February 12, 2009

Customer Retention: The Myth

If you analyze customer data, you're painfully aware of the myth of "Customer Retention".

Here's your exercise for this week. Go back as far as you have customer data, and calculate the following metrics ... standard metrics in any Multichannel Forensics analysis.
  1. Customer Retention Rate: The number of customers who purchased in 2007 and then again purchased in 2008. Repeat this exercise as far back as your database allows you to.
  2. Orders Per Buyer: Total annual orders divided by annual buyers.
  3. Average Order Value: Sum all demand, divide by the number of orders, annual.
Here are a few secrets about each metric.
  1. Customer Retention Rate: Unless you do something that fundamentally changes your industry (introduce the iPod, or magically encourage customers to pay $5 for coffee at any of six store locations within two blocks of your office building), it is rare to see this metric move by a total of six or seven points. Maybe if you under-advertise to customers, you can move the percentage more, but otherwise, "it is what it is".
  2. Orders Per Buyer: Very difficult to move. Honestly, how do you get a customer to buy something four times a year instead of two times a year? Moving this metric by + 0.2 orders per year is an amazing accomplishment.
  3. Average Order Value: Very easy to move. This metric depends upon Price Per Item and Items Per Order. You can get customers to purchase expensive items, or cheap items. And you can get a customer to add items to an order ("do you want fries with that").
The two metrics that ultimately comprise true customer loyalty (Customer Retention Rate and Orders Per Buyer) are very hard to move.

The one metric that ultimately measures short-term spending (Average Order Value) is easy to move.

You're going to read an awful lot about getting through challenging times by "focusing on your best customers". This sounds so good, so tempting, so easy.

The reality is that it is very difficult to improve customer retention. Honestly, what could Talbots do to get you to genuinely spend more? Better merchandise? That takes seven to twelve months, and is a huge guess that, when done by very bright people, has at best a 60% chance of succeeding. Better customer service? That's a five or ten year process. Talbots needs to increase sales today.


In the short-term, you crawl under every possible rock, plugging every possible leak in the profit and loss statement. The profit improvements are re-invested in customer acquisition --- the newly acquired customers pay you back over the next 2-5 years. And so the cycle goes.

9 comments:

  1. Opalene1:34 AM

    That is he painful truth that somehow customer trends change everytime and since you are a business you need to follow that.

    internet marketing ebook

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  2. Great post. Very timely. I'll be Twittering about it shortly. But before I do ...

    You say "Orders Per Buyer: Sum all orders, divide by the number of buyers, annual."

    Don't you mean "Orders Per Buyer: Take the total NUMBER of orders and divide by the number of buyers, annual??"

    Harry Joiner
    EcommerceRecruiter.com
    http://twitter.com/ecommercejobs

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  3. Your wording will get you to the number I'm describing!

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  4. John Webb - England2:47 PM

    Kevin,

    I guess improving customer retention largely depends upon how well you are currently maketing to your customers.

    Lets say you are a relatively new company, perhaps you're a bigger company but for whatever reason have lost touch with your database.

    It is possible that in either of these situations you are still almost blanket mailing your customers. Likely using a very broad brush RFM, not segmenting based on products purchased, channels used, offers taken, other buyers purchase behaviours etc.

    In this case then there is a lot of scope for improving retention and orders per buyer, simply by improving your contact strategies and moving away from mass marketing toward targeted and more personal marketing.

    I do find myself strongly agreeing with you for those seasoned companies out there that have of course finely tuned their marketing strategies. But let us not forget those smaller players (and some larger ones) that have all the fun of contact strategy optimisation ahead of them.

    p.s. Great blog Kevin, really thought provoking stuff - still trying to figure where I stand on the profitability of micro-channels post you made the other day!

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  5. Mr. Webb, thanks for your comments!

    Sure, there are cases where marketing is not optimized, and you can improve the metrics. For instance, you could add an e-mail marketing program with targeted mailings based on prior buying habits, and see retention rates bump up a few points, and see orders per buyer bump up a few tenths of a point.

    Glad you're enjoying the blog --- the goal isn't to be right or wrong, but to encourage direct marketers to think ... a good thing!

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  6. I think this also varies by product. Clearly there's more potential to add additional purchases if you sell gourmet food (or tea) vs plasma tv's.

    We've increased our retention rate significantly, but we also fall into the category of companies that aren't marketing efficiently (at least before). And our category has room to encourage additional consumption of the product - especially to fans.

    my two cents . . .
    Jay

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  7. Yup Jay, when marketing isn't optimized, you can move retention rate. And it is possible to move retention by broadening the product assortment.

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  8. I think when it comes to retention you need more than 1 level. You need to be tracking by source and against the timing of the "retention event".
    So, maybe the rate is the same, but the time between purchases, for example, is shorter. You can then attack the source levels that do best and then apply that rate to your goals and financial plan.

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  9. Afewtips, you make a valid point. Of course, if the time between purchases is shorter, then your metrics will indicate that the customer is ordering more times per year. This metric is also very difficult to move.

    All that being said, you are correct that there are multiple ways to view retaining customers.

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