Seven Keys to Customer Retention
It takes far more effort to acquire a new customer than to retain one, says the old business adage. And the benefits can be far greater when you know how to target efforts to maximize impact retention in a cost-effective manner. It is also possible to limit losses by identifying and appropriately dealing with unprofitable customers and those that do not advance the mission or market position of your organization.
Throughout this article, we speak about customers, but you can easily replace the term customer with member and this article becomes an exploration on how to retain members for your association or non-profit.
Customer retention as strategic market planning
The role of customer retention in the overall organizational strategy is one of protecting and managing the primary source of resources. It is also one of defending and enhancing market position and of optimizing resources and opportunity. That is why, although seemingly a purely tactical approach, customer retention also belongs in the realm of strategic market planning and is a required strength inherent to any successful organization.
The most effective way to manage retention is to identify those key areas where efforts can be leveraged for maximum impact. With retention targets identified and prioritized, it is then possible to develop a customer management plan that efficiently applies retention management tools and monitors progress.
The EurekaFacts approach to customer retention stems from the assumption that within any population of existing customers it is possible to identify several segments with different attributes, including purchase behavior. Each segment has consistent responses to specific marketing efforts which allows for the planning and execution of targeted efforts to maximize retention. Targeting segments supports resource optimization as well as maximization of each customer relationship.
Identifying and gaining an understanding of loyal customers and heavy user groups among your customer base is important. Knowing who your at-risk customers are, is perhaps more so. The strategies applied to most customers are focused on loyalty and revenue-building (e.g. up-sell, cross-sell and similar efforts). When you identify segments with a higher propensity to leave the organization, it is then easier to develop targeted measures aimed at increasing retention among these groups without having to invest excessive resources in those who are not a flight risk.
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The Seven Keys
1. Develop a retention and customer management plan
Many marketing and business plans are focused on the acquisition of new customers, because of the complexity and cost involved in segmenting and targeting audiences and positioning to attract new customers. However, it is equally important to develop plans that address the needs of your current customer base. This includes overall objectives, strategies, tactical programs and feedback through key business metrics. Just as targeting an external market, a critical process in the marketing effort for your customers is the segmentation, targeting and positioning strategy (STP).
The STP process consists of segmenting your customer base, identifying and offering the services that best meet the needs of target segments, and packaging the bundle of benefits into a compelling position that occupies a niche where your organization can claim and maintain market differentiation.
At the heart of any retention management effort is the need to manage the Life Time Value (LTV) of the customer. Beyond the simple discounted cash flow view of each customer, your analysis needs to include the following:
- Evaluate the life expectancy of the customer relationship: study the cycle, the events, and circumstances that prompt continued involvement as well as those that cause attrition.
- Identify the services used among the customer base.
- Assess customer knowledge of available services and products available throughout your organization.
- Identify the demographic, behavioral and attitudinal variables of your customer base with special emphasis on identification of those attributes that separate loyal customers from defectors.
- Identify the Key Moments of Truth: discover the timing and interactions that define a customer’s intention and action to renew or defect.
- Examine opportunities for maximizing the value and the utility of the services to existing members or customers.
- Assess the cost of renewal, both monetary and non-monetary.
- Identify decision-makers and influencers.
- Evaluate the current cash flow and opportunities.
2. Segment the customer base
Addressing possible segmentation schemas, it is common to find the application of Pareto’s 80-20 rule. Plans that focus on this approach usually include specific tactics for the top customers (20%) who generate the highest revenue or profit (80%) and develop cost-efficient strategies for the bulk of the customer base. This type of tiered approach is useful but also has its limitations.
When you look at your customer list, those in the bottom section may include groups of light users, sporadic joiners, nearly inactive customers, and former customers. Some of these group (a.k.a. segments) carry the potential for much higher involvement, while others may not be worth pursuing at all. Most retention strategies ignore groups toward the bottom, leaving vast opportunities untapped.
Develop STP alternatives
Conducting multivariate segmentation of the customer base with respect to the attrition rate will uncover the likelihood of leaving across several attributes such as 1) demographics, 2) usage, 3) geographic distribution, 4) service unit, and 5) attitudinal values.
Examining these segmentation schemas and prioritizing them can uncover the needed steps necessary to address each group. Once you know which segments are most likely to leave and the factors that shape their higher attrition rate, it becomes easier to develop plans to increase retention among your current customer base.
By identifying possible strategies for each segment and their expected response to each strategy it becomes possible to evaluate segmentation-targeting-positioning alternatives and choose those that offer the highest potential.
It is also important to step back and examine segments not only as the make-up of the customer base and the building blocks for the marketing strategy, but also as a portfolio of assets. Examine segment size both in relation to the total customer base as well as to the total market niche, segment growth, market penetration, acquisition cost, renewal/ maintenance cost, strategic value, and lifetime value.
Some possible segment-by-segment strategies may include adaptive and customer-change strategies:
- Modify service offer – create young professional networking environments to capture those who are new to the field.
- Address service quality – establish monitoring mechanisms to track the percentage of customers receiving the minimum service level offered. Review messaging to identify areas where over-promising may be taking place.
- Educate customers – deploy service awareness messaging to those who have not utilized services that generate involvement and commitment. Prepare customer orientations, new member manuals, guides, and online user resources.
- Adjust expectations – identify service glitches quickly and alert customers of the issues with as much advance notice as reasonably possible.
- In analyzing timing, it is important to examine it with respect to the original purchase as well as in relation to other events. Plot the customer life cycle, identifying when they are most likely to leave. Often new customers have a higher than average attrition rate. Also, examine the response to the renewal series and overall fit of the messaging platform for each segment.
Predictors of Attrition
- Identify the predictors of attrition and renewal and manage them. Professional associations may have attrition that is partially driven by the level of reimbursement offered by their employer. Understanding the career cycle of individuals can then unlock opportunities to transition individuals from employer-paid memberships to individual dues-paying continuation strategies. This can also assist you in the messaging necessary for those who inherit institutional or employer-paid memberships and offers.
The chart below shows the output of a multivariate analysis that separates a customer base by the top predictors of renewal. Each node represents a particular segment of the membership with distinct characteristics. In the image below, D and E are the at-risk segments, and F and G are the safe segments.
3. Target offers for each segment
Once segments have been identified and characterized, it is essential to lay out a path to secure retention and greater involvement. In many cases, it is reasonable to pick the services that, if used, will generate greater loyalty. When many options exist, it is also possible to identify these offers through data-mining, pinpointing the optimum series of offers. True market segments show a consistently similar response to market stimuli, so once you have identified a successful path for each segment, you can turn the retention strategy into one that also helps optimize involvement and revenue.
To develop the path, the key steps are:
- Articulate your objectives for each segment.
- Define your communications and positioning objectives.
- Identify the services that are hard to replace and build compelling offers to make them part of the critical path.
Examine the demographics and attitudinal sets of your at-risk audiences to test affinity with the current retention and renewal strategy. Once you identify the motivators for continued involvement it is possible that existing communications and services are insufficiently targeting at-risk segments.
To fully benefit from the segmented approach it is often necessary to examine those unprofitable/unattractive groups that need to be weeded out or transitioned to more profitable platforms. Managing churn is often counter-intuitive to those who march to the objective of growing the customer base. But when the cost or effort of retaining a member exceeds the total value of retention, it is necessary to develop upgrade/exit strategies.
New customer acquisition
When planning new customer acquisition efforts, using segmentation to gain an understanding of the expected loyalty and profitability of customers is instrumental. Applying the same principles to prospective members, an association can choose to focus on a particular segment of the prospect base. For example, it is common to focus on new entrants to a professional field. They may be more likely to respond to a particular offer. However, are the new entrants more likely to stay in the field than those who have been in it for more than two years? A similar situation occurs with those who join an association responding to a discount for an upcoming conference. Because the promotional offer (convention discount) and the long term service offered (professional membership) are not completely aligned, the life expectancy of the membership may be lower than for those who were simply sold on an offer to gain access to the full set of membership benefits.
With an understanding of the segments and the drivers of attrition, retention and renewal communications can be seen in a new light. If these are standardized across segments to include social media, email, and renewal invoices, you will know where there is ample opportunity for improvement.
4. Increase relevance, usage and service penetration
Loyalty is often enhanced with the level of involvement accomplished. The more services customers use, the higher the loyalty and the lower their likelihood of finding a replacement. Although each service has particular dynamics at play and the assumptions should be tested, examining how to increase involvement and the number of services used will not only support revenue maximization, but also retention. The strategies to utilize may include a mix of the following:
- Increase the number of services offered.
- Implement loyalty reward programs.
- Build high-value features that are hard to replace/require continued membership
- Create incentives to keep current information/database.
- Build periodic processes to reexamine existing relationships and formulate retention/up-selling plans.
- Build exit/switching costs.
Some associations are able to set up mandatory membership via accreditation requirements such as the American Medical Association. In this case, the exit cost is very high, because doctors lose the ability to perform their profession. Some associations embed liability insurance into their membership. This requires continued membership in order to continue to gain access to the benefit. However, locking individuals into their membership can also create negative reactions.
Manage the customer experience
The development and targeting of actual offers need to take the complete customer experience into account. Developing an understanding of the sought value (tangible and intangible, rational and emotional) and the environment in which it is utilized can uncover important elements on which the retention strategy can rest.
Associations are by nature social groups, so group composition defines to a very large extent who will remain after their trial period and who will not. Influencers, although a fraction of the customer base, are key to involvement and retention efforts. Building strong referral and reference power is essential and this extends past the initial trial period. Among professional associations, these influencers may be university professors, renowned professionals, and trusted consultants in the field. Reference and peer groups need to be considered in the retention strategy as well.
5. Enroll your organization to help
Intention to repeat a purchase, renew a membership and/or increase involvement is often tied to individual actions on the part of the staff. This is especially true in service organizations. An analysis of the actions that lead to customer retention and those that lead to increased loyalty are likely to yield concrete identification of key touch-points and identification of cause-effect dynamics that can be addressed through training and process changes.
- Communicate the cost of obtaining a renewal versus acquiring a new member.
- Identify the ways in which staff can influence retention.
A set of predictors may suggest that the number of rings before pickup and the number of call transfers are drivers of satisfaction. Likewise, consider turnaround times for email responses and the use of self-service information pages and real-time chats. This may then assist in the training of staff to optimize these key measures, positively influencing customer satisfaction. In interaction, measurement of a number of attributes may impact their intention to renew.
In one study where several attributes were measured, the best predictors of membership renewal were staff friendliness and courtesy of the staff. In the example, 94% of the membership plans to renew. When these customers perceived the staff to be friendly, their likelihood to renew jumped to 98%. But when they perceived staff as not friendly and courteous, the likelihood to renew dropped to 83%.
6. Establish a service recovery strategy
Understanding that uneven and/or sub-par service will be delivered at some point in time. Therefore, service recovery strategies need to be in place. Airlines offer free upgrades; some hotels offer a free stay when something goes wrong. An important question that needs to be answered is: What is the service recovery strategy for your nonprofit?
Your service recovery strategy begins with a clear definition of the minimum standard of service that your customer expects. Your service recovery strategy needs to be communicated. When a breach in service occurs, not only the customer pinpoints it, but, preferably, the staff involved can identify the breach and offer some restitution to the affected customers. Then comes the reward. Research has shown that customers who have had a negative experience addressed and resolved become more loyal than those who have not experienced a problem. Among big-ticket and high involvement services this is even more important.
Taking this effort one step further, developing measures of the level of service delivered and the differences in how it is perceived are key. This leads to the systematic identification of opportunities for improvement. An effort of this nature can be completed within a quality management program such as six sigma.
- Define the minimum acceptable level of service.
- Develop means for problem identification.
- Establish problem resolution processes.
- Implement service recovery and customer recovery strategies.
7. Keep the pulse on who leaves and why
Decisions to repeat purchases and continue membership affiliations are made based on past behavior, attitudes and customer experience. But there is more to it, gaining understanding and monitoring other external factors such as competing offers and substitutes is essential. Establishing a process to monitor attrition, the strengths of competing and substitute offers by obtaining customer input and linking it to measures of external factors can help pinpoint needed adjustments to the strategy.
The most critical aspects of an effective monitoring program are:
- select effective metrics
- implement a follow-up process
- create ways to limit sponsor bias in customer feedback and obtain accurate reads
- execute effectively
- follow up on new findings and learned lessons
Many associations maintain exit surveys for those who have not renewed after a number of efforts. The information these efforts yield can be powerful in qualitative terms, as well as a good quantitative measure from the customer’s perspective. Those who take a more proactive approach establish ongoing feedback mechanisms to assess the health of their customer relationships.
Enhancing this data with that available from the customer database, the transactions they engaged in (or the services they did not use), their state or local affiliate, and other data can uncover even more powerful insights. The example below shows distinct differences in intentions to renew a membership offer with marked differences by state and region of the country.
Ultimately it’s all about value
Customer retention is ultimately driven by value. Even the best segmentation, targeting, positioning, creative messaging or promotion with flawless execution will fall flat in the absence of value. In developing a plan to maintain and upgrade a customer base it is necessary then to build a solid foundation. Then, and only then, will the keys unlock the door to greater customer retention and overall organizational success.
Segmenting your customers has its challenges, but the rewards for knowing more about them is great. Segmentation can inform your strategic plan, your marketing, and your customer service. Each of these seven keys presents their strengths and offers distinct value. Whether you end up using one or several of these keys, it boils down to finding the answers and insights that will help you create the most value. We invite you to explore the rest of our web site and reach out to explore what might be the best fit for you. Let’s get the conversation started.
Updated from Seven Keys to Customer Retention by Jorge Restrepo, CEO at EurkeFacts Smart Research Solutions, © 2006.
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