When Acquisition Spoils Retention
Drilling Down Newsletter # 53: 1/2005

Drilling Down - Turning Customer
Data into Profits with a Spreadsheet
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Customer Valuation, Retention, 
Loyalty, Defection

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In This Issue:
# Topics Overview
# Best Customer Retention Articles
# When Acquisition Spoils Retention
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Topics Overview

Hi again folks, Jim Novo here.

This month we're looking at the interaction of acquisition and retention programs, a topic near and dear to my heart.  Did you know it is quite common for acquisition programs to accelerate customer defection or create customers more likely to defect?  Happens all the time.  As usual, the truth is in the data.

We also have a couple of great article links, one on segmenting your customer base and one on valuing customers, two skills critical to success in customer retention programs.

Speaking of segmenting customers, I did a seminar with Brent Hieggelke of WebTrends for the AMA (American Marketing Association) on web segmentation and visitor / customer retention.  It's free to check out, though they want some personal info from you.  See:

http://tinyurl.com/3kt6b

OK, let's do some Drillin'...

Best Customer Marketing Articles
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KPI's: Taming the Metrics Chaos
January 14, 2004  DM Review
This article is about supply chain KPI's (Key Performance Indicators) but the methodology and framework is sound and could be used in any business to develop and track metrics that really make a difference to the profitability of the business.  If you're looking to develop KPI's for customers, these will work just fine.

Profits, One Customer at a Time
January 24, 2004  destinationCRM Magazine
This is a very good, straight-up discussion on valuing customers.  The idea of using a "relative value" is something I have preached for years.  Don't get hung up on trying to derive "absolute" values for customers, just use a consistent valuation model and then start turning your customer data into profits.

Questions from Fellow Drillers
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When Acquisition Spoils Retention

Please note: XXX is a major wireless carrier.

Q:  I'm an XXX customer - I saw an ad for a new phone I wanted for $80.  I went in to the XXX store and asked for the phone - the clerk rang it up at $280!! I showed him the ad.  He said that is for new customers and he could not give it to me at that price.  So it made me feel that XXX did not value my business.  I then cancelled with XXX and have told about 10 people about this situation.

A:  Right, this is a pretty common problem with companies that don't understand
customer retention.  They're so focused on acquisition that they cause defection and that's where all the churn in that particular business comes from.  I'd chalk it up to totally clueless marketing management.  

The irony of this situation:  XXX was one of the "gold standard" 1-to-1 marketers in the 70's and 80's, along with American Express.

In the first place, you should not "broadcast" these kinds of offers, because you understand the impact, the leverage, the "costs 5x as much to acquire a customer as retain one" and so forth.  If you want to make offers like that, you try to use discrete channels - direct mail and so on, as opposed to newspapers or radio / TV.  The strategic issue is people are defecting at such a high rate the company thinks they need to really drive acquisition to make up for it instead of concentrating on retention, which would be less costly and more profitable overall.  But even worse, these aggressive acquisition programs are actually increasing the likelihood of customer defection!

Here's an example: In the second cable system I ran (a business very similar to telco), the connects and disconnects were about even each month.  The regional GM told me there was "no growth" because new customers were not coming on fast enough.  I asked her why concentrating on reducing disconnects instead of growing connects might not be a better approach - if you could do this, you would get net growth, and reduce expenses at the same time.  She told me that was impossible, and that I had to hire more salespeople.  This logic is the same used by company XXX above!

After I listened to a few disconnect calls in customer service, I had part of my answer.  The reps weren't trained to handle a "disco" properly.  I trained the customer service reps to handle these disconnect requests differently, ask the customer, why do you want to disconnect?  Here is a typical conversation:

"Too expensive" says customer.  Rep says, "Are there any channels you like?"  Customer, "Oh, I'm going to miss Discovery, A & E, etc."  Rep:  Did you know you can get rid of your HBO and your other movie channels and reduce your bill by $40 a month but still keep Discovery, A & E, etc.?"  

Customer: "No, I had no idea they could be separated and I could keep "basic" cable.  Let's do that instead of disconnecting the cable".

That's a customer retention program, and now we are reducing disconnects.  

But, what is the source, why did the customer think this?  What about the process of acquiring these customers was creating customers who were likely to disconnect?

On a hunch, I ran disconnect rates by salesperson, and compared that with disconnect rates overall and for the phone reps.  And there it was - the source.

In the 80's, it was the early days for cable, kind of where the web is today, and the average person simply didn't know much about the "technical" aspects of cable (sound familiar)?  They believed what they were told, in this case, by the salespeople, and some of the salespeople generated new customers with disconnect rates far higher than average.  Here was the source of the customer acquisition - the salespeople - driving customer defection.  In other words, just like company XXX, the acquisition marketing was increasing customer defection rates.

So I fired half of the salespeople and trained the phone reps - who already created new customers with much lower defection rates - to be good salespeople.

The regional GM gave me 6 months to make it work.  It does take a while for the effects of this kind of change in strategy to take hold.  That year, this cable system with flat to down growth for years was the fastest growing cable system in the New England region for the company.  At the same time, marketing costs (which include commissions to sales people) fell by 50%, so the increase to system cash flow was quite dramatic.  The financial leverage is huge once retention programs gets rolling, the cash just seems to come out of nowhere.

The reps were handling "controllable" disconnects (those you can save)  quite well now, but what about the "uncontrollable"?  The single biggest source of uncontrollable disconnects in a cable system is people moving out of system, you can't save a customer you can't service.  I had "plugged the leak" on the controllable side with training, but how could I recapture the uncontrollable homes?

It was well known in the cable business that the "easy money" for a sales person was to get a list of households disconnecting cable service (excluding billing related) and drive those homes looking for the moving van (at least it was in the 80's).  A high percentage of disconnects are because people are moving, so the odds play out pretty well - the people moving into a home that had cable are likely to also want cable.  Demographics at work.

So as part of the customer service training, I created a bank of disconnect reasons and had the agents key in the disconnect reason if the customer could not be "saved" as in the above example.  That way, I could isolate the primary segments and track the behavior.  

During one month, I excluded the homes disconnecting Reason: Moving from the lists given to the salespeople, and watched to see if any of those homes signed up for cable all by themselves.  Right off the bat, some in fact did.  They simply called my newly trained phone reps and scheduled the install for themselves.  Based on this early information, I stuck with the approach.

By the end of the month, 63% of the homes disconnecting Reason: Moving had active new customers in them - no sales commissions, and full price for the installation, not the "half price" offered by the salespeople.  Another  giant increase in cash flow, this time from reducing marketing spending.

The next question was, can I drive that 63% higher with the right kind of marketing, the right message, to the right person, at the right time?  I reasoned these other 37% of households must be a bit resistant, so I came up with a simple "Welcome" postcard offering half price installation and mailed it out to those move households where there was no service after 30 days.  I played with the "window" a little bit, testing 20 days, 40 days, etc.  The sweet spot - where I maximized the number of people who signed up by themselves and maximized postcard response - ended up being right around 35 days.  The postcard added another 10% of the homes for a total of 73% of homes disconnected Reason: Move that were now active customers.

The 27% left were obviously hard core resistors and would need some real push, or the houses were still vacant.  How do you deal with a wildcard like vacancy from a database marketing perspective?  You can't, there's no "customer".  So I ran a list of these and gave them to the salespeople.  They came back from the field mumbling about how "all of a sudden, nobody wants cable" and "something is wrong with the list".

The reality was these salespeople had just experienced "selling" versus "order taking" for the first time.  Many more left, but a few got with the program and became very good salespeople, bringing in "the tough ones", which is what you want salespeople to focus on in a business like this.

The above example is a balanced approach to acquiring and retaining customers based on detailed operational knowledge of the business and an understanding of how to use customer data.  The goal is to reduce marketing and service "defects" such as creating customers who are more likely to defect, or wasting money on suboptimal marketing programs.  

Each target segment receives a different marketing approach based on their own behavior, and the retention and acquisition programs are not creating friction or defects for the other side.  Acquisition costs fall as customer retention rises, creating a significant increase to bottom-line profits.

In other words, Six-Sigma Marketing.

Q:  So, how does a company handle giving discounts to new customers and still handle the damage that can result when existing customers find out about it?  Giving the existing customers the discount after the fact may work - but you have lost trust with your best customers.

A:  Even if you are discrete with acquisition offers, you are bound to end up making the offer to some current customers.  Once in a while a customer would call in to schedule the install themselves and then get a "half price installation" postcard.  When they called to complain, they were immediately given the discount - without talking to the manager, etc.  Reps were also given a specific script to deal with the situation, telling the customer we "meant for you to have the discount, that's why we mailed the postcard.  We apologize for the card arriving after you called, and want to thank you for bringing it to our attention".

By doing this, a potentially negative customer confrontation is turned into a positive customer experience.  The customer who was agitated and expecting flack is instead treated to "surprise and delight".  This kind of experience is what retains customers.  I'm sure you would have been equally delighted if the store rep said, "This offer is only for new customers Mr. Jones, but in your case, I will make an exception, since you've been with us for 10 years / are a good customer / etc."

This kind of treatment is what makes customers resistant to competitive offers.  If you want to call that loyalty, you can, but I prefer to call it what it is.  There is rarely any true "loyalty" to a company, there is only resistance to defection, either tangible or intangible barriers you can create with targeted customer care.

The cost of giving current customers breaks on acquisition offers should be factored into the ROI of the program, and the instructions to every employee should be "if a current customer wants the deal, give it to them".  

A further and more profitable refinement of that instruction, if the company has the proper systems in place, would be "check their Current Value / Potential Value, and based on this, here is a matrix of what you should do - give them the offer, give them an alternative offer, tell them you're very sorry, etc."  These kinds of rules should always be planned out in advance, customized to each campaign, and shared with the front line people.  

The alternative, which is what you probably experienced, is "tell the front line no acquisition deals for current customers, no matter who they are or what the deal is".  That makes it easier for the marketing people, but very tough for the front line - not to mention being a rock-stupid execution for this business.

Customer retention and customer acquisition are inextricably linked.  You can't have programs on the one side that fight with the other side, there has to be a cohesive "blended" customer strategy.  Right message, to the right people, at the right time; that's the name of the game.  And if you use the customer's own behavior to drive your marketing programs - particularly with respect to "right time" - you will drive higher revenues while reducing marketing costs. 

Jim
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Marketing program designs, click here.
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That's it for this month's edition of the Drilling Down newsletter.  If you like the newsletter, please forward it to a friend!  Subscription instructions are top and bottom of this page.

Any comments on the newsletter (it's too long, too short, topic suggestions, etc.) please send them right along to me, along with any other questions on customer Valuation, Retention, Loyalty, and Defection here.

'Til next time, keep Drilling Down!

- Jim Novo

Copyright 2005, The Drilling Down Project by Jim Novo.  All rights reserved.  You are free to use material from this newsletter in whole or in part as long as you include complete credits, including live web site link and e-mail link.  Please tell me where the material will appear.