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The Leaky BucketFour ways to fix your customer retention issues

October 2009


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Introduction

What has this got to do withcustomer retention?Well, a lot of companies go withapproach number one to fix theircustomer retention issues. Instead offixing the root causes of their retentionproblem, they simply top up their

bucket with lots of new customers toreplace the ones that churn out of theirholes.

Many companies spend an absolutefortune on acquisition for very littleprofitable growth. The Leaky Bucketapproach is a very expensive way torun a business. With the credit crunch,the days of high spend acquisitioncampaigns are over. Retaining yourexisting customers, and deliveringprofitable growth is more importantthan ever.

This discussion paper examinesfour of the most material impacts oncustomer retention and offers somesolutions on how to tackle customerchurn effectively.

Imagine using a bucket of water to wash your car. But

the only bucket you have has lots of holes in it. To keep

it full of water you have three options:

1) Keep putting more water in

2) Fix the holes

3) Get a new bucket

Option 1 requires too much effort and is highly

inefficient, option 3 is too expensive, so how do you go

about fixing the holes?


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1. Acquisition is the answer, what is the question?

The first and perhaps the largestcause of customer churn is actuallyacquisition, the first part of thecustomer lifecycle.

Many acquisition and business growthstrategies are very aggressive, andan aggressive acquisition strategywill, without fail, create customermanagement problems in the future.

Most companies have embracedthe use of digital channels as a wayof delivering more cost-efficientacquisition, but that alone is notenough. Companies need to deliveracquisition strategies with a muchmore holistic value-based approach

that are capable of deliveringprofitable customer growth.

Are bankers really to blame forthe credit crunch, or does the realcause of the recession actually lieat the doorstep of those that createacquisition strategies?Many companies are volume driven,with resultant sales strategies thatheavily discount their productsto customers, of whom many

fundamentally cant afford the productat full price. Substantial offers arebeing made to customers to meetshort term sales targets, withoutconsidering future implications of thisstrategy.

It happened in the sub-prime market,it happens in subscription businessesand it is particularly widespread inretail. If your customers cannot affordyour product when they come off adiscount then they will churn, a patternbecoming increasingly predominant intodays economic climate.Customer value expectations aredefined during and soon after the pointof acquisition. Once these have beenestablished (on a discounted basis iflots of acquisition offers have beenused to acquire those customers) thenit will be very difficult to subsequentlychange those value expectations.

A business intent on volume, will

struggle to manage its customerretention. If they do, it will come athigh cost. After all, if you are givingaway goods at acquisition, then youwill be expected to do the same at the

end of the cycle if you want to retainyour customers. Subsequently, youend up spending more than ever onboth acquisition and retention theclassic leaky bucket.

Has anyone ever read a marketing textbook that says that to sell a product,you have to discount it to the pointyou are practically giving it away?Although theoretically absurd, thisis what many businesses are doingin practice. Many marketers say theyhave to make aggressive offers to getpeople through the door, but are thepeople attracted with these offersreally the type of customers you want?

Many subscription companies, in

particular, have been creating theirown self-contained credit crunch byfalling into the trap of:

Short term, aggressive sales targetsIncreasingly discounted offers as themeans to achieve those targetsDiscount strategies which acquirecustomers who cant afford theproduct at full priceExisting customers demanding thesame treatment as new customers

and subsequently seeking torenegotiate their existing termsReducing loyalty as the customerbase destabilises

How much of an impact doesaggressive acquisition have on yourbusiness? Well, one large UK companyimproved its P&L by millions of poundsby simply stopping heavy, short-termdiscounting.

The previously increasing churnrate almost immediately reversedwhen they softened their aggressiveacquisition strategy, while thecustomer base continued to grow,

despite less acquisition. A largeamount of the existing customer basehad been offer seeking simply becausethey could. Once the offers wereremoved this behaviour stopped andchurn rates dramatically declined.

Organisations may think they aredelivering great benefit to the businessby bringing in lots of customers withgreat offers, but if the result meansthat they have to spend millions tryingto retain those customers as they

come off acquisition offers then thestrategy is flawed.

A common misconception is that if youdont have an aggressive acquisitionstrategy then you risk losing salesto competitors. Maybe this is so,but lowering the barrier to entry forcustomers through unsustainablepropositions to get them to buy aproduct they cannot afford at fullprice is one of, if not the biggest,

contributors to customer churn. Doyou actually want customers whocannot afford to buy from you?

Therefore, for any business itis absolutely critical to get youracquisition strategy right growth yes,but sustainable and profitable growth.

Increased use of discountoffers - high volume, highrisk creating churn

New, less aggressive

acquisition strategy

introduced

Case Study - Large UK Blue Chip company



2. It is about me the individual and what I do

not the products and services you provide meAs a consumer you shop around andcarefully select a product you wantto buy and the supplier you wish topurchase from. Within days, and with

no concept of who you are and whatyou want, you are then inundatedwith copious amounts of marketingcollateral asking you to purchaseevery single product and service thecompany has ever created.

The failure of previous incarnationsof CRM has spawned a new, ultrasimplistic approach to marketing.Who cares about customer behaviourwhen an alternative and easier wayto manage the customer and stop

churn is to get customers to ownas many products and services aspossible?

Again, we have a scenario wheremany companies are positioningtheir goods and services in sucha way (e.g. bundles, one size

fits all) that at full price manycustomers could not afford or wantto purchase them. Giving awayyour services and therefore profitmargin on an indiscriminate basis,is not a profitable way to retain yourcustomers.

A rule of thumb for 21st CenturyMarketing: If something is easy tomarket to the whole country, then itwont be profitable.

Product or customer?

Most companies will be able togive you a lot of information on

the retention performance of theirproducts and why it is good to have agiven customer on a certain product.(e.g. Product X delivers 30 of profitand customers will survive for 20months on that product). However,that statistic may relate to 1 millioncustomers and within this periodsome customers will leave, otherswill upgrade, and others could stayindefinitely. The range in values,risk and potential of the customerswill differ so much that hardly anycustomers will individually deliver a30 profit and stay for 20 months.

Product approaches to determiningthe value of customers are thereforeflawed. Purchasing decisions aremade by customers and customersonly. Customer Lifetime Value andNet Present Value (NPV) approachesare far more actionable to deliverprofitability and will grow a businessmore than any product approach.

Product NPV Customer NPV

Views at product and packagelevel only

Based on insight from historicalsegment and cohort behaviour(not customer behaviour)Not customer level modellingNo concept of what a customercould do on the future that will

impact their valueNo use of additional 3rd partyunique customer dataSegmented business rulesdriving customer levelinvestment decisions

Views at individual customerlevel

Customer propensity, churn andvalue modelling driving uniquevalue calculations for eachcustomerAn understanding of whatcustomers could do in the futurethat will impact their value

Unique and individual valuescores driving cutomer levelinvestment decisions

Application of additionalcustomer level data (credit, lifestage, etc) to determine mostaccurate likely outcomes

Relate to Product Performance Relate to Customer Behaviour



Most importantly, these approachesgive businesses the capability tomake decisions based on what thecustomer does, not what their peersdo. Every customer can be treated asan individual, and even have their ownP&L and you wont be able to achievea more accurate view of profitability.

To deliver genuine profitablecustomer growth, businesses needto respond to and predict individualcustomer behaviour.Why does the marketing plan neverachieve its objectives?

Too often it is focused on theaccountants way (i.e. comeup with a number and workbackwards) and as a resulttargets are often unrealistic andmarketing plans fail.Plans are usually focused on the

product and not the customers.

If we want marketing plans that delivergrowth and profit then it is time fora new approach a new phase ofcustomer interaction and a new wayof thinking. We need to accept thatcustomers do not conform to pre-determined segments like SOHO, butin fact they are totally individual andsometimes irrational. Most importantlywe need to recognise customers as

carbon based life forms capable ofmaking informed purchasing decisions.

1.

2.

The individual customer is kingModern marketing is not aboutforcing people to purchase because ofsegmented stereotypes or because acertain product is good at preventingchurn. Instead, it is about facilitatingdifferent individual customer needsand preferences in the most profitableway. Therefore, optimisation is the

single biggest new capability forthe modern marketer to acquire.Optimisation is fact based, it dealswith individual customers and metrics,and is not based on the guess work andaverages that underpin many of todaysapproaches.

Optimisation is critical ascommunication and targeting willhave to be increasingly focused onthe individual if you are to manage thecustomer lifecycle effectively.

Optimisation Meeting the specific needs of the individual customer



Segmentation is still a necessaryrequirement to define yourstrategies. However, this has tobe focused away from productsand redirected to the individualcustomers and the potential valuethey can create.

A multi-faceted customer level

NPV approach that looks at currentcustomer value, customers churnrisk, and customer potential (e.g.will they buy other products andservices?) is a powerful way to lookat your customer base. This will helpidentify who risky customers are,which are worthy of future investmentand which type of investment is mostappropriate.

This customer lifetime valueapproach enables the creation of

growth, retention and aversionstrategies for managing customersthat fit more closely to actualcustomer behaviour.Using acombination of customer valuesegmentation and targeting atindividual customer level results in avery powerful customer managementstrategy. Adopting such a strategy cantransform your return on investmentby 10-40%, even for businesses thatalready adopt some optimisation and

segmentation techniques.

A 21st Century Approach to Customer Value and Retention

Customer Strategies

A. Who is valuable today? B. Who might leave?

C. Who has the potential to be more valuable tomorrow?



3. Customer loyalty or bribery for signing on the

dotted line?

Why do your customers stay with you? Do they value

what you do, or are they simply tied in to a contract that

prevents them from leaving?

Customer behaviour works in two ways.They will do what they want most of thetime, however they often behave theway they do because you, through yourbusiness rules, have encouraged themto behave that way. For example, manycustomers churn at the end of a contractbecause they are human beings with abrain, and having been told that they areon a contract, they know when they can

shop around again.

Look at the impact that contracts,business rules, and terms andconditions are having on your business.Are contracts and tie-ins actually forcingyour customers to churn or downgradeen masse at a particular time?

There are very few businesses thatproactively try and influence when acustomer will churn. Most rely on letting

customers try to cancel, and then gettingthem to enter a new contract again toretain them for another year or so.

What can you do, as a marketer, topositively influence your customersbehaviour so they do things you actuallywant them to do?

If a business has a churn problem,they usually throw money at it inreactive retention the last chancesaloon. Experience suggests youare much better throwing more effort

into proactive retention. The reasonyou need to do this is simple - to savecustomers reactively involves callcentres, agents, offers and therefore alot of money.

There are companies that have managedto deliver proactive customer retentionthat has improved the churn rate and atvery low cost. By identifying the mostat-risk customers, activities such asservice messaging, or exclusive low

cost offers can significantly improvechurn over time. One particular UKcompany ran a successful programme

that not only saved customers, butachieved this at a cost per save of one-third of that of reactive retention forsimilar customer profiles.

Proactive loyalty schemes do work andmake a real difference, but only if doneproperly and if the business accepts thatthe benefits deliver over time and notover night.

It is not a quick fix and this long-term approach is possibly why manybusinesses give up and rely on reactivequick wins instead. However, ifbusinesses are serious about regainingprofitability in their customer retentionactivities, then they will increasinglyneed to focus on proactive retentionrather than reactive retention

High risk propensity

Customers with a high-risksequence of events

Retention callers in the lastmonth

Customers experiencingoccasional payment issues

Customers with entry-levelsubscription packages

Difference between two curves due toimprovement in customer tenure due toProactive Retention marketing

At Risk Segments

At risk

Not at

risk

Insight-driven Strategy Successful Campaign Results

Customer

base

Case Study Proactive Retention Benefits Achieved by Large Blue Chip Company



4. Meeting customer needs - the dying and

misunderstood art of good customer service.

I want the cashier in the grocery store

to not be miserable and surly. If I buya carpet, I want them to fit it for meand properly. If I buy a mobile phone, Iwant it to work. This is all simple stuff,yet often customers experiences willbe the exact opposite.

You can be as clever as you want, orinvest as much money as you want incustomer retention, but if you do notdo the simple things well, then you willfail the customer.

Customer service doesnt just meancall centres. Many companies spendmillions of pounds on the call centres ,but many fail to make life easy for theircustomers, which is what it is all about.Customer service is really aboutcustomer experience.

To quote a famous phrase,customers want it to do what itsays on the tinCustomers want joined up and

consistent communicationsthrough the channel of theirchoice; some dont want to speakto you at all and that also needs tobe recognised.

1.

2.

Customers want you as a business

to understand that they have everchanging needs and demands.Many businesses still treatcustomers in the same way theydid when they joined 5 years ago in that time they may have gotmarried, had kids, completelychanged their outlook on lifebusinesses need to respond tothose changes.Brand Use the brand to setthe customer expectations(reasonably) so that customersare clear on what to expect fromyour company. From personalexperience of reading and listeningto many customer complaints, itis amazing how many result fromcustomers thinking they shouldget something or some benefit,and then find out that they arentallowed.And in todays world it isunacceptable to not have systemsthat can remember and record

previous customer interactions!

To expand the last point further, itdoesnt matter if the call centre isin the UK or India or anywhere else.

3.

4.

5.

Without any relevant, individual

customer information, a call centreagent will be unable to provide goodservice to a customer.



Ultimately, the reason why serviceis dying is because businesseshave not kept up with the fact thatthe consumer has become moreand more demanding. What wasacceptable 10 years ago is no longeracceptable to todays consumers.

So, if the consumer is getting more

and more demanding, how do yourespond? Below are just a feweffective marketing responses thatcan be used to meet the needs of the21st century consumer.

21st century consumer dynamics

Multiple new channels

Saturation

Propensity to shop around

Whats in it for me?

Never satisfied

Choice, but confusion

Reduced friction

Cost conscious

Possible marketing response

Utilise them!!

Proposition innovation

Cross-sell

Communication

Personalisation

Brand values

Proactive retention

Proposition differentiation

As well as responding throughmarketing, it is also very important toget the customer service right.Many companies are yet to trulyutilise the power of the internet oremail for servicing their customers.Dont get left behind. Look atcompanies like Expedia, as anexample, and how they have taken

the core travel market from thetraditional high street travel agents.By not adopting new marketingand customer service channels yourisk losing market share to yourcompetitors. You have to meet thesechanging consumer demands.



Conclusion - Four ways to fix your leaky bucket.

If you want a loyal customer baseremember the 4 key themes of why youhave a leaky bucket in the first place,and manage them appropriately

Set behaviours and expectationsof your customers from the daythey join. Getting acquisition rightpays dividends. Getting it wrongmakes life difficult for everyone.Conduct one to one relationshipswith your prospects andcustomers across all stages of thecustomer journey. Do CRM again,but this time do it properly withan increasing focus on individualcustomer profitability.

Positively influence your customerbehaviour with good effectivemarketing. Dont rely on reactivestrategies to bail you out. Be moreproactive in how you interact withyour customer base.Deliver the services andpropositions to meet yourcustomer needs and desires.Service is about the wholecustomer experience, not justabout call centres.

1.

2.

3.

4.

The final note of caution is that in orderto properly fix customer retention, youneed two further things:

A talented and sizeable team of peoplefocused on the customer.A cross business team that workstogether and to the same customer andbusiness goals.

The customer lifecycle is a complicatedjourney, and requires management atevery point. However, businesses seemreluctant to invest in people to manageit, and more intent in creating silos ofMarketing teams and Customer Servicethat run with opposing and conflicting

customer strategies.

All the causes of the leaky bucket area result of the business not working tothe same goals and people have theirown objectives and deliverables. Thebest sports teams are those where theplayers have a deep understanding ofeach other and what they do, and playas a team and not as a set of individuals.The best businesses operate in thesame way. Make it so in your business.

Uninterested

& rejecters

Interested Enquirer Subscribe On boarding Nursery Establishment In Life Renew

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Ex Customer

Managing Customer Retention Spans the Whole Customer Lifecycle

1. Get the acquisition strategy right

2. Focus on individual customers, focus on future customer value

3. Proactively, and positively impact customer behaviours

4. Service customer needs


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About the author

Russell Woodward

Lead Consultant

Experian Integrated Marketing

Russell Woodward is Lead Sector Consultant for Experians specialist integratedmarketing division. He has 10 years sector experience, predominantly in mobiletelecoms and media and entertainment. Seven years were spent client side withOrange in a number of key roles across consumer and business teams.

As an experienced sector specialist, Russell has been instrumental in deliveringmany projects that have turned data and insight into actual profitable and innovativemarketing strategies demonstrated by his team winning the Data Strategy Award Best Practice in Data two years running for Skys Olive(see http://www.experianim.com/trustscience)


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Experian Integrated Marketing450 Capability GreenLuton LU1 3LUT 44 (0) 845 234 0391

[email protected]

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