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Arthur Middleton Hughes VP / Solutions Architect Customer Retention: how to measure it, build it and keep it. San Francisco DMA March 16, 2006 3:00 5:00 Slide 2 Marketing Database Analytic & Campaign Software Customer Transactions Marketing Staff - Access By Web Inputs from retail, phone, web How a Modern Database Works Appended Data Modeling & Analytics Marketing Campaigns Data Cleaning Standardization Website Slide 3 Why retention is important: long term loyal customers Buy more per year Buy higher priced options Buy more often Are less price sensitive Are less costly to serve Are more loyal Have a higher lifetime value Slide 4 How to retain them Recruit the right customers to begin with Once you have them, segment them by lifetime value Communicate with them to build loyalty Slide 5 Manufacturer of indoor lighting products Catalog sent to 45,000 contractors Previous policy: wait for the orders Test: pick 1,200 customers, split into test of 600 and control of 600 Two person pilot program build relationship with test customers to see the results What proves that communications work? Slide 6 Change in the number of orders Slide 7 Change in the Average Order Size Slide 8 Total revenue gain: $2.6 million dollars Slide 9 Communications work! Building a relationship with customers can be highly profitable Using a database to recreate the old family grocer is a winning strategy Relationship marketing is the way to go Slide 10 But, with millions of customers Which ones should you spend resources on? If you communicate with everyone, you will not have enough resources to retain the very best. To select the best, you need to compute customer lifetime value Slide 11 Lifetime Value Slide 12 Why we need Lifetime Value Analysis We need to know the value of our customers, so as to properly target our sales and retention efforts We need to discriminate among our customers to acquire and retain the best Slide 13 Lifetime Value Analysis Goal: Determine... where to put your retention dollars the value of each retention strategy where to put your acquisition dollars how much to spend on acquisition Slide 14 What is lifetime value? Net present value of the profit to be realized on the average new customer during a given number of years. To compute it, you must be able to track customers from year to year. Main use: To evaluate strategy. Slide 15 Examples of Profitable Strategies User Groups Newsletters Surveys and Responses Loyalty Programs Customer and Technical Services Membership cards and status levels Event Driven Communications Slide 16 Event driven communication: Dear Mr. Hughes: I would like to remind you that your wife Helenas birthday is coming up in two weeks on November 5th. We have the perfect gift for her in stock. As you know, she loves Liz Claiborne clothing. We have an absolutely beautiful new suit in blue, her favorite color, in a fourteen, her size, priced at $232.00. If you like, I can gift wrap the suit at no extra charge and deliver it to you next week, so that you will have it in plenty of time for her birthday. Or, I can put it aside so you can come in to pick it up. Please call me at (703) 754-4470 to let me know which youd prefer. Sincerely yours, Robin Baumgartner Robin Baumgartner, Store Manager Ridgeway Fashions Leesburg, VA 22069 Slide 17 Lets look at a retail operation Before and after a loyalty program Slide 18 LTV Before New Strategies Slide 19 Discount Rate Basic Formula Market Rate of Interest...5% Assume Risk (Double rate)...10% Years = n Interest = i Formula: D = (1 + i) n Calculation of rate after 2 years: D = (1 +.10) 2 = (1.10) 2 = 1.21 Slide 20 Provide all customers with a card or register their credit cards Birthday Club Communicate with them Give them premiums if they shop a lot Lets see what could happen New Retention Strategies Slide 21 With New Strategies Slide 22 Effect of adoption of new strategies Slide 23 What is the proper computation period? Which is the correct lifetime value? 1, 2, 3, 4, 5 or more years? They are all correct. Which you use depends on your product or service. Long lifetimes: banks, insurance, utilities. Short lifetimes: discount houses, package goods, catalogers. Slide 24 Increase the retention rate Increase the referral rate Increase the spending rate Decrease the direct costs Decrease the marketing costs Five Ways to Boost LTV with Database Strategies Slide 25 How to use lifetime value Compute a base lifetime value Dream up a new strategy. Estimate the benefits and costs Determine whether your new lifetime value goes up or goes down Dont undertake any new strategy until you can prove it will be successful Slide 26 Using lifetime value to get budget approval Database marketing budgets are usually carved from somewhere else You have to prove that you will make better use of the funds than the others Lifetime value can supply testable numbers that CFOs can understand Base your budget on solid numbers backed up by valid tests Slide 27 What your new budget will buy Slide 28 How you got there Slide 29 Using lifetime value to get budget approval Database marketing budgets are usually carved from somewhere else You have to prove that you will make better use of the funds than the others Lifetime value can supply testable numbers that CFOs can understand Base your budget on solid numbers backed up by valid tests Slide 30 Who is going to defect? Besides LTV, you can develop a model that predicts which customers are most likely to leave. Putting that model with LTV you can refocus your entire retention strategy You create a Risk Revenue Matrix Slide 31 Focus on A and B: 44% of your customers. Slide 32 Who uses LTV in marketing?* DMA survey shows 52% of Consumer Only marketers use LTV. 25% of B to B use LTV. 49% Larger companies ($100 million or more) use LTV. 32% smaller companies use LTV 65% plan to use LTV more extensively in 2006 70% use LTV to decide when to reactivate a lapsed customer. 68% determine promotions by LTV *DMA Survey 2005 Slide 33 Conclusion: you can do this Create a lifetime value table for your customers. Put LTV into each customer record Use LTV to determine your marketing strategy Use it to improve retention, cross sales, and profits Slide 34 Break Slide 35 Why you need customer segments Customers are usually very different College students, senior citizens, families with children, empty nesters The same message to all may not work so well. Solution: create segments, and design a program for each segment. Slide 36 How one retail store created 9 customer segments. Slide 37 Segments differ from status levels Slide 38 Segment Strategy Slide 39 An ideal segment Has definable characteristics in terms of behavior and demographics: for example, Retired Couples Is large enough in terms of potential sales to justify a custom marketing strategy with appropriate rewards and budget Has members who can be motivated by cost effective rewards to modify their behavior in ways that are profitable for your company Makes efficient use of available data to support segment definition and marketing efforts Can be measured in performance, with control groups Justifies an organization devoted to it: can be a single person, or part of a persons time, but there should be someone who owns each segment. Slide 40 A valid segment strategy involves: Communications to the segment (direct mail, email, on-location personal attention) Rewards designed to modify behavior Controls to measure the success of the strategy A budget for implementation of the strategy Specific goals and metrics for engagement: for behavior modification An organization that accepts responsibility for the segment Slide 41 Segment action plan: A roadmap showing what will happen when. Send each policyholder a birthday card and a policy review 45 days before their policy renewal date. A budget for the infrastructure and for the segment marketing plans An organization chart that shows who is responsible for each segment Specific goals to be achieved with milestones for measurement of success Slide 42 Using Clusters as segments Slide 43 How one non profit measured success by cluster- Their best Slide 44 Their worst in terms of response and contributions Slide 45 Success from mailing only to the best, and not mailing the worst $5 Million more in net gross revenue. Slide 46 Multi-channel users are more loyal Illustrative numbers from several case studies Slide 47 Why the web is important to retention Web customers are more affluent Their average order size is 12% higher than phone orders. The cost of the web order is 16% lower than phone orders. Typical incentive offered is 5% off on any order over $50. Result: 11% of non web customers shift to the web every year. Slide 48 Creating a club on the internet A company selling sporting goods created an internet member club. When DB was built they learned that: Club members bought 11 times more than non club members. In two years, 81% of club members became multi- buyers. The club boosted retention Slide 49 Club Members Retention Slide 50 Cataloger Customer Retention Miles Kimball sent 20,000 emails with three different catalogs, and 20,000 with the three catalogs alone. Those who got the emails bought 18% more than those who got the catalogs alone. More sales = Higher overall retention levels Slide 51 Retailer Customer Retention Video retailer sent email newsletters to 170,000 customers for 6 months. Control group of 14,000 got no emails Retail sales to test group was 28% more than to those without emails. More sales = Higher overall retention levels Slide 52 One Click Ordering With the web we use cookies to say, Welcome back Susan. We keep her credit card on file if she wants so she can do one click ordering Result, compared to controls, is higher retention and annual revenue from those who have one click ordering available. Slide 53 Tests and controls Essential to measuring the effectiveness of retention programs Slide 54 Why controls are essential The sales force acquires new customers Database marketers create higher retention rates How do you prove this? Retention program effectiveness can only be measured using control groups Slide 55 Every marketing promotion should always be a test Test those who get the promotion against the performance of those who do not get the promotion If you are sending birthday cards or a newsletter, select 50,000 who do not get birthday cards or the newsletter. Look at the controls spending rate, and retention rate. If there is no difference, your cards or newsletters are a waste of money. Slide 56 What to measure Attrition and retention of both groups Migration upward and downward Incremental sales per program and per season Frequency of purchases Dollars spent per trip and per season Number of departments shopped Number of items purchased Share of customers wallet Slide 57 Illustration: Birthday Gift Get customers to record their birthdays with their emails. On their birthday, send them a birthday Pizza Coupon One fast food restaurant offered a $10 birthday coupon to 215,000 customers. Of the coupons sent out, 86,612 were redeemed ($866,120) producing overall sales of $2,900,000 a sales increase of $2 million. Slide 58 Live Agent 74% of shopping carts abandoned at checkout. Reason: customers have some question. They are unsure about the product, service, color, delivery, etc. Solution: put a live chat button at checkout time. Have live agents available to answer questions. Result: increased retention and sales Slide 59 Caller ID Use Caller ID to bring customers complete purchasing history on the screen before the agent begins talking. Result, she can talk to the customer as if she knew her. Result: Increased retention. Greater opportunity for cross sales. Slide 60 What should you do to keep your customers? Select loyal customers to begin with. Reward agents for customer loyalty. Set up a customer communications plan Calculate LTV of each customer Use modeling to predict churn and to determine the Next Best Product Combine LTV and NBP to run a proactive retention program Optimize your inducements Slide 61 Books by Arthur Hughes From McGraw Hill. Order at www.dbmarketing.com Contact Arthur: arthur.hughes@kbm1.com www.dbmarketing.com