When a customer buys from you six times a year, there may be very little pattern to the frequency. That makes a customer defection harder to predict in B2B compared with B2C.
In this conversation, Wholesale Change hosts Ian Heller and Jonathan Bein explain how distributors can spot customer-churn risks sooner to respond before customers have time to defect.
Ian Heller: When it comes to customer churn, the challenges that distributors face vs. what consumer marketers face are very different. For example, a cell phone service provider like Verizon has it much easier than a distributor.
Jonathan Bein: Right. You have a contract with Verizon month-to-month. They’ll look at each month and the probability of their customers churning or defecting. They’ll rank their customers from one to 80 million, and they may take the top 3% or 4% of customers and do some type of intervention or retention move.
They’ve developed science around predicting churn and figuring out the right intervention. But, this is a very different world than distribution. How do we know when somebody has churned or defected in distribution?
Heller: In B2B, it’s harder to see defection risk. With a contractual subscription, you get the same amount of money every month for a long period of time. It’s easy to see a change. But, if you get a customer that buys from you six times a year, and there’s very little pattern to the frequency, that’s a much harder thing to predict.
Bein: Another contrast with the B2C world is that other factors besides purchasing are used to predict defection. For example, if we use the cell phone scenario again, a company might notice that your quality of service is not good or that you’ve made a number of service calls recently and look at that to predict defection. Whereas in distribution, companies are almost entirely looking at transactions. We don’t have a good way of tracking service incidents with our distribution customers.
In B2C, when there’s a problem, you have business, and then it drops off a cliff. It goes from whatever the cash flow or margin is to zero instantaneously. In distribution, you tend to see a more gradual decrease. For example, a customer might abandon purchasing a certain product category from you or buy less of that category.
So as you start to think about understanding churn in distribution, look at the macro, “Are they still buying from me at all?” as well as the micro. For example, if I’ve got 10 to 20 product categories at the top of my product taxonomy, am I noticing significant changes downward or upward in the purchase of those categories by a given customer?
Heller: Another thing I see with distributor customers who defect is that they don’t think of themselves as having defected. Every time they need that air compressor that wears out in the back of their service truck, they’ll come to you. But that just so happens to be every two years. So there’s that notion that not only do you segment customers, but they segment and pigeonhole you when they don’t know what you carry.
There are three formulas related to customer lifetime value: cost of acquisition, customer lifetime value and the power of 1%.
Bein: Cost of acquisition is not well understood in the distribution world.
A simple way to think about cost of acquisition is: What is the number of first-time accounts you have in one year, and what is the cost of prospecting? Ask yourself what marketing is spending on prospecting; that cost over the number of first-time accounts is cost of acquisition. This will be at the single account level. If you’re looking at the company level, you need to multiply this by the number of accounts and look at the margin dollars again in one year.
Let’s say you have a $10,000-a-year client with a 25% margin. That margin is one key input to the customer’s lifetime value. Churn rate is another factor. For example, let’s say you have a 25% churn rate; that means you’ll turn over your entire customer base every four years and lose 25% per year.
Customer retention has the power to keep on giving exponentially. Going up 1% in customer retention will generate a 6% higher lifetime customer value. In most cases, gaining a point of retention is better than gaining a point of margin increase. There are a lot of things you could do to increase the margin flow that you’re getting, but the most powerful lever is retention.
Heller: Several months ago, I spoke at a conference and had about 150 people in my breakout session. I asked, “How many of you know how many customers you lost last year?” Twenty hands went up. Then I asked, “For those who still have your hands up, how many have a goal for the number of customers you’ll lose this year?” I would say at least half of them put their hands down. Then I asked, “How many of you have somebody who is specifically responsible for hitting the number of lost customers this year?” Only one or two hands were still up.
Every sales rep, district manager, regional manager, CFO or CEO has a margin goal. But, although retention is more powerful in most cases, there are no goals around that in many companies. Distributors are very comfortable with income statements because everyone understands them. However, retention numbers are harder to calculate.
Bein: B2C companies really understand the cost of customer acquisition. But, there’s a phenomenon of distributors being unwilling to invest in marketing. They don’t think about customer lifetime value or the cost of customer acquisition.
It’s really important not to view these things as one-size-fits-all. You need to think differently about churn for the top 10% of customers than for the next 10% or the bottom 80%. I would put these three into separate bins.
Heller: So, what do you do differently for the top versus the bottom? You can react differently to big customers who look like they are exhibiting defection behavior versus small customers. In other words, your biggest customer might get a sales rep. The next one down might get a telephone-based sales rep. Then, the customer below that might have somebody call from the branch.
One way to improve retention is to send direct mail or emails. Some people say they don’t want to send offers to their biggest customers because they already get much bigger discounts, and everything in the offer is overpriced for them. But, although these customers get much better deals, the order of magnitude still works for them. Your goal is to educate them about what you carry. You’ve got to break them out of their box and expand their impression of you. You can do that by constantly hitting them with offers for products they didn’t know you carried.
For years I have battled the notion that you shouldn’t price things. I was just in a distributor branch two weeks ago that didn’t have prices on anything. I asked why and they said their prices were higher than what most people received, and they didn’t want to discourage them from making a purchase. I told them that what discourages them from making a purchase is the potential embarrassment of taking something to the counter, finding out it’s more than they want to pay for, and then having to carry it back.
Instead, you can price everything on displays and then have signs that say, “Contractor pricing available.” Then they’ll know it isn’t their price; it’s just the asking price. The same is true in catalogs and websites. I think you should price everything.
Bein: What other things can we do to improve retention and customer lifetime value?
Heller: The No. 1 thing is offer frequency. There’s a correlation between how frequently you put offers in front of customers and how frequently they buy from you. They can even be email or print offers. An email is much less valuable than a sales call, but it’s 100% better than nothing.
As you raise frequency, you don’t want them to unsubscribe. This speaks to relevance. High relevance builds more tolerance to offer frequency. For example, my tolerance for stuff that’s not relevant to me is very low, while my tolerance for relevant things is very high. The more you can segment your audience and offers, the more tolerance you’ll have for order and offer frequency.
Another aspect of improving retention is onboarding. Onboarding is a big deal. When someone buys from you for the first time, you should treat it as a celebration and have a welcome party for them. Even if it’s just a welcome to the club kit, thank your customer for their first purchase.
Bein: First-time buyers are likely to churn until they get into a repeat purchasing pattern. When you look at customer data, you’ll probably find that 15% to 25% of the folks who have bought from you in the last year are one-time buyers.
What else can we do?
Heller: You need to do your own data analysis. Understand the economics around customer acquisition and retention and do the math. It doesn’t have to be perfect, but the fact that it’s hard means that if you do it, you’ll have an advantage over your competitors who won’t.
Then, set some goals. What are your goals for new customers? What are your goals for lost customers? Have basic strategies to detect when someone exhibits churn behavior and have the mechanisms to respond. This can even be an email or wellness check mentioning that you haven’t heard from them in a while and to let you know if they have a complaint.
Have basic measurements and a response metric in place and set goals with someone responsible for them. You don’t have to get into more advanced things right now to be ahead; you just have to be better than your competitors.
Watch the full conversation: