The marketing cube: DIMENSION 3 RETENTION

The marketing cube: DIMENSION 3 RETENTION

The third dimension is retention.

In May 1998, Best Week — Insurance News and Analysis summarised the importance of retention to the insurance industry:

‘new business itself can destroy economic value in its first few years . . . takes as long as nine years to add business beyond the hurdle rate (ie the cost of capital). That means the success of adding customers, but not retaining them, is like actually dying the death of a thousand cuts . . .’

. . . improvements to retention add value to the enterprise at almost exponential rates . . . For instance a two point improvement in retention, say from 85 per cent to 87 per cent, adds value equal to 6 per cent of current premium volume. For a company with one billion dollars in premium, that creates another 60 million dollars in value by simply keeping the customers it has already won in the first place . . . ‘

In the landmark work, The Loyalty Effect by Frederick F. Reichheld (1996), the author summarises his research on the importance of retention. After studying a variety of industries, he concludes that a mere 5 per cent reduction in attrition would have a very noteworthy effect on the firm’s profits.

Marketing professionals frequently maintain that defecting customers are of little value, and it may not be prudent to allocate resources towards saving them. This cannot be further from the truth. Figure 2 highlights the pattern of balances that existed at a bank before attrition took place. The graphic demonstrates that while, by definition, the balance of a defector is $0 at the point of attrition, several months prior to this event there is relatively no difference in balance levels between survivor and defector! It certainly is a wise decision to ‘save’ these customers.

Figure 2 Balance levels of survivors and defectors

Figure 2 Balance levels of survivors and defectors

There has been a disagreement among practitioners as to when these defectors should be rescued. For a long time, many supported a school of thought that maintained that three or four months prior to attrition is an optimal point. After all, the attrition mindset has not fully set in and salvage work has a chance to be successful. However, the above analysis suggests that it may make more sense to begin marketing to potential defectors several months preceding the point where balances begin to decline. In this scenario, one is saving not only the customer, but more importantly, the revenue as well.

This viewpoint has led to the development of ‘balance diminishment’ models. Essentially, the goal here is to predict when balances will begin to diminish, not when actual attrition occurs. The marketing process to construct a balance diminishment model would follow the procedure outlined in Figure 3.

Figure 3 Balance diminishment model

Figure 3 Balance diminishment model

—       Various behaviours are used as the predictors for determining the likelihood that any one customer will diminish his balance

—       Once these probabilities are calculated, they are applied to the customer base

—       Marketing rescue intervention occurs to save the appropriate customer.

study undertaken by The Advisory Board Co. concluded that while 75 per cent of managers felt that the above general procedure was important, only 25 per cent had any sort of formal retention programme in place!

 

Figure 2 Balance levels of survivors and defectors

Representative APR 391%

Let's say you want to borrow $100 for two week. Lender can charge you $15 for borrowing $100 for two weeks. You will need to return $115 to the lender at the end of 2 weeks. The cost of the $100 loan is a $15 finance charge and an annual percentage rate of 391 percent. If you decide to roll over the loan for another two weeks, lender can charge you another $15. If you roll-over the loan three times, the finance charge would climb to $60 to borrow the $100.

Implications of Non-payment: Some lenders in our network may automatically roll over your existing loan for another two weeks if you don't pay back the loan on time. Fees for renewing the loan range from lender to lender. Most of the time these fees equal the fees you paid to get the initial payday loan. We ask lenders in our network to follow legal and ethical collection practices set by industry associations and government agencies. Non-payment of a payday loan might negatively effect your credit history.

Calculate APR