Customer Value : When Acquisition
# 53: 1 / 2005
Drilling Down - Turning Customer
Data into Profits with a Spreadsheet
Customer Valuation, Retention, Loyalty, Defection
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In This Issue:
# Topics Overview
# Best Customer Retention Articles
# When Acquisition Spoils Retention
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:
OK, let's do some Drillin'...
Best Customer Retention Articles
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,
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, use a consistent valuation model
and then start turning
your customer data into profits.
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visitors you generate, you can help them make it happen - click here.
Questions from Fellow Drillers
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
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
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 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,
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, now we are reducing
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
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
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
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.
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
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 employees should be "if a current customer wants the
deal, give it to them".
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.
That's it for this month's edition of the Drilling Down Newsletter. If you like the newsletter, please forward it to a friend - why don't you do this now while you are thinking of it? Subscription instructions are at the top and bottom of the newsletter for their convenience when subscribing.
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 right here.
'Til next time, keep Drilling Down!
- Jim Novo
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