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Re s e arch & Tren ds

Understanding customer retention

Published in, June 2011

The consumer has changed, and so, too, should the way you measure loyalty.
by Matt McNaghten and Clark Passino In reaction to the recent change in the retail landscape, leading retailers have launched initiatives to understand and drive improved retention. Deloitte conducted a series of executive interviews in June and July 2010 across retail sectors that revealed just how acutely the customer brand loyalty issue is affecting the industry and a variety of innovative and leading practices. 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 in terms of annual spend. We found four leading practices that can be used to 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 Continuously Start 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. 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. 2. Develop Usable Analytics Develop customer engagement analytics and research to gain a more in-depth understanding of key drivers of retention behavior. 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. Customers found to be lagging in their interactions were treated with marketing strategies designed to stimulate retentiondriving 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 marketing resources where they would count most.

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3. Track Retention Across Channels Enable tracking of engagement and retention markers across retail channels to minimize retention gaps created when customers migrate from one channel to another. These types of markers are generally a predictor of future purchase behavior. One retailer is using its website click stream data, social media traffic, and other nonpurchase engagement factors to identify these customers at different points in the purchase life cycle. The engagement score developed from this data is then leveraged to reward 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 Establish a systematic method for getting the VOC (voice of customers) 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. They found that their commission-based sales associates were fighting over the best customers and ignoring 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 causing customers to defect at both ends of the spend spectrum led to changes intended to create a more teambased selling approach targeted at known highvalue customers.

Take Action Retention measurement is a fundamental building block for success in todays retail environment. Get started with information that is easily accessible, only adding data and resources when the organizations capabilities are mature enough to use them and the business case is warranted. Engaging valuable customers in todays environment is an achievable objective. Those that do it well are already using a variety of resources to make a positive impact on customer retention. For more information, please contact: Matt McNaghten Senior Manager Deloitte Consulting LLP +1 216 589 3756 Clark Passino Manager Deloitte Consulting LLP +1 312 486 5854

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