Customer Lifecycle: Customer Retention is Even More Important Than You Think

Customer retention is much more than simply measuring how many customers are still active 12 months after they begin a relationship with your company. It’s much more than trying to please everybody who walks in the door or orders from your online store. It is, in fact, a perpetual process that is all about profitable allocation of limited resources. How best to focus your dollars to know where customers are in the buying cycle, what behaviors distinguish one customer from another and which customers are worthy of effort in moving them toward upward migration. The key and often overlooked component of retention is to have the discipline to ignore the disengaged.

Understanding what retention is and what role it plays in your business decisions will ultimately determine the long-term profitability of your organization. Too often, retention is approached using a one size fits all approach. Too much energy is focused on plugging the drain, keeping every customer. What ends up happening is that companies spend too much money on customers who aren’t worth it and not enough on customers that are ready, willing and able to move to the next level of engagement.This article will help business decision makers understand and implement the set of distinctive steps that all organizations can take to ensure a profitable retention strategy.

Not All Customers Are the Same

This may seem obvious, but knowing this and acting on it are two different things. The graphic below illustrates a very useful way to conceptualize different customer segments, which will ultimately lead to different strategies in dealing with them.

The segments outlined here are based not only on current profitability and engagement, but on future potential. This means that some customers are primed and ready to move up the ladder, while others are likely to stay in the same spot. It is critical to understand this dynamic. In order to place customers in their proper segment, the following questions should be answered: What are they buying? How often are they buying? Which channels are they using and why? How has this pattern changed over time? Analytic techniques such as behavioral segmentation are quite helpful in not only answering these questions, but also in creating a reusable framework for segmenting customers on an on-going basis.  

Getting to the “Why”- Moving beyond Transactional Data

Why customers behave the way they do is just as important as understanding what the behavior is in the first place. Focusing on transactional data alone can be limiting as it only focused on the “what” and ignores the “why.” Investing in primary customer research or making use of third party attitudinal or behavioral data is an invaluable way to gain insights into customer motivations. Knowledge on what motivates a customer can have a profound impact on how customers are communicated with and through which channels they prefer to be engaged. In this day and age companies have access to virtually unlimited data beyond simple transactions. Social media, web habits, channel preferences, lifestyle segments and many other sources can be useful areas to add color and context to your data.

Giving the Customer a Little Nudge

Once a base of knowledge to what the motivating factors are behind a customer’s unique behavior, the next step is to take advantage of that information to determine if they can be moved up the value chain. Is there an opportunity for increasing their value to the company? It is important to understand that an organization may experience resistance when trying to alter a customer’s purchase behavior. A strategy of “Get them to buy as much as possible as often as possible” may not always work and may do more harm than good. The key is to identify behavior triggers and then offer up those triggers to the customer on a more consistent basis. In other words, make it as easy as possible for the customer to strengthen their engagement and loyalty. Customers should not have to work to do that.

Fill in the Gaps

During the process of uncovering customer behavior patterns and the triggers that initiate them, it is inevitable that a company may find a gap between what the customer is looking for and what the company currently offers. Depending on where the customer is in the value chain, it may be necessary to tweak your product or service offering, or the features associated with it. You may discover that your organization has been neglecting a certain communication or buying channel.  Invest in filling the gaps to ensure your highest value and highest potential value customers have a clear path to growing their relationship with you.

Building the Analytic Toolbox

Building a dynamic and effective retention strategy requires a great deal of knowledge about the customer, their behaviors and how your organization is setup to respond and optimize its business practices. A broad range of analytical techniques can be used to make this happen. No matter what strategy you end up adopting, clean, consistent and up to date transactional data is critical. The old saying “garbage in, garbage out” very much applies here. Taking advantage of a robust customer database through techniques such as transactional segmentation, behavioral segmentation, clone modeling, best customer modeling, seasonal buying analysis, risk modeling, life time value analysis and many others can be leveraged as invaluable tools that your organization can draw upon to enhance its understanding of its customers. It may also be valuable to seek out data not normally captured in a customer transaction database. Social media behaviors, third party demographics and attitudinal data are available from a variety of sources which will significantly enrich the data you already have available. Primary customer research such as surveys, focus group or ethnography should also be investigated.

It is clear that a profitable and long-term retention strategy has many moving parts. Start with a solid understanding of your customer and what motivates them, determine which customers require additional investment and which do not, fill in any gaps on the purchase path that may be missing and support your strategy with fact based analytics across multiple subject areas. Adopting this kind of informed, analytics based strategy will ensure your limited resources are being spent in a way that adds to the bottom line!