Managing the Customer Life-cycle:Customer Acquisition, Retention and

Development

Semester Genap 2010/2011

Learning Objectives

Understand the meaning of the terms customer life-cycle

Introduce the strategies that can be used to recruit new customers

Understand the economics of customer retention and how to select which customers to target for retention

Stages of the Customer Life Cycle

Customer acquisitionCustomer retention

aims to keep a high proportion of current customers by reducing customer defections

Customer development aims to increase the value of those

retained customers to the company

Customer Acquisition

Why Focus on Newly Acquired Customers?

New customers may have greater future life-time value potential than longer tenure customers evidence suggests that retention rates rise

over time, so if defections can be prevented in the early stages of a relationship, there will be a pay-off in future revenue streams

Key Customer Acquisition Questions

Which prospects (potential new customers) will be targeted?

How will these prospects be approached?What offer will be made?

Two Types of New Customer

New-to-category customers are customers who have either identified a

new need or have found a new category of solution for an existing need

New-to-company are customers are won from competitors

Strategic Switching

Strategic switching occurs when customers who shift their allegiances from one supplier to another in pursuit of a better deal

Banks know that their promotional pricing stimulates hot money

Selection of Prospects to Target for Acquisition

What is the estimated value of the customer? This depends on the margins earned from the customer’s

purchases over a given time period. If that customer switches from his current supplier/s,

what proportion of category spending will your company earn?

What is the probability that the customer will switch from current supplier/s?

Hofmeyr’s Conversion Model

Hofmeyr’s basic premise is that customers who are not committed are more likely to be available to switch to another provider.

Commitment is a function of satisfaction with the brand or offer, the attractiveness of alternatives, and involvement in the brand or offer.

B2B Prospecting: Key Questions

Does the lead have a need for my company’s products?

Does the lead have the ability to pay?Is the lead authorised to buy?

Sources of B2B Leads

Satisfied customers Referrals from satisfied customers

Networking Personal contacts with well-connected and co-operative people

Promotional activities Exhibitions, seminars, tradeshows and conferences

Delegate and attendee lists Advertising response inquiries Publicity

Web-sites Lists and directories

SIC listings, telephone directories Canvassing Tele-marketing E-mail

Sources of B2C Prospects

advertisingsales promotionbuzz or word-of-mouthmerchandising

Cognitive & Affective Advertising Objectives

Cognitive advertising objectives include: raising awareness developing

understanding generating knowledge

Affective advertising objectives include: developing a liking for

the product generating preference

Advertising Questions for Customer Acquisition

Which messages will generate most new customers?

Which media are most cost-effective at customer acquisition?

Media Efficiency Statistics

Response rates provide a first-level indicator of ad effectiveness. Examples include the number of coupons clipped

and returned, or calls requesting information (RFI) made to a contact centre.

Conversion rates offer a second-level indicator of ad effectiveness. Examples include sales made as a percentage of

coupons returned, or proposals submitted as a percentage of RFIs.

KPI’s for Customer Acquisition Programs

How many customers are acquired?What is the cost per acquired

customer?What is the value of the acquired

customer?

Operational CRM Tools for Customer Acquisition

lead management The lead management process includes a number of sub-

processes, including lead generation, lead qualification, lead allocation and lead tracking

campaign management Campaign managers design, execute and measure marketing

campaigns with the support of CRM technologies. Sometimes these are multi-media campaigns across direct mail, email, fax, outbound telephony, and SMS platforms

event-based marketing EBM provides companies with opportunities to approach

prospects at times which have a higher probability of leading to a sale, e.g. important life-stage events

CRM Analytics Supports Customer Acquisition

Operational CRM tools have to be supported by sound analytics to ensure that the right offer is made to the right prospect through the right channel at the right time

It is often possible to query current customer-related databases for clues to guide customer acquisition

Customer Retention

Contents of a Customer Retention Plan

1. Which customers should be targeted for retention?

2. What customer retention objectives should be set?

3. What customer retention strategies will be used?

4. How will the performance of the retention plan be measured?

Can You Tell If a Customer Has Defected?

May not be able to measure retention and defection if you have Product-based views of customers Channel-based views of customers Separate customer records in sales,

marketing and service

Measures of Customer Retention

Raw customer retention rate the number of customers doing business with a firm at the

end of a trading period expressed as percentage of those who were active customers at the beginning of the period.

Sales-adjusted retention rate the value of sales achieved from the retained customers

expressed as a percentage of the sales achieved from all customers who were active at the beginning of the period.

Profit-adjusted retention rate the profit earned from the retained customers expressed

as a percentage of the profit earned from all customers who were active at the beginning of the period.

Retention Issues

It may not be beneficial to maintain relationships with all customers. Some are too costly to serve strategic switchers constantly in search of a

better deal not strategically significant in roles such as

benchmark, door opener, inspiration or technology partner

Which customers to retain?

Strategically significant customers High life-time value customers High volume customers Benchmarks Inspirations Door openers

But… these may also be attractive to your competitors

Commitment and Retention

The level of commitment between your customer and you will figure in the decision about which customers to retain. If the customer is highly committed, i.e.

impervious to the appeals of competitors, you do not need to invest so much in retention.

If strategically significant customers are not committed to you, you may want to invest considerable sums in their retention

Negative & Positive Customer Retention Strategies

Create exit barriers Enforce the contract Extract switching

penalties

Delight customers Create customer-

perceived added value Create social and

structural bonds Create customer

engagement

What is Customer Delight?

Customer delight = P > E 

where P = PerceptionE = Expectation

What Do Customers Really Expect?

1. Expectations based on promises

“I expect to have my car serviced within 2 days of calling the garage”

2. Expectations based on desires

“I want my car serviced the day I call the garage”

3. Expectations based on experience

“Most folks normally have to wait 3 days to have their car serviced”

4. Expectations based on ideals

“My car should be serviced overnight and delivered to my home the next morning”

Ways to Delight Customers

provide information about the customer’s served market A packaging company could alert a fast-moving

consumer goods manufacturer customer to competitive initiatives in the market.

volunteer to collect and replace a faulty product from a customer rather than issuing a credit note

offer better, lower cost solutions to the customer, even though that might reduce margin

3 Ways to Create Customer-perceived Added Value

loyalty schemescustomer clubssales promotions 

Bonds

Social• Positive relationships

between individuals • Empathy• Responsiveness• Reliability

• Leads to development of trust and commitment

Structural• Investments linking

customer and supplier• Financial • Legal• Equity• Technological• Value-based• Geographic• Project• Multi-product

KPIs for Customer Retention Programs

1. Raw customer retention rate2. Raw customer retention rate in each customer segment3. Sales-adjusted retention rate4. Sales-adjusted retention rate in each customer segment5. Profit-adjusted retention rate6. Profit-adjusted retention rate in each customer segment7. Cost of customer retention8. Share of wallet of the retained customers9. Customer churn rate per product category, sales region or

channel10. Cost-effectiveness of customer retention tactics

Customer Development

The Role of Research

Why are customers churning?Are there any lead indicators of impending

defection?What can be done to address the root

causes?

Advance Indicators of Intention to Churn

Reduced RFM scores (Recency – Frequency – Monetary value) Non-response to a carefully targeted offer Reduced levels of customer satisfaction Dissatisfaction with complaint handling Reduced share of customer (e.g. customer only flies one leg of

an international flight on your airline) Inbound calls for technical or product-related information Late payment of an invoice Querying an invoice Customer touch points are changed e.g. store closes, change of

website address Customer change of address

CRM Technologies for Customer Development

Campaign management Event-based marketing Data mining Customization Channel integration Integrated customer communications Marketing optimization

Strategies for Terminating Customers

Raise pricesUn-bundle the offerRespecify the productReorganise sales, marketing and service

departmentsIntroduce ABC class service

Typology of Companies’ Termination Behaviours

Hardliners take an active and rigorous stance in terminating

unprofitable relationships, including the regular clearance of their customer portfolio.

Appeasers take a more cautious approach concerning the

termination of unprofitable relationships The undecided

are reluctant to terminate unprofitable relationships

References

Francis Buttle, Customer Relationship Management: Concepts and Technologies, 2e, Elsevier Ltd., 2009

Baran, Galka and Strunk, Principles of Customer Relationship Management, South-Western, 2008