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.

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