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Using Latency to Improve Customer Retention

Written by: Corte Swearingen

Article Overview: Latency is simply the average amount of time between customer transactions. By monitoring purchase latencies, you can reduce your marketing expenses while increasing your revenue and customer retention rate.

Using Latency to Improve Customer Retention

If you record the date of every customer transaction in your database, you can use the power of Latency to help improve your customer retention.

Latency is simply the average amount of time between customer transactions. You’ll typically find the Latency between the 1st and 2nd purchase to be different from the 2nd & 3rd purchase, the 3rd & 4th purchase and so on.

For example, if you own a retail business and find that the average time between the 1st and 2nd purchase for all your customers is 3 weeks, anyone taking longer than 3 weeks to make their 2nd purchase is deviating from the average customer behavior.

If you send a promotional communication to customers that have just crossed over this "2nd purchase latency" period, you have a very good chance of tipping these customers into making that all important 2nd purchase. This is a smart way of building a customer retention strategy.

Of course, not everyone will respond to a 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 to the right customer at the right time.

Start Measuring Your Customer Latencies
So, what’s the best way to start promoting to your customers based on Latency?

To keep things simple, begin by calculating the average time between the 1st & 2nd purchase of all your customers together. The, calculate the Latency between the 2nd & 3rd purchase and so on. Here's an example of what a latency table might look like.

Transaction & Latencies
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

The first thing you may notice is that you have a lot of customers that purchase from you once and then never buy again. You may also find out that you don’t have a lot of 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 if you don't know the latency characteristics of your customers.

Looking at the above table, we can say that any customer that passes the average number of days for a particular transaction, and does not make a purchase, is deviating from the average customer behavior. Sending them a promotion right after a particular latency period passes is smart marketing. It’s sending the right promotion to the right customer at the right time.

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.

1. Why does the latency take a drastic increase after the 4th purchase?

2. What can I do to reduce the latency between the 4th and 5th purchase?

3. 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 also look at ways I might decrease the latency between the 4th and 5th purchase. Perhaps a larger incentive communicated at day 25 or 30.

Another advantage to using Latency data in your marketing program is that it will tell you the best time to communicate with your customers. Do you send the same marketing communication piece to all your customers regardless of where they are in the purchase cycle? Using Latency, you only promote to the customers that pass their Latency periods, allowing you to only spend when you need to.

I recommend you take a little time to monitor your customer purchase latencies. It's the smartest and most effective way to reduce your spending while increasing your profits and customer retention.

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Article Tags: amount of time, customer behavior, customer retention strategy, customer transaction, customer transactions, direct marketing, good chance, latency, retail business, right time



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