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					Customer Retention: how to
measure it, build it and keep it.

         San Francisco DMA
          March 16, 2006
            3:00 – 5:00




Prof. Rushen Chahal
       How a Modern Database Works



   Customer
  Transactions        Marketing
                      Campaigns                  Marketing
                                                   Staff -
                                    Analytic &   Access By
                                    Campaign       Web
Inputs from retail,    Marketing    Software
   phone, web          Database

                                                  Modeling &
Data Cleaning
                                                   Analytics
Standardization
                                   Appended
                      Website        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%

            100%          82%
            80%
Change in
number of   60%
 orders
            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%
                          70%
Change in   80%
   total
 revenue    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:
                                               Ridgeway Fashions
Dear Mr. Hughes:                               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        Year 2        Year 3
Retention Rate               40%           45%           50%
Customers                200,000        80,000        36,000
Visits Per Year               1.4           1.6           1.8
Spending Per Visit           $50           $60           $70
Revenue              $14,000,000    $7,680,000    $4,536,000

Cost Percentage              50%           49%           48%
Costs                 $7,000,000    $3,763,200    $2,177,280
Acquisition Cost $32   $6,400,000
Total Costs          $13,400,000    $3,763,200    $2,177,280

Profit                 $600,000     $3,916,800    $2,358,720
Discount Rate                  1           1.12          1.32
NPV Profit             $600,000     $3,497,143    $1,786,909
Cum NPV Profie         $600,000     $4,097,143    $5,884,052
Lifetime Value             $3.00         $20.49        $29.42
   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
                         Year 1         Year 2         Year 3
Retention Rate                 50%            60%            65%
Customers                  200,000        100,000         60,000
Visits Per Year                 1.6              2            2.4
Spending Per Visit             $55            $70            $80
Revenue                $17,600,000    $14,000,000    $11,520,000

Cost Percentage                50%            49%            48%
Costs                   $8,800,000     $6,860,000     $5,529,600
Acquisition Cost $32     $6,400,000
Database Costs             $500,000       $250,000       $150,000
Loyalty Program               $5.00         $8.00         $10.00
Loyalty Costs            $1,600,000     $1,600,000     $1,440,000
Total Costs            $17,300,000     $8,710,000     $7,119,600

Profit                   $300,000      $5,290,000     $4,400,400
Discount Rate                    1            1.12           1.32
NPV Profit               $300,000      $4,723,214     $3,333,636
Cum NPV Profie           $300,000      $5,023,214     $8,356,851
Lifetime Value               $1.50          $25.12         $41.78
     Effect of adoption of new strategies


                       Year 1      Year 2       Year 3
Old LTV                    $3.00      $20.49       $29.42
New LTV                    $1.50      $25.12       $41.78
Change                    -$1.50       $4.63       $12.36
With 200,000 members   -$300,000    $926,071   $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



                       Year 1      Year 2       Year 3
Old LTV                    $3.00      $20.49       $29.42
New LTV                    $1.50      $25.12       $41.78
Change                    -$1.50       $4.63       $12.36
With 200,000 members   -$300,000    $926,071   $2,472,799
How you got there
                         Year 1         Year 2         Year 3
Retention Rate                 50%            60%            65%
Customers                  200,000        100,000         60,000
Visits Per Year                 1.6              2            2.4
Spending Per Visit             $55            $70            $80
Revenue                $17,600,000    $14,000,000    $11,520,000

Cost Percentage                50%            49%            48%
Costs                   $8,800,000     $6,860,000     $5,529,600
Acquisition Cost $32     $6,400,000
Database Costs             $500,000       $250,000       $150,000
Loyalty Program               $5.00         $8.00         $10.00
Loyalty Costs            $1,600,000     $1,600,000     $1,440,000
Total Costs            $17,300,000     $8,710,000     $7,119,600

Profit                   $300,000      $5,290,000     $4,400,400
Discount Rate                    1            1.12           1.32
NPV Profit               $300,000      $4,723,214     $3,333,636
Cum NPV Profie           $300,000      $5,023,214     $8,356,851
Lifetime Value               $1.50          $25.12         $41.78
      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.

         Probability of Leaving Soon
LTV      High       Medium Low
High     Priority A Priority B Priority C
Medium   Priority B Priority B Priority C
Low      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%       60%   70%   80%




                Illustrative numbers from several case studies
    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 multi-
      buyers.
    ◦ The club boosted retention
        Club Members Retention

                   80.5%   Conversion to Multi-
90.0%                      Buyers after two years
80.0%
70.0%
60.0%
50.0%
                                    23.4%
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.

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                                 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

				
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Description: Prof. Rushen notes for MBA and BBA students