Retention has always played second fiddle to acquisition within marketing – despite the fact that acquiring new customers is far more expensive than retaining existing ones and that the top tranche of customers contributes the vast majority of long-term revenue. But this attitude is set to change, driven by a shift in demographics and a new era of 1:1 personalisation enabled by highly accurate predictive modelling.
Acquisition will always remain a marketing priority, but as the digitally native generation starts to come of age and skew the online to offline sales ratio even further, how will brands create that essential long-term relationship with ever fewer direct interactions? Simply relying on bringing in new users is no longer enough. Marketers must combine continuous prediction of individual customer behaviours – when they will buy and at what value – with timely, relevant recommendations and other personalisation techniques that can truly improve customer engagement and optimise the value that each individual customer delivers to the brand.
It is widely accepted that it can cost anywhere between five and seven times more money to acquire a new customer than to retain an existing one. Furthermore, a long-term loyal customer has massive long-term business value – with research analysts such as Gartner predicting that 80% of a brand’s future revenue will come from just 20% of the existing customer base.
It seems hard, therefore, to justify the fact that retention is the poor relation in marketing, with upwards of 90% of the budget spent on acquisition and conversion activity. Historically, retention and acquisition teams rarely worked together, operating with distinct cost centres and Key Performance Indicators (KPIs). However, while this clear division between the direct marketing activity of acquisitions and the loyalty-focused communications of retention made sense in the past, how valid is that model in an era of highly effective 1:1 personalisation and customer engagement? With acquisition activity becoming ever more sophisticated and focused, organisations are seeing their most valuable customers under increasing pressure from the competition, creating new pressures for the under-gunned retention team.
Predicting Customer Behaviour
The problem to date for marketers focused on the retention side has been the inability to create the true 1:1 customer relationships required to build deep loyalty and drive meaningful revenue. While acquisition can take a broad brush approach based on the target customer demographic profile, in order to retain a customer a brand needs not only to know each individual, to understand behaviour, incentives and drivers but also to create a way of automatically and directly engaging with each customer.
While marketers have been able to use traditional tools such as recency, frequency and monetary modeling to identify that 20% – the golden customer segment – they have not had the ability to go beyond a broad segment or determine how best to engage with those individuals in a way that improves both loyalty and lifetime customer value. At best, marketers report that they are using some form of very basic personalisation, but still have a way to go until they’ve mastered the approach to 1:1 multichannel marketing.
Predictive modelling and analytics are changing the game for retention teams. By providing answers not to the question “what did my customers do?” but rather “what will my customers do next?” – predictive modelling provides marketing with the insight required to tailor the right messages to the right customers at the right time at an individual level.
Combining Predictions and Recommendations
Indeed it is the combination of prediction with personalisation that is really powerful. For example, a brand might predict that a customer is likely to purchase in the next seven days; the purchase is likely to be valued around £100; and the customer will open an email and not opt out. This information drives an automated email sent at a personalised time, with personalised recommendations for products around £120, a personalised discount or offer, such as spend £100 and get a second item at 30% off; and even a personalised call-to-action, to tempt the customer’s spent upwards. By combining highly accurate prediction with personalisation based on previous behaviour and implicit data uncovered throughout engagement, such as interests, the marketer can truly optimise revenue and value for that brand.
The results are compelling. Those brands that have applied predictive modelling to personalisation have seen as much as 95% of revenue coming from just 5% of customers. Not only are these companies improving the likelihood of individual customers remaining loyal to a brand and not falling prey to a competitor’s acquisition tactics, but they are significantly increasing customer lifetime value for every individual.
Of course, effective retention alone cannot sustain a business – new customer acquisition and conversion will always remain an essential component of business growth. However, by achieving individual level insight into the most valuable customers, this retention information has real value to the acquisition campaign. It provides far more information about the long- term value of customers, enabling direct marketers to focus acquisition activity towards those channels and activities that generated these long-term valuable customers. By using retention to optimise the acquisition mix, a true powerhouse brand can arise!
eCommerce is expected to grow at around 10% CAGR until 2018 in the US and UK, but no one is predicting beyond that date because, to be frank, at this point the digitally native generation will come of age and online sales are expected to soar. This is a generation that already buys more online than offline and will soon have significant buying power. Brands therefore need to consider just how they will build one-to-one relationships with these consumers when face-to-face transactions are fewer and farther between.
The short-term focus of acquisition and conversion is no longer good enough to win and retain the next generation. A long-term strategy that builds lifetime value and revenue requires far more effective one-to-one engagement with these consumers throughout their lifetime. It is time for brands to consider the growing role of retention within the overall marketing mix, including the use of retention data to inform and optimise acquisition strategies to drive down the cost to acquire and add customers that are more valuable to the brand.
As the demographic shift changes sales behaviour once again, it is those brands that look to place as much emphasis on optimising customer value as winning customers in the first place that will be best placed to create that vital engagement with the increasingly influential digital natives.