COLLOQUY Corner: Understanding Attrition
In most consumer-focused industries, competition is brutal. Customers are promiscuous. Couple this tough environment with the old but true saw that it costs more to acquire a customer than it does to retain one, and focusing your marketing efforts on existing customers makes sound business sense. Customer loyalty programs have a proven track record of stemming attrition through the targeted application of tangible rewards, coupons, rebates, or special treatment and recognition. The more attractive and relevant your value proposition appears to your customers, the less likely they are to defect to the competition. It’s a way to keep your finger in the dyke.
Besides the lift in incremental revenue, the positive effect on member retention rates is the most important and true measure of loyalty program success. You measure the percentage of your membership that transacts with you at least once during a defined time period; those who meet that definition are active members, and those who don’t are lost members. The length of the defining time period is subject to your particular business and definitions. Although in many loyalty programs a 12-month retention period is typical, in high-volume, everyday-spend environments, shorter periods are the norm—six-month, quarterly, and even monthly measurement periods are not uncommon.
The opposite of retention is attrition, and that’s the score you hope to reduce. During a given period, some percentage of your customers will attrite. Some customers simply move out of town. Still others might find better value or service at your competitor’s facilities. Some level of attrition is natural, so don’t expect to ever eliminate it. Loyalty programs are designed to lower, not eliminate, the level of attrition. Your targets are those customers who have abandoned you for another brand, not those who have moved away or made major lifestyle or lifestage transitions that render your products superfluous.
A 10-percentage-point reduction in your current rate of attrition—say, from 37% to 27%—is a modest, attainable goal. We’ve seen marketers reduce attrition rates by as much as 25%. The greater your current rate of attrition, the more likely you are to reduce it and deliver a positive financial impact from the program.
In most business environments, customers as a rule don’t identify themselves as attriters. Subscription businesses such as telecoms, on the other hand, require customers to take overt action and cancel their subscriptions, which pegs them as lost customers. Although some customers may have a bad-enough experience with your brand that they angrily announce their status as ex-customers, most don’t. They simply stop showing up.
A simple way for many loyalty marketing analysts to measure the likelihood of a customer to attrite is to combine the velocity measures of recency and frequency to produce an attrition score—a mathematical value that describes the probability of attrition for a specific customer. As a customer’s recency fades and his frequency lessens, the probability that you’ll lose that customer increases. You want to take aggressive action with those customers who have the highest probability to leave.
Here you can apply a simple rule: The richer your value proposition, the greater your ability to reduce attrition. As an example, consider a simple cash-back program: You can safely assume that you’ll see more improvement in attrition with a 2% cash-back program than with 1% back. That doesn’t, however, mean that to succeed a loyalty program has to wreck your profit margin. It’s the program’s perceived value that counts—airline miles, for example, have more perceived value than a simple discount. The more perceived value you can build into your program, in the form of points as deferred discounts, special recognition, and perks for your top-line customers, the greater the attrition benefit you can achieve.
When modeling the financial impact of your loyalty program, understanding the attrition benefit is key to understanding the program’s true return on investment. As some customers are more likely to defect than others, the attrition benefit of your program will be greater for a customer at high risk of defection, and correspondingly smaller for one at lower risk. In other words, you can realize an attrition benefit from keeping a customer only if that customer would indeed have left you without the loyalty program. Understanding a customer’s likelihood to defect will help you predict the attrition benefit of your program with greater accuracy—that’s why the attrition score is so important.
Once you’ve estimated the likelihood of attrition for a given customer segment, you can then apply different attrition benefit estimates to your financial model based on the risk of that segment. For example, you might estimate a 15% decrease in attrition for customers in a low-risk segment, compared with a 10% improvement in customers at high risk.
In addition, unless there are mitigating factors in play, the attrition benefit typically should have a compounding effect. A customer retained thanks to your brilliant loyalty program will accrue financial benefit to you not only at the point of time when the attrition event would have occurred but also into the future. If your company retains a customer today, the true benefit is the sum of what he spends today as well as what he will spend in the days to come.
Always remember, however, to look at your loyalty program in context with your overall brand and service offering. If your attrition rate is exceedingly high, then you probably have fundamental problems that no loyalty program can fix. Before designing and launching a program, you should identify those other issues, take corrective action, and stabilize retention rates.
But done right, your loyalty strategy can help with retention measures that correlate directly to your bottom line. As retention increases, more customers stay with you over time. Your acquisition efforts will always add customers, but what does it avail you if every time you bring in a new customer, you lose an existing one? If the lost customer is particularly valuable, or if you haven’t held on to him long enough to cover your acquisition costs, then attrition will eventually drain your profitability and threaten your long-term survival. It’s the difference between a slow trickle of defection and a destructive tide.
Rick Ferguson is the editorial director for COLLOQUY, a provider of loyalty-marketing services.
Copyright COLLOQUY 2007 First rights only
Other articles by Rick Ferguson:
You’re Only As Strong As Your Staff
Dialogue, the Coin of the Realm
The Customer, Not the Payment Type, Is King
The Yin and Yang of Loyalty Marketing
