OBJECTIVES:

- By the end of this chapter, you will understand:

1. what is meant by the term ‘ customer retention ’

2. the economics of customer retention

3. how to select which customers to target for retention

4. the distinction between positive and negative customer retention

5. several strategies for improving customer retention performance

6. several strategies for growing customer value

7. why and how customers are ‘ sacked ’

WHAT IS CUSTOMER RETENTION?

-A customer retention strategy aims to keep a high proportion of valuable customers by

reducing customer defections (churn).

WHAT IS CUSTOMER DEVELOPMENT?

- A customer development strategy aims to increase the value of those retained

customers to the company.

Some important questions have to be answered when a company puts together a

customer retention strategy.

1. Which customers will be targeted for retention?

2. What customer retention strategies will be used?

3. How will the customer retention performance be measured?

 Customer retention is the number of customers doing business with a fi rm at the

end of a financial year, expressed as percentage of those who were active
customers at the beginning of the year.
 Sometimes companies are not clear about whether an individual customer has
defected. This is because of the location of customer related data, which might
be retained in product silos, channel silos or functional silos.

The use of aggregates and averages in calculating customer retention rates can mask a
true understanding of retention and defection. This is because customers differ in their
sales, cost-to serve and buying behaviors. A solution to this problem is to consider
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 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.

PRODUCT SILOS

-consider personal insurance. Insurance companies often have productbased

information systems.

CHANNEL SILOS

-in the B2B context, independent office equipment dealers have formed into cooperative
buying groups to purchase goods at lower prices and benefit from other economies of
scale in marketing. When a dealer stops buying direct from Brother Electronics and
joins a buying group, Brother’s customer data may report a defection, but all that has
happened is that the dealer has begun to buy through a different channel.

MANAGE CUSTOMER RETENTION OR VALUE RETENTION?

Improving customer retention is an important objective for many CRM

implementations. Its definition and measurement need to be sensitive to the sales,
profitability and value issues discussed previously. It is important to remember that the
fundamental purpose of focusing CRM efforts on customer retention is to ensure that
the company maintains relationships with value-adding 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 of a better deal. These can be
value-destroyers, not value-adders.

ECONOMICS OF CUSTOMER RETENTION

The argument goes as follows:

Increasing purchases as tenure grows: Providing the relationship is satisfactory, trust

grows while risk and uncertainty are reduced.

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.

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-of-mouth and influence the beliefs, feelings
and behaviours of others.

Premium prices: customers who are satisfied in their relationship may reward their
suppplier by paying higher prices.

WHICH CUSTOMERS TO RETAIN?

-The customers who have the greatest strategic value to your company are prime
candidates for your retention efforts. These are the customers we defined as having
high lifetime value or who are otherwise strategically significant as high-volume
customers, benchmarks, inspirations or door openers.
STRATEGIES FOR CUSTOMER RETENTION
POSITIVE CUSTOMER RETENTION STRATEGIES

Customer Delight - Delighting customers, or exceeding customer expectations, means

going beyond what would normally satisfy the customer. This does not necessarily
mean being world-class or best-in-class. It does mean being aware of what it usually
takes to satisfy the customer and what it might take to delight or pleasantly surprise the
customer Positive customer retention strategieS.

In formulaic terms:

CD = P > E where CD = customer delight, P= perception and E = expectation.

Add customer-perceived value - Companies can explore ways to create additional

value for customers. The ideal is to add value for customers without creating additional
costs for the company. If costs are incurred then the value-adds may be expected to
recover those costs.

There are three common forms of value-adding programme:

 Loyalty Schemes
 Customer clubs
 Sales Promotions

Bonding- The next positive customer retention strategy is customer bonding.B2B

researchers have identified many different forms of bond betweencustomers and
suppliers. These include interpersonal bonds, technologybonds (as in EDI), legal bonds
and process bonds.

These form split into two major categories:

 Social
 Structural

Different types of structural bond

 Financial
 Legal
 Equity
 Knowledge-based
 Technological
 Process
 Values-based
 Geographic
 Project
 Multi-Product

Build customer engagement- The final positive strategy for building customer
retention is to build customer engagement. Various studies have indicated that
customer satisfaction is not enough to ensure customer longevity.

Learning from research into customer commitment

-A number of authorities have urged companies to work on developing customer
commitment so that they develop a strong attachment to, or engagement with, a brand
or company.

There are three different forms of commitment

  Instrumental commitment --this occurs when customers are convinced that no
other offer or company could do a better job of meeting their needs

 Relational commitment- customers can become highly attached to a company’s

people. An emotional tie may be formed with an individual person, a work group
or the generalized company as a whole.

 Value-based commitment- customers become committed when their values are

aligned with those of the company

Context makes a difference

Context makes a difference to customer retention in two ways;

-there are some circumstances when customer acquisition makes more, indeed the
only, sense as a strategic goal.

- customer retention strategies will vary according to the environment in which the
company competes.

The impact of contextual conditions on the choice and timing of customer retention
practices has not been thoroughly researched.

However, we can see that a number of contextual considerations impact on

customer retention practices:

Number of competitors -this typically applies in state-provided services such as

education and utilities such as gas, electricity, rail and telecommunications, whether
deregulated or not.

Corporate culture -in corporate banking, the short-term profi t requirement of both
management and shareholders has resulted in a lack of genuine commitment to
relationship banking.

Channel configuration - sellers may not have the opportunity to maintain direct
relationships with the ultimate buyers and users of their products.

Purchasing practices -the purchasing procedures adopted by buyers can also make
the practice of customer retention futile.

Ownership expectations -the demands of business owners can subordinate customer

retention to other goals.

Ethical concerns -public sector medical service providers cannot simply focus on their
most profitable customers or products.

The role of research

Companies can reduce levels of customer churn by researching a number of questions:

1. Why are customers churning? 2.

2. Are there any lead indicators of impending defection?
3. What can be done to address the root causes?
Strategies for customer development
-Customer development is the process of growing the value of retained customers.
Companies generally attempt to cross-sell and up-sell products into the customer base
while still having regard for the satisfaction of the customer.

Cross-sell- is selling additional products and services to an existing customer.

Up-sell- is selling higher priced or higher margin products and services to an existing
customer

CRM technologies
Campaign management software -is used to create up-sell and crosssell customer
development campaigns and track their effectiveness, particularly in terms of sales and
incremental margin

Event-based marketing -campaigns are often associated with events.

Data mining -offers are based on intelligent data mining. Transactional histories record
what customers have already bought.

Customization -offers are customized at segment or unique customer level.

Channel integration -customer development activities are integrated across channels.

Integrated customer communications -the messages communicated to customers

are consistent across all channels.

Marketing optimization -optimization software is available from CRM analytics

organizations such as SAS.

Strategies for sacking customers

Raise prices -customers can choose to pay the higher price. If not, they effectively
remove themselves from the customer base.

Unbundle the offer -you could take a bundled value proposition, unbundle it, reprice
the components and reoffer it to the customer.

Respecify the product -this involves redesigning the product so that it no longer
appeals to the customer(s) you want to sack.

Reorganize sales, marketing and service departments -so that they no longer focus
on the sackable segments or customers.

Introduce ABC class service -you 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 selfservice.

Three clusters in respect of the customer sacking behaviours

Hardliners take an active and rigorous stance in terminating unprofi table relationships,
including the regular clearance of their customer portfolio.

Appeasers take a more cautious approach concerning the termination of unprofi table
relationships, above all due to strategic considerations such as not playing customers
into competitors ’ hands.
 The undecided are reluctant to terminate unprofi table relationships, mainly because
they fear the costs of attracting new customers.