Marketers looking to boost bottom lines should focus more on retention

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In a tough economy, no business should be leaving money on the table. But a recent study conducted by the Palo Alto, Calif.-based CMO Council indicated that the majority of companies are doing just that by overlooking one of their most valuable revenue sources: existing customers.

The “Routes to Revenue” report, released by the CMO Council in December, found that 76% of senior marketers believe they are not realizing the full revenue potential of their current customers. In addition, only 46.5% said they have good insights into retention rates, customer profitability and lifetime value.

Sponsored by Ricoh/IBM InfoPrint Solutions Co., the study was based on an international audit of 650 senior marketers from June through September 2008. Participants represented 17 industries. Almost a third held C-suite titles, while 39% were senior marketers. Survey results were supplemented with data gathered during in-depth interviews with marketing professionals from leading brands.

“It is inexplicable that the vast majority of marketers are still struggling to source and extract meaningful insights from customer data at a behavioral, transactional and account value level,” said CMO Council Executive Director Donovan Neale-May. “Marketing must assert its role as the owner of both customer experience and information, and apply this to devising growth strategies that leverage better knowledge of customer opportunity and potential.”

For some companies, accomplishing this requires a fundamental change of philosophy. Ken Dec, chief measurement officer at PARTNERS+simons, a Boston-based brand communications agency, said organizations must view their customer databases as relationship engines instead of transaction engines. “It’s time to move beyond simple mass efficiency to constructive customer engagement,” he said.

According to Mark Klein, CEO of predictive analytics company Loyalty Builders, marketers must also develop solid and sustainable plans for customer retention, including benchmarks for current customer retention rates, risk profiles of customer populations and risk scores for each customer.

“Rank the scores so you understand the risk status of any customer as well as having an overall picture of the customer population and the revenue at risk,” Klein said. “A risk profile should show the correlation between prior-period risk score and current-period purchasing, as well as the amount of revenue at risk.” Once marketers understand the level of risk associated with customers, segmentation by risk score and other key variables can be used to determine the right message and offer for the right individual.

“Our more innovative pieces in the last six months have been building CRM programs and strategies that are focused on … understanding what’s the core driver for segments and then building unique content and communications vehicles for reaching those users,” said Dan Vassallo, director of engagement for New York-based digital marketing agency Greater Than One.

Conventional segmentation techniques, such as Recency, Frequency and Monetary value (RFM), can be useful. But some experts believe retention programs are more effective when marketers supplement these with analyses that evaluate changes in customer behavior over time.

“The metrics most indicative of potential churn are those reflective of customer velocity, not the static, traditional metrics like Recency, Frequency and Monetary value,” Klein said. “RFM won’t correctly spot potential defectors.”

When helping its clients improve customer retention, Irving, Texas-based direct marketing agency Javelin Direct uses contextual time series models to evaluate how cumulative behavior affects dependent variables, such as likelihood to purchase and likelihood to defect.

“Contextual time series models are very effective because they’re showing you the relative importance of marketing mix variables over time and allowing you to dive down to individual people to pick up flags to say, ‘Hey, these people require a remedy,’ ” said Javelin Direct Senior VP of Business Strategy Don Barlow.

Of course, success in customer retention also requires significant investments of time and budgets. With marketing resources increasingly scarce, these can be difficult to make. But according to Barlow, the returns will justify the means.

“Obviously retention efforts aren’t as glamorous to Wall Street, so to speak, as are organic sales growth or new acquisitions,” he said. “But if you look at the bottom line profitability of a company, I think it’s without question that retention efforts produce more to the bottom line.”

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