Customer Retention: Proactive and Reactive – Don Peppers

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In a recent survey designed to illuminate how well businesses are adapting to the world of “Big Data,” more than 60% of executives rated their firms as weak or mediocre when it comes to using customer data today. Generating real business benefits by using customer data well, however, often involves some effort to improve customer retention. And usually when when companies discuss the initiatives and policies involved in retaining customers they talk about them as either proactive or reactive efforts, although they might not use those terms.

Proactive retention efforts are those service improvements, process enhancements, and quality initiatives that encourage loyalty primarily by removing the causes of defection in the first place. In my view, the strongest possible proactive customer retention policy is simply to offer a frictionless customer experience. Because customer dissatisfaction is much more heavily correlated to defection than customer satisfaction is to loyalty, keeping obstacles, problems, and difficulties out of a customer’s path will almost certainly reduce the likelihood that the customer will defect from your brand. Yes, you can and should also try to “surprise and delight” customers, or to “wow” them with terrific service, but these efforts can only be truly effective once you’ve eliminated the obstacles.

Proactive retention could also include a loyalty program of some kind, along with customized service treatments and the like. If a customer interacts with you to specify some aspect of how they want to be treated, you can effectively “loyalize” the customer by remembering that personal detail and providing a customized experience in the future. In effect, by telling you what she wants, the customer is investing in the relationship herself. Even if your direct competitor offers the same kind of customized service, the customer would first have to re-invest (by telling the competitor what she needs) in order to enjoy the same level of service.

Reactive retention initiatives, on the other hand, are those policies and practices aimed at intercepting customer defections and preventing them, or perhaps reversing them as they occur. “Win-back” efforts, seeking to re-acquire customers just after they have left the franchise, are a kind of reactive initiative.

In a business rich in customer data (telecom or financial services, for instance) an increasingly common kind of reactive retention strategy involves using data to detect the kinds of behaviors, transactions, or events that are likely to immediately precede defection, and then actively intervening when you see such patterns developing for particular customers. This is an analytics-based approach, and those companies that have data-rich customer relationships can benefit greatly.

In the four years from the beginning of 2002 through the end of 2005, for example, Verizon Wireless used this tactic to cut the churn rate among its contract customers in half, reducing a blistering 2.6% attrition per month to just 1.3% per month. They used analytics (1) to anticipate those customers most likely to leave, (2) to decide what “save” offer would be most effective for each different customer, and (3) to calculate how likely each such customer was to respond to the offer. By mailing the right offer, only to those with a good likelihood of accepting it, the company saved some 60% of what it would otherwise have had to spend.

As Martha Rogers and I documented in our 2008 book Rules to Break & Laws to Follow, while Verizon Wireless reported $21 billion in operating income over that four-year period, a back-of-the-envelope calculation using publicly available data shows that it also grew its customer equity – the sum total of lifetime values of its customers – by $20 billion, about half of which was attributable to the value of new customers acquired, while half was attributable to the increase in average lifetime values due to increased customer retention.

So while companies can gnash their teeth and beat their breasts all they want over the difficulty of calculating the genuine ROI of using customer data, once you begin improving your customers’ loyalty with it, the benefits are likely to be obvious.

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