Definitions: Customer Retention and Customer Loyalty

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Drilling Down Definitions

Customer Retention - Good marketers have two objectives with any kind of customer retention marketing:

1. Hold on to the most valuable customers
2. Try to make less valuable customers more valuable

Retention marketing programs are designed to react to and prevent customer defection while growing the overall valuation of the customer base.

Customer Loyalty - A byproduct of customer retention programs; customers who are part of an active retention program demonstrate higher loyalty to the business. A highly specialized version of retention programs using a unique store of value to provide customer incentive is called a loyalty program.

Data-Driven Marketing - Customer retention oriented marketing approach using customer behavior profiles, not demographics, to determine the targeting, timing, and content of marketing promotions.

Rules of Data-Driven Marketing - Four rules underlying all Data-Driven marketing programs:

1. Data-Driven Marketing is about allocating marketing resources. Customer profiles are used to select marketing approaches generating the highest profit, and to avoid promotions with the lowest profit.

2. Past and Current customer behavior is the best predictor of Future customer behavior. Customer profiles using demographic characteristics are not nearly as effective in predicting the likelihood of the next visit or purchase as profiles of customer behavior.

3. Customers want to win at the consuming game. They like to "feel good" about decisions they make, and marketing promotions (discounts, sweepstakes, special benefits, etc.) are designed to encourage these feelings.

4. Data-Driven marketing is all about:

Action – Reaction – Feedback – Repeat

Marketing with customer data is a highly evolved and valuable conversation, but it has to be back and forth between the marketer and the customer, and you have to LISTEN to what customers are saying to you through their actions or non-actions.

Data is Speaking - If customer data is organized and visually displayed in specific ways, it can "tell", or speak to, the dynamics of a business. The data is, in effect, speaking for the customer, suggesting how and when to promote to specific customers and flagging potential problems in the business.

Hurdle Rate - the percentage of customers demonstrating a certain level of the behavior being profiled. Looking at Hurdle Rates for certain customer profiles over time is predictive of future strength or weakness in a business. For more information on using Hurdle Rate techniques, read the "advanced" articles at the end of the Drilling Down tour.

Customer LifeCycle - predictable patterns in customer behavior occurring from the first interaction with a business through the last. LifeCycles are usually required to determine LifeTime Value (LTV). More on Lifecycles (from the site Method Tour)

LifeTime Value (LTV) - the net profit a customer contributes to a business over the entire LifeCycle. Generally calculated as gross margin or contribution to overhead minus the promotional costs of acquisition and retention, including any discounts. More on LTV (from the site Method Tour)

RFM - stands for Recency, Frequency, Monetary value. A method of ranking a customer relative to all other customers in their likelihood to respond to promotions and ranking the customer's future value to the company. Drilling Down uses methods based on RFM theory, but these methods have been updated and modified for use in interactive environments, and emphasize the visual display of customer behavior. More on RFM (from the site Method Tour)

ROI - stands for Return on Investment. In the classic definition, it's the amount of money spent divided by the net profit generated over a defined length of time. More on ROI (from the site Method Tour)

These concepts are more fully explained in the Drilling Down book.

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Drilling Down Definitions