Customer LoyaltyHow you can foster it and profit from it

KeynoteSan Francisco DMA

March 16, 20065:30 PM

Arthur Middleton HughesVP Solutions Architect

Why loyalty is important: Long term customers:

• Buy more per year

• Buy higher priced options

• Buy more often

• Are less price sensitive

• Are less costly to serve

• Are more loyal

• Have a higher lifetime value

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60%

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90%

Percentage Retained

from Previous

Year

1 2 3 4 5

Years as a customer

Loyalty is measured by the retention rate

Retention pays better than acquisition

($62)

$48

($80)($60)($40)($20)

$0$20$40$60

New Customer 3rd YearCustomer

Annual Profit

Two Kinds of Database People

Constructors

People who build databases

Merge/Purge, Hardware, Software

Creators

People who understand strategy

Build loyalty and repeat sales

You need both kinds!

Relationship Buyers vs Transaction Buyers

• Transaction buyers are always shopping for the best price. They have no loyalty.

• Relationship buyers are looking for a friendly institution that treats them well and provides good service.

• Relationship buyers will stick with you when your prices go up.

• Transaction buyers will leave for a dime’s worth of difference.

Loyalty and Affluence

• Wealthy customers are more loyal

• 92% of $125K+ are in airline loyalty programs compared to 51% of all

• Wealthy customers do not want discounts. They want status and perks.

Loyalty and Preferences

• Customers who register their preferences are more loyal than others

• Once you know what they want, you have to give them what they want!

• Awarding points or miles works.

How Sears Determines Preferences

How I feel about brands: • I typically buy top of the line name brand products • I buy name brand products at a moderate price • I am always looking for a bargain. I will try any brand if the price is right. How I feel about technology: • I buy products with the latest features & innovations • I buy products with mainstream features & technology • I am not interested in technology, keep it simple for me Home status: • Home Owner • Renter • Lived in my home for less than 6 months • Plan to move in the next 6 months • Plan to remodel in the next 6 months Presence of Children: • Baby (Age 0 - Age 1) • Kids (age 1 - Age 12) • Teenagers (age 13- Age 18) • None

Create your segments based on these answers

What Reichheld said about loyalty

• Frederick Reichheld in The Loyalty Effect pointed out that some customers are loyal and some are not.

• He suggested that companies should start by trying to attract the right kind of customer to begin with.

• Loyalty and disloyalty can be predicted early in a customer’s career.

• One insurance company, he said, found that disloyal customers were often:

– Single people, rather than married people

– Renters, rather than homeowners.

– People who responded to low-ball discount offers

– People who respond to temporary sales

How to determine your net customer promoter index*

• Ask all customers a single question:

*Frederick Reichheld: The one number you need to grow

Determine your net promoter index: (Promoters minus Detractors)

• 41 minus 24 is 17 – that is your net promoter index

• Average of 400 companies was 16

• eBay, Amazon, USAA scored 75 to 80

Brian Woolf on Loyalty

Sales always grow when prices are cut. Unfortunately, new customers attracted by such promotions typically exhibit low loyalty and require constant ‘price feeding’ to keep returning which means continued lower gross margins.

Heavy promotional pricing is not a recommended tactic for building loyalty.

Ruin your customers with discount price offers

• Low ball offers, discounts and coupons bring in the wrong kind of customers

• They train your good customers to think about price

• Discount customers:– spend less, less likely to stay

– are more costly to service

– make good customers feel cheated

Maintaining loyalty

• Communicate with your customers often– Thank you for your order

– Your order was shipped today track # 44455

– Did your order arrive OK?

• Make your communications relevant– You have Release 2.0, Mr. Hughes

– Release 3.0 will double your speed

– To find out about it click here.

Many customers are profitable – some are very unprofitable

79.67%

24.82%15.83%

1.52%

-21.83%

-40.00%

-20.00%

0.00%

20.00%

40.00%

60.00%

80.00%

5% 11% 28% 28% 28%

This 28% lost 22% of the bank’s profits!

Bank Customers by Profitability

GOLD Spend Service Dollars Here

Spend Marketing Dollars Here

Reactivate or Archive

Your Best Customers - 80% of Revenue

Your Best Hope for New Gold Customers

Move Up

1% of Total Revenue These may be losers

Customer Status Levels

Status Levels and Marketing Segments

Gold

Silver

Bronze

BusinessCustomers

AffluentRetired

YoungSingles

FamiliesWith Kids

Low RateShoppers

CheckCashers

Status Levels

Marketing Segments

Customer Marketing Staff

Segments are essential for marketing

• Many customers are quite different in their purchase patterns

• Create actionable segments and determine the value of each

• Use the results to focus your retention programs and acquisition programs on the most profitable segments

Building Loyalty by Cross Sales

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Number of Products Owned

Retention Rate by Products Owned

How to sell a second product

• Customers who have more than one product have a higher retention rate.

• Two reasons for second product:– Profit from the new product

– Retain customers for the existing one.

• An insurance company with independent agents used a model to predict the Next Best Product for each customer

• Offered a 10% discount on first product if second is purchased

Dear Bob & Kitty:

As I figure it, you could save

about $206 per year on your

auto premium. Call me today!

Susan

Create personal notes from agents

Automatic follow up note

Dear Bob & Kitty

I haven’t heard from

you on the letter on

the new homeowner’s

policy. The savings

on your auto policy

are terrific. Call m

e.

Susan Hughes

How did it work out?

• 89% of agents invited went to web and participated.

• 52% created personal notes

• Recipient HH bought 11% more than the controls

• Follow up letter created 8% more sales

• Follow up phone gained 43% more.

Conclusion: This method works!

• Personal notes increased sales by 140%

• Model prediction: Top decile sales 68% over average and 195% over bottom decile.

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Sales by decile

Travelers Insurance

• Costs 20 times as much to acquire new customers than to retain existing ones

• Customers want communications

• Contacts should be conducted locally

• 1% increase in retention is worth $ millions

What the retention database program provided

• Systematic process

• Turnkey operation

• Customer segmentation

• High quality communications at minimum cost

• Personal, professional

• Building a customer relationship

• Agents paid all the expenses

Database Analysis to support Travelers communications

• Profile the customer base.

• Who is staying? Who is leaving?

• Establish measure of customer desirability

• Determine profitability

• Determine lifetime value

• Use these to drive segmentation and retention strategy

What happens during a year

• Letter 60 days before annual renewal

• Annual review

• Thank you card in 1st quarter

• Cross sell postcard in 2nd quarter

• Newsletter in 3rd quarter

• Seasonal card in 4th quarter

Results…

• Increased the customer retention rate from 85.1% to 90.5% -- compared to controls. Worth millions of dollars to Travelers.

• All previous programs had been subsidized . They had all failed

• In this program, the agent paid for all. In prior programs, the agent risked nothing

• In this program, the agents wanted to make sure that their money was not wasted

• 62% of customers who left, never talked to an agent first

• 80% of people who talked to an agent did not leave.

Summary: how to build loyalty

• Recruit loyal customers to begin with

• Create status levels for your customers

• Create marketing segments

• Develop a relationship with each customer

• Communicate often

• Sell a second product to build loyalty

• Work to build your net promoter index

Books by Arthur Hughes

From McGraw Hill. Order at www.dbmarketing.com Contact Arthur: arthur.hughes@kbm1.com

Thank you!