Beware of Retention Rate Ideas
By N. Ramasubramani

Published in DM Direct Newsletter

You have just finished a major customer acquisition drive, business is growing and your customer retention rate is pretty high. You could not have asked for anything better, right? Think again. Are you sitting on a load of customer goodwill? Or is your customer retention rate creating an illusion of strong customer loyalty? You must be thinking I am crazy. Whoever heard of customer retention rate creating an illusion of loyalty? Every book on marketing talks about the invincibility of retention rate, right? Tomes have been written on the right way to calculate the retention rate to indicate customer loyalty accurately. Am I indulging in some brinkmanship when I urge you to "beware the perils of retention rate?" Not really, I have a pretty simple explanation for my rather sensational submission.

Retention rate is a very good indicator of repeat buying behavior and is a fairly good indicator of future behavior. However, my submission is this: retention rate is a good indicator - not of loyalty but of the lack of it; in other words, a low retention rate can tell you that your customers are not loyal to you, but a high retention rate does not necessarily indicate a strong loyalty. Sounds like a case of "heads I win-tails you lose?" Too bad, but that is how it works. Is it pointless to have a high retention rate? Should we bid goodbye to retention rate as an indicator of loyalty? To answer these questions we must first consider a different set of questions: Is the customer staying with you out of his own choice? Or is he exhibiting passive loyalty?

Passive loyalty or inertia loyalty occurs due to a variety of reasons and under a number of different scenarios where the customer is exhibiting repeat buying behavior - not out of choice but because he is forced to do. In such a scenario, retention rate could be really misleading as an indicator of future potential for business. What are the cases of passive loyalty?

Situations of quasi-monopoly: Where there is only a single shop in a location and you have to buy your products there. Good examples are the lonely shops in picnic spots which charge you 300 percent markup on any product. Other examples include forced-choice situations such as razor blades for your safety razor or even cases where entire shops are sponsored by brands.

Habitual buying: When you buy your cigarettes form the vendor next to the railway station, you do so because it is convenient. Not because you are loyal to him! Similarly when you travel by the same bus every day. I am sure the conductor of the bus is enjoying a high retention rate.

Risk minimization: This is typical of products which you buy on someone's recommendation, such as medicine. You are using a brand of medicine because you are afraid of changing to another brand. Financial investments are another category that evokes such "loyalty."

Switching hassles: You would like to switch brands but you feel the cost of switching is way too high and that the benefits are not high enough. A typical example is your e-mail address. How many times have you thought of changing your provider and given the idea up because it involves informing too many people? Or you wanted to change your mobile service provider and did not have the courage because too many people had your mobile number and it would be too much of a hassle?

Lack of a decent alternative: Think about it, when you use the postal service or water utility, are you doing so out of volitional loyalty? Often loyalty is forced upon you because there may not be an alternative. And then loyalty is not loyalty it is slavery (Wouldn't you say all those who stood by the communist regimes were exhibiting loyal behavior?)

In each of the above cases, the retention rate will tell us that the customers are highly loyal to the brand and that going by their past behavior, they are likely to buy the brand again in the future. But the truth is that the customer is there because he does not have a choice. Now, would you call that loyalty? At the first opportunity he gets, he is going to walk out, leaving you with your carefully calculated indices and metrics.

Am I suggesting that we bury retention rate? Far from that. Retention rate as a measure of the tendency to defect is a very useful tool and should be used as such. But if you want to measure the true loyalty or volitional loyalty of a customer, don't put your money on retention rate. Perhaps the right solution would be to use it in conjunction with an opportunity-to-switch index. How many brands are there which are equivalent to your brand? How competitively are they priced? How well are they distributed? The opportunity to switch will vary as a function of these variables. And it is the opportunity to switch in combination with the retention rate that can tell you whether your customers are really loyal or just biding their time.

N. Ramasubramani (Ram) is a practicing loyalty manager from India. He works for Edenred Pte Ltd and has more than 20 years of experience in marketing, advertising, brand building, direct marketing and online brand building. You can contact Ram at ram_n@surfgold.com.