Latency - A Customer Retention Strategy

Here's an interesting customer retention strategy that uses the concept of Latency. Latency is simply the average time between two of the same customer interaction events. These events could be a purchase, a phone call, or a web visit.

The power of database marketing is that you don't have to remember the buying habits of hundreds of customers. Instead, you let the database tell you the best time to market to a particular customer or set of customers.

How Customer Latency Works

Let's say you own a retail business and by looking at purchase transaction data, you find that the average time between the 1st and 2nd purchase, for all your customers, is 3 weeks. This time period is called the latency. More specifically, we would call it the "2nd purchase latency" since the latency is usually different between the 2nd & 3rd purchase and so on.

So what do you do with this information? Well, for starters, any customer taking longer than 3 weeks to make their 2nd purchase is deviating from the average customer behavior. Now, there might be a perfectly good reason why they haven't made that 2nd purchase but it could be that the customer has defected, perhaps buying from one of your competitors.

A Marketing Secret

The secret in marketing is to deliver the right message to the right customer at the right time. By using the concept of latency, you can set up a customer retention strategy that does just this!

Getting back to our retail example, if you send a promotional communication (e.g., email, postcard) to customers that have just crossed over the "2nd purchase latency" time period, you have a very good chance of engaging these group of customers and most likely retaining some of them that may have been ready to defect. This is a smart way to build a customer retention strategy.

Of course, not everyone will respond to your latency-based promo, but that's simply the nature of direct marketing. The smart thing about using latency is that it helps you deliver your message at the right time for maximum impact. Remember - right message, right customer, right time.

Applying latency as a customer retention strategy isn't always as easy as I've made it sound above. Depending on the complexity of your business, you may find different latency characteristics between various customer segments as well as different types of products.

Latency Tables

To make things as simple as possible, I recommend you do a latency table based on the customer activity of your choice for all your customers together. This is the perfect starting point in getting a handle on your customer lifecycle. Then, after you have some experience setting up and analyzing the data, you can create latency tables based on customer or product type.

Let's look at an example of doing this for all your customers. If you are a retailer, here is how you would set up a latency table based on transactions. Remember, the latency is the average time between customer interactions. To find the latency between the 1st & 2nd purchase, you will need to look at all your customers that have made a 2nd purchase and then calculate the average number of days between the 1st and 2nd. Here's an example of what a latency table would look like.

Activity	Latency
1st & 2nd purchase	30 days
2nd & 3rd purchase	20 days
3rd & 4th purchase	15 days
4th & 5th purchase	90 days
5th & 6th purchase	150 days

This is a good exercise and you will learn a lot of things about your customers. Probably the first thing you'll notice is that you have a lot of customers that buy from you once and then you never see them again. Perhaps you don't have any customers that have purchased from you more than 3 times. That is good information to know as well. You certainly can't design an effective customer retention strategy is you don't know the latency characteristics of your customers.

Take a second look at the above latency table. Now you have information on multiple purchases. This information can form the basis of a more comprehensive customer retention strategy. Any customer that passes the average number of days for a particular transaction is deviating from the average customer and could receive a marketing communication to give them a nudge. Now you're spending money at the point of maximum impact instead of mailing all your customers at the same time irrespective of latency data.

Latency Patterns

Another interesting thing you have noticed from the above latency table is that the latency decreased for each purchase up to the 4th purchase and then it drastically increased after that. If this is what my customer purchase latency table looked like, and assuming I had a lot of customers that only purchased once, I would have 3 questions to resolve.

Why does the latency take a drastic increase after the 4th purchase?
What can I do to reduce the latency between the 4th and 5th purchase?
How can I reduce the number of customers that just make a single purchase and then never come back?

Had I not created a latency table, I might have never even thought of the above questions. Now, having knowledge of my latency data, I might create a welcome package for new customers with an incentive to make a 2nd purchase. I would want to use a special promo code so I could track the effectiveness of the program to determine if it caused more one-time customers to make a second purchase.

I would also look at various marketing programs that would attempt to decrease the latency between the 4th and 5th purchase. I would try a larger incentive communicated at day 25 or 30. Again, I would make sure I had a way to measure the effectiveness of my promotion and would monitor any latency change between the 4th and 5th purchase.

Using Your Latency Data

I wish I could tell you exactly what you should do to change your latency data but marketing is not an exact science. You simply have to take your best shot and measure the results. If you are careful about monitoring & measuring, it won't take you very long to hit on an effective customer retention strategy.

If you are on a very strict budget, what would be the best way to spend your money if you had the above latency data? Well, for my money, I'd concentrate on lowering the latency between the 4th and 5th purchase. If you have the budget and time, however, you could send out a communication to each customer that passes the average latency trip point for each purchase level. With email communications, this is a very inexpensive proposition.

Start using the power of latency today in your own marketing program. It will help you decide when to spend your money and also to help you spend it at the point of maximum impact. It's the smartest way to design the perfect customer retention strategy.

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