How to retain customers

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					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   60%
 Retained    50%
   from
 Previous    40%
   Year      30%
             20%
             10%
             0%    1    2       3      4     5

                       Years as a customer
    Retention pays better than
    acquisition. $100 spent returns:

             Annual Profit
                             $48
 $60
 $40          ($62)
 $20
  $0
($20)
($40)
($60)
($80)
        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
100                      Buyers

 80

 60

 40               Relationship
 20                 Buyers
  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 segments-
          Many are unprofitable


           79.67%               This 28% lost 22% of the
80.00%                          bank’s profits!

60.00%

40.00%
                      24.82%
                                15.83%
20.00%                                      1.52%

 0.00%

-20.00%                                                -21.83%
                    Bank Customers by Profitability
-40.00%
           5%        11%        28%        28%         28%
           Marketing to Customer Segments

                                                Spend Service
Your Best Customers -         GOLD              Dollars Here
80% of Revenue


Your Best Hope for New                          Spend Marketing
                            Move Up
Gold Customers                                  Dollars Here




  1% of Total                                  Reactivate or
  Revenue                These may be losers
                                               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.


         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
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         5+
              Number of Products Owned
   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%       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.

                                                   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 e-
subscription 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:
                              % Sales or Percent     % Change    % Change   % Change
                              Customers Customers        in       Orders/    Average
              Strategy         Affected Responding   Retention     Year       Order
 1   Phone Calls                 10%      10.00%       1.00%      1.00%       1.00%
 2   Personalized Letters        30%      5.00%        1.50%      1.50%       1.50%
 3   Personalized Email          20%      5.00%        1.00%      2.00%       4.00%
 4   Email Newsletters           20%      5.00%        1.00%      2.00%       4.00%
 5   Gold Member Services         5%      40.00%       2.00%      1.00%       2.00%
 6   Loyalty Program             40%      10.00%       4.00%      4.00%       4.00%
 7   Birthday Club               20%      5.00%        1.00%      4.00%       5.00%
 8   Shift to Multi Channel      20%      10.00%       2.00%      2.00%       2.00%
 9   Next Best Product           80%      5.00%        4.00%      4.00%       4.00%
10   Segment Strategies          60%      3.00%        1.80%      1.80%       1.80%
     All Customer Impact        30.5%     19.60%      19.30%      23.30%     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

                         % Sales or Percent     Annual                 Total
                         Customers Customers Customer      Total      Annual
         Strategy         Affected Responding Investment Customers    Costs
Phone Calls                 10%      10.00%        $3.00    200,000    $60,000
Personalized Letters        30%      5.00%         $1.50    200,000    $90,000
Personalized Email          20%      5.00%         $0.06    200,000     $2,400
Email Newsletters           20%      5.00%         $0.10    200,000     $4,000
Gold Member Services         5%      40.00%        $5.00    200,000    $50,000
Loyalty Program             40%      10.00%        $4.00    200,000   $320,000
Birthday Club               20%      5.00%         $1.00    200,000    $40,000
Shift to Multi Channel      20%      10.00%        $1.00    200,000    $40,000
Next Best Product           80%      5.00%         $0.10    200,000    $16,000
Segment Strategies          60%      3.00%         $0.40    200,000    $48,000
Total                                                                 $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!

				
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