2. 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)
3. Reicheld on Customer Retention
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%
4. 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
5. The Cost of Lost Business
The 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)
6. 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
7. 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.
8. /
A Cus tomer Value
Retention Model
☛
☛The CV/retention model offers a good way of
The CV/retention model offers a good way of
explaining the key relationships among the core
explaining the key relationships among the core
elements that create value in an organization
elements that create value in an organization
☛
☛Customer value is built through the proper mix of
Customer value is built through the proper mix of
SQIP
SQIP (service, quality, image & price) - elements
(service, quality, image & price) - elements
that attract and keep customers
that attract and keep customers
10. 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.
12. A Customer Loyalty Framework
Multiple loyalty
Situational loyalty
Limited loyalty
No Loyalty Some Loyalty Complete Loyalty
13. 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.
14. 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.
15. Sequences in Retention process
Exploring
Evaluating
Establishing Strategies
Examining feedback
16. 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.
17. 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
18. 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
19. 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)
(Reinartz, W. and Kumar, V., 2002)
20. Butterflies:
Good fit
High profit potential
Transaction satisfaction
Milk active accounts
Cease investing
Strangers:
Little fit
Lowest profit potential
Make no investment
Max transaction profit
True Friends:
Good fit
Best profit potential
Consistent communication
Attitudinal & behavioral loyalty
Delight customers
Barnacles:
Limited fit
Low profit potential
Measure size and share of wallet
Low share, up- and cross-sell
Small wallet, strict cost control
Transaction Relationship
High profit
Low profit
Classification of
Classification of
Customer Loyal Segments
Customer Loyal Segments
21. 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..
22. 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
23. 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
24. Usage Analysis Tools
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)
25. 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)
26. 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
27. How to Do an RFM Analysis *
4. Access a summary of each customer’s RFM transaction history.
This includes most recent purchase, frequency of purchases, and monetary value spent
per order.
s 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..
28. How to Do an RFM Analysis * - cont.
Sort your customers by frequency (number of orders) and apply the same
methodology as in #2.
n Sort your customers by monetary value (average $ amount of each order) and apply
the same methodology as in #2.
l 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)
Adapted from Kahan, R. (1998)
29. Customer Retention Approaches
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)
30. 9 Common/Effective
9 Common/Effective
Approaches for Enhancing Retention
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.
31. Most Common/Effective
Most Common/Effective
Approaches for Enhancing Retention – cont.
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
32. 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
33. 7 Criteria for Selecting
CR Approaches
■ Efficiency - low cost
Efficiency - low cost
■
■ Effectiveness - likelihood to succeed
Effectiveness - likelihood to succeed
■
■ Adaptability - strategic fit with the organizational culture
Adaptability - strategic fit with the organizational culture
■
■ Consistency - works well with the current marketing plan
Consistency - works well with the current marketing plan
■
■ Competitive advantage
Competitive advantage
■
■ Ease of implementation
Ease of implementation
■
■ Projected profitability
Projected profitability
34. 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
35. Measuring Customer Retention
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)
36. 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
