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Maximizing Chapter Value Through Retention Marketing
The Importance of Customer Retention (CR) Customer Retention Models CR Approaches
Why Focus on Customer Retention (CR)?
Customers leave service organizations due to service reasons about 2/3 of the times. Core service problems Service encounter failures Inconvenience Response to failed service Pricing Competition Ethical concerns Involuntary switching/other factors
(Keveaney, S.M., 1995)
Reichheld on Customer Retention
Service companies must retain the best personnel to win and keep good customers It's impossible to build a loyal bank of customers without a loyal employee base On average, U.S. corporations lose half of their customers in 5 years A typical company has a customer defection rate of 10-30% per year Raising the customer retention rate by 5% can increase the value of an average customer (lifetime profits) by 25-100%
Kotler on Customer Retention
The key to customer retention is customer satisfaction Satisfied Customers Stay loyal longer Talk favorably about the organization Pay less attention to the competition Are less price sensitive Offer service ideas to the organization Cost less to serve than new customers
The Cost of Lost Business for a Hospital
15,000 patients annually 3,750 defections (25% defection rate, 75% retention rate) $2,500 average patient revenue $9.375 million = annual lost revenues $703,125 = lost profits (7.5% profit margin)
Patient Retention Tactics
Image/Promotion - community service, direct mail, educational offerings, health fairs, integrated marketing communications, newsletters, regular patient contact, informational materials, website Service Quality - continuous quality initiatives, convenience, customer service training, demonstrate that patients are highly valued, mystery shopping, patient representatives/ ombudsman, service failure training, smile, treat patients as family
cont..
Patient Retention Tactics - cont.
Research - analyze defection rates/reasons, classify customers by usage/satisfaction/loyalty, develop targeted retention programs, "inside-out" (patientfocused) healthcare model Internal Marketing - loyalty task force, prepare "solutions" to recurring problems, share appropriate patient data with staff, reward and publicize customer care patient of the month * Patient-Centered - "dialogue" marketing, patient bill of rights, patient care councils, understand patient expectations
A Customer Value/ Retention M odel
The CV/retention model offers a good way of explaining the key relationships among the core elements that create value in an organization Customer value is built through the proper mix of SQIP (service, quality, image & price) - elements that attract and keep customers
The Customer Value/Retention Model
Customer Attractio n
Customer Value
Customer Satisfaction
Loyalty
Business Performance
Shareholder Value
Customer
Weinstein/Johnson, 2003.
Retention
Applications of the Customer Value Retention Model (CV/RM)
The key variables and their relationships to one another are clarified. This provides strategic guidance to management. Second, it stresses long term relationships (retention) but still realizes that some customer defection and attrition will occur so customer attraction must remain a priority. Third, the model is interfunctional and systematic -- it ties marketing objectives to the big picture, the financial situation. Feedback loops are also depicted in the Customer Value/Retention Model.
Customer Satisfaction, Loyalty and Retention Model
Highly Satisfied
Retain
Highly Loyal
Satisfied Dissatisfied Defect
Loyal
Disloyal
A Customer Loyalty Framework Multiple loyalty Situational loyalty
No Loyalty Complete Loyalty
Limited Some Loyalty loyalty
Buyer or Try-er?
Realize that a 1-time buyer is really a try-er, rather than a customer To move beyond the transaction stage, organizational experiences must meet or exceed expectations Repeated incidents of high satisfaction are sought through the utilization of relationship marketing strategies, leading to greater customer loyalty
Principles of Loyalty Management (Knox)
Most customers buy on a portfolio basis All customers are not created equally Loyalty is retention with attitude
Classification of Customer Loyal Segments
Strangers short-term-low profit customers Butterflies high-profit potential but tend to be short-term and disloyal Barnacles stay around for the long-term but generate relatively low profits True friends are both highly profitable and are long-term customers
(Reinartz, W. and Kumar, V., 2002)
Loyalty Building Strategies
Send salespeople to work at the offices of your best customers
Participate in customers events
I nterview your customers' customers Hold a retreat with a major customer to share best practices Invite customers to participate in training seminars
CONT..
Loyalty Building Strategies - CONT.
Set up a customer advisory council Develop a preferred-customer pricing strategy Reward customers for referring new business 3-5 Develop year business plans with customers Partner with key accounts on industry research projects
Usage Analysis and CR
Differentiated marketing strategies for user groups: 1st-time users, repeat customers, heavy users, and former users By classifying customer accounts based on usage frequency and variety, companies can develop effective strategies to retain and upgrade customers
Usage Analysis Tools
Heavy, medium, light, former, and nonusers (A,B,C,D,X) Heavy half segmentation (80/20 rule) Users vs. nonusers, competitive users Loyal (degree) versus nonloyal customers Product/service applications by user group Adopter categories - innovators, followers, laggards Geographic comparisons (customer penetration indices, growth)
4-Tier Usage Segmentation
Platinum Tier the company's most profitable customers Gold Tier seek price discounts, less loyal, and use multiple vendors Iron Tier essential customers who provide the volume to utilize the firm's capacity, but their spending levels, loyalty, and profitability do not merit special treatment Lead Tier customers who cost the company money. They demand more attention than they are due given their spending and profitability - sometimes problem customers that complain and tie up resources. (Rust, Zeithaml, and Lemon, 2000/2003)
RFM Analysis
Recency refers to the last service encounter/ transaction Frequency assesses how often these customercompany experiences occur Monetary value probes the amount that is spent, invested, or committed by customers for the firm's offerings
How to Do an RFM Analysis *
1.
Access a summary of each customer's RFM transaction history. This includes most recent purchase, frequency of purchases, and monetary value spent per order.
1.
Sort customers by purchase dates in reverse chronological order. Divide the customer list into 5 equal segments. Tag the most recent customer quintile as 1 while the least recent purchases are quintile 5.
Cont..
How to Do an RFM Analysis * - cont.
1. Sort your customers by frequency (number of orders) and apply the same methodology as in #2.
1.
Sort your customers by monetary value (average $ amount of each order) and apply the same methodology as in #2.
1.
You now have created RFM scores for each of your customers, from your best customer segment (111) to your worst (555).
Adapted from Kahan, R. (1998)
Customer Retention Approaches
CR tactics are short term in nature while CR strategies create lasting value for customers CR efforts should begin once the firm wins a customer These efforts should include Learning as much as possible about customer needs Responding promptly to any indications of disinterest Making customers feel truly cared for Resolving complaints quickly and efficiently Be willing to negotiate with high-value customers who show signs of inactivity
(Passavant, 1995)
9 Common/Effective Approaches for Enhancing Retention
Build a customer database/marketing information system Design ongoing customer programs - continuity and loyalty-based initiatives Offer long term services - membership/subscription programs Custom promotion - use reminder advertising and press releases
-cont.
Most Common/Effective Approaches for Enhancing Retention cont.
Focus on key accounts and heavy users Use newsletters/informational materials to stay in touch with infrequent customers Attend trade shows Research customers needs and wants Welcome suggestions and complaints
Other Customer Retention Tools
Customer relationship management (CRM), an expensive information technology, is also frequently used by large companies for business usage analyses The 80/20 principle was integral in determining the focus & location of Fast Industries' most important customers SWOT analysis -- strengths, weaknesses, opportunities, and threats -- information can be gathered from each strategic customer
7 Criteria for Selecting CR Approaches
Efficiency - low cost Effectiveness - likelihood to succeed Adaptability - strategic fit with the organizational culture Consistency - works well with the current marketing plan Competitive advantage Ease of implementation Projected profitability
5-Step Process for Designing a Customer Retention Program
Determine your current CR rate Analyze the defection problem Establish a new CR objective Invest in a targeted CR plan to enhance customer loyalty Evaluate the success of the CR program
Measuring Customer Retention
Annual and targeted customer retention rates Weighted customer retention rates - accounts for usage differences Segmented retention indicators - subgroup analysis based on geographic, demographic, lifestyle, product preferences, etc. Share-of-customer Customer lifetime value (CLTV) Recency, frequency, and monetary value (RFM)
Useful Metrics for CR Evaluation
Innovative customer value managers should consider the measures below to gain additional insight on retention:
Expected future use Anticipated regret Intent to switch Intent to remain loyal likelihood to return to provider and to recommend provider