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.

Mention the words “Six Sigma” around marketing folks and you will likely receive blank stares in response. The few that recognize the terminology will probably attempt to steer the conversation elsewhere, perhaps to a less intimidating topic like the latest logo proposals sent by the branding agency. I don’t think I would be exaggerating to say that most marketers would prefer having their wisdom teeth removed than going through a Six Sigma project.

For those of you still wondering what the fuss is about, Six Sigma is way to improve quality and reduce the number of defects in a process. It is highly analytical, makes use of complicated statistical methods, and follows controlled experiments to improve processes. In other words, its the ultimate nightmare of numbers-adverse marketers who trust their intuition more than any spreadsheet. Clearly, Six Sigma did not come from the mind of some branding guru, but was born in the hell-fires of some engineering lab.

I am sure that someone out there has run or will run a Six Sigma project to figure out why there are so few Six Sigma projects in the marketing department, but, in the meantime, let me offer a few less-than-scientific thoughts on why (many) marketers are allergic to Six Sigma:

1. Its analytical. As mentioned earlier, Six Sigma is a numbers endeavor. Most marketers entered the field on the premise that their inability to master calculus back in college would not be a stumbling block to future career success and those who did survive the odd non-elective statistics course haven’t touched an Excel spreadsheet in ages. When suddenly confronted with long-forgotten terms like “regression analysis” and “control limits”, these math-impaired marketers run for the hills.

2. Its accountable. Most marketers know the quote, “Half the money I spend on advertising is wasted; the trouble is I don’t know which half.” A department store magnate named John Wanamaker supposedly spoke these words as he lamented the difficulties with calculating a return on marketing spend. Marketers like to share this lament, but the dirty little secret is these same marketers are all too happy with this situation. That oh-so-regretable intransparency also happens to keep the finance people from prying too deeply into coveted marketing budgets. With numbers comes accountability, and suddenly, through Six Sigma, you are able to speak the same language as the CFO.

3. Its actionable. Forgive the consultant-speak for a moment, but Actionable fits exceedingly well with the other two A’s in my list. Actionable, in the management consultant sense, means you can make decisions that will impact your business based on the results of your analyses. Six Sigma is above all actionable, in that a well-conceived Six Sigma project should be short on theories and long on experimentation. Now actionable may not seem such a bad thing, but when pet projects — such as the marketing director’s creative epiphany from last month — start getting closed down in the name of process optimization and Kaizen, that certainly has the potential to bruise a few marketing egos.

To be fair and balanced, not all marketers despise numbers as much as I have suggested here, but there is reason why you rarely see marketers crossing over into financial or accounting positions. Over time, I expect the math-literacy of marketers to increase dramatically, as a new generation of practitioners schooled in search engine marketing, web analytics, CRM, and database marketing start to fill senior management ranks. For the moment though, Six Sigma is definitely a hard sell in traditional marketing circles.

Now comes the interesting part…at least for me and, hopefully, for you as the reader of this blog. I will be embarking on my first Six Sigma project. My opinion is that Six Sigma most definitely belongs in the toolset of any serious marketer, however, I reserve the right to change my mind about Six Sigma down the road. I intend to write more on my experiences with Six Sigma, with the hope of helping fellow marketers who may be considering or already undertaking Six Sigma projects of their own. I won’t be mentioning too many specifics of my project — that is proprietary corporate stuff, you know — but anything else related to Six Sigma in a marketing context is going to be fair game. And, if you are a marketer with a Six Sigma belt to your name, by all means join the conversation…