Back in this posting, I announced the start of a Six Sigma project that would venture deep into marketing territory.  Well, the project has started, but I have been a bit remise in posting updates to this blog.  “Total neglect” would be another, perhaps more accurate, pronouncement on my blogging practices.  I’ve been thinking too long about where best to begin the story and which topics to address first and which last.  In the end, I’ve decided to just take the sage advice of the King of Hearts in Alice in Wonderland.  Asked by the White Rabbit where to begin the story, the King replies:

Begin at the beginning, the King said gravely, and go on till you come to the end: then stop.

The beginning

Most seasoned marketers will have heard the conventional wisdom that that the cost of acquiring new customers is five times the cost of servicing established ones. Whether you believe the five times figure or not is less important than understanding that the cost of retaining existing customers is usually much less than the cost of acquiring new customers (and converting them to loyal customers).  Of course, there are always exceptions to the rule, but generally businesses do well to spend on retenting their existing, profitable customers.

Customer churn is another way of describing the loss of previously loyal customers.  Churn is the bain of every salesperson and every marketer.  It is rarely a good thing to see a customer who previously purchased your products and services — perhaps even recommended your company to others — suddenly decide to stop buying, stop recommending, and, in some cases, outright defect to a competitor. In some businesses, notably b2b and private banking, churn is evident and obvious, expressed in the form of a lost account or a defecting client.  In other industries like telecoms, airlines, hotels, and consumer goods, churn is often a silent killer, reflected over time as declining revenues, missed sales targets, and lost market share.

The back-of-the-napkin calculation is simple:  for every customer lost, you must acquire a new one to stay even.  Yet, few marketers are afforded the luxury of a performance objective that requires just staying even — most marketers are expected to bring growth to the business every single year of their career. Thus, the churn calculation becomes a bit more insidious:  if you have a year-end objective of 20% growth and your business line has an annual churn rate of 30% (not at all uncommon for consumer goods or online retailing), you are actually looking at a 50% growth target (20% new customers plus an additional 30% to replace those customers who left during the course of the year).

The beginning, part 2

With the exception of a bursting bubble in the in late 90s, the internet and online channels in general have been exceptionally high growth areas for most businesses over the past decade.  As a consequence, those of us in the online space seldom have been confronted with issues of customer retention.  What need is there to spend time measuring lost customers when we are busy enough just trying to manage the intake of new customers, building infrastructure to handle ever great volumes of visitors on our websites, and adding new features and services to address our burgeoning customer base? Of course, churn has not disappeared, it has just been obscured from our view by amazing customer acquisition rates, as traditional channels stagnate and customers flock online.

At some point the party ends, as the early stage growth drops, the online channel matures, and competitors enter the scene.  After three years of running an online channel and spending heavily on customer acquisition, I had an epiphany.  It was all sparked by a sudden, major re-branding of a website I managed. Curious about the impact of a completely new brand and URL on our customers, I ran a simple report comparing customers who visited regularly before the re-branding with customers who visited regularly six months after the re-branding.  At the time, the re-branding had been hailed as a complete success, since total numbers of visits and customers had continued to grow strongly six months after the re-branding.  The results of my analysis were shocking:  one out of two loyal customers before the re-branding were no longer with us six months later.  We had grown indeed, but churn had been particularly vicious (and silent).  Our acquisition programs had been good enough to maintain top-level growth, but marketing had been hardly efficient.  It was obvious that we could have grown much more if churn had been managed.

To be honest the story could have ended there — there was no particular need to address churn at that point, since acquisition was still so productive and growth targets were still being met. However, I’ve always believed a marketer should be naturally curious, willing to chart out new territories even if it means a significant deviation from the course.  Like Alice, confronted with a curious-looking rabbit hole, I decided to jump into the customer retention mystery, not quite knowing how deep the rabbit hole would go, but eager to find out and, if possible, improve things down there.  Thus was born my Six Sigma project: improving customer retention in the online channel.

Sunday, September 21st, 2008 @ 1:42 pm six sigma
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