Extreme Retention = Profit-centric Marketing

Published June 30-July 7, 2022

Marketing’s Wrong Turn

During my recent US visit, I met a friend who has been very active in marketing for a long time – as a professional and then as a professor. I browsed through some of her older books – a curated set of titles linked with her interests. Here is a glimpse of the collection:

What struck me was the focus on customer loyalty. This contrasts with the focus today on themes like digital advertising, performance marketing and social media marketing. Of course, the customer has changed – very digital and very targetable at an individual level. Yet, I could not help feeling that in the relationship that marketers are building for their brands with customers, something went wrong in the past decade.

Marketing’s wrong turn has been about an extreme focus on customer acquisition via adtech platforms. The likes of Google and Meta (Facebook) made it so easy to spend money targeting and acquiring new ‘customers’ that marketers went overboard on the future (new customers) and forgot about the present (existing customers). They have missed (or deliberately overlooked) the fact that half of their spending is being wasted on reacquisition and wrong acquisition. They have hurt their employers by ignoring retention and fostering loyalty, and instead focused on the shiny and new digital customers who click through and then sometimes vanish into a black hole.

Businesses are paying a huge price for this. When the revenue generated by the adtech platforms goes up 30-40% a year (about $50 billion in 2021), that money is coming from brands participating in an unwinnable race and cutting into their profitability pool. This may have been less of an issue in the past few years with free capital from investors hungry for topline growth. As a slowdown approaches and capital becomes scarce, the focus will necessarily have to shift to profits and free cash flows being the only oxygen for growth. CEOs will then be faced with two tough choices: cut employee costs or reduce marketing costs. This series is about helping leaders make the right decisions and correct marketing’s historical mistakes with the idea with a focus on what I call “extreme retention” (XR) is at the heart of “profit-centric marketing” (PCM) by eliminating the profit killers and bringing in the profit creators.

Marketing Mistakes

There have been three big blunders in digital marketing over the past decade.

First, marketers forgot the basics. Instead of building deep relationships with their existing customers, they have over-emphasised the importance of new customers. The former is hard work; the latter is easy. The combination of a digitising customer base with a demand from the company leadership to show growth led them to the doors of Google and Facebook who promised to deliver the new numbers each day that made the marketers look good to the CEOs, and CEOs delight the Board. After all, if you didn’t do it, then the competitor was also chasing that same customer. There was little thought given to lifetime value; it was all about the here and now. Get that next customer in by winning the auction for the click, and then get the transaction done with whatever discount is needed. Need more revenues? Simply, increase the ad spend. The side-effect: rising customer acquisition cost (CAC) which aided the bottomlines of the adtech majors at the cost of brand profits.

Second, even among the existing customers, marketers did not segment based on lifetime value. All customers were treated the same. Uniformity became the norm instead of differentiation. Push messages sent to everyone. Each visitor’s clickstream recorded and put into a giant ever-increasing database. Website and app pages look almost the same for everyone. Marketers forgot that every brand has a small cohort of customers who deliver disproportionate value and therefore should be treated differently. With every customer just a statistic and part of an aggregate, digital’s biggest strength of being able to target individuals was forgotten. Customers may be part of cohorts, but they are also individuals.

Third, marketers forgot their responsibility. Marketing is about being the profit driver for a business – the generator of demand that the innovation teams fulfill. Innovation can be about product, price or service. Marketing is about winning customers, ensuring they come back again and again, and in some of the future visits, they bring their friends along. Retention, repetition and referrals. This means thinking through the persuasion journey; it means ensuring satisfaction at each stage from pre-purchase to post-purchase. In the pre-digital world, it was not possible to know an individual customer. Now, it is – an identity (email ID, mobile number, device ID) can be linked to a clickstream and transaction history. Ironically, marketers let the likes of Google and Facebook use this data from their own site via the cookies but forget to leverage it for their own relationship building activities. This is because they are not thinking profits; they are simply focused on the transactions. It is like a startup founder being focused not on building a long-term business but just on the next round of funding.

These three errors – an addiction to new acquisition rather than retention and relationships, not providing differentiated experiences, and not thinking profitability – have meant that marketing departments have dug themselves into a deep hole. The first thing they need to do is to stop digging. For that, it is important to identify the profit killers in the business.

Profit Killers – 1

I have listed out several profit killers that many marketing departments are fostering. (Each profit killer can thus lead to a profit creator.)

Wrong Acquisition: Many paid clicks to either the website or for app installs are being wasted because the prospect either goes away without doing a transaction or deletes the app in a matter of days. This is money wasted. The question to ask: what percentage of ad spends results in a wrong acquisition?
Reacquisition: Many existing customers go dormant. These “inactives” could end up getting retargeted via the adtech platforms and thus getting reacquired. How much money is being spent on such reacquisitions?
Discounts: While discounts do a good job of persuading a person to do the first transaction, how many of these relationships do not move forward? Unless it’s a digital product, the likelihood is that the discount is a loss-leader to drive future purchases. But what if those purchases do not happen? How much money is being wasted on offers which do not lead to a lasting relationship?
Marketplace Fees: Marketplaces like Amazon are a reality. They have the traffic and they lead to product discovery. But they are also profit suckers because they deny the brand the ability to build a direct relationship with customers. As such, it is important for marketers to build their own direct traffic. Marketplaces also have the habit of creating their own branded products to compete in various categories (case in point: AmazonBasics – everything from USB cables to batteries to mouse to safes to tripods to vacuum cleaners to table lamps to notebooks .., and on and on it goes).
Missing Hotline: When 10-20% of the push messages (emails, SMSes, push notifications) are opened, it means that 80-90% are ignoring the brand communication. This increases the cost of bringing customers back to the properties (website, app) for repeat transactions. What will it take to solve the attention recession problem and double or treble the engagement rates?
Email IDs Collection: Almost every digital user has an email address and therefore an inbox. Many app-first companies don’t even ask for an email address at sign-up time. As a result, if there is an uninstall, they have no second channel to go back and engage with the person who had downloaded (and who was probably acquired via a paid marketing program). What is the extent of waste because of this mistake?
Multi-channel Messaging: Brands send us the same message on multiple channels: email, SMS, PN or WhatsApp. Why? Other than the push notification, every other channel costs money. All it does is irritate the recipient (customer!) who then gets trained to ignore brand communication. Why not focus on the channel that the customer prefers and just send a single message first? Only if that message is unread or ignored should a second channel be used.
In-mail Engagement: New technologies like AMP for Email (from Google) allow for interactivity within the email. No clickthroughs and no landing pages needed! This can increase engagement. Why are marketers not using this? Every missed engagement opportunity is a profit killer.

Profit Killers – 2

Continuing with the list of profit killers:

Zero-party Data: How many times have marketers asked us for our personal info? Why not? The more info they can get on us, the better they can tailor the product/service to us? Every email could be a way to ask us a question about our interests and preferences.
Better Search: How many times have we searched something on a site and been told our search query did not return any results – and then we find the item we are looking for with a different set of terms or via browsing the pages? Every miss is a lost sale possibility and therefore a profit killer.
Timely Nudges: Contextual walkthroughs can be very helpful in driving transactions. For example, a prepaid telecom service customer could be nudged to renew a few days before the expiry period. How many marketers insert nudges in customer journeys to smoothen the way to a transaction?
Post-purchase Messaging: How many brands engage with us after we make a purchase? They could tell us the new features of the product we just bought, how to make the best use of it, and so on. This is how branding – and a hotline to the customer – gets established.
Right Segmentation: How are Best Customers identified? There are many ways of doing the CLV (customer lifetime value) calculation wrong. Do marketers even realise there is a power law of marketing – 20% customers, 60% revenues, 200% profits? Not creating differentiated experiences for Best Customers can lead to their churn, which is a sure profit killer.
Service Response Times: I recently waited 45 minutes to get a response from a simple query on a US airline website. I was not a Best Customer, agreed. But I was still a paying customer – and perhaps a future Best Customer. The phone wait time moved to a chatbox makes no sense. Could a chatbot have helped?
Reactivation, not Reacquisition: What does it take to reactivate a dormant customer rather than spending 10-100 times more targeting them via the adtech platforms?
Personalisation: How many sites leverage the customer data that they have to provide 1:1 recommendations? Why not? Isn’t someone thinking profits?
AI and Learning: AI engines have become very good to help augment marketer actions. Predictive segments, Churn prediction, subject-line generation, send-time optimisation, identifying next best action – martech platforms with good AI engines can do all this and more. Are marketers using the full potential of these platforms?
Measuring NRR: Are marketers tracking the growth in revenue from last year’s customers? Is this number – NRR, or net revenue retention – greater than 100%?
Referrals: Are marketers prodding their Best Customers to bring in their friends and family, instead of rolling out run-of-the-mill programs and then worrying about fraud?
New like Best: Are marketers using the lookalike model of the Best Customers to target new acquisition, instead of dumping the info about all customers on the adtech platforms?

Behind each question lurks a profit killer – and the right answer leads to a profit creator. This is what marketers should be discussing and doing – rather than dumping money on the adtech platforms. Most brands have an 80:20 or 90:10 in adtech:martech spending. Only by rebalancing this to a more equitable 50:50 can they accelerate their journey on the path to profitability.

Making It Happen

This headline from early April in the Wall Street Journal caught my attention:

The story adds: ““The biggest difference this time is we are loving those who love us,” [JC Penney CEO] Mr. Rosen said, adding that “we need to give them more opportunity to come back and find things they love.””

This is a point echoed by Fred Reichheld, the creator of the Net Promoter System: “Executives allocate time and financial resources in support of treating customers well, so that they come back for more and bring their friends.”

The common theme: make sure customers come back for more and bring their friends. Therein lies the secret to profit-centric marketing. And to accomplish it, what is needed is what I call “extreme retention” (XR). Bridging the two needs a set of tokens: Mu, as rewards for attention and data, and the XRT (eXtreme Retention Token), which opens a gateway to differentiated experiences for the Best Customers. The mantra: Better Experiences for Better Customers.

Here is how there are all connected:

Conventional retention thinking equalises data collection and experiences for all customers. Extreme Retention uses CLV to create a new SBU for the Best Customers. (Think: Velvet Rope Marketing.)
Conventional retention thinking becomes too much about the features of martech platforms. Extreme Retention flips the focus to a new set of parameters to maximise engagement and excitement with Best Customers: gamification, asset appreciation and loyalty. (More on this soon.)
Conventional retention thinking leads to generic loyalty programs with dollars and cents, points, and tiers. Extreme Retention is about Loyalty 2.0 – data and time, experiences and differentiation. Loyalty 2.0 is about the upstream of transactions with a focus on attention, engagement, habit creation, streaks, stickiness, and zero-party data, with “atomic rewards” to incentivise and nudge behaviour of the Best Customers.

I have covered some of these themes in the past:

Extreme Retention builds on the blockchain to ensure complete transparency. The Mu token rewards attention and data, with the marketer in complete control on who to incentivise. The XRT can be thought of as an NFT which opens a world of privileged experiences for the Best Customers – so they can keep coming back for more and bring their friends, thus maximising their category spend with the brand. Extreme Retention is about replacing profit killers with profit creators. It provides a roadmap for marketers to reimagine marketing for the Web3/Metaverse Era, and position themselves not just as CMOs but as Chief Profitability Officers, a title which will be much in demand during the coming slowdown and likely recession.

The Story

Here is a summary of the key points we have discussed:

B2C/D2C Businesses are hurting with rising CAC, increasing discounts, attention recession and data poverty
All these are driving them to keep spending increasingly larger parts of their marketing budgets on adtech (new acquisition)
Half of the money being spent on adtech is being wasted (“AdWaste”) because of reacquisition (of inactive customers) and wrong acquisition (of customers who churn quickly)
The focus on adtech has resulted in many profit killers
These spends and the focus on growth-at-all-costs is hurting profitability
What businesses need is a framework for profit-centric marketing, with profit creators
This can only come from existing customers – combining retention, repetition, referrals, reactivation (as opposed to reacquisition) and replenishment (targeted new acquisition)
This 5R focus needs the 4P framework: pipes, partitioning, properties, and prospecting
Email 2.0 (AMP, Ems, Atomic Rewards, Hooked Score and Progency) and Loyalty 2.0 (tokens for attention and data) are the building blocks for profit-centric marketing
Martech platforms help businesses with relationship building with their existing customers
Existing martech platforms tend to be focused more on features than on outcomes
They do not factor in the power law of marketing: 20% customers generate 60% of revenue and deliver 200% of profits
What marketers need to do is to therefore go beyond retention (of all) to extreme retention (of few)
eXtreme Retention (XR) needs a new SBU for Best customers to empower marketers to manage the upstream of transactions with a loyalty program which combines gamification, asset appreciation and tradability, thus enabling the creation of differentiated experiences
In short: better experiences for better customers
XR is the key to growing revenues and profits from Best customers because these customers stay longer (higher CLV), spend more with the brand, and bring in their network (family and friends) who are also more likely to be future Best customers
XR needs two tokens: a data-time token (Mu) to incentivise micro-actions by customers that are not directly connected to transactions, and an XR Token (XRT) which opens doors to a world of royalty (going beyond loyalty) for the Best customers
The best moat in a business is extreme retention: when existing customers don’t switch, keep increasing their spends with the business each year, and bring in others like them leading to high “earned growth”
The XR mindset, implemented via Mu and XRT, enables the creation of the moat, and therefore profits – leading to exponential, forever profitable growth
This is the transformation needed in marketing – from growth alone to sustainable profitable growth, from adtech to martech, from all customers to Best customers, from retention to extreme retention, and from a transaction-only focus to the upstream
This transformation will need the third generation of martech platforms: the first generation was about point solutions and the second generation was about full-stack platforms. The third generation will be about platforms which are Web3 powered and enable the tokenisation that marketers need to make XR (and therefore profit-centric marketing) a reality.

Imagine

Let us imagine how our lives as customers will be different in the XR world.

I go to the apparel ecommerce store. It recognises me as a Best customer based on their CLV analysis of my history. I am offered a different website – completely customised to my preferences. I am offered a preview of the season’s newest collections – ahead of everyone else. I can order what I want and pay for it only if I decide to keep the item. I have access to a tailor should I wish to get any alternations done – all I have to do is to show my XRT (an NFT from the brand which identifies me as a Best customer) on my mobile. I also get prioritised delivery of items. I am also invited to exclusive events – my XRT is the entry pass.

I go to my favourite OTT channel. It knows I am a Best customer based on the time I have spent with them and the referrals I have made. It shows me that there is a new series that is available exclusively for XRT holders like me – three days ahead of general release. I can also invite my friends to watch it – bragging rights to elevate my social status! There is also a Zoom session with the director of the series where I have been invited. I also earn Mu based on the time I spend watching the series.

I go to the nearby electronics store looking to upgrade my phone. At the entrance, I scan the brand XRT and I am immediately identified as a Best customer. The store manager walks up to me, welcomes me, and immediately connects me to the best salesperson who can guide me through my purchase. I don’t have to wait in line at the checkout counter. All in all, a delightful experience which makes me want to come back for my next purchase.

I have just got an alert from the multiplex near my house offering me pre-reserved three seats for the new Disney movie releasing on Friday – my favourite seats (second last row, aisle) and favourite show time (Saturday evening). I have a couple hours to decide if I want to decline. I can also invite as many friends as I want in this two-hour window. When I arrive and scan my XRT, I am asked about our food order and what time I would like it delivered. At any point during the show, I can simply open up the chat window on the app should I need anything.

These are just a few examples of how experiences can be enhanced for Best customers – driving greater loyalty and more repeat business. Airlines do this very well with their tiered loyalty programs. Every brand should be able to: the XRT enables offline stores to bring that same level of personalisation and elevated experience that their Best customers deserve.

Enablers

There are six enablers that marketers will need to bring this new world to life: Mu token, brand XRT, third-gen martech platform, Progency, Insights team and Rebudgeting.

Mu Token: This is a pan-brand token offered by a DAO (decentralised autonomous organization). Its purpose is to incentivise customers to share personal data and spend more time. Marketers can use Mu to nudge customers to do the actions they want. The brand controls who to give Mu and how many Mu to give. It is pan-brand because it is not possible for a single brand to make it attractive for customers from an earnings perspective. The DAO manages the marketplace and exchange. There is a graded increase encoded in rules of the total Mu in circulation – thus enabling some appreciation in value over time. Mu can be traded (unlike loyalty points).

Brand XRT (eXtreme Retention Token): This is a non-fungible token (NFT) specific to a brand. It is stored in a mobile wallet and cannot be transferred or traded. It uniquely identifies the specific customer and bestows rights and privileges for fostering differentiated and exclusive experiences.

Third-gen Martech platform: This platform adds support for the Mu token and Brand XRT. It also enables brands to create a separate SBU and differentiated experiences for Best customers. In fact, the CLV algorithm proactively identifies the Best customers. It is AI-first thus freeing the marketer from many daily chores of campaign management. Over time, the platform will also need to help marketers with the virtual assets – for example, land bought in metaverse platforms.

Progency: This is a new type of agency which combines creative, data and software skillsets to work as an extension of the brand marketing department. Part of its compensation is linked to outcomes. It is Web3-native in the sense that it understands the world of crypto, blockchain, NFT and the metaverse, and works to guide the brand into the new era because that is where tomorrow’s customers are to be found.

Insights Team: This is a team that focuses on customer and competitive research. With consumer tastes changing rapidly and with technology evolving continuously, brands need the equivalent of a marketing R&D team – which can imagine the future, run focus groups, conduct experiments and guide the other teams in future directions. This cannot be outsourced because of the pace of change and the speed needed for decisions.

Rebudgeting: Marketers will need to rebalance their budgets and split them squally between the Best customers, other existing customers (Rest and Test), and future customers (Next). This will be a big shift from the 80:16:4 split today – with 80% going for Next customers, and the rest of the spend split equally among all existing customers, thus leaving just 20% of 20% (=4%) for Best customers.

What the marketer will need to do internally is to align different departments to envision newer and better experiences for the Best customers. Adtech (new acquisition) will still continue but with lower focus and reduced budgets. The mix of new tech, external help and internal teams will prepare the CMO and the brand for tomorrow’s world – where retention trumps acquisition, where profitability trumps money-guzzling growth, where experience differentiation is as important as product, choice and convenience. This is the transformation marketing needs for the new world of extreme retention and profit-centric marketing.

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