Customer Retention: how to
measure it, build it and keep it.
San Francisco DMA
March 16, 2006
3:00 – 5:00
Arthur Middleton Hughes
VP / Solutions Architect
How a Modern Database Works
Customer
Transactions
Inputs from retail,
phone, web
Marketing
Campaigns
Marketing
Database
Analytic &
Campaign
Software
Marketing
Staff Access By
Web
Modeling &
Analytics
Data Cleaning
Standardization
Website
Appended
Data
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
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
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
Change in the number of orders
112%
120%
82%
100%
Change in
number of
orders
80%
60%
40%
20%
0%
1
2
Control vs Test Groups
Change in the Average Order
Size
114%
120%
86%
100%
80%
Change in
average 60%
order size
40%
20%
0%
1
2
Control vs Test Group
Total revenue gain: $2.6 million
dollars
127%
140%
120%
100%
Change in
total
revenue
70%
80%
60%
40%
20%
0%
1
2
Control vs Test Group
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
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
Lifetime
Value
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
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
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.
Examples of Profitable Strategies
User Groups
Newsletters
Surveys and Responses
Loyalty Programs
Customer and Technical Services
Membership cards and status levels
Event Driven Communications
Event driven communication:
Dear Mr. Hughes:
Ridgeway Fashions
Leesburg, VA 22069
I would like to remind you that your wife Helena’s 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
you’d prefer.
Sincerely yours,
Robin Baumgartner
Robin Baumgartner, Store Manager
Lets look at a retail operation
• Before and after a loyalty program
LTV Before New Strategies
Year 1
40%
200,000
1.4
$50
$14,000,000
Year 2
45%
80,000
1.6
$60
$7,680,000
Year 3
50%
36,000
1.8
$70
$4,536,000
50%
Cost Percentage
$7,000,000
Costs
$6,400,000
Acquisition Cost $32
$13,400,000
Total Costs
49%
$3,763,200
48%
$2,177,280
$3,763,200
$2,177,280
$600,000
1
$600,000
$600,000
$3.00
$3,916,800
1.12
$3,497,143
$4,097,143
$20.49
$2,358,720
1.32
$1,786,909
$5,884,052
$29.42
Retention Rate
Customers
Visits Per Year
Spending Per Visit
Revenue
Profit
Discount Rate
NPV Profit
Cum NPV Profie
Lifetime Value
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
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
With New Strategies
Retention Rate
Customers
Visits Per Year
Spending Per Visit
Revenue
Year 1
50%
200,000
1.6
$55
$17,600,000
Year 2
60%
100,000
2
$70
$14,000,000
Year 3
65%
60,000
2.4
$80
$11,520,000
Cost Percentage
Costs
Acquisition Cost $32
Database Costs
Loyalty Program
Loyalty Costs
Total Costs
50%
$8,800,000
$6,400,000
$500,000
$5.00
$1,600,000
$17,300,000
49%
$6,860,000
48%
$5,529,600
$250,000
$8.00
$1,600,000
$8,710,000
$150,000
$10.00
$1,440,000
$7,119,600
$300,000
1
$300,000
$300,000
$1.50
$5,290,000
1.12
$4,723,214
$5,023,214
$25.12
$4,400,400
1.32
$3,333,636
$8,356,851
$41.78
Profit
Discount Rate
NPV Profit
Cum NPV Profie
Lifetime Value
Effect of adoption of new
strategies
Old LTV
New LTV
Change
With 200,000 members
Year 1
$3.00
$1.50
-$1.50
-$300,000
Year 2
$20.49
$25.12
$4.63
$926,071
Year 3
$29.42
$41.78
$12.36
$2,472,799
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.
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
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
• Don’t undertake any new strategy until you can
prove it will be successful
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 CFO’s can understand
• Base your budget on solid numbers backed up
by valid tests
What your new budget will buy
Old LTV
New LTV
Change
With 200,000 members
Year 1
$3.00
$1.50
-$1.50
-$300,000
Year 2
$20.49
$25.12
$4.63
$926,071
Year 3
$29.42
$41.78
$12.36
$2,472,799
How you got there
Retention Rate
Customers
Visits Per Year
Spending Per Visit
Revenue
Year 1
50%
200,000
1.6
$55
$17,600,000
Year 2
60%
100,000
2
$70
$14,000,000
Year 3
65%
60,000
2.4
$80
$11,520,000
Cost Percentage
Costs
Acquisition Cost $32
Database Costs
Loyalty Program
Loyalty Costs
Total Costs
50%
$8,800,000
$6,400,000
$500,000
$5.00
$1,600,000
$17,300,000
49%
$6,860,000
48%
$5,529,600
$250,000
$8.00
$1,600,000
$8,710,000
$150,000
$10.00
$1,440,000
$7,119,600
$300,000
1
$300,000
$300,000
$1.50
$5,290,000
1.12
$4,723,214
$5,023,214
$25.12
$4,400,400
1.32
$3,333,636
$8,356,851
$41.78
Profit
Discount Rate
NPV Profit
Cum NPV Profie
Lifetime Value
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 CFO’s can understand
• Base your budget on solid numbers backed
up by valid tests
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 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
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
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
Break
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.
How one retail store created 9
customer segments.
Segments differ from status levels
Segment Strategy
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 person’s time, but there should be
someone who “owns” each segment.
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
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
Using Clusters as segments
How one non profit measured
success by cluster- Their best
Their worst – in terms of
response and contributions
Success from mailing only to the
best, and not mailing the worst
• $5 Million more in net gross revenue.
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.
Tests and controls
• Essential to measuring the effectiveness
of retention programs
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
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.
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.
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
Books by Arthur Hughes
From McGraw Hill. Order at
www.dbmarketing.com
Contact Arthur: arthur.hughes@kbm1.com