Articles - Written by Arthur Hughes - 2 Comments
How to build customer retention
Newly acquired buyers are often unprofitable. The profits come from repeat business from loyal customers. Such customers typically:
- 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
So how can you attract and retain long term loyal customers? Using a customer marketing database, there are today a number of tried and true methods that really work and pay for themselves many times over.
The first step is to recruit the right kind of customers to begin with. Frederick Reichheld in his wonderful book The Loyalty Effect points out that some people are inherently loyal, and some are not. Typically, customers acquired by low-ball offers are seldom loyal. To attract the right kind of customer, you have to sell the value of your service. Make them think about what they are getting rather than what they are paying.
To keep loyal customers, once acquired, you need to communicate with them often. Travelers created a one-to-one customer contact system that consisted of:
- 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 result of agents using this system was to increase the customer retention rate from 85.1% to 90.5% — an increase worth millions of dollars to Travelers.
A lighting manufacturer set up a two person staff to make friends with the decision makers in 600 of his best commercial customers, setting aside an identical 600 company control group that did not get the phone calls. The result, after six months, was 28% larger order size, 30% more orders and $2.9 million more in sales from those who received the phone calls.
For the communications to work they have to be personalized based on information in the database. Typically, the first step is to create customer segments based on their spending habits and demographics. Successful communications to senior citizens are usually different from those sent to college students, or families with children. Successful segment marketing strategy typically involves
- Rewards designed to modify behavior
- Controls to measure the success of the strategy
- A budget for implementation of the strategy
- Specific goals for behavior modification
- An organization that accepts responsibility for the segment
- Computation of the lifetime value of each segment, and its members. (see How to Compute Customer LTV DM News 07/28/2004)
Loyalty Programs Boost Retention
Loyalty programs permit you to keep track of customer behavior. They
- Let you see if valuable customers are reducing their orders or spending
- Let you proactively call them, write them, or make them offers.
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%
Selling a second product
One of the most productive ways of boosting retention is to sell a second product. Such a cross sale not only returns a profit from the second product, it typically increases the retention rate of the first product. Sales of a second product are more easily achieved if you determine the Next Best Product for each customer based on their demographics, prior purchase behavior and the behavior of similar customers. Amazon does this with collaborative filtering.
An insurance company with independent agents used a model to predict the Next Best Product for each customer. They offered a 10% discount on the first product if the second was purchased. Using this system:
- Recipient households bought 11% more than the controls
- A follow up letter created 8% more sales
- A follow up phone gained 43% more.
Getting customers to become multi-channel
11% of non web customers shift to the web every year. A typical incentive offered to use the web is 5% off on any order over $50. The advantages of multi channel customers are significant:
- 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.
Examples of web use by retailers to boost retention are:
A company selling sporting goods created an internet member club. 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
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.
A video retailer sent email newsletters to 170,000 customers for 6 months. The control group of 14,000 got no emails. Retail sales to the test group was 28% more than to those without emails.
Estimating the cumulative effect of retention strategies
Once you have developed a program of retention building strategies, you can develop a chart that shows what various strategies can accomplish. This illustrative chart shows how these can be estimated.
Too many companies either have not created a customer marketing database, or have not developed a program of retention building programs using their database. As you can see from this illustration, the rewards can be significant.
Arthur Middleton Hughes, vice president of The Database Marketing Institute, has presented 28 seminars on database and email marketing. Arthur has also authored several books includingStrategic Database Marketing 4th Edition (McGraw-Hill 2012). He and Andrew Kordek, chief strategist and co-founder of Trendline Interactive, are hosting a two-day Email Strategy Study Group in Fort Lauderdale March 26-27, 2013, featuring group competition for email marketers responsible for subscriber acquisition, lifetime value, ratings and reviews, boosting their email budget, and doubling their ROI. To learn how to attend the Study Group, click here
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