Customer retention

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  • Arthur Middleton HughesVP / Solutions ArchitectCustomer Retention: how to measure it, build it and keep it. San Francisco DMAMarch 16, 20063:00 5:00

  • MarketingDatabaseAnalytic &CampaignSoftwareCustomer TransactionsMarketing Staff -Access By WebInputs from retail, phone, webHow a Modern Database WorksAppendedDataModeling &AnalyticsMarketing CampaignsData CleaningStandardizationWebsite

  • Why retention is important: long term loyal customers Buy more per yearBuy higher priced optionsBuy more oftenAre less price sensitiveAre less costly to serveAre more loyalHave a higher lifetime value

  • How to retain themRecruit the right customers to begin withOnce you have them, segment them by lifetime valueCommunicate with them to build loyalty

  • What proves that communications work?Manufacturer of indoor lighting productsCatalog sent to 45,000 contractorsPrevious policy: wait for the ordersTest: pick 1,200 customers, split into test of 600 and control of 600Two person pilot program build relationship with test customers to see the results

  • Change in the number of orders

    Orders

    0.82

    1.12

    Control vs Test Groups

    Change in number of orders

    Sheet1

    82%

    112%

    Sheet2

    Sheet3

  • Change in the Average Order Size

    OrderSize

    0.86

    1.14

    Control vs Test Group

    Change in average order size

    Sheet1

    86%

    114%

    Sheet2

    Sheet3

  • Total revenue gain: $2.6 million dollars

    Revenue

    0.7

    1.27

    Control vs Test Group

    Change in total revenue

    Sheet1

    70%

    127%

    Sheet2

    Sheet3

  • Communications work!Building a relationship with customers can be highly profitableUsing a database to recreate the old family grocer is a winning strategyRelationship marketing is the way to go

  • But, with millions of customersWhich 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

  • Lifetime Value

  • Why we need Lifetime Value AnalysisWe need to know the value of our customers, so as to properly target our sales and retention effortsWe need to discriminate among our customers to acquire and retain the best

  • Lifetime Value Analysis Goal: Determine...where to put your retention dollarsthe value of each retention strategywhere to put your acquisition dollarshow much to spend on acquisition

  • 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.

  • Examples of Profitable StrategiesUser GroupsNewslettersSurveys and ResponsesLoyalty ProgramsCustomer and Technical ServicesMembership cards and status levelsEvent Driven Communications

  • 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 ManagerRidgeway Fashions Leesburg, VA 22069

  • Lets look at a retail operation

    Before and after a loyalty program

  • LTV Before New Strategies

    11.01

    NumberResponseSalesAverage

    OffersRateResponsesConversionSalesSaleSales

    Currently100,000,0002.00%2,000,00030%600,000$260$156,000,000

    Warehouse100,000,0002.10%2,100,00030%630,000$260$163,800,000

    Increase100,00030,000$7,800,000

    11.02

    IncreasedProfitIncreased

    SalesRateProfits

    Annual Warehouse Benefits$7,800,00030%$2,340,000

    Annual Warehouse Costs$3,500,000

    Loss from warehouse$1,160,000

    11.03

    80%

    IncreasedProfitIncreased

    SalesRateProfits

    Data Mart Benefits$6,240,00030%$1,872,000

    Data Mart Costs$800,000

    Gain from Data Mart$1,072,000

    11.04

    StepsCost

    Warehouse Build$6,000,000

    Over Three Years$2,000,000

    Annual Maintenance$500,000

    Customer Communications$1,000,000

    Total$3,500,000

    11.05

    LifetimeLikelihood of Defection

    ValueHighMediumLow

    HighPriority APriority BPriority C

    MediumPriority BPriority BPriority C

    LowPriority CPriority CPriority C

    11.06

    LeadsConv.One TimeConv.Two TimeAnnualTotal

    RateBuyersRateBuyersRevenueRevenue

    Present500,00030%150,00050%75,000$200$15,000,000

    With Customer Management500,00036%180,00060%108,000$240$25,920,000

    Cost of Customer Management$4,000,000

    Net Increased Return$6,920,000

    11.07, 08, 09

    Year 1Year 2Year 3

    Retention Rate40%45%50%

    Customers200,00080,00036,000

    Visits Per Year1.41.61.8

    Spending Per Visit$50$60$70

    Revenue$14,000,000$7,680,000$4,536,000

    Cost Percentage50%49%48%

    Costs$7,000,000$3,763,200$2,177,280

    Acquisition Cost $32$6,400,000

    Total Costs$13,400,000$3,763,200$2,177,280

    Profit$600,000$3,916,800$2,358,720

    Discount Rate11.121.32

    NPV Profit$600,000$3,497,143$1,786,909

    Cum NPV Profie$600,000$4,097,143$5,884,052

    Lifetime Value$3.00$20.49$29.42

    Fig 11.07

    Year 1Year 2Year 3

    Retention Rate50%60%65%

    Customers200,000100,00060,000

    Visits Per Year1.622.4

    Spending Per Visit$55$70$80

    Revenue$17,600,000$14,000,000$11,520,000

    Cost Percentage50%49%48%

    Costs$8,800,000$6,860,000$5,529,600

    Acquisition Cost $32$6,400,000

    Database Costs$500,000$250,000$150,000

    Loyalty Program$5.00$8.00$10.00

    Loyalty Costs$1,600,000$1,600,000$1,440,000

    Total Costs$17,300,000$8,710,000$7,119,600

    Profit$300,000$5,290,000$4,400,400

    Discount Rate11.121.32

    NPV Profit$300,000$4,723,214$3,333,636

    Cum NPV Profie$300,000$5,023,214$8,356,851

    Lifetime Value$1.50$25.12$41.78

    Fig 11.08

    Year 1Year 2Year 3

    Old LTV$3.00$20.49$29.42

    New LTV$1.50$25.12$41.78

    Change-$1.50$4.63$12.36

    With 200,000 members-$300,000$926,071$2,472,799

    Fig 11.09

    10.11

    ConversationsMessagesResponses

    TotalActiveSentOpenedQuestions

    Zap Registrant Surveys55167921553

    Zap Registrant Non Buyers3002072095010

    Buyers Invited to Training43017012300

    CSR Survey2195142772368149

    Corporate Billing Contract Usage1371414700

    10.12

    Likelihood of Playing in these events

    SaturdayWednesdayTuesdayThursday

    Gold LottoGold LottoOz LottoPowerball

    Jane Smith95.00%2.00%2.00%1.00%

    John Brown23.00%25.00%27.00%25.00%

    Pat Johnson65.00%31.00%3.00%1.00%

    10.13

    Second Year Performance

    ConversionOrders PerProfit Per

    PercentCustomerCustomer

    Team78.60%4.1$282.24

    Non Team46.60%1.14$30.15

    GC84.50%3.86$212.72

    Non GC39.10%0.73$12.13

    10.14

    10.15

    MBD004223EC.xls

    Basic Data

    Eurosport buyers January 1999 - June 2001

    Life Time Value Study

    MultiConv.OrdersSalesGrossGMPromoCost PerPromoPromosTotalContrib.% 2 YrAd

    CustomersBuyersPercentOrdersPer. Cust.DollarsPer Cust$AOSMarginPercentCostMailingCountPer CustContrib.Per Cust.ContribRatio

    First 3 month Performance

    Team30,09312,34341.0%22,2740.740$3,852,825$128.03$172.97$1,584,87941.0%$40,520$0.4983,0472.76$1,544,357$51.3218.2%0.014

    Non Team180,45838,34621.0%51,3800.285$3,505,384$19.42$68.22$1,657,12047.0%$225,718$0.47476,9532.64$1,431,404$7.9326.3%0.083

    GC50,13222,12744.0%37,6250.751$4,973,628$99.21$132.19$2,110,58542.0%$69,454$0.47146,5172.90$2,041,135$40.7219.1%0.018

    Non GC160,41928,56218.0%36,0290.225$2,384,582$14.86$66.19$1,131,41547.0%$196,788$0.47416,4902.60$934,629$5.8348.1%0.106

    Avg Cust210,55150,68924.0%73,6540.350$7,358,208$34.95$99.90$3,242,00444.0%$266,240$0.47563,0072.70$2,975,765$14.1321.8%0.046

    First 6 month Performance

    Team26,48713,56351.2%29,7081.122$4,938,634$186.46$166.24$2,049,66941.5%$71,696$0.47153,8405.81$1,977,972$74.6826.5%0.019

    Non Team159,38443,04727.0%64,4750.405$4,550,331$28.55$70.58$2,144,03247.1%$398,174$0.47845,6365.31$1,745,860$10.9536.3%0.112

    GC45,21925,35756.1%51,9421.149$6,788,515$150.13$130.69$2,898,16442.7%$125,751$0.47267,3615.91$2,772,416$61.3128.8%0.024

    Non GC140,65231,25322.2%42,2410.300$2,700,455$19.20$63.93$1,295,54048.0%$344,119$0.47732,1155.21$951,420$6.7655.8%0.163

    Avg Cust185,87156,61030.5%94,1830.507$9,488,969$51.05$100.75$4,193,70244.2%$469,871$0.47999,4765.38$3,723,833$20.0330.9%0.063

    First Year Performance

    Team19,49613,26368.0%42,6262.186$7,303,357$374.61$171.34$3,030,34841.5%$124,705$0.46274,03014.06$2,905,643$149.0452.8%0.022

    Non Team118,83245,05037.9%84,4050.710$6,400,160$53.86$75.83$2,980,69246.6%$709,566$0.461,538,11412.94$2,271,128$19.1163.4%0.142

    GC35,33026,14274.0%76,9982.179$10,418,291$294.89$135.31$4,425,29442.5%$229,540$0.46501,68514.20$4,195,757$118.7655.8%0.028

    Non GC102,99832,17131.2%50,0330.486$3,285,226$31.90$65.66$1,585,74648.3%$604,732$0.461,310,45912.72$981,014$9.5278.5%0.236

    Avg Cust138,32858,31342.2%127,0310.918$13,703,520$99.07$107.88$6,011,04243.9%$834,271$0.461,812,14413.10$5,176,772$37.4257.7%0.078