CHAPTER 4

MANAGING THE CUSTOMER

LIFECYCLE
Customer retention and development
CHAPTER OBJECTIVES
By the end of this chapter, you will understand:
 What is meant by the terms ‘customer retention’ and ‘customer
development’.
 The economics of customer retention. .
 How to select which customers to target for retention
 The distinction between positive and negative customer retention
strategies.
 Several strategies for improving customer retention performance.
 Several strategies for growing customer value.
 CRM technologies that facilitate growth in customer value
 Why and how customers are ‘sacked’.
 ITRODUCTION (1)
 In this chapter, we turn to customer retention and development, The
major strategic purpose of CRM is to manage a company’s relationships
with customers profitably 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.
 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
What is customers retention?
 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.
 Sometimes companies are not clear about whether an individual customer
has defected. This is because of the location of customer-related 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. 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 office equipment
dealers have formed into cooperative buying groups to purchase at
lower prices and experience other economies of scale in marketing.
 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
measures of customer retention

1- Raw customer retention rate. This is the number of customers doing

business with a firm at the end of a trading period expressed as a
percentage of those who were active customers at the beginning of the
period.
2- 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
3- Profit-adjusted retention rate. This is 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.
Managing customer retention or value retention?

Improving customer retention is an important objective for many CRM strategies. Its
definition and measurement need to be sensitive to the sales, profitability and value
issues mentioned above. 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-creating customers. It may not be beneficial 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-creators
Economics of customers retention
There is a strong economic argument in favour of customer retention,
which was first introduced in Chapter 2. The argument goes as follows:
1- Increasing purchases as tenure grows. Over time customers come to
know their suppliers. Providing the relationship is satisfactory, trust
grows whilst risk and uncertainty are reduced. Therefore, customers
commit more of their spending to those suppliers with which 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.
2-Lower customer management costs over time. The relationship start-
up costs that are incurred when a customer is acquired can be quite
high. It may take several years for enough profit to be earned from the
relationship to recover those acquisition costs.
3- Customer referrals. Customers who willingly commit more of their
purchases to a preferred supplier are generally more satisfied than
customers who do not. They are therefore more likely to utter positive
word-of-mouth (WOM) and influence the beliefs, feelings and
behaviors of others.
4-Premium prices. Customers who are satisfied 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.
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 who have high CLV, or are otherwise strategically
significant as high volume customers, benchmarks, inspirations or
door openers.
 You need to bear in mind that there may be a considerable cost of
customer retention. 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. On the other hand, 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
strategies for customer retention
 Positive and negative retention strategies
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.
 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 principle of modern customer management that
companies should understand customers, and then ensure their
satisfaction and retention.
Exceeding expectations need not be costly. For example, a sales
representative could do a number of simple things for a customer, such
as:
 Volunteer to collect and replace a faulty product 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, 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.
Add customer-perceived value:
There are three common forms of value-adding programmes: loyalty schemes, customer communities
and sales promotions.
 Loyalty schemes:
A loyalty scheme is a customer management programmed that offers delayed or immediate
incremental rewards to customers for their cumulative patronage.
 Customer clubs:
A customer club is a company-run membership organization that offers a range of value-adding
benefits exclusively to members.
 Sales promotions:
Whereas loyalty schemes and clubs are relatively durable, sales promotions offer only temporary
enhancements to customer-experienced value. Sales promotions, as we saw in the last chapter, can
be used for customer acquisition too. Retention-oriented sales promotions encourage the customer
to repeat purchase.
 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
electronic data interchange – EDI), legal bonds and process bonds. These
different forms can be split into two major categories: social and structural:
 Social bonds :Social bonds are found in positive interpersonal relationships
between people. 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
 Structural bonds:
Structural bonds are established when companies and customers
commit resources to a relationship. Generally, these resources yield
mutual benefits for the participants.
Different types of structural bond can be identified. All are
characterized by an investment of one or both parties in the other:
• Financial bonds: 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 bonds: when there is a contract or common ownership linking the
relational partners.
• Equity bonds: where both parties invest in order to develop an offer for
customers, e.g. 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 bonds: when each party grows to know and understand the
other’s processes and structures, strengths and weaknesses.
• Technological bonds: when the technologies of the relational partners are
aligned, e.g. with EDI, Just-in-Time logistics and manufacturing.
• Process bonds: when processes of the two organizations are aligned, e.g. 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).
• Values-based bonds. Some companies are renowned for their strong values,
e.g. the Body Shop is opposed to testing cosmetics on animals, and it will not
source products from suppliers who do so.
• Geographic bonds: when companies in a trading area – street, city region or
country – create a buyer–seller referral network that supports all members of
their group.
• Project bonds: when the partners are engaged in some special activity outside
of their normal commercial arrangements, e.g. a new product development
project. There may be an exchange of resources to enable the desired outcome
to be achieved, e.g. an exchange of engineers and technologists between the
companies.
• Multi-product bonds: when a customer buys several products from a supplier,
the bond is more difficult 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 significant money, transaction and psychic
costs in identifying one or more replacements. Further, the level of perceived risk
attached to a new relationship may become uncomfortable
Build customer engagement
The final positive strategy for improving customer retention is to build
customer engagement. Various studies have indicated that customer
satisfaction is not enough to ensure customer longevity
Customer engagement can be thought of as a multidimensional
construct composed of four elements: cognitive engagement, affective
engagement, behavioral engagement and social engagement. The
cognitive and affective elements reflect the experiences and feelings of
customers, and the behavioral and social elements capture brand or
organizational participation by consumers, beyond merely buying the
firms’ offerings. Consumers who are engaged do more than just buy
 Gamification :is the use of game-like mechanics in non-game contexts.
Customers may also feel a strong sense of connection to a brand or organization
when they build close relationships with the firm’s employees or when their
personal values align with those of the firm
Relational attachment:Customers can become highly attached to a company’s
people. An emotional tie may be formed with an individual person, a work group
or the generalized company as a whole. Customers who talk about ‘my banker’
or ‘my mechanic’ or ‘my builder’ are expressing this attachment
Values-based attachment:Values are core beliefs that transcend context and
serve to organize and direct attitudes and behaviours
Context makes A deference
 Context makes a difference to customer retention in two ways. First, there are
some circum - stances when customer acquisition makes more, indeed the only,
sense as a strategic goal. Second, customer retention strategies will vary according
to the environment in which the company competes.
 The impact of contextual conditions on the choice and timing of customer
retention practices has not been thoroughly researched. However, we can see that
a number of contextual considerations impact on customer retention practices:
• Number of competitors.
• Corporate culture.
• Channel configuration
• Purchasing practices
• Ownership expectations
• Ethical concerns
 Key performance indicators of customers
retention programmes:
CRM practitioners may focus on a number of key performance indicators (KPIs) as
they measure the impact of their customer retention strategies and tactics, among
them the following:
1 Raw customer retention rate.
2 Raw customer retention rate in each customer segment.
3 Sales-adjusted retention rate.
4 Sales-adjusted retention rate in each customer segment.
5 Profit-adjusted retention rate.
6 Profit-adjusted retention rate in each customer segment.
7 Cost of customer retention.
8 Share-of-wallet of the retained customers.
9 Customer churn rate per product category, sales region or channel.
10 Cost-effectiveness of customer retention tactics.
The role of research in reducing churn
Companies can reduce levels of customer churn by researching a number of
questions:
1 Why are customers churning?
2 Are there any lead indicators of impending defection?
3 What can be done to address the root causes?
The first question can be answered by contacting and investigating a sample of
former customers to find out why they took their business elsewhere. Customers
defect for all sort of reasons, not all of which can be foreseen, prevented or
managed by a company. For example, Susan Keaveney identified eight causes of
switching behaviors in the service industries: price, inconvenience, core service
failures, failed employee responses to service failure, ethical problems, involuntary
factors, competitive issues and service encounter failures.
The second question attempts to find out if customers give any early warning
signals of impending defection. If these were identified the company could take
pre-emptive action. Signals might include the following:
• 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 wallet (e.g. customer switches mobile phone service to another
provider, but keeps fixed line service with your firm)
• inbound calls for technical or product-related information
• late payment of an invoice
• querying an invoice
• customer touchpoints are changed, e.g. store closes, change of website address
• customer change of address
Customer researchers are advised to analyze the reasons for customer
defection, and to identify the root causes.50 Sometimes management can fix
the problems causing churn. For example, if you lose customers because of the
time taken to deal with a complaint, manage ment can audit and overhaul the
complaints management process. This might involve identifying the channels
and touchpoints through which complaints enter the business, introducing
complaints-management software to ensure issues are resolved to the
customer’s satisfaction, or training and empowering front-line staff. Root causes
can be analyzed by customer segment, channel and product. The 80:20 rule may
be applicable. In other words, it may be possible to eliminate 80 per cent of the
causes of customer defections with relative ease.
 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 whilst 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.
 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 in single or multiple communication channels and track
their effectiveness, particularly in terms of sales and incremental margin
• Event-based marketing. Up-selling and cross-selling campaigns are often associated with
events. For example, a bank will cross-sell an investment product to an existing customer if
deposits in a savings account reach a trigger point.
• Data mining. Cross-sell and up-sell campaigns are often 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 (propensityto-buy), based on
their transactional history or profile. First Direct, an online and telephone bank, uses
propensity to buy scores to run targeted, event-driven cross-sell campaigns through direct
mail and call centres. They achieve high conversion rates by making follow-up out-bound
telephone calls.
• Customization. Cross-sell and up-sell offers can be customized at segment or unique
customer level, based upon the transactional history and profile of the target. Also
personalized is the communication to the customer and the channel of communication –
• Channel integration. Customer development activities can be integrated across channels.
When different channels make different offers to the same customer at the same time, this
creates bad customer experience. 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. CRM practitioners generally prefer that 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), and customers’ transactional histories and
propensities-to-buy
 Strategies for terminating consumer
relationship
There are a number of strategies for shedding unprofitable customers:
• Make them profitable by raising prices or cutting the cost-to-serve. A company can
simply increase prices to increase margin; customers who pay the higher price become
profitable. If most customers are retained at the higher price, it suggests you were not
charging enough in the first place! Customers unwilling to pay the higher price, find
insufficient value in your product given the higher price, effectively remove
themselves from the customer base when they stop transacting. Where price is
customized this is a feasible option.
• Un-bundle the offer. You could take a bundled value proposition, un-bundle it,
reprice the components and reoffer it to the customer. This makes transparent the
value in the offer, and enables customers to make informed choices about whether
they want to pay the un-bundled 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 they regarded as high
value.
• Reorganize sales, marketing and service departments so that they no longer focus on
segments or customers you no longer wish to retain. You would stop running
marketing campaigns targeted at these customers, prevent salespeople calling on
them and discontinue servicing their queries.
• Introduce ABC class service. A business-to-business company 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-servic
Questions
and
Answers