Customer Relationship Management, Second Edition
Chapter 9, Managing the customer lifecycle: Customer retention and development
As most successful CRM practitioners know, there's a time to develop customer relationships and a time to unload unprofitable customers. In this chapter excerpt, learn strategies for developing profitable customers and get tips for using CRM technology for customer development. Also, get strategies for terminating unprofitable customers.
Customer Relationship Management, Chapter 9
Table of contents:
Customer retention management
Customer retention vs. value retention
Creating positive customer retention strategies
Understanding customer commitment
Customer development and termination strategies
Strategies for customer development
Customer development is the process of growing the value of retained customers. Companies generally attempt to cross-sell and up-sell products into the customer base while still having regard for the satisfaction of the customer. Cross-selling, which aims to grow share of wallet can be defined as follows:
Cross-selling is selling additional products and services to an existing customer.
Up-selling can be defined as follows:
Up-selling is selling higher priced or higher margin products and services to an existing customer.
Customers generally do not respond positively to persistent and repeated efforts to sell additional products and services that are not related to their requirements. Indeed, there is an argument that companies should seek to down-sell where appropriate. This means identifying and providing lower cost solutions to the customers ' problems, even if it means making a lower margin. Customers may regard up-selling as opportunistic and exploitative, thereby reducing the level of trust they have in the supplier, and putting the relationship at risk. However, multi-product ownership creates a structural bond that decreases the risk of relationship dissolution. There are a number of CRM technologies that are useful for customer development purposes.
- Campaign management software is used to create up-sell and cross-sell customer development campaigns and track their effectiveness, particularly in terms of sales and incremental margin.
- Event-based marketing: campaigns are often associated with events. For example, a bank will offer a customer an investment product if deposits in a savings account reach a trigger point.
- Data mining: offers are based on intelligent data mining. Transactional histories record what customers have already bought. Data mining can tell you the probability of a customer buying any other products (propensity to buy), based on their transactional history or demographic/psychographic profile. First Direct, the Internet and telephone bank, uses propensity to buy scores to run targeted, event-driven cross-sell campaigns through direct mail and call centres. They aim at high conversion rates through follow-up calls.
- Customization: offers are customized at segment or unique customer level. Also personalized is the communication to the customer and the channel of communication: e-mail, surface mail, SMS or phone call, for example.
- Channel integration: customer development activities are integrated across channels. It is regarded as bad customer management practice to have different channels making different offers to the same customer. In retail, channel integration is observed when channels such as stores, web and direct to consumer channels act in an integrated, customer-centric manner. For this to happen, customer information and customer development plans need to be shared across channels.
- Integrated customer communications: the messages communicated to customers are consistent across all channels.
- Marketing optimization: optimization software is available from CRM analytics organizations such as SAS. Optimization enables marketers to enjoy optimal returns from up-sell and cross-sell campaigns across multiple channels and customer segments, taking account of issues such as budget constraints, communication costs, contact policies (e.g. no more than two offers to be communicated to any customer in any quarter), customers ' transactional histories and propensities to buy.
In professional services, the client audit is often the foundation for cross-selling and up-selling of clients. In B2B environments, sales representatives need to be alert to opportunities for cross- and up-selling. This means understanding customers ' manufacturing processes, and knowing their product innovation plans.
In mature markets, where customer acquisition is difficult or expensive, the development of retained customers is an important source of additional revenues. For example, in the mature mobile telecommunications market, the penetration of handsets is at a very high level. Winning new-to-market customers is regarded as too difficult, since these are the laggards and expensive to convert. Network operators have begun to focus on selling additional services to their existing customer bases, including data applications.
Strategies for terminating customer relationships
Companies rarely hesitate to terminate employee positions that serve no useful purpose. In a similar vein, a review of customer value might identify customers that are candidates for dismissal, including customers who will never be profitable or who serve no other useful strategic purpose. More specifically, these include fraudsters, persistent late payers, serial complainants, those who are capricious and change their minds with cost consequences for the supplier, and switchers who are constantly searching for a better deal. This certainly happens in reverse; customers sack suppliers when they switch vendors.
Relationships dissolve when one partner no longer views the relationship as worth continuing investment. In a B2B context, activity links, resource ties and actor bonds would be severed. However, even if there is no strategic value in a customer, dissolution of the relationship is not always an attractive option because of contractual obligations, expectations of mutuality, word-of-mouth risks and network relationships.
McKinsey reports that 30 to 40 percent of a typical company's revenues are generated by customers who, on a fully costed, standalone, basis would be unprofitable. It is therefore important to conduct regular reviews of the customer base to identify potential candidates for dismissal. If this is not done sales, marketing and service resources will continue to be suboptimally deployed. Nypro, a large plastic injection moulder, had 800 customers and sales of $50 million in 1987 when it decided to move out of low value-add manufacturing. Many of these customers served no useful strategic purpose and, by 1997, the company had only 65 customers, all of whom were large and required valueadded solutions rather than cheap moulded products. However, sales revenues were $450 million.
Sacking customers needs to be conducted with sensitivity. Customers may be well connected and spread negative word-of-mouth about their treatment. In the year 2000, UK banks began a programme of branch closures in geographic areas that were unprofi table. Effectively, they were sacking low-value customers in working-class and rural areas. There was considerable bad publicity, the government intervened and the closure strategy was reviewed.
There are a number of strategies for sacking customers:
- Raise prices: customers can choose to pay the higher price. If not, they effectively remove themselves from the customer base. Where price is customized this is a feasible option. When banks introduced transaction fees for unprofi table customers many left in search of a better deal.
- Unbundle the offer: you could take a bundled value proposition, unbundle it, reprice the components and reoffer it to the customer. This makes the value in the offer transparent, and enables customers to make informed choices about whether they want to pay the unbundled price.
- Respecify the product: this involves redesigning the product so that it no longer appeals to the customer(s) you want to sack. For example, the airline BA made a strategic decision to target frequent-flying business travellers who they regarded as high value. They redesigned the cabins in their fleet, reducing the number of seats allocated to economy travellers.
- Reorganize sales, marketing and service departments so that they no longer focus on the sackable segments or customers. You would stop running marketing campaigns targeted at these customers, prevent salespeople calling on them and discontinue servicing their queries.
- Introduce ABC class service: you could migrate customers down the service ladder from high quality face-to-face service from account teams, to sales representatives, or even further to contact centre or web-based self-service. This eliminates cost from the relationship and may convert an unprofitable customer into profit. In a B2C context, this equates to shifting customers from a high-cost to a low-cost service channel. Frontier Bank, for example, introduced a no-frills telephone account for business customers who needed no cash processing facilities. A minimum balance was needed for the bank to cover its operating costs. Customers who did not maintain the targeted credit balance in their account were invited to switch to other products in other channels. If they refused, the bank asked them to close their account.
Empirical evidence on how companies terminate customer relationships is sparse. However, one study of German engineering companies reports that very few firms have a systematic approach to managing unprofitable customers. Most respondents confirm that unprofitable relationships are commonplace; indeed, a fifth of firms have a customer base more than half of which is not, or not yet, profitable. Companies fall into three clusters in respect of the customer-sacking behaviours:
1. Hardliners take an active and rigorous stance in terminating unprofitable relationships, including the regular clearance of their customer portfolio. More qualitative implications, such as a potential loss of trust in relationships with other customers or negative word-of- mouth, do not seem to hinder their willingness to sack unprofitable customers.
2. Appeasers take a more cautious approach concerning the termination of unprofitable relationships, above all due to strategic considerations such as not playing customers into competitors ' hands.
3. The undecided are reluctant to terminate unprofitable relationships, mainly because they fear the costs of attracting new customers.
In this chapter we have looked at the important issues of how companies can retain, develop and, if necessary, sack customers. The economic argument for focusing on customer retention is based on four claims about what happens as customer tenure lengthens: the volume and value of purchasing increases, customer management costs fall, referrals increase and customers become less price sensitive. Measures of customer retention vary across industry because of the length of the customer repurchase cycle. There are three possible measures of customer retention. Raw customer retention is 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 same period. This raw figure can be adjusted for sales and profit. Customer retention efforts are generally directed at customers who are strategically valuable. These same customers may be very attractive to competitors and may be costly to retain.
A number of alternative strategies can be used to retain customers. A distinction can be made between positive and negative retention strategies. Negative retention strategies impose switching costs on customers if they defect. Positive retention strategies reward customers for staying. There are four main forms of positive retention strategy. These are meeting and exceeding customer expectations, finding ways to add value, creating social and structural bonds and building customer engagement. Companies have a number of methods for adding value, including loyalty schemes, customer clubs and sales promotions. What is an appropriate customer retention strategy will be contextually defined. Not all strategies work in all circumstances. In addition to customer retention, two other customer management activities were discussed in this chapter. These are developing and sacking customers. Customer development aims to increase the value of the customer by cross-selling or up-selling products and services to existing customers. The termination of customer relationships aims to improve the profitability of the customer base by divesting customers who show no signs of ever becoming profitable or strategically significant.
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