Managing the
Costumer Lifecycle:
Costumer Retention and Development
PRESENTED TO YOU BY GROUP 4
Chapter Objectives:
By the end of this chapter, you will understand:
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What is meant by the terms ‘customer retention’ and customer development’.
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The economics of customer relation.
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How to select which customers to target for retention.
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The distinction between positive and negative customer retention strategies.
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Several strategies for improving customer retention performance.
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Several strategies for growing customer value.
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CRM technologies that facilitate growth in customer value.
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Why and how customers are ‘sacked’.
WHAT IS CUSTOMER RETENTION?
-Customer retention is the
maintenance of contionuous
trading relationships with
customers over the long term.
CUSTOMER RETENTION
LOCATION OF CUSTOMER RELATED-DATA
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Product Silos
Channel Silos
Functional Silos
CUSTOMER RETENTION
THREE MEASURES OF CUSTOMER RETENTION:
1.
Raw customer retention rate- This is the number of customers doing
business with a firm at the end of a trading period expressed as a
percentage of those who were active customers at the beginning of
the period.
2.
Sales-adjusted retention rate- This is 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.
3.
Profit-adjusted retention rate- This is 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.
Managing customer retention or value retention?
Improving customer retention is an important objective for
many CRM strategies. Its definition and measurement
need to be sensitive to the sales, profitability and values
issue mentioned above. It is important to remember that
the fundamental purpose of focusing CRM efforts on
customer retention is to ensure that the company
maintains relationship with value-creating customers. It
may not be beneficial to maintain relationships with all
customers. Some may be too costly to serve. Others may
be strategic switchers constantly in search for a better
deal. These can be value-destroyers not-value creators.
ECONOMICS OF CUSTOMER RETENTION
There is a strong economic argument in favor of customer retention:
1 Increasing purchases as tenure grows. Over time customers come to know their suppliers. Providing the
relationship is satisfactory, trust grows whilst risk and uncertainty are reduced.
2 Lower customer management costs over time. The relationship start-up costs that are incurred when a
customer is acquired can be quite high. It may take several years for enough profit to be earned from the
relationship to recover those acquisition costs.
3 Customer referrals. Customers who willingly commit more of their purchases to a preferred supplier are
generally more satisfied than customers who do not. They are therefore more likely to utter positive word-ofmouth (WOM) and influence the beliefs, feelings and behaviors of others.
4 Premium prices. Customers who are satisfied in their relationship may reward their suppliers by paying
higher prices. There is strong empirical evidence linking customer satisfaction to willingness-to-pay.“
These conditions mean that retained customers are generally more profitable than newly acquired customers.
WHICH CUSTOMERS TO RETAIN?
Simply, the customers who have greatest strategic value to your company are prime
candidates for your retention efforts. These are the customers who have high CLV, or are otherwise
strategically significant as high-volume customers, benchmarks, inspirations or door opener.
You need to bear in mind that there may be a considerable cost of customer retention. Your
most valued customers are also likely to be very attractive to your competitors. If the costs of
retaining customers become too great, then they might lose their status as strategically
significant.
Another justification for focusing on recently acquired customers comes from research into
service failures. When customers experience service failure, they may before forgive if they have a
history of good service with the service provider.
In other words, customers who have been
recently acquired and let down are more likely to defect or reduce their spending than customers
who have a satisfactory history with supplier.
STRATEGIES FOR CUSTOMER RETENTION
Positive and Negative Retention Strategies
In the following sections we look at a number of positive customer retention strategies, including
creating customer delight, adding customer-perceived value, creating social and structural bonds,
and building customer engagement.
NEGATIVE CUSTOMER RETENTION STRATEGIES It impose high switching cost on customers,
discouraging their defection.
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In a B2C context, mortgage companies have commonly recruited new customers with
attractive discounted interest rates. When the honeymoon period is over, these customers
may want to switch to another provider, only to discover that they will be hit with early
redemption and exit penalties.
▪
In a B2B context, a customer may have agreed to purchase a given volume of raw materials at
a quoted price. Some way through the contract a lower cost suppliers makes a better offer. The
customer wants to switch but finds that there are penalty. The new supplier is unwilling to buy
customer out of the contract by paying their penalties.
POSITIVE CUSTOMER RETENTION STRATEGIES
In the following sections we look at a number of positive customer retention strategies,
including creating customer delight, adding customer-perceived value, creating social and
structural bonds, and building customer engagement.
Customer Delight-
it is a fundamental principle of modern customer management that
companies should understand customers, and then ensure their satisfaction and retention.
-Customer delight occurs when the customer’s perception of their experience of doing business
with you exceeds their expectation. In the formula terms:
CD=P>E
Where CD=customers delight, P=perception of performance, and E= Expectation
-This formula implies that customer delight can be influenced in two ways: by managing
expectations or by managing performance.
Kano’s customer delight model
Noriaki Kano has developed a product quality model that distinguishes between
three forms of quality. Basic qualities those that customer routinely expects in
the product, Linear quality attributes of which the customer wants more or less,
Attractive quality attributes that surprise, delight and excite the customer.
Figure 4.1 satisfaction and importance
data to guide service improvement
Figure 4.2 Kano’s model for creating
customer delight
POSITIVE CUSTOMER RETENTION STRATEGIES
Add customer-perceived value
Companies can explore ways to experience additional value as they buy and use products and
services. The ideal is to enable additional value to be experienced by customers without creating
additional cost for the suppliers
There are three forms of value-adding programmes:
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LOYALTY SCHEMES- is a customer management programme that offers delayed or
immediate incremental rewards to customers for their cumulative patronage.
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CUSTOMER CLUBS- is a company-run membership organization that offers a range of value-
adding benefits exclusively to members.
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SALES PROMOTION- offers only temporary enhancements to customer- experienced value.
Here are some examples:
-In pack or on-pack voucher
-Free Premium for continuous purchase
-Rebate or Cashback
-Collection Schemes
-Patronage Awards
-Self-Liquidating premium
POSITIVE CUSTOMER RETENTION STRATEGIES
Bonding
Research have identified many different form of bond between customer and suppliers. These
include interpersonal bonds, technology bonds, legal bonds and process bonds. These different
forms can be split into two major categories:
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SOCIAL BONDS- are found in positive interpersonal relationships between people. Positive
interpersonal relationships are characterized by high levels of trust and commitment.
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STRUCTURAL BONDS- are established when companies and customers commits resources to
a relationship.
Different types of structural bonds:
-Financial Bonds
-Process Bonds
-Legal Bonds
-Values-Based Bonds
-Equity Bonds
-Geographic Bonds
-Knowledge-Based Bonds
-Project Bonds
-Technological Bonds
-Multi-Product Bonds
BUILD CUSTOMER ENGAGEMENT
Customer Engagement - multidimensional construct
composed of four elements:
1. Cognitive Engagement
2. Affective Engagement
3. Behavioral Engagement
4. Social Engagement
BUILD CUSTOMER ENGAGEMENT
Acts of Corporate Citizenship
1.Uttering positive word-of-mouth
2.Providing frequent feedback on their experience
3. Being more forgiving
4. Participating in online communities and user groups.
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Managers try to build engagement by creating interactive relationships with
consumers.
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Development that lifts interactivity is Gamification of brands.
Gamification- use of game-like mechanic in non-game contexts.
BUILD CUSTOMER ENGAGEMENT
RELATIONAL ATTACHMENT
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customers can become highly attached to company's people.
customer who take about 'my banker' , 'my mechanic ', or 'my builder' are
expressing this attachment.
customer can become attached to a work group
customer can attach to an oraganization as a whole.
VALUES-BASED ATTACHMENT
- Beliefs that transcend context and serve to organize and direct attitudes and
behaviors
CORE BELIEFS
❑ sustainability
❑ honesty
❑ child protection
❑ independence.
❑ family-centredness and etc.
CONTEXT MAKES A DIFFERENCE
Customer makes a difference to customer retention in two ways:
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First, There are some circumstances when customer acquisition makes more, indeed
the only, sense as a STRATEGIC GOAL
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Second, CUSTOMER RETENTION STRATEGIES will vary according to the environment
in which the company competes.
CUSTOMER RETENTION PRACTICES
•Number of Competitors
•Corporate Culture
•Channel Configuration
•Purchasing practices
•ownership expectations
•ethical concerns
Key Performance Indicators of Customer
Retention Programmes
CRM practitioners may focus on a number of key performance indicators (KPI) as
they measure the impact of their customer retention strategies and tactics. Among
them the ff:
1. Raw customer retention rate.
2. Raw customer retention rate in each customer segment.
3. Sales-adjusted retention rate.
4. Sales-adjusted retention rate in each customer segment.
5. Profit-adjusted retention rate.
6. Profit-adjusted retention rate in each customer segment.
7. Cost of customer retention.
8. Share-of-wallet of the retained customers.
9. Customer churn rate per product category, sales region or channel.
10. Cost effectiveness of customer retention tactics.
THE ROLE OF RESEARCH IN REDUCING CHURN
Companies can reduce levels of customer churn by researching a number
of questions:
1. Why are customers churning?
2. Are there any lead indicators of impending defection?
3. What can be done to address the root causes?
THE ROLE OF RESEARCH IN REDUCING CHURN
The first question can be answered by contacting and investigating a sample of former customers
to find out why they took their business elsewhere.
The second question attempts to find out if customers give any early warning signals of impending
defection.
If there were identified the company could take pre-emptive action. Signals might include the ff:
▪ Reduced RFM scores (Recency-frequency-Monetary Value)
▪ Non-response to a carefully targeted offer
▪ Reduced levels of customer satisfaction
▪ Dissatisfaction with complaint handling
▪ Reduced share of customer wallet (e.g., customers switches mobile phone service to another
provider, but keeps fixed line service with your firm)
▪ Inbound calls for technical or product-related information
▪ Late payment of an invoice
▪ Querying an invoice
▪ Customer touchpoints are changed, e.g., store closes, change of website address
Customer change of address
Customer researchers are advised to analyze the reasons for customer defection, and to identify the
root causes.
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STRATEGIES FOR CUSTOMER DEVELOPMENT
Customer development is the process of growing the value of retained customers.
Companies generally attempts to cross-sell and up-sell products into the customer
base whilst still having regard for the satisfaction of the customer.
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Cross-selling is selling additional products and services to an existing customer.
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Up-selling is selling higher priced or higher margin products and services to an
existing customer.
STRATEGIES FOR CUSTOMER DEVELOPMENT
There are number of CRM technologies that are useful for customer development purposes:
Campaign management software-is used to create up-sell and cross-sell customer
development campaigns in single or multiple communication channels
and track their
effectiveness, particularly in terms of sales and incremental margin.
Event-based marketing-Up-selling and cross-selling campaigns are often associated with
events.
Data mining- Cross-sell and up-sell are often based intelligent data mining.
Customization-
Cross-sell and up-sell offers can be customized at segment or unique
customer level, based upon the transactional history and profile of target.
STRATEGIES FOR CUSTOMER DEVELOPMENT
Channel integration- Customer development activities can be integrated across channels.
Integrated costumer communication- CRM practitioners generally prefer that the messages
communicated to customers are consistent across all channels.
Marketing optimization- Optimization software is available from CRM analytics organization
such as SAS. Optimization enables marketers to enjoy optimal returns from up-sell and crosssell campaigns across multiple channels and customer segments, taking account of issues
such as budget constraints, communication costs, contact policies (e.g., no more than two
offers to be communicated to any customer in any quarter), and customers transactional
histories and propensities-to-buy.
STRATEGIES FOR TERMINATING CUSTOMER RELATIONSHIPS
Relationship dissolved when one partner no longer views the relationship as worth continuing
investment.
Sacking customers, sometimes called 'demarketing', needs to be conducted with sensitivity.
Customers may be well connected and spread negative word-of-mouth about their treatment.
There are a number of strategies for shedding unprofitable customers:
Make them profitable by raising prices or cutting the cost-to-serve. A company can simply
increase prices to increase margin; customer who pay higher price become profitable.
Un-buddle the offer You could take a bundled value proposition, un-bundle it, reprice the
components and reoffer it to the customer. This makes transparent the value in the offer and
enables customers to make informed choices about whether they want to pay the un-bundled
price.
Respecify the product This involves redesigning the product so that it no longer appeals to
the customer(s) you want to sack.
STRATEGIES FOR TERMINATING CUSTOMER RELATIONSHIPS
Reorganize sales, marketing and service departments so that they
no longer focus on segments or customers you no longer wish to
retain.
Introduce ABC class service A business-to-business company
could migrate customers down the service ladder from high-quality
face-to-face service from account teams, to sales representatives, or
even further to contact centre or web-based self-service.
STRATEGIES FOR TERMINATING CUSTOMER RELATIONSHIPS
THREE CLUSTERS IN RESPECT OF THE CUSTOMER-SACKING BEHAVIORS
1 Hardliners take an active and rigorous stance in terminating unprofitable relationships,
including the regular evaluation of their customer portfolio. Qualitative implications, such as a
potential loss of trust in relationships with other customers or negative word- of-mouth do not
seem to hinder their willingness to sack unprofitable customers.
2 Appeasers take a more cautious approach concerning the termination of unprofitable
relationships, due to strategic considerations such as not playing customers into competitors'
hands.
3. The undecided are reluctant to terminate unprofitable relationships, mainly because they fear
the costs of attracting new customers.
Thank You
for Listening