This is one of the questions I always ask when I first sit down to review a business. On the face of it, this is a simple question, but why do so many businesses struggle to answer it? How would you answer it?

Firstly, it requires the business to have a definition of a customer. Secondly, it requires an understanding of the point when a customer ceases to be a customer. The answer will have a major impact on whether you grow customer lifetime value, web marketing return on investment (ROI) and business profitability. If you know the point when your customer makes a decision not to buy from you any more and becomes a lapsed customer, you have an opportunity to do something about it. As a marketer you could choose to:

  • ignore it (which would be silly)
  • persuade (or incentivise) the customer to buy again
  • or develop a customer contact strategy that maximises web marketing ROI

A definition of a customer

The definition I use is – a customer is someone:

  • who has bought a product or service from you
  • and is expected to buy again from you in the future

The first part of the definition is straightforward. Most companies have a list or database of customer purchases. The hard part is knowing whether or not they intend to buy again from you in the future. You might be aware that a small proportion of your customer base does not intend to buy again in the future. Some unhappy customers may have told you that they never intend to buy from you ever again. Sadly, some others may have died. But what about the rest? Are they all customers? At what point does a customer become a lapsed customer?

Why is this important?

Firstly, using the definition above is a good indicator of the health of your business. If you assume every customer is still a customer, then you are getting a false picture of the business by just adding on new customers each week or month. You need to take off lapsed customers to determine the net effect to identify whether your overall customer count is growing or reducing.

Secondly, it is generally the case that the cost of attracting a new customer is significantly more than the cost of keeping one. Developing marketing activities to prevent customers on the point of lapsing (or leaving or defecting) from lapsing usually results in a significant improvement in MROI.

The challenge is to identify who to market to and when, which brings us back to the central question, when is a customer about to lapse?

How to identify the potential lapse date?

Some businesses sell their products or services with a “known” product life cycle. Insurance is a good example where the customer buys cover for 12 months, so the annual renewal date becomes a key trigger for renewal activity to avoid the customer lapsing. Companies like the AA & RAC have very sophisticated renewal programmes & achieve very high renewal rates. The challenge for them is to identify which customers would naturally renew without any activity or marketing spend versus others that might need more of a nudge.

But what do you do if you run a restaurant. How do you know when a customer is at the point of lapsing?

Latency – a lifecycle metric to determine who to market to and when

The concept of latency identifies normal customer behaviour to set trigger points which are used to determine when to take action to increase customer value. First of all you need to calculate the average time between activities. The activities measured will depend on the business but could be between:

  • 1st purchase and 2nd purchase; 2nd purchase & 3rd purchase etc
  • 1st web site visit and 2nd; 2nd & 3rd etc
  • 1st stage of sales process & 2nd; 2nd & 3rd etc

So if the average interval (i.e. normal behaviour) between 1st and 2nd purchase is 60 days, then anyone who hasn’t made a 2nd purchase by 61 days of the 1st purchase is outside the norm and potentially about to lapse.  In this example the trigger point would be 60 days and should prompt some marketing activity e.g. email marketing to prevent lapsing.

Marketing activity in less than 60 days is unnecessary (and a waste of money) as they are still following normal behaviour. Every day beyond 60 days means they are more likely to become a lapsed customer and it will get harder (and usually more expensive) to get them to come back. So don’t delay.

What about businesses that don’t have “sophisticated customer databases”?

Latency can be simply applied to all businesses. Take a restaurant for example. They may use a diary to record bookings showing the customer name, date of booking, number of people. By transferring the data to a PC spreadsheet, it would be relatively easy to look over a 6 or 12 month period to identify the average interval between bookings.

They might find that the average interval between bookings is 35 days. They might also find out that 40% of customers have not booked for over 180 days which suggests they are lapsed customers and indicates a big problem. They use an interval of 35 days as a trigger to prompt marketing activity and send a postcard offering a free bottle of wine worth £7 to customers (not having booked for 35 days).The offer is valid for bookings made in the next 7 days to encourage an immediate response.

A disappointingly small number respond and book a meal. During the meal, at some point the staff mention “in a friendly way” that they have noticed the customer hasn’t been in for a while and ask why. A frequent response was that the customer was planning to book in a few weeks anyway and the wine voucher prompted them to come in sooner. And then the penny dropped. These customers tended to have young families. Could it be that customers with young families have a different cycle to customers that don’t have young families? On reviewing the data, it was possible to separate out young families by time of meal and booking of high chairs and sure enough customers with young families had an average interval of 60 days whilst customers without young children had an average interval of 18 days.

This analysis led to 2 different marketing campaigns: one to customers with young families who haven’t booked after 60 days and the other to customers without young families who haven’t booked after 18 days. They also experimented with different offers for the 2 groups to improve response. e.g. “The children eat free” would only be appropriate for one of the two customer segments.

Whatever your business make sure that you use these techniques to keep your customers and grow customer lifetime value