I have been thinking about a conversation I had recently.  I was talking to someone from a prestigious Boston cultural organization about her subscriber base and the catch 22 they are facing.  The subscriber base is aging so the organization needs to bring in new, younger subscribers.  However, younger subscribers do not like the repertoire favored by the existing subscriber base.  She described a challenge that companies face all the time.  How do you acquire new customers while retaining loyal customers?

In this difficult economic environment, it is hard not to focus on protecting and defending your most loyal customers. They represent the life blood of your company. However, they will not be there forever. You need to balance acquisition and retention efforts.

In the case of the cultural organization, I think she has at least three options:

1. Focus on the loyal customers for now. Once the economic climate improves and budgets ease, begin courting high potential prospects. For example, a local opera company performed Carmen on the Boston Common and used the opportunity to collect lead information from attendees. In this case, they collected information on cards distributed before the performance and then sent a targeted follow up mailing about their upcoming season. 
2. Create a new sub-brand. The organization could develop a sub-brand that would leverage their considerable name recognition and reputation. For example, Boston Modern Orchestra Project (BMOP) has concerts at the Jordan Hall in Boston as well as concerts some Tuesday nights at Club Café. They may play Elliot Carter at both types of venue but the club concerts are in a more intimate and less intimidating space. I imagine that they attract a different crowd as a result - probably younger and less well-versed in classical music. I haven’t yet made it to a club concert but the next one is February 3! By providing an alternate venue and experience, BMOP caters to their current subscribers and reaches out to new customers who will become future subscribers.
3. Try to please to both segments. It can be hard to meet the needs of both new and loyal customers. James Levine caused a stir in Boston by including new and contemporary compositions with traditional stalwarts of the repertoire at the Boston Symphony Orchestra (BSO). However, the BSO did not give up. A new program provides $20 tickets for those under 40; it is another innovative way to bring a younger demographic to the symphony.

These are my thoughts. Is there anything you would suggest?

Tangyslice had a recent post about customer retention metrics.  To his list, I would add lifetime value.  There are many ways to calculate lifetime value but let me tell you about one way I have calculated it.

A cellular phone company was losing customers due to churn and wanted help to retain their most profitable ones.  In other words, they wanted to know the future value of their customers.  With a lifetime value model, the company could increase ROI through targeted retention and provide one-to-one marketing.

In the cellular phone industry, most customers sign up for two year contracts.  However, some customers default on their contract and others continue their service even when the contract ends.   Thus, the lifetime value model in this example consists of two parts: 

1. survival analysis which predicts survival probability, the likelihood that a customer will remain a customer
2. financial data that include revenue and costs used to determine future customer profit

The first step was estimating the tenure of each customer.   A proportional hazards model or baseline hazards model can be used to estimate tenure.  Once the tenure is determined, the next step is estimating the future value based on past average monthly spending by the customer and the cellular phone company’s costs.

The formula calculates the discounted profit.  In the calculation above, i= the cost of capital and the terminal value is an estimate of the revenue beyond the 36th month of tenure. 

Does this bring back nightmares from Finance and calculating the discounted present value  of cash flow?  The same advice applies.   Be very careful how you calculate the terminal value because it can account for a large percentage of a customer’s estimated value.