Ways to Build Customer Retention

Newly acquired buyers are often unprofitable. The profits come from repeat business of loyal customers. Such customers usually:

· 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, a number of tried and true methods 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,” notes that some people are inherently loyal and some are not. Customers acquired by low-ball offers are seldom loyal. To attract the right kind of customer, 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 must communicate with them often. Travelers created a one-to-one customer contact system consisting of:

· A letter 60 days before annual renewal.

· Annual review.

· Thank-you card in first quarter.

· Cross-sell postcard in second quarter.

· Newsletter in third quarter.

· Seasonal card in fourth quarter.

The result of agents using this system was to raise the customer retention rate from 85.1 percent to 90.5 percent, an increase worth millions of dollars to Travelers.

A lighting manufacturer set up a two-person staff to make friends with 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 a 28 percent larger order size, 30 percent more orders and $2.9 million more in sales from those who got the calls.

Personalized messages. 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 usually differ from those to college students, or families with children. Segment marketing strategy usually involves:

· Rewards designed to modify behavior.

· Controls to measure the success of the strategy.

· A budget for implementing the strategy.

· Specific goals for behavior modification.

· An organization that accepts responsibility for the segment.

· Computation of lifetime value of each segment, and its members (see “How to Compute Customer LTV,” DM News, July 28, 2004).

Loyalty programs boost retention. Loyalty programs let you keep track of customer behavior. They:

· Let you see whether 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-flier programs: 92 percent.

· Hotel frequent-guest programs: 79 percent.

· Credit card rewards: 71 percent.

· Retail store programs: 44 percent.

Sell a second product. One of the most productive ways to boost 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 achieved more easily if you determine the “Next Best Product” for each customer based on 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. It offered a 10 percent discount on the first product if the second was purchased. Using this system: recipient households bought 11 percent more than the controls; a follow-up letter created 8 percent more sales; and a follow-up phone call gained 43 percent more.

Getting customers to become multichannel. Eleven percent of non-Web customers shift to the Web yearly. A typical incentive offered to use the Web is 5 percent off any order exceeding $50. The advantages of multichannel customers are significant: Web customers are more affluent; average order size is 12 percent higher than with phone orders; and Web orders cost 16 percent less than phone orders.

A company selling sporting goods created an Internet member club. It learned that club members bought 11 times more than non-club members. In two years, 81 percent of club members became multi-buyers. The club boosted retention.

Miles Kimball sent 20,000 customers e-mails with three different catalogs, and 20,000 customers the three catalogs alone. Those who got the e-mails bought 18 percent more than those who got the catalogs alone.

A video retailer sent e-mail newsletters to 170,000 customers for six months. The control group of 14,000 got nonoe. Retail sales to the test group were 28 percent higher.

One-click ordering boosts retention. 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. The result, compared with controls, is higher retention and annual revenue from those who have one-click ordering available.

Estimating the cumulative effect of retention strategies. Once you develop a program of retention building strategies, you can develop a chart that shows what various strategies can accomplish. The accompanying chart shows how these can be estimated.

Too many firms either have not created a customer marketing database or have not developed retention-building programs using their database. As you can see from the chart, the rewards can be significant.

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