CUSTOMER RELATIONSHIP MANAGEMENT: CONCEPTS AND TOOLS

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CUSTOMER RELATIONSHIP MANAGEMENTCONCEPTS AND
TOOLS

• Chapter 9
• Managing The Customer Lifecycle Customer
  Retention And Development

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3 stages of the customer lifecycle

• Customer acquisition
• Customer retention
• aims to keep a high proportion of current
  customers by reducing customer defections
• Customer development
• aims to increase the value of those retained
  customers to the company

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Contents of a customer retention plan

1. Which customers should be targeted for retention?
2. What customer retention objectives should be set?
3. What customer retention strategies will be used?
4. How will the performance of the retention plan be
   measured?

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Measuring customer retention

• The number of customers doing business with a
  firm at the end of a financial year expressed as
  percentage of those who were active customers at
  the beginning of the year
• However
• What is an active customer?
• Is a year always the appropriate time frame?

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The appropriate time frame

• Depends on re-purchase cycle found in the
  industry.
• Insurance policies are renewed annually
• If the normal car replacement cycle is four
  years, then retention rate is more meaningful if
  it is measured over four years instead of twelve
  months

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Three measures of customer retention

• Raw customer retention rate.
• 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.
• Sales-adjusted retention rate.
• 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.
• Profit-adjusted retention rate.
• 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.

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Retention issues

• Retention measures should be made with an
  understanding of customer profitability issues
• The fundamental purpose of focussing CRM efforts
  on customer retention is to ensure that the
  company maintains relationships with
  strategically significant customers.
• It may not be beneficial to maintain
  relationships with all customers. Some are
• too costly to serve
• strategic switchers constantly in search of a
  better deal
• not strategically significant in roles such as
  benchmark, door opener, inspiration or technology
  partner

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The economic argument for customer retention

• Purchases grow as tenure grows
• Customer management costs fall over time
• Customer referrals grow
• Premium prices
• Customers who are satisfied in their relationship
  may reward their suppliers by paying higher
  prices.

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Which customers to retain?

• Strategically significant customers
• High life-time value customers
• High volume customers
• Benchmarks
• Inspirations
• Door openers
• Technology partners
• But these may also be attractive to your
  competitors

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Commitment and retention

• The level of commitment between your customer and
  you will figure in the decision about which
  customers to retain.
• If the customer is highly committed, i.e.
  impervious to the appeals of competitors, you do
  not need to invest so much in retention.
• If strategically significant customers are not
  committed to you, you may want to invest
  considerable sums in their retention

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Why focus on newly acquired customers?

• New customers may have greater future life-time
  value potential than longer tenure customers.
• evidence suggests that retention rates rise over
  time, so if defections can be prevented in the
  early stages of a relationship, there will be a
  pay-off in future revenue streams

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Two basic strategies for customer retention
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Negative and positive customer retention
strategies

• Create exit barriers
• Enforce the contract
• Extract switching penalties

• Delight them
• Create added value
• Use sales promotions
• Create social and structural bonds
• Earn the customers trust

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Positive customer retention strategy 1

• Wow your customers by meeting and exceeding
  their expectations
• Create customer delight
• Satisfaction plus one
• Do you understand customer expectations?
• Do you know which expectations are important?
• Do you know where the gaps are?

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Positive customer retention strategies 2-5

• Find ways to create additional value for
  customers
• Reward (loyalty) programs
• Customise the offer
• Customer clubs
• Sales promotions
• Bonds
• Social and Structural
• Commitment

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Reward programs

• Co-op dividend gt Green Shield Stamps
• gt American Airlines AAdvantage Card gt Nectar
• Card-based schemes have changed over time
• No identification members name
• Magnetic strip chip-embedded
• Solus networked
• Company-operated third-party operated
• Trivial reward major reward (5)

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The Tesco Clubcard

• Tesco introduced its first loyalty program in
  1995, called the Clubcard
• Enabled customers to accumulate points with each
  purchase that could be used to obtain discounts
  off future purchases.
• The Clubcard proved to be very successful.
• First, in attracting more customers to Tesco
  stores.
• Second, in capturing valuable information from
  customers with every swipe of the card, which led
  to the creation of a powerful database
• As a result of this initial success, 108 customer
  segments were identified and specific offers
  were made to each
• high-value customers receive valet parking when
  they come to shop and other special privileges.
• In 1996 Tesco introduced two further loyalty
  cards, a student card and a card for mothers,
  with offers specifically targeted to each groups
  needs.

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Five types of value from loyalty programs

• cash value.
• How much is the reward worth in cash compared to
  what is spent to obtain it?
• redemption value.
• How wide a range of rewards is offered?
• aspirational value.
• How much does the customer want the reward?
• relevance value.
• How achievable are the rewards?
• convenience value.
• How easy is it to collect the credits and redeem
  them for the reward?

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Customize the offer anything goes
People
Communication
Process
Logistics
Product/brand
Price
Location
Service
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Customer Clubs

• Swatch the Club
• The Rolling Stones Fan Club
• Pampers Parenting Institute
• Casa Buitoni
• The Harley Owners Group
• Sainsburys Littleones Club
• The Volkswagen Club

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Sales promotions to promote repeat purchasing

• In-pack or on-pack voucher
• Rebate or cash-back
• Free premium for continuous purchase
• Self-liquidating premium
• Collection schemes

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Bonds

• Social
• Positive relationships between individuals
• Empathy
• Responsiveness
• Reliability
• Leads to development of trust and commitment

• Structural
• Investments linking customer and supplier
• Financial
• Legal
• Equity
• Technological
• Process
• Project
• Multi-product

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Build customer commitment

• Create emotional attachment to your product,
  brand or company
• Committed customers are
• Highly satisfied
• Believe in the superiority of your product, brand
  or company
• Involved in your product, brand or company
• Resistant to competitive offers and have a strong
  intention to re-buy

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Three forms of commitment

• Instrumental
• customers are convinced that no other offer or
  company could do a better job of meeting their
  needs.
• Relational
• customer develops an emotional tie may be with an
  individual person, a work group or the
  generalised company as a whole
• Values-based
• customers values are aligned with those of the
  company

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Commitment to a low involvement product?

• Product modification
• add some feature that is highly involving because
  it connects to needs, values or interests
• detergents reformulated to become green
• Product association
• associate the product with some involving issue
  or context
• Buy Mobil and support our Olympians
• Product repositioning
• Lucozade became a sports drink
• Häagen Dazs reinvented the ice cream market by
  being adult and sexy

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Values-based commitment

• Body Shop International
• John Lewis Partnership
• Harley Davidson
• Co-operative Bank
• Cochlear
• Virgin Group
• Holden

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. and then theres negative commitment too

• Nestlé
• Infant formula in Africa
• Shell
• Brent Spar oil platform to be dumped in the North
  sea
• Nike
• Employment practices have been criticised

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Good corporate citizenship

• Giving positive word-of-mouth
• Offering advice on product design
• Reporting dated or tired point of sale
• Wearing your branded clothing
• Taking part in corporate events
• Participating in research
• Policing other customers
• Becoming a shareholder
• Taking role in corporate governance
• Recommending you as an employer

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Context makes a difference to retention practices

• Number of competitors
• Corporate culture
• Channel configuration
• Purchasing practices
• Ownership expectations
• Ethical concerns

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KPIs for customer retention programs

1. What is the raw customer retention rate?
2. What is the raw customer retention rate in each
   customer segment?
3. What is the sales-adjusted retention rate?
4. What is the profit-adjusted retention rate?
5. What are the sales and profit adjusted retention
   rates in each customer segment?
6. What is the cost of customer retention?
7. What is the share of wallet of the retained
   customers?
8. What is the customer churn rate per channel?
9. What is the cost-effectiveness of customer
   retention tactics?

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The role of research

1. Why are customers defecting?
2. Are there any lead indicators of impending
   defection?
3. What can be done to address the root causes?

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Lead indicators of defection

• Reduced RFM scores
• Non-response to a carefully targeted offer
• Reduced satisfaction levels
• Dissatisfaction with complaint handling
• Reduced share of customer
• Inbound calls for technical information
• Late payment
• Querying an invoice
• Changed customer touch points

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Core customer development strategies

• Up-sell
• Cross-sell
• Down-sell
• Reduce cost-to-serve

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Attributes of CRM-enabled customer development

1. Use of data-mining to identify opportunities
2. Customization
3. Channel integration
4. Integrated customer communication
5. Campaign management
6. Event-based marketing