Wednesday, August 08, 2012

Customer Replacement Therapy

Where do we need to focus our attention?

In many circles the discussion focuses on customer loyalty; it sounds so good.   But the reality is that we lose far more customers on the way to loyalty than we care to admit.  In fact, the odds run 19 to 1 against.

First, just what do we mean by loyal?

Like many concepts in marketing it can be elusive to define what we mean.  For this post, I'm going to define it simply:  A customer is loyal if the probability of another visit exceeds 60% so a bit better than flipping a coin.

Since we tend to be creatures of habit, the probability of shopping somewhere is fairly predictable at least in aggregate.   In fact, we can fit a curve to estimate the number of future transactions a business is likely to have from a cohort of new customers.

The picture shows the results of estimating how many future transactions a group of new customers will make over the next year or so.  The steep drop off from 0 to 1 is quite typical and is a function of the category purchase cycle.  But the crux of the matter is very clear, a lot of people simply don't come back for a second visit.

Given the definition of loyalty above, that doesn't happen until the 4th transaction or higher where the step change from one transaction to the next starts to get small.

The implication:  We go thru a lot of customers to get to one loyal customer.   To see the effect of this curve on a business, imagine starting with 50,000 customers and we want to know how the business looks after 10 years.  In particular,
  • How many loyal customers do we have?
  • How much focus do we need to spend on acquisition?
The following table simulates the above curve over time and shows the number of expected customers each year by the their visit number.

After 10 years, fewer than 5% of our customers are loyal.   More importantly, 60% of our business comes from new customers. 

So, rather than burn thru bodies to get to loyalty maybe we should think more about our replacement strategy. 
  • Why do over half of our customers fail to come back?  How did we disappoint them?
  • Why does it take so long to go from trial to loyalty? What are people thinking at each stage?
  • What is the essence of our offering that makes the decision to repeat a no-brainer?

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