1-to-1 Impact

What Every Exec Should Know About Customer Retention

by Don Peppers and Martha Rogers, Ph.D.

As customer acquisition costs continue to rise, customer retention continues to be one of the most important, yet misunderstood, areas of customer strategy. Of all the things that C-level execs need to know about retention, this is the most important: Any strategy you undertake to keep customers must be done under the heading of creating value for your enterprise and your customers.

One of the best examples of applying this reality is happening in the wireless telecom business. Here's an industry where it can easily cost more than $300 to acquire a new retail customer, and perhaps $60,000 or more to secure a new enterprise customer. As a result, many mobile firms have placed a great deal of emphasis on customer retention. Of course, retention is only one of the variables that figure in the overall value that customers create, but in mobile telecom, it is certainly one of the most important.

The good
Best practices in retention can be classified into three categories: differentiated offers aimed at particular types of customers, additional offerings that deepen a customer's relationship, and self-service options that entangle the customer with the firm.

Arguably, the wireless industry's strong suit has been the differentiated offerings and services aimed at specific customers. Nextel, for instance, has staked out a strong claim to serve the needs of mobile sales forces. Among other things, Nextel offers these customers a uniquely appealing suite of "Group Connect" services designed to meet their needs better than routine mobile phone service would.

Virgin Mobile, on the other hand, has appealed to the youth market for the same purpose. Its latest service is called "Rescue Ring." If a customer is headed out on a date or other meeting that may not go well, he or she can arrange for an automated call to arrive 20 minutes into it, which can then either be ignored or used as an excuse to bail out. Among the 3 million users it has acquired in its first two years, Virgin Mobile says more than 60 percent of them use Rescue Ring or other features, such as Comedy Central's Joke of the Day. More than half downloaded ringtones last year at $3.49 a pop.

Self-service is also a top-performing retention tactic. Customers who go online are likely to implement some aspect of their service that they have partly built themselves. Such customer "collaborations" are guaranteed to improve retention. It is probably no coincidence that Verizon Wireless, a company with one of the lowest wireless churn rates, reports one of the highest self-service usage rates.

Room for improvement
One thing that some telecoms probably aren't doing as well as they could, however, is gleaning insight from their data to engage customers before they become churn risks. For instance, telecoms have a Call Detail Record (CDR) of each call made, listing where it originated, where it went, how long it lasted, and whether it was cut off or not. Telecoms also know how often network outages occur in a geographical area. It's up to telecoms to aggregate these and other forms of data, use them to anticipate churn risks among high-value customers and then take action. If a customer calls you with a problem, it's probably already too late.

Let's take it a step further. Wireless firms track and report monthly churn rates, as well as monthly average revenue per user (ARPU). When combined with operating margin, these figures can help investment analysts determine how much actual value a company has created with its marketing efforts – including not just current earnings, but also any value created from increasing its customers' lifetime value (LTV). In other words, is the wireless company maximizing the value of its customers – its scarcest and most valuable assets? Are its marketing decisions for combating churn and retaining customers creating or destroying enterprise value? To answer these questions, executives require a new form of measurement. We call it Return on Customer^SM.

Calculating Return on Customer^SM for Sprint
As an example, we examined the wireless division of Sprint. According to the company's most recent quarterly report, its "Fair and Flexible" spending plans, which allow customers to avoid overage charges for exceeding their plan minutes, "represented the majority of Sprint's direct gross adds in the quarter" (translation: it was this marketing initiative that drove customer acquisition). One result is that over the last four quarters, Sprint's wireless customer base increased by 22 percent, and the division's first-quarter operating income rose 64 percent, to $455 million.

Dig a bit deeper, however, and you'll find that Sprint's marketing efforts actually created a great deal more value for its shareholders over the last year than may be immediately apparent. Its monthly customer churn rate declined significantly, from 2.9 percent to 2.5 percent, year over year. So while its marketing program is successfully acquiring customers, it appears to us that it is also improving customer retention. This decline in the churn rate has substantially increased the lifetime values of all its customers.

When we did the math, we discovered that, in addition to the $2 billion in operating income Sprint Wireless recorded during its most recent four quarters, its customer acquisition success and its improved retention rates have created roughly the same amount of additional value (about $2 billion) in the form of increased lifetime values within its customer base. About two thirds of that extra $2 billion was created by adding new customers, while a third of it stemmed from the increased retention rate.

We calculated a Return on Customer for Sprint, over its most recent four quarters, of nearly 70 percent, a phenomenally good rate of value creation. The challenge now will be maintaining that retention rate, to keep from "giving back" the extra value that Sprint created with this year's marketing effort.

It's important to note that we are only using publicly reported information for this analysis. There are many ways companies can decrease churn, other than earning the trust of customers. In fact, if companies undermine the trust of customers to reduce churn (by locking customers into contracts, for example) they will have difficulty hanging onto the value they had created.

Bio: Don Peppers and Martha Rogers, Ph.D. are co-founders of Peppers & Rogers Group, a management consulting firm recognized as the leading authority on customer-based business strategy. Together, they've co-authored five best-selling books on the subject. Their firm helps its clients worldwide create and execute customer-based initiatives that make a bottom-line impact. Visit Peppers & Rogers Group online at www.1to1.com.