INTRODUCTION

Customer Retention is the activity that the selling organization undertakes to

reduce customer account defections. The success of this activity is when the

customer account places an additional order before a 12-month period has expired.

Note that ideally these orders will need to contribute similar financial amounts to

the previous 12 months. It can also be described as a series of actions that the

selling organization undertakes to reduce defections. This is the selling

organization's perspective of what they have to implement after the agreement in

principle stage of the buying cycle. The success of the customer retention process

is measured when the customer places an additional order before a 12-month

period has expired. Retention Rate is the percentage of the total number of

customers who have repeatedly placed an order (or made a transaction) during a

twelve month period measured over a number of years, compared to the total

number of customers in the same period.

Customer Retention marketing is a tactically-driven approach based on customer

behavior.  It's the core activity going on behind the scenes in Relationship

Marketing, Loyalty Marketing, Database Marketing, Permission Marketing, and

so forth.  Here’s the basic philosophy of a retention-oriented marketer:

1.  Past and Current customer behavior is the best predictor of Future

customer behavior.  Think about it.  In general, it is more often true than not true,

and when it comes to action-oriented activities like making purchases and visiting

web sites, the concept really shines through.

1

We are talking about actual behavior here, not implied behavior.  Being a 35-year-

old woman is not a behavior; it’s a demographic characteristic.  Take these two

groups of potential buyers who surf the ‘Net:

People who are a perfect demographic match for your site, but have never

made a purchase online anywhere

People who are outside the core demographics for your site, but have

purchased repeatedly online at many different web sites

If you sent a 20% off promotion to each group, asking them to visit and make a

first purchase, response would be higher from the buyers (second bullet above)

than the demographically targeted group (first bullet above).  This effect has been

demonstrated for years with many types of Direct Marketing.  It works because

actual behavior is better at predicting future behavior than demographic

characteristics are.  You can tell whether a customer is about to defect or not by

watching their behavior; once you can predict defection, you have a shot at

retaining the customer by taking action.

2.  Active customers are happy (retained) customers; and they like to "win." 

They like to feel they are in control and smart about choices they make, and they

like to feel good about their behavior.  Marketers take advantage of this by

offering promotions of various kinds to get consumers to engage in a behavior and

feel good about doing it.  

These promotions range from discounts and sweepstakes to loyalty programs and

higher concept approaches such as thank-you notes and birthday cards. 

Promotions encourage behavior.  If you want your customers to do something,

you have to do something for them, and if it’s something that makes them feel

2

good (like they are winning the consumer game) then they’re more likely to do it.

Retaining customers means keeping them active with you.  If you don't, they will

slip away and eventually no longer be customers.  Promotions encourage this

interaction of customers with your company, even if you are just sending out a

newsletter or birthday card.

The truth is, almost all customers will leave you eventually.  The trick is to keep

them active and happy as long as possible, and to make money doing it.

3.  Retention Marketing is all about:Action – Reaction – Feedback – Repeat. 

Marketing is a conversation, as the ClueTrain Manifesto and Permission

Marketing have pointed out.  Marketing with customer data is a highly evolved

and valuable conversation, but it has to be back and forth between the marketer

and the customer, and you have to LISTEN to what the customer is saying to you.

For example, let's say you look at some average customer behavior.  You look at

every customer who has made at least 2 purchases, and you calculate the number

of days between the first and second purchases.  This number is called "latency" -

the number of days between two customer events.   Perhaps you find it to be 30

days. Now, look at your One-Time buyers.  If a customer has not made a second

purchase by 30 days after the first purchase, the customer is not acting like an

"average" multi-purchase customer.  The customer data is telling you something is

wrong, and you should react to it with a promotion.  This is an example of the data

speaking for the customer; you have to learn how to listen.   This site and the

Drilling Down book are all about how to discover, manage, and listen to customer

data.  The data is speaking for the customer, telling you by its very existence (or

non-existence) there has been an action (or non-action) waiting for a reaction.

3

4.  Retention Marketing requires allocating marketing resources.  You have to

realize some marketing activities and customers will generate higher profits than

others.  You can keep your budget flat or shrink it while increasing sales and

profits if you continuously allocate more of the budget to highly profitable

activities and away from lower profit activities.  This doesn't mean you should 

"get rid" of some customers or treat them poorly.  

It means when you have a choice, as you frequently do in marketing, instead of

spending the same amount of money on every customer, you spend more on some

and less on others.  It takes money to make money.  Unless you get a huge

increase in your budget, where will the money come from?

For example, let's say you have 1,000 customers, and you have an annual budget

of $1,000.  You spend $1 on each customer each year, and for that $1, you get

back $1.10 in profits.  That's an ROI of 10%; you got back $1,100 for spending

$1,000.

Now, what if you knew spending $2 each year on a certain 50% of customers

would bring back $8 in profits.  That's a 400% ROI.  Where do you get the extra

$1?  You take it away from the other 50% of customers.  You spend the same

$1,000 total and you make back 500 (half the customers) x $8 = $4,000. If you

always migrate and reallocate marketing dollars towards higher ROI efforts,

profits will grow even as the marketing budget stays flat.  You have to develop a

way to allocate resources to the most profitable promotions, deliver them to the

right customer at the right time, and not waste time and money on unprofitable

promotions and customers.  This is accomplished by using the data customers

create through their interactions with you to build simple models or rules to

follow.  These models are your listening system, like the "30 day latency" model

4

above.  They allow the data to speak to you about the customer. This site and the

Drilling Down book are about teaching you how to build and use these models

yourself in 30 minutes with an Excel spreadsheet.  If you want to increase sales

while reducing the costs of marketing to customers, you have to get this book.

EXPLORE THE VALUE OF CUSTOMER RETENTION

Customer Service Skill Customer Relations Customer Strategy Customer

Market Plans Strategy

Customer retention is not only a cost effective and profitable strategy, but in

today's business world it's necessary. This is especially true when you remember

that 80% of your sales come from 20% of your customer and clients. With these

statistics I am wondering why most marketing and sales campaigns are designed

for the new customer.

Take for instance the wireless telephone companies; if you sign a new contract

you are given a large rebate or even a free cellular telephone. If you are a current

customer you have the privilege of paying full price. Can someone please explain

that methodology to me. With this type of promotion are we not just pushing

current customers and clients to seek services elsewhere when their contract ends?

Perhaps we need to rethink our marketing and sales strategies, afterall many

experts will tell you that it's five times more profitable to spend marketing and

advertising dollars to retain current customers than it is to acquire new customers.

In years past the importance of focusing on customer retention was not as

important, stickiness came naturally. We shopped in our neighborhood shops and

our corner grocery stores. We had a personal connection with our service

5

providers and the thought of shopping at another store would have never crossed

our minds.

That has all changed now. Our stores our larger, the majority of the sales

personnel don't know that you even exist. Not to mention that now we have the

convenience of the Internet and do a large portion of our shopping online, where

you are known by your email address. As a result, customer loyalty has

disappeared and large corporations and virtual storefronts are unable to ask the

millions of disloyal customers what caused them to stray.

However, there is a solution. Sophisticated technology and database equipment

has made it possible for specialized firms to make attempts at customer retention

through database marketing programs. Establishing a detailed client database will

allow these companies to keep track of personal information and individual

preferences of all their customers. This enables them to provide better service and

value. Just like the corner grocery store owner kept information on 200 customers

in his head, the large superstore can now keep track of 20,000 customers through

its customer database. With effective implementation of customer databases,

companies will be able to re-establish contact with customers, and will be able to

work successfully towards increasing customer retention, repeat sales, and

customer referrals.

To achieve the objectives of the database and customer retention programs, the

entire campaign should be designed and carried out with the customer in mind.

The exercise will only be effective if the customer recognizes and associates some

value with being part of your database. If they do not perceive value in your

program all of your communications, coupons, special offers, and newsletters will

6

be discarded. Your customers have been inundated with meaningless "junk" mail

and email spam, so embed your campaign with value.

A few value-add strategies that you can use include:

Membership cards and programs that entitle your customers to special

offers, discounts, or preferential treatment.

Welcome, acknowledgement, sales recognition, thank you statements.

After sales satisfaction and complaint inquiries and surveys.

Event oriented communications in which the customer is genuinely

interested.

Enhanced and empowered customer, after sales, and technical support.

Customer Math brings you simple mathematical proof that will convince you that

Customer Retention is the best strategy for success in business and career.

Customer Math formulae like 1=5, 1=3, 1=12, 10%=47%, and 1=23 will make

you a BELIEVER in the concept of customer satisfaction and retention. Once

you have understood the mathematics related to the customer, you will never dare

to make the customer unhappy.

BEST CUSTOMER RETENTION STRATEGIES

Customer retention rate: -- The customer retention rate refers to the number of

customers lost over a period of time. It is normally calculated by the percentage of

lost customers versus existing customers over a quarterly or annual period,

without tallying new customer acquisitions.

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While there are obvious benefits to keeping customers loyal and maintaining high

customer retention rates, it can be extremely challenging for management to keep

retention rates up.

UNDERSTANDING CUSTOMER RETENTION

Those getting started with a customer retention strategy might initially assume

that retention rate is based on customer satisfaction. However, several studies

have indicated that there is little correlation between customer satisfaction and

retention or future purchases, according to customer experience expert Lior

Arussy, founder of Strativity Group Inc. In one case, only 17% of satisfied

customers of financial institutions claimed that they would not entertain a

competing offer.

The real indication for customer retention is not customer satisfaction, but

customers' actions, Arussy said. Repeat business, purchasing ancillary services,

recommendations to others, willingness to pay premium price and frequency of

purchasing are the indicators of customer retention. These factors can be easily

quantified and measured by the dollar value of each action.

Sometimes organizations need to understand that the closest touch point to the

customer can help improve customer retention. For example, Arussy received a

question from a SearchCRM.com reader who manages a fleet of truck drivers,

who was wondering about ways to improve the customer experience. Arussy

advised this fleet manager to embrace the role of his drivers as the "delivery on

the promise" professionals, meaning they are the action behind the promises and

commitments made by the sales force. As Arussy said, "They are experience

creators in every way that they conduct themselves: clothing, appearance,

8

language, etc. They are the face of the company and they can help customer

retention rates."

Arussy's advice to this reader was to put in place a retention strategy that supports

the customer experience. The infrastructure should include training drivers (or any

other employees that are interacting with customers) about their role and how they

are being perceived by the customers. Arussy encouraged the reader to create

incentives and motivation programs to encourage desired behavior as well as

performance evaluations that measure how customers rank behavior.

While there may not be a direct correlation between customer satisfaction and

customer retention rates, many experts have studied employee retention and how

it affects customer retention.

A 2007 study on customer experience management by the Stativity Group

surveyed 309 global executives and found a number of negative trends. One of the

major issues? Only 54% of respondents said their company deserves their loyalty.

"Which is a very dangerous trend," Arussy said. "If your employees don't believe

in the value of a product or owe you any type of loyalty, trying to win the battle

for customers' hearts, wallets and relationships is impaired."

Customer retention expert Michael Lowenstein, vice president and senior

consultant for customer loyalty management at Harris Interactive, agrees that

employee loyalty and engagement has a direct relationship to customer

marketplace behavior. He explored employee retention strategies, in an article

called.

Employees are capable of directly contributing to both customer disappointment

and customer delight. It is essential that companies have a research and analysis

method that links staff performance engagement directly to customer behavior, so

9

they can hire, train, recognize and reward employees for how they contribute to

customer value."

BUILD A CUSTOMER RETENTION STRATEGY

As Lowenstein points out, customer loyalty is all about driving perceived value,

whether that is rational (functional, quality, cost, etc.), emotional (trust, service,

communication, information, brand equity, etc.) or a combination of these two

dimensions. His advice for building a customer retention strategy? First, identify

what leverages top-end customer commitment and advocacy behavior, and then

build customer experience around it. According to Lowenstein's research on

customer retention, there is no standard schedule for how often to communicate

with customers to build loyalty. In his research, customers reported an interest in

receiving communication from suppliers as long as they could see personal value

in each message. The excerpt below is from an article Lowenstein wrote called

Balancing Messaging and Experience: The CRM 'Lasagna' Recipe for Creating

Customer Advocacy:

"In CRM, like lasagna, it's layers of messaging and experience over an extended

period; but it has to begin with messaging, i.e., how the brand promise is initially

communicated and sustained, and grown, with each succeeding customer

engagement and contact. Companies tend to believe that customers gain

experience with their enterprises entirely through people, products and services.

Largely true, as far as this thinking goes; but organizations often don't have

enough awareness that what is said to customers, and how, where, and when it is

said has an equal, if not greater, behavioral impact. Communication is about

relevance and trust, two essential elements in the way customers see suppliers.

Customers have grown increasingly skeptical of supplier messaging. When

10

considering alternative suppliers or making final purchase decisions, it is now

becoming well understood that the principal, previously neglected criteria are

intangible, emotional, relationship benefits, with much of what is tangible seen as

one-dimensional and expected. This absolutely requires that the meld between

messaging and experience is as seamless as possible."

IMPLEMENTATION OF A CUSTOMER RETENTION PROGRAM

A road map for implementing a customer loyalty program should include the

following, according to Lowenstein:

Appropriate research for identifying the benefits.

Testing them for prospective customer interest and effectiveness.

Following up with further research once implemented to make certain that

the loyalty program's benefits are working.

11

HOW TO CALCULATE RETENTION RATE

The customer retention rate is calculated by determining the number of customers

lost over a period of time compared to repeat customers over the same amount of

time. Pisello said, "A customer is one who continues to make purchases, and a lost

customer is one who has made purchases, but does not repeat these purchases for

some time. The key is to analyze the repeats over a long enough horizon." The

calculation is:

(Total number of customers minus the number of repeat customers) divided

by total number of customers

In environments where users purchase a subscription, the calculation is easier, and

can be represented as:

Number of subscribers who cancelled or did not renew during the period

divided by the total number of subscribers for the period

As Pisello advised, "The difficult part in this equation is determining the right

total number of subscribers to use: the ones at beginning of period, the ones at the

end, a peak, or an average over the period."

Some companies can measure retention rate using their CRM system, since any of

the vendors with solid sales modules should offer this capability. Customer

service expert Lori Bocklund, founder and president of Strategic Contact, Inc.,

recommends that companies look for this functionality when evaluating CRM

solutions, even though it is unlikely to be the differentiating factor.

"You can also consider performance optimization tools if you want to combine

things like save rate with other key performance indicators for an overall

scorecard," Bocklund said. Companies like Witness, Performix, AIM, and Merced

12

offer these types of tools. To measure this, some companies combine data from

the CRM system and data from other systems, such as your quality monitoring

system, ACD or CTI solution handling contact routing and reporting.

There are no hard and fast rules on calculating customer defection and customer

retention, according to Lowenstein. It can depend on the industry or the type of

business, since some companies have long-term arrangements with customers.

B2B customer deflection models may be somewhat more challenging, Lowenstein

said, because of the greater likelihood to have missing or incomplete

'firmographic' variables. However, several consulting and database management

companies have succeeded in creating them.

IMPROVE YOUR CUSTOMER RETENTION RATE

Improving your customer retention rate is vital in a competitive business climate,

and Beyond Philosophy is here to help you create a better approach to customer

retention marketing techniques. It makes no sense to invest the time, effort, and

money to attract a customer yet pay no attention to what it takes to keep the

customer. This is the scenario, however, that many companies continue to pursue.

Maintaining a high customer retention rate is a growing challenge for many

organizations because keeping the customer is unfamiliar territory.

Why do companies pour money into attracting new customers but spend little on

formulating a better customer retention strategy? One client recently told us that

his company was losing 30% of its customers in the first year, yielding huge

losses in revenue. In cases such as this, the costs of customer acquisition are not

even reclaimed.

13

VALUE INNOVATION

The value innovation concept provides a relevant support for questioning

product/market strategies as well as underlying assumptions. You must examine

radically what constitutes real value for customers by asking fundamental

questions: what value offering need to be introduced or increased to meet

customer needs? what value offerings can be reduced or eliminated, because they

do not constitute real value for customers

CUSTOMERS FOR LIFE

The purpose of a business is to create and keep a customer. If a business

successfully creates and keeps customers in a cost-effective way, it will make a

profit while continuing to survive and thrive. If, for any reason, a business fails to

attract or sustain a sufficient number of customers, it will experience losses. Too

many losses will lead to the demise of the enterprise.

According to Dun and Bradstreet, the single, most important reason for the failure

of businesses in America is lack of sales. And, of course, this refers to resales as

well as initial sales. So your company’s job is to create and keep a customer, and

your job is exactly the same.

GETTING LOYAL CUSTOMERS

Delighted and loyal customers will return for follow-on business without

considering alternatives of comparing the competition. Though, there is a number

of factors that influence customers' decisions to remain loyal, true loyalty is based

on your company's continuous delivery of superior value. Customer loyalty is a

14

major contributor to sustainable profit growth - "and to win customer loyalty, the

business must first satisfy the customer repeatedly."... More

BENEFITS OF BUSINESS PROCESS MANAGEMENT

The payoffs of process mastery can be breathtaking. Costs melt away, quality goes

through the roof, and time spans shrink to a fraction of what they were. Hammer

and Company8 surveyed dozens of companies that had adopted the process

approach to work and business.

In order fulfilment, cycle times had typically decreased by 60% to 90%

"Perfect orders" (those delivered on time, with no mistakes) had increased by 25%

These improvements in process performance paid off in the critical enterprise

currencies of customer satisfaction, customer retention, and corporate profits...

More

PARTNERING WITH CUSTOMERS

Customer connection comes from involving customers, partnering with them.

Partnering with customers represents your firm's "capacity to anticipate what

customers need even before they know they need it."

Customer Retention marketing is a tactically-driven approach based on customer

behavior.  It's the core activity going on behind the scenes in Relationship

Marketing, Loyalty Marketing, Database Marketing, Permission Marketing, and

so forth.  Here’s the basic philosophy of a retention-oriented marketer:

1.  Past and Current customer behavior is the best predictor of Future

customer behavior.  Think about it.  In general, it is more often true than not true,

15

and when it comes to action-oriented activities like making purchases and visiting

web sites, the concept really shines through.

We are talking about actual behavior here, not implied behavior.  Being a 35-year-

old woman is not a behavior; it’s a demographic characteristic.  Take these two

groups of potential buyers who surf the ‘Net:

People who are a perfect demographic match for your site, but have never

made a purchase online anywhere

People who are outside the core demographics for your site, but have

purchased repeatedly online at many different web sites

If you sent a 20% off promotion to each group, asking them to visit and make a

first purchase, response would be higher from the buyers (second bullet above)

than the demographically targeted group (first bullet above).  This effect has been

demonstrated for years with many types of Direct Marketing.  It works because

actual behavior is better at predicting future behavior than demographic

characteristics are.  You can tell whether a customer is about to defect or not by

watching their behavior; once you can predict defection, you have a shot at

retaining the customer by taking action.

2.  Active customers are happy (retained) customers; and they like to "win." 

They like to feel they are in control and smart about choices they make, and they

like to feel good about their behavior.  Marketers take advantage of this by

offering promotions of various kinds to get consumers to engage in a behavior and

feel good about doing it.  

These promotions range from discounts and sweepstakes to loyalty programs and

higher concept approaches such as thank-you notes and birthday cards. 

16

Promotions encourage behavior.  If you want your customers to do something,

you have to do something for them, and if it’s something that makes them feel

good (like they are winning the consumer game) then they’re more likely to do it.

Retaining customers means keeping them active with you.  If you don't, they will

slip away and eventually no longer be customers.  Promotions encourage this

interaction of customers with your company, even if you are just sending out a

newsletter or birthday card.The truth is, almost all customers will leave you

eventually.  The trick is to keep them active and happy as long as possible, and to

make money doing it.

3.  Retention Marketing is all about: Action – Reaction – Feedback – Repeat. 

Marketing is a conversation, as the ClueTrain Manifesto and Permission

Marketing have pointed out.  Marketing with customer data is a highly evolved

and valuable conversation, but it has to be back and forth between the marketer

and the customer, and you have to LISTEN to what the customer is saying to you.

For example, let's say you look at some average customer behavior.  You look at

every customer who has made at least 2 purchases, and you calculate the number

of days between the first and second purchases.  This number is called "latency" -

the number of days between two customer events.   Perhaps you find it to be 30

days.

Now, look at your One-Time buyers.  If a customer has not made a second

purchase by 30 days after the first purchase, the customer is not acting like an

"average" multi-purchase customer.  The customer data is telling you something is

wrong, and you should react to it with a promotion.  This is an example of the data

speaking for the customer; you have to learn how to listen.  

17

This site and the Drilling Down book are all about how to discover, manage, and

listen to customer data.  The data is speaking for the customer, telling you by its

very existence (or non-existence) there has been an action (or non-action) waiting

for a reaction.

4.  Retention Marketing requires allocating marketing resources.  You have to

realize some marketing activities and customers will generate higher profits than

others.  You can keep your budget flat or shrink it while increasing sales and

profits if you continuously allocate more of the budget to highly profitable

activities and away from lower profit activities.  This doesn't mean you should 

"get rid" of some customers or treat them poorly.  

It means when you have a choice, as you frequently do in marketing, instead of

spending the same amount of money on every customer, you spend more on some

and less on others.  It takes money to make money.  Unless you get a huge

increase in your budget, where will the money come from?

For example, let's say you have 1,000 customers, and you have an annual budget

of $1,000.  You spend $1 on each customer each year, and for that $1, you get

back $1.10 in profits.  That's an ROI of 10%; you got back $1,100 for spending

$1,000.

Now, what if you knew spending $2 each year on a certain 50% of customers

would bring back $8 in profits.  That's a 400% ROI.  Where do you get the extra

$1?  You take it away from the other 50% of customers.  You spend the same

$1,000 total and you make back 500 (half the customers) x $8 = $4,000.

If you always migrate and reallocate marketing dollars towards higher ROI

efforts, profits will grow even as the marketing budget stays flat. 

18

You have to develop a way to allocate resources to the most profitable

promotions, deliver them to the right customer at the right time, and not waste

time and money on unprofitable promotions and customers.  This is accomplished

by using the data customers create through their interactions with you to build

simple models or rules to follow.  These models are your listening system, like

the "30 day latency" model above.  They allow the data to speak to you about the

customer. This site and the Drilling Down book are about teaching you how to

build and use these models yourself in 30 minutes with an Excel spreadsheet

CUSTOMER RETENTION LAW & LEGAL DEFINITION

Customer retention refers to the percentage of customer relationships that, once

established, a business is able to maintain on a long-term basis. Customer

retention is a simple concept—happy customers who feel important and are

regularly communicated with in the right way will keep coming back. It is a major

contributing factor in the net growth rate of businesses. For example, a company

that increases its number of new customers by 20 percent in a year but retains only

85 percent of its existing customers will have a net growth rate of only 5 percent

(20 percent increase less 15 percent decrease). But the company could triple that

rate by retaining 95 percent of its clients. Of course, growth is just one of the

benefits that superior customer retention can offer a company. Increased profits

are another. The cost of acquiring customers and putting them on the books

generally exceeds by several times the annual cost of serving existing customers.

So the longer customers are kept, the more years over which the initial cost of

acquisition can be spread.

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A variety of strategies are available to small business owners seeking to improve

their customer retention rates. Of course, the most basic tools for retaining

customers are providing superior product and service quality. High-quality

products and services minimize the problems experienced by customers and create

goodwill toward the company, which in turn increases customers' resistance to

competitors' overtures. However, it is important that small business owners not

blindly seek to improve their customer retention rate. Instead, they must make

sure that they are targeting and retaining the right customers—the ones who

generate high profits. In short, customer retention should not be a stand-alone

program but should be seen as part of an overall customer relations management.

The first step in establishing a customer retention program is to create a time line

of a typical customer relationship, outlining all the key events and interactions that

occur between the first contact with and the eventual loss of the customer. The

next step is to analyze the company's trends in losing customers. Customer

defections may be related to price increases or to a certain point in the relationship

life cycle, for example. Finally, small business owners can use the information

gathered to identify warning signs of customer loss and develop retention

programs to counteract it.

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STRATEGIES FOR RETAINING CUSTOMERS

One basic customer retention strategy available to small business owners involves

focusing on employee retention and satisfaction. A company with a high turnover

rate may not be able to maintain strong personal relationships with its customers.

Even if relationships are established, the customer may decide to take its business

to a new company when its contact person leaves. At the very least, high turnover

creates a negative environment and reduces the quality of service provided to

customers. In order to reduce turnover, it is important to provide employees with

career development opportunities and high degrees of involvement in the

business. Another possible strategy for retaining customers involves

institutionalizing customer relationships. Rather than just providing contact with

individual employees, a small business can provide value to customers through the

entire company. For example, it could send newsletters or provide training

programs in order to become a source of information and education for customers.

It may also be possible to establish membership cards or frequent-buyer programs

as direct incentives for customer retention.

Some companies may be able to use electronic links to improve the service they

provide to customers. For example, e-mail connections could be used to provide

updates on the status of accounts, electronic order systems could be used to

simplify reordering and reduce costs, and online services could be used to provide

general information. Customer retention programs are particularly important in

volatile industries—those characterized by fluctuating prices and product values.

In this situation, superior service may discourage but not prevent customer

defections. Some strategies that may be useful to companies in volatile industries

21

include providing stable prices over the customer life cycle, basing prices on the

overall cost and profitability of the customer relationship, and cross-selling

additional products and services. All of these strategies are intended to minimize

the changes and problems customers experience, thus making them want to

maintain the business relationship.

An important distinction can be made between strategies that lock the customer in

by penalizing their exit from a relationship, and strategies that reward a customer

for remaining in a relationship. The former are generally considered negative, and

the latter positive, customer retention strategies. Negative customer retention

strategies impose high switching costs on customers, discouraging their defection.

In a B2C context, mortgage companies have commonly recruited new customers

with attractive discounted interest rates. When the honeymoon period is over,

these customers may want to switch to another provider, only to discover that they

will be hit with early redemption and exit penalties. Customers wishing to switch

retail banks find that it is less simple than anticipated: direct debits and standing

orders have to be reorganized. In a B2B context, a customer may have agreed a

deal to purchase a given volume of raw material at a quoted price. Some way

through the contract a lower cost supplier makes a better offer. The customer

wants to switch, but finds that there are penalty clauses in the contract. The new

supplier is unwilling to buy the customer out of the contract by paying the

penalties.

Some customers find these switching costs are so high that they remain customers,

though unwillingly. The danger for CRM practitioners is that negative customer

retention strategies produce customers who feel trapped. They are likely to agitate

22

to be freed from their obligations, taking up much management time. Also, they

may utter negative word-of- mouth. They are unlikely to do further business with

that supplier. Companies that pursue these strategies argue that customers need to

be aware of what they are buying and the contracts they sign. The total cost of

ownership (TCO) of a mortgage should, and does, include early redemption costs.

When presented with dissatisfied customers complaining about high relationship

exit (switching) costs, companies have a choice. They can either enforce the terms

and conditions, or not. The latter path is more attractive when the customer is

strategically significant, particularly if the company can make an offer that

matches that of the prospective new supplier.

POSITIVE CUSTOMER RETENTION STRATEGIES

In the following sections we look at a number of positive customer retention

strategies, including creating customer delight, adding customer-perceived value,

creating social and structural bonds and building customer engagement.

CUSTOMER DELIGHT

It is very difficult to build long-term relationships with customers if their needs

and expectations are not understood and well met. It is a fundamental precept of

modern customer management that companies should understand customers, and

then acquire and deploy resources to ensure their satisfaction and retention. This is

why CRM is grounded on detailed customer-related knowledge. Customers that

you are not able to serve well may be better served by your competitors.

23

Delighting customers, or exceeding customer expectations, means going beyond

what would normally satisfy the customer. This does not necessarily mean being

world-class or best-in-class. It does mean being aware of what it usually takes to

satisfy the customer and what it might take to delight or pleasantly surprise the

customer. You cannot really strategize to delight the customer if you do not

understand the customer's fundamental expectations. You may stumble onto

attributes of your performance that do delight the customer, but you cannot

consistently expect to do so unless you have deep customer insight. Consistent

efforts to delight customers show your commitment to the relationship.

Commitment builds trust. Trust begets relationship longevity.

Customer delight occurs when the customer's perception of their experience of

doing business with you exceeds their expectation. In formulaic terms:

CD = P > E

where CD = customer delight, P = perception and E = expectation. This formula

implies that customer delight can be influenced in two ways: by managing

expectations or by managing performance. In most commercial contexts customer

expectations exceed customer perceptions of performance. In other words,

customers can generally find cause for dissatisfaction. You might think that this

would encourage companies to attempt to manage customer expectations down to

levels that can be delivered. However, competitors may well be improving their

performance in an attempt to meet customer expectations. If your strategy is to

manage expectations down, you may well lose customers to the better performing

company. This is particularly likely if you fail to meet customer expectations on

important attributes.

24

Customers have expectations of many attributes, for example product quality,

service responsiveness, price stability and the physical appearance of your people

and vehicles. These are unlikely to be equally important. It is critical to meet

customer expectations on attributes that are important to the customer. Online

customers, for example, look for rapid and accurate order fulfilment, good price,

high levels of customer service and website functionality. Online retailers must

meet these basic requirements. Dell Computers believes that customer retention is

the outcome of their performance against three variables: order fulfi lment (on-

time, in full, no error (OTIFNE)), product performance (frequency of problems

encountered by customers) and after-sales service (percentage of problems fixed

first time by technicians). The comments in parentheses are the metrics that Dell

uses.

Figure identifies a number of priorities for improvement (PFIs) for a restaurant

company. The PFIs are the attributes where customer satisfaction scores are low,

but the attributes are important to customers. In the example, the PFIs are food

quality and toilet cleanliness. There would be no advantage in investing in

speedier service or more helpful staff.

ADD CUSTOMER-PERCEIVED VALUE

The second major positive customer retention strategy is to add customer-

perceived value. Companies can explore ways to create additional value for

customers. The ideal is to add value for customers without creating additional

costs for the company. If costs are incurred then the value-adds may be expected

to recover those costs. For example, a customer club may be expected to generate

a revenue stream from its membership.

25

There are two common forms of value-adding programme: loyalty schemes,

customer clubs and sales promotions.

LOYALTY SCHEMES

Loyalty schemes reward customers for their patronage. Loyalty schemes or

programmes can be defined as follows:

A loyalty programme is a scheme that offers delayed or immediate incremental

rewards to customers for their cumulative patronage. The more a customer spends,

the higher the reward. Loyalty schemes have a long history. In 1844, in the UK,

the Rochdale Pioneers developed a cooperative retailing operation that distributed

surpluses back to members in the form of a dividend. The surpluses were

proportionate to customer spend. S & H Pink Stamps and Green Shield stamps

were collected in the 1950s and 1960s, and redeemed for gifts selected from

catalogues. In the 1970s, Southwest Airlines ran a ' Sweetheart Stamps '

programme that enabled travellers to collect proofs of purchase and surrender

them for a free fl ight for their partner.

26

Today's CRM-enabled loyalty schemes owe their structure to the frequent flier

programmes (FFP) that started with American Airlines ' Advantage programme in

1981. The airline made a strategic decision to use its spare capacity as a resource

to generate customer loyalty. Airlines are high fixed-cost businesses. Costs do not

change much, regardless of whether the load factor is 25 percent or 95 percent.

American knew that filling the empty seats would have little impact on costs, but

could impact significantly on future demand. The airline searched its reservation

system, SABRE, for details of frequent fliers in order to offer them the reward of

free flights. This basic model has migrated from airlines into many other B2C

sectors: hotels, restaurants, retail, car hire, gas stations and bookstores, for

example. It has also transferred into B2B contexts with many suppliers offering

loyalty rewards to long-term customers.

The mechanics of these schemes have changed over time. Initially, stamps were

collected. The first card-based schemes were anonymous, i.e. they carried no

personal data, not even the name of the participant. Then magnetic stripe cards

were introduced, followed by chip-embedded cards that carried a lot of personal

and transactional data. Innovators developed their own individual schemes.

Eventually, these transformed into linked schemes, in which, for example, it was

possible to collect air miles from various participating companies such as gas

stations, credit cards and food retailers. Current schemes are massively different

from the early programmes. For example, Nectar is a consortium loyalty scheme

operating in the UK managed not by the participants, but by an independent third

party. Its core retail participants are all number one or two in their respective

markets: Sainsbury's, Barclaycard, Debenhams and BP. Shoppers register with the

scheme, then carry a single magnetic stripe card and collect points that are

27

converted into vouchers redeemable in a wide range of retailers, including

supermarkets, liquor stores, catalogue retailers, restaurants, hotels, cinemas, travel

outlets and tourist attractions. Each of the major retail participants had been a

member of another loyalty programme, and customers were able to convert their

existing credits to Nectar points

Loyalty programmes provide added value to consumers at two points, during

credit acquisition and at redemption. Although the credits have no material value

until they are redeemed, they may deliver some pre-redemption psychological

benefits to customers, such as a sense of belonging and of being valued, and an

enjoyable anticipation of desirable future events. At the redemption stage,

customers receive both psychological and material benefits. The reward acts to

positively reinforce purchase behavior. It also demonstrates that the company

appreciates its customers. This sense of being recognized as valued and important

can enhance customers ' overall sense of well-being and emotional attachment to

the firm. However, customers can become loyal to the scheme, rather than to the

company or brand behind the scheme.

Loyalty schemes are not without critics. Critics question their cost and

effectiveness. Certainly, they can be very expensive to establish and manage. In

respect of operating costs, retail schemes typically reward customers with a cash

rebate or vouchers equivalent to 1 percent of purchases. This comes straight out of

the bottom line so a retailer that is making 5 percent margin loses one-fifth or 20

percent of its profit to fund the scheme. There may also be a significant

investment in technology to support the scheme, and marketing to launch and

sustain the scheme. Supermarket operator Safeway dropped its UK loyalty

28

programme, which had been costing about £30 million annually. Shell is reported

to have spent up to £40 million to develop its smart card scheme. Unredeemed

credits represent liabilities for scheme operators. For example, it has been

suggested that if all the unused air miles were redeemed on the same day it would

take 600,000 Boeing 747s to meet the demand.

Schemes are also criticized for their effectiveness. Critics claim that schemes have

become less distinctive and value-adding as many competitors now operate me-

too programmes. Indeed, it is very hard to fi nd any hotel chain that does not have

a loyalty programme. Customers now expect to accumulate credits as part of the

standard hotel value proposition. Many UK supermarket shoppers carry loyalty

cards from more than one supermarket. 21 The customer's choice set when

grocery shopping might include all suppliers with whom they have a card-based

relationship.

One major concern is that loyalty schemes may not be creating loyalty at all.

Loyalty takes two forms: attitudinal and behavioural loyalty. Attitudinal loyalty is

reflected in positive affect towards the brand or supplier. Behavioural loyalty is

refl ected in purchasing behaviour. There is very little longitudinal evidence about

shifts in customer behaviours after joining a loyalty scheme. One retailing study,

however, using longitudinal data from a convenience store franchise, found that

shoppers who were heavy buyers at the beginning of a loyalty programme did not

change their patronage behaviour after joining. However, shoppers whose initial

patronage levels were low or moderate gradually became more behaviourally

loyal to the fi rm, increasing their shopping spend at the franchise. For light

buyers, the loyalty programme encouraged shoppers to buy from additional

categories, thus deepening their relationship with the franchise.

29

Whether or not they develop loyalty, these schemes certainly reward buying

behaviour. Accumulated credits represent investments that the customer has made

in the scheme or the brands behind the scheme. When customers get no return

from this investment, they can be deeply distressed. Members of at least fi ve

airline schemes, Braniff, Midway, MGM Grand, Legend and Ansett, lost their air

miles when their airlines folded. Members of Pan Am's FFP were fortunate to

have their credits transferred into Delta Airlines when Pan Am stopped fl ying.

Frequent fl iers of Australia-based Ansett forfeited their miles after the airline

stopped fl ying in 2001. Passengers organized themselves into a group to lobby,

ultimately unsuccessfully, for their loyalty to be recognized and rewarded by the

company administrators, or prospective purchasers of the airline.

Additionally, loyalty schemes are successful enablers of customer insight.

Personalized cards are obtained only after registering personal data. Then it

becomes possible to monitor transactional behaviour. Chip- embedded smart cards

carry the information on the card itself. A huge amount of data is generated that

can be warehoused and subjected to data mining for insights into purchasing

behaviour. These insights can be used to guide marketing campaigns and offer

development. Boots, for example, ran a series controlled experiments mailing

health and beauty offers to select groups of carefully profi led customers. It

achieved 40 per cent response rates, in comparison to 5 per cent from the control

group. 24 The loyalty scheme concept has been migrated into the online

environment. One of the innovators, beenz, which was established in 1998, has

not survived.

30

SALES PROMOTIONS

Whereas loyalty schemes and clubs are relatively durable, sales promotions offer

only temporary enhancements to customer value. Sales promotions, as we saw in

the last chapter can also be used for customer acquisition. Retention-oriented sales

promotions encourage the customer to repeat purchase, so the form they take is

different. Here are some examples.

In-pack or on-pack voucher: customers buy the product and receive a

voucher entitling them to a discount off one or more additional purchases.

Rebate or cash back: rebates are refunds that the customer receives after

purchase. The value of the rebate can be adjusted in line with the quantity

purchased, in order to reward customers who meet high volume targets.

Patronage awards: customers collect proofs of purchase, such as store

receipts or barcodes from packaging, which are surrendered for cash or

gifts. The greater the volume purchased the bigger the award.

Free premium for continuous purchase: the customer collects several

proofs of purchase and mails them in, or surrenders them at retail outlets to

obtain a free gift. Sometimes the gift might be part of a collectable series.

For example, a manufacturer of preserves and jams developed a range of

collectable enamel badges. Customers collected proofs of purchase and

mailed them in to receive a badge. There were 20 different badges in the

series. This promotion was so popular that a secondary market was

established so that collectors could trade and swap badges to obtain the full

set.

Collection schemes: these are long-running schemes where the customer

collects items with every purchase. Kellogg's ran a promotion in which

31

they inserted picture cards of carefully chosen sports stars into packets of

cereals. Customers didn't know which card they had until they bought and

opened the pack. These became collectable items.

Self-liquidating premium: a self-liquidating promotion is one that

recovers its own direct costs. Typically, consumers are invited to collect

proofs of purchase, and mail them in with a personal cheque or money

order. This entitles the customer to buy a product at a discounted premium,

such as a camera or gardening equipment. The promoter will have reached

a deal with the suppliers of the products to buy in bulk at a highly

discounted rate, perhaps on a sale or return basis. Margins earned from the

sale of product, plus the value of the cheque or money order cover the

costs of running the promotion which, as a consequence, becomes self-

liquidating.

BONDING

The next positive customer retention strategy is customer bonding. B2B

researchers have identified many different forms of bond between customers and

suppliers. These include interpersonal bonds, technology bonds (as in EDI), legal

bonds and process bonds. These different forms can be split into two major

categories: social and structural.

SOCIAL BONDS

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Social bonds are found in positive interpersonal relationships between people on

both sides of the customer-supplier dyad. Positive interpersonal relationships are

characterized by high levels of trust and commitment. Successful interpersonal

relationships may take time to evolve, as uncertainty and distance are reduced. As

the number of episodes linking customer and supplier grow, there is greater

opportunity for social bonds to develop. Suppliers should understand that if they

act opportunistically or fail to align themselves to customer preferences, trust and

confidence will be eroded.

Strong social bonds can emerge between employees in companies having similar

sizes, cultures and locations. For example, small and medium-sized businesses

generally prefer to do business with similar sized companies, and Japanese

companies prefer to do business with other Japanese companies. Geographic

bonds emerge when companies in a trading area cooperate to support each other.

Social relationships between buyer and seller can be single or multilevel. A

single-level relationship might exist between the supplier's account manager and

the customer's procurement officer. The more interpersonal links there are

between the dyad, the more resistant the relationship is to breakdown. For

example, technical, quality and operations people talk to their equivalents on the

other side.

Social bonds characterized by trust generally precede the development of

structural bonds. Mutual investments in business relationships serve as structural

bonds. These structural bonds can be formally recognized in an alliance or joint

venture having legal status. Companies are unlikely to commit resources if there is

a low level of trust in the partner's integrity and competence.

BUILD CUSTOMER ENGAGEMENT

33

The final positive strategy for building customer retention is to build customer

engagement. Various studies have indicated that customer satisfaction is not

enough to ensure customer longevity. For example, Reichheld reports that 65 to

85 percent of recently defected customers claimed to be satisfi ed with their

previous suppliers. Another study reports that one in ten customers who said they

were completely satisfied, scoring ten out of ten on a customer satisfaction scale,

defected to a rival brand the following year. Having satisfied customers is,

increasingly, no more than a basic requirement of being in the game.

Highly engaged customers have levels of emotional or rational attachment or

commitment to a brand, experience or organization that are so strong that they are

highly resistant to competitive influence. The terms engagement, attachment and

commitment tend to be used interchangeably to describe this phenomenon. The

topic of customer engagement was introduced in Chapter 6.

34

OTHERS CUSTOMER RETENTION STRATEGIES

Before we get into details, here's a quick list of customer retention strategies that

you can implement on your site.

Fresh content - regularly

A regular (free) publication

Signups for fututre notifications

Data mining

STRATEGIES OF CUSTOMER RETENTION

1. REGULAR FRESH CONTENT

Most professional Internet marketers agree: content sells.

If your site has great content, the word gets around and people start flocking to

your site. But that's great for customer acquisition. What about retention? To get

the same customers to keep coming back for more, you have to add fresh content

on a regular basis.

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2. REGULAR FREE PUBLICATION

Free newsletters are great tools in customer retention. You should offer a signup-

box on most pages within your site, and checkboxes for newsletters on most major

forms on your site - like the feedback and order form.

Your newsletter establishes your expertise in the eyes of your customers and it

keeps them updated on what's on offer at your web site - but... The best thing

about a newsletter is that your name and/or your company name is under the

customer's nose on a regular basis. It keeps reminding her of you. It tells her that

your dotcom bubble did not burst. It get's them coming back.

The bottom line about newsletters is that they require a lot of time. Time that most

of us don't have. Generating enough good content to fill a newsletter every week

or even every month can be a daunting task.

3. SIGNUPS FOR FUTURE NOTIFICATIONS

I've updated my thinking on sign-ups. This is where I used to tell you to ask

visitors to sign up for notifications of changes to your site. In the years that I've

asked people to sign up for Pandecta notifications, I had maybe 10 sign ups - so I

dropped it. If it doesn't work it just clutters.

36

Try it for yourself. People who sign up for site notifications usually make great

customers. They already know you deliver good value and they're ready to buy

from you.

CUSTOMER RETENTION MARKETING TECHNIQUES

We are often asked how the customer retention rate is affected by the experience a

customer receives? The answer is simple. If you provide customers with a poor

experience, they will leave your company. If you provide them with an average

experience, they are open to being attracted to leave. If you provide them with a

great experience, it will take some effort on the part of your competitor for them

to leave.

Beyond Philosophy’s customer retention consultants are experts in helping your

company understand the necessity of creating better customer retention marketing.

In our first book, Building Great Customer Experiences, we tell you how to build

a great experience and create better customer retention marketing tactics for your

business. In our second book, Revolutionize Your Customer Experience, we reveal

the journey from naïve to natural that leads all organizations to become more

customer-centric. Finally, our latest book, The DNA of Customer Experience:

How Emotions Drive and Destroy Value, reveals in detail the emotions that, if

evoked, can drive and destroy customer retention.

37

MANAGING THE CUSTOMER LIFECYCLE:

CUSTOMER RETENTION AND DEVELOPMENT

The customer lifecycle is made up of three core customer management processes:

customer acquisition, customer retention and customer development. The major

strategic purpose of CRM is to manage, for profi t, a company’s relationships with

customers through three stages of the customer lifecycle: customer acquisition,

customer retention and customer development.

A customer retention strategy aims to keep a high proportion of valuable

customers by reducing customer defections (churn), and a customer development

strategy aims to increase the value of those retained customers to the company.

Just as customer acquisition is focused on particular prospects, retention and

development also focus on particular customers. Focus is necessary because not

all customers are worth retaining and not all customers have potential for

development. We will deal with the issue of retention fi rst, before turning to

development.

A number of important questions have to be answered when a company puts

together a customer retention strategy. . Which customers will be targeted for

retention?

What customer retention strategies will be used? . How will the customer

retention performance be measured? We believe that these issues need to be

carefully considered and programmed into a properly resourced customer

retention plan. Many companies, perhaps as many as six out of ten, have no

explicit customer retention plan in place. 1 Most companies spend a majority of

38

their time, energy and resources chasing new business, with 75 per cent or more of

marketing budgets being earmarked for customer acquisition.

Customer retention is the maintenance of continuous trading relationships with

customers over the long term. Customer retention is the mirror image of customer

defection or churn.

Customer retention is 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, the appropriate interval over

which retention rate should be measured is not always one year. Rather, it depends

on the customer repurchase cycle. Car insurance and magazine subscriptions are

bought on an annual basis. Carpet tiles and hi-fi s are not. If the normal hi-fi

replacement cycle is four years, then retention rate is more meaningful if it is

measured over four years instead of twelve months. Additional

complexity is added when companies sell a range of products and services, each

with different repurchase cycles. Automobile dealers might sell cars, parts, fuel

and service to a single customer. These products have different repurchase cycles

which make it very difficult for the dealer to have a whole of customer perspective

on retention.

Sometimes companies are not clear about whether an individual customer has

defected. This is because of the location of customerrelated data, which might be

retained in product silos, channel silos or functional silos.

Product silos: consider personal insurance. Insurance companies often have

product-based information systems. Effectively, they regard an insurance policy

as a customer. If the policy is renewed, the customer is regarded as retained.

39

However, take a customer who shops around for a better price and, after the policy

has expired, returns to the original insurer. The insurer may take the new policy to

mean a new customer has been gained, and an old customer has churned. They

would be wrong.

Channel silos: in the B2B context, independent offi ce equipment dealers have

formed into cooperative buying groups to purchase goods at lower prices and

benefi t from other economies of scale in marketing. When a dealer stops buying

direct from Brother Electronics and joins a buying group, Brother’s customer data

may report a defection, but all that has happened is that the dealer has begun to

buy through a different channel. Telecommunications companies acquire

customers through many channels. Consider a customer who buys a 12 month

mobile phone contract from a Vodafone-owned retail outlet. Part way through the

year Vodafone launches a new pay-as-you-go product with no contractual

obligation. The customer allows her current contract to expire and then buys the

new pay-asyou- go product, not from a Vodafone outlet but from a supermarket.

Vodafone regards her as a lost customer because the contract was not renewed.

They would be wrong. .

Functional silos: customer-related data are often kept in functional silos that are

not integrated to provide a whole of customer perspective. A customer might not

have made a product purchase for several years, and is therefore regarded as a

churned customer on the sales database. However, the same customer might have

several open queries or issues on the customer service database, and is therefore

regarded as still active. The use of aggregates and averages in calculating

40

customer retention rates can mask a true understanding of retention and defection.

This is because customers differ in their sales, costs-to-serve and buying

behaviours. It is not unusual for a small number of customers to account for a

large proportion of company revenue. If you have 100 customers and lose ten in

the course of a year, your raw defection rate is 10 per cent. But what if these

customers account for 25 per cent your company’s sales? Is the true defection rate

25 per cent? Consideration of profi t makes the computation even more complex.

If the 10 per cent of customers that defected produce 50 per cent of your

company’s profi ts, is the true defection rate 50 per cent?

What happens if the 10 per cent of lost customers are at the other end of the sales

and profi t spectrum? In other words what if they buy very little and/or have a

high cost-to-serve? It could be that they contribute less than 5 per cent to sales and

actually generate a negative profi t, i.e.they cost more to serve than they generate

in margin. The loss of some customers might improve the company’s profi t

performance. It is not inconceivable that a company could retain 90 per cent of its

customers, 95 per cent of its sales and 105 per cent of its profi t! A solution to this

problem is to consider three measures of customer retention:

Raw customer retention rate: this is the number of customers doing business

with a fi rm 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: this is 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.

41

MANAGE CUSTOMER RETENTION OR VALUE RETENTION

This indicates that companies should focus on retaining customers that contribute

value. Sometimes this will mean that the focus is not on retention of customers,

per se, but on retention of share of wallet. In the banking industry, for example, it

may be more important for companies to focus on managing the overall

downward migration of customer spending than managing customer retention.

Many customers simply change their buying behaviour rather than defect.

Changes in buying behaviour may be responsible for greater changes in customer

value than defection. One bank, for example, lost 3 per cent of its total balances

when 5 per cent of checking account customers defected in a year, but lost 24 per

cent of its total balances when 35 per cent of customers reduced the amounts

deposited in their checking accounts. The need to manage migration, rather than

defection, is particularly important when customers engage in portfolio purchasing

by transacting with more than one supplier.

Improving customer retention is an important objective for many CRM

implementations. Its defi nition and measurement need to be sensitive to the sales,

profi tability and value issues discussed previously. It is important to remember

that the fundamental purpose of focusing CRM efforts on customer retention is to

ensure that the company maintains relationships with value-adding customers. It

may not be benefi cial to maintain relationships with all customers; some may be

too costly to serve, others may be strategic switchers constantly in search of a

better deal. These can be value-destroyers, not value-adders.

42

OBJECTIVE OF THE STUDY

To study the current practices of Customer Retention Strategy.    

To find out the impact of Customer Retention Strategy on the

profitability of the organization.

To study the factors affecting the Customer Retention Strategy

practices.

To study the role of information technology in Customer

Retention Strategy.

43

COMPANY PROFILE

Reliance – Anil Dhirubhai Ambani Group, an offshoot of the Reliance Group

founded by Shri Dhirubhai H Ambani (1932-2002), ranks among India’s top three

private sector business houses in terms of net worth. The group has business

interests that range from telecommunications (Reliance Communications Limited)

to financial services (Reliance Capital Ltd) and the generation and distribution of

power (Reliance Infrastructure Limited).

Reliance – ADA Group’s flagship company, Reliance Communications, is India's

largest private sector information and communications company, with over 100

million subscribers. It has established a pan-India, high-capacity, integrated

(wireless and wireline), convergent (voice, data and video) digital network, to

offer services spanning the entire infocomm value chain.

Other major group companies — Reliance Capital and Reliance Infrastructure —

are widely acknowledged as the market leaders in their respective areas of

operation.

 

44

 

Few men in history have made as dramatic a contribution to their country’s

economic fortunes as did the founder of Reliance, Sh. Dhirubhai H Ambani.

Fewer still have left behind a legacy that is more enduring and timeless.

As with all great pioneers, there is more than one unique way of describing the

true genius of Dhirubhai: the corporate visionary, the unmatched strategist, the

45

proud patriot, the leader of men, the architect of India’s capital markets, the

champion of shareholder interest.

But the role Dhirubhai cherished most was perhaps that of India’s greatest wealth

creator. In one lifetime, he built, starting from the proverbial scratch, India’s

largest private sector enterprise.

     

When Dhirubhai embarked on his first business venture, he had a seed capital of

barely US$ 300 (around Rs 14,000). Over the next three and a half decades, he

converted this fledgling enterprise into a Rs 60,000 crore colossus—an

achievement which earned Reliance a place on the global Fortune 500 list, the first

ever Indian private company to do so.

Dhirubhai is widely regarded as the father of India’s capital markets. In 1977,

when Reliance Textile Industries Limited first went public, the Indian stock

market was a place patronised by a small club of elite investors which dabbled in

a handful of stocks.

Undaunted, Dhirubhai managed to convince a large number of first-time retail

investors to participate in the unfolding Reliance story and put their hard-earned

money in the Reliance Textile IPO, promising them, in exchange for their trust,

substantial return on their investments. It was to be the start of one of great stories

of mutual respect and reciprocal gain in the Indian markets.

46

Under Dhirubhai’s extraordinary vision and leadership, Reliance scripted one of

the greatest growth stories in corporate history anywhere in the world, and went

on to become India’s largest private sector enterprise.

CUSTOMER RETENTION - DEFINITION

ICLP – the global loyalty marketing agency – is an expert in customer

retention.

Customer retention is an imperative in modern business – a strategy whose

objective is to keep a company’s customers and to retain their revenue

contribution. Primarily it aims to prevent customers from defecting to alternative

brands / going to the competition.

As all managers know, it costs less to keep an existing customer than to acquire a

new one, thus having a customer retention strategy is common sense.

Customer retention is the driving force behind Customer Relationship

Management (CRM), relationship marketing and loyalty marketing.

Studies across a number of industries have revealed that the cost of retaining an

existing customer is only about 10% of the cost of acquiring a new customer, so

customer retention makes powerful, economic sense.

Putting in place a customer retention strategy increases customer profitability as

acquisition costs only occur at the beginning of a relationship, so the longer the

relationship, the lower the amortised cost; account maintenance costs decline as a

47

percentage of total costs (or as a percentage of revenue); long-term customers tend

to be less inclined to switch, and also tend to be less price sensitive; long-term

customers may introduce new customers via verbal referral; long-term customers

are more likely to purchase additional products; customers who stay with you tend

to be satisfied with the relationship and are less likely to switch to competitors,

making it difficult for competitors to enter the market or gain market share;

regular customers tend to be less expensive to service because they are familiar

with the process, require less ‘education’, and are consistent in their buying

behaviour; increased customer retention and customer loyalty makes the

employees' jobs easier and more satisfying. In turn, happy employees feed back

into better customer satisfaction in a virtuous circle.

USING CUSTOMER SATISFACTION AND IMPORTANCE

DATA TO IDENTIFY PRIORITIES FOR IMPROVEMENT.

KANO'S CUSTOMER DELIGHT MODEL

Noriaki Kano has developed a product quality model that distinguishes between

three forms of quality. Basic qualities are those that the customer routinely

expects in the product. These expectations are often unexpressed until the product

fails. For example, a car's engine should start first time every time, and the

sunroof should not leak. The second form is linear quality. These are attributes of

which the customer wants more or less; for example, better comfort, better fuel

economy and reduced noise levels. Marketing research can usually identify these

requirements. Better performance on these attributes generates better customer

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satisfaction. The third form is attractive quality. These are attributes that surprise,

delight and excite customers. They are answers to latent, unarticulated, needs and

are often difficult to identify in marketing research., Kano's analysis suggests that

customers can be delighted in two ways: by enhancing linear qualities beyond

expectations and by creating innovative attractive qualities.

Exceeding expectations need not be costly. For example, a sales representative

could do a number of simple things such as:

Volunteer to collect and replace a faulty product from a customer rather

than issuing a credit note and waiting for the normal call cycle to schedule

a call on the customer.

Offer better, lower cost solutions to the customer, even though that might

reduce profit margin.

Provide information about the customer's served market. A packaging

company, for example, might alert a fast-moving consumer goods

manufacturer customer to competitive initiatives in their served markets.

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CUSTOMER DELIGHT THROUGH PRODUCT QUALITY.

Some efforts to delight customers can go wrong. For example, sooner is not

necessarily better: if a retail store customer has requested delivery between 1 pm

and 3 pm, and the driver arrives an hour early, the truck may clog up goods

inwards and interfere with a carefully scheduled unload plan. Many contact

centres play music while callers are waiting online. This is to divert the caller's

attention and to create the illusion of faster passage of time. However, the cycle

time of the selected music must not be too fast, otherwise callers will be exposed

to the same songs repeatedly. Also, the music needs to be appropriate to the

context. Customers may not appreciate ' (I Can't Get No) Satisfaction ' by the

Rolling Stones if they are waiting online to complain.

A number of companies have adopted ' Customer Delight' as their mission,

including Cisco, American Express and Kwik Fit, the auto service chain. Others

pay homage to the goal but do not organize to achieve it. In the service industries,

customer delight requires frontline employees to be trained, empowered and

rewarded for doing what it takes to delight customers. It is in the interaction with

customers that contact employees have the opportunity to understand and exceed

their expectations. The service quality attributes of empathy and responsiveness

are on show when employees successfully delight customers.

Companies sometimes complain that investing in customer delight is

unproductive. As noted earlier, expectations generally increase as competitors

strive to offer better value to customers. Over time, as customers experience

delight, their expectations change. What was exceptional becomes the norm. In

Kano's terms, what used to be an attractive attribute becomes a linear or basic

attribute. It no longer delights. Delight decays into normal expectation, and

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companies have to look for new ways to pleasantly surprise customers. In a

competitive environment, it seems to make little sense to resist the quest for

customer delight because competitors will simply drive up expectations anyway.

There is a strong economic argument in favour of customer retention, Increasing

purchases as tenure grows: over time, customers come to know their suppliers.

Providing the relationship is satisfactory, trust grows while risk and uncertainty

are reduced. Therefore, customers commit more of their spending to those

suppliers with whom they have a proven and satisfactory relationship. Also,

because suppliers develop deeper customer intimacy over time, they can enjoy

better yields from their cross-selling efforts.

Lower customer management costs over time: the relationship startup costs that

are incurred when a customer is acquired can be quite high. It may take several

years for enough profi t to be earned from the relationship to recover those

acquisition costs. For example, it can take six years to recover the costs of

winning a new retail bank customer. In the B2B context in particular, ongoing

relationship maintenance costs such as selling and service costs can be low

relative to the costs of winning the account. Therefore, there is a high probability

that the account will become more profi table on a period-by-period basis as

tenure lengthens. These relationship maintenance costs may eventually be signifi

cantly reduced or even eliminated as the parties become closer over time. In the

B2B context, once automated processes are in place, transaction costs are

effectively eliminated. Portals largely transfer account service costs to the

customer. In the B2C context, especially in retailing, the assertion that acquisition

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costs generally exceed retention costs is hard to prove. This is in part because it is

very diffi cult to isolate and measure customer acquisition costs.

Customer referrals: customers who willingly commit more of their purchases to

a preferred supplier are generally more satisfi ed than customers who do not. They

are therefore more likely to utter positive word-of-mouth and infl uence the

beliefs, feelings and behaviours of others. Research shows that customers who are

frequent buyers are heavier referrers. For example, online clothing customers who

have bought once refer three other people; after ten purchases they will have

referred seven. In consumer electronics, the one-time customer refers four; the ten

times customer refers The referred customers spend about 50 to 75 per cent of the

referrer’s spending over the fi rst three years of their relationship. 11 However, it

is also likely that newly acquired customers, reshly enthused by their experience,

would be powerful word-of-mouth advocates, perhaps more than longer-term

customers who are more habituated.

Premium prices: customers who are satisfi ed in their relationship may reward

their suppliers by paying higher prices. This is because they get their sense of

value from more than price alone. Customers in an established relationship are

also likely to be less responsive to price appeals offered by competitors.

These conditions mean that retained customers are generally more profitable than

newly acquired customers. Drawing from their consulting experience, Dawkins

and Reichheld report that a 5 per cent increase in customer retention rate leads to

an increase in the net present value of customers by between 25 and 95 per cent

across a wide range of industries, including credit cards, insurance brokerage,

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automobile services and office building management. 13 In short, customer

retention drives up customer lifetime value.

Which customers to retain? Simply, the customers who have greatest strategic

value to your company are prime candidates for your retention efforts. These are

the customers we defined as having high lifetime value or who are otherwise

strategically significant as high volume customers, benchmarks, inspirations or

door openers. You need to bear in mind that the cost of customer retention may be

considerable. Your most valued customers are also likely to be very attractive to

your competitors. If the costs of retaining customers become too great then they

might lose their status as strategically significant.

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,

they will be impervious to the appeals of competitors, and you will not need to

invest so much in their retention. However, if you have highly significant

customers who are not committed, you may want to invest considerable sums in

their retention.

Some companies prefer to focus their retention efforts on their recently acquired

customers. They often have greater future lifetime value potential than longer

tenure customers. There is some evidence 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. A further justification for focusing on recently

acquired customers comes from research into service failures. When customers

experience service failure, they may be more forgiving if they have a history of

good service with the service provider. In other words, customers who have been

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recently acquired and let down are more likely to defect or reduce their spending

than customers who have a satisfactory history with the supplier.

Retention efforts where there is portfolio purchasing can be very difficult. Should

effort be directed at retaining the high-share customer with whom you have a

profit - table relationship, the medium-share customer from whom you might lose

additional share to competitors or the low-share customer from whom there is

considerable lifetime value

potential? The answer will depend on the current value of the customer, the

potential for growing that value, and the cost of maintaining and developing the

relationship.

STRUCTURAL BONDS

Structural bonds are established when companies and customers commit resources

to a relationship. Generally, these resources yield mutual benefits for the

participants. For example, a joint customer-supplier quality team can work

improving quality compliance, benefiting both companies. Resources committed

to a relationship may or may not be

recoverable if the relationship breaks down. For example, investments made in

training a customer’s operatives are non-returnable. On the other hand, a chilled

products manufacturer that has installed refrigerated space at a distributor’s

warehouse may be able to dismantle and retrieve it if the relationship dissolves. A

key feature of structural bonding is investment in adaptations to suit the other

party. Suppliers can adapt any element of the offer – product, process, price and

inventory levels, for example – to suit the customer. Customers, on the other hand,

also make adaptations. For example, they can adapt their manufacturing processes

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to accommodate a supplier’s product or technology. Power imbalances in

relationships can produce asymmetric adaptations. A major multiple retailer might

force adaptations from small suppliers, while making no concessions itself. For

example, it could insist on a reduction in product costs, co-branding of point-of-

sale material, or even attempt to coerce the supplier not to supply competitors.

Different types of structural bond can be identified. All are characterized by an

investment of one or both parties in the other: .

Financial: where the seller offers a financial inducement to retain the

customer. Insurance companies form financial bonds with customers by

offering no-claims discounts, tenure related discounts and multi policy

discounts. .

Legal: when there is a contract or common ownership linking the

relational partners. .

Equity: where both parties invest in order to develop an offer for

customers. For example, the owners of airports invest in the shells of the

duty-free retail outlets. The retailer invests in the internal fixtures and

fittings. .

Knowledge-based: when each party grows to know and understand the

other’s processes and structures, strengths and weaknesses. .

Technological: when the technologies of the relational partners are

aligned, for example, with EDI, just-in-time logistics and manufacturing.

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Process: when processes of the two organizations are aligned. For

example, the quality assurance programmed on the supplier side and the

quality inspection programmed on the customer side. Some suppliers

manage inventory levels for their customers, ensuring inventory levels are

optimized. This is known as vendor managed inventory (VMI). The

chemicals company, Solve Interrex, uses telemetry systems to perform

VMI for its customers.

Values-based: some companies are renowned for their strong values. Co-

operative Bank is known for its pro-environment, ethical stance. It bonds

closely with other companies, such as investment houses, that adopt the

same position. It refuses to invest in companies that have poor

environmental records.

Geographic: these bonds exist when companies in a trading area (street,

city region or country) create a buyer–seller–referral network that supports

all members of their group. In the UK, retailers in downtown Leamington

Spa have combated out of town developments by creating a loyalty

programme in which customers can collect and redeem loyalty credits at

any member store. . Project: when the partners are engaged in some

special activity outside of their normal commercial arrangements, for

example, anew product development project. There may be an exchange of

resources to enable the desired outcome to be achieved, for example, an

exchange of engineers and technologists between the companies.

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Multi-product: when a customer buys several products from a supplier,

the bond is more diffi cult to break. There are economies for customers

when they deal with fewer suppliers. When a relationship with a supplier

of several products is dissolved, the customer may incur signifi cant

money, search and psychic costs in identifying one or more replacements.

Further, the level of perceived risk attached to a new relationship may

become uncomfortable.

CUSTOMER RETENTION: BE A RELATIONSHIP LEADER

Most salespeople are familiar with the 80-20 rule. Eighty percent of sales come

from merely 20% of the loyal customer base. But so many companies are either

unfamiliar with the rule or have abandoned it, evidenced by their weak customer

retention program that devalues customer loyalty.

A Knowledge@Wharton marketing survey found that profitable companies are

“relationship leaders” and make customer retention a priority. Loyal customers

rave about great companies. Without that customer word-of mouth approval your

company is skating on thin ice. One dissatisfied customer tells 8 to 10 people

about their miserable customer experience. With the Web, one can tell thousands.

A weak customer retention program allows for two things :

1)     Not providing some reimbursement when customers are inconvenienced.

2)     Favoring new customers and ignoring the old. 

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SURVEYS HELP CUSTOMER RETENTION

It’s a quantifiable fact: Acquiring new customers is 10 times more difficult and

expensive than retaining existing ones. Fortunately, it may be easier than you

think to keep your clients.

An experiment by Rice University professors and published in Harvard Business

Review concluded that simply asking customers how a company performed is

itself a great customer-retention strategy. Researchers selected two groups of

customers and sent just one of them a satisfaction and opinion survey. After a

year, the group that took the survey was twice as likely to have continued loyalty

toward the company. Researchers speculate this is because:

1. Satisfaction surveys reinforce customers’ desire to be coddled and

reinforce positive feelings.

2. Surveys may increase awareness of auxiliary products and services.

3. The very process of asking opinions can induce people to form an

opinion on something they otherwise may not have considered.

Customer Relationship Management or CRM is a combination of enterprise

strategies, business processes and information technologies used to learn more

about customers' needs and behaviors in order to develop stronger relationships

with them. CRM software systems automate many customer-related business

tasks. CRM applications are traditionally developed as client-server software

which incurs higher initial cost of ownership. The proliferation of the Internet and

the Web has fueled the rapid growth of Web-based CRM or online CRM

applications CRM systems are widely deployed for web based call center, contact

management, trouble ticket, personal information manager and scheduling.

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The life cycle of CRM consists of three phases - customer acquisition, customer

relationship enhancements and customer retention. CRM software streamlines

CRM activities at each phase of customer relationship management.

CUSTOMER ACQUISITION

Contact management module and direct marketing module of CRM allow

companies to effectively promote and market their products and services to

prospects. Those modules help speed up the acquiring processes and reduce the

cost of acquiring new customers.

CUSTOMER RELATIONSHIP ENHANCEMENTS

CRM helps companies better understand existing customers' needs and behaviors

and enhance the profitability from existing customers by cross-selling. They can

customize their products and services to individual customers' needs and

preferences.

CUSTOMER RETENTION

Customer service module of CRM system gives the organizations the edge in

customer support and call center services. They can increase customer satisfaction

while reducing the cost of support. Customer retention is critical to the overall

profitability of an organization. A customer you spend hundreds of dollars and

months to acquire may leave you in seconds as a result of poor customer services.

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Customer retention management is a fitting explanation for the acronym CRM

when we consider the significance businesses accord to retaining customer

loyalty. CRM has existed for as long as trade has, and since the time the Romans

traded with India. Traders have always known that when dealing with established

customers, it takes less time and resources and thus, there are proven ways to

retain existing customers. Diane I re-worded it was not making sense at all.

The loyalty business model, which can be considered a basis for developing

customer retention management practices states that a customer’s first or recent

experience with a business is the key to the buyer’s opinion on the business

transaction at hand.  This is because the customer today is more informed than

before, and initiates an interaction with a business with preconceived ideas and

notions based on information gathered, which puts the expectations higher on the

one selling.

It is a documented fact, that selling back to your existing customer base yields

profitability/benefits for businesses regardless of the industry or mode of

operation. Therefore, even if you run a transaction-oriented business, customer

retention is just as important for you as it is for businesses that operate over longer

cycles. Customer acquisition and retention are to be pursued as simultaneously as

the current sale on hand,  if business success and growth is to be achieved and

with longevity.

HOW DOES CRM HELP WITH RETENTION?

The basic objective of a CRM solution is to help with customer retention. Its

secondary objective is to gain customer acquisition at a low cost, without

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jeopardizing existing customer relations and ensuring a smooth transition of a new

customer to loyal long term customer.

A focus on customer retention enables a company to achieve maximum positive

results with regards to ROI, loyalty, acquisition, and revenue. Customer retention

is the common thread that runs through all CRM objectives and most of all,

profitability.

CRM systems empower a business to efficiently retain customers by providing

data on customer history, identifying valuable customers, niche customers, and

frequent customers as well.  The information extracted from the data is used to

execute the two most crucial steps in retaining customer loyalty. These are

ensuring customer satisfaction and being proactive with customer relationships.

Customer satisfaction means promising and then delivering on your promise,

getting it right the first time, and ensuring successful problem resolution when it

occurs. Proactive initiatives with CRM implies offering that little bit extra to your

customers, going beyond the defined deliverables and making the customer feel

good about doing business with you. This is KEY.

A FEW CUSTOMER RETENTION POINTERS

1. Customer retention can be achieved at a low cost by implementing CRM

in a structured manner.

2. Awareness of the distinguishing features of your business, and offering the

customer a great experience reduces your dependence on having to

compete on price. There is slack when service is that good. 

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3. Activities for broadening the existing customer base and retaining

customers are not to be seen in isolation; they complement and often

overlap each other.

4. You should track the cost of acquisition and retention as well as calculate

the Return on Customer (ROC). This aids in developing balanced

marketing strategies.

5. Existing processes related to acquiring new customers, nurturing existing

relations, and analysis of CRM data should be on par with the industry best

practices.

TYPES OF PROGRAMS

First, it must be noted that customer retention programs are not the same as

customer relationship management programs. More people understood that

customer relationship management is not simply retention or customer service or

marketing. CRM is a systematic business approach using information and on-

going dialogue to build long lasting and mutually beneficial customer

relationships.

CRM integrates data, technology, analyses and marketing and communications

processes across all customer touch-points. In CRM, the customer is the building

block for data management, reporting, goal setting, and measurement as well as

business and marketing strategy, organization and technical infrastructure, and

corporate culture and values over time and across all business units.

That said, the basic types of customer retention programs are listed below.

CRM and Customer Retention

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Obviously CRM software is a crucial part of customer retention. What can a CRM

system do and what can't it do in regards to customer retention?

First, let’s define “CRM system.” Many firms think that when they purchase a

sales force automation system or a customer service automation system they have

purchased a CRM system. However, a true CRM system also requires the ability

to gather data about customers, store that data in a format that is easy to access,

analyze the customer data, use this customer information to market to or

communicate with customers. Usually, this means that a firm will use more than

one piece of software to meet their analytic and operational CRM needs.

In terms of customer retention, the appropriate data capture, access and analysis

system enables a firm to determine which customers it is most interested in

retaining. Campaign management software enables the firm to target these

customers and manage a variety of offers to encourage the customers to remain

with the firm. A sales force or customer service system can identify high-value

customers to sales and service forces so these customers will benefit from

individualized retention activities.

THE COSTS AND DIFFICULTIES OF CUSTOMER RETENTION

PROGRAMS

In addition to the cost of administering retention programs (which can be rather

expensive – producing cards and marketing materials, setting up points tracking

systems, maintaining a customer service center or Web-site), the programs may

end up offering rewards or discounts to customers who would have purchased

products or services without an incentive. More than 87% of customers said they

would purchase from a company even if they weren’t in a program (International

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Research Project on Loyalty Programs, Retail Advertising and Marketing

Association).

Regardless of the costs vs. the benefits of a customer retention strategy, like any

customer relationship management activity, retention programs are often

hamstrung by a lack of enterprise-wide direction. It is difficult to pinpoint who

advocates the customer.

Typically, a firm will need to change in four areas to improve their focus on the

customer:

How the organization thinks – are the firm’s success metrics centered on

customers?

How the organization works – are processes engineered around customers?

How the organization is structured – does the form of the firm follow its

function (to meet customer needs)?

How culture manifests itself in the organization – does everyone in the

firm think about, listen to, and respond to customers?

HOW TO OVERCOME THESE HURDLES

Here’s how a firm might effect change in the four problem areas:

How the organization thinks: Convert product-centric, channel-centric and other

metrics to customer centric metrics over time. For instance, a firm may evolve

from measuring sales volume alone, to measuring the customer value impact of

new sales.

How the organization works:Begin to execute and measure pilot projects to test

new processes, for example, developing a mini database for customer analysis and

segmentation. Work with “customer owners” or advocates throughout the

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organization to establish business rules that create value for customers and the

firm, for example, develop a “fatigue rule” and do not contact customers more

than “n” times per quarter. Develop business cases and use customer data in

decision-making.

For example, in addition to the economic analysis required before deciding to

close an unprofitable store, determine which customers will be affected by the

closing and how you will respond to them to retain them as loyal customers.

How the organization is structured: Does the form of the firm follow its function,

that is, to meet customer needs? Save restructuring until the firm has changed

processes and measures. This is an evolutionary process, not revolutionary, so

simply adding customer advocates or customer segment managers to the

organizational chart will not change the behavior of the firm or its value to

customers.

How culture manifests itself in the organization: Does everyone in the firm think

about, listen to, and respond to customers? Make sure the CEO is the number one

advocate of customer retention and CRM. Develop grass roots support for

customer retention and CRM through changes in process, measurement,

incentives, structure and language.

Ro works with Quaero clients to execute their CRM strategies by optimizing their

technology choices, improving their use of customer data and refining their

marketing approaches. Her clients include leaders in the financial services,

telecommunications and pharmaceutical industries. Prior to Quaero, Ro worked at

Tillinghast-Towers Perrin, where she was Senior Consultant, and Furash &

Company, where she was a Principal. Previously, as Senior Vice President, Retail

Marketing and Analysis at Signet Bank, she developed and implemented

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profitable customer acquisition and retention programs as well as led marketing

teams, managed deposit portfolio growth, and oversaw branch sales.

THE ROLE OF SURVEYS IN CUSTOMER RETENTION PROGRAMS

It can take hundreds of dollars in advertising for some businesses to acquire each

new customer. Surprisingly, many businesses focus exclusively on acquiring new

customers, and expend little effort in retaining existing customers. A customer

retention program consists of three main items:

A focus on satisfying current customers,

A means of measuring why customers leave,

A planned effort to prevent customers from leaving once they express a

desire to do so.

Perhaps you are lucky enough to know the names of your customers. If you do,

and you are in a business in which your customers have accounts, you have an

opportunity that other businesses do not; you can easily find out why your

customers are leaving. This can be done through a closed account survey.

Such a survey can be implemented at the time an account is closed, or shortly

afterwards. Some of the basic issues addressed in such a survey include the

following:

How satisfied was the customer? What is the customer's reason for leaving?

Typical reasons would include:

Poor service,

Pricing,

Change of address,

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Customer no longer has a need for the service,

Customer received a better offer from a competitor.

For any of the above reasons for leaving mentioned by a customer, further

questions would be asked to better understand the reason. For example, you would

want to find out the specifics surrounding poor service, the actual price charged by

a competitor, the specific offer received by a competitor, the name of the

competitor to whom the customer is going, how they heard of the competitor's

offer, etc. Armed with this information, you can formulate a customer retention

program, which, depending upon the reasons customers are leaving, might consist

of one or more of the following:

A program to address service concerns to prevent additional customers

from leaving,

An evaluation of current pricing,

An evaluation of competitors' advertising campaigns and determine

whether a marketing response is warranted,

Development of an "exit interview" (a specialized closed account survey)

to determine why a customer is leaving and to attempt to prevent the

customer from leaving at that time through "counter-offers.".

An effective customer retention program, which includes a detailed understanding

of why customers are leaving, can generate more revenue for you than a large

increase in advertising expenditures. For example, if you spend $50,000 to bring

in 2000 new customers per year, it costs you $25 in advertising for each new

customer. If you have a customer base of 8000 households and a 20% customer

turnover rate, you lose 1600 customers per year, for a net gain of 400. If through a

customer retention program, you can reduce your customer turnover from 20% to

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15%, you'll retain an additional 400 customers per year and increase your net gain

to 800. Without a customer retention program, this net gain of 400 would have

required an additional advertising expenditure of $50,000.

A customer retention program doesn't have to be expensive. The costs would

include a modest survey, a series of "scripts" written to entice customers to stay, a

few moments of time on the part of each employee who closes accounts, and a

modest counter-offer.

RETENTION & LOYALTY PROGRAM DESIGN

Jim's Intro:  Marketing Agencies / Consulting Groups with clients in need of a

customer retention or loyalty program should beware of the following issues when

selecting a vendor.

Here's a few interesting facts from the world of Customer Retention & Loyalty:

A rebate program (get a $5 coupon back for every $150 you purchase, for

example) is not a retention or loyalty program.  It's a profit destroying program

which significantly lowers the margin of your best customers and drives little or

no incremental profit among others.

Better service does not by itself increase customer retention or loyalty.  Rather,

good service is the minimum requirement needed to operate a profitable customer

retention or loyalty program.  If your service stinks, adding a customer retention

or loyalty program will make it much, much worse.  Trust me.  If you want

examples, call me.  Been there, done that.  I won't design a program for a

company with rotten service (anymore), period.

Customer retention and loyalty programs are supposed to be profitable, and the

well designed ones are.  You can very accurately model the financial benefits of a

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program before it is implemented.  If you are talking with someone who says this

kind of modeling is not possible, then one of the following scenarios is probably

true:

You don't have nearly enough data on your customers, and should not even

be thinking of a retention or loyalty program at this juncture.  I can help

you with this, by telling you what data you need and providing ideas for

the collection of it.

You have the data but you don't know how to extract the information you

need from it in order to do the modeling.  I can help you with this too, by

creating the proper Metrics and Reporting you need.

The people you are talking with just don't know what they are doing, and

are trying to sell you some kind of idea that is not a real retention or

loyalty program.  I can't help you with this, unless you want to use

somebody else for your design.

Customer Retention and Loyalty programs can be very, very profitable.  The

problem is most people simply do not understand how to design them correctly,

and do not understand the need for tracking, analysis, and program refreshment to

keep the profitability ball rolling.

Many customer retention and loyalty programs begin life as profitable efforts, but

are left to wither and grow stale, ultimately resulting in negative profitability.  If

you need to redesign an existing program properly, I can help you.

Finally, CRM is only a failure because people don't know enough about their

customers before they implement, and end up putting too much cost in up front.  If

you are thinking of going the CRM route, the best thing you could possibly do for

yourself is put in a customer retention program first.  The program will tell

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you what you really need from a CRM perspective, and save you a ton of money

down the road.  Try it, you'll like it.

RESEARCH METHODOLOGY

Research is common parlance refresh to a search for knowledge. One can also

define research as a scientific and systematic search for pertinent information on a

specific topic.

In fact, research is an art of scientific investigation. The Advanced Learner’s

dictionary of current English lay down the meaning research as “a careful

investigation and inquiry especially through search for new facts in any branch

knowledge”.

Research is an academic activity and as such the term should be used in a

technical sense. According to Clifford woody research comprises defining and

redefining problems, formulating hypothesis or suggested solutions; collecting,

organizing and evaluating data; making deductions and reaching conclusion; and

at last carefully testing the conclusion to determine whether they fit the

formulating hypothesis.

The systematic approach concerning generalization and the formulation of theory

is also research. As such the term “Research” refers to the systematic method

consisting of enunciating the problem, formulating a hypothesis, collecting the

facts of data, analyzing the facts and reaching certain conclusion either in the form

70

of solution towards the concerned problem or certain in certain generalization for

some theoretical formulation.

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TYPES OF RESEARCH

There are the following types of research, which are as follows.

1. Descriptive vs. Analytical: Descriptive research includes surveys and fact-

finding enquiries of different kinds. The majors’ purpose of descriptive research is

description the set of affairs it exists at present.

In analytical research, on the other hand, the research has to use facts or

information already available, and analyze these to use fact or information already

available, and analyze these to make a critical evaluation of material.

2. Applied vs. Fundamental: Research can either be applied research or

fundamental research. Applied research aims at finding a solution for an

immediate problem facing a society or and industrial / Business origination,

Whereas Fundamental research is mainly concern with generalization

and with the formulation of a theory.

3. Quantitative vs. Qualitative: Quantitative research is based on the

measurement of quantity or amount. It is applicable to phenomena that can be

expressed in terms of quantity. Qualitative research, on the other hand is

concerned with Qualitative phenomenon, that is, phenomenon relating to or

involving quality or kind.

4. Conceptual vs. Empirical: Conceptual research is that related some abstract

idea or theory. It is generally used by philosophers and thinkers to develop new

concepts or to reinterpret existing ones.

On the other hand, Empirical research realizes on experience or

observation alone, often without due regard for system and theory. It is a data

based research.

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RESEARCH DESIGN

“A research design is the arrangement of conditions for collection and

analyses of data in a manner that aims to combined relevance to the research

purpose with economy in procedure”. In fact, the research design is the

conceptual structure within which research is conducted; it is constitute the

blue print for the collection, measurement and analyses of data.

DATA SOURCES

The task of data collection begins after a research problem has been defined

and research design/plan chalked out. While deciding about the method of

data collection to be used for study, the researcher should keep in mind two

types of data.

1. Primary data

2. Secondary data

1. Primary data: These data are collected afresh & for the first time and thus

happen to be original in character.

2. Secondary data: These data are already collected by someone else and which

have already been passed through the statistical process. The researcher would

have to decide which sort of data he would be using for his study and accordingly

he will have to select one or other method of data collection.

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COLLECTION OF PRIMARY DATA

We collect primary data during the course of doing experiments in an

experimental research but in case we do research of the descriptive nature and

perform surveys, whether sample survey or census surveys, then we can obtain

primary datas either through observation or through personal interviews. This in

other words means that there are several other methods of collecting data,

particularly in surveys & descriptive researches. Important ones are:

1. Observation method

2. Interview method

3. Through questionnaire

4. Through schedules

5. Other methods

COLLECTION OF SECONDARY DATA

Secondary data means data that are already available i.e.; they refer to data, which

have already been collected and analyzed by someone else. When the researcher

utilizes secondary data, then he has to look into various sources from where he

can obtain them. In this case he is certainly not confronted with the problems that

are usually associated with the collection of original data. Secondary data may

either be published data or unpublished data. Usually published data are available

in:

Various publications of central, state and local governments

Various publications of foreign governments or of international bodies and

their subsidiary organizations

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Technical and trade journals

Books, magazines and newspapers etc

Reports and publication of various associations connected with business

and industry, banks, stock exchanges etc.

Reports prepared by research scholars, universities, economists etc

Public records and statistics, historical documents

Our project is based on secondary data also which we have collected from various

sources-

Annual reports

Websites

Journals

In this research project, secondary data were used. Magazines, journals, annual

reports, statements and periodicals were consulted to fetch the information

about Venture Capital in India. Research project is also based on the

information collected from various websites and e-links.

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ANALYSIS & FINDINGS

REASONS FOR CUSTOMER SWITCHING

The reasons for customer switching can be identified as following:

1. Pricing (High price, unfair pricing, deceptive pricing)

2. Inconvenience (Wait for service, wait for appointment)

3. Core service failure (Service mistakes, Billing errors)

4. Service encounter failure (Uncaring, impolite, unresponsive behavior)

5. Response to service failure (Negative response, no response, reluctant

response)

6. Competition (Found better service)

7. Ethical problem (Cheating, Unsafe)

8. Involuntary switching (customer moved, provider closed)

An important aspect of the above is that six out of the eight service switching

factors are controllable from a service organization’s point of view.

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STRATEGIES FOR CUSTOMER RETENTION

(A) Complaint Management System

Any worthwhile complaints management system has to have following basic

features:

a) Visibility: Customer should know where to complain.

b) Accessibility: Customer should know how to complain. As a rule of

thumb, the more formal the system for lodging complaints, the less

accessible it is to customers.

c) Responsiveness: Complaints need to be dealt quickly. The quicker the

complaints are dealt with, the higher the customer satisfaction.

d) Customer-focused approach: A service provider who adopts customer-

focused approach, invites complaints and indicates commitment of

resolving complaints by its words and actions in all fairness.

e) Accountability: Someone in the organization has to take responsibility for

complaint handling.

f) Continuous Improvement: This is about looking at the root causes and

fixing them.

A good complaint management system must ensure that that complainant is kept

informed, the staff understands the complaint processes, complaints are taken

seriously and employees are empowered to deal with situations.

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(B) Service Recovery Strategies

Consider the following incident regarding an airlines (British Airways). “An

aircraft door was left open in a rainstorm before take off and a passenger near the

door unfortunately got showered. The flight attendant not only did everything that

was routine- offered to have the customer’s garments cleaned and made sure that

a customer relations representative contacted the customer later to demonstrate

that they genuinely cared- but also made special gesture by offering the

passenger a complimentary choice of certain tax free goods.”

It is very important for service companies to have service recovery strategies

which can be applied in case of service failure. The following steps are useful in

an effective service recovery system.

1. Measure the costs of effective service recovery. It should include the

indirect cost also, when a customer departs unhappily.

2. Break customer silence and listen closely for complaints.

3. Act fast.

4. Train and empower employees. The front line people must be trained and

empowered by the organization.

5. Close the customer feedback loop.

(C) Managing Customer Waiting

Sometimes, it is not possible to match demand & capacity, and hence waiting by

customers becomes inevitable. While reducing waiting time is important for a

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marketer, it is equally if not more, important to reduce the customer’s perceived

waiting time. If a customer’s perceived waiting time is less, he will be more

satisfied with the service.

Various ways of managing customer waiting are as follows:

1. The organization should analyze its operational processes in order to

identify and remove inefficiencies or bottlenecks, if any.

2. In case waiting cannot be avoided, a reservation system can be used.

3. Since unoccupied time feels longer than occupied time, keep customer

occupied by installing distractions that entertain and physically involve

them. For example, TV sets, magazines reading material can be provided

in waiting area.

4. Provide ‘waiting duration information’ i.e. information about the expected

length of wait and/or ‘queuing information’ i.e. a customer’s position in

queue with continuous update.

5. If unexpected delays occur, explanation should be given to the customer.

This helps in reducing uncertainty and customer irritation. The key is to

impress upon the customer that he has not been forgotten. Simple things

like providing a glass of water or a cup of tea to the waiting customer can

do wonders.

6. Keep resources not serving customer out of sight. This can be done by

keeping idle employees out of view and conducting activities that do not

involve customer interactions out of customer’s sight.

7. Try to reduce pre-service waiting time by transferring some of the pre-

service waiting to the service encounter phase.

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8. A smiling service person who knows his job well can be very helpful in

overcoming many negative effects of waiting. Therefore, training and

incentive/ rewards for providing good service should be made.

IMPORTANCE OF CUSTOMER RETENTION

Why are customers more profitable for service firms over a period of time? There

are a number of reasons for this. To begin with, to acquire a customer a company

incurs promotional costs like advertising, sales promotion etc. It is said that it

costs five times more to attract a new customer than retaining one. The

operating cost decreases when a customer stays. Services being rich in experience

and credence qualities, it takes some time for customers to get accustomed to it

and once they are used to the service and are satisfied with the service

provider ,they tend to purchase more over a period of time.

As they remain satisfied with a service provider, they spread a positive word of

mouth, which is very effective in case of services for attracting new customers.

Longer the customer stays with an organization, more the organization knows

about him, which enables it to offer customized services which make it difficult

for the customer to defect. This may even provide opportunities to the

organization to charge price premium by offering individualized services which

may be difficult for the competitors to offer.

Considering the importance of retaining customers in service business, Reichheld

& Sasser coined a term ‘Zero Defection’. They highlighted that companies can

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boost profits by almost 100% by retaining just 5% more of their customers.

Further, it is also very important to understand the life time value of a customer.

For example, if an average customer of BSNL pays Rs. 500 per month and stays

with the company for 20 years., his average lifetime value will be Rs. 500x 12x

20=Rs. 1,20,000. Further, if by a positive word of mouth, he brings just one more

customer to the organization, his value to the organization doubles. Therefore, it is

important for all the employees in the organization to understand the life time

value of their customers. Once they understand it, they will treat the customer

accordingly and will focus on building relationship with the very people who keep

them in business.

WHY CUSTOMER RETENTION?

In today's competitive business world and challenging economy, retaining your

customer base is critical to your success. If you don't give your customers some

good reasons to stay, your competitors will give them a reason to leave. Customer

retention and satisfaction drive profits. It's far less expensive to cultivate your

existing customer base and sell more services to them than it is to seek new,

single-transaction customers. Most surveys across industries show that keeping

one existing customer is five to seven times more profitable than attracting one

new one.

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WE’LL LOOK AT THE VARIOUS FINDINGS OF RETAINING

CUSTOMERS IN GREATER DETAIL.

Possibility of repeat business

This is probably the most obvious advantage of customer retention. Effective

services that lead to customer satisfaction will make your customer coming

back to you again, thus giving you repeat business. Repeat business is a win-

win proposition for the business / service provider and the customer. The

business reduces the cost of customer acquisition, while the customer reduces

the cost of finding a reliable vendor and thus also saves on costs associated

with switching vendors.

Reduced costs for customer acquisition

Acquiring a customer has certain associated costs. These include the costs

associated with advertising, following up, sales demos, travel and meeting

costs etc. Having a repeat customer means that the customer is already aware

of your processes and can predict a certain quality of output, thus minimising

the costs involved in new customer acquisition. Having a repeat customer also

has the potential to open up another channel to advertise your business – word

of mouth. Word of mouth advertising / recommendations are perhaps the most

important outcome of having a satisfied customer.

Fostering greater interaction between business and customer

Today’s markets are increasingly moving away from mass produced standard

products and services, towards a more customised market, where products and

services are tailored to meet customers’ specific requirements. Having a repeat

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customer is an opportunity for you to build a more focused relationship based

on your customers’ specific needs and requirements. Being ensured of having

a customer who comes back, you have more confidence to suggest

improvements, provide insights to better understand their needs and

consequently design products and services that are relevant. Having a repeat

business also provides an opportunity for the buyer and the seller to co-create

products and services.

Having more delighted customers

Effective customer retention strategies allow you to move from the zone of

customer satisfaction to customer delight. Studies have shown that customer

delight is achieved only when there is a perfect synergy between the buyer and

seller – when the seller understands exactly what the buyer needs and the

buyer understands what the seller can deliver exactly what he needs. If you are

able to delight your customers, you have better chances of them coming back

to you, since they now know why you are different from the rest of

competition.

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CONCLUSION

Today’s customers are becoming harder to please. They are smarter, more price

conscious, more demanding, less forgiving and they are approached by many

more competitors with equal or better offers. The challenge is not to produce

satisfied customers; several competitors can do this. The challenge is to produce

delighted and loyal customers. If these customers are retained with the

organization, they become really profitable by way of increase in purchasing,

reduced operating costs, price premiums and through referrals. Too many

companies suffer from customer churn i.e. high customer defection. It is like

adding water to a leaking bucket. Various strategies such as measuring customer

life time value, efficient complaint management system and service recovery

strategies can be really helpful in retaining customers.

This is the way that lifetime value analysis is used to test the validity of loyalty

building strategies before serious money is spent on them. In the past, companies

have had to bull ahead and try new ideas without any really good way of

measuring the effectiveness. Lifetime value gives them a valuable tool. It is a

forward looking concept. Where do these numbers come from? Some of them are

estimates based on previous tests. Some are assumptions that can be tested

through experience. A key consideration is that they are all testable numbers. A

year later, we can look back and find out exactly what our retention, referral and

spending rates were. We can improve our projections. We can try out new ideas

on small segments of our customer database, either geographically or by spending

segment. When we have made our mistakes and have learned what works, then we

expand our strategies to larger segments of our customer base.

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Lifetime value analysis provides a basis for getting the annual marketing budget

approved. Advertising has to rely on awareness estimates. Database Marketing

relies on strong, specific, provable numbers which can be quite convincing to a

CFO when he understands them. More and more companies today are using

lifetime value analysis to test and improve their retention strategies.

The availability of CRM packages come across a wide price spectrum, which 

means that companies of all sizes and budget capabilities; can deploy CRM to

work on customer retention. Companies that neglect customer retention, and lay

greater stress on customer acquisitions will find that an existing customer base

dwindles within time. The best approach is to work on both customer loyalty and

customer retention. 

CUSTOMER RETENTION PROGRAMS

What a customer retention program is, what it isn’t, and how it can help your

business.

Customer retention programs can be a powerful tool in the arsenal of customer

relationship management. Customer retention is important to most companies

because the cost of acquiring a new customer is far greater than the cost of

maintaining a relationship with a current customer.

For many firms, customer profitability is skewed in such a way that losing

the most profitable customers has a very serious effect. In many banks, for

example, the top 30 percent of customers (when ranked by profitability)

can make up 100–150 percent of total customer profitability. That’s right

-- the bottom eighty percent of customers may provide no profitability or,

worse yet, destroy 50 percent of profitability.

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In addition to saving profitable customers, retention programs allow

companies to collect data about their customers. This data can be used to

better understand, target, market to, and communicate with customers or to

customize future interactions with customers. Retention programs can be a

relatively inexpensive means of making customers feel special, increase

their purchases and recommend prospects.

In Discount Programs, customers receive a price cut on repeat purchases.

For example, many insurance companies will offer a discount on auto

insurance if a customer also has homeowner’s insurance. These firms

assume that customers are more likely to remain loyal if they own a

greater breadth of the firms’ products.

Loyalty Programs often taking the form of frequent flyer/frequent buyer

programs, and are usually based on a points system. Points are given to

customers for interactions they have with the company. Interactions may

include making purchases, using a new channel (like a Web site or self-

service kiosk), or referring prospective customers. Points can be redeemed

for rewards or discounts.

Card-based Programs can be a specific type of points based or discount

program. A popular type of card-based program may be used by your

supermarket, where your “valued customer” card can be swiped at the

point of sale and you are offered immediate discount on purchases.

This is the way that lifetime value analysis is used to test the validity of

loyalty building strategies before serious money is spent on them. In the

past, companies have had to bull ahead and try new ideas without any

really good way of measuring the effectiveness. Lifetime value gives them

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a valuable tool. It is a forward looking concept. Where do these numbers

come from? Some of them are estimates based on previous tests. Some are

assumptions that can be tested through experience. A key consideration is

that they are all testable numbers. A year later, we can look back and find

out exactly what our retention, referral and spending rates were. We can

improve our projections. We can try out new ideas on small segments of

our customer database, either geographically or by spending segment.

When we have made our mistakes and have learned what works, then we

expand our strategies to larger segments of our customer base.

Lifetime value analysis provides a basis for getting the annual marketing

budget approved. Advertising has to rely on awareness estimates. Database

Marketing relies on strong, specific, provable numbers which can be quite

convincing to a CFO when he understands them. More and more

companies today are using lifetime value analysis to test and improve their

retention strategies.

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SUGGESTIONS

What efforts can be adopted to increase Customer Retention?

Right from the inception itself there are several efforts any business needs

to take in order to ensure that the customer is on its list of priorities. And

not just on its list of priorities but one of the very first. It can do this in

several ways. For starters a company needs to ask itself several questions

like - What information it would like to have about its customers? How it

intends to use this information? What is the most productive way to use it

so as to benefit the customer? Are there any other ways in which it can

make the experience of its customers a better one? Does it have the

necessary resources and technology needed to implement CRM? What

other resources does it need to increase customer retention?

Customer appreciation is a forgotten task. Despite the fact that engaging in

this will go a long way in mitigating customer loss, organizations fail to

make it a part of their business process and employees fail to incorporate

this in their dealings with the customer. This needs to be done at all stages.

Another failure on the part of businesses in claiming customer loyalty is

their inability to educate the customer about the product. Or shall we say

reluctance rather than inability? Why do companies hesitate when this

effort on their part can undoubtedly go a long way in alleviating their

customer retention problems? The hesitance occurs due to the time

constraints and cost involved. Businesses believe that if they shirk this

duty they will not pay a price. That is a wrong assumption. Attempting to

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educate the customer about the product will go a long way in bettering the

customer experience for him

One of the ways in which organizations can assist their customer loyalty

programs is by ensuring that their customers get to share their positive

experiences with other customers thereby boosting customer retention.

Customer feedback is fundamental and essential in any attempt to

understand the customer and succeed at customer retention. What happens

when a company encourages feedback from its customers is that they are

equipped with additional customer knowledge and can avail of the

valuable suggestions and advice that is got through customer feedback

alone. It is the only means by which the company gets to know the exact

picture of how customers feel about the enterprise. Efforts towards

improvement can only be made after this is had.

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LIMITATIONS

1. Good time was spent in persuading and collecting the matter.

2. Sometimes there was a problem of server in college.

3. No magazines and books were available in the library.

4. Heavy cost was incurred in the preparation of the report.

5. No extra resources were available to collect the matter except net.

6. Lack of availability of up to date data.

7. Much detail required for the report was not available easily.

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BIBLIOGRAPHY

Books:

Kothari C.R “Research Methodology”Second Edition,Wishwa

PraKashan,2000

Gupta S.L., Marketing Research, Excel Books

Kotler Philip, Marketing Management: Prentice Hall of India Pvt.

Webliography:

http://www.major-media.com/learning-resources/customer-retention-

lit.htm

http://www.jimnovo.com/Customer-Retention-more.htm

http://www.entrepreneur.com/sales/customerservice/index115864.html

http://en.wikipedia.org/wiki/Customer_retention

http://marketing.about.com/cs/customerservice/a/crmstrategy.htm

http://searchcrm.techtarget.com/generic/

0,295582,sid11_gci1312331,00.html

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