Retention is the New Acquisition

Updated: July 27, 2009

By Phil Olivieri and Miro Slodki

Ask any business today and it will profess to be both customer-centric AND long-term focused.
Whereas the past practice of customer acquisition at any cost has become too costly, it has
given rise to the pursuit of new forward-thinking customer retention initiatives that in effect
create value. Some even say that this is the underlying principle of Alfred Rappaport's famous
dictum that "Without customer value there can be no shareholder value."


As any marketer will attest, the calculus of the Life Time Value (LTV) metric encapsulates many
of marketing's most important customer behavioral outcomes - the value stream
(revenue/margin/profit) and the costs associated with the acquisition of new customers, the
retention growth of next best customers (as a function of response rates to up-sell and cross-sell
offers), the reactivation of lapsed customers, the loss of customers, the impact of word of
mouth referrals and finally the discount rate to reflect the inherent risk/volatility premium of
the financial value stream all of which provide an ongoing tally of that customer/segment
anticipated retained present value.

Still, there are some things LTV doesn't accommodate very well, beginning with the basic
formula where the use of a single average discount rate runs the risk of leading to under
spending on existing customers and overspending on new customer acquisition efforts. Others
have also noted shortfalls accommodating the social multiplier-network effect reflecting a
brand's incremental advantages as it cross threshold levels of scale/community (see Gupta,
"Value of a Free Customer"). Hogan et al (2002) also speaks to underlying drivers of purchase
continuity like quality and service satisfaction as well as competitive effects.


Defining retention


So how do we define retention? It's actually a trickier question that it seems. At the most basic
level, everyone will agree that retention can be validated at the last instance of purchase. What
about the time in between, especially for those who buy infrequently or irregularly? Consider as
well that many view retention to be both a state of mind AND a state of being.


Not surprisingly then, our definition of retention will form the cornerstone not only of one's
brand strategy (catering to buyers at one end or partners at the other) but of the company itself.
How the company/brand chooses to interact with customers (and visa versa) along the Push Vs
Pull continuum in an increasingly interconnected world through experience, word of mouth and
reputation can literally transform retention into a powerful acquisition channel.


In fact Gupta, Lehman & Stuart showed that improved customer retention had the largest
impact on customer value, followed by improved margins with reduced acquisition cost having
the smallest impact. The results show that a 1% improvement in customer retention enhances
customer value (and, in turn, company value) by approximately 2.45% to 6.75%, whereas a
similar decrease in the discount rate increases customer value and thus company value by only
.5% to 1.2%. In other words, the retention elasticity is almost five times the discount rate
elasticity. (See Gupta, "Valuing Customers").


If keeping customers creates superior value, then it follows that greater success will come to
those better able to establish not only a value-differentiated brand, but also actively engaged
partnerships. Support for this comes via McKinsey which noted that consumers tended to have
one of three types of relationship orientation;


1) emotive (strong brand attachment),


2) inertial (habitual brand buyers either uninvolved or don't feel need to change) or


3) deliberative (frequently reassess and recommit to the brand)


(See McKinsey, "Customer retention is not enough").


Moreover, McKinsey suggest the greater opportunity lies not in trying to mitigate against
outright customer defection, but in seeking to influence expenditure shifts between competing
offerings. In their calculations, managing the upward migration of a brand's share of
requirements (with engaged customers) could have as much as ten times more value than
concentrating on defections alone. The quality of active engagements is further corroborated by
an IBM retail sector study which reports that at (any) given level of spend, a greater proportion
will come from brand advocates than non-advocates. (See McKinsey, "Why advocacy matters to
apparel retailers")


The pendulum swings back


We are all familiar with the fabric of social connectivity first studied in Milgram's Small World
experiments. Since then we have seen many popularized models (Gladwell's Tipping Point,
Duncan J Watt's Big Seed - one can even include the field of Behavioral Finance) recognize the
influence of those around us in our decision making. Add to this the evolution from linear to
scale power laws made possible by our new found global social network connectivity and one
quickly realizes that the pendulum of marketing is swinging bringing us full circle to the
realization that retention is both behavioural and attitudinal.

Armed with that knowledge some marketers eagerly embrace the chance to engage one's
customers in co-creational activities across all elements of the brand while others pursue a
traditional behavioral relationship orientation. In either event, from a CRM practitioner's
perspective, there are several best practices companies can adopt and implement to realize
retention as the new acquisition.


Putting theory into practice


In order to traverse the chasm from academic theory to real world business practice, it is
important to first identify best, next best and the worst customers. A mutually beneficial
business relationship requires that we identify best and next best customers and collaborate
with them through a dialogue to create new value that will benefit both parties over the long
term. Deciding which customers to focus on and invest in for growth and which to simply
maintain, and in some cases neglect, is the first and most important strategic decision toward
intelligent customer retention. It is important to recognize that value creation is a joint
experience between the brand and the customer and consequently, value will vary with each.
Basic CRM analytics and simple business rules allows companies to indentify and flag these
customers in their data warehouse.


Curiously, many companies often overlook the fact that managing customer retention is both
proactive and reactive and both need a plan to succeed. Proactive management requires
businesses to be able to anticipate customers' needs based on past and current behaviour, i.e.,
lifecycle (products or services that customers need throughout their lives), life stage (student,
younger independents, older independents, families, retirees) and attrition propensity. One
might also consider some form of customer appreciation retention bonus to customers for
having graciously supported the brand in the last year. In fact those proactive measures may
play a significant role in any reactive retention management plans the business puts into action
since it has some foundational goodwill investment to draw against its account with the
customer.


Straddling the proactive/reactive management of customer retention are event detection
triggers which can be set up in the customer data warehouse using business rules and
operational processes to trigger a heads up notice to customers that some aspect of the brand
promise has been below expectation, but that the brand is aware of the situation. That ‘simple'
notice not only avoids unnecessary customer enquiries, but also signals the sanctity to which the
brand upholds in terms of consistent service delivery.


Operationalizing retention practices


A best operational practice is to develop a master contact management strategy and plan (CMP)
that will serve as a communications roadmap and optimize interactions, both proactive and
reactive, through appropriate channels. The CMP is a multi-dimensional matrix that assigns
appropriate messages and treatments by customer across their life stage and life cycle also
taking in to account, propensities for cross-sell, up-sell and attrition. Within the CMP,
companies can assign relationship investment thresholds based on the value of the customer,
which translates into richness of offer, optimal channel selection, etc. The CMP can be
operationalized using campaign management technologies for both outbound and inbound
channel interactions.


Campaign management applications (CMA) help companies to evolve by shifting to a more
customer-centric strategy that delivers consistent and superior experiences to more savvy and
demanding customers; it leverages the increasing proliferation of addressable attention
channels - including inbound (call centre, retail locations, branches with treatment prompts)
and outbound (direct mail, statement/invoice with personalized messages); and strives for
responsiveness to individual customer behaviors leveraging real event detection in near real
time.


CMA functionality also helps companies achieve the transition to customer-centricity by:


• being customer-aware: the ability to capture what a buyer is saying both explicitly, i.e.,
leveraging existing warehouse investments) and implicitly (to process that information
to determine what to say next);
• providing centralized decision making with optional decentralized execution and co
ordination : to determine the best marketing message to extend in outbound and
inbound marketing channels, online and offline;
• enabling cross-channel execution: to help drive message and treatment consistency as
well as a synchronized seamless experience as customers interact with the enterprise;
• integrating marketing operations: to help marketers improve collaboration and facilitate
cross-channel planning, design, execution, and measurement;
• anticipating new customer insight and channel capabilities: attitudinal fusion, mobile
channels, social networking relationship channels.


In addition, what's managed also needs to be measured to ensure the success of all customer
retention efforts. Performance measurement is a business imperative and key performance
indicators (KPIs) must be created to depict the current state of the customer and generally
include such metrics as retention rate, incremental value (revenue/margin/profit), engagement
index, etc. And while there is much excitement about the promise of social media channels,
there is also uncertainty about the measurement of conversations and the application of any
learning to everyday customer management practices. To do nothing is the worst decision, to
test and learn the wisest.


So then, perhaps the most important learning of all is that, as marketing and CRM practitioners,
we need to challenge the comfort of our current customer marketing practices and data
warehouse defined universe to include additional ‘truths', acceptance of which, will bring one
back to the beginning and excel in a socially interconnected world where increasingly, retention
is the new acquisition.


Phil Olivieri is senior consultant at PDO Associates, an independent full-service Customer Relationship and Loyalty Management consulting firm located in Markham, Ontario. PDO Associates helps companies plan, design and implement optimized customer relationship and loyalty management strategies to ensure consistent customer experiences across the enterprise. For more information, contact him at phil-o@rogers.com.


Miro Slodki is the sole proprietor of Brand Central, a consultancy providing strategic/tactical support for customer centric brand marketers seeking to build stronger, more profitable customer affinity. With a bias toward street-level execution, Miro's experience spans marketing (direct brand, product, and service) market research, loyalty, sales and relationship management in both the B2B and B2C spaces. He can be reached via e-mail at: miroslodki@yahoo.ca.

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