Retailers that monitor customer retention and analyze its fundamental drivers have a leg up on the competition. Our recent research suggests, however, that there are common mistakes in any attempt at achieving a better understanding of customer retention.
5
Understanding customer retention in the retail industry Retailers that monitor customer retention and analyze its fundamental drivers have a leg up on the competition. Our recent research suggests, however, that there are common mistakes in any attempt at achieving a better understanding of customer retention. Retailers can learn from these mistakes and from the successes of today’s industry leaders. The shift is here to stay A “New Normal” in consumer spending behavior has been well publicized. As reported, this shift is the product of a range of factors such as the recent recession, increasing globalization, adoption of social media and market demand for sustainable solutions. The net effect of the new environment is that retailers across the industry are seeing decreases in customers’ loyalty to retail brands 1 (“Loyalty” has many meanings; for the purposes of this discussion we define a “loyal” customer as one who remains engaged at a retailer, at the same expenditure level, over a given period of time). This spending drain presents new and complex issues, especially for those retailers who rely on discretionary spending (e.g., department, apparel, and electronics stores). For 1 2009 Deloitte Shift Index discretionary spend-reliant retailers, understanding behavior and retention drivers may very well mean the difference between survival and failure. Importantly, a looming demographic shift is expected to compound the changes that have already occurred and dramatically alter the landscape for competitors as they fight to retain valuable customers. The Baby Boomer generation stands on the edge of a phase of life that has historically been marked by a dramatic decrease in discretionary spending. 45-54 year old Americans have the highest discretionary spending of any age group. 2 However, this age cohort is expected to decline in population by 7.5% over the next ten years while the next two oldest age cohorts (55-64 and 65+) are expected to increase in size by 18.5% and 36.2% respectively over the same time period. 3 We believe that expanding focus to include acquisition, retention and improvement in the share of wallet with a younger generation of customers is a mandate for growth. 2 2009 U.S. Census Bureau Population Projections , 2008 U.S. Dept. of Labor Statistics 3 2009 U.S. Census Bureau Population Projections , 2008 U.S. Dept. of Labor Statistics
Transcript
Understanding customer retentionin the retail industry
Retailers that monitor customer retention and analyze its fundamental drivers have a leg up on the competition. Our recent research suggests, however, that there are common mistakes in any attempt at achieving a better understanding of customer retention. Retailers can learn from these mistakes and from the successes of today’s industry leaders.
The shift is here to stayA “New Normal” in consumer spending behavior has been well publicized. As reported, this shift is the product of a range of factors such as the recent recession, increasing globalization, adoption of social media and market demand for sustainable solutions. The net effect of the new environment is that retailers across the industry are seeing decreases in customers’ loyalty to retail brands1 (“Loyalty” has many meanings; for the purposes of this discussion we define a “loyal” customer as one who remains engaged at a retailer, at the same expenditure level, over a given period of time). This spending drain presents new and complex issues, especially for those retailers who rely on discretionary spending (e.g., department, apparel, and electronics stores). For
1 2009 Deloitte Shift Index
discretionary spend-reliant retailers, understanding behavior and retention drivers may very well mean the difference between survival and failure.
Importantly, a looming demographic shift is expected to compound the changes that have already occurred and dramatically alter the landscape for competitors as they fight to retain valuable customers. The Baby Boomer generation stands on the edge of a phase of life that has historically been marked by a dramatic decrease in discretionary spending. 45-54 year old Americans have the highest discretionary spending of any age group.2 However, this age cohort is expected to decline in population by 7.5% over the next ten years while the next two oldest age cohorts (55-64 and 65+) are expected to increase in size by 18.5% and 36.2% respectively over the same time period.3 We believe that expanding focus to include acquisition, retention and improvement in the share of wallet with a younger generation of customers is a mandate for growth.
2 2009 U.S. Census Bureau Population Projections , 2008 U.S. Dept. of Labor Statistics3 2009 U.S. Census Bureau Population Projections , 2008 U.S. Dept. of Labor Statistics
Average discretionary spend across age groups4
In reaction to the recent change in the retail landscape, leading retailers have already launched initiatives to understand and drive improved retention. Because the consumer has changed, however, the way of measuring loyalty should change as well. Traditional lagging indicator “scorecards” should be supplemented with leading indicators that leverage the use of data mining and predictive analytics to better understand which customers present an attrition risk and when they are likely to leave. Furthermore, that quantitative research should be further supplemented with Voice of Customer (VOC) research to understand why customers leave and how that behavior differs across customer cohorts. The ultimate goal should be to develop an in-depth understanding of the key drivers of repetitive shopping behavior so that they may be used to guide actions to improve retention. In a deeper examination of these issues, we’ll first take a look at the common mistakes that are made and then describe actions retailers could implement to succeed in this effort. We’ll do so using case studies of retention oriented programs used by leading organizations.
4 2009 U.S. Census Bureau Population Projections, 2008 U.S. Dept. of Labor Statistics
Our findingsDeloitte conducted a series of executive interviews5 across retail sectors that revealed just how acutely the customer brand loyalty issue is affecting the industry. Executives told us that they continue to lose customers, customer trips and customer spend on a year to year basis (defined as all customers that made a purchase in the previous 12 months as well as the period 13-24 months ago). While those customers in the bottom two quartiles of spending behavior are the usual sources of customer attrition, we found that customers in the top two quartiles are also defecting at an alarming rate. The consensus is that customers are leaving at a greater rate overall and, unlike previous periods, those that are leaving span a greater spectrum of the customer base top to bottom in terms of annual spend.
Our interviews found that this issue was even more acute for retailers that are reliant on discretionary spending. Interviewees provided a range of perspectives on why customers are increasingly disloyal; however, a consistent theme was an increase in sensitivity to price and promotion. Customers are increasingly “splitting” their share of wallet to cherry pick different items from different retailers. The executives interviewed speculated that this shift is due, in large part, to the transparency of information that customers literally have at their finger tips. The availability of competitive options, more aggressive “high–low” pricing and increased availability of information via the internet and mobile applications are driving “smarter” consumption in an increasingly large swath of retail categories.
5 Interviews were conducted in June and July, 2010
2009 U.S. Census Bureau population projections
2008 Average discretionary expenditure ($)
65 and older55-6445-5435-4425-34>25
$10.3
$19.4
$21.5$20.4
$16.3
$9.1
36.2%
18.5%
-7.5%
5.8%10.1%
6.2%
Expected % change in population (2010-2020)
2
Current state: Three common mistakes1. Misguided loyalty programsAn actionable understanding of customer retention is imperative in this new market. Retail executives should, however, resist the temptation to use a loyalty program solely as a method to retain customers. This is the first mistake we observed in the subjects of our retention research. Whether it is an organizational legacy or newly launched, a loyalty program can often be misguided. In many channels, these programs are nearly ubiquitous. 84% of shoppers belong to at least one,6 and most households belong to at least 12 such programs. Yet, too many retailers rely on these programs as differentiators. Leading companies are demonstrating that what truly makes a loyalty program a competitive differentiator is the ability to develop unique customer insights from mining the program’s data. Loyalty programs should be evaluated based on their ability to deliver differentiated insights across the enterprise, drive accretive business value and use programmatic treatments that are targeted and meaningful.
2. Ignoring “free agents”In an environment where retailers may likely have more former customers than current ones, it is surprising that so few are tracking lapsed customers. A lack of attention to those customers that haven’t made a purchase in the last few months creates two significant problems. First, it eliminates the ability to create programs designed to reengage former customers who may be willing to come back given their “free agent” status. Second, it doesn’t allow marketing analytics to create models based on lapsed customer date to predict when current customers may leave so that they may be targeted with retention related treatments. These two reasons alone provide enough business value to give old customers a new look and to monitor existing customers for signs of impending attrition.
6 Deloitte/Harrison Group Study, July 2010
3. Lack of enterprise-wide usageFinally, we found a fundamental deficiency in the connection between how retailers understand and predict changing loyalties and where they use that collectable data to make business decisions. This disparity was consistently noted across the spectrum — from defining retention metrics and developing methodologies for tracking those metrics, to initiating actions from the collected information to generate insights about customer behavior and drivers. Amongst the retailers we interviewed, we found that most were using retention information in the marketing function, but only a few use that same beneficial information in merchandising and/or operations. This observation underscores the need to develop enterprise wide transparency.
What are the leaders doing?Our interviews did reveal a wide variety of innovative and leading practices. Retailers leading on the retention front are already using the data that they have to make informed decisions about where to focus limited resources. These companies are using well-defined retention metrics to signal the need to take action. We found four leading practices that can be used to properly evaluate the current retention situation and formulate a strategy for addressing the fundamental reasons for customer migration.
1. Get the basics right and track them continuouslyStart by measuring the basics of retention behavior on a regular basis to answer three questions: how often do customers make a purchase, what types of purchases are those customers making and what is the value of those purchases?
A specialty apparel retailer we spoke with tracks a series of basic customer behavior and retention metrics on a rolling 12 month basis. These metrics include what categories and channels the customers purchase in, their relative profitability, sale vs. full price merchandise mix, online shopping cart and click stream data, frequency of purchase, monetary value of all purchases and time since most recent purchase. By synthesizing basic Recency, Frequency and Monetary (RFM) metrics in concert with more sophisticated behavioral markers (such as an abandoned online shopping cart analysis), this retailer identifies their valuable customers and targets marketing actions designed to increase profitability. By grouping customers based on likelihood to make a purchase, this retailer can focus scarce marketing resources where they will make the most impact. By focusing relevant marketing efforts to the most likely to respond customers, this retailer has also seen a positive trend in their retention because customers value the less frequent but more relevant messages.
3
2. Develop usable analyticsDevelop customer engagement analytics and research to gain a more in depth understanding of key drivers of retention behavior.
Through intensive customer data analysis, one retailer we interviewed learned that new customers who remained active beyond their first year as a customer were five times more likely than others to remain customers for multiple years into the future. Because of this critical insight, this retailer set off on a journey to identify the ‘first year’ behavior patterns of customers whom they had previously retained longer than one year. In short, they were searching for behavior markers that would enable them to monitor, track and ultimately influence ‘first year’ customer behavior to increase the likelihood of long term retention. Exploratory analysis found that markers beyond simple visit frequency, spend per visit and recency of visit, were prevalent in the data. For instance, they found that certain product categories and mixes of categories within market baskets were highly linked to a ‘second year’, and thus, long term retention. Armed with these and other key findings, the client developed a set of predictive models that were applied to ‘first year’ customers. These models assessed the customers’ behavior patterns and demographics to determine both their level and quality of interaction with the retailer. Customers found to be lagging in their interactions were treated with marketing strategies designed to stimulate retention-driving behaviors. Conversely, those customers with higher quality and levels of interaction were not offered marketing treatments or discounts. This strategy, enabled by predictive analytics, allowed the retailer to focus scarce marketing resources where they would count most.
3. Track retention across retail channelsEnable tracking of engagement and retention markers across retail channels to minimize retention gaps created when customers migrate from one channel to another.
Many leading class retailers are actually focused on both customer engagement and retention across channels. They measure the efficacy of their programs by evaluating engagement factors to understand where their best customers prefer to interact with the brand and giving them rewards for doing so more frequently and with a higher level of intensity than the average. These types of markers are generally a predictor of future purchase behavior. One retailer is using their web site click stream data, Facebook traffic, Twitter followership, and other non-purchase engagement factors to identify these customers at different points in the purchase lifecycle.
The engagement score that is developed from this data is then leveraged to award that customer for their loyalty to the brand by giving them targeted incentives to make purchases, inviting them to unique events and making special service channels available when needed.
4. Inject Voice Of Customers (VOC) into the mixEstablish a systematic method for getting the Voice of Customer captured, analyzed and leveraged for identifying retention improvement opportunities.
An upscale retail client had historically recorded retention metrics that varied significantly across the customer base. Not surprisingly, they found that higher annual spend customers returned year to year at a much higher rate than lower spend customers. The recent economic turmoil, however, turned this trend upside down and attrition became an issue across the entire customer base. Not satisfied with merely examining the statistics, the retailer recently conducted primary customer research and spoke with sales associates to get a better handle on why attrition had become so widespread across the customer base. What they found was that the commission based sales associates were fighting over the best customers and ignoring the customers with unknown value. This skewed service model was essentially driving customers to competitors’ stores that offered more egalitarian service. The insight that the sales and service model was actually causing customers to defect at both ends of the spend spectrum led to changes intended to create a more team based selling approach targeted at known high value customers and incentives for engaging customers that are new and/or of unknown value.
4
Take actionIf we’ve learned only one thing from the last two years, it is that consumers change preferences, attitudes, and sentiments quickly. This manifests itself in rapid changes in behavior. Adapting to the pace of those changes will make a difference in retaining the existing level of trips and basket size. While the state of the consumer and economy is still very fragile, taking lessons from the aforementioned leading practices enables a more thorough, and ongoing, understanding of retention drivers. However, that baseline understanding must then be used to hypothesize and test the right actions to improve retention. Management actions may take the form of assortment, pricing, marketing communication, or customer experience (i.e., service model) adjustments. Many retailers, however, don’t employ well designed tests to truly understand the efficacy of the actions they take.
Retention measurement is a fundamental building block for success in today’s retail environment, but it also has to be supplemented with customer behavior root cause analysis leveraging Voice of Customer research and predictive analytics. This may seem like a complex endeavor; however, the preferred course of action is to get started with information that is easily accessible, only adding data and resources when the organization’s capabilities are mature enough to use them and the business case is warranted. Engaging valuable customers in today’s environment is an achievable objective; those that do it well are already thinking creatively about the problem and using a variety of resources to make a positive impact on customer retention.
This publication contains general information only and is based on the experiences and research of Deloitte practitioners. Deloitte is not, by means of this publication, rendering business, financial, investment, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte, its affiliates, and related entities shall not be responsible for any loss sustained by any person who relies on this publication.
As used in this document, “Deloitte” means Deloitte Consulting LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.
Clark PassinoManagerDeloitte Consulting LLP +1 312 486 5854 [email protected]
Visit Deloitte.comTo learn more about our services, visit us online at www.deloitte.com/Retail. Here you can access our complimentary Dbriefs webcast series, innovative and practical industry research, and a lot more about the issues facing retailers from some of the industry’s most experienced minds.
