CUSTOMER RELATIONSHIP MANAGEMENT

CONCEPTS AND TECHNOLOGIES

Chapter 4
Managing the customer life-cycle:
customer retention and development
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
Generic goals of customer retention & development

 Customer retention: to keep a high proportion of

valuable customers by reducing customer defections
(churn).
 Customer development: to increase the value of
those retained customers to the company.
Simple customer retention definition

 Customer retention is 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.
The appropriate time frame

 Depends on re-purchase cycle found in the industry.

● Insurance policies are renewed annually
● If the normal replacement cycle is four years, then retention
rate is more meaningful if it is measured over four years
instead of twelve months
Can you tell if a customer has defected?

 May not be able to measure retention and defection if

you have
● Product-based views of customers
● Channel-based views of customers
● Separate customer records in sales, marketing and service
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.
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 retention vs. value retention

 Companies should focus on retaining customers that

contribute value.
 Sometimes this will mean that the focus is not on
retention of customers, per se, but on retention of
share of wallet.
● In the banking industry, for example, it may be more
important for companies to focus on managing the overall
downward migration of customer spending than customer
retention. Many customers simply change their buying
behavior rather than defect.
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.
Which customers to retain?

 Strategically significant customers

● High life-time value customers
● High volume customers
● Benchmarks
● Inspirations
● Door openers

 But… these may also be attractive to your

competitors
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
Why focus on newly acquired customers?

 New customers may have greater future life-time

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
Two basic strategies for customer retention
Negative and positive customer retention strategies

 Create exit barriers  Delight customers

 Enforce the contract  Create customer-perceived
 Extract switching added value
penalties  Create social and structural
bonds
 Create customer
engagement
What is customer delight?

Customer delight = P > E

 

where
P = Perception
E = Expectation.
Bridging the gaps: importance against performance

5.5 Importance
Clean toilets
OFI
2.5 Performance

6.5 Importance
Food quality
OFI
4.5 Performance
Numbers are scores
on a 7-point scale
OFI = opportunity for improvement
Customer delight through product quality

Figure 4.2
Simple ways to delight customers

 provide information about the customer’s served

market.
● A packaging company could alert a fast-moving consumer
goods manufacturer customer to competitive initiatives in the
market.
 volunteer to collect and replace a faulty product from
a customer rather than issuing a credit note
 offer better, lower cost solutions to the customer,
even though that might reduce margin
3 ways to create customer-perceived added value

1. loyalty schemes
2. customer communities
3. sales promotions
 
Loyalty program definition

 A loyalty scheme is a customer management

program that offers delayed or immediate incremental
rewards to customers for their cumulative patronage.
Reward programs

 Co-op dividend > Green Shield Stamps

> American Airlines AAdvantage Card > Nectar

 Card-based schemes have changed over time

● No identification – member’s name
● Magnetic strip – chip-embedded
● Solus – networked
● Company-operated – third-party operated
● Trivial reward – major reward (5%)
Nectar loyalty program

Figure 4.3
Sources of added value from loyalty programs

 Collecting points may deliver some pre-redemption

psychological benefits to customers, such as a sense
of belonging and of being valued, and an enjoyable
anticipation of desirable future events.
 At the redemption stage, customers receive both
psychological and material benefits.
Criticisms of loyalty programs

 They are ineffective at generating attitudinal loyalty

 They cost too much to operate
Customer club definition

 A customer club is a company-run membership

organisation that offers a range of value-adding
benefits exclusively to members.
B2C customer clubs

 Swatch the Club (www.swatch.com )

 The Harley Owners Group (HOG) (
www.hog.com )
 The Subaru Owners Club (
www.subaruownersclub.com )
 Nestlé’s mother and baby Club (
www.nestlebaby.com )
Sales promotions that build repeat purchase

 In pack or on-pack voucher

 Rebate or cash-back
 Patronage awards
 Free premium for continuous purchase
 Collection schemes
 Self-liquidating premium
Cash back sales promotion

Figure 4.4
Bonds

 Social  Structural
• Positive relationships • Investments linking
between individuals customer and supplier
• Empathy • Financial
• Responsiveness • Legal
• Reliability • Equity
• Technological
• Leads to development of • Values-based
trust and commitment • Geographic
• Project
• Multi-product
Insurers encourage loyalty with financial bonds

 Excellent claims service

 No claims discounts
 Tenure-related discounts Financial Bonds
 Multi-policy discounts
Build customer engagement

 Engaged consumers are generally thought to have a

higher intensity of participation in and connection to a
brand or organization.
 They feel a strong sense of connection to the
organization or brand based on their experiences of
the firm’s offerings, activities and reputation.
4 types of engagement

1. cognitive engagement
2. affective engagement
3. behavioural engagement
4. social engagement
Building engagement

 Interactivity
● Gamification
 Relational attachment
 Values-based attachment
Values defined

Values are core beliefs that transcend

context and serve to organise and direct
attitudes and behaviours
Values-based attachment

 Body Shop International

 Harley Davidson
 Virgin Group
Context makes a difference to customer retention strategies

 Number of competitors
 Corporate culture
 Channel configuration
 Purchasing practices
 Ownership expectations
 Ethical concerns
KPIs for customer retention programs

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

 Why are customers churning?

 Are there any lead indicators of impending defection?
 What can be done to address the root causes?
Advance indicators of intention to churn

 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 (e.g. customer only flies one leg of an
international flight on your airline)
 Inbound calls for technical or product-related information
 Late payment of an invoice
 Querying an invoice
 Customer touch points are changed e.g. store closes, change of
website address
 Customer change of address
Two main strategies for customer development

 Cross-selling is selling additional products and

services to an existing customer.
 
 Up-selling is selling higher priced or higher margin
products and services to an existing customer.
CRM technologies used for customer development

 Campaign management
 Event-based marketing
 Data mining
 Customization
 Channel integration
 Integrated customer communications
 Marketing optimization
Strategies for terminating customers

 Make them profitable by raising prices or cutting the

cost to serve.
 Un-bundle the offer
 Respecify the product
 Reorganise sales, marketing and service
departments
 Introduce ABC class service
A typology of companies’ termination behaviours

 Hardliners
● take an active and rigorous stance in terminating
unprofitable relationships, including the regular clearance of
their customer portfolio.
 Appeasers
● take a more cautious approach concerning the termination
of unprofitable relationships
 The undecided
● are reluctant to terminate unprofitable relationships