Customer Relationship Management:
Concepts and Tools
CUSTOMER RELATIONSHIP MANAGEMENT:
CONCEPTS AND TOOLS
Chapter 9
Managing The Customer Lifecycle:
Customer Retention And Development
Customer Relationship Management:
Concepts and Tools
3 stages of the customer lifecycle
1. Customer acquisition
2. Customer retention
aims to keep a high proportion of current customers
by reducing customer defections
3. Customer development
aims to increase the value of those retained
customers to the company
Customer Relationship Management:
Concepts and Tools
Contents of a customer retention plan
1. Which customers should be targeted for
retention?
2. What customer retention objectives should be
set?
3. What customer retention strategies will be
used?
4. How will the performance of the retention
plan be measured?
Customer Relationship Management:
Concepts and Tools
Measuring customer retention
 The number of customers doing business with
a firm at the end of a financial year expressed
as percentage of those who were active
customers at the beginning of the year
 However
 What is an active customer?
 Is a year always the appropriate time frame?
Customer Relationship Management:
Concepts and Tools
The appropriate time frame
 Depends on re-purchase cycle found in the
industry.
 Insurance policies are renewed annually
 If the normal car replacement cycle is four years,
then retention rate is more meaningful if it is
measured over four years instead of twelve months
Customer Relationship Management:
Concepts and Tools
Three measures of customer retention
 Raw customer retention rate.
 the number of customers doing business with a firm at the
end of a trading period expressed as percentage of those
who were active customers at the beginning of the period.
 Sales-adjusted retention rate.
 the value of sales achieved from the retained customers
expressed as a percentage of the sales achieved from all
customers who were active at the beginning of the period.
 Profit-adjusted retention rate.
 the profit earned from the retained customers expressed
as a percentage of the profit earned from all customers
who were active at the beginning of the period.
Customer Relationship Management:
Concepts and Tools
Retention issues
 Retention measures should be made with an
understanding of customer profitability issues
 The fundamental purpose of focussing CRM efforts on
customer retention is to ensure that the company
maintains relationships with strategically significant
customers.
 It may not be beneficial to maintain relationships with
all customers. Some are
 too costly to serve
 strategic switchers constantly in search of a better deal
 not strategically significant in roles such as benchmark,
door opener, inspiration or technology partner
Customer Relationship Management:
Concepts and Tools
The economic argument for customer retention
 Purchases grow as tenure grows
 Customer management costs fall over time
 Customer referrals grow
 Premium prices
 Customers who are satisfied in their relationship may
reward their suppliers by paying higher prices.
Customer Relationship Management:
Concepts and Tools
Which customers to retain?
 Strategically significant customers
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High life-time value customers
High volume customers
Benchmarks
Inspirations
Door openers
Technology partners
 But… these may also be attractive to your
competitors
Customer Relationship Management:
Concepts and Tools
Commitment and retention
 The level of commitment between your
customer and you will figure in the decision
about which customers to retain.
 If the customer is highly committed, i.e.
impervious to the appeals of competitors, you do not
need to invest so much in retention.
 If strategically significant customers are not
committed to you, you may want to invest
considerable sums in their retention
Customer Relationship Management:
Concepts and Tools
Why focus on newly acquired customers?
 New customers may have greater future lifetime value potential than longer tenure
customers.
 evidence suggests that retention rates rise over
time, so if defections can be prevented in the early
stages of a relationship, there will be a pay-off in
future revenue streams
Customer Relationship Management:
Concepts and Tools
Two basic strategies for customer retention
Negative and positive
customer retention strategies
 Create exit barriers
 Enforce the contract
 Extract switching
penalties
Customer Relationship Management:
Concepts and Tools
 Delight them
 Create added value
 Use sales promotions
 Create social and
structural bonds
 Earn the customer’s
trust
Customer Relationship Management:
Concepts and Tools
Positive customer retention strategy 1
 ‘Wow’ your customers by meeting and
exceeding their expectations
 Create customer delight
 Satisfaction plus one
 Do you understand customer expectations?
 Do you know which expectations are important?
 Do you know where the gaps are?
Customer Relationship Management:
Concepts and Tools
Positive customer retention strategies 2-5
2. Find ways to create additional value for
customers
 Reward (loyalty) programs
 Customise the offer
 Customer clubs
3. Sales promotions
4. Bonds
 Social and Structural
5. Commitment
Customer Relationship Management:
Concepts and Tools
Reward programs
 Co-op dividend > Green Shield Stamps
> American Airlines AAdvantage Card >
Nectar
 Card-based schemes have changed over time
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No identification – member’s name
Magnetic strip – chip-embedded
Solus – networked
Company-operated – third-party operated
Trivial reward – major reward (5%)
Customer Relationship Management:
Concepts and Tools
The Tesco Clubcard
 Tesco introduced its first loyalty program in 1995, called the ‘Clubcard’
 Enabled customers to accumulate points with each purchase that
could be used to obtain discounts off future purchases.
 The ‘Clubcard’ proved to be very successful.
 First, in attracting more customers to Tesco stores.
 Second, in capturing valuable information from customers with
every swipe of the card, which led to the creation of a powerful
database
 As a result of this initial success, 108 customer segments were
identified and specific offers were made to each
 high-value customers receive valet parking when they come to
shop and other special privileges.
 In 1996 Tesco introduced two further loyalty cards, a student card and
a card for mothers, with offers specifically targeted to each group’s
needs.
Customer Relationship Management:
Concepts and Tools
Five types of value from loyalty programs
1. cash value.
How much is the reward worth in cash compared to what
is spent to obtain it?
2. redemption value.
How wide a range of rewards is offered?
3. aspirational value.
How much does the customer want the reward?
4. relevance value.
How achievable are the rewards?
5. convenience value.
How easy is it to collect the credits and redeem them for
the reward?
Customer Relationship Management:
Concepts and Tools
Customize the offer: anything goes
People
Communication
Process
Logistics
Product/brand
Price
Location
Service
Customer Relationship Management:
Concepts and Tools
Customer Relationship Management:
Concepts and Tools
Customer Clubs
 Swatch the Club
 The Rolling Stones Fan Club
 Pampers Parenting Institute
 Casa Buitoni
 The Harley Owners Group
 Sainsbury’s Littleones Club
 The Volkswagen Club
Customer Relationship Management:
Concepts and Tools
Sales promotions to promote repeat purchasing
 In-pack or on-pack voucher
 Rebate or cash-back
 Free premium for continuous purchase
 Self-liquidating premium
 Collection schemes
Customer Relationship Management:
Concepts and Tools
Bonds
 Social
 Positive relationships
between individuals
 Empathy
 Responsiveness
 Reliability
 Leads to development
of trust and
commitment
 Structural
 Investments linking
customer and supplier
 Financial
 Legal
 Equity
 Technological
 Process
 Project
 Multi-product
Customer Relationship Management:
Concepts and Tools
Build customer commitment
 Create emotional attachment to your product,
brand or company
 Committed customers are
 Highly satisfied
 Believe in the superiority of your product, brand or
company
 Involved in your product, brand or company
 Resistant to competitive offers and have a strong
intention to re-buy
Customer Relationship Management:
Concepts and Tools
Three forms of commitment
 Instrumental
 customers are convinced that no other offer or
company could do a better job of meeting their
needs.
 Relational
 customer develops an emotional tie may be with an
individual person, a work group or the generalised
company as a whole
 Values-based
 customers’ values are aligned with those of the
company
Customer Relationship Management:
Concepts and Tools
Commitment to a low involvement product?
1. Product modification
 add some feature that is highly involving because it
connects to needs, values or interests
 detergents reformulated to become ‘green’
2. Product association
 associate the product with some involving issue or
context
 Buy Mobil and support our Olympians
3. Product repositioning
 Lucozade became a sports drink
 Häagen Dazs reinvented the ice cream market by
being adult and sexy
Customer Relationship Management:
Concepts and Tools
Values-based commitment
 Body Shop International
 John Lewis Partnership
 Harley Davidson
 Co-operative Bank
 Cochlear
 Virgin Group
 Holden
Customer Relationship Management:
Concepts and Tools
…. and then there’s negative commitment too
 Nestlé
 Infant formula in Africa
 Shell
 Brent Spar oil platform to be dumped in the North
sea
 Nike
 Employment practices have been criticised
Customer Relationship Management:
Concepts and Tools
Good corporate citizenship
1. Giving positive word-of-mouth
2. Offering advice on product design
3. Reporting dated or tired point of sale
4. Wearing your branded clothing
5. Taking part in corporate events
6. Participating in research
7. Policing other customers
8. Becoming a shareholder
9. Taking role in corporate governance
10.Recommending you as an employer
Customer Relationship Management:
Concepts and Tools
Context makes a difference to retention practices
 Number of competitors
 Corporate culture
 Channel configuration
 Purchasing practices
 Ownership expectations
 Ethical concerns
Customer Relationship Management:
Concepts and Tools
KPIs for customer retention programs
1. What is the raw customer retention rate?
2. What is the raw customer retention rate in each
customer segment?
3. What is the sales-adjusted retention rate?
4. What is the profit-adjusted retention rate?
5. What are the sales and profit adjusted retention rates
in each customer segment?
6. What is the cost of customer retention?
7. What is the share of wallet of the retained customers?
8. What is the customer churn rate per channel?
9. What is the cost-effectiveness of customer retention
tactics?
Customer Relationship Management:
Concepts and Tools
The role of research
1. Why are customers defecting?
2. Are there any lead indicators of impending
defection?
3. What can be done to address the root
causes?
Customer Relationship Management:
Concepts and Tools
Lead indicators of defection
 Reduced RFM scores
 Non-response to a carefully targeted offer
 Reduced satisfaction levels
 Dissatisfaction with complaint handling
 Reduced share of customer
 Inbound calls for technical information
 Late payment
 Querying an invoice
 Changed customer touch points
Customer Relationship Management:
Concepts and Tools
Core customer development strategies
 Up-sell
 Cross-sell
 Down-sell
 Reduce cost-to-serve
Attributes of CRM-enabled
customer development
1.
2.
3.
4.
5.
6.
Customer Relationship Management:
Concepts and Tools
Use of data-mining to identify opportunities
Customization
Channel integration
Integrated customer communication
Campaign management
Event-based marketing