Retail CRM: From profiling to profits

At the heart of customer relationship marketing is a simple equation: Treat customers with the respect and recognition they deserve and they will respond by buying more products more often over a longer period. A concept that most retailers intuitively grasp...

At the heart of customer relationship marketing is a simple equation: Treat customers with the respect and recognition they deserve and they will respond by buying more products more often over a longer period. A concept that most retailers intuitively grasp – but find awfully difficult to put into practice.

Merchandisers at heart, retailers are more concerned with the volume and type of products moving out of the store instead of the volume and quality of customers coming in. So advertising dollars get spent promoting sales events to the public at large rather than pleasing existing customers who are proven buyers. Success is defined by year-over-year increases in store or department sales, and since those are the measures by which line management is held accountable, their overriding marketing priority is to create store traffic, not retain customers.

Too often, retailers believe that customer retention is solved simply through the introduction of a rewards program. What starts out as a noble endeavour to win the enduring loyalty of customers ends up a shriveled version of the original launch plan, eviscerated by budget cutbacks due to management apathy. Because no one ever bothers to prove the long-term economic merits of the program, funding inevitably gets chopped. Opportunities to regularly communicate with the most valuable customers through direct mail and interactive media are passed up in favour of – guess what – more discount pricing for everyone.

Alarming discoveries

A major part of the problem is that retailers are just not accustomed to looking at – and making sense of – customer-level data. For them, inventory turnover is all that counts. Figure out the lifetime value of a customer? Calculate the retention rate? Stratify the customer base into value tiers? Abstract concepts that are hardly essential to running a retail operation.

Yet when retailers finally do look at their customer data, they make some surprising – and occasionally alarming – discoveries. Take the example of a music retailer that had been operating a card-based frequency marketing program for years. Despite a healthy sign-up rate, the retailer felt ambivalent about the program, uncertain of its precise contribution to the bottom line. Was it better to continue rewarding customers with a discount based on their past purchase history – simply dump more items into the promotional bin – or abandon the database in favour of a less costly punch-card program like its chief competitor?

The retailer was urged by an outside consultant to conduct a behavioural profile analysis of its customer file – something the company had not done before, mainly because they never knew what questions to ask. And even though there was no product item detail on the file – no one had ever thought to capture it on the loyalty database system – they had enough other member data to work with: namely, the date, amount, and store location of every sales and redemption transaction going back to the launch of the program.

In ranking the customer base by total past year spending, they were shocked to see that 10% of their membership base accounted for 44% of their revenues – and that a customer in the best decile could be expected to spend on average 20 times more than the worst one. And when they mapped out where their customers lived, they found that their best store had a much higher proportion of top decile members in their trading area than any other location, suggesting a strong correlation between program enrolment and sales performance.

Satisfied that the program was working, the retailer wanted to take the next step of enhancing it. So a survey was mailed to 50% of the best customers soliciting their ideas, accompanied by a $5 gift certificate as an advance token of appreciation. Twenty per cent of the recipients responded, volunteering all kinds of information about themselves: what made them choose one retailer over another; their level of satisfaction with the loyalty program; what could be done to attract more of their musical purchases, and so on.

The answers sometimes went far beyond the rating scales, including suggestions like ‘more updates on new selections,’ ‘put CD tests beside comfy chairs,’ and ‘get a better selection – more alternative, punk.’ Sound advice – from valued customers.

Best of all, 80% of them enthusiastically endorsed the idea of special offers through direct mail or e-mail.

The conversion dilemma

The challenge of relationship marketing isn’t always to satisfy the most valued customers – it also means learning how to create a valuable customer in the first place. No matter how hard a retailer may work at making the shopping experience a memorable one, or how good they are at catering to loyal shoppers, they may still run into trouble converting a first-time buyer into a regular customer.

This conversion dilemma is particularly endemic within the furniture sector, due to the irregular buying cycle. One Ontario retailer of fine furniture never really paid much attention to the issue until its sales began to plummet. Attributing the decline to an aging customer base and encroaching competitors, they figured the remedy was a brand makeover. But how should they reposition themselves? And what markets should they go after? Before trying to answer those questions, they were advised to profile their existing customers.

The analysis showed that – no surprise here – the top 10% of customers accounted for 40% of sales, and that the top three deciles were spending more than twice the portfolio average. And since the database had sales contract detail going back many years, it was possible to determine that the customer retention rate – 79% – was reasonably acceptable.

But the analysis also revealed a serious fault line: the conversion ratio. Almost 90% of first-time customers never returned to make another purchase. Either they were bargain hunters or they had migrated elsewhere for their furniture needs.

Only 10% of customers had been active buyers in previous years – and just 1% had bought every year. The combination of those historical buying patterns and a continued drop-off in sales traffic had foreboding implications for the future: a sharply decreasing revenue curve.

Suddenly, the prime marketing objective became clear: Never mind fussing with brand image – figure out how to convert first-time buyers. It might not be possible to stave off competitive raids on its trading frontier, but having gone to the expense of acquiring new customers, surely it could persuade them to return.

The question then became, how much should the company invest in that effort? The arithmetic of relationship marketing can sometimes defeat even the best-intentioned retailer simply because, at first glance, the costs seem excessive. By playing with the major portfolio levers – sales visits, average purchase amount, and conversion and retention ratios – it is possible to develop a realistic payback scenario. Usually, all that’s required is a modest increase in one or more of those variables to produce a significant lift in net contribution. By figuring out the potential incremental gain per customer, a retailer can easily calculate how much of those estimated earnings it can afford to put into a relationship marketing program, guaranteeing the type of payback that will convince a CFO it is worth doing.

Showing a return on investment is the key to winning a long-term commitment to relationship marketing from senior management. By conclusively proving the link between relationships and profits through behavioural profiling, the business case can be made to shift the strategic emphasis from driving sales traffic to keeping customers.

Stephen Shaw is an independent consultant specializing in database and relationship marketing. He can be reached by phone at (416) 695-4286 or via e-mail at stephen.shaw@sympatico.ca

Also in this report:

- Customers, marketers love loyalty programs: Whether it’s Air Miles or buy-10-coffees-get-one-free, consumers are tapping into programs and marketers are designing more