Retention strategy

Prof. Aparna Kanchan

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 Why Focus on Customer Retention
(CR)?

Service encounter failures

Inconvenience
Response to failed service
Pricing
Competition
Ethical concerns
Involuntary switching
Other factors

(Keveaney, S.M., 1995)

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Reicheld on Customer Retention
Service companies must retain the best
personnel to win and keep good customers
It’s impossible to build a loyal bank of
customers without a loyal employee base
A typical company has a customer
defection rate of 10-30% per year
Raising the customer retention rate by 5%
can increase the value of an average
customer (lifetime profits) by 25-
100%

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 Philips Kotler on Customer
Retention
The key to customer retention is
customer satisfaction

Satisfied Customers
Stay loyal longer
Talk favorably about the organization
Pay less attention to the competition
Are less price sensitive
Offer service ideas to the organization
Cost less to serve than new customers

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 Customer Retention Tactics
Image/Promotion - community service, direct
mail, educational offerings, integrated
marketing communications, newsletters, regular
customer contact, informational materials,
website

Service Quality - continuous quality initiatives,

convenience,customer service training,
demonstrate that customers are highly valued,
mystery shopping, customer representatives/
ombudsman, service failure training, smile,
treat customers as family.
5 cont..
 Customer Retention Tactics - cont.
Research - analyze defection rates/reasons,
classify customers by usage/satisfaction/loyalty,
develop targeted retention programs.

Internal Marketing - loyalty task force, prepare

“solutions” to recurring problems, share
appropriate customer data with staff, reward
and publicize customer care person of the
month.

* Customer-Centered - “dialogue” marketing,

customer bill of rights, customer care councils,
6 understand customer expectations.
 A Customer Value/
Retention Model
☛The CV/retention model offers a good
way of explaining the key
relationships among the core elements
that create value in an organization

☛Customer value is built through the

proper mix of SQIP (service, quality,
image & price) - elements that attract
and keep customers

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 The Customer Value/Retention Model
Customer
Attraction

Customer Customer Business Shareholder

Loyalty Value
Value Satisfaction Performance

Customer
8 © Weinstein/Johnson, 2003. Retention
Applications of the Customer Value
Retention Model (CV/RM)
The key variables and their relationships
to one another are clarified. This provides
strategic guidance to management.
Second, it stresses long term relationships
(retention) but still realizes that some
customer defection and attrition will occur
so customer attraction must remain a
priority.
Third, the model is interfunctional and
systematic -- it ties marketing objectives
to the big picture, the financial situation.
Feedback loops are also depicted in the
Customer Value/Retention Model.
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 Customer Satisfaction, Loyalty and Retention Model

Highly Highly
Satisfied Loyal
Retain

Satisfied Loyal

Defect
Dissatisfied Disloyal

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 A Customer Loyalty Framework

Multiple loyalty
Situational loyalty
Limited loyalty
No Loyalty Some Loyalty Complete Loyalty

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According to CRM experts Jay Curry and Adam
Curry:
Top 20% of the customer deliver 80% of
the revenue.
Existing customers contributes upto 90% of
the revenue
Top 20%of the customers delivers more
than 100% profits.
The bulk of Marketing benefit is often spent
on people other than customers.

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According to CRM experts Jay Curry and Adam
Curry:
Between 5% and 30% of all customer have
the potential for moving upward the loyalty
ladder.
2% upward migration in the loyalty ladder
means 10% more revenue and 50% more
profits.

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Sequences in Retention process
Exploring
Evaluating
Establishing Strategies
Examining feedback

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Attrition: The Negative Signal to Retention
Increase in the number of complaint
Decrease in the frequency of contacts
Decrease in personal visits
Decrease in enquiries
Decrease in the volume of business
Decrease in the number of active buyers
Decrease in the extent of interaction
Decrease in the flow of communication.

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 Brand Switching Behavior
Dissatisfaction with present brand
Change in fashion
Promises made by competitors
Change in the perceived benefits
Personal characteristics of the customer
concerned
Pressure of salespersons
Personal reasons

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 Buyer or Try-er?
Realize that a 1-time buyer is really a try-er,
rather than a customer

To move beyond the transaction stage,

organizational experiences must meet or exceed
expectations

Repeated incidents of high satisfaction are sought

through the utilization of relationship marketing
strategies, leading to greater customer loyalty
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Classification of
Customer Loyal Segments

• Strangers short-term-low profit

customers
• Butterflies high-profit potential but tend
to be short-term and disloyal
• Barnacles stay around for the long-term
but generate relatively low profits
• True friends are both highly profitable
and are long-term customers
(Reinartz, W. and Kumar, V.,
2002)
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 Classification of
Customer Loyal Segments

Transaction Relationship
Butterflies: True Friends:
Good fit Good fit
High profit High profit potential Best profit potential
Transaction satisfaction
Consistent communication
Milk active accounts Attitudinal & behavioral loyalty
Cease investing Delight customers

Barnacles:
Strangers:
Limited fit
Little fit
Low profit Lowest profit potential Low profit potential
Measure size and share of wallet
Make no investment
Low share, up- and cross-sell
Max transaction profit
Small wallet, strict cost control

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 Loyalty Building Strategies
 Send salespeople to work at the offices of
your best customers
 Participate in customers events
 Hold a retreat with a major customer to
share
best practices
 Invite customers to participate in training
seminars
20 CONT..
☛ Set up a customer advisory council

☛ Develop a preferred-customer pricing

strategy

☛ Reward customers for referring new

business

☛ Develop 3-5 year business plans with

customers

☛ Partner with key accounts on industry

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research projects
 Usage Analysis and CR
Differentiated marketing strategies for
user groups: 1st-time users, repeat
customers, heavy users, and former
users

By classifying customer accounts based

on usage frequency and variety,
companies can develop effective
strategies to retain and upgrade
customers
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Usage Analysis Tools
Heavy, medium, light, former, and
nonusers (A,B,C,D,X)
Heavy half segmentation (80/20 rule)
Users vs. nonusers, competitive users
Loyal (degree) versus nonloyal customers
Product/service applications by user group
Adopter categories - innovators, followers,
laggards
Geographic comparisons (customer
penetration indices, growth)

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 4-Tier Usage Segmentation
 Platinum Tier – the company’s most profitable
customers

 Gold Tier – seek price discounts, less loyal, and use

multiple vendors

 Iron Tier – essential customers who provide the

volume to utilize the firm’s capacity, but their
spending levels, loyalty, and profitability do not merit
special treatment

 Lead Tier – customers who cost the company money.

They demand more attention than they are due given
their spending and profitability - sometimes problem
customers that complain and tie up resources.
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(Rust, Zeithaml, and Lemon, 2000/2003)
 RFM Analysis
Recency refers to the last service
encounter/ transaction
Frequency assesses how often these
customer-company experiences occur
Monetary value probes the amount that
is spent, invested, or committed by
customers for the firm’s offerings

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 How to Do an RFM Analysis *

1. Access a summary of each customer’s RFM transaction

history.
This includes most recent purchase, frequency of purchases,
and monetary value spent per order.

2. Sort customers by purchase dates in reverse chronological

order. Divide the customer list into 5 equal segments. Tag the
most recent customer quintile as 1 while the least recent
purchases are quintile 5.

Cont..

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 How to Do an RFM Analysis * - cont.

3. Sort your customers by frequency (number of orders) and

apply the same methodology as in #2.

4. Sort your customers by monetary value (average Rs.

amount of each order) and apply the same methodology as
in #2.

5. You now have created RFM scores for each of your

customers, from your best customer segment (111) to your
worst (555).

Adapted from Kahan, R.

27 (1998)
Customer Retention Approaches
 CR tactics are short term in nature while CR
strategies create lasting value for customers
 CR efforts should begin once the firm wins a customer

These efforts should include

 Learning as much as possible about customer needs
 Responding promptly to any indications of disinterest
 Making customers feel truly cared for
 Resolving complaints quickly and efficiently
 Be willing to negotiate with high-value customers who
show signs of inactivity
(Passavant,
1995)

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9 Common/Effective
Approaches for Enhancing Retention
 Build a customer database/marketing information
system

 Design ongoing customer programs - continuity

and loyalty-based initiatives

 Offer long term services -

membership/subscription programs

 Custom promotion - use reminder advertising and

press releases -cont.
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 Most Common/Effective
Approaches for Enhancing Retention –
cont.
 Focus on key accounts and heavy users

 Use newsletters/informational materials to stay in

touch with infrequent customers

 Attend trade shows

 Research customers needs and wants

 Welcome suggestions and complaints

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Other Customer Retention Tools

 Customer relationship management (CRM), an

expensive information technology, is also
frequently used by large companies for
business usage analyses

 The 80/20 principle is integral in determining

the focus & location of most important
customers

 SWOT analysis -- strengths, weaknesses,

opportunities, and threats -- information can be
gathered from each strategic customer

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 7 Criteria for Selecting
CR Approaches

■ Efficiency - low cost

■ Effectiveness - likelihood to succeed
■ Adaptability - strategic fit with the organizational
culture
■ Consistency - works well with the current
marketing plan
■ Competitive advantage
■ Ease of implementation
■ Projected profitability

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 5-Step Process for Designing a
Customer Retention Program

Determine your current CR rate

Analyze the defection problem
Establish a new CR objective
Invest in a targeted CR plan to enhance
customer loyalty
Evaluate the success of the CR program

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Measuring Customer Retention
 Annual and targeted customer retention rates
 Weighted customer retention rates - accounts
for usage differences
 Segmented retention indicators - subgroup
analysis based on geographic, demographic,
lifestyle, product preferences, etc.
 Share-of-customer
 Customer lifetime value (CLTV)
 Recency, frequency, and monetary value (RFM)

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Useful Metrics for CR Evaluation
Innovative customer value managers
should consider the measures below to
gain additional insight on retention:

 Expected future use

 Anticipated regret
 Intent to switch
 Intent to remain loyal – likelihood to return to
provider and to recommend provider

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 Thank - You

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