"aíí|0E "5. *~-c S y o P s v in S ú °.3 3fi ■n f On C S » £ i 5 ¥ 2l J '* $ .ž * § S S (L) +- t, .O >* ti S ^ 5 2 € c 1 292 Customer Relationship Management ^ ľ Business to business prospects are generated in a number of ways includir interoersonal networks promotional activities such as exhibition1; trade conferences advertising publicity and public relations canvassing telemat e mail New customers for consumer companies can be generated from much the s< as B2B prospects but much greater effort js put into advertising sales proi merchandising -i e As customer databases improve data mining techniques can be used more p j to recruit new customers The transactional histories of current custom analysed and the cost effectiveness of different customer acquisition stra puted By analysing customer data companies^ are better informed abou i promising target prospects appealing offers or appropriate product bundle ř ''modelling can determine relattonshľp sfarter products such as car insurar u re acquire customers m the personaf insůrancVmarfcet When sales have been m customer's permission to use their informatfop has been obtained other prac cross sold turning acquisition into repeat purchase and subsequently int 'retention i _ References 1 Ford, D (19f)2) The development of buyer—seller rditionsrur. industrial markets. In: Hákansson, H. (ed.). International Marketing Purchasing of Industrial Goods - An Interaction Approach, pp. 288-New York: Wiley. 2. Peppers, D. and Rogers, M. (1997) Enterprise One-To-One. Lou Piatkus. 3. Hofmeyr, J. and Rice, B. (2000) Commitment-led Marketing: The K Brand Profits is in the Customer's Mind. Chichester: John Wiley. 4. Chaffey, D., Mayer, R., Johnston, K. and Ellis-Chadwick, F. G Internet Marketing. London: FT Prentice Hall. 5. Godin, S. (1999) Permission Marketing: Turning Strangers into Friend. Friends into Customers. New York: Simon and Schuster. 6. Krugman, H. E. (1975) What makes advertising effective? Hat Business Review, March-April, p. 98. 7. Ehrenberg, A. S. C. (1974) Repetitive advertising and the consu Journal of Advertising Research, Vol. 14, pp. 25-34. 8. Barnard, N. and Ehrenberg, A. S. C. (1997) Advertising: strc persuasive or just nudging? Journal of Advertising Research, Vol. 2 pp. 21-31. 9. Lodish, L., Abraham, M., Kalmenson, S., Livelsberger, J., Lubetkb Richardson, B. and Stevens, M. E. (1995) How TV advertising woi meta-analysis of 389 real-world split cable TV advertising ex ments. Journal of Marketing Research, Vol. 32, May, pp. 125-39. 10. Abraham, M. M. and Lodish, L. (1990) Getting the most oi advertising and promotion. Harvard Business Review, May/June, 68(3), pp. 50-6. Managing the customer lifecyde: customer acquisition 293 11. Naumann, E. (1995) Creating Customer Value: The Path to Sustainable Competitive Advantage. Cincinnati, OH: International Thomson Press. 12. Buttle, F. and Kay, S. (2000) RAFs, MGMs and CRSs: is £10 enough? Proceedings of the Academy of Marketing Annual Conference. 13. LBM Internet, UK. Personal communication. 14. Lee, J. (1999) Net stock frenzy. Fortune, Vol. 139(2), 1 February, pp. 148-51. 15. Gurley, J.W. (1998) The soaring cost of e-commerce. Fortune, Vol. 138(2), 3 August, pp. 226-8. ■m '■' JL J Chapter objectives By ti in« of th- chipter >ou \ ill und inland 1 \ h l ij im int bv the t->rm ni tom^r ri-trntion 2 tliH «-conomics of cu-ttomer r trntion 3 hu to s-*\tLt custom r&totuq t for iWrntiin i tlu distinction b ti« n positi.c iiid npgitiv curtomor irfntion 5 j- HrJstr tecji s for cuitonu r r tcntion including meeting iiid exc"riinq ciiitomt r

Office Supplies. This year it bought 50 PCs, of which 30 were from Apex From Apex's point of view it has grown customer value by 50 per cenl (from 20 to 30 machines), which it might regard as an excellent achievement. However, in a relative sense, Apex's share of customer has fallen from 67 per cent (20/30) to 60 per cent (30/50). How should Apex regard this customer? The customer is clearly a retained customer in a 'raw' sense, and has grown in absolute value, but fallen in relative value. Consider also a retail bank customer who maintains a savings account, but during the course of a year transfers all but a few dollars of her savings to a different institution in pursuit of a better interest rate. This Managing the customer lifecyde: customer retention and development 301 customer is technically still active, but significantly less valuable to the bank. Customer retention is an important key performance indicator (KPI) for CRM implementations. Its definition and measurement need to be made with an understanding of the customer profitability issues raised 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 strategically significant 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. Others may perform no useful strategically significant role such as benchmark, door opener, inspiration or technology partner, as defined in Chapter 4. Economics of customer retention The economic argument in favour of customer retention goes as follows.4-5 • Increasing purchases as tenure grows: over time, customers come to know their suppliers. Providing the relationship is satisfactory, trust grows while risk and uncertainty are reduced. Therefore, they commit more of their spending to those suppliers with whom 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. • Lower customer management costs over time: the relationship startup 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. For example, it can take 6 years to recover the costs of winning a new retail bank customer.6 In the B2B context in particular, the ongoing relationship maintenance costs such as selling and service costs can be low relative to the costs of winning the account. Therefore, there is a high probability that the account will become more profitable on a period-by-period basis as tenure lengthens. These relationship maintenance costs may eventually be significantly reduced or even eliminated as the parties become closer over time. In the B2B context, once automated processes are in place, transaction costs are effectively eliminated, while Extranets and portals largely transfer account service costs to the customer. In the business-to-consumer (B2C) context, especially in retailing, the claim that acquisition costs generally exceed retention costs is not well proven, in part because it is very difficult to isolate and measure customer acquisition costs.7 • Customer referrals: customers who willingly commit more of their purchases to a preferred supplier are generally more satisfied than 302 Customer Relationship Management customers who do not. They are therefore more likely to utter word-i mouth and influence the beliefs, feelings and behaviours of others If likely that newly acquired customers, freshly enthused by thi experience, would be powerful word-of-mouth advocates, not long term customers who are more habituated.7 Reichheld shows that pre from customer referrals grows as tenure lengthens.4 Research al shows that customers who are frequent buyers are heavier ref errers. I example, online clothing customers who have bought once refer thr people; after 10 purchases they will have referred seven. In consurr. electronics, the one-time customer refers four; the 10 times custorr refers 13. These referred customers spend about 50-75 per cent of il referrer's spending over the first 3 years of their relationship.8 • Premium prices: customers who are satisfied in their relationship m reward their suppliers by paying higher prices. This is because they j their sense of value from more than price alone. Customers in. established relationship are also likely to be less responsive to pr appeals offered by competitors. These conditions mean that retained customers are generally rric profitable than newly acquired customers. Drawing from their consult! experience, Dawkins and Reichheld reported that a 5 per cent increase customer retention rate led to an increase in the net present value' customers by between 25 and 95 per cent across a wide range industries, including credit cards, insurance brokerage, auto services a'; office building management9 In short, customer retention drives ci tomer lifetime value (LTV). Which customers to retain?* Simply, the customers who have greatest strategic value to your compa are prime candidates for your retention efforts. These are the custom! we defined as having high LTV, or are otherwise significant as hij volume customers, benchmarks, inspirations, door openers or technolô. partners. You need to bear in mind that there may be a considerable b of customer retention. Your most valued customers are also likely to those that are very attractive to your competitors. If the costs of retaining customers become too great then they mi£ lose their status as strategically significant. For example, top-t customers may demand customization, just-in-time delivery and pr discounts. If this reduces their LTV significantly, and they do not fit ii any other strategically significant category, they may be downgraded tier two. The level of commitment between a company and a customer v figure in the decision about which customers to retain. If the custome] highly committed, that is, impervious to the appeals of competitors, y do not need to invest so much in retention. However, if you have higl significant customers who are not committed, you may want to inV' considerable sums in their retention. Managing the customer lifecyde: customer retention and development 303 Some companies prefer to focus their retention efforts on their recently acquired customers. They often have greater future LTV potential than longer tenure customers. There is some evidence 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.4 Another justification for focusing on recently acquired customers comes from research into service failures. When customers experience service failure, they may be more forgiving if they have a history of good service with the service provider. In other words, customers who have been recently acquired and let down are more likely to defect or reduce their spending than customers who have a satisfactory history with the supplier.10 Retention efforts where there is portfolio purchasing can be very difficult. Should effort be directed at retaining the high-share customer with whom you have a profitable relationship, the medium-share customer from whom you might lose additional share to competitors or the low-share customer from whom there is considerable LTV potential? The answer will 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. In a B2C context, mortgage companies have commonly recruited new customers with attractive discounted interest rates. When the honeymoon period is over, these customers may want to switch to another provider, only to discover that they will be hit with early redemption and exit penalties. Customers wishing to switch retail banks find that it is less simple than anticipated: direct debits and standing orders have to be reorganized. In a B2B context, a customer may have agreed a deal to purchase a given volume of raw material at a quoted price. Some way through the contract a lower cost supplier makes a better offer. The customer wants to switch but finds that there are penalty clauses in the contract. The new supplier is unwilling to buy the customer out of the contract by paying the penalties. Some customers find that these switching costs are so high that they remain customers, although unwillingly. The danger for CRM practitioners is that negative customer retention strategies produce customers who feel trapped. They are likely to agitate to be freed from their 304 Customer Relationship Management obligations, taking up much management time. Also, they may utter negative word-of-mouth. They are unlikely to do further business with™ that supplier. Companies that pursue these strategies argue that customers need to be aware of what they are buying and the contracts they sign. The total cost of ownership (TCO) of a mortgage can include early redemption costs. ^ When presented with a dissatisfied customer who is complaining about high relationship exit (switching) costs, companies have a choice They can either enforce the terms and conditions, or not. The latter path is more attractive when the customer is strategically significant particularly if the company can make an offer that matches that of the prospective new supplier. A In the following sections we look at a number of positive customer retention strategies, including meeting and exceeding customer expecta-^ tions, finding ways to add value, creating social and structural bonds/ and building commitment. $ Meet and exceed expectations f 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 precept of modern customer management that companies should understand customers, then acquire and deploy resources to ensure their satisfaction and retention. This is why CKM is grounded on detailed customer knowledge (Chapter 5). Customers that you arc not positioned to serve may be better served by your competitors. Exceeding customer expectations means going beyond what would normally satisfy the customer. This does not necessarily mean being world-class or best-in-class. 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. You cannot really strategize to delight the customer if you do not understand the customer's fundamental expectations. You may stumble onto attributes of your performance that do delight the customer, but you cannot consistently expect to do so unless you have deep customer insight. Consistent efforts to dehght customers show your commitment to the relationship. Commitment builds trust. Trust begets relationship longevity. Customer delight occurs when the customer's perception of their experience of doing business with you exceeds their expectation In formulaic terms: ■" Customer delight = P > E where P = perception and E = expectation. This formula implies that customer delight can be influenced in two ways: by managing expectations or by managing performance. In most commercial contexts customer expectations are ahead of perceptions In other words, customers generally can find cause for dissatisfaction. You might think that this would encourage companies to attempt to manage customer expectations down to levels that can be delivered. However Managing the customer lifecyde: customer retention and development 305 competitors may well be improving their performance in an attempt to meet customer expectations. If your strategy is to manage expectations down, you may well lose customers to the better performing company. This is particularly so if you fail to meet customer expectations on important attributes. Customers have expectations of many attributes, for example product quality, service responsiveness, price stability, and the physical appearance of your people and vehicles. These are unlikely to be equally important. It is important to meet customer expectations on attributes that are important to the customer. Online customers, for example, look for rapid and accurate order fulfilment, good price, high levels of customer service and website functionality. Dell Computers believes that customer retention is the outcome of their performance against three variables: order fulfilment [on time, in full, no error (OTIFNE)], product performance (frequency of problems encountered by customers) and aftersales service (percentage of problems fixed first time by technicians). The comments in parentheses are the metrics that Dell uses. Figure 9.2 identifies a number of priorities for improvement (PFIs) for a restaurant company. The PFIs are the attributes where customer satisfaction scores are low, but the attributes are important to customers. In the example, the PFIs are food quality and toilet cleanliness. There would be no advantage in investing in speedier service or more helpful staff. Kano has developed a product quality model that distinguishes between three forms of quality. Basic qualities are those that the customer routinely expects in the product. These expectations are often unexpressed until the product fails. For example, a car's engine should start first time every time and the sunroof should not leak. The second form is linear quality. These are attributes of which the customer wants more or less; for example, more comfort, better fuel economy and reduced noise levels. Marketing research can usually identify these requirements. Better performance on these attributes generates better customer satisfaction. The third form is attractive quality. These are attributes that surprise, delight and excite customers. They are answers to latent, unarticulated __________ ________________________ ' importance uaia i ^^w^ms^mmmmmmm^mm^mm identify priorities „ ., * for improvement 306 Customer Relationship Management J \ V needs and are often difficult to identify in marketing research. As showi in Fig. 9.3, Kano's analysis suggests that customers can be delighted ii. two ways: by enhancing linear, qualities beyond expectations and bi creating innovative attractive qualities.11 ,a A number of companies have adopted 'customer delight' as thei mission, including Cisco, American Express and Kwik-Fit, the auh service chain. Others pay homage to the goal but do not organize t< achieve it. In the service industries, customer delight requires £ront-lin< employees to be trained, empowered and rewarded for doing what i takes to delight customers. It is in the interaction with customers thä contact employees have the opportunity to understand and exceed thei expectations. The service quality attributes of empathy and responsive ness are on show when employees aim to delight customers. i Exceeding expectations need not be costly. For example, a sale representative could do a number of simple things such as: • volunteer to collect and replace a faulty product from a custome rather than issuing a credit note and waiting for the normal call cycl to schedule a call on the customer • offer better, lower cost solutions to the customer, even though thä might reduce margin • provide information about the customer's served market. A packaginj company, for example, might alert a fast-moving consumer good manufacturer customer to competitive initiatives in the market. Managing the customer lifecyde: customer retention and development 307 Some efforts to delight customers can go wrong. For example, sooner is not necessarily better. For example, if a retail store customer has requested delivery between 1 and 3 pm, and the driver arrives an hour early, the truck may clog up goods inwards and interfere with a carefully scheduled unload plan. Many contact centres play music while callers are waiting online. This is to divert the caller's attention and create the illusion of faster passage of time. However, the cycle time of the selected music must not be too fast, otherwise callers will be exposed to the game songs repeatedly. Also, the music needs to be appropriate to the context. Customers may not appreciate '(I Can't Get No) Satisfaction' by the Rolling Stones if they are waiting online to complain. Companies sometimes complain that investing in customer delight is unproductive. As noted earlier, expectations generally increase as competitors seek to offer better value to customers. Over time, as customers experience delight, their expectations change. What was exceptional becomes the norm. In Kano's terms, what used to be an attractive attribute becomes a linear or basic attribute. It no longer delights. Delight decays into normal expectation, and companies have to look for new ways to pleasantly surprise customers. In a competitive environment, it seems to make little sense to resist the quest for customer delight, because competitors will simply drive up expectations anyway. Find ways to add value Companies can explore ways to create additional value for customers. The ideal is to add value for customers without creating additional costs for the company. If costs are incurred then the value-adds may be expected to recover those costs. For example, a customer club may be expected to generate a revenue stream from its membership. There are three common forms of value-adding programme: loyalty schemes, customer clubs and sales promotions. Loyalty schemes Loyalty schemes reward customers for their patronage. The more a customer spends, the higher the reward. Loyalty schemes have a long history. In 1844, in the UK, the Rochdale Pioneers developed a cooperative retailing operation that distributed surpluses back to members in the form of a dividend. The surpluses were proportionate to customer spend. S&H Pink Stamps and Green Shield stamps were collected in the 1950s and 1960s, and redeemed for gifts selected from catalogues. In the 1970s, Southwest Airlines ran a 'Sweetheart Stamps' programme that enabled travellers to collect proofs of purchase and surrender them for a free flight for their partner.12 Today's CRM-enabled loyalty schemes owe their structure to the frequent flier programmes (FFPs) that started with American Airlines' AAdvantage programme in 1981. The airline made a strategic decision to use its spare capacity as a resource to generate customer loyalty. Airlines are high fixed cost businesses. Costs do not change much, no matter whether the load factor is 25 or 95 per cent. American knew that filling the empty seats would have little impact on costs, but could impact 308 Customer Relationship Management significantly on future demand. The airline searched its reserv system, SABRE, for details of frequent fliers in order to offer them reward of free flights. w This basic model has migrated from airlines into many other B sectors, such as hotels, restaurants, retail, car hire, petrol stations* an bookstores. It has also transferred into B2B contexts, with many suppij offering loyalty rewards to long-term customers. The mechanics of these schemes have changed over time. InitíaTŕ stamps were collected. The first card-based schemes were anonymous^ they carried no personal data, not even the name of the participant. Ttľ magnetic stripe cards were introduced, followed by chip-embedded c~" that carried a lot of personal and transactional data. Innovato developed their own individual schemes (see Cases 9.1 and Is? Eventually, these transformed into linked schemes, in which, for example, it was possible to collect air miles from various participating compaSu™ such as petrol stations, credit cards and food retailers. Current schem are massively different from the early programmes. For example, Nect is a consortium loyalty scheme operating in the UK, and managed riqt." the participants, but by an independent third party. Its core participants are all number one or two in their respective marked Salisbury's, Barclaycard, Debenhams and BP. Shoppers register iiuííSi scheme, then carry a single magnetic stripe card and collect points tha are converted into vouchers redeemable in a wide range of retailers including supermarkets, off-licences, catalogue retailers, restaurants: hotels, cinemas, travel agencies and tourist attractions. Each of the major; retail participants had been a member of another loyalty programme, anjä-customers were able to convert their existing credits to Nectar points.? Case 9.1 The Tesco Clubcard The cornerstone of Tesco s CRM strategy has been its loyalty programmes Tes< its frst loyalty programme m 1995 Called,the 'Clubcard', this loyalty care enabled customers to accumulate points with each purchase that could be u discounts off future purchases ^ > The Clubcard proved to be very successful first, in attracting more customers tc second, m capturing valuable information from customer» with every swipt which led to the creation of a powerful database that was made possible membership information For example, the card provided letco with vital infc as what products customers w ere and were not buying, where they w ere spend in the store, and where they were not, as measured by spending As a result success, 108 customer segments were identified and specific offers were made as high value customer* rtceiving valet parking when they came to shop and other specfj privileges ^ ^\T In 1996 Tesco introduced two further loyalty cards a student card and a card for mothers with offers specifically targeted to each group's needs Managing the customer lifecyde: customer retention and development 309 Case 9.2 Eoyalty programme at Boots the Chemist e^Boofc, the Chemist is the UK s leading health and beautv retailer Ninety per cent of the UK's |r60 million population visits a Boots store at least once a year The company has an annual p turnover of aiound £3 billion from a network of some 1300 stores "v ŕ" l~Boofs launched their CRYL stntegy m 1999 It was built around the 'Advantage Card , a «.loyalty programme enabled by a chip-embedded smart card The standard reward for »^purchases is four points for every £1 spent equivalent to a 4 ptr cent discount or rebate Tins pis a very generous, rate of reward compared with the other retail sectors, where the major ^supermarket lovalty schemes represent a 1 per cen^ saving for customers " E^Afjer an initial investment m excess of £30 million, the programme has become the third-c^arge^t retail loyalty scheme m the UK"4Boots reported that it took 3 years to achieve the Fprpgramme's revenue objectives and there have been many other benefits such as higher ISeyels of customer retention increased in store spending and overall increased profitability jgBpots took its time to introduce the scheme rather than rapidly following the trend to loyalty Pschemes in the early 1990s It conducted extensile market research to determine what ^customer segment-» to target, how to differentiate.their programme and how to ensure that it ed the organization s jmage The market research discovered that 83 per cent of Boots' >tomers were female, aged 20-<-5, who on 55 per cent of their visits to a store purchased a n essential indulgent item Considering the results from the market research the Ivantage Card was targeted to vards female customers rewarding them with indulgent , items instead of reducing the cosv of their normal shopping J Since inception the card has become the largest smart card based retail loyalty card scheme in the world It currently ha1. 12 3 million cardholders and more than 40 per cent of ŕ transactions m store are now linked to the card *" It has been suggested that successful schemes deliver five types of Willie to participants: 13 • cash value: how much is the reward worth in cash compared with what is spent to obtain it? • redemption value: how wide a range of rewards is offered? • aspirational value: how much does the customer want the reward? • relevance value: how achievable are the rewards? • convenience value: how easy is it to collect the credits and redeem them for the reward? F\ en if they possess these characteristics, loyalty schemes are not without critics. They can be very expensive to establish and manage. In respect of operating costs, retail schemes typically reward customers with a cash rebatu or vouchers equivalent to 1 per cent of purchases. This comes straight out of the bottom line, so a retailer that is making 5 per cent margin loses one-fifth or 20 per cent of its profit to fund the scheme. There m iy also be a significant investment in technology to support the scheme, 310 Customer Relationship Management and marketing to launch and sustain the scheme. Supermarl Safeway dropped its UK loyalty programme, which had b about £30 million annually. Shell is reported to have spen million to develop its smart card scheme.14 Unredeemed credi liabilities for scheme operators. For example, it has been sugg all the unused air miles were redeemed on the same day it 600000 Boeing 747s to meet the demand.12 Schemes have become less distinctive and value-addin competitors now operate me-too programmes. Fundamer schemes may not be creating loyalty at all. For example, supermarket shoppers carry loyalty cards from more than market.15 The customer's choice set when grocery shopping suppliers with whom they have a card-based relationship claimed that customers become loyal to the scheme rather company or brand behind the scheme.16 Whether they develop loyalty or not, these schemes certai buying behaviour. Accumulated credits represent investmei customer has made in the scheme or the brands behind the set customers get no return from this investment, they can distressed. Members of at least five airlines, Braniff, Mid-Grand, Legend and Ansett, lost their air miles when their airl. Members of Pan Am's FFP were fortunate to have their credits into Delta Airlines when Pan Am stopped flying. Freque Australia-based Ansett forfeited their miles after the airli> flying in 2001. Passengers organized themselves into a grot Figure 9.4 ipoints website ^^^^^^š^^^^SMĚWĚIĚSŠ&MMs^É$^i Managing the customer lifecyde: customer retention and development ultimately unsuccessfully, for their loyalty to be recognized and rewarded by the company administrators, or prospective purchasers of the airline. In addition, loyalty schemes are successful enablers of customer insight. Personalized cards are obtained only after registering personal data. Then it becomes possible to monitor transactional behaviour. Chip-embedded smart cards carry the information on the card itself. A huge amount of data is generated that can be warehoused and subjected to data mining for insights into purchasing behaviour. These insights can be used to guide marketing campaigns and offer development. Boots, for example, ran a series of controlled experiments mailing health and beauty offers to select groups of carefully profiled customers, It achieved 40 per cent response rates in comparison to 5 per cent from the control group. For more information on the history and development of loyalty schemes, see Worthington.17 The loyalty scheme concept has migrated into the online retail environment. One of the innovators, beenz, which was established in 1998, has not survived. Other scheme brands include ipoints (Fig. 9.4) and mypoints. Customer clubs Customer clubs are organizations established by companies to deliver a range of benefits 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.18 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 offers and services for them. Clubs can only succeed if members experience benefits that they value. Club managers can assemble and offer a range of value-adding services and products that, given the availability of customer data, can be personalized to segment or individual level. 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. There is a huge number of customer clubs. One report estimates that there are 'several hundred' in Germany alone.18 B2C clubs include: • Swatch the Club (see www.swatch.com) • The Rolling Stones Fan Club (see Case 9.3) • The Pampers Parenting Institute (see http://www.pampers.com/en_ US/ learning/ ppi / jhtml) • Casa Buitoni (see http://www.buitoni.com/index/index.asp) t The Harley Owners' Group (HOG) (see http://www.hog.com/ home.asp) • Salisbury's Littleones Club (see http://www.sainsburys.co.uk/lit-tleones/defauIt.asp?page = main.asp). • The Volkswagen Club (see http://www.vw-club.de/). Case 9.3 The Rolling Stones fan club • Offers, three classes of membership Premium Got a Ticket tnd Basic' L V n i i l'remium status costs US$9d a year At the beginning of 2003 benefits included - Access to all the features of the Rolling Stones Official Fan Club website - The chance to purchase up to four tickets to one show (two to theatres -md clu1 i Ľ they go on sale toHhe general public - A complimentary copy of the new Stones CD, Forty l ich, - A complimentary Official Fan Club hat L - A code good for 5 per cent oft all purchaser in the soon to be hunched O i store * -, i ~ ** v- i?V a There are 650 000 paid-up members of the Harley Owners'Group Th choose from two levels of membership, full and associate, and a vanal membership length, from 1 year to lifetime. Among the many benefits c an affinity group Visa card, a membership manual, a touring handbot s a dedicated website, magazines, a mileage programme, membership i over 600 chapters, invitations to events and rallies, and a lot more Sales promotions Whereas loyalty schemes and clubs tend to have a long life, sal promotions offer only temporary enhancements to customer value Sal promotions can also be used for customer acquisition (see Chapter ■* Retention-oriented sales promotions encourage the customer to repť ■ purchase, so the form they take differs. • In-pack or on-pack voucher: customers buy the product and receive voucher entitling them to a discount off one or more additior il purchases. • Rebate or cashback: rebates are refunds that the customer receiv after purchase. The value of the rebate can be adjusted in line with ti quantity purchased, to reward customers who meet high volun requirements. • Free premium for continuous purchase: the customer collects proc of purchase and mails them in, or surrenders them at retail to obtair free gift. Sometimes the gift might be part of a collectible sent Customers buying preserves and jams collected proofs of purchase ai I mailed them in to receive an enamel badge. There were 20 differe badges in the series. So popular was this promotion that a seconda., market was established so that collectors could trade and swap badges to obtain the full set. • Self-liquidating premium: a self-liquidating promotion is one that recovers its own direct costs. Typically, consumers are invited to collect proofs of purchase, such as store receipts or barcodes from packaging, and mail them in with a personal cheque. This entitles the customer to a discounted premium such as a camera or gardening equipment The Managing the customer lifecycle: customer retention and development 313 %-~. promoter will have reached a deal with the suppliers of the premiums ; to buy at a highly discounted rate, perhaps on a sale-or-return basis. Margins earned from the sale of product, plus the value or the cheque, cover the costs of running the promotion. ' f Collection schemes: these are long-running schemes in which the customer collects items with every purchase. Kellogg's ran a promotion in which they inserted picture cards of carefully chosen sports £- stars into packets of cereals. Customers did not know what card they had until they bought and opened the pack. These became collectable . items. Bonding . {■ The next customer retention strategy is bonding. B2B researchers have „?■ identified many different forms of bond between customers and 1 suppliers. These include interpersonal bonds, technology bonds [as in J electronic data interchange (EDI) L legal bonds and process bonds. These 'Í- different forms can be split into two major categories: social and ;■ structural.19 I Social bonds }■ Social bonds are found in positive interpersonal relationships between ŕ people on both sides of the customer-supplier dyad. Positive inter-l personal relationship are characterized by high levels of trust and I commitment. Successful interpersonal relationships may take time to 1 evolve as uncertainty and distance are reduced. As the number of episodes linking customer and supplier grow, there is greater opportunity forsocial bonds to develop. Suppliers should understand that if they act j: opportunistically or fail to align themselves to customer preferences, trust and confidence will be eroded. Strong social bonds can emerge between employees in companies having similar sizes, cultures and locations. For example, small and medium-sized businesses generally prefer to do business with similar-sized companies, and Japanese companies prefer to do business with other Japanese companies. Geographical bonds emerge when companies in a trading area co-operate to support each other. Social relationships between buyer and seller can be single-level or multi-level. A single-level relationship might exist between the supplier's account manager and the customer's procurement officer. The more layers there are between the dyad, the more resistant the relationship is to breakdown. For example, technical, quality and operations people talk to their equivalents on the other side. Social bonds characterized by trust generally precede the development of structural bonds. Mutual investments in a joint venture are structural bonds. Companies are unlikely to commit resources if there is a low level of trust in the partner's integrity and competence. Structural bonds Structural bonds are established when companies and customers commit resources to the relationship. In general, these resources yield mutual • They are involved in your brand, offer or company. • They have a strong intention to buy that overrides promotional offer! from competitors. Three different form of commitment have been identified: instrument relational and values-based.24 Instrumental commitment This occurs when customers are convinced that no other offer oř company could do a better job of meeting their needs. They are not just^ very satisfied, but unbeatably satisfied. All expressed and latent needt. í have been met. When a customer feels that her bank has the best J products, the best access, the best processes, the lowest interest rates on loans and the best reputation, she is committed. Relational commitment a Customers can become highly attached to a company's people The i emotional tie may be 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. They feel a sense of personal identification with that individual. Often, these are employees who 'break the rules' or 'go the extra mile' to satisfy customers completely. They are reliable, competent, empathic and responsive. When these employees recover an at-risk customer, they create a friend. Customer-focused organizations make heroes out of these individuals. They are feted and celebrated. For example, American Express tells the story of a customer service agent who responded to a call from a customer who had been robbed, by arranging to have replacement traveller's cheques delivered- personally to the customer. He also confirmed the customer's hotel reservation, arranged for a car to collect the customer from the phone booth and notified the police: all above and beyond the call of duty. Customers can also become attached to a work group. In banking, for example, some customers are highly committed to a specific branch and prefer not to transact elsewhere. Finally, customers can become attached to an organization as a whole, believing its people to be better than competitors on dimensions that are important to the customer. They may provide 'the best service' or be 'the friendliest people'. Values-based commitment Customers become committed when their values are aligned with those of the company. Values can be defined as: Customers have many and van awareness, honesty, child protection, independence, family-centredness and so on. Many of these reflect cultural norms. Where these values coincide with those of an organization, the customer may become a Managing the customer litecyde: customer retention and development 317 committed, highly involved customer. Companies that are accused of using child labour, damaging the environment or otherwise acting unethically place themselves at risk. Nestle had been accused of marketing infant formula in African countries where the infrastructure made its use dangerous. Many babies died as mothers used unclean water and unsterilized equipment. This is estimated to have cost the company $40 million.25 Sales of Shell fuel were estimated to have fallen between 20 and 50 per cent during the Brent Spar boycott.26 The company had planned to decommission the 4000 tonne Brent Spar oil platform by dumping it into the North Sea. Just as customers can take action against companies that they feel are in beach of their values, so can they commit to companies that mirror with their values. Research supports the claim that there is a hierarchical relationship from values to attitudes to purchase intention and ultimately to purchase.27 Various companies benefit from values-based commitment, for example Body Shop, John Lewis, Harley Davidson, Co-operative Bank and Virgin. Body Shop International, the health and beauty retailer, was founded by Anita and Gordon Roddick. The company's values include a refusal to source products tested on animals, and support for community trade, human rights and the environment. A successful and. influential business was developed on the back of these values. Body Shop influenced other retailers to become more sensitive to these issues. The John Lewis Partnership is a UK-based department store with a 140 year history. It is a mutual organization, owned by its staff and incorporated as a trust. Profits are not distributed to external shareholders. Rather, they are shared with employees, who are regarded as partners. The company is reputed to look after these partners very well, including, for example, having a final salary pension scheme. Harley Davidson, the US motorcycle manufacturer, has a phenomenally committed customer base. When Harley riders replace their bikes, 95 per cent buy another Harley. The bike is a central part of a lifestyle that is grounded on fraternity, independence and rebellion. Image is critical to the Harley rider. In the USA, the average age of a Harley rider is 46 (up from 38 a decade ago), the average salary is $78 000 and the typical cruiser bike costs $17000. The challenge for Harley is to develop value propositions that appeal to a younger customer.28 The Co-operative Bank is positioned in the UK retail banking market as the ethical bank. The mutually owned bank believes that its ethical stance contributed about £20 million to pre-tax profits of £107.5 million reported in 2001. In its annual partnership report, which measures ethical performance, the bank said it had turned down 52 finance opportunities on ethical grounds in 2001. About 41 per cent were rejected because they could damage the environment, including finance for an engineering group to build a pipeline in Sudan. Another 15 per cent were rejected because the companies did not have a satisfactory animal-testing policy or were involved in intensive farming. One-third of the bank's customers moved to the bank because of its ethical and eco-friendly policies.29 The Virgin Group is a family of many hundreds of privately owned strategic business units ranging from airline to rail, cosmetics, cola. 318 Customer Relationship Management telecoms, music and financial services. In year 2000 group sales reached US$5.8 billion. The values of the Virgin brand are integrity, value for money, quality and fun. Virgin Group is chaired by its founder th renegade but highly visible Sir Richard Branson. Customers are attracte to the brand because or its reputation for fairness, simplicity transparency. Customers trust the brand and rely on it in markets that are new to them. For example, Virgin was a late mover into the index linked mutual fund marketplace. It still managed to become market leader in 12 months, despite having no history as a financial institution. Lj, 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. Secondly, customer retention strategies will vary according to the environment in which the company competes f When launching a new product or opening up a new market a ~ company's focus has to be on customer acquisition. In contexts where there ^ are one-off purchases such as funerals, infrequent purchases such as heart * surgery, or unique conditions such as gave rise to the demand for Y2K , compliance software, customer retention is subordinate to acquisition / The impact of contextual conditions on the choice and riming of customer retention practices has not been thoroughly researched However, several contextual considerations impact on customer retention practices. Number of competitors In some industries, there is a notable lack of competitors, meaning that companies do not suffer badly from customer churn. This typically applies in state-provided services such as education and utilities such as gas, electricity, rail and telecoms, whether deregulated or not. When customers are dissatisfied they have no competitor to turn to. They may also believe that the competitors in the market are not truly differentiated by their service standards. In other words, each supplier is as bad as the others. The result is inertia. Corporate culture In corporate banking, the short-term profit requirement of both management and shareholders has resulted in the lack of real commitment to relationship banking. Banks have been very opportunistic in their preference for transactional credit-based relationships with customers.30 Channel configuration Sellers may not have the opportunity to maintain direct relationships with the ultimate buyers and users of their products. Instead, they may rely on their intermediaries. Caterpillar, for example, does not have a Managing the customer lifecycle: customer retention and development 319 relationship with the contractors who use their equipment. Instead, it works in partnership with about 2G0 independent dealers around the world to provide customer service, training, field support and inventories of spare parts. Purchasing practices The purchasing procedures adopted by buyers can also make the practice of customer retention futile. Customers do not always want relationships with their suppliers. For example, government departments in the UK have adopted compulsory competitive tendering (CCT) as their mechanism for making purchasing decisions. The process is designed to prevent corrupt relationships developing and to ensure that tax-payers get good value for money; that is, pay a low price for the services rendered. Every year or so, current suppliers and other vendors are invited to pitch for the business. Price is often the primary consideration for the choice of supplier. Ownership expectations The demands of business owners can subordinate customer retention to other goals. For example, Korean office-equipment manufacturers are very focused on sales volumes. They require their wholly owned distributors to buy quotas of product from Korea, and sell them in the served market regardless of whether the products are well-matched to local market conditions and customer requirements. The distributors are put in a position of having to create demand against competitors that do a better job of understanding and meeting customer requirements.3 Ethical concerns Public sector medical service providers cannot simply focus on their most profitable customers or products. This would result in the neglect of some patients and a failure to address other areas of disease management. Private sector providers do not necessarily face this problem. The Shouldice Hospital 'in Ontario specializes in hernia repairs. Their website, www.shouldice.com, reports that they have repaired 270 000 hernias over a 55 year period with a 99 per cent success rate. They even organize annual reunions. Recently, these events have been attended by 1000 satisfied patients. Key performance indicators of customer retention programmes Practitioners of CRM are concerned with a number of KPIs for these customer retention activities, among them the following: 320 Customer Relationship Management • What is the raw customer retention rate? • What is the raw customer retention rate in each customer segment' j • What is the sales-adjusted retention rate? j_, • What is the profit-adjusted retention rate? _^ • What are the sales and profit-adjusted retention rates in each customei segment? c • What is the cost of customer retention? i • What is the share of wallet of the retained customers? £ • What is the customer churn rate per channel? • What is the cost-effectiveness of customer retention tactics? The choice of KPI will vary according to context. Some companies do not have enough data to compute raw retention rate per segment Other' may not know their share of wallet (share of customer spending on the category). il The role of research Companies can reduce levels of customer churn by researching a numbei of questions: • Why are customer defecting? • 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 former customers to find out why they took their business elsewhere Customers defect for all sort of reasons, not all of which can bt foreseen, prevented or managed by a company. For example, Keavene) identified eight causes of switching behaviours in service industries price, inconvenience, core service failures, failed employee responses tc service failure, ethical problems, involuntary factors, competitive issue' and service encounter failures. Six of the eight causes of switching behaviours are controllable by the service provider.31 Other research has identified six types of defectors: 32 • price: for a lower price • product: for a superior product • service: for a better service • market: for a different market, for example, a transport company tha has moved out of road haulage and therefore no longer buys trailers • technological: a customer that has converted from using one technol ogy to another, for example from dedicated word processors tc multipurpose PCs • organizational: switches due to political pressure. The second question attempts to find out whether customers give anj early warning signals of impending defection. If these were identified tht Managing the customer lifecyde: customer retention and development 321 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 (e.g. customer only flies one leg of an international flight on your airline) • inbound calls for technical information • late payment • querying an invoice • customer touch points are changed (e.g. store closes, change of website address) • preferred customer contact person moves on • customer change of address. Customer researchers are also advised to analyse the reasons for customer defection, and to identify the root causes.33 Sometimes these can be remedied by management. For example, if you lose customers because of the time taken to deal with a complaint, management can audit and overhaul the complaints management process. This might involve identifying the channels and touchpoints through which complaints enter the business, updating complaints database management, or training and empowering frontline staff. Root causes can be analysed 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 while still having regard for the satisfaction of the customer. Cross-selling means selling additional products and services. Up-selling means selling higher value (and margin) products and services. Customers generally do not respond positively to persistent and repeated efforts to sell additional products and services that are not related to their requirements. 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. Successful CRM-based customer development activities have a number of characteristics.