acquisition retention loyalty in proper proportion to maximize profitability

In proper propor(on, to maximize profitability June, 2015

acquisition | retention | loyalty

2 ©2015 suitecx – Confiden(al

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The Challenge

To extend the profit stream beyond its expected pa4ern, a company must develop and implement strategies that:

§  Rebalance from the singular focus on acquisi(on to reten(on/growth

§  Drive customer reten(on (for incremental profits regardless of achieving loyalty)

§  Improve customer loyalty (for long-‐term referrals and growth)

§  Use a combina(on of both (leveraging the response and revenue liN from different sets of customers).

§  Acquire strategically to grow most profitably

Lenskold Group.


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The Path to Profitability

Strategies to achieve goals Programs driving Reten>on/Loyalty Repeatable ac>ons

Op>mizing Incremental ROI Driving revenue while maintaining or decreasing costs

The Opportunity Evidence/Facts Emo>ons/Insights


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Though most people focus on loyalty – reten(on is where the most impact/revenue occurs

“reten>on” is defined as sustaining the exis>ng profit stream from current customers, in effect decreasing the expected trends of customer defec(on. When marke(ng efforts generate new customers or increase the share of customer, a certain level of con(nued repeat business is expected. When customers show paWerns of discon(nued or decreased spending, a reten(on opportunity exists.

“customer loyalty” has a wide range of defini(ons that are based on each individual company’s view of the customer rela(onship. From the perspec(ve of understanding profitability dynamics, we define “loyalty” as the customer behavior of a sustained profit stream without the need for incremental marke2ng investment.

Lenskold Group.


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Acquisi(on is the ‘carrot’ that companies chase

§  When you go into most companies and interview the CEO and Sales and Marke(ng teams, they invariably have their acquisi(on numbers at the (ps of their fingers. Same goes for the folks on wall street who are valuing companies based on new customer acquisi(on and barely looking at revenue or repeat use.

§  Most companies don’t seem to value their exis(ng customers anywhere near as much as new customers. The headline sta(s(cs give an indica(on of the scale of the problem: §  30% of companies say they are ‘very commiWed’ to rela(onship marke(ng §  46% say they are commiWed ‘to a certain extent’ §  22% say they don’t do any rela(onship marke(ng

§  A whole industry has sprung up around ‘demand genera(on’ where both B2B and B2C companies spend millions crea(ng awareness and considera(on programs.

§  These programs have complex channel, content and lead scoring strategies as well as new marke(ng automa(on technologies that focus solely on geeng to a sales opportunity.

§  This is a preWy astonishing finding when you look at the figures for marke(ng spend vs. customer reten(on. There seems to be a collec(ve ignorance of common sense that is driving companies away from their exis(ng customers and, instead, focusing their (me, energy and budget on acquiring expensive new customers – even when they know that costs will be higher and ROI lower.


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But reten(on is bankable and evidence based

§  It costs a business about 5-‐10 (mes more to acquire a new customer than it does to sell to an exis(ng one -‐-‐ and on average those current customers spend 67% more than a new one (Inc. Magazine)

§  A 2% increase in customer reten(on has the same effect as decreasing costs by 10%*

§  ROI is up to 10 (mes higher for investments in customer reten(on than for the acquisi(on of new customers (Baxter research )

§  A 5% increase in customer reten(on typically relates to a 75% increase in aggregate life(me profits (Baxter study)

§  Depending on the industry, reducing your customer defec(on rate by 5% can increase your profitability by 25 to 125%*

§  A first-‐(me customer has a 30% chance of becoming a long-‐term profitable customer. If they buy three (mes rela(vely quickly, their chance of becoming long-‐term more than doubles to 67%. (Loyalty Magic)

§  Customer profitability tends to increase over the life of a retained customer

*Leading on the Edge of Chaos Emmet C. Murphy and Mark A. Murphy.


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In fact, customer reten(on is both cheaper than customer acquisi(on and delivers a higher ROI


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So why does everyone focus on acquisi(on?

§  Because new is perceived beWer than old. §  It’s an evolu(onary fact of humanity that newer and younger is always

preferable to older

§  Because it’s easier to measure. §  Reten(on is fixing invisible problems, and as a result it takes more (me,

money and energy.

§  Achieving posi(ve ROI on reten(on marke(ng is challenging without precision targe(ng to reach vulnerable customer segments

§  Thus, acquisi(on is always more visible and valued by leadership than reten(on, though reten(on is oNen far more profitable


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Loyalty is strategic, aspira(onal and emo(onal

§  Loyalty is a posi(ve belief, generated over the course of mul(ple interac(ons, in the value that a company and its products and/or services provide, which leads to con(nued interac(ons and purchases over (me. (Oracle)

§  A properly executed loyalty program can deliver significant, long-‐las(ng benefits to the host company in the areas of customer knowledge, product and service differen(a(on, customer reten(on, and profitability.

§  Conver(ng new customers to become loyal takes more (me and expense than moving exis(ng customers up the con(nuum

§  Loyal customers generally have greater usage and are more open to upsell/cross sell

§  Loyal customers refer new customers (strategic value) while defec(ng customers tell 8-‐16 others about the reason for defec(on

§  Loyal customers are less price sensi(ve


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So why the focus on acquisi(on and loyalty vs. reten(on?

Primary Marke>ng Goal of US B2B Marketers

62%

20%

14%

4%

Customer Acquisi>on

Customer Reten>on

Brand Awareness

Other

Source: eMarketer


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The boWom line – calculate these for yourself:

§  If our company retained its customers one more year with their average sales, we would enjoy a liN of $$

§  If our exis(ng loyal customers bought one more product or service our profit would increase by $$

§  We would have to acquire # more customers (based on our acquisi(on costs less how many purchases they would have to make to get to exis(ng customer LTV) to make up that revenue

§  Loyal customers would purchase # more products and services than an average retained customer, making them the most profitable segment


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Customer lifecycle – get/keep/grow are all interrelated

Inactive

Attrition

Highest Opportunity

Best Customers

New to file Reduced

Usage Learners/Tryers

1

2 3

4

ü  Encourage Retention ü  Reclaim Lapsing ü  Reduce Best Erosion ü  Stabilize New


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To be most profitable all three must be (ed together

§  A loyalty program can be a great way to bring more engagement with your customers. But it’s not a silver bullet for customer reten(on. You must have a complete customer reten(on plan that includes measuring, monitoring, and other outreach besides a loyalty campaign

§  When acquiring new customers you should model for your BEST, MOST LOYAL customers and look to aWract and acquire them vs. expending that high cost on less desirable customers


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Reten(on is based on a combina(on of things

§  Good customer service is the single aspect most likely to encourage people to spend more, followed by personalized rewards they feel are relevant to them

§  Poor customer service is the aspect most likely to put people off increasing their spend, followed by unachievable rewards, unrealis(c points expiry deadlines, or receiving too much communica(on

§  A large majority of customers leave because they are dissa(sfied with customer service

§  The company losing the customer, however, thinks customers leave because of price

Source:


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Reten(on and data flow lifecycle

Customer reten(on strategies are based on solid quan(ta(ve informa(on pulled from internal company sta(s(cs as well as voice of the customer data


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Strategic Reten(on Planning

Step 1: Iden>fy Target Customers •  Iden(fy & Segment target customers •  Determine customers’ core & secondary needs •  Determine customer base & suggest types of reten(on offers

Step 2: Commit to Price or Value •  Decide to compete on price or value, and adjust reten(on efforts

accordingly

Step 3: Build Customer Rela>ons •  Nurture customer rela(onships •  Communicate with customers through avenues such as personal

aWen(on, phone calls & surveys

Step 4: Use a Data Warehouse •  Integrate separate informa(on systems •  Analyze individual customers •  Monitor customers’ behavior & react accordingly

Step 5: Train Front Line Employees •  Train employees to iden(fy the products & service sa(sfying

customers’ needs •  Provide customers with access to all products & services

Step 6: Measure the Reten>on Rate •  Determine the program’s success •  Measure customer sa(sfac(on •  Provide benchmarks for improvement


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Loyalty requires more of a process

§  A loyalty program provides detailed informa(on on transac(ons, demographics, and personal preferences

§  These are required to successfully iden(fy the unique segments among a company’s customer base and then design products or services that meet those segmented customers’ needs.

§  True loyalty is built upon a sequence of mutually beneficial transac(ons and interac(ons, and companies need to manage these as a cohesive whole.

§  Brand equity, which is achieved by providing highly valued, well-‐differen(ated products and services, is the cornerstone of loyalty.


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Managing Loyalty

Every act of marke>ng and sales should drive sales

One popular applica(on of a customer reten(on strategy is a loyalty campaign or loyalty program. A loyalty program is seen as the basis for a customer reten(on program not a supplement to a strategy. Reten(on is a much deeper and complex problem to solve

Loyalty programs can obscure your customers expecta>ons

§  Loyalty programs are rampant. They should not be tossed in same conversa(on as discoun(ng and coupons. Make sure you can illustrate expecta(ons or advantages of your product or service before crea(ng rewards that tend to work against your market posi(on.

Loyalty programs can easily marginalize your product or service value

§  When you enter into a loyalty program, the first items you start to discuss are the offers and discounts you are going to present to your customers. So you are taking a voluntary cut on your margins to ask them to buy the same product they successful purchased before.

§  Unless you know what drives a loyal customer to your business you can’t not successfully create offers or advantages in a program that are low cost to you and high value to your customer. Don’t take the simple road of killing your margins.

Improperly designed loyalty programs can create more cost to your business

§  Loyalty programs can spend lots of money in both cost, and lost profit if they are not done around specific reten(on targets. Make sure you start slow with your loyalty programs and evaluate return constantly.


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Integrated Loyalty Marke(ng Lifecycle

Loyalty campaigns need to be both: §  Proac(ve—

targeted at improving customer profitability

§  Reac(ve—providing incen(ves for customers to purchase undersold products

Loyalty Marke(ng Lifecycle

Iden(fy Areas for Research

and Refinement

Measure Promo(on Results

Purchase Ac(vity

Create and Execute Marke(ng Campaign

Create Loyalty Promo(on

Iden(fy Op(mal Campaign Strategy

Iden(fy and Segment Targeted Members

Analyze Inventory


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The Rules of Loyalty

§  Keep it simple §  Rewards that are relevant to the individual rate most highly amongst

consumers, encouraging them to spend more with a business.

§  Know who your friends are §  Geeng to know and understanding your regular customers and their

needs is essen(al if businesses want to breed loyalty.

§  Maintain service standards §  A loyalty scheme isn't worth much if your customer service s(nks. If

the customer service in your business isn't up to scratch it might be worth concentra(ng on that before you can start thinking about customer loyalty.


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Steps to Ensure Customer Loyalty

Step 1: Iden>fy Key Customer Interac>on Points

Step 2: Map Associated Business Processes

Step 3: Iden>fy Desired Business Outcomes

Step 4: Iden>fy Key Profitability Drivers

Step 5: Design an Integrated Marke>ng Strategy

Step 6: Define Loyalty Analy>cs Requirements

Step 7: Segment Members

Step 8: Design the Incen>ve Structure

Step 9: Define the Partnering Strategy

Step 10: Choose the Appropriate Technologies & Vendor


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Why loyalty programs fail

§  There are a variety of reasons for the failure of current loyalty programs to deliver value.

§  First among them is that most companies do not follow an op(mal loyalty program management strategy.

§  The three most common strategic mistakes are :

§  Failure to understand and manage the long-‐term nature of loyalty §  Failure to differen(ate members by value – the best ROI is for focusing

on best customers who are likely to defect vs. was(ng spend on those who will remain loyal without the incremental programs

§  Implementa(on of customer value tracking schemes that do not match members’ true value


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Customer Expecta(ons

Customer Understanding

Marke(ng Techniques

Strategies for Customer Acquisi(on & Reten(on must be synergis(c

Need for New Customers Need to Keep Exis>ng Customers

Metrics

Financials §  Scale economies/market posi(on §  Return against LTV/Payback

§  Set by Marke(ng & Sales Promises

§  Researched §  Assump(ve

§  Interrup(on adver(sing to all §  Offers, incen(ves, discounts

§  Volumes §  Costs

§  Market posi(on §  Retained volume/value at

lowest cost

§  Set by experience

§  Transac(onal §  Behavioural

§  More targeted communica(ons §  Offers, incen(ves, discounts

§  Volumes §  Values §  Costs


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Sustaining Differen(a(on-‐ the right blend

Above the water: Available and Visible to All §  AWract new customers §  Standard offers and promo(ons §  Maintain compe((ve presence

Below the water: Targeted Communica(ons §  Special earn/redeem offers §  Target customers with high ROI §  Re-‐engage at-‐risk customers to reduce churn §  Incent customers with upward migra(on poten(al §  Minimize ineffec(ve spend

Visible to compe>tors

Stealth Marke>ng


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Conclusion: acquisi(on, reten(on and loyalty all can provide ROI depending on the specific customer

§  Companies must con(nue their efforts to build loyalty and retain customers while ensuring that investments can generate profitable returns.

§  Acquisi(on should focus on geeng the best customer look alikes by referrals, targeted messaging, etc.

§  Managing ROI at the customer level is far superior than managing the ROI for acquisi(on, reten(on, and all other campaigns independently.

§  Companies need to balance their strategic planning through greater integra(on with customer rela(onship ini(a(ves and assign appropriate levels of investments across all three areas

Thank You Valerie Peck [email protected] @custoholic