tu -: -- -Z* * _ - = = — — — _ "~ tu o o ■I "S S -tí ro -a ťo-5 OJ <£ S £ -_ *" f r - — ~ — ~ 1 m 'S Is?! I * >*T3b we y. -'[ft S*-S g ^ O ^ f ■ Jj JU rt 3 " .13 P Y u >i OJ t >-, lň > .o *° . >* « .. j, v r. ^^r, n. P. P & 3 ^3 .3 -" a, & ŕ > p E c £k£&£L3 8u&-5 324 Customer Relationship Management for a better deal. McKinsey reports that 30-40 per cent of a typical company's revenues are generated by customers who, on a fully costed stand-alone basis would be unprofitable.34 These customers would be potential candidates for dismissal. 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 value-added 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 geographical areas that were unprofitable. 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. Banks introduced transaction fees for unprofitable customers. • Unbundle the offer: you could take the bundled value proposition that is sold to the customer, unbundle 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 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, 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, stop salespeople calling on them and stop servicing their queries. • Introduce ABC class service: 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 service channel into 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.35 Managing the customer Hfecycle: customer retention and development 325 , .. -------... .... .....------------------„ „. ------_,..,-----_., _,, ,„^„,, UE,,,op 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 iess 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 saies and profit. Customer retention efforts are generally directed at customers who are strategically significant. These same customers may be very attractive to competitors and may be costly to retain, thus undermining their value and significance. 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, building bonds and establishing emotional commitment. Companies have a number of methods for adding value, including loyalty schemes, customer clubs and saies promotions. Customer bonds can be categorized as either social or structural. Three different forms of commitment have been identified; instrumental, relational and values-based. What is an appropriate customer retention strategy will be contextuaily defined. Not ail strategies work in ail circumstances. In addition to customer retention, two other CRM activities were discussed in this chapter. These are developing and sacking customers. Customer development aims to increase the value of the customer by selling additional or replacement offers to the customer. Sacking aims to improve the profitability of the customer base by getting rid of customers who show no signs of ever becoming profitable or strategically significant. References 1. Ahmad, R. and Buttle, F. (2001) Customer retention: a potentially potent marketing management strategy. Journal of Strategic Marketing, Vol. 9, pp. 29-45. 2. Dawkins, P. M. and Reichheld, F. F. (1990) Customer retention as a competitive weapon. Directors & Board, Summer, pp. 42-7. 3. Ahmad, R. and Buttle, F. (2002) Customer retention management: a reflection on theory and practice. Marketing Intelligence and Planning, Vol. 20(3), pp. 149-61. 4. Reichheld, F. F. (1996) The Loyalty Effect: The Hidden Force Behind Growth, Profits, and Lasting Value. Boston, MA: Harvard Business School Press.