It’s pretty common knowledge and accepted business lore that customer retention gives you more bang for your buck in terms of return sales. Just reconnecting or helping for a few minutes can be done at little or no cost and usually results in a new sale from an old account. However, customer retention still costs money to perform. So that naturally raises the question, how best to spend your resources on it. For the finance folks among us, this is a no-brainer question. Put your money on the ones that show a return on the bottom line. Ok, but how do you identify those?

 

Jim Novo tackled that question and some related other ones in a recent post on his blog, The Marketing Productivity Blog.

 

Jim himself is an interactive customer retention, defection, and loyalty expert with nearly 20 years of experience generating exceptional returns on customer marketing program investments. The average ROI of Jim’s programs now stands at just over 70%, with several reaching ROI of over 400% according to his website. Jim is  also the Co-Chair of the Web Analytics Association’s Education Committee, creating the first college level courses focused on web analytics.

 

His professional career has been focused on introducing Data-Driven marketing to new industries. In the 1980’s, cable television was the target and his ground-breaking High ROI  customer retention programs were widely adopted throughout the industry. In the 90’s, Jim revolutionized the TV Shopping business by focusing resources on the customer instead of the products.  For the 2000’s, the Internet lies squarely in Jim’s sights. The innovative yet simple customer analysis techniques found in his Drilling Down book put two decades of High ROI Customer Relationship Management experience in the hands of today’s interactive marketers.

 

From Jim’s perspective, the finance side of customer retention is pretty formulaic. Stuff either works or it doesn’t - did you make money or not? If you have a small number of very high value customers who look to be defecting then a sales call is triggered.  If you have lots of medium to low value customers who look to be defecting, then a direct mail campaign is probably what you need, which is probably marketing.  Match the value of the effort to the value of the customer; this is how you get gigantic return on investment (or for finance types, more accurately something like ROMEs - Return On Marketing Expense).  The scoring approach to customer value is about allocating scarce resources to the highest and best use.

 

So following this approach one would need to first accurately quantify the worth of each customer currently served or on the books. Second, prioritize them in categories of biggest spenders, okay to moderate spending, and spend very little (yes, this is a bit simplistic but bear with me). Third, determine how much resources will be spent and then put the majority of the funding where it has the highest potential to result in the biggest amount of revenue.

 

Okay, that sounds simple enough. But what happens when customers change categories and a big player becomes mediocre and a small player does the opposite? Well, obviously your accounts and scoring require ongoing maintenance to watch and see these changes as they have the potential to occur. I don’t believe that Novo is saying only put all your eggs in one basket on the big players and ignore the rest. A lot of companies make this mistake, and forget what got them to where they did was the small players. Instead, the message is making sure your customer retention funding is put into activities and customers that have the highest likelihood to produce revenue.

 

You can very easily have a customer with big potential, but after all is done, you find you spent almost as much trying to win them over. Where’s the profit? It’s a net wash. Yet, a medium size customer may just need a personal nudge here or there, costing maybe 5% more than minimum outlay, and then your net profit on that account becomes 60% or 70% over total cost. Now that’s profitable customer retention!

 

Novo really sums up the above issue in two simple, working rules of High ROI Customer Marketing:

1. Don’t spend until you have to
2. When you spend, spend at the point of maximum impact

 

When you put customer retention in this framework, it all starts to make clear sense and cents!

 

 

Tags: blog, customer retention, finance, Jim Novo, productivity blog, return on investment, revenue, sales

This entry was posted on Saturday, October 11th, 2008 at 1:41 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.