October 26, 2011

Death Spiral: New Customers vs. Loyalty

Here's an easy one.  Businesses locked in a Death Spiral are, for a myriad of reasons, unable to acquire enough newbies to offset the customers being lost.
  • Example:  100,000 twelve-month buyers, 45% repurchase = 45,000 customers ... 25,000 reactivated customers ... 15,000 new buyers ... total buyer file next year = 85,000 customers.
This isn't a challenging query to run.  Just run it, monthly!!

Management is going to have a natural reaction ... they're going to suggest that if customers were just more "loyal" or more "engaged", you wouldn't have a problem.  Unfortunately, that's not true.  Repurchase Rates vary by +/- 10%, on average ... so if you did everything right on repurchase rate, you'd have the following situation.
  • Example:  100,000 twelve-month buyers, 50% repurchase rate = 50,000 customers ... 25,000 reactivated customers ... 15,000 new buyers ... total buyer file next year = 90,000 customers.
In other words, new customers are a bigger indicator of a business in a Death Spiral than changes in customer loyalty is.

Run this query on a monthly basis, and communicate your findings to Management.  If you are in Management, demand that somebody run this query for you, you need to understand this relationship!

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