Managing the Customer Lifecycle Customer Acquisition Retention and

Managing the Customer Life-cycle: Customer Acquisition, Retention and Development Semester Genap 2010/2011

Learning Objectives v Understand the meaning of the terms customer life-cycle v Introduce the strategies that can be used to recruit new customers v Understand the economics of customer retention and how to select which customers to target for retention

Stages of the Customer Life Cycle v Customer acquisition v Customer retention § aims to keep a high proportion of current customers by reducing customer defections v Customer development § aims to increase the value of those retained customers to the company

Customer Acquisition

Why Focus on Newly Acquired Customers? v New customers may have greater future life-time value potential than longer tenure customers § evidence suggests 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

Key Customer Acquisition Questions v Which prospects (potential new customers) will be targeted? v How will these prospects be approached? v What offer will be made?

Two Types of New Customer v New-to-category customers § are customers who have either identified a new need or have found a new category of solution for an existing need v New-to-company § are customers are won from competitors

Strategic Switching v Strategic switching occurs when customers who shift their allegiances from one supplier to another in pursuit of a better deal v Banks know that their promotional pricing stimulates hot money

Selection of Prospects to Target for Acquisition v What is the estimated value of the customer? § This depends on the margins earned from the customer’s purchases over a given time period. v If that customer switches from his current supplier/s, what proportion of category spending will your company earn? v What is the probability that the customer will switch from current supplier/s?

Hofmeyr’s Conversion Model v Hofmeyr’s basic premise is that customers who are not committed are more likely to be available to switch to another provider. v Commitment is a function of satisfaction with the brand or offer, the attractiveness of alternatives, and involvement in the brand or offer.

B 2 B Prospecting: Key Questions v Does the lead have a need for my company’s products? v Does the lead have the ability to pay? v Is the lead authorised to buy?

Sources of B 2 B Leads v Satisfied customers § Referrals from satisfied customers v Networking § Personal contacts with well-connected and co-operative people v Promotional activities § Exhibitions, seminars, tradeshows and conferences Delegate and attendee lists § Advertising response inquiries § Publicity v Web-sites v Lists and directories § SIC listings, telephone directories v Canvassing v Tele-marketing v E-mail

Sources of B 2 C Prospects v advertising v sales promotion v buzz or word-of-mouth v merchandising

Cognitive & Affective Advertising Objectives v Cognitive v Affective advertising objectives include: § raising awareness § developing a liking for the product § developing understanding § generating preference § generating knowledge

Advertising Questions for Customer Acquisition v Which messages will generate most new customers? v Which media are most cost-effective at customer acquisition?

Media Efficiency Statistics v Response rates provide a first-level indicator of ad effectiveness. § Examples include the number of coupons clipped and returned, or calls requesting information (RFI) made to a contact centre. v Conversion rates offer a second-level indicator of ad effectiveness. § Examples include sales made as a percentage of coupons returned, or proposals submitted as a percentage of RFIs.

KPI’s for Customer Acquisition Programs v How many customers are acquired? v What is the cost per acquired customer? v What is the value of the acquired customer?

Operational CRM Tools for Customer Acquisition v lead management § The lead management process includes a number of subprocesses, including lead generation, lead qualification, lead allocation and lead tracking v campaign management § Campaign managers design, execute and measure marketing campaigns with the support of CRM technologies. Sometimes these are multi-media campaigns across direct mail, email, fax, outbound telephony, and SMS platforms v event-based marketing § EBM provides companies with opportunities to approach prospects at times which have a higher probability of leading to a sale, e. g. important life-stage events

CRM Analytics Supports Customer Acquisition v Operational CRM tools have to be supported by sound analytics to ensure that the right offer is made to the right prospect through the right channel at the right time v It is often possible to query current customer-related databases for clues to guide customer acquisition

Customer Retention

Contents of a Customer Retention Plan 1. Which customers should be targeted for retention? 2. What customer retention objectives should be set? 3. What customer retention strategies will be used? 4. How will the performance of the retention plan be measured?

Can You Tell If a Customer Has Defected? v May not be able to measure retention and defection if you have § Product-based views of customers § Channel-based views of customers § Separate customer records in sales, marketing and service

Measures of Customer Retention v Raw customer retention rate § 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 period. v Sales-adjusted retention rate § 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. v Profit-adjusted retention rate § 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.

Retention Issues v It may not be beneficial to maintain relationships with all customers. Some are § too costly to serve § strategic switchers constantly in search of a better deal § not strategically significant in roles such as benchmark, door opener, inspiration or technology partner

Which customers to retain? v Strategically significant customers § High life-time value customers § High volume customers § Benchmarks § Inspirations § Door openers v But… these may also be attractive to your competitors

Commitment and Retention v 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, i. e. impervious to the appeals of competitors, you do not need to invest so much in retention. § If strategically significant customers are not committed to you, you may want to invest considerable sums in their retention

Negative & Positive Customer Retention Strategies v Create exit barriers v Delight customers v Enforce the contract v Create customerperceived added value v Extract switching penalties v Create social and structural bonds v Create customer engagement

What is Customer Delight? Customer delight = P > E where P = Perception E = Expectation

What Do Customers Really Expect? 1. Expectations based on promises “I expect to have my car serviced within 2 days of calling the garage” 2. Expectations based on desires “I want my car serviced the day I call the garage” 3. Expectations based on experience “Most folks normally have to wait 3 days to have their car serviced” 4. Expectations based on ideals “My car should be serviced overnight and delivered to my home the next morning”

Ways to Delight Customers v provide information about the customer’s served market § A packaging company could alert a fast-moving consumer goods manufacturer customer to competitive initiatives in the market. v volunteer to collect and replace a faulty product from a customer rather than issuing a credit note v offer better, lower cost solutions to the customer, even though that might reduce margin

3 Ways to Create Customer-perceived Added Value v loyalty schemes v customer clubs v sales promotions

Bonds v Social • Positive relationships between individuals • Empathy • Responsiveness • Reliability • Leads to development of trust and commitment v Structural • Investments linking customer and supplier • Financial • Legal • Equity • Technological • Value-based • Geographic • Project • Multi-product

KPIs for Customer Retention Programs 1. 2. 3. 4. 5. 6. 7. 8. 9. Raw customer retention rate in each customer segment Sales-adjusted retention rate in each customer segment 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 10. Cost-effectiveness of customer retention tactics

Customer Development

The Role of Research v Why are customers churning? v Are there any lead indicators of impending defection? v What can be done to address the root causes?

Advance Indicators of Intention to Churn v Reduced RFM scores (Recency – Frequency – Monetary value) v Non-response to a carefully targeted offer v Reduced levels of customer satisfaction v Dissatisfaction with complaint handling v Reduced share of customer (e. g. customer only flies one leg of an international flight on your airline) v Inbound calls for technical or product-related information v Late payment of an invoice v Querying an invoice v Customer touch points are changed e. g. store closes, change of website address v Customer change of address

CRM Technologies for Customer Development v Campaign management v Event-based marketing v Data mining v Customization v Channel integration v Integrated customer communications v Marketing optimization

Strategies for Terminating Customers v Raise prices v Un-bundle the offer v Respecify the product v Reorganise sales, marketing and service departments v Introduce ABC class service

Typology of Companies’ Termination Behaviours v Hardliners § take an active and rigorous stance in terminating unprofitable relationships, including the regular clearance of their customer portfolio. v Appeasers § take a more cautious approach concerning the termination of unprofitable relationships v The undecided § are reluctant to terminate unprofitable relationships

References v Francis Buttle, Customer Relationship Management: Concepts and Technologies, 2 e, Elsevier Ltd. , 2009 v Baran, Galka and Strunk, Principles of Customer Relationship Management, South-Western, 2008