BrainTrust Query: Are You Measuring Customer Retention Correctly?
Commentary by Mark Price, Managing Partner of M Squared Group
Through a special
arrangement, presented here for discussion is a summary of a current article
from Cultivating Your Customers, the M Squared Group
As Fred Reichheld wrote in The Loyalty Effect, loyal customers tend
to be related to loyal employees, lower returns, lower customer service expense
and so on. Yet, in measuring retention, as in many things, the "devil
is in the details."
Retention is usually defined as the percent of this
year’s customers who
also purchased in the prior year. Traditionally, marketing uses this metric
to gauge the impact of all relationship marketing efforts (as well as customer
experience) in motivating customers to maintain a relationship over time.
how do you identify the impact of specific salespeople, customer service agents
and marketing programs on building long term customer relationships? How do
you identify what contributed to a customer’s extended relationship?
are some two approaches:
Low tech: A retailer should make sure that it sets up control groups
for every marketing program. When the results of those programs are compared
to the control group in terms of retention, they will clearly see which programs
do the most to help build a relationship with customers that extends over time.
To understand the impact of an individual salesperson or customer-service
agent, a cross-tab analysis can be conducted to identify the best and the worst
performing staff. A retailer may not see the small differences between two
similarly performing agents, but will find the best and the worst. Then the
retailer can head off the worst and interview the best to bring best practices
to the rest of the team. It’s not precise, but it provides a lot of value quickly.
More sophisticated: More advanced statistical modeling will permit
stores to identify the ideal combination of marketing programs and staff to
maximize customer retention and customer long-term profitability (which are
not always the same).
The path a retailer chooses to take has to do with the "analytical maturity"
of the organization — will the company accept and act on statistics-driven
conclusions or should they focus on easy-to-understand calculations that can
be done on a calculator. (Do those things still exist?)
There is no right answer.
There is only the answer that will be the most successful in gaining broad-scale
acceptance in the company.
Discussion Question: What do you think are the best methods for measuring
customer retention at the retail store level? What does knowledge of customer
retention gain for an organization?