Keys To Unlocking Your Web Marketing Genius. Increase Customer Retention by Analyzing Visitor Segments. By Jim Novo. Based on WebTrends TAKE 10 Series

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1 Keys To Unlocking Your Web Marketing Genius Increase Customer Retention by Analyzing Visitor Segments By Jim Novo Based on WebTrends TAKE 10 Series

2 Keys To Unlocking Your Web Marketing Genius Increase Customer Retention by Analyzing Visitor Segments Since it typically costs 6-7 times more to acquire a new customer than to keep an existing one, customer retention is critical to your business success. Just to be clear, I m not talking about some mystical mathematical or management goal here. To me, a retained customer is one that is generating sales. A customer that is no longer generating sales is a defected customer. There are lots of things you can do to increase customer retention: make operational changes, create retention-marketing programs and introduce new products, to name a few. But before you can figure out how to improve customer retention for your organization, you need to be able to measure it. And before you can measure it, you have to define it! Few companies know what their customer retention rates are, as most have not yet defined the metric. DEFINING RETENTION There are two variables to consider when allocating resources to customer retention: The current value of the customer The potential value of the customer (or the likelihood of the customer to defect) High-value customers tend to become even more valuable over time, so the defection of high-value customers is more important financially than the defection of low-value customers. In other words, if a high-value and a low-value customer each called up and said, I m taking my business elsewhere, it would be smart to put more resources toward retaining the high-value customer. Given limited resources, this is a financially prudent reaction because the current value of the customer justifies it. The likelihood of a customer to defect speaks to the potential value of the customer. A high-value customer who is not likely to defect is worth more to the company than a high-value customer who is likely to defect. Why? Well, the customer who is not likely to defect represents more potential value than the one who is likely to defect. As in the comparison with current value above, if two high-value customers called up and said, I m taking my business elsewhere, it would be more financially prudent to try to retain the high-value customer who is less likely to defect if the company could figure this out. Given limited resources, this is a financially prudent reaction, because the potential value of the customer who is less likely to defect justifies it. SEGMENTING BY CURRENT VALUE There are two measures of current value commonly used on the Web: Frequency Lifetime Value Frequency goes beyond repeat visitor to measure how many times a visit has occurred. Most companies would like visitors to come back to their sites. Some sites depend on it because visits are tied to revenue. When trying to allocate resources toward various projects on the web site, it might make sense to allocate more resources toward the areas generating visitors who come back to the site again and again. Lifetime Value is the total sales generated since tracking of the visitor began. This is pretty self-explanatory more sales are normally a good thing for a web site. To segment is to group visitors (or customers) with like attributes; for example, grouping by: Media used to acquire the visitor Search engine used to access the site Keyword phrase used to access the site Offer you make on the initial visit Products or categories purchased from Content areas visited When you segment your visitors by attributes like the ones above, you will find there are significant differences in current value by source or by experience with the site. For example, how would you react to a table like this one: Content Area Visited Frequency Lifetime Value News 45 $1200 Sports 10 $33 In this case, it doesn t matter whether Frequency or Lifetime Value is more important to your site customers viewing News have much higher current value than customers viewing Sports. KEYS TO UNLOCKING YOUR WEB MARKETING GENIUS

3 The competition is just a search and a click away. So it is important to recognize the likelihood of defection for any customer segment and take action to slow or prevent it. This is what customer retention is all about. Jim Novo It makes financial sense to reallocate resources away from Sports coverage towards News coverage to attract and retain high current-value customers. SEGMENTING BY POTENTIAL VALUE Perhaps you are already doing current-value analysis, and the example above is no big surprise. Good for you, because many companies are not matching segments to their current value. But here s the problem with just relying on totals like Frequency or Lifetime Value: they represent history. It s over and done with, and you have no idea what the future holds. Ideally, if you were going to lay real customer marketing money on the table, you would also want to bet on those customer segments with high potential value. Frequency and Lifetime Value don t tell you anything about potential value. All they tell you is about past value. But on the Web, it is quite easy for customers to create past value and then defect from your organization and establish a relationship with somebody else. The competition is just a search and a click away. So it is important to recognize the likelihood of defection for any customer segment and take action to slow or prevent it. This is what customer retention is all about. Customer retention activities are an investment. When making most investments, there is an expectation that the value of the investment will rise. You generally have a choice of investments you can make, and should choose the one you think has the highest potential return. For example, given limited resources and ten projects that require funding, managers may choose the three projects with the highest likelihood of increasing the profitability of the company. You can think of your visitor segments as potential investments in the same way. If you had some way to peg the potential value of a segment, you could compare segments and target the ones you think have the highest likelihood of increasing the future profitability of the company. Sound too far-fetched? Maybe like a bunch of CRM hyperbole? It s not. The fact is, offline database marketers have for years used two simple metrics to predict the potential value of a customer and used this information to take action to slow or prevent customer defection. And now these metrics are available with WebTrends. Recency is a potential value metric commonly used for predicting customer defection in a business where the customer is in control, which includes most retail models. A special form of Recency called Latency is often used in businesses for which orders and contacts have a defined cycle, including those with a defined sales process, businesses that are subscription-based, and businesses selling durable goods or high-ticket items. We re going to take a look at both of these retention metrics and how you can use them. UNDERSTANDING RECENCY Let s say I offer you a bet. I want you to choose from two B2C customers the one most likely to continue purchasing in the future. The customers are very similar to each other and each has a Lifetime Value of $3,000. There is one difference, though the last purchase of one was over a year ago and the last purchase of the other was in the past 30 days. Which would you bet is the most likely to buy in the future, and thus has the higher potential value? I don t know about you, but I d take the one that has purchased more recently, hands down. Who knows what happened to the other one? At least the one purchasing more recently has demonstrated they are still in the game. Customer defection in consumer businesses is usually measured in terms of how long it has been since the customer has had contact with the company, because the longer it has been since you had contact with the customer, the less likely it is that the customer is still a customer. The span of time since the last contact is called Recency. Think about your own behavior hobbies you used to have, restaurants you used to go to, video games you used to play. How did it happen that you defected from those activities? The time between instances of engaging in them grew longer and longer until you stopped completely. That s Defection. And you can predict defection by looking at patterns of Recency. INCREASE CUSTOMER RETENTION BY ANALYZING VISITOR SEGMENTS

4 Keys To Unlocking Your Web Marketing Genius WORKING WITH RECENCY A good place to start with Recency is to simply determine the Average Recency of your visitors or customers. On average, how long has it been since the last visit or purchase? Once you have an average, you can create two groups those with last visit or purchase at the average or more Recent than average, and those with last visit or purchase less Recent than average. Customers with last contact dates at the average or more Recent than average are the most likely to still be customers. Customers with last contact dates less Recent than average are the most likely to be in the process of defecting or are already defected customers. Don t take my word for this; you can prove it to yourself. You probably have a newsletter or special offer you send to customers and visitors. Flag customers or customer groups as more Recent than average or less Recent than average and send out the . When you look at responses or visits back to the site, you will find that those who are more Recent than average have a response rate 3-10 times higher than those less Recent than average. Why? Because those less Recent than average are in the process of defecting they are your future former customers or visitors. Offline, the Recency metric is used to predict potential value and decide which customers are no longer worth the expense of mailing to or contacting. Using Recency in this way has a huge positive effect on the bottom line. Maybe you think is free and this doesn t apply to you. On distribution costs, perhaps you are right. But on profits, you are probably not. When responses vary by Recency you should be customizing offers by Recency to maximize profits. If you are not, you are leaving money on the table. An idea with more immediate impact on your business can be found in the chart below: Visitor / Customer Source More Recent Than Average Less Recent Than Average From Search Engines 70% of visitors 30% of visitors From s 30% of visitors 70% of visitors Here we have two sources of traffic and whether on average visitors/customers from each source are more or less Recent than the average for the site. The majority of More Recent Than Average visitors come from Search Engines as opposed to s. What does the information in this table mean? Let s say Search Engines and s generate visitors/customers of equal current value; you believe a dollar spent on either medium is equally profitable. But the reality is that every dollar you spend on search engine marketing works much harder than every dollar you spend on marketing, because search generates visitors with higher than average Recency. In other words, in this case the potential value of search visitors is higher than that of visitors. You can make these kinds of comparisons using a slew of attributes. The ones listed below are generally the most significant for differentiating potential value segments: Media used to acquire the visitor Search engine used to access the site Keyword phrase used to access the site Offer you make on the initial visit Products or categories purchased from Content areas visited This list might look familiar to you it s the same list of attributes we used to look at current value. The same attributes responsible for creating current value are often strong predictors of potential value. I hope you are beginning to understand how powerful this idea might be. For example, what happens if you look at both the current and potential value of visitor segments at the same time? You get four groups: High Current Value, High Potential Value Low Current Value, High Potential Value High Current Value, Low Potential Value Low Current Value, Low Potential Value Now think about the fact that certain ads, searches, products and content are responsible for customers being in each of the four groups above. Those in the top group can easily generate many, many times the profit for a company than those in the bottom group. If you are choosing which ads, offers, products and content are being offered to customers, you are choosing how many customers end up in each of the four groups above. UNDERSTANDING LATENCY The basic Recency model above works best when there is completely free will on the part of the customer to make decisions. In some businesses, there are external forces or cycles affecting customer behavior. For example, in many B2B sales there are a lot of process-defined, sequential steps that have to take place. Many high-ticket sales in general tend to be for items considered durable goods which are replaced when KEYS TO UNLOCKING YOUR WEB MARKETING GENIUS

5 they wear out, based on a lifecycle. In these cases, a related metric, Latency, may make more sense to use than Recency to determine potential value. Latency uses the time between customer contacts as a reference point, rather than the date of last contact as Recency does. For example, you look at the average time between visits or purchases instead of the date of last visit or purchase. But like Recency, the longer a customer does not fulfill the expected behavior, the less likely it is that he ever will. WORKING WITH LATENCY Latency in used in much the same way as Recency. Find the average time between events as a guide and set up segments with higher than average latency and lower than average Latency for a particular cycle or step. The average time between actions is a trip wire. Any segment taking longer than average to progress to the next step is likely beginning the defection process. The longer the segment postpones completing the step, the more likely defection becomes. For example, if you are a subscription-based content site and you publish new content weekly, it would be reasonable to expect that the average Latency of a visitor would be seven days. Any segment with a Latency of more than the seven-day trip wire is likely to have a growing percentage of defectors, and the higher the Latency of a segment, the higher the percentage of defectors. As with Recency, certain ads, offers, searches and content will create visitors who are either above or below the seven-day trip wire, and you should take action to adjust marketing or content appropriately. If your subscription offering is expensive, it might be worth it to be proactive in finding out why somebody who pays a lot of money for the service accesses it less regularly than the average subscriber, and then take action to retain the customer. Latency is highly predictive of defection in cases where a regular cycle is expected. The bottom line on customer retention is this: you can t retain every customer, but you can take steps to keep your best customers coming back. Using web analytics to segment by current and potential value metrics, you can make more profitable customer investment decisions for your company: Focus efforts on acquiring customers who tend to stick with you over the long run, take action to slow defection by identifying segments where defection is most likely, and allocate resources toward retaining segments that have the highest potential value. ABOUT THE AUTHOR Jim Novo Jim is an independent customer analysis consultant and works with Future Now, Inc. as a strategic partner, offering Data-Driven Marketing advice to clients. He was VP of Marketing and Programming at Home Shopping Network before starting his own consultancy in 1997, and has provided expertise on interactive consumer behavior to such companies as Cellular One, MBNA Bank, Dell Computer, SteelTorch Software, Retek Direct, CBS SportLine, Morrison Homes, Radio Shack, Pfizer, Kobie Marketing, Ariel, Tupperware, Barnes & Noble (multi-channel), and a bunch of smaller companies you have never heard of. The average ROI of customer marketing programs Jim has designed for clients now stands at just over 70%; several clients have consistently achieved ROI of over 400%. He authored the book, Drilling Down: Turning Customer Data into Profits with a Spreadsheet to teach managers how to increase sales while lowering marketing costs. INCREASE CUSTOMER RETENTION BY ANALYZING VISITOR SEGMENTS

6 KEYS TO UNLOCKING YOUR WEB MARKETING GENIUS MEASURING RETENTION WebTrends Reporting Series, Enterprise Edition provides new features and reports to help you measure and improve the effectiveness of your customer retention efforts. Specifically, with WebTrends Segmentation Analysis, you ll have the flexibility to customize and analyze different segments of visitors and their behavior, giving you the insight you need to identify which segments are most valuable. Below is a sampling of the reports that are available. Keep in mind that you have the capability to create a near-infinite number of reports based on the variables you could analyze. But we don't advise you do that. With great power comes great responsibility. The key is to start with the specific business questions you're trying to answer, and then use the WebTrends Custom Reports Wizard to configure a set of custom reports to include just the specific metrics you're interested in analyzing. Here are a few that illustrate the range of retention analysis available: Content Interests by Loyal Visitors Use this report to gauge the content interests of your most loyal web visitors. In this report, loyalty is measured and segmented based on frequency (how often they come to your site within a specific timeframe). Remember: the higher the frequency, the more loyal the visitor. By understanding which pages, products, news and other content areas your most loyal visitors are interested in, you're able to better serve the needs of those customers. Lifetime Value by Initial Search Phrase Use this report to understand how lifetime value (the sum of all purchases over time) correlates to how visitors came to your site from search engines. What this report allows you to see is how the behavior differs for segments of visitors based on the search terms they used to find your site. In many cases, those visitors who come to your site through very specific search phrases will have a higher propensity to buy than those who visit your site through a more generic search. You can then use this information to help optimize your Search Engine Marketing strategies. Frequency and Latency by Campaign Use this report to more effectively evaluate the performance of campaigns. By segmenting visitors by the initial campaign they respond to and then measuring frequency (for current value) and latency (for potential value), you can see which campaigns over time spawn more loyal visitors and which visitors have the highest potential to visit and/or purchase again. FOR MORE INFORMATION To learn more about measuring customer retention, visit the WebTrends Resource Center: CONTACTS Worldwide Headquarters NetIQ Corporation 3553 North First Street San Jose, CA fax sales info@netiq.com WebTrends Sales info@webtrends.com NetIQ EMEA +44 (0) info@netiq.com NetIQ Japan info-japan@netiq.com For our offices in Latin America & Asia Pacific, please visit our web site at Based on WebTrends Series 2003 NetIQ Corporation, all rights reserved. CS10551HOLM MH 0403 WP10679RET MH0703