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Recognizing the Real Estate Recency Trap

Dec. 1, 2014

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Gail Ayala Taylor, PhD, Scott A. Neslin, PhD, Kimberly D. Grantham, PhD, and Kimberly R. McNeil, PhD

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Research by Saber (2014) highlights the challenges facing residential real estate agencies as additional e-information becomes available to consumers. Saber outlines strategies for agents to emphasize the value of services they provide to their clients, and the importance of “keeping the agent’s name and good work in the mind of the client” even after the real estate transaction has concluded. Maintaining relationships with past customers, encouraging positive word-of-mouth/referrals, and repeat patronage can be crucial to ensuring firm profitability. The National Association of Realtors (2014) reports 35% of residential sales volume typically comes from past client referrals and 30% comes from repeat business from past clients. With 65% of a firm’s business being linked to past customers, firms need to maximize their contacts with past customers in order to stay top-of-mind when the opportunity for repeat purchase or positive word of mouth presents itself.

Managing Relationships

Effectively using customer data or database marketing can be a systematic way to improve customer relationships (Blattberg, Kim and Neslin 2008). This raises the questions of what types of data are most useful in the real estate industry and how that data may be used to maintain relationships with customers. “Recency” (the amount of time since last purchase), has been found by direct marketers to influence future purchase behaviors of customers (Blattberg et al. 2008). We suggest that real estate firms use this concept to guide their outreach to past customers.

A common finding is that the longer it has been since the customer has purchased from the firm, the less likely the customer is to purchase now (Rhee and McIntyre 2008; Bult and Wansbeek 1995; Bitran and Mondschein 1996; Fader, Hardie, and Lee 2005). As a result, there is a tendency to ignore customers who have not purchased in a long time. This can be problematic in the residential real estate world given the long time periods between home purchases. Emrath (2009) estimated that half of all people who purchased a new home were still in that home approximately 15 years after their initial purchase. Given these extended intervals between purchases, the likelihood of firms losing contact with prior customers is high. This puts firms in the position we define as a recency trap. The recency trap is when “… customers do not purchase in a given period, this increases their recency, which makes it less likely they will purchase in the next period, which in turn increases their recency, making them even less likely to purchase in the period after that, etc.” (Neslin, Taylor, Grantham & McNeil, 2013, p. 321). The recency trap results in customers drifting away from the firm, resulting in decreased revenue

The Recency Trap

A customer who has been out of touch with a firm for an extended period of time may appear to be an unlikely prospect. As a result, firms often ignore these customers by not communicating with them. But this only amplifies the recency trap. As time goes on, this process continues and eventually the customer’s chance of buying falls virtually to zero, basically resulting in the customer being lost to the company. They have slid down the curve shown in Figure 1, following the recency trap.

Figure 1

infographic charting Percentage who purchase versus recency

We observed the recency trap in a study we conducted in a meal preparation service environment. Figure 1 shows the purchase patterns for customers in our test establishment. As recency increased, the percentage who purchased decreased.

In the case of the company we studied, we found that the additional marketing expense associated with targeting customers who appeared to have lapsed from the firm would be a good investment. Our mathematical model was based on a thorough understanding of the effect of recency of purchase on likelihood to buy, and ability of marketing efforts to bring the high-recency customer back. It demonstrated that the company could increase customer value by hundreds of dollars per target customer if it allocated some of its marketing communications efforts to customers who had not purchased in a long time. The value of customers who would have been lost to the company was significant.

Applying these Concepts to Real Estate

We believe this concept is applicable in a real estate environment. In Figure 2, we graph the 25-year home migration data presented by Emrath (2009) and apply an exponential trend line to show the similarity of these purchase trends to the data we found in our study.

Figure 2

Graphic charting Percent moving within a year versis years since home purchased

We suggest that firms begin efforts to overcome the recency trap. The first step is to create a customer database. Given the nature of real estate transactions, it is necessary to expand the outcome variable from “purchase” to all potential revenue generating interactions (RGIs) at the individual customer level. These data points include purchase and referrals made to others. The next step is to plot the firm’s recency curve, i.e., graph the time since the most recent RGI versus the likelihood of a RGI in the current period (periods could be monthly, quarterly or yearly intervals). Step three involves segmenting customers based upon their position on the curve. During the final step, customized marketing messages based upon recency segment are developed and executed. For example, consider a letter from the agency leader thanking clients for past patronage, a congratulatory “anniversary in your home” card, a hello email from the selling agent, or simply a holiday greeting from all the caring professionals in your firm. These marketing interventions will ignite the awareness of the firm in the mind of past clients. The key point is to not ignore clients who have been out of touch for an extended period of time.

Conclusion

Recency is an important concept that can provide a road map to real estate professionals in their relationship management efforts. Firms should draw their recency curve based upon the amount of time since customers’ most recent RGI. Once this curve is drawn, customers can then be segmented and customized marketing messages delivered. The most important thing to remember about recency is not to give up too early on clients that have been out of touch. Or else they fall into the recency trap and they’re gone forever.

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Recommended Reading

Neslin, Scott A., Gail A. Taylor, Kimberly D. Grantham & Kimberly R. McNeil (2013), “Overcoming the 'Recency Trap' in Customer Relationship Management,” Journal of the Academy of Marketing Science, 41 (3) 320-337.

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References

Bitran, Gabriel R. & Susana V. Mondschein (1996), "Mailing Decisions in the Catalog Sales Industry," Management Science, 42(9), 1364-81.

Blattberg, Robert C., Byung-Do Kim, & Scott A. Neslin (2008), Database Marketing Analyzing & Managing Customers. New York: Springer.

Bult, Jan Roelf & Tom Wansbeek (1995), "Optimal Selection for Direct Mail," Marketing Science, 14 (4), 378-94.

Emrath, Paul (2009), “How Long Buyers Remain in Their Homes,” Special Studies, February 12. Available at https://www.nahb.org/generic.aspx?genericContentID=110770&channelID=311 HousingEconomics.com. Accessed 19 September 2014.

Fader, Peter S., Bruce G. S. Hardie, & Ka Lok Lee (2005), "RFM & CLV: Using Iso-Value Curves for Customer Base Analysis," Journal of Marketing Research, 42 (4), 415-30.

National Association of Realtors. (2014). Real Estate Firms Optimistic About Future of Industry [News Release]. Retrieved from https://www.realtor.org/news-releases/2014/10/real-estate-firms-optimistic-about-future-of-industry.

Saber, Jane Lee (2014), “How the Internet Can Impact Your Business & What to Do About It,” Keller Center Research Report, 7 (3), 22-26.

Rhee, Subom, & Shelby McIntyre (2008), “Including the Effects of Prior & Recent Contact Effort in a Customer Scoring Model for Database Marketing,” Journal of the Academy of Marketing Science, 36 (4), 538-551.

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About the Authors

Gail Ayala Taylor, PhD
Visiting Associate Professor of Management-Tuck School of Business,
Dartmouth College

Gail Ayala Taylor (PhD – Florida State University) is a visiting Associate Professor of Management at the Tuck School of Business at Dartmouth College. Her research interests include customer loyalty, service employee retention, and the effectiveness and impact of nontraditional promotion techniques. Her research has appeared in a variety of academic journals, including Journal of Retailing, The Journal of the Academy of Marketing Science, Health Marketing Quarterly, Psychology and Marketing, Journal of Services Marketing, International Journal of Research in Marketing, Cornell Quarterly,and a host of other scholarly publications. She is a contributing author for Service Quality in Hospitality Organizations and Advertising Research: The Internet, Consumer Behavior and Strategy. She has received several “Best Paper” awards and has been recognized as an outstanding Woman Leader as a recipient of the “Dux Femina Facti” award at the Tuck School of Business. Professor Taylor has taught extensively at the graduate, undergraduate and executive levels and in addition to her regular teaching and research responsibilities she is also a faculty director in Tuck’s Business Bridge program. She has worked with a multitude of large and small business owners to help them improve their productivity by focusing on improving their interactions with both their external and internal customers.

Scott A. Neslin, PhD
The Albert Wesley Frey Professor of Marketing-Tuck School of Business,
Dartmouth College

Scott A. Neslin (PhD - Sloan School of Management, Massachusetts Institute of Technology) is the Albert Wesley Frey Professor of Marketing at the Tuck School of Business, Dartmouth College. Professor Neslin’s expertise is in database marketing, sales promotion, and advertising. He has published on these and other topics in journals such as Marketing Science, Journal of Marketing Research, Management Science, Journal of Marketing, and Journal of Interactive Marketing. In the field of database marketing, he is co-author with Robert C. Blattberg and Byung-Do Kim of Database Marketing: Analyzing and Managing Customers (2008, Springer). He is also co-editor, with Kristof Coussement and Koen W. De Bock of Advanced Database Marketing (2013, Gower). He has applied predictive modeling to cross-selling, forecasting customer churn, and optimal customer management. He has analyzed issues in multichannel customer management including research shopping, customer channel migration, channel choice, and cross-channel effects of advertising. In the sales promotion area, he is co-author with Robert C. Blattberg of the book, Sales Promotion: Concepts, Methods, and Strategies (1990, Prentice-Hall), and author of the monograph Sales Promotion (2002, Marketing Science Institute). Professor Neslin is an Associate Editor for Marketing Science, and on the editorial boards of the Journal of Marketing Research, Journal of Marketing, Journal of Interactive Marketing, Journal of the Academy of Marketing Science, and Marketing Letters. He served as President of the INFORMS Society for Marketing Science (ISMS) and is an ISMS Fellow.

Kimberly D. Grantham, PhD
Senior Lecturer, University of Georgia

Kimberly Grantham (PhD – Duke University) is a Senior Lecturer at the University of Georgia in the Terry College of Business. Her research interests include service learning experiences, consumers’ use of word-of-mouth information, and factors that influence customer decisions in customer-enriched service environments. Dr. Grantham’s research has appeared in the Journal of the Academy of Marketing Science, Journal of Learning in Higher Education, Quality Assurance in Education, and the Asia Pacific Journal of Management. Dr. Grantham’s research has also been presented at numerous academic conferences including the American Marketing Association, Society for Marketing Advances, SCP Advertising and Consumer Psychology, Association for Consumer Research, and the Frontiers in Services conferences. She teaches Principles of Marketing both online and in traditional classroom settings. She also teaches Integrated Marketing Communications, Consumer Behavior, and Multicultural Marketing.

Kimberly R. McNeil, PhD
Associate Professor of Marketing, North Carolina A&T State University

Kimberly R. McNeil (PhD – Florida State University) is an Associate Professor of Marketing at North Carolina A&T State University. Her primary research interests include marketing issues in travel, leisure, and services, marketing education, and influences on consumer behavior. She has published in journals such as the Journal of the Academy of Marketing Science, Journal of Vacation Marketing, the Journal of Fashion Marketing and Management, Research in Higher Education Journal, and Journal of the Academy of Business Administration. Dr. McNeil teaches international marketing, consumer behavior, and principles of marketing. She actively engages in various initiatives in the business school. Previously, she successfully brought the Globalizing Business Schools program to the university, an initiative geared towards internationalizing business schools at historically black colleges and universities. Dr. McNeil is currently working on developing a leadership program for school of business students focused on professional development. She is a member various professional organizations including the American Marketing Association, Association for Consumer Research, and Marketing Management Association. Prior to joining the faculty at North Carolina A&T State University, she was a part-time instructor, research assistant and doctoral student at Florida State University.

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