How to retain
customers
Arthur Middleton Hughes
VP Solutions Architect
KnowledgeBase Marketing
A complete customer retention plan
• Why customer retention is important
• Methods of retention
– Recruit right ones to start with
– Communicate with them & reward them
• Create segments
• Predict attrition – Risk Revenue Matrix
• Create a loyalty program
– Sell them a second product
– Get them to become multi-channel buyers
• Evaluation of Retention Programs
– Tests and Controls
– Return on investment
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
Retention is the way to measure
loyalty
90%
80%
70%
Percentage
Retained
from
Previous
Year
60%
50%
40%
30%
20%
10%
0%
1
2
3
4
Years as a customer
5
Retention pays better than
acquisition. $100 spent returns:
Annual Profit
$48
$60
$40
$20
$0
($20)
($40)
($60)
($80)
($62)
New Customer
3rd Year
Customer
Basic Retention Strategy Rule:
Put yourself in customer shoes
Say: “What would I want to be on
this database? What’s in it for me?”
If you can’t come up with a good
answer, the database will fail
Methods of Retention
– Recruit right ones to start with
– Communicate with them & Reward them
• Create segments
• Predict attrition – Risk Revenue Matrix
• Create a loyalty program
Who are likely to be loyal?
• Reichheld points out that
– Some customers are loyal – others not
– Begin by recruiting the right ones
• One insurance company found that disloyal
customers were:
–
–
–
–
–
–
Transient individuals
Young people, rather than older people
Single people, rather than married people
Renters, rather than homeowners.
People who respond to low-ball discount offers
People who respond to temporary sales
Recruit relationship buyers
Relationship Vs Transaction Buyers
120
Transaction
Buyers
100
80
60
Relationship
Buyers
40
20
0
Company A
Company B
Company C
Company D
• Transaction buyers only interest is price
• Relationship buyers want a firm that gives good service to
whom they can be loyal
How to find relationship buyers
• Lowball offers will attract transaction buyers
• You cannot make a profit from them
• Relationship buyers are interested in good
service, high value and two way loyalty
• They will stick with you and provide a
profitable bottom line
Methods of Retention
– Recruit right ones to start with
– Communicate with them & reward them
• Create segments
• Predict attrition- Risk Revenue Matrix
• Create a loyalty program
has a one-to-one
customer communications program.
• Results: Retention goes up 5.6 points
• Travelers gains $14,000 per year per agent
• Agents gain $2,380 per year
The
annual program
• Letter 60 days before annual renewal
• Annual review
• Thank you card in 1st quarter
• Cross sell postcard in 2nd quarter
• Newsletter in 3rd quarter
• Seasonal card in 4th quarter
The value of a conversation with
insurance customers
• 62% of customers who leave, never talk
to an agent first
• 80% of people who talk to an agent do
not leave.
Restaurant chain sent $5 reward
cards to 4,000 lapsed customers
• Average member visits went from 25
per day before the promotion, to 42 per
day.
• Average visits per card went from 1.18
before to 1.26 during and 1.22 after the
promotion.
• Incremental sales were $17,100 during
the promotion and $4,700 in the 35 days
after the promotion was over.
• Communications increased sales and
retention.
Methods of Retention
– Recruit right ones to start with
– Communicate with them & reward them
• Create segments
• Predict attrition – Risk Revenue Matrix
• Create a loyalty program
Creating customer segmentsMany are unprofitable
79.67%
This 28% lost 22% of the
bank’s profits!
80.00%
60.00%
24.82%
40.00%
15.83%
1.52%
20.00%
0.00%
-20.00%
Bank Customers by Profitability
-21.83%
-40.00%
5%
11%
28%
28%
28%
Marketing to Customer Segments
Your Best Customers 80% of Revenue
Your Best Hope for New
Gold Customers
1% of Total
Revenue
GOLD
Move Up
These may be losers
Spend Service
Dollars Here
Spend Marketing
Dollars Here
Reactivate or
Archive
A ideal segment:
• Has definable characteristics
• Is large enough to justify a custom marketing
strategy with appropriate rewards and budget
• Has members who can be motivated
• Makes efficient use of available data
• Can be measured in performance
• Justifies an organization devoted to it. Can be
part of a person’s time, but there should be
someone who “owns” each segment.
Strategy for each segment:
• 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
Segments and Status Levels
How one women’s chain
segments their customers
Methods of Retention
– Recruit right ones to start with
– Communicate with them & reward them
• Create segments
• Predict attrition- Risk Revenue Matrix
• Create a loyalty program
Methods of Retention
– Recruit right ones to start with
– Communicate with them & reward them
• Create segments
• Predict attrition- Risk Revenue Matrix
• Create a loyalty program
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
Focus retention programs on A
and B: 44% of your customers.
LTV
High
Medium
Low
Probability of Leaving Soon
High
Medium Low
Priority A Priority B Priority C
Priority B Priority B Priority C
Priority C Priority C Priority C
Using Risk Revenue Matrix
• Telecom company sent special
messages to priorities A and B.
• Ignored customers in priority C
• Result: Boost in retention and profits
Further results…
Methods of Retention
– Recruit right ones to start with
– Communicate with them & reward them
• Create segments
• Predict attrition- Risk Revenue Matrix
• Create a loyalty program
What is a loyalty program?
• A system whereby a customer has specifically
signed up for a program.
• She may receive a plastic card with her name
on it.
• The card is used whenever she shops in a retail
store, on the phone or on the web.
• The card provides her with some benefit she
could not get without the card.
• It provides you with valuable information that
you can use to understand the customer and
build her loyalty.
Who participates in loyalty
programs?
• Parago (www.parago.com) found that
high income households ($125K and
more), participated much more in loyalty
programs than the average household.
Notable participation rates were:
• Airline Frequent Flyer Programs 92%
• Hotel Frequent Guest Programs 79%
• Credit Card Rewards 71%
• Retail Store Programs 44%
How do loyalty programs boost
retention?
• Program permits you to keep track of customer
behavior
• You can see if valuable customers are reducing
their orders or spending
• You can proactively call them, write them, or
make them offers
Telecom
company
rewards
program results:
A complete customer retention plan
• Methods of retention
–
–
–
–
Recruit right ones to start with
Communicate with them and reward them
Sell them a second product
Get them to become multi-channel
• Evaluation of Retention Programs
The value of a second product
Retention Rate by Products Owned
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1
2
3
4
Number of Products Owned
5+
Next Best Product
• Collaborative Filtering can be used to
determine for each customer her next
most likely product.
• Customer service and the web have this
info available whenever a customer visits
or calls.
• Tests with GUS, largest cataloger in the
UK, resulted in doubling the cross sale
rate (from 20% to 40%) using the next
best product on the telemarketers
screens
Cross sales build retention
• Customers who have more than one
product have a higher retention rate.
• Two reasons for second product:
– Profit from the new product
– Retain customers for the existing one.
• An insurance company with independent
agents used a model to predict the Next
Best Product for each customer
• Offered a 10% discount on first product if
second is purchased
Selling a second insurance product
Automatic follow up note
How did it work out?
• 89% of agents invited went to web and
participated.
• 52% created personal notes
• Recipient HH bought 11% more than the
controls
• Follow up letter created 8% more sales
• Follow up phone gained 43% more.
A complete customer retention plan
• Methods of retention
–
–
–
–
Recruit right ones to start with
Communicate with them and reward them
Sell them a second product
Get them to become multi channel
• Evaluation of Retention Programs
Multi-channel users are more loyal
Retention Rate Year 2
Catalog, retail, web
Catalog & Web
Retail and Web
Retail & Catalog
Web Only
Catalog Only
Retail Only
0%
10%
20%
30%
40%
50%
Illustrative numbers from several case studies
60%
70%
80%
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.
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 multibuyers.
– The club boosted retention
Club Members Retention
80.5%
90.0%
Conversion to MultiBuyers after two years
80.0%
70.0%
60.0%
23.4%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
Goal Club
Non Goal Club
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.
118
120
115
110
105
100
100
95
90
Control
Test
More sales = Higher overall retention levels
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.
128
140
100
120
100
80
60
40
20
0
Control
Test
More sales = Higher overall retention levels
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.
A complete customer retention plan
• Evaluation of Retention Programs
– Tests and Controls
– Return on investment
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
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 control’s spending rate, and
retention rate.
• If there is no difference, your cards or
newsletters are a waste of money.
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
A complete customer retention plan
• Evaluation of Retention Programs
– Tests and Controls
– Return on investment
Retention Strategies to be
quantified
• Find out who your Gold customers are, and keep them
loyal
• Reward customer loyalty, resulting in increased retention
• Increase purchases and average order size
• Profile your customers, and acquire new ones with the
same profile
• Personalize customer’s web and phone experience
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.
Illustration: Corporate collaboration
 Hewlett Packard tested an on line survey to
promote their network printers.
 Direct mail drove responders to a web site that
contained the survey. Responders received $10 in
Pizza Hut coupons.
 The survey provided a special HP offer for
network printing solutions, product links, and esubscription information.
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
Caller ID
• Use Caller ID to bring customer’s
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.
Putting It All Together:
1
2
3
4
5
6
7
8
9
10
Strategy
Phone Calls
Personalized Letters
Personalized Email
Email Newsletters
Gold Member Services
Loyalty Program
Birthday Club
Shift to Multi Channel
Next Best Product
Segment Strategies
All Customer Impact
% Sales or
Percent
Customers Customers
Affected Responding
10%
10.00%
30%
5.00%
20%
5.00%
20%
5.00%
5%
40.00%
40%
10.00%
20%
5.00%
20%
10.00%
80%
5.00%
60%
3.00%
30.5%
19.60%
% Change
in
Retention
1.00%
1.50%
1.00%
1.00%
2.00%
4.00%
1.00%
2.00%
4.00%
1.80%
19.30%
% Change
Orders/
Year
1.00%
1.50%
2.00%
2.00%
1.00%
4.00%
4.00%
2.00%
4.00%
1.80%
23.30%
% Change
Average
Order
1.00%
1.50%
4.00%
4.00%
2.00%
4.00%
5.00%
2.00%
4.00%
1.80%
29.30%
• An average of 19% of customers respond to one or more strategies
• The overall retention rate goes up by 19.3%
• Orders per year and average order size also increase significantly
• These numbers are illustrative. You can create your own numbers
using tests and controls
Annual costs of the strategies
Strategy
Phone Calls
Personalized Letters
Personalized Email
Email Newsletters
Gold Member Services
Loyalty Program
Birthday Club
Shift to Multi Channel
Next Best Product
Segment Strategies
Total
% Sales or
Percent
Annual
Customers Customers Customer
Total
Affected Responding Investment Customers
10%
10.00%
$3.00
200,000
30%
5.00%
$1.50
200,000
20%
5.00%
$0.06
200,000
20%
5.00%
$0.10
200,000
5%
40.00%
$5.00
200,000
40%
10.00%
$4.00
200,000
20%
5.00%
$1.00
200,000
20%
10.00%
$1.00
200,000
80%
5.00%
$0.10
200,000
60%
3.00%
$0.40
200,000
Total
Annual
Costs
$60,000
$90,000
$2,400
$4,000
$50,000
$320,000
$40,000
$40,000
$16,000
$48,000
$670,400
What should you do to increase
retention?
–
–
–
–
–
–
–
–
Recruit right customers to start with
Communicate with them & reward them
Determine their lifetime value
Create customer segments with a
marketing strategy for each segment
Sell them a second product
Get them to become multi-channel
buyers
Use Tests and Controls
Calculate return on investment
Books by Arthur Hughes
From McGraw Hill. Order at
www.dbmarketing.com
Contact Arthur: arthur.hughes@kbm1.com
Thank you!