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Why Focus on Customer Retention (CR)?
Service encounter failuresInconvenienceResponse to failed service PricingCompetitionEthical concernsInvoluntary switchingOther factors
(Keveaney, S.M., 1995)
Reicheld on Customer RetentionReicheld 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 CustomersStay loyal longerTalk favorably about the organizationPay less attention to the competitionAre less price sensitiveOffer service ideas to the organizationCost less to serve than new customers
The Cost of Lost BusinessThe Cost of Lost Business for a Hospital 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)
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
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.
Customer Retention Tactics - cont.
A Customer Value/ Retention Model☛☛The CV/retention model offers a good The CV/retention model offers a good
way of explaining the key way of explaining the key relationships among the core elements relationships among the core elements that create value in an organizationthat create value in an organization
☛☛Customer value is built through the Customer value is built through the proper mix of proper mix of SQIPSQIP (service, quality, (service, quality, image & price) - elements that attract image & price) - elements that attract and keep customers and keep customers
Customer Attractio
n
Customer
Retention
Shareholder Value
Customer
Value Customer
Satisfaction Loyalty Business
Performance
The Customer Value/Retention Model
© Weinstein/Johnson, 2003.
Applications of the Customer Value Applications of the Customer Value Retention Model (CV/RM)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 SatisfiedSatisfied
SatisfiedSatisfied
DissatisfiedDissatisfied
Highly Highly LoyalLoyal
Loyal
DisloyalDisloyal
Retain
Defect
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 processExploringEvaluatingEstablishing StrategiesExamining feedback
Attrition: The Negative Signal to RetentionIncrease in the number of complaintDecrease in the frequency of contactsDecrease in personal visitsDecrease in enquiriesDecrease in the volume of businessDecrease in the number of active buyersDecrease in the extent of interactionDecrease in the flow of communication.
Brand Switching BehaviorDissatisfaction with present brandChange in fashionPromises made by competitorsChange in the perceived benefitsPersonal characteristics of the customer
concernedPressure 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., (Reinartz, W. and Kumar, V., 2002)2002)
Butterflies:Good fitHigh profit potentialTransaction satisfactionMilk active accountsCease investing
Strangers:Little fitLowest profit potentialMake no investmentMax transaction profit
True Friends:Good fitBest profit potentialConsistent communicationAttitudinal & behavioral loyaltyDelight customers
Barnacles:Limited fitLow profit potentialMeasure size and share of walletLow share, up- and cross-sellSmall wallet, strict cost control
Transaction Relationship
High profit
Low profit
Classification of Classification of Customer Loyal Segments Customer Loyal Segments
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 CRDifferentiated 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 ToolsUsage Analysis Tools
Heavy, medium, light, former, and nonusers (A,B,C,D,X)
Heavy half segmentation (80/20 rule)Users vs. nonusers, competitive usersLoyal (degree) versus nonloyal customersProduct/service applications by user groupAdopter categories - innovators, followers,
laggardsGeographic comparisons (customer
penetration indices, growth)
4-Tier Usage Segmentation 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 AnalysisRecency refers to the last service
encounter/ transactionFrequency assesses how often these
customer-company experiences occurMonetary 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..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. Adapted from Kahan, R.
(1998)(1998)
Customer Retention ApproachesCustomer 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 includeLearning as much as possible about customer needsResponding promptly to any indications of disinterestMaking customers feel truly cared forResolving complaints quickly and efficientlyBe willing to negotiate with high-value customers who
show signs of inactivity (Passavant,
1995)
9 Common/Effective 9 Common/Effective Approaches for Enhancing RetentionApproaches 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 Most Common/Effective Approaches for Enhancing Retention – Approaches for Enhancing Retention – cont.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 costEfficiency - low cost
■ ■ Effectiveness - likelihood to succeedEffectiveness - likelihood to succeed
■ ■ Adaptability - strategic fit with the organizational Adaptability - strategic fit with the organizational cultureculture
■ ■ Consistency - works well with the current Consistency - works well with the current marketing planmarketing plan
■ ■ Competitive advantageCompetitive advantage
■ ■ Ease of implementationEase of implementation
■ ■ Projected profitabilityProjected profitability
5-Step Process for Designing a Customer Retention Program
Determine your current CR rateAnalyze the defection problemEstablish a new CR objectiveInvest in a targeted CR plan to enhance
customer loyaltyEvaluate the success of the CR program
Measuring Customer RetentionMeasuring Customer RetentionAnnual and targeted customer retention ratesWeighted customer retention rates - accounts
for usage differencesSegmented retention indicators - subgroup
analysis based on geographic, demographic, lifestyle, product preferences, etc.
Share-of-customerCustomer 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 useAnticipated regretIntent to switchIntent to remain loyal – likelihood to return to
provider and to recommend provider
Questions are welcomed.
End of the topic