Category Archives: Analytical Culture

Actionable Customer Retention Measurement

Jim answers questions from fellow Drillers

Topic Overview

Hi again folks, Jim Novo here.

Simple question below, not so simple answer. There’s a lot of conflicting ideas floating around on the subject of how to measure customer retention properly, and to be honest, it really does depend on the type of business we’re talking about. Further, in order to properly measure customer retention – in a way you can take action to improve retention / increase profits – you have to define it first, and that can be as much of a challenge as the actual measurement. Ready for a trip down into the depths of this area? Hang on, it’s quite a ride, you Driller you …


Q:  How do most companies measure customer retention?  Is there a formula?

A:  The short answer is not many companies outside of specific industries are very adept at customer retention – yet.  For traditional (not-online-born) companies, it is most commonly used in telecommunications, financial services (including insurance), direct marketing (catalogs / web sites, etc.), subscriptions / publishing, and the travel industry.

The reason for this concentration: these industries have traditionally collected detailed data on customer interactions as part of the offline business model.  Now that many other industries are collecting data on customer interactions online, the lessons learned in these “lead” industries are proving quite valuable for industries new to direct customer interaction.

A “standard” way to measure it, if you are looking to align your metrics with Wall Street and your financial statements for example, is “12 month active”.  Any customer you have had contact with in the past 12 months is still a customer, any customer with no contact in the past 12 months is a defected customer.

This is a retail / mail order oriented view, and if you sell products, then “contact” means “purchase”.  If you are in the services business, it could be any contact – phone call, e-mail, sales call, download.  Divide the number of 12 month active customers by the total number of customers and you have your retention rate.

There is no reason you can’t use “24 month active” or “36 month active” or “5 year active”.  The point is to define what retention is for your particular business and stick with it.  Get agreement on what makes sense for a measuring stick and try to improve.  Often your own data will tell you what the best “no activity cutoff” is for your business.

Retention is really a “continuum”, and retention rate is always “relative” to your perspective.  If you use a very “tight” definition like “12 month active”, you will lower your retention rate.  As you expand the time period, your retention rate rises.  The problem with most companies is they expand this cutoff time period to infinity, meaning every customer is still a customer unless they notify you they are not.  Is this a useful measurment? Doubt it…

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Set Up Retention Program Measurement for Wireless

Jim answers questions from fellow Drillers

Topic Overview

Hi again folks, Jim Novo here.

So, how to you actually set up the measurment for a retention program? Since you will ultimately want to conclusively prove that what you are doing is working, the 1st thing you have to is measure what the current retention rate is, hopefully by segment so you have a basis for creating successful program features. But how do you do that? Read on, fellow Driller!


Q: I got the job of servicing the top users on our network.  I must confess I dazzled the interviewers with statistics from your Recency, Frequency, and Monetary model !!!

A:  Congratulations!  Well done.

Q:  I know I should be paying you for this but I would like to communicate with you once in a while to tell you what’s going on..?  If you are not happy with this I really understand.

A:  I’m fine with it, as long as it doesn’t become a full time job!

Q:  Here’s my plan:

1. I would like to start by segmenting high users by usage, (usage bands)

2. Next I would like to profile demographics for each usage band

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Branding vs. Direct Marketing Metrics

Jim answers questions from fellow Drillers

Topic Overview

Hi again folks, Jim Novo here.

Oh dear. A marketer caught between branding and direct. Each approach has it’s own data and metrics that either can be important or not to the folks working with the other approach. Can the measurment of success using these two approaches be reconcilled? It’s possible, but does that make sense if the “success outcomes” are radically different? Gonna be a deep Drillin’…


Q:  We constantly try to quantify the value of web sites as a branding vehicle.  The thing that keeps gnawing at me is we will often report the average time spent on site.  This seems like it should have a value we could wrap into our ROI, but as it is, it stands largely on its own.  

Are you aware of, or have any thoughts on, how we might put an actual value to this?  Is it enough to show lift without respect to time, and to talk about return visits in terms of frequency models, or is there some way to drill down to a fundamental value of what a person-second on your site could be worth (obviously the content of the site will impact how much of that value you actually got)? 

A:  I’ve done a bunch of work like this and personally, I think you measure branding with branding metrics and direct with direct metrics.  If the CPG people understand the value of advertising in terms of brand affinity, recall, intent to purchase, and so forth, then it seems to me that is what you measure.  They have already made the “final connection” between these metrics and ROI, so it’s not really up to the marketer to make those connections.  They believe increasing intent to purchase = advertising worked.  And I’m not sure you really can make a connection, because the “units” you are measuring are different and the math ultimately fails.

Here’s why.  Traditional advertising has never been judged by the “value of the customer,” it is judged by the “value of the media.”  The customer is “reach” and has no individual value; individual customers are totally exchangeable as long as the reach is the same.  Any single person is irrelevant; it does not matter what they do or don’t do.  If there is no “customer,” I’m not sure how you would ever get to ROI.  It is assumed from reach comes sales, and this is proven using branding metrics, not ROI.

Q:  I’ve gone back and forth on this and approached it from a few different angles For example, determine cost of 1 second of TV advertising per person.  You could use this information to calculate how much it would have cost to communicate the total person-seconds you had on your site in a particular month, but this is fraught with problems as you might guess, and am looking for another point of view.

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