Customer Retention: How to improve it utilizing Customer Behavior Analytics

Understanding how often your customers repurchase items can yield large paybacks in terms of sales and profits 

Many companies are not aware they are sitting on a gold mine of sales and profits and all they have to do is look for it.  Over the years I have analyzed customer purchase behaviors and in many instances found opportunity to capture more sales, improve retention rate all while increasing profits.  Does this sound too good to be true?  The key to identifying purchase behavior that could be cultivated into one of the most profitable marketing programs is to look at item sales across time to identify if the same customer purchases the same item multiple times.  The easiest method of identifying such behavior is to list item by customer number who purchased.  If it is observed that over twenty percent of your items are repeat purchases from the same customer, you’ve struck gold.

Many companies have this behavior hidden in their transaction data and are not aware of its value.  I have found such behavior at both B2B and B2C companies.  The majority of this buying behavior can be associated with products that are “consumed” or regularly replaced.  Some good examples of consumable products include paper supplies, business forms, annual replacement items, nutritional supplements, filters, equipment that fails after use and numerous other examples.  If in doubt, the basic analysis is straight forward and should be done, it only takes a small percentage of your items to generate impressive ROI on the resulting program.

So let’s say you found your product portfolio contains consumable products, now what?  The next step is to find what the minimum time interval is between purchases.  For illustration purposes, you find that the average time between purchases is nine months.   The key is to contact the customer prior to the average replacement window and secure the reorder as opposed to allowing the customer an opportunity to explore alternative sources for the product.  

In this example, I will use some actual data from a B2B marketer I worked with who sold supplies which have a clear replacement cycle as the products ultimately fail with repeated use.  In this study there are 4,100 customers who purchased one (or more) of seven similar items used to deliver services to their customer.  These customers had purchased one of the items within a window of a minimum of 6 months and a maximum of 24 months ago.  For this test 2,950 will receive a special communication regarding the item replacement while another 1,150 are held out as a control group to measure the incremental lift.  

The communication’s content should be personalized to the recipient such that the purpose and action is clear.  For this test the communication contains a picture of the product purchased, date of purchase and a brief explanation that the product’s useful life may soon expire, and photos of products with various component failures are shown to help the customer evaluate the remaining life of the item.  The customer is urged to examine the product and if any signs of potential failure are found, a replacement should be ordered immediately.   The communication was sent via snail mail, but the technology has advanced quickly and this customized communication can be sent via the customers preferred channel of communication.  The control group continued to receive all the regular communication except for this replacement notification.

The performance of the test and control groups is documented below.

	Control - Total Qty 1,150			Test - Total Qty 2,950
Product	Data	Total		Data	Total
Category	Buyers	103		Buyers	330
Performance	Sales	$19,359		Sales	$54,460
	Sales per Member	$16.85		Sales per Member	$18.45
	Response	8.96%		Response	11.18%
				Sales Increase	9.5%
				Response Increase	24.7%
SKU	Data	Total		Data	Total
Performance	Buyers	48		Buyers	207
	Sales	$5,109		Sales	$20,185
	Sales per Member	$4.45		Sales per Member	$6.84
	Response	4.18%		Response	7.01%
				Sales Increase	53.8%
				Response Increase	67.9%
Overall	Data	Total		Data	Total
Performance	Buyers	243		Buyers	762
	Sales	$90,607		Sales	$338,106
	Sales per Member	$78.86		Sales per Member	$114.53
	Response	21.15%		Response	25.81%
				Sales Increase	45.2%
				Response Increase	22.1%

Not only did the effort result in elevated levels of customers reordering the items included in the communication, but additional items in the product category and products outside of the category were purchased too.  Overall retention was improved by 22% and with an increase of average order value sales increased by an average of 45%.  These are actual results achieved, not all programs will have such strong results, but I have always seen this program deliver acceptable results when implemented as outlined.  For some businesses that have a highly consumable product portfolio this type of program typically becomes the mainstay of top line sales and bottom line profits.

Acquisition Cost: How to calculate it and how to determine what your business can afford

Understanding what it costs to acquire a new customer and how long it takes to break-even on the investment is a critical step to growing your business profitably.

In an earlier post I spoke of the need to acquire new customers in order for your business to grow.  Understanding how much those new customers cost to acquire and how long it will take to recoup your investment is the key to growing your business profitably.  So how is it done?

Going back to the Buyer Matrix post, you will need to identify all new customers acquired during a given time frame (I typically use a year of activity) and attempt to link them back to the promotion that brought them in.  If you have a large portion of your first orders with accurate key code capture this is an easy task.  Most companies are not as fortunate and some analytics needs to be conducted to get customers associated with the promotion that converted them to customers.  One common technique is to do a match back.  This process requires a file from your merge purge house of all prospects who were promoted during the period you are measuring.  You then match all your new customers against this file, regardless of what channel they converted through.  (I wonder if JC Penny’s did this prior to deciding to eliminate all their catalog mailings.)  If your new customers have a valid source code use that as your source, if not, and the customer hits the match back file, use the list from the match back as the source, if the customer still does not meet either of those criteria label it as “miscellaneous” and leave it in the channel converted through.

You will also need some additional information including:

1.  Marketing costs by channels and specific effort – How much you spent on catalogs, Direct Mail Pieces, List Costs, Printing and postage, pieces or units sent, PPC, Banner ads, Email.
2. Gross margin – what was your cost of goods sold, try to get this down to the order if possible, if not, use the average
3. Fulfillment costs – what it costs to take an order and get the product to the customer, If your S&H is done at a profit, take this off the this cost, if it is done at a loss add it in.

You now have enough information to begin the calculation process.   You should have the new customers broken down into what promotion/channel the order was placed through (i.e. phone, web, email, SEO, PPC and other).  Get your total new customers counts down to specific effort and then any miscellaneous new customers in that channel get allocated across all that channel’s efforts.  You now have information telling you what channels and specific promotions delivered customers during the analysis period.  Now it is time to calculate Acquisition cost.  See the example below.

Acquisition cost Calculation example
100	Acquired Customers
Revenue	$12,500		Gross Revenue generated (does not include S&H)
AOV	$125		Average Order Value
GM%	50.0%		Gross Margin percent
COGS	$6,250		Cost of Goods Sold
Marketing	$10,000		Marketing Costs to acquiring these customers
Unit Cost	$0.80		Marketing expense divided by units sent
Response	0.80%		New Customers divided by Units sent
Fulfillment	$10		Cost to take and ship order
Fulfill Cost	$1,000		Total Fulfillment Cost
Profit(Loss)	($4,750)		Cost to acquire these customers
Acquisition	($47.50)		Cost to acquire one customer

The example shows an acquisition cost of $47.50 per customer for this promotion.  The more granular you can get this calculation, the more actionable your efforts.  By this I mean if you can get this down to specific lists or search terms the more you will be able to evaluate that specific effort.  If you can only do this at a channel, then you can’t evaluate specific efforts within that channel.

Now you need to determine if $47.50 is an acceptable acquisition cost.  To do this you need to utilize the Buyer Matrix to understand future behavior patterns of your new customers.  Typically I model customer behavior by channel the customer came in on and then compare those behaviors to see if there is any material behavior difference across the various channels.  The key to this kind of statistical comparison is to have sufficient customers in each channel to reduce “statistical noise”.  A few hundred customers is my rough standard for this comparison exercise.

The example below shows the behaviors for new customers across a few years of activity.  I only use two years since you should have a positive return on your acquisition invest in that time line.  If the acquisition investment takes longer than that, you are probably spending too much to acquire customers.

NTF Count		100
Same year Orders		30
AOV		175
Margin		0.5
Fullfilment		10
Demand		$5,250
Cogs		$2,625		Cost/Unit	Frequency
Marketing		360		$0.80	4.5
Fullfil		300
GM		$1,965
Per FTB		$19.65
Year 1
Pct. Return		0.35	35	Customers Returning
Orders Per		1.5
AOV		189
Demand		$9,923
Orders		53
COGS		$4,961		Cost/Unit	Frequency
Marketing		$720		$0.80	9
Fullfil		$525
GM		$3,716
Per FTB		$37.16
Year 2
Pct. Return		0.8	28	Customers Returning
Orders Per		1.7
AOV		189
Demand		$8,996
Orders		60
COGS		$4,498		Cost/Unit	Frequency
Marketing		$576		$0.80	9
Fullfil		$595
GM		$3,327
Per FTB		$33.27

From the above illustration in the same year acquired an average of $19.65 profit per customer is earned.  Over the next year a total of $37.16 is earned per buyer.  Both these figures are averages across the 100 customers being analyzed.  So with an acquisition cost of $47.50, the payback occurs at about the ninth month of the next year.  

This gives you the basis from which to begin evaluating various channels and promotions in terms of their respective effectiveness at delivering new customers at an acceptable cost.  Obviously if the investment cost cannot be recouped in two years, you are probably spending too much.  If on the other hand, if the costs are recouped in less than a year, you should probably be looking for ways to expand the volume and investments, without raising the costs too fast.

This type of balanced approach to your acquisition efforts will help grow your customer base and sales while generating sufficient profits to keep the growth engine running smoothly.