January 16, 2007

Measuring Loyal Customer Behavior Using Multichannel Forensics

How do you define whether your customer base is 'loyal' or not? If a customer purchased eight times at Wal-Mart last year, is the customer loyal? If a customer purchased eight times at H20Plus last year, is the customer loyal?

In reality, every business, even those with a poor management team, have very loyal customers. It becomes important to understand how customers behave over time.

The majority of businesses can measure customer loyalty over the course of a year. Management categorizes all customers who purchased during, say, 2005, and measures how many customers purchased again during 2006. This metric is called the 'repurchase rate', and is a very important metric for management to understand.

There are three modes that any corporation, product, brand or channel fall in to. They are:
  • Retention Mode: When sixty percent or more of last year's customers purchase again this year, your business is in Retention Mode. These businesses have loyal, repeat purchasers. Management can focus on increasing the purchase frequency of customers, as well as encouraging customers to purchase more items per order.
  • Hybrid Mode: When between forty percent and sixty percent of last year's customers purchase again this year, your business is in Hybrid Mode. These businesses are among the most enjoyable for executives to manage. They have a multitude of levers to pull to increase sales. It is possible for management to increase retention rates into Retention Mode. It is possible for management to increase purchase frequency, or to encourage customers to purchase more items per order.
  • Acquisition Mode: When less than forty percent of last year's customers purchase again this year, your business is in Acquisition Mode. This mode is surprisingly deceptive to executives, because it flies in the face of customer feedback. Management reads letters from loyal customers who love your product. Yet, the average customer is unlikely to purchase again next year. Management running businesses in Acquisition Mode have no choice but to continually find large sources of new customers to fuel future growth. Surprisingly, many web-based businesses that don't have the sku breadth of Amazon.com fall into Acquisition Mode. These businesses may struggle when the flow of customers transitioning from catalog businesses slow down over the next five years.
Your homework assignment is this: Talk to your resident programmer, and ask her to identify all customers who purchased in 2005. Of those customers, measure the percentage who purchased during 2006. Once you have that metric, identify which of the three modes your customer base falls into. We'll talk more about this tomorrow.


  1. Anonymous6:20 AM

    Quick question... are your retention buckets based on total retention or direct channel retention?

    As a traditional cataloger (with a small but expanding retail presence), we've traditionally looked at direct channel retention rates (phone+web orders) and discovered the challenge of defining total retention (w/retail) in the face of limited retail data capture (without a loyalty program to incent identification in retail.)

    Thus, should the retention rate we mine be a total retention rate, with a grossed up retail percentage to account for capture? (Even if direct channel management focuses on the direct retention/ etc) I understand the importantance of both, but I wonder to which your retention definitions apply.

  2. If it were me, I would not gross up retention rates for capture rate. You never know if you are missing customers, or if you are missing individual transactions within actual customers.

    We'll address the rest of your concerns in today's post and homework assignment!

  3. Anonymous3:32 PM

    Kevin - Thanks for the comment and advice on my post about seo newbie vs. pros.

    Going to spend tonight reading yours, looks interesting

    THanks again Marc


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