Customer retention is a multi-dimensional issue

Increasing the rate at which a company retains customers can be a great value driver, i.e. it increases profits disproportionate to the amount spent. If that is the case, why then is it the most neglected of the three basic areas of customer management? The answer has to do with three issues. Measurement, ownership and visibility. The three are inter-related, but let us discuss them one by one and then talk about how your company could benefit from an increased focus on customer retention.

At first blush, retention seems like a pretty simple thing to measure. Can't you just see how many active customers you have this month v / s last month or last year and deduct newly acquired customers to measure how many customers you have retained? Sometime the answer is yes, but, unfortunately, it is often not that simple.

Depending on the kind of business you are in, it can be hard to even define a customer let alone counting how many you have now or have had over time. The definition of a customer starts with defining what kind of entity a customer is. Is it a person, a family or a household (people living under one roof, who are related but not all members of the same nuclear family)?

In a business-to-business situation, is it the parent company, the subsidiaries or divisions that purchase from you, the branches or the individuals who are making purchasing decisions? There is no right answer. You need to decide what is appropriate in your situation and stick with a definition that all of the key decision makers can live with.

We have had clients who have put in very sophisticated software tools to scrub their customer data, remove duplicates and household their customers together only to find that their customer counts went down and they were too scared to report that to upper management! "How do I explain to the CEO that after spending a lot of money on cleaning our customer data, we now have fewer customers?" This is a case where the truth does not necessarily set you free, but lands you in a quandary. Of course, accurate data eventually leads to better decisions, but eventually may be longer time frame than you care to think about.

Once you have defined a customer, the next problem is defining the term "active". This is relatively easy for companies that are selling some kind of subscription service, like a cellular phone company, magazine or cable. However, when you have a product that has a variable purchase cycle, i.e. fast moving consumer goods, where customers can switch back and forth or subscribe to various levels of service, e.g. in financial services where a person can carry a credit card but not use it for several months, you need to establish thresholds which define "active". The establishment of these thresholds can itself become a political hot potato, especially when marketing or product groups have their incentive compensation tied to these numbers.

Ownership and accountability can also be an issue in some organisations, especially multi-product organisations with competing brands or products. Who owns the customer? Who owns the customer information and bears responsibility for tracking and measuring customer metrics as against product sales?

A high tech company sold a wide range of products through multiple divisions that each had a marketing department and all of them had access to the customer file for the entire company. Each division sent out frequent emails that aggressively promoted their products to their target segments within the corporate customer base, without any knowledge of or coordination with the other divisions or corporate marketing.

Customers, many of them very valuable and profitable, complained about the deluge of marketing messages, some of them contradicting each other. Corporate marketing was too weak, politically, to impose communication standards and regulate the outbound traffic, until senior account reps in the sales force complained to the head of sales, who intervened and ensured that corporate marketing coordinated these communications and ensured that each customer only received a limited amount of email and the messages were somewhat tailored to their situation, so that they did not receive contradictory or irrelevant solicitations.

Product marketers were forced to go through corporate marketing for their direct to customer communications. Bureaucracy? Yes, sometimes (not very often, though) it can be a good thing.

Finally, visibility. It is relatively easy to count and claim credit for new customers or for cross selling additional products and services to existing customers. Customer attrition, on the other hand, is a silent killer of profits. There is no clear way to measure controllable attrition. Customers go away for a number of reasons. They die, they grow up (e.g. toddlers outgrowing diapers), their needs change.

How do you isolate the impact of your actions from these natural factors outside of your control? A simple way is to establish benchmarks based on historical performance, but this can be difficult in fast changing markets. The best way is through the establishment of control groups within existing customer segments, so that you can track truly voluntary attrition. The topic of how you set up statistically significant control groups, however, beyond the scope of this month's column.

Why bother with customer retention? Increasing customer retention may well be one of the most effective ways to increase profits, and it can be done relatively quickly and with long lasting impact. One of our clients launched a programme to call their most profitable customers on a quarterly basis to thank them for their business - no sales pitch, just thank you. The customers, who had never been thanked before by this company or the competition, were so pleasantly surprised, that attrition went down by a third, measured against a control group, of course.

Not only that, we discovered that they voluntarily walked in to buy additional products at a rate that was 10 per cent higher than expected. This was an unexpected bonus. We also suspect that there was positive impact due to positive word of mouth to their friends, although we were not set up to measure this. Customer retention may not be sexy, but it certainly can be profitable.

*The author, former consultant and co-founder of CRM practice within McKinsey & Company, is CEO, Quaero Corporation (www.quaero.com), a marketing performance management company headquartered in Charlotte, NC. He is the author of High Performance Marketing: Bringing Method to the Madness of Marketing.