# 70: 8 / 2006
Drilling Down - Turning Customer
Data into Profits with a Spreadsheet
Customer Valuation, Retention, Loyalty, Defection
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In This Issue:
# Topics Overview
# Defection Rejection
Hi again folks, Jim Novo here.
Each year about this time I get inundated with questions from both
B2C and B2B marketers who are looking at the fall season as a heavy
customer acquisition opportunity. They want to know what they
can do now to ensure they keep these customers after using lots of
resources to acquire them. Many don't have the resources to
"do anything big" because of budget or political constraints
- the boss simply rejects the idea customers are defecting or doesn't
believe customer retention marketing is profitable. Still, these
folks understand how important it is to retain good customers -
especially newly acquired ones.
So today I'm going to begin outlining a basic method for developing
your business case and taking some action on the customer retention
front. We'll get into reporting, budgets, politics,
culture, the whole thing, and wrap it up before you need to start
taking some action early next year. I hope you will be ready... Let's do that
P.S. There's rarely any cutting edge articles in the trade
magazines during August, and this year was no exception (they save the
good stuff for Fall), so we're skipping the article links this
Questions from Fellow Drillers
Reducing costs is one way to get ROI from a Marketing and / or Service
system; it's also probably the simplest way. But the more
profitable, highest ROI way to get payout on these systems is to increase the value of customers
by keeping them as active, engaged customers for a longer time.
Longer time? That's where the disagreements usually
start. People get bogged down in LifeTime Value and other arcane
stuff and before you know it, once again, nothing will be done about
customer retention this year.
So let's change that!
The first thing you have to do, and I mean have to do, is
define a customer defection. A lot of times this discussion gets
bogged down in the minutia of LTV or inflexible attempts to
"measure" defection. This approach is not going to work
very well until you have more data and experience working through these
ideas by testing and proving the concepts. Defection is often
not an event, it's a process. If you're just starting out,
we need to use a simpler approach.
So the first thing I would put on the table is this: forget about
triangulating "customer defection", and talk about productivity.
I'm pretty sure you are familiar with all the discussions about
marketing accountability. Most C-level types get to where they
are because they increase productivity - the profits generated per
dollar spent - in one way or another. If you want the marketing
/ analytics folks to have a seat at that table, you have to talk about
marketing productivity - how hard is the spending working for the
To talk about marketing productivity, you need data. So we're
going to create your first chart on customer productivity, which you
can use to bring people to the table. There are a couple
of ways to do this; use the way easiest for the analysts or whichever
way will be
more likely understood by managers. The attrition approach can be
more difficult for analysts but is more easily understood by
management because it is one data set over time. Retention
is going back in time over several datasets - not so clear.
Go back 5 years (or 3, or 10, depending on how old your company is and
what you have good data for) and find all customers who became new customers in
that year. Then find how many of those customers are still
customers, defined by some kind of transaction this year.
If you think 2 years is a better measure of activity (highly seasonal
businesses), use 2 years - new customer 5 years ago and the customer
is active in the past 2 years.
What you will find is a major percentage of new customers from 5
years ago have not contacted you in the past 1 or 2 years
- at least 50%, probably more like 60% - 80%.
Take your current active customers (some kind of a transaction this
year or past 2 years) and bucket them by how many years they have been
a customer; express these buckets as "Percent of Active Customers who were New customers X years ago". What you
will find is the same idea as above, expressed in reverse: at least
50%, probably more like 60 - 80% of your active customers were New
Customers in the past year or two. The rest are spread out over
the years back into time.
Either way, the conclusion is the same: the majority of revenue you
are generating in the current time period is coming from customers who
are newer customers. "Old" customers generate very
little in current revenue on a per customer basis.
For online only businesses, these numbers will skew even higher,
into the 80% - 90% range. For either approach above, the
transaction defining "active" does not have to be a
"purchase", it could be a service interaction of some kind,
or simply logging into a web site. It should be an action that
has the potential to generate revenue or decrease cost, because in the
end, we are talking about increasing the productivity of
marketing dollars spent.
Now, given these numbers sitting right in front of you, you have to
ask this question: does it make any sense at all to spend marketing
budget equally against "all customers" when it is clear that
customers become unresponsive over time when using this exact approach?
Wouldn't it be more productive to
reallocate marketing spend against the customers more likely to
generate revenue - that is, customers with the more Recent
transactions / contact with the company?
Going past revenue, if the average "old" customer generates
little current revenue, what do per customer profits look like after
you include the cost of marketing? You don't need to run
LTV models to understand that you can't possibly be making money with
these customers. The cost of marketing wipes out any profit you
might have in them. Right?
Now, don't tell your boss these customers inactive for over a year
or two have defected - that's too controversial, even though you
know it is true. Tell the boss that in terms of bang for the
buck, it makes sense to reallocate marketing spend from the
non-responsive "customers" you have been burying with
irrelevant marketing efforts towards the
more responsive, active customers. It's really that simple. This change will increase marketing
productivity, and you can prove it.
If you measured back over 5 years and ended up at 20% of 5 year old
customers still active in the current period, then
your task is to increase this rolling 5 year retention rate to 21%,
22%, 23%, 24% and so on. Or, if your business is short cycle,
choose earlier periods, say 2 or 3 years, and approach it the same
way. The most productive time frame for retention
marketing tends to be where you see abrupt drops in current
activity. If when looking at new customers back over 5 years,
you find the percentage of currently active customers really drops off
at 3 years ago, then use 3 years as the rolling benchmark.
Don't over-think this or get lost in the minutia. Use this
simple, definitive data to track the performance of your
efforts. This must be done in order to measure how many customers you
"save" with CRM or Retention Marketing, which leads
to finding the value you created and calculating productivity.
If it helps ease the internal political pain of "letting go" of
these customers and declaring them "non-productive", refer to these former
customers as "new prospects", for example:
Boss, look at the huge number of highly targeted new prospects we have
- our non-productive "customers". We can still spend
on them, but let's change our marketing approach to them so it
reflects their new status as prospects". Right? That
fixes the "if we tell the President 50% of our customers are not
really customers they will reduce our budget" problem.
Shift the mindset, then shift the dollars; reallocate to active
At the risk of repeating myself, this attrition or retention information is your
"base case" to get people to start thinking about marketing
/ customer productivity. It provides the platform for you to
call a meeting and get people interested in retention marketing.
The results of this analysis will drive a change in the way
customer marketing is viewed, and making the appropriate change
in tactics will increase the productivity of your marketing efforts
right away. I'll detail some of those tactics for you in a
couple of months - no hurry, you've got until Jan 2007 to get ready
In the meantime, work on setting those "old customers"
free by doing the attrition or defection reporting outlines
above. Heck, if you have the resources, break it out by quarters
or even months - you know that will be the first question they ask
when they see the annualized results - Hey, can I get this information
broken out by quarter?
By doing this you will gain the most powerful knowledge an analyst or
marketer can have - an understanding of the Customer
Next Month: What if the boss still doesn't get it? Simple
follow-up analytics prove the point.
If you are a consultant, agency, or software developer with clients
needing action-oriented customer intelligence or High ROI Customer
Marketing program designs, click
That's it for this month's edition of the Drilling Down newsletter.
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Any comments on the newsletter (it's too long, too short, topic
suggestions, etc.) please send them right along to me, along with any
other questions on customer Valuation, Retention, Loyalty, and
'Til next time, keep Drilling Down!
- Jim Novo
Copyright 2006, The Drilling Down Project by Jim Novo. All
rights reserved. You are free to use material from this
newsletter in whole or in part as long as you include complete
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