sporting goods created an
  internet member club.
• When DB was built they learned that
• Club members bought 11 times more than non club
  members.
• In two years, 81 of club members became
  multi-buyers.
• The club boosted retention

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Club Members Retention
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Cataloger Customer Retention

• Miles Kimball sent 20,000 emails with three
  different catalogs, and 20,000 with the three
  catalogs alone.
• Those who got the emails bought 18 more than
  those who got the catalogs alone.

More sales Higher overall retention levels
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Retailer Customer Retention

• Video retailer sent email newsletters to 170,000
  customers for 6 months.
• Control group of 14,000 got no emails
• Retail sales to test group was 28 more than to
  those without emails.

More sales Higher overall retention levels
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One Click Ordering

• With the web we use cookies to say, Welcome back
  Susan.
• We keep her credit card on file if she wants so
  she can do one click ordering
• Result, compared to controls, is higher retention
  and annual revenue from those who have one click
  ordering available.

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Tests and controls

• Essential to measuring the effectiveness of
  retention programs

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Why controls are essential

• The sales force acquires new customers
• Database marketers create higher retention rates
• How do you prove this?
• Retention program effectiveness can only be
  measured using control groups

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Every marketing promotion should always be a test

• Test those who get the promotion against the
  performance of those who do not get the promotion
• If you are sending birthday cards or a
  newsletter, select 50,000 who do not get birthday
  cards or the newsletter.
• Look at the controls spending rate, and
  retention rate.
• If there is no difference, your cards or
  newsletters are a waste of money.

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What to measure

• Attrition and retention of both groups
• Migration upward and downward
• Incremental sales per program and per season
• Frequency of purchases
• Dollars spent per trip and per season
• Number of departments shopped
• Number of items purchased
• Share of customers wallet

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Illustration Birthday Gift

• Get customers to record their birthdays with
  their emails.
• On their birthday, send them a birthday Pizza
  Coupon
• One fast food restaurant offered a 10 birthday
  coupon to 215,000 customers.
• Of the coupons sent out, 86,612 were redeemed
  (866,120) producing overall sales of 2,900,000
  a sales increase of 2 million.

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Live Agent

• 74 of shopping carts abandoned at checkout.
• Reason customers have some question. They are
  unsure about the product, service, color,
  delivery, etc.
• Solution put a live chat button at checkout
  time.
• Have live agents available to answer questions.
• Result increased retention and sales

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Caller ID

• Use Caller ID to bring customers complete
  purchasing history on the screen before the agent
  begins talking.
• Result, she can talk to the customer as if she
  knew her.
• Result Increased retention. Greater opportunity
  for cross sales.

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What should you do to keep your customers?

• Select loyal customers to begin with. Reward
  agents for customer loyalty.
• Set up a customer communications plan
• Calculate LTV of each customer
• Use modeling to predict churn and to determine
  the Next Best Product
• Combine LTV and NBP to run a proactive retention
  program
• Optimize your inducements

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Books by Arthur Hughes
From McGraw Hill. Order at www.dbmarketing.com
Contact Arthur
arthur.hughes_at_kbm1.com