CHAPTER (4)

MANAGING THE CUSTOMER

LIFECYCLE: CUSTOMER
RETENTION AND DEVELOPMENT

Dr. May Win Kyaw

Associate Professor
Department of Management Studies
Yangon University of Economics
 LEARNING OUTCOMES
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

WHAT IS CUSTOMER RETENTION?
 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.
 An individual customer has defected because of the

location of customer-related data which might be

retained in product silos, channel silos or functional
silos
 Three measures of customer retention

 Raw customer retention rate

 Sale-adjusted retention rate

 Profit-adjusted retention rate

ECONOMICS OF CUSTOMER
RETENTION
 There is a strong economic argument in favor of
customer retention
 Increasing purchase as tenure grows

 Lower customer management costs over time

 Customer referrals

 Premium prices
 WHICH CUSTOMERS TO RETAIN?
 The customers who have greatest strategic value to your
company are prime candidates for your retention efforts
 Some companies prefer to focus retention efforts on their

recently acquired customers

 Should effort be directed at retaining the high-share

customer with whom you have a profitable relationship,

the medium-share customer with whom you might lose
additional share to competitors or the low-share customer
from whom there is considerable CLV potential?
 Depend on the current value of the customer, the potential

for growing that value and the cost of maintaining and

developing the relationship.
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.

 Negative customer retention strategies impose high

switching costs on customers, discouraging their

defection.
POSITIVE CUSTOMER RETENTION
STRATEGIES
Customer delight
 Delighting customers, or exceeding customer
expectations, means going beyond what would
normally satisfy the customer.
 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.
 CD = P > E

 where CD = Customer Delight, P =

Perception of performance, and E =

Expectation
POSITIVE CUSTOMER RETENTION
STRATEGIES
POSITIVE CUSTOMER RETENTION
STRATEGIES
Add customer-perceived value
 Companies can explore ways for customers to

experience additional value as they buy and use

products and services.
 The ideal is to enable additional value to be

experienced by customers without creating additional

costs for the supplier.
 If costs are incurred then customers may be expected

to contribute towards cost recovery.

 There are three common forms of value-adding

programmes: loyalty schemes, customer communities

and sales promotions.
POSITIVE CUSTOMER RETENTION
STRATEGIES
Loyalty scheme
 A customer management programme that offers

delayed or immediate incremental rewards to

customers for their cumulative patronage.
 The more a customer spends, the higher the reward.

 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.
Loyalty scheme
 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.
POSITIVE CUSTOMER RETENTION
STRATEGIES

customer clubs
 a company-run membership organization that offers a

range of value-adding benefits exclusively to

members.
 The initial costs of establishing a club can be quite

high but thereafter most clubs are expected to cover

their operating expenses and, preferably, return a
profit.
 Research suggests that customer clubs are successful

at promoting customer retention.

POSITIVE CUSTOMER RETENTION
STRATEGIES

customer clubs
 To become a member and obtain benefits, clubs
require customers to register. With these personal
details, the company is able to begin interaction with
customers, learn more about them, and develop
customized offers and services for them.
 Among the more common benefits of club
membership are access to member-only products and
services, alerts about upcoming new and improved
products, discounts, magazines and special offers.
POSITIVE CUSTOMER RETENTION
STRATEGIES
Sales promotions
 Whereas loyalty schemes and clubs are relatively

durable, sales promotions offer only temporary

enhancements to customer-experienced value.
 Retention-oriented sales promotions encourage the

customer to repeat purchase, so the form they take is

different.
 In pack or on-pack voucher, Rebate or cash-back,

Patronage awards, Free premium for continuous

purchase, Collection schemes, Self-liquidating
premium.
POSITIVE CUSTOMER RETENTION
STRATEGIES
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.

 Social bonds characterized by trust generally precede

the development of structural bonds.

POSITIVE CUSTOMER RETENTION
STRATEGIES
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.

Financial bonds, Legal bonds, Equity bonds,

Knowledge-based bonds, Technological bonds,
Process bonds, Values-based bonds, Geographic
bonds, Project bonds, Multi-product bonds.
POSITIVE CUSTOMER RETENTION
STRATEGIES
Build customer engagement
 Various studies have indicated that customer

satisfaction is not enough to ensure customer

longevity.
 Today, many commentators are stressing the need for

companies to lift levels of customer engagement

instead of just focusing on customer satisfaction.
 Customer engagement composed of four elements:

cognitive engagement, affective engagement,

behavioral engagement and social engagement.
POSITIVE CUSTOMER RETENTION
STRATEGIES
 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.

They may perform acts of ‘corporate citizenship’,

such as being an unpaid advocate by uttering positive
word-of-mouth, providing frequent feedback on their
experiences,
POSITIVE CUSTOMER RETENTION
STRATEGIES
Gamification
 The use of game-like mechanics in non-game

contexts.
Relational attachment
 Customers can become highly attached to a

company’s people. An emotional tie may be formed

with an individual person.
Values-based attachment
 Customers may develop a strong sense of emotional

attachment when their personal values are aligned

with those of the company.
.
CONTEXT MAKES A
DIFFERENCE
 Context makes a difference to customer retention in
two ways.
 First, there are some circumstances 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.
 A number of contextual considerations impact on

customer retention practices: Number of competitors,

Corporate culture, Channel configuration,
Purchasing practices, Ownership expectations,
 KEY PERFORMANCE INDICATORS OF
CUSTOMER RETENTION PROGRAMMES
 Raw customer retention rate.
 Raw customer retention rate in each customer segment.

 Sales-adjusted retention rate.

 Sales-adjusted retention rate in each customer segment.

 Profit-adjusted retention rate.

 Profit-adjusted retention rate in each customer segment.

 Cost of customer retention.

 Share-of-wallet of the retained customers.

 Customer churn rate per product category, sales region or

channel.
 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:
 Why are customers churning?

 Are there any lead indicators of impending defection?

 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.
THE ROLE OF RESEARCH IN
REDUCING CHURN
 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

THE ROLE OF RESEARCH IN
REDUCING CHURN
 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 touch points are changed, e.g. store closes,

change of website address

 customer change of address.
STRATEGIES FOR CUSTOMER
DEVELOPMENT
 Customer development is the process of growing the
value of retained customers. .
 Cross-selling is selling additional products and services

to an existing customer.
 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, Event-based marketing, Data
mining, Customization, Channel integration, Integrated
customer communications, Marketing optimization.
STRATEGIES FOR TERMINATING
CUSTOMER RELATIONSHIPS
 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.
 Fraudsters, persistent late payers, serial complainants,

those who are capricious and change their minds with

cost consequences for the supplier, and switchers who
are in constant search for a better deal.
 This certainly happens in reverse; customers sack

suppliers when they switch vendors.

STRATEGIES FOR TERMINATING
CUSTOMER RELATIONSHIPS
There are a number of strategies for shedding
unprofitable customers:
 Make them profitable by raising prices or cutting the

cost-to-serve
 Un-bundle the offer

 Re specify the product

 Reorganize sales, marketing and service departments

 Introduce ABC class service

THANK YOU!