Jim answers questions from fellow Drillers
Hi again folks, Jim Novo here.
Today we’ve got a bit of confusion between RFM and Customer Lifecycles, but that’s a situation we’ve been dealing with for 30 years so not really an issue. Sure, it can be confusing. Reality is, these two ideas are related in some ways but not remotely the same in other ways. Plus, each is very good at accomplishing the job it was designed to do – as long as the user understands the problem to be solved and the specific purpose / output of each approach.
So, you want to understand these ideas better? OK, get ready for the Drillin’ …
Today’s question is from a fellow Driller who understands customer retention really well but just can’t decide on the best metrics to measure retention in the supplements business. Should he use Customer Retention Rate? Customer Churn Rate? Hurdle Rate? Ahh, to make the right choice here the gory details will need to be visited – so let’s get to the Drillin’ !
Q: Hi Jim,
I am here choosing all the metrics I will use in the coming days to evaluate the health of my business and learn a little bit more about it. I will begin analyzing some basic metrics and then (just after being completely comfortable with the “basic metrics”) I will do some more sophisticated analyses like LTV and RF Grids. (Jim’s Note: RF Grids are advanced customer LifeCycle tracking tools described in my book).
Now I am trying to decide which is the best metric to measure my site’s ability to retain customers. There are three metrics that come to my mind. Customer Retention Rate, Customer Churn Rate and Hurdle Rate.
Customer Retention Rate would be the easiest to measure but the least precise. I could be doing a great job retaining customers but if I am attracting a lot of new customers this metric could give the wrong impression that we are doing more poorly than the last time we measured.
Customer Churn Rate is very easy to calculate when you have a “subscription model business.” If the customer cancels the contract it means a defection. But in my case there is no contract. We sell products. If the customer does not purchase in 30 days it doesn’t mean necessarily that he defected.
The Hurdle Rate based on Recency (45 days for purchase seems to be a good number for the products we sell- natural supplements, based in Brazil) seems to be the best metric I can choose to measure our ability to retain customers over time.
What metric do you think I should be using to measure our ability to retain customers?
A: I think you are one of the smartest IT guys on the subject of database marketing, that does not do database marketing for a living, I have ever met (?) ! Where did you learn this stuff? Did you read a book or something? ;)
Your analysis is absolutely correct on every point, and the approach is on target. If you start simple and work towards more complexity, you will learn more about your customers. And assuming most of your products are roughly a 30 day supply, 45 days is an excellent cut-off for a Hurdle Rate analysis. Simply track the percentage of customers who have made a purchase in the past 45 days over time, perhaps monthly to start. If the percentage is rising, you are getting better at retaining customers. If it is falling, you should be looking for reasons why this is so.Continue reading Choosing Customer Retention Metrics for the Supplements Business