Customer Retention

•The importance of customer retention •Retention and loyalty •Defection analysis

CRM - Prof. Barak Libai

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A Bain study from the 1980’s regarding the profitability drivers of different industries

CRM - Prof. Barak Libai

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The expected effect of retention rate on profit in theCredit Card Industry

Period 1 2 3 4 5 6 7 8 9 10 11 12
CRM - Prof. Barak Libai

R=0.9 100 90 81 73 66 59 53 48 43 39 35 31

R=0.95 100 95 90 86 81 77 74 70 66 63 60 57
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And for different industries

CRM - Prof. Barak Libai

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Overall, the Bain studies helped to draw managerial attention to the role of customer retention

Customer defection is a widespread phenomenon that costs firms much money

Bain estimated the US average across all industries to be about 80% Typically it is between 0.6-0.95
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Cautions
Customer heterogeneity

Do we really want the extra 5%

Why the difference among the firms?

CRM - Prof. Barak Libai

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The difference among the firms can come mostly ”from the change in ”Retention Elasticity

Retention Elasticity- To what extent will a 1% change in the retention rate change the firm’s profits ( i.e., customer equity )

CRM - Prof. Barak Libai

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The marginal cost of retention probably also goes up with the retention rate

It becomes harder to retain customers as the retention rate is higher

Loyalty Myths
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It is probably still right that managers underestimate the benefit of customer Retention

Especially due to the historic emphasis on acquisition

Even today, retention rates are not reported by most firms.

CRM - Prof. Barak Libai

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Customer Retention and Loyalty

The topic of customer retention is often associated with the term “customer loyalty” Do you have “loyal” customers ?

CRM -- Prof. Barak Libai CRM Prof. Barak Libai

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A combined approach to loyalty
Repeat purchase High I High Relative Attitude towards the brand Low
“Real” loyalty Commitment

Low
Latent loyalty

II

III

Spurious loyalty Switching costs

IV

No loyalty

CRM -- Prof. Barak Libai CRM Prof. Barak Libai

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real loyalty” may be defined as”
a commitment to re-buy or re patronize a preferred product or service consistently in the future, despite situational influences and marketing efforts having the potential to cause switching behavior
(Oliver 1997)

CRM -- Prof. Barak Libai CRM Prof. Barak Libai

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”Indicators of ”Real Loyalty

    

Price insensitivity Reactions to competitive actions Ability to develop a customer Reactions to service failures Cooperation in market research

CRM -- Prof. Barak Libai CRM Prof. Barak Libai

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Hence we can see two avenues to reach a higher retention rate

Via favorable brand attitude

Brand commitment Spurious loyalty

Via customer switching costs

•In a general sense, we will be able to retain customers when the value by staying with us is higher than the perceived value they get by switching from us •It is critical to recall that “value” may be composed of numerous kinds of costs and CRM -- Prof. Barak Libai CRM Prof. Barak Libai benefits

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Switching Costs and Retention

CRM -- Prof. Barak Libai CRM Prof. Barak Libai

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Switching costs are costs customers perceive to occur upon moving from one supplier to another

Don’t have to occur immediately after the change of suppliers

Switching costs provide market power to companies with ”locked-in” customers

CRM -- Prof. Barak Libai CRM Prof. Barak Libai

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There are various types of switching costs

Procedural switching costs – Primarily involve the expenditure of time and effort

E.g.,  Economic risk- the cost of potential negative outcomes
when one does not know enough on the new supplier
  

Evaluation costs- time and effort costs associated with
search and analysis needed to make a switching decision

Learning costs - time and effort costs of acquiring new
skills and know how

Setup costs- time and effort costs associated with the
process of initialing the relationship with the new supplier
CRM -- Prof. Barak Libai CRM Prof. Barak Libai 17

Financial switching costs – Loss of financial quantifiable resources E.g.,

Benefit loss costs – costs associated with benefits
accumulated such as in frequency (loyalty) programs

Monetary lost cost - direct financial payments one need to do
upon the change.

CRM -- Prof. Barak Libai CRM Prof. Barak Libai

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Relational Switching costs – Psychological or emotional discomfort due to issues such as the loss of identity and breaking of bonds E.g.,  Personal relationship costs loss – with people

Brand relationship costs loss –with brands

CRM -- Prof. Barak Libai CRM Prof. Barak Libai

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In technological markets

Focus on technological standards And specifically on “Network externalities” or “Network effect “

the utility of a consumer from a certain product or brand increases with the number of others users

CRM -- Prof. Barak Libai CRM Prof. Barak Libai

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Switching costs can change the nature of the relationship between satisfaction and loyalty

CRM -- Prof. Barak Libai CRM Prof. Barak Libai

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Intended and actual behavior at airlines

CRM -- Prof. Barak Libai CRM Prof. Barak Libai

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:A few remarks on switching costs
Switching costs should be managed like any other Retention tool Reliance on switching costs is risky
  

Smart customers will resist them Regulators will oppose them In the presence of competition they may be hard to maintain in the long term. When they disappear, in the absence of knowing how to manage customer satisfaction, market failure can be fast.
CRM -- Prof. Barak Libai CRM Prof. Barak Libai 23

:Two interesting books on this subject

Information Rules by Varian and Shapiro

Focuses on information markets

Higher Profits Through Customer Lock-In by Joachim Buschken

CRM -- Prof. Barak Libai CRM Prof. Barak Libai

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Dealing with customer defections

CRM -- Prof. Barak Libai CRM Prof. Barak Libai

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? “Who is a “defector
Clearer in a Lost For Good case, demands more managerial consideration for Migration / Always a Share

We might want to use a declining sales criteria and not wait for the full defection to .take place in order to take action
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When is a customer a ”candidate for ? ”defection
   

Comparing Recency to expected Frequency Customer interactions- especially complaints Customer importance to our competitors Profiles of defectors
 

Understanding defection purchase pattern Using data mining techniques to predict behavior

CRM -- Prof. Barak Libai CRM Prof. Barak Libai

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Companies invest much in churn models to predict the defection of customers

For example, Wachovia Bank, looks at demographics, life events (divorce, losing jobs, opening a business, graduating kids, etc.), declines in account balance levels, and more.

They also conduct research on high value customers who have already defected, hoping to uncover other root causes. These results then get factored into how they approach customers who are considered to be at high risk for defection

Possible uses: Trying to change the behavior, aiming to
understand the causes, more efficient marketing spending, planning
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Defection Analysis

A defection is an important event that contains much information Systems can be improved by analyzing problems, hence we should analyze defections So the most important task of a defection analysis is to learn

CRM -- Prof. Barak Libai CRM Prof. Barak Libai

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Why don’t we see more defection analysis attempts
Ignorance regarding the retention-loyalty connection Managers and employees don’t like to deal with failures It may be hard to determine a “defection” Its hard to understand the real reasons

CRM -- Prof. Barak Libai CRM Prof. Barak Libai

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An example of a defection analysis
Bank A with 2 million customers, 20% yearly defection rate Satisfaction surveys did not help much to understand the defections

CRM -- Prof. Barak Libai CRM Prof. Barak Libai

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An interview with a customer that moved from bank A to bank B

How long were you a customer of bank A?

12 years

Why did you close your account

Bank B gives a higher interest rate on savings

Is Bank B’s rate higher for a long time?

I don’t know, I just noticed

How did it happen that you noticed?

I got mad at Bank A and I noticed bank B’s ad in the Thursday paper CRM -- Prof. Barak Libai CRM Prof. Barak Libai

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Why were you mad at bank A?

Because they did not approve my credit card

Did they reject you in the past?

Yes. But this time they sent me a letter I am a “preferred customer” and asked me to order, and then they sent me a rejection letter.

CRM -- Prof. Barak Libai CRM Prof. Barak Libai

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Bank A moved to act in two phases
At phase A experienced interviewers sat with customers to understand the motivation for defections At phase B the bank developed a software that enabled large scale interviewing

CRM -- Prof. Barak Libai CRM Prof. Barak Libai

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Problems with branch managers

Many did not believe that half of the problems were with the branches. Wanted to hear recordings Some could not believe the defectors are profitable customers Generally: the bank changed its customer relationship strategy following the retention analysis

CRM -- Prof. Barak Libai CRM Prof. Barak Libai

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Important issues in this regard

Have to overcome internal resistance First priority is to learn

And thus have to overcome the urge to answer/convince the customer he was wrong

 

External market research is not enough Need the involvement of senior management

CRM -- Prof. Barak Libai CRM Prof. Barak Libai

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