The Building Blocks of Retention (1)
I speak to many brands – particularly in the consumer services space (telco, utilities, insurance, finance, media…) for whom customer retention is a major lever in their P&L.
Most of these businesses have the concept of a renewal point or contract lapse in their customer lifecycle, yet surprisingly (given many operate in high cost customer acquisition markets) have not put in place all the building blocks to optimise performance of such a critical area of their business.
Here is part 1 of 2 on the building blocks of Customer Retention – that discusses getting clarity on performance and value. To manage retention properly, you need to understand performance movements. That sounds obvious to most, but it requires a reasonably detailed approach to both forecasting and trading.
At a high level there are some golden rules to consider:
Removing the noise – ‘mix’ effects
The first thing is adjustment of results for ‘mix’. In nearly all consumer services businesses, the high-level retention KPI movements month to month can be driven by changes in acquisition profile (for example 12 months ago in insurance or 24 months ago in mobile).
This is because channels attract different profiles of customer – for example price comparison sites in insurance and utilities, and indirect channels in mobile – tend to attract higher churn customers. If you’ve done a lot/little acquisition business in these channels 12/24 months ago, it will make it look as if your results are worsening/improving – when they are not in real terms.
By normalising results to a consistent ‘mix’ (such as last year or full year average channel mix) you can explain ‘mix effects’, versus real performance changes. These mix effects can be driven by product, value, channel of acquisition – you need to understand what drives the differentials in your particular market.
Keep it consistent
As far as is possible, the methodology you use to forecast/budget should be aligned to how you look at trading. Otherwise not only will you be in for some ugly conversations with the CFO as revenue forecasts will be off – you will waste time joining the two stories as to how you are performing, rather than actually doing something to improve results!
Seeing the parts as well as the whole
A base level churn (/renewal/retention/persistency rate – delete according to sector and organisation!) is only so useful on its own.
In mobile you have a high degree of early churn (bad debt & fraud). In insurance you need to keep a watch on ‘survival’ to renewal invite. In most subscription-based industries you also have propensity metrics for customers to phone up and negotiate, the customer save rate, and discount rate given to retain.
As you can see, in terms of the overall retention number there are always several constituent parts of the customer journey that need a performance focus – and therefore have metrics associated with them.
£s as well as #s
There is also the classic ‘value versus volume’ debate. A save rate in a retention centre for example reflects the number of customers saved, but in an environment where discounting is part of the activity is almost useless on its own (100% discounts are a sur fire way to drive up retention rates!).
However, nearly all metrics can be thought of in revenue, if not margin, terms. An invited insurance cohort has a renewal revenue number attached to it, which can be understood as a % of the revenue quoted that was actually renewed.
‘Commercial’ vs ‘customer’ insight.
The commercial insight about performance is only a starting point – it doesn’t always reveal the valuable customer insight that sits behind it. It’s usually the customer insight that lets you drive real and meaningful change. Sometimes this isn’t simple, but if you bring external viewpoints into your trading meetings, it becomes easier to draw conclusions.
For example, a declining retention performance for certain cohorts may align with competitor advertising in finance, acquisition pricing activity in insurance, service failures in broadband – and so on. Build processes to capture customer experience and competitor activity, and make these topics part of trading conversations.
Customer exit surveys undertaken by customer service agents or digital channels can add further proof points here. These serve to not only capture the destination of leaving customers (competitors versus leaving the market etc) but can also show trends in reasons that brands can address points of risk (and see the results of changes) such as pricing and service.
When brands have a clearer view on performance results, the time explaining the result can be minimised and the conversation can be better directed to improving results.
These results can be broken down to drive a focus on both the constituent parts of the customer journey that make up the retention result – and value (rather than volume).
When you combine these with the customer insight that sits behind the results – that’s a strong starting point in building out improvement plans. I’ll discuss how to think about the major levers and activity types in my next article.