CustomerRetention strategy

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)

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
On average, U.S. corporations lose half of their
customers in 5 years
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%
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
The Cost of Lost Business
for a Hospital

15,000 patients annually

3,750 defections
(25% defection rate, 75% retention rate)
$2,500 average patient revenue
$9.375 million = annual lost revenues
$703,125 = lost profits (7.5% profit margin)
 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.
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, 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
 The Customer Value/Retention
Customer Model
Attractio
n

Customer Customer Business Shareholder

Loyalty
Value
Value Satisfaction Performance

Customer
© 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.
 Customer Satisfaction, Loyalty and Retention Model

Highly Highly
Satisfied Loyal
Retain

Satisfied Loyal

Defect
Dissatisfied Disloyal
 A Customer Loyalty Framework

Multiple loyalty
Situational loyalty
Limited loyalty
No Loyalty Some Loyalty Complete Loyalty
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.
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.
Sequences in Retention process
Exploring
Evaluating
Establishing Strategies
Examining feedback
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.
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
 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
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)
 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

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

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
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)
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.

(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
 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..
 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 $ 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. (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)
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.
 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

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 was integral in determining the focus

& location of Fast Industries’ most important customers

 SWOT analysis -- strengths, weaknesses, opportunities,

and threats -- information can be gathered from each
strategic customer
 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
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
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)
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
End of the topic

Questions are welcomed.