By-Avinash Kumar

kumaravinash23@gmail.com

Retention strategy

Why Focus on Customer Retention (CR)?

Service encounter failuresInconvenienceResponse to failed service PricingCompetitionEthical concernsInvoluntary switchingOther factors

(Keveaney, S.M., 1995)

Reicheld on Customer RetentionReicheld on Customer Retention

Service companies must retain the best personnel to win and keep good customers

It’s impossible to build a loyal bank of customers without a loyal employee base

On average, U.S. corporations lose half of their customers in 5 years

A typical company has a customer defection rate of 10-30% per year

Raising the customer retention rate by 5% can increase the value of an average customer (lifetime profits) by 25-100%

Philips Kotler on Customer Retention The key to customer retention is customer satisfaction

Satisfied CustomersStay loyal longerTalk favorably about the organizationPay less attention to the competitionAre less price sensitiveOffer service ideas to the organizationCost less to serve than new customers

The Cost of Lost BusinessThe Cost of Lost Business for a Hospital for a Hospital

15,000 patients annually

3,750 defections

(25% defection rate, 75% retention rate)

$2,500 average patient revenue

$9.375 million = annual lost revenues

$703,125 = lost profits (7.5% profit margin)

Image/Promotion - community service, direct mail, educational offerings, integrated marketing communications, newsletters, regular customer contact, informational materials, website

Service Quality - continuous quality initiatives, convenience,customer service training, demonstrate that customers are highly valued, mystery shopping, customer representatives/ ombudsman, service failure training, smile, treat customers as family.

cont..

Customer Retention Tactics

Research - analyze defection rates/reasons, classify customers by usage/satisfaction/loyalty, develop targeted retention programs.

Internal Marketing - loyalty task force, prepare “solutions” to recurring problems, share appropriate customer data with staff, reward and publicize customer care person of the month.

* Customer-Centered - “dialogue” marketing, customer bill of rights, customer care councils, understand customer expectations.

Customer Retention Tactics - cont.

A Customer Value/ Retention Model☛☛The CV/retention model offers a good The CV/retention model offers a good

way of explaining the key way of explaining the key relationships among the core elements relationships among the core elements that create value in an organizationthat create value in an organization

☛☛Customer value is built through the Customer value is built through the proper mix of proper mix of SQIPSQIP (service, quality, (service, quality, image & price) - elements that attract image & price) - elements that attract and keep customers and keep customers

Customer Attractio

n

Customer

Retention

Shareholder Value

Customer

Value Customer

Satisfaction Loyalty Business

Performance

The Customer Value/Retention Model

© Weinstein/Johnson, 2003.

Applications of the Customer Value Applications of the Customer Value Retention Model (CV/RM)Retention Model (CV/RM)

The key variables and their relationships to one another are clarified. This provides strategic guidance to management.

Second, it stresses long term relationships (retention) but still realizes that some customer defection and attrition will occur so customer attraction must remain a priority.

Third, the model is interfunctional and systematic -- it ties marketing objectives to the big picture, the financial situation.

Feedback loops are also depicted in the Customer Value/Retention Model.

Customer Satisfaction, Loyalty and Retention Model

Highly Highly SatisfiedSatisfied

SatisfiedSatisfied

DissatisfiedDissatisfied

Highly Highly LoyalLoyal

Loyal

DisloyalDisloyal

Retain

Defect

A Customer Loyalty Framework

Multiple loyalty

Situational loyalty

Limited loyalty

No Loyalty Some Loyalty Complete Loyalty

According to CRM experts Jay Curry and Adam Curry:

Top 20% of the customer deliver 80% of the revenue.

Existing customers contributes upto 90% of the revenue

Top 20%of the customers delivers more than 100% profits.

The bulk of Marketing benefit is often spent on people other than customers.

According to CRM experts Jay Curry and Adam Curry:

Between 5% and 30% of all customer have the potential for moving upward the loyalty ladder.

2% upward migration in the loyalty ladder means 10% more revenue and 50% more profits.

Sequences in Retention processExploringEvaluatingEstablishing StrategiesExamining feedback

Attrition: The Negative Signal to RetentionIncrease in the number of complaintDecrease in the frequency of contactsDecrease in personal visitsDecrease in enquiriesDecrease in the volume of businessDecrease in the number of active buyersDecrease in the extent of interactionDecrease in the flow of communication.

Brand Switching BehaviorDissatisfaction with present brandChange in fashionPromises made by competitorsChange in the perceived benefitsPersonal characteristics of the customer

concernedPressure of salespersons Personal reasons

Buyer or Try-er?

Realize that a 1-time buyer is really a try-er, rather than a customer

To move beyond the transaction stage, organizational experiences must meet or exceed expectations

Repeated incidents of high satisfaction are sought through the utilization of relationship marketing strategies, leading to greater customer loyalty

Classification of Customer Loyal Segments

• Strangers short-term-low profit customers

• Butterflies high-profit potential but tend to be short-term and disloyal

• Barnacles stay around for the long-term but generate relatively low profits

• True friends are both highly profitable and are long-term customers

(Reinartz, W. and Kumar, V., (Reinartz, W. and Kumar, V., 2002)2002)

Butterflies:Good fitHigh profit potentialTransaction satisfactionMilk active accountsCease investing

Strangers:Little fitLowest profit potentialMake no investmentMax transaction profit

True Friends:Good fitBest profit potentialConsistent communicationAttitudinal & behavioral loyaltyDelight customers

Barnacles:Limited fitLow profit potentialMeasure size and share of walletLow share, up- and cross-sellSmall wallet, strict cost control

Transaction Relationship

High profit

Low profit

Classification of Classification of Customer Loyal Segments Customer Loyal Segments

Loyalty Building Strategies

Send salespeople to work at the offices of

your best customers Participate in customers events

Hold a retreat with a major customer to

share

best practices Invite customers to participate in training

seminars

CONT..

Loyalty Building Strategies - CONT.

☛ Set up a customer advisory council

☛ Develop a preferred-customer pricing strategy

☛ Reward customers for referring new business

☛ Develop 3-5 year business plans with customers ☛ Partner with key accounts on industry research projects

Usage Analysis and CRDifferentiated marketing strategies for

user groups: 1st-time users, repeat customers, heavy users, and former users

By classifying customer accounts based on usage frequency and variety, companies can develop effective strategies to retain and upgrade customers

Usage Analysis ToolsUsage Analysis Tools

Heavy, medium, light, former, and nonusers (A,B,C,D,X)

Heavy half segmentation (80/20 rule)Users vs. nonusers, competitive usersLoyal (degree) versus nonloyal customersProduct/service applications by user groupAdopter categories - innovators, followers,

laggardsGeographic comparisons (customer

penetration indices, growth)

4-Tier Usage Segmentation 4-Tier Usage Segmentation

Platinum Tier – the company’s most profitable customers

Gold Tier – seek price discounts, less loyal, and use multiple vendors

Iron Tier – essential customers who provide the volume to utilize the firm’s capacity, but their spending levels, loyalty, and profitability do not merit special treatment

Lead Tier – customers who cost the company money. They demand more attention than they are due given their spending and profitability - sometimes problem customers that complain and tie up resources.

(Rust, Zeithaml, and Lemon, 2000/2003)

RFM AnalysisRecency refers to the last service

encounter/ transactionFrequency assesses how often these

customer-company experiences occurMonetary value probes the amount that

is spent, invested, or committed by customers for the firm’s offerings

How to Do an RFM Analysis *

1. Access a summary of each customer’s RFM transaction history.

This includes most recent purchase, frequency of purchases, and monetary value spent per order.

2. Sort customers by purchase dates in reverse chronological order. Divide the customer list into 5 equal segments. Tag the most recent customer quintile as 1 while the least recent purchases are quintile 5.

Cont..Cont..

How to Do an RFM Analysis * - cont.

3. Sort your customers by frequency (number of orders) and apply the same methodology as in #2.

4. Sort your customers by monetary value (average $ amount of each order) and apply the same methodology as in #2.

5. You now have created RFM scores for each of your customers, from your best customer segment (111) to your worst (555).

Adapted from Kahan, R. Adapted from Kahan, R.

(1998)(1998)

Customer Retention ApproachesCustomer Retention Approaches

CR tactics are short term in nature while CR strategies create lasting value for customers

CR efforts should begin once the firm wins a customer

These efforts should includeLearning as much as possible about customer needsResponding promptly to any indications of disinterestMaking customers feel truly cared forResolving complaints quickly and efficientlyBe willing to negotiate with high-value customers who

show signs of inactivity (Passavant,

1995)

9 Common/Effective 9 Common/Effective Approaches for Enhancing RetentionApproaches for Enhancing Retention

Build a customer database/marketing information system

Design ongoing customer programs - continuity and loyalty-based initiatives

Offer long term services - membership/subscription programs

Custom promotion - use reminder advertising and press releases -cont.

Most Common/Effective Most Common/Effective Approaches for Enhancing Retention – Approaches for Enhancing Retention – cont.cont.

Focus on key accounts and heavy users

Use newsletters/informational materials to stay in touch with infrequent customers

Attend trade shows

Research customers needs and wants

Welcome suggestions and complaints

Other Customer Retention Tools

Customer relationship management (CRM), an expensive information technology, is also frequently used by large companies for business usage analyses

The 80/20 principle was integral in determining the focus & location of Fast Industries’ most important customers

SWOT analysis -- strengths, weaknesses, opportunities, and threats -- information can be gathered from each strategic customer

7 Criteria for Selecting CR Approaches

■ Efficiency - low costEfficiency - low cost

■ ■ Effectiveness - likelihood to succeedEffectiveness - likelihood to succeed

■ ■ Adaptability - strategic fit with the organizational Adaptability - strategic fit with the organizational cultureculture

■ ■ Consistency - works well with the current Consistency - works well with the current marketing planmarketing plan

■ ■ Competitive advantageCompetitive advantage

■ ■ Ease of implementationEase of implementation

■ ■ Projected profitabilityProjected profitability

5-Step Process for Designing a Customer Retention Program

Determine your current CR rateAnalyze the defection problemEstablish a new CR objectiveInvest in a targeted CR plan to enhance

customer loyaltyEvaluate the success of the CR program

Measuring Customer RetentionMeasuring Customer RetentionAnnual and targeted customer retention ratesWeighted customer retention rates - accounts

for usage differencesSegmented retention indicators - subgroup

analysis based on geographic, demographic, lifestyle, product preferences, etc.

Share-of-customerCustomer lifetime value (CLTV)Recency, frequency, and monetary value (RFM)

Useful Metrics for CR Evaluation Innovative customer value managers

should consider the measures below to gain additional insight on retention:

Expected future useAnticipated regretIntent to switchIntent to remain loyal – likelihood to return to

provider and to recommend provider

Questions are welcomed.

End of the topic