INTRODUCTION

Customer Retention is the activity that the selling organization undertakes to

reduce customer account defections. The success of this activity is when the
customer account places an additional order before a 12-month period has expired.
Note that ideally these orders will need to contribute similar financial amounts to
the previous 12 months. It can also be described as a series of actions that the
selling organization undertakes to reduce defections. This is the selling
organization's perspective of what they have to implement after the agreement in
principle stage of the buying cycle. The success of the customer retention process
is measured when the customer places an additional order before a 12-month
period has expired. Retention Rate is the percentage of the total number of
customers who have repeatedly placed an order (or made a transaction) during a
twelve month period measured over a number of years, compared to the total
number of customers in the same period.
Customer Retention marketing is a tactically-driven approach based on customer
behavior. It's the core activity going on behind the scenes in Relationship
Marketing, Loyalty Marketing, Database Marketing, Permission Marketing, and
so forth. Heres the basic philosophy of a retention-oriented marketer:

1. Past and Current customer behavior is the best predictor of Future

customer behavior. Think about it. In general, it is more often true than not true,
and when it comes to action-oriented activities like making purchases and visiting
web sites, the concept really shines through.

We are talking about actual behavior here, not implied behavior. Being a 35-yearold woman is not a behavior; its a demographic characteristic. Take these two
groups of potential buyers who surf the Net:

People who are a perfect demographic match for your site, but have never
made a purchase online anywhere

People who are outside the core demographics for your site, but have
purchased repeatedly online at many different web sites

If you sent a 20% off promotion to each group, asking them to visit and make a
first purchase, response would be higher from the buyers (second bullet above)
than the demographically targeted group (first bullet above). This effect has been
demonstrated for years with many types of Direct Marketing. It works because
actual behavior is better at predicting future behavior than demographic
characteristics are. You can tell whether a customer is about to defect or not by
watching their behavior; once you can predict defection, you have a shot at
retaining the customer by taking action.

2. Active customers are happy (retained) customers; and they like to "win."
They like to feel they are in control and smart about choices they make, and they
like to feel good about their behavior. Marketers take advantage of this by
offering promotions of various kinds to get consumers to engage in a behavior and
feel good about doing it.
These promotions range from discounts and sweepstakes to loyalty programs and
higher concept approaches such as thank-you notes and birthday cards.
Promotions encourage behavior. If you want your customers to do something, you
have to do something for them, and if its something that makes them feel good
2

(like they are winning the consumer game) then theyre more likely to do it.
Retaining customers means keeping them active with you. If you don't, they will
slip away and eventually no longer be customers. Promotions encourage this
interaction of customers with your company, even if you are just sending out a
newsletter or birthday card.
The truth is, almost all customers will leave you eventually. The trick is to keep
them active and happy as long as possible, and to make money doing it.

3. Retention Marketing is all about:Action Reaction Feedback Repeat.

Marketing is a conversation, as the ClueTrain Manifesto and Permission
Marketing have pointed out. Marketing with customer data is a highly evolved
and valuable conversation, but it has to be back and forth between the marketer
and the customer, and you have to LISTEN to what the customer is saying to you.
For example, let's say you look at some average customer behavior. You look at
every customer who has made at least 2 purchases, and you calculate the number
of days between the first and second purchases. This number is called "latency" the number of days between two customer events. Perhaps you find it to be 30
days. Now, look at your One-Time buyers. If a customer has not made a second
purchase by 30 days after the first purchase, the customer is not acting like an
"average" multi-purchase customer. The customer data is telling you something is
wrong, and you should react to it with a promotion. This is an example of the data
speaking for the customer; you have to learn how to listen. This site and the
Drilling Down book are all about how to discover, manage, and listen to customer
data. The data is speaking for the customer, telling you by its very existence (or
non-existence) there has been an action (or non-action) waiting for a reaction.
3

4. Retention Marketing requires allocating marketing resources. You have to

realize some marketing activities and customers will generate higher profits than
others. You can keep your budget flat or shrink it while increasing sales and
profits if you continuously allocate more of the budget to highly profitable
activities and away from lower profit activities. This doesn't mean you should
"get rid" of some customers or treat them poorly.
It means when you have a choice, as you frequently do in marketing, instead of
spending the same amount of money on every customer, you spend more on some
and less on others. It takes money to make money. Unless you get a huge
increase in your budget, where will the money come from?
For example, let's say you have 1,000 customers, and you have an annual budget
of $1,000. You spend $1 on each customer each year, and for that $1, you get
back $1.10 in profits. That's an ROI of 10%; you got back $1,100 for spending
$1,000.
Now, what if you knew spending $2 each year on a certain 50% of customers
would bring back $8 in profits. That's a 400% ROI. Where do you get the extra
$1? You take it away from the other 50% of customers. You spend the same
$1,000 total and you make back 500 (half the customers) x $8 = $4,000. If you
always migrate and reallocate marketing dollars towards higher ROI efforts,
profits will grow even as the marketing budget stays flat. You have to develop a
way to allocate resources to the most profitable promotions, deliver them to the
right customer at the right time, and not waste time and money on unprofitable
promotions and customers. This is accomplished by using the data customers
create through their interactions with you to build simple models or rules to
follow. These models are your listening system, like the "30 day latency" model
4

above. They allow the data to speak to you about the customer. This site and the
Drilling Down book are about teaching you how to build and use these models
yourself in 30 minutes with an Excel spreadsheet. If you want to increase sales
while reducing the costs of marketing to customers, you have to get this book.

EXPLORE THE VALUE OF CUSTOMER RETENTION

Customer Service Skill Customer Relations Customer Strategy Customer
Market Plans Strategy
Customer retention is not only a cost effective and profitable strategy, but in
today's business world it's necessary. This is especially true when you remember
that 80% of your sales come from 20% of your customer and clients. With these
statistics I am wondering why most marketing and sales campaigns are designed
for the new customer.
Take for instance the wireless telephone companies; if you sign a new contract
you are given a large rebate or even a free cellular telephone. If you are a current
customer you have the privilege of paying full price. Can someone please explain
that methodology to me. With this type of promotion are we not just pushing
current customers and clients to seek services elsewhere when their contract ends?
Perhaps we need to rethink our marketing and sales strategies, afterall many
experts will tell you that it's five times more profitable to spend marketing and
advertising dollars to retain current customers than it is to acquire new customers.
In years past the importance of focusing on customer retention was not as
important, stickiness came naturally. We shopped in our neighborhood shops and
our corner grocery stores. We had a personal connection with our service

providers and the thought of shopping at another store would have never crossed
our minds.
That has all changed now. Our stores our larger, the majority of the sales
personnel don't know that you even exist. Not to mention that now we have the
convenience of the Internet and do a large portion of our shopping online, where
you are known by your email address. As a result, customer loyalty has
disappeared and large corporations and virtual storefronts are unable to ask the
millions of disloyal customers what caused them to stray.
However, there is a solution. Sophisticated technology and database equipment
has made it possible for specialized firms to make attempts at customer retention
through database marketing programs. Establishing a detailed client database will
allow these companies to keep track of personal information and individual
preferences of all their customers. This enables them to provide better service and
value. Just like the corner grocery store owner kept information on 200 customers
in his head, the large superstore can now keep track of 20,000 customers through
its customer database. With effective implementation of customer databases,
companies will be able to re-establish contact with customers, and will be able to
work successfully towards increasing customer retention, repeat sales, and
customer referrals.
To achieve the objectives of the database and customer retention programs, the
entire campaign should be designed and carried out with the customer in mind.
The exercise will only be effective if the customer recognizes and associates some
value with being part of your database. If they do not perceive value in your
program all of your communications, coupons, special offers, and newsletters will

be discarded. Your customers have been inundated with meaningless "junk" mail
and email spam, so embed your campaign with value.
A few value-add strategies that you can use include:

Membership cards and programs that entitle your customers to special

offers, discounts, or preferential treatment.

Welcome, acknowledgement, sales recognition, thank you statements.

After sales satisfaction and complaint inquiries and surveys.

Event oriented communications in which the customer is genuinely

interested.

Enhanced and empowered customer, after sales, and technical support.

Customer Math brings you simple mathematical proof that will convince you that
Customer Retention is the best strategy for success in business and career.
Customer Math formulae like 1=5, 1=3, 1=12, 10%=47%, and 1=23 will make
you a BELIEVER in the concept of customer satisfaction and retention. Once
you have understood the mathematics related to the customer, you will never dare
to make the customer unhappy.

BEST CUSTOMER RETENTION STRATEGIES

Customer retention rate: -- The customer retention rate refers to the number of
customers lost over a period of time. It is normally calculated by the percentage of
lost customers versus existing customers over a quarterly or annual period,
without tallying new customer acquisitions.

While there are obvious benefits to keeping customers loyal and maintaining high
customer retention rates, it can be extremely challenging for management to keep
retention rates up.
UNDERSTANDING CUSTOMER RETENTION
Those getting started with a customer retention strategy might initially assume
that retention rate is based on customer satisfaction. However, several studies have
indicated that there is little correlation between customer satisfaction and retention
or future purchases, according to customer experience expert Lior Arussy, founder
of Strativity Group Inc. In one case, only 17% of satisfied customers of financial
institutions claimed that they would not entertain a competing offer.
The real indication for customer retention is not customer satisfaction, but
customers' actions, Arussy said. Repeat business, purchasing ancillary services,
recommendations to others, willingness to pay premium price and frequency of
purchasing are the indicators of customer retention. These factors can be easily
quantified and measured by the dollar value of each action.
Sometimes organizations need to understand that the closest touch point to the
customer can help improve customer retention. For example, Arussy received a
question from a SearchCRM.com reader who manages a fleet of truck drivers,
who was wondering about ways to improve the customer experience. Arussy
advised this fleet manager to embrace the role of his drivers as the "delivery on
the promise" professionals, meaning they are the action behind the promises and
commitments made by the sales force. As Arussy said, "They are experience
creators in every way that they conduct themselves: clothing, appearance,
language, etc. They are the face of the company and they can help customer
retention rates."
8

Arussy's advice to this reader was to put in place a retention strategy that supports
the customer experience. The infrastructure should include training drivers (or any
other employees that are interacting with customers) about their role and how they
are being perceived by the customers. Arussy encouraged the reader to create
incentives and motivation programs to encourage desired behavior as well as
performance evaluations that measure how customers rank behavior.
While there may not be a direct correlation between customer satisfaction and
customer retention rates, many experts have studied employee retention and how
it affects customer retention.
A 2007 study on customer experience management by the Stativity Group
surveyed 309 global executives and found a number of negative trends. One of the
major issues? Only 54% of respondents said their company deserves their loyalty.
"Which is a very dangerous trend," Arussy said. "If your employees don't believe
in the value of a product or owe you any type of loyalty, trying to win the battle
for customers' hearts, wallets and relationships is impaired."
Customer retention expert Michael Lowenstein, vice president and senior
consultant for customer loyalty management at Harris Interactive, agrees that
employee loyalty and engagement has a direct relationship to customer
marketplace behavior. He explored employee retention strategies, in an article
called.
Employees are capable of directly contributing to both customer disappointment
and customer delight. It is essential that companies have a research and analysis
method that links staff performance engagement directly to customer behavior, so
they can hire, train, recognize and reward employees for how they contribute to
customer value."
9

BUILD A CUSTOMER RETENTION STRATEGY

As Lowenstein points out, customer loyalty is all about driving perceived value,
whether that is rational (functional, quality, cost, etc.), emotional (trust, service,
communication, information, brand equity, etc.) or a combination of these two
dimensions. His advice for building a customer retention strategy? First, identify
what leverages top-end customer commitment and advocacy behavior, and then
build customer experience around it. According to Lowenstein's research on
customer retention, there is no standard schedule for how often to communicate
with customers to build loyalty. In his research, customers reported an interest in
receiving communication from suppliers as long as they could see personal value
in each message. The excerpt below is from an article Lowenstein wrote called
Balancing Messaging and Experience: The CRM 'Lasagna' Recipe for Creating
Customer Advocacy:
"In CRM, like lasagna, it's layers of messaging and experience over an extended
period; but it has to begin with messaging, i.e., how the brand promise is initially
communicated and sustained, and grown, with each succeeding customer
engagement and contact. Companies tend to believe that customers gain
experience with their enterprises entirely through people, products and services.
Largely true, as far as this thinking goes; but organizations often don't have
enough awareness that what is said to customers, and how, where, and when it is
said has an equal, if not greater, behavioral impact. Communication is about
relevance and trust, two essential elements in the way customers see suppliers.
Customers have grown increasingly skeptical of supplier messaging. When
considering alternative suppliers or making final purchase decisions, it is now
becoming well understood that the principal, previously neglected criteria are
10

intangible, emotional, relationship benefits, with much of what is tangible seen as

one-dimensional and expected. This absolutely requires that the meld between
messaging and experience is as seamless as possible."

IMPLEMENTATION OF A CUSTOMER RETENTION PROGRAM

A road map for implementing a customer loyalty program should include the
following, according to Lowenstein:

Appropriate research for identifying the benefits.

Testing them for prospective customer interest and effectiveness.

Following up with further research once implemented to make certain that

the loyalty program's benefits are working.

11

HOW TO CALCULATE RETENTION RATE

The customer retention rate is calculated by determining the number of customers
lost over a period of time compared to repeat customers over the same amount of
time. Pisello said, "A customer is one who continues to make purchases, and a lost
customer is one who has made purchases, but does not repeat these purchases for
some time. The key is to analyze the repeats over a long enough horizon." The
calculation is:
(Total number of customers minus the number of repeat customers) divided
by total number of customers

In environments where users purchase a subscription, the calculation is easier, and

can be represented as:
Number of subscribers who cancelled or did not renew during the period
divided by the total number of subscribers for the period
As Pisello advised, "The difficult part in this equation is determining the right
total number of subscribers to use: the ones at beginning of period, the ones at the
end, a peak, or an average over the period."
Some companies can measure retention rate using their CRM system, since any of
the vendors with solid sales modules should offer this capability. Customer service
expert Lori Bocklund, founder and president of Strategic Contact, Inc.,
recommends that companies look for this functionality when evaluating CRM
solutions, even though it is unlikely to be the differentiating factor.
"You can also consider performance optimization tools if you want to combine
things like save rate with other key performance indicators for an overall
scorecard," Bocklund said. Companies like Witness, Performix, AIM, and Merced
12

offer these types of tools. To measure this, some companies combine data from the
CRM system and data from other systems, such as your quality monitoring
system, ACD or CTI solution handling contact routing and reporting.
There are no hard and fast rules on calculating customer defection and customer
retention, according to Lowenstein. It can depend on the industry or the type of
business, since some companies have long-term arrangements with customers.
B2B customer deflection models may be somewhat more challenging, Lowenstein
said, because of the greater likelihood to have missing or incomplete
'firmographic' variables. However, several consulting and database management
companies have succeeded in creating them.

IMPROVE YOUR CUSTOMER RETENTION RATE

Improving your customer retention rate is vital in a competitive business climate,
and Beyond Philosophy is here to help you create a better approach to customer
retention marketing techniques. It makes no sense to invest the time, effort, and
money to attract a customer yet pay no attention to what it takes to keep the
customer. This is the scenario, however, that many companies continue to pursue.
Maintaining a high customer retention rate is a growing challenge for many
organizations because keeping the customer is unfamiliar territory.

Why do companies pour money into attracting new customers but spend little on
formulating a better customer retention strategy? One client recently told us that
his company was losing 30% of its customers in the first year, yielding huge
losses in revenue. In cases such as this, the costs of customer acquisition are not
even reclaimed.

13

VALUE INNOVATION
The value innovation concept provides a relevant support for questioning
product/market strategies as well as underlying assumptions. You must examine
radically what constitutes real value for customers by asking fundamental
questions: what value offering need to be introduced or increased to meet
customer needs? what value offerings can be reduced or eliminated, because they
do not constitute real value for customers

CUSTOMERS FOR LIFE

The purpose of a business is to create and keep a customer. If a business
successfully creates and keeps customers in a cost-effective way, it will make a
profit while continuing to survive and thrive. If, for any reason, a business fails to
attract or sustain a sufficient number of customers, it will experience losses. Too
many losses will lead to the demise of the enterprise.
According to Dun and Bradstreet, the single, most important reason for the failure
of businesses in America is lack of sales. And, of course, this refers to resales as
well as initial sales. So your companys job is to create and keep a customer, and
your job is exactly the same.

GETTING LOYAL CUSTOMERS

Delighted and loyal customers will return for follow-on business without
considering alternatives of comparing the competition. Though, there is a number
of factors that influence customers' decisions to remain loyal, true loyalty is based
on your company's continuous delivery of superior value. Customer loyalty is a

14

major contributor to sustainable profit growth - "and to win customer loyalty, the
business must first satisfy the customer repeatedly."... More

BENEFITS OF BUSINESS PROCESS MANAGEMENT

The payoffs of process mastery can be breathtaking. Costs melt away, quality goes
through the roof, and time spans shrink to a fraction of what they were. Hammer
and Company8 surveyed dozens of companies that had adopted the process
approach to work and business.

In order fulfilment, cycle times had typically decreased by 60% to 90%

"Perfect orders" (those delivered on time, with no mistakes) had increased by 25%
These improvements in process performance paid off in the critical enterprise
currencies of customer satisfaction, customer retention, and corporate profits...
More

PARTNERING WITH CUSTOMERS

Customer connection comes from involving customers, partnering with them.
Partnering with customers represents your firm's "capacity to anticipate what
customers need even before they know they need it."

Customer Retention marketing is a tactically-driven approach based on customer

behavior. It's the core activity going on behind the scenes in Relationship
Marketing, Loyalty Marketing, Database Marketing, Permission Marketing, and
so forth. Heres the basic philosophy of a retention-oriented marketer:
1. Past and Current customer behavior is the best predictor of Future
customer behavior. Think about it. In general, it is more often true than not true,
15

and when it comes to action-oriented activities like making purchases and visiting
web sites, the concept really shines through.
We are talking about actual behavior here, not implied behavior. Being a 35-yearold woman is not a behavior; its a demographic characteristic. Take these two
groups of potential buyers who surf the Net:

People who are a perfect demographic match for your site, but have never
made a purchase online anywhere

People who are outside the core demographics for your site, but have
purchased repeatedly online at many different web sites

If you sent a 20% off promotion to each group, asking them to visit and make a
first purchase, response would be higher from the buyers (second bullet above)
than the demographically targeted group (first bullet above). This effect has been
demonstrated for years with many types of Direct Marketing. It works because
actual behavior is better at predicting future behavior than demographic
characteristics are. You can tell whether a customer is about to defect or not by
watching their behavior; once you can predict defection, you have a shot at
retaining the customer by taking action.

2. Active customers are happy (retained) customers; and they like to "win."
They like to feel they are in control and smart about choices they make, and they
like to feel good about their behavior. Marketers take advantage of this by
offering promotions of various kinds to get consumers to engage in a behavior and
feel good about doing it.
These promotions range from discounts and sweepstakes to loyalty programs and
higher concept approaches such as thank-you notes and birthday cards.
16

Promotions encourage behavior. If you want your customers to do something, you

have to do something for them, and if its something that makes them feel good
(like they are winning the consumer game) then theyre more likely to do it.
Retaining customers means keeping them active with you. If you don't, they will
slip away and eventually no longer be customers. Promotions encourage this
interaction of customers with your company, even if you are just sending out a
newsletter or birthday card.The truth is, almost all customers will leave you
eventually. The trick is to keep them active and happy as long as possible, and to
make money doing it.

3. Retention Marketing is all about: Action Reaction Feedback Repeat.

Marketing is a conversation, as the ClueTrain Manifesto and Permission
Marketing have pointed out. Marketing with customer data is a highly evolved
and valuable conversation, but it has to be back and forth between the marketer
and the customer, and you have to LISTEN to what the customer is saying to you.
For example, let's say you look at some average customer behavior. You look at
every customer who has made at least 2 purchases, and you calculate the number
of days between the first and second purchases. This number is called "latency" the number of days between two customer events. Perhaps you find it to be 30
days.
Now, look at your One-Time buyers. If a customer has not made a second
purchase by 30 days after the first purchase, the customer is not acting like an
"average" multi-purchase customer. The customer data is telling you something is
wrong, and you should react to it with a promotion. This is an example of the data
speaking for the customer; you have to learn how to listen.
17

This site and the Drilling Down book are all about how to discover, manage, and
listen to customer data. The data is speaking for the customer, telling you by its
very existence (or non-existence) there has been an action (or non-action) waiting
for a reaction.

4. Retention Marketing requires allocating marketing resources. You have to

realize some marketing activities and customers will generate higher profits than
others. You can keep your budget flat or shrink it while increasing sales and
profits if you continuously allocate more of the budget to highly profitable
activities and away from lower profit activities. This doesn't mean you should
"get rid" of some customers or treat them poorly.
It means when you have a choice, as you frequently do in marketing, instead of
spending the same amount of money on every customer, you spend more on some
and less on others. It takes money to make money. Unless you get a huge
increase in your budget, where will the money come from?
For example, let's say you have 1,000 customers, and you have an annual budget
of $1,000. You spend $1 on each customer each year, and for that $1, you get
back $1.10 in profits. That's an ROI of 10%; you got back $1,100 for spending
$1,000.
Now, what if you knew spending $2 each year on a certain 50% of customers
would bring back $8 in profits. That's a 400% ROI. Where do you get the extra
$1? You take it away from the other 50% of customers. You spend the same
$1,000 total and you make back 500 (half the customers) x $8 = $4,000.
If you always migrate and reallocate marketing dollars towards higher ROI
efforts, profits will grow even as the marketing budget stays flat.
18

You have to develop a way to allocate resources to the most profitable

promotions, deliver them to the right customer at the right time, and not waste
time and money on unprofitable promotions and customers. This is accomplished
by using the data customers create through their interactions with you to build
simple models or rules to follow. These models are your listening system, like
the "30 day latency" model above. They allow the data to speak to you about the
customer. This site and the Drilling Down book are about teaching you how to
build and use these models yourself in 30 minutes with an Excel spreadsheet

CUSTOMER RETENTION LAW & LEGAL DEFINITION

Customer retention refers to the percentage of customer relationships that, once
established, a business is able to maintain on a long-term basis. Customer
retention is a simple concepthappy customers who feel important and are
regularly communicated with in the right way will keep coming back. It is a major
contributing factor in the net growth rate of businesses. For example, a company
that increases its number of new customers by 20 percent in a year but retains only
85 percent of its existing customers will have a net growth rate of only 5 percent
(20 percent increase less 15 percent decrease). But the company could triple that
rate by retaining 95 percent of its clients. Of course, growth is just one of the
benefits that superior customer retention can offer a company. Increased profits
are another. The cost of acquiring customers and putting them on the books
generally exceeds by several times the annual cost of serving existing customers.
So the longer customers are kept, the more years over which the initial cost of
acquisition can be spread.

19

A variety of strategies are available to small business owners seeking to improve

their customer retention rates. Of course, the most basic tools for retaining
customers are providing superior product and service quality. High-quality
products and services minimize the problems experienced by customers and create
goodwill toward the company, which in turn increases customers' resistance to
competitors' overtures. However, it is important that small business owners not
blindly seek to improve their customer retention rate. Instead, they must make
sure that they are targeting and retaining the right customersthe ones who
generate high profits. In short, customer retention should not be a stand-alone
program but should be seen as part of an overall customer relations management.
The first step in establishing a customer retention program is to create a time line
of a typical customer relationship, outlining all the key events and interactions that
occur between the first contact with and the eventual loss of the customer. The
next step is to analyze the company's trends in losing customers. Customer
defections may be related to price increases or to a certain point in the relationship
life cycle, for example. Finally, small business owners can use the information
gathered to identify warning signs of customer loss and develop retention
programs to counteract it.

20

STRATEGIES FOR RETAINING CUSTOMERS

One basic customer retention strategy available to small business owners involves
focusing on employee retention and satisfaction. A company with a high turnover
rate may not be able to maintain strong personal relationships with its customers.
Even if relationships are established, the customer may decide to take its business
to a new company when its contact person leaves. At the very least, high turnover
creates a negative environment and reduces the quality of service provided to
customers. In order to reduce turnover, it is important to provide employees with
career development opportunities and high degrees of involvement in the
business.

Another

possible

strategy

for

retaining

customers

involves

institutionalizing customer relationships. Rather than just providing contact with

individual employees, a small business can provide value to customers through the
entire company. For example, it could send newsletters or provide training
programs in order to become a source of information and education for customers.
It may also be possible to establish membership cards or frequent-buyer programs
as direct incentives for customer retention.
Some companies may be able to use electronic links to improve the service they
provide to customers. For example, e-mail connections could be used to provide
updates on the status of accounts, electronic order systems could be used to
simplify reordering and reduce costs, and online services could be used to provide
general information. Customer retention programs are particularly important in
volatile industriesthose characterized by fluctuating prices and product values.
In this situation, superior service may discourage but not prevent customer
defections. Some strategies that may be useful to companies in volatile industries

21

include providing stable prices over the customer life cycle, basing prices on the
overall cost and profitability of the customer relationship, and cross-selling
additional products and services. All of these strategies are intended to minimize
the changes and problems customers experience, thus making them want to
maintain the business relationship.

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 these switching costs are so high that they remain customers,
though unwillingly. The danger for CRM practitioners is that negative customer
retention strategies produce customers who feel trapped. They are likely to agitate
22

to be freed from their 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 should, and does, include early redemption costs.
When presented with dissatisfied customers 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.

POSITIVE CUSTOMER RETENTION STRATEGIES

In the following sections we look at a number of positive customer retention
strategies, including creating customer delight, adding customer-perceived value,
creating social and structural bonds and building customer engagement.

CUSTOMER DELIGHT
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, and
then acquire and deploy resources to ensure their satisfaction and retention. This is
why CRM is grounded on detailed customer-related knowledge. Customers that
you are not able to serve well may be better served by your competitors.

23

Delighting customers, or 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 delight 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:
CD = P > E
where CD = customer delight, 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 exceed customer perceptions of performance. In other words,
customers can generally 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, 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 likely if you fail to meet customer expectations on
important attributes.

24

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 critical 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. Online retailers must
meet these basic requirements. Dell Computers believes that customer retention is
the outcome of their performance against three variables: order fulfi lment (ontime, in full, no error (OTIFNE)), product performance (frequency of problems
encountered by customers) and after-sales service (percentage of problems fixed
first time by technicians). The comments in parentheses are the metrics that Dell
uses.
Figure 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.
ADD CUSTOMER-PERCEIVED VALUE
The second major positive customer retention strategy is to add customerperceived 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.

25

There are two common forms of value-adding programme: loyalty schemes,

customer clubs and sales promotions.

LOYALTY SCHEMES
Loyalty schemes reward customers for their patronage. Loyalty schemes or
programmes can be defined as follows:
A loyalty programme is a scheme that offers delayed or immediate incremental
rewards to customers for their cumulative 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 fl ight for their partner.

26

Today's CRM-enabled loyalty schemes owe their structure to the frequent flier
programmes (FFP) that started with American Airlines ' Advantage 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, regardless of whether the load factor is 25 percent or 95 percent.
American knew that filling the empty seats would have little impact on costs, but
could impact significantly on future demand. The airline searched its reservation
system, SABRE, for details of frequent fliers in order to offer them the reward of
free flights. This basic model has migrated from airlines into many other B2C
sectors: hotels, restaurants, retail, car hire, gas stations and bookstores, for
example. It has also transferred into B2B contexts with many suppliers offering
loyalty rewards to long-term customers.
The mechanics of these schemes have changed over time. Initially, stamps were
collected. The first card-based schemes were anonymous, i.e. they carried no
personal data, not even the name of the participant. Then magnetic stripe cards
were introduced, followed by chip-embedded cards that carried a lot of personal
and transactional data. Innovators developed their own individual schemes.
Eventually, these transformed into linked schemes, in which, for example, it was
possible to collect air miles from various participating companies such as gas
stations, credit cards and food retailers. Current schemes are massively different
from the early programmes. For example, Nectar is a consortium loyalty scheme
operating in the UK managed not by the participants, but by an independent third
party. Its core retail participants are all number one or two in their respective
markets: Sainsbury's, Barclaycard, Debenhams and BP. Shoppers register with the
scheme, then carry a single magnetic stripe card and collect points that are
27

converted into vouchers redeemable in a wide range of retailers, including

supermarkets, liquor stores, catalogue retailers, restaurants, hotels, cinemas, travel
outlets and tourist attractions. Each of the major retail participants had been a
member of another loyalty programme, and customers were able to convert their
existing credits to Nectar points

Loyalty programmes 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. 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. However, customers can become loyal to the scheme, rather than to the
company or brand behind the scheme.
Loyalty schemes are not without critics. Critics question their cost and
effectiveness. Certainly, they can be very expensive to establish and manage. In
respect of operating costs, retail schemes typically reward customers with a cash
rebate or vouchers equivalent to 1 percent of purchases. This comes straight out of
the bottom line so a retailer that is making 5 percent margin loses one-fifth or 20
percent of its profit to fund the scheme. There may also be a significant
investment in technology to support the scheme, and marketing to launch and
sustain the scheme. Supermarket operator Safeway dropped its UK loyalty
28

programme, which had been costing about 30 million annually. Shell is reported
to have spent up to 40 million to develop its smart card scheme. Unredeemed
credits represent liabilities for scheme operators. For example, it has been
suggested that if all the unused air miles were redeemed on the same day it would
take 600,000 Boeing 747s to meet the demand.
Schemes are also criticized for their effectiveness. Critics claim that schemes have
become less distinctive and value-adding as many competitors now operate metoo programmes. Indeed, it is very hard to fi nd any hotel chain that does not have
a loyalty programme. Customers now expect to accumulate credits as part of the
standard hotel value proposition. Many UK supermarket shoppers carry loyalty
cards from more than one supermarket. 21 The customer's choice set when
grocery shopping might include all suppliers with whom they have a card-based
relationship.
One major concern is that loyalty schemes may not be creating loyalty at all.
Loyalty takes two forms: attitudinal and behavioural loyalty. Attitudinal loyalty is
reflected in positive affect towards the brand or supplier. Behavioural loyalty is
refl ected in purchasing behaviour. There is very little longitudinal evidence about
shifts in customer behaviours after joining a loyalty scheme. One retailing study,
however, using longitudinal data from a convenience store franchise, found that
shoppers who were heavy buyers at the beginning of a loyalty programme did not
change their patronage behaviour after joining. However, shoppers whose initial
patronage levels were low or moderate gradually became more behaviourally
loyal to the fi rm, increasing their shopping spend at the franchise. For light
buyers, the loyalty programme encouraged shoppers to buy from additional
categories, thus deepening their relationship with the franchise.
29

Whether or not they develop loyalty, these schemes certainly reward buying
behaviour. Accumulated credits represent investments that the customer has made
in the scheme or the brands behind the scheme. When customers get no return
from this investment, they can be deeply distressed. Members of at least fi ve
airline schemes, Braniff, Midway, MGM Grand, Legend and Ansett, lost their air
miles when their airlines folded. Members of Pan Am's FFP were fortunate to
have their credits transferred into Delta Airlines when Pan Am stopped fl ying.
Frequent fl iers of Australia-based Ansett forfeited their miles after the airline
stopped fl ying in 2001. Passengers organized themselves into a group to lobby,
ultimately unsuccessfully, for their loyalty to be recognized and rewarded by the
company administrators, or prospective purchasers of the airline.
Additionally, 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 controlled experiments mailing
health and beauty offers to select groups of carefully profi led customers. It
achieved 40 per cent response rates, in comparison to 5 per cent from the control
group. 24 The loyalty scheme concept has been migrated into the online
environment. One of the innovators, beenz, which was established in 1998, has
not survived.

30

SALES PROMOTIONS
Whereas loyalty schemes and clubs are relatively durable, sales promotions offer
only temporary enhancements to customer value. Sales promotions, as we saw in
the last chapter can also be used for customer acquisition. Retention-oriented sales
promotions encourage the customer to repeat purchase, so the form they take is
different. Here are some examples.

In-pack or on-pack voucher: customers buy the product and receive a

voucher entitling them to a discount off one or more additional purchases.

Rebate or cash back: rebates are refunds that the customer receives after
purchase. The value of the rebate can be adjusted in line with the quantity
purchased, in order to reward customers who meet high volume targets.

Patronage awards: customers collect proofs of purchase, such as store

receipts or barcodes from packaging, which are surrendered for cash or
gifts. The greater the volume purchased the bigger the award.

Free premium for continuous purchase: the customer collects several

proofs of purchase and mails them in, or surrenders them at retail outlets to
obtain a free gift. Sometimes the gift might be part of a collectable series.
For example, a manufacturer of preserves and jams developed a range of
collectable enamel badges. Customers collected proofs of purchase and
mailed them in to receive a badge. There were 20 different badges in the
series. This promotion was so popular that a secondary market was
established so that collectors could trade and swap badges to obtain the full
set.

31

Collection schemes: these are long-running schemes where 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 didn't know which card they had until they bought and
opened the pack. These became collectable items.

Self-liquidating premium: a self-liquidating promotion is one that

recovers its own direct costs. Typically, consumers are invited to collect
proofs of purchase, and mail them in with a personal cheque or money
order. This entitles the customer to buy a product at a discounted premium,
such as a camera or gardening equipment. The promoter will have reached
a deal with the suppliers of the products to buy in bulk at a highly
discounted rate, perhaps on a sale or return basis. Margins earned from the
sale of product, plus the value of the cheque or money order cover the
costs of running the promotion which, as a consequence, becomes selfliquidating.

BONDING
The next positive customer retention strategy is customer bonding. B2B
researchers have identified many different forms of bond between customers and
suppliers. These include interpersonal bonds, technology bonds (as in EDI), legal
bonds and process bonds. These different forms can be split into two major
categories: social and structural.

32

SOCIAL BONDS
Social bonds are found in positive interpersonal relationships between people on
both sides of the customer-supplier dyad. 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. As
the number of episodes linking customer and supplier grow, there is greater
opportunity for social bonds to develop. Suppliers should understand that if they
act 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. Geographic
bonds emerge when companies in a trading area cooperate to support each other.
Social relationships between buyer and seller can be single or multilevel. A singlelevel relationship might exist between the supplier's account manager and the
customer's procurement officer. The more interpersonal links 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 business relationships serve as structural
bonds. These structural bonds can be formally recognized in an alliance or joint
venture having legal status. Companies are unlikely to commit resources if there is
a low level of trust in the partner's integrity and competence.
BUILD CUSTOMER ENGAGEMENT
33

The final positive strategy for building customer retention is to build customer
engagement. Various studies have indicated that customer satisfaction is not
enough to ensure customer longevity. For example, Reichheld reports that 65 to 85
percent of recently defected customers claimed to be satisfi ed with their previous
suppliers. Another study reports that one in ten customers who said they were
completely satisfied, scoring ten out of ten on a customer satisfaction scale,
defected to a rival brand the following year. Having satisfied customers is,
increasingly, no more than a basic requirement of being in the game.
Highly engaged customers have levels of emotional or rational attachment or
commitment to a brand, experience or organization that are so strong that they are
highly resistant to competitive influence. The terms engagement, attachment and
commitment tend to be used interchangeably to describe this phenomenon. The
topic of customer engagement was introduced in Chapter 6.

34

OTHERS CUSTOMER RETENTION STRATEGIES

Before we get into details, here's a quick list of customer retention strategies that
you can implement on your site.

Fresh content - regularly

A regular (free) publication

Signups for fututre notifications

Data mining

STRATEGIES OF CUSTOMER RETENTION

1. REGULAR FRESH CONTENT
Most professional Internet marketers agree: content sells.
If your site has great content, the word gets around and people start flocking to
your site. But that's great for customer acquisition. What about retention? To get
the same customers to keep coming back for more, you have to add fresh content
on a regular basis.

35

2. REGULAR FREE PUBLICATION

Free newsletters are great tools in customer retention. You should offer a signupbox on most pages within your site, and checkboxes for newsletters on most major
forms on your site - like the feedback and order form.
Your newsletter establishes your expertise in the eyes of your customers and it
keeps them updated on what's on offer at your web site - but... The best thing
about a newsletter is that your name and/or your company name is under the
customer's nose on a regular basis. It keeps reminding her of you. It tells her that
your dotcom bubble did not burst. It get's them coming back.
The bottom line about newsletters is that they require a lot of time. Time that most
of us don't have. Generating enough good content to fill a newsletter every week
or even every month can be a daunting task.

3. SIGNUPS FOR FUTURE NOTIFICATIONS

I've updated my thinking on sign-ups. This is where I used to tell you to ask
visitors to sign up for notifications of changes to your site. In the years that I've
asked people to sign up for Pandecta notifications, I had maybe 10 sign ups - so I
dropped it. If it doesn't work it just clutters.
36

Try it for yourself. People who sign up for site notifications usually make great
customers. They already know you deliver good value and they're ready to buy
from you.

CUSTOMER RETENTION MARKETING TECHNIQUES

We are often asked how the customer retention rate is affected by the experience a
customer receives? The answer is simple. If you provide customers with a poor
experience, they will leave your company. If you provide them with an average
experience, they are open to being attracted to leave. If you provide them with a
great experience, it will take some effort on the part of your competitor for them
to leave.
Beyond Philosophys customer retention consultants are experts in helping your
company understand the necessity of creating better customer retention marketing.
In our first book, Building Great Customer Experiences, we tell you how to build
a great experience and create better customer retention marketing tactics for your
business. In our second book, Revolutionize Your Customer Experience, we reveal
the journey from nave to natural that leads all organizations to become more
customer-centric. Finally, our latest book, The DNA of Customer Experience:
How Emotions Drive and Destroy Value, reveals in detail the emotions that, if
evoked, can drive and destroy customer retention.

37

MANAGING THE CUSTOMER LIFECYCLE:

CUSTOMER RETENTION AND DEVELOPMENT
The customer lifecycle is made up of three core customer management processes:
customer acquisition, customer retention and customer development. The major
strategic purpose of CRM is to manage, for profi t, a companys relationships with
customers through three stages of the customer lifecycle: customer acquisition,
customer retention and customer development.
A customer retention strategy aims to keep a high proportion of valuable
customers by reducing customer defections (churn), and a customer development
strategy aims to increase the value of those retained customers to the company.
Just as customer acquisition is focused on particular prospects, retention and
development also focus on particular customers. Focus is necessary because not
all customers are worth retaining and not all customers have potential for
development. We will deal with the issue of retention fi rst, before turning to
development.
A number of important questions have to be answered when a company puts
together a customer retention strategy. . Which customers will be targeted for
retention?
What customer retention strategies will be used? . How will the customer
retention performance be measured? We believe that these issues need to be
carefully considered and programmed into a properly resourced customer
retention plan. Many companies, perhaps as many as six out of ten, have no
explicit customer retention plan in place. 1 Most companies spend a majority of

38

their time, energy and resources chasing new business, with 75 per cent or more of
marketing budgets being earmarked for customer acquisition.
Customer retention is the maintenance of continuous trading relationships with
customers over the long term. Customer retention is the mirror image of customer
defection or churn.
Customer retention is 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. However, the appropriate interval over
which retention rate should be measured is not always one year. Rather, it depends
on the customer repurchase cycle. Car insurance and magazine subscriptions are
bought on an annual basis. Carpet tiles and hi-fi s are not. If the normal hi-fi
replacement cycle is four years, then retention rate is more meaningful if it is
measured over four years instead of twelve months. Additional
complexity is added when companies sell a range of products and services, each
with different repurchase cycles. Automobile dealers might sell cars, parts, fuel
and service to a single customer. These products have different repurchase cycles
which make it very difficult for the dealer to have a whole of customer perspective
on retention.
Sometimes companies are not clear about whether an individual customer has
defected. This is because of the location of customerrelated data, which might be
retained in product silos, channel silos or functional silos.

Product silos: consider personal insurance. Insurance companies often have

product-based information systems. Effectively, they regard an insurance policy as
a customer. If the policy is renewed, the customer is regarded as retained.
39

However, take a customer who shops around for a better price and, after the policy
has expired, returns to the original insurer. The insurer may take the new policy to
mean a new customer has been gained, and an old customer has churned. They
would be wrong.

Channel silos: in the B2B context, independent offi ce equipment dealers have
formed into cooperative buying groups to purchase goods at lower prices and
benefi t from other economies of scale in marketing. When a dealer stops buying
direct from Brother Electronics and joins a buying group, Brothers customer data
may report a defection, but all that has happened is that the dealer has begun to
buy through a different channel. Telecommunications companies acquire
customers through many channels. Consider a customer who buys a 12 month
mobile phone contract from a Vodafone-owned retail outlet. Part way through the
year Vodafone launches a new pay-as-you-go product with no contractual
obligation. The customer allows her current contract to expire and then buys the
new pay-asyou- go product, not from a Vodafone outlet but from a supermarket.
Vodafone regards her as a lost customer because the contract was not renewed.
They would be wrong. .

Functional silos: customer-related data are often kept in functional silos that are
not integrated to provide a whole of customer perspective. A customer might not
have made a product purchase for several years, and is therefore regarded as a
churned customer on the sales database. However, the same customer might have
several open queries or issues on the customer service database, and is therefore
regarded as still active. The use of aggregates and averages in calculating
40

customer retention rates can mask a true understanding of retention and defection.
This is because customers differ in their sales, costs-to-serve and buying
behaviours. It is not unusual for a small number of customers to account for a
large proportion of company revenue. If you have 100 customers and lose ten in
the course of a year, your raw defection rate is 10 per cent. But what if these
customers account for 25 per cent your companys sales? Is the true defection rate
25 per cent? Consideration of profi t makes the computation even more complex.
If the 10 per cent of customers that defected produce 50 per cent of your
companys profi ts, is the true defection rate 50 per cent?
What happens if the 10 per cent of lost customers are at the other end of the sales
and profi t spectrum? In other words what if they buy very little and/or have a
high cost-to-serve? It could be that they contribute less than 5 per cent to sales and
actually generate a negative profi t, i.e.they cost more to serve than they generate
in margin. The loss of some customers might improve the companys profi t
performance. It is not inconceivable that a company could retain 90 per cent of its
customers, 95 per cent of its sales and 105 per cent of its profi t! A solution to this
problem is to consider three measures of customer retention:

Raw customer retention rate: this is the number of customers doing business
with a fi rm at the end of a trading period, expressed as percentage of those who
were active customers at the beginning of the period.

Sales-adjusted retention rate: this is 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.
41

MANAGE CUSTOMER RETENTION OR VALUE RETENTION

This indicates that companies should focus on retaining customers that contribute
value. Sometimes this will mean that the focus is not on retention of customers,
per se, but on retention of share of wallet. In the banking industry, for example, it
may be more important for companies to focus on managing the overall
downward migration of customer spending than managing customer retention.
Many customers simply change their buying behaviour rather than defect.
Changes in buying behaviour may be responsible for greater changes in customer
value than defection. One bank, for example, lost 3 per cent of its total balances
when 5 per cent of checking account customers defected in a year, but lost 24 per
cent of its total balances when 35 per cent of customers reduced the amounts
deposited in their checking accounts. The need to manage migration, rather than
defection, is particularly important when customers engage in portfolio purchasing
by transacting with more than one supplier.
Improving customer retention is an important objective for many CRM
implementations. Its defi nition and measurement need to be sensitive to the sales,
profi tability and value issues discussed previously. 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 value-adding customers. It
may not be benefi cial 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. These can be value-destroyers, not value-adders.

42

OBJECTIVE OF THE STUDY

To study the current practices of Customer Retention Strategy.

To find out the impact of Customer Retention Strategy on the

profitability of the organization.

To study the factors affecting the Customer Retention Strategy

practices.

To study the role of information technology in Customer

Retention Strategy.

43

COMPANY PROFILE

Reliance Anil Dhirubhai Ambani Group, an offshoot of the Reliance Group

founded by Shri Dhirubhai H Ambani (1932-2002), ranks among Indias top three
private sector business houses in terms of net worth. The group has business
interests that range from telecommunications (Reliance Communications Limited)
to financial services (Reliance Capital Ltd) and the generation and distribution of
power (Reliance Infrastructure Limited).
Reliance ADA Groups flagship company, Reliance Communications, is India's
largest private sector information and communications company, with over 100
million subscribers. It has established a pan-India, high-capacity, integrated
(wireless and wireline), convergent (voice, data and video) digital network, to
offer services spanning the entire infocomm value chain.
Other major group companies Reliance Capital and Reliance Infrastructure
are widely acknowledged as the market leaders in their respective areas of
operation.

44

Few men in history have made as dramatic a contribution to their countrys

economic fortunes as did the founder of Reliance, Sh. Dhirubhai H Ambani.
Fewer still have left behind a legacy that is more enduring and timeless.

As with all great pioneers, there is more than one unique way of describing the
true genius of Dhirubhai: the corporate visionary, the unmatched strategist, the
proud patriot, the leader of men, the architect of Indias capital markets, the
champion of shareholder interest.
But the role Dhirubhai cherished most was perhaps that of Indias greatest wealth
creator. In one lifetime, he built, starting from the proverbial scratch, Indias
largest private sector enterprise.
45

When Dhirubhai embarked on his first business venture, he had a seed capital of
barely US$ 300 (around Rs 14,000). Over the next three and a half decades, he
converted this fledgling enterprise into a Rs 60,000 crore colossusan
achievement which earned Reliance a place on the global Fortune 500 list, the first
ever Indian private company to do so.
Dhirubhai is widely regarded as the father of Indias capital markets. In 1977,
when Reliance Textile Industries Limited first went public, the Indian stock
market was a place patronised by a small club of elite investors which dabbled in
a handful of stocks.
Undaunted, Dhirubhai managed to convince a large number of first-time retail
investors to participate in the unfolding Reliance story and put their hard-earned
money in the Reliance Textile IPO, promising them, in exchange for their trust,
substantial return on their investments. It was to be the start of one of great stories
of mutual respect and reciprocal gain in the Indian markets.
Under Dhirubhais extraordinary vision and leadership, Reliance scripted one of
the greatest growth stories in corporate history anywhere in the world, and went
on to become Indias largest private sector enterprise.

46

CUSTOMER RETENTION - DEFINITION

ICLP the global loyalty marketing agency is an expert in customer
retention.
Customer retention is an imperative in modern business a strategy whose
objective is to keep a companys customers and to retain their revenue
contribution. Primarily it aims to prevent customers from defecting to alternative
brands / going to the competition.
As all managers know, it costs less to keep an existing customer than to acquire a
new one, thus having a customer retention strategy is common sense.
Customer retention is the driving force behind Customer Relationship
Management (CRM), relationship marketing and loyalty marketing.
Studies across a number of industries have revealed that the cost of retaining an
existing customer is only about 10% of the cost of acquiring a new customer, so
customer retention makes powerful, economic sense.
Putting in place a customer retention strategy increases customer profitability as
acquisition costs only occur at the beginning of a relationship, so the longer the
relationship, the lower the amortised cost; account maintenance costs decline as a
percentage of total costs (or as a percentage of revenue); long-term customers tend
to be less inclined to switch, and also tend to be less price sensitive; long-term
customers may introduce new customers via verbal referral; long-term customers
are more likely to purchase additional products; customers who stay with you tend
to be satisfied with the relationship and are less likely to switch to competitors,
making it difficult for competitors to enter the market or gain market share;
regular customers tend to be less expensive to service because they are familiar
with the process, require less education, and are consistent in their buying
47

behaviour; increased customer retention and customer loyalty makes the

employees' jobs easier and more satisfying. In turn, happy employees feed back
into better customer satisfaction in a virtuous circle.

USING CUSTOMER SATISFACTION AND IMPORTANCE

DATA TO IDENTIFY PRIORITIES FOR IMPROVEMENT.

KANO'S CUSTOMER DELIGHT MODEL

Noriaki 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, better 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, needs and
are often difficult to identify in marketing research., Kano's analysis suggests that
customers can be delighted in two ways: by enhancing linear qualities beyond
expectations and by creating innovative attractive qualities.
Exceeding expectations need not be costly. For example, a sales representative
could do a number of simple things such as:

48

Volunteer to collect and replace a faulty product from a customer rather

than issuing a credit note and waiting for the normal call cycle to schedule
a call on the customer.

Offer better, lower cost solutions to the customer, even though that might
reduce profit margin.

Provide information about the customer's served market. A packaging

company, for example, might alert a fast-moving consumer goods
manufacturer customer to competitive initiatives in their served markets.

CUSTOMER DELIGHT THROUGH PRODUCT QUALITY.

Some efforts to delight customers can go wrong. For example, sooner is not
necessarily better: if a retail store customer has requested delivery between 1 pm
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 to create the illusion of faster passage of time. However, the cycle

49

time of the selected music must not be too fast, otherwise callers will be exposed
to the same 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.
A number of companies have adopted ' Customer Delight' as their mission,
including Cisco, American Express and Kwik Fit, the auto service chain. Others
pay homage to the goal but do not organize to achieve it. In the service industries,
customer delight requires frontline employees to be trained, empowered and
rewarded for doing what it takes to delight customers. It is in the interaction with
customers that contact employees have the opportunity to understand and exceed
their expectations. The service quality attributes of empathy and responsiveness
are on show when employees successfully delight customers.
Companies sometimes complain that investing in customer delight is
unproductive. As noted earlier, expectations generally increase as competitors
strive 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.

There is a strong economic argument in favour of customer retention, Increasing

purchases as tenure grows: over time, customers come to know their suppliers.
Providing the relationship is satisfactory, trust grows while risk and uncertainty
50

are reduced. Therefore, customers 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 profi t to be earned from the relationship to recover those
acquisition costs. For example, it can take six years to recover the costs of
winning a new retail bank customer. In the B2B context in particular, 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 profi table on a period-by-period basis as
tenure lengthens. These relationship maintenance costs may eventually be signifi
cantly 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. Portals largely transfer account service costs to the
customer. In the B2C context, especially in retailing, the assertion that acquisition
costs generally exceed retention costs is hard to prove. This is in part because it is
very diffi cult to isolate and measure customer acquisition costs.

Customer referrals: customers who willingly commit more of their purchases to

a preferred supplier are generally more satisfi ed than customers who do not. They
are therefore more likely to utter positive word-of-mouth and infl uence the
beliefs, feelings and behaviours of others. Research shows that customers who are
51

frequent buyers are heavier referrers. For example, online clothing customers who
have bought once refer three other people; after ten purchases they will have
referred seven. In consumer electronics, the one-time customer refers four; the ten
times customer refers The referred customers spend about 50 to 75 per cent of the
referrers spending over the fi rst three years of their relationship. 11 However, it
is also likely that newly acquired customers, reshly enthused by their experience,
would be powerful word-of-mouth advocates, perhaps more than longer-term
customers who are more habituated.

Premium prices: customers who are satisfi ed in their relationship may reward
their suppliers by paying higher prices. This is because they get their sense of
value from more than price alone. Customers in an established relationship are
also likely to be less responsive to price appeals offered by competitors.
These conditions mean that retained customers are generally more profitable than
newly acquired customers. Drawing from their consulting experience, Dawkins
and Reichheld report that a 5 per cent increase in customer retention rate leads to
an increase in the net present value of customers by between 25 and 95 per cent
across a wide range of industries, including credit cards, insurance brokerage,
automobile services and office building management. 13 In short, customer
retention drives up customer lifetime value.
Which customers to retain? Simply, the customers who have greatest strategic
value to your company are prime candidates for your retention efforts. These are
the customers we defined as having high lifetime value or who are otherwise
strategically significant as high volume customers, benchmarks, inspirations or
door openers. You need to bear in mind that the cost of customer retention may be
52

considerable. Your most valued customers are also likely to be very attractive to
your competitors. If the costs of retaining customers become too great then they
might lose their status as strategically significant.
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,
they will be impervious to the appeals of competitors, and you will not need to
invest so much in their retention. However, if you have highly significant
customers who are not committed, you may want to invest considerable sums in
their retention.
Some companies prefer to focus their retention efforts on their recently acquired
customers. They often have greater future lifetime value 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. A further 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.
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
profit - table relationship, the medium-share customer from whom you might lose
additional share to competitors or the low-share customer from whom there is
considerable lifetime value

53

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.

STRUCTURAL BONDS
Structural bonds are established when companies and customers commit resources
to a relationship. Generally, these resources yield mutual benefits for the
participants. For example, a joint customer-supplier quality team can work
improving quality compliance, benefiting both companies. Resources committed
to a relationship may or may not be
recoverable if the relationship breaks down. For example, investments made in
training a customers operatives are non-returnable. On the other hand, a chilled
products manufacturer that has installed refrigerated space at a distributors
warehouse may be able to dismantle and retrieve it if the relationship dissolves. A
key feature of structural bonding is investment in adaptations to suit the other
party. Suppliers can adapt any element of the offer product, process, price and
inventory levels, for example to suit the customer. Customers, on the other hand,
also make adaptations. For example, they can adapt their manufacturing processes
to accommodate a suppliers product or technology. Power imbalances in
relationships can produce asymmetric adaptations. A major multiple retailer might
force adaptations from small suppliers, while making no concessions itself. For
example, it could insist on a reduction in product costs, co-branding of point-ofsale material, or even attempt to coerce the supplier not to supply competitors.
Different types of structural bond can be identified. All are characterized by an
investment of one or both parties in the other: .
54

Financial: where the seller offers a financial inducement to retain the

customer. Insurance companies form financial bonds with customers by
offering no-claims discounts, tenure related discounts and multi policy
discounts. .

Legal: when there is a contract or common ownership linking the

relational partners. .

Equity: where both parties invest in order to develop an offer for

customers. For example, the owners of airports invest in the shells of the
duty-free retail outlets. The retailer invests in the internal fixtures and
fittings. .

Knowledge-based: when each party grows to know and understand the

others processes and structures, strengths and weaknesses. .

Technological: when the technologies of the relational partners are

aligned, for example, with EDI, just-in-time logistics and manufacturing.

Process: when processes of the two organizations are aligned. For

example, the quality assurance programmed on the supplier side and the
quality inspection programmed on the customer side. Some suppliers
manage inventory levels for their customers, ensuring inventory levels are
optimized. This is known as vendor managed inventory (VMI). The

55

chemicals company, Solve Interrex, uses telemetry systems to perform

VMI for its customers.

Values-based: some companies are renowned for their strong values. Cooperative Bank is known for its pro-environment, ethical stance. It bonds
closely with other companies, such as investment houses, that adopt the
same position. It refuses to invest in companies that have poor
environmental records.

Geographic: these bonds exist when companies in a trading area (street,

city region or country) create a buyersellerreferral network that supports
all members of their group. In the UK, retailers in downtown Leamington
Spa have combated out of town developments by creating a loyalty
programme in which customers can collect and redeem loyalty credits at
any member store. . Project: when the partners are engaged in some
special activity outside of their normal commercial arrangements, for
example, anew product development project. There may be an exchange of
resources to enable the desired outcome to be achieved, for example, an
exchange of engineers and technologists between the companies.

Multi-product: when a customer buys several products from a supplier,

the bond is more diffi cult to break. There are economies for customers
when they deal with fewer suppliers. When a relationship with a supplier
of several products is dissolved, the customer may incur signifi cant

56

money, search and psychic costs in identifying one or more replacements.

Further, the level of perceived risk attached to a new relationship may
become uncomfortable.

CUSTOMER RETENTION: BE A RELATIONSHIP LEADER

Most salespeople are familiar with the 80-20 rule. Eighty percent of sales come
from merely 20% of the loyal customer base. But so many companies are either
unfamiliar with the rule or have abandoned it, evidenced by their weak customer
retention program that devalues customer loyalty.

A Knowledge@Wharton marketing survey found that profitable companies are

relationship leaders and make customer retention a priority. Loyal customers
rave about great companies. Without that customer word-of mouth approval your
company is skating on thin ice. One dissatisfied customer tells 8 to 10 people
about their miserable customer experience. With the Web, one can tell thousands.
A weak customer retention program allows for two things :
1)

Not providing some reimbursement when customers are inconvenienced.

2)

Favoring new customers and ignoring the old.

SURVEYS HELP CUSTOMER RETENTION

Its a quantifiable fact: Acquiring new customers is 10 times more difficult and
expensive than retaining existing ones. Fortunately, it may be easier than you
think to keep your clients.

57

An experiment by Rice University professors and published in Harvard Business

Review concluded that simply asking customers how a company performed is
itself a great customer-retention strategy. Researchers selected two groups of
customers and sent just one of them a satisfaction and opinion survey. After a year,
the group that took the survey was twice as likely to have continued loyalty
toward the company. Researchers speculate this is because:
1. Satisfaction surveys reinforce customers desire to be coddled and
reinforce positive feelings.
2. Surveys may increase awareness of auxiliary products and services.
3. The very process of asking opinions can induce people to form an
opinion on something they otherwise may not have considered.
Customer Relationship Management or CRM is a combination of enterprise
strategies, business processes and information technologies used to learn more
about customers' needs and behaviors in order to develop stronger relationships
with them. CRM software systems automate many customer-related business
tasks. CRM applications are traditionally developed as client-server software
which incurs higher initial cost of ownership. The proliferation of the Internet and
the Web has fueled the rapid growth of Web-based CRM or online CRM
applications CRM systems are widely deployed for web based call center, contact
management, trouble ticket, personal information manager and scheduling.
The life cycle of CRM consists of three phases - customer acquisition, customer
relationship enhancements and customer retention. CRM software streamlines
CRM activities at each phase of customer relationship management.

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CUSTOMER ACQUISITION
Contact management module and direct marketing module of CRM allow
companies to effectively promote and market their products and services to
prospects. Those modules help speed up the acquiring processes and reduce the
cost of acquiring new customers.

CUSTOMER RELATIONSHIP ENHANCEMENTS

CRM helps companies better understand existing customers' needs and behaviors
and enhance the profitability from existing customers by cross-selling. They can
customize their products and services to individual customers' needs and
preferences.

CUSTOMER RETENTION
Customer service module of CRM system gives the organizations the edge in
customer support and call center services. They can increase customer satisfaction
while reducing the cost of support. Customer retention is critical to the overall
profitability of an organization. A customer you spend hundreds of dollars and
months to acquire may leave you in seconds as a result of poor customer services.
Customer retention management is a fitting explanation for the acronym CRM
when we consider the significance businesses accord to retaining customer
loyalty. CRM has existed for as long as trade has, and since the time the Romans
traded with India. Traders have always known that when dealing with established

59

customers, it takes less time and resources and thus, there are proven ways to
retain existing customers. Diane I re-worded it was not making sense at all.
The loyalty business model, which can be considered a basis for developing
customer retention management practices states that a customers first or recent
experience with a business is the key to the buyers opinion on the business
transaction at hand. This is because the customer today is more informed than
before, and initiates an interaction with a business with preconceived ideas and
notions based on information gathered, which puts the expectations higher on the
one selling.
It is a documented fact, that selling back to your existing customer base yields
profitability/benefits for businesses regardless of the industry or mode of
operation. Therefore, even if you run a transaction-oriented business, customer
retention is just as important for you as it is for businesses that operate over longer
cycles. Customer acquisition and retention are to be pursued as simultaneously as
the current sale on hand, if business success and growth is to be achieved and
with longevity.

HOW DOES CRM HELP WITH RETENTION?

The basic objective of a CRM solution is to help with customer retention. Its
secondary objective is to gain customer acquisition at a low cost, without
jeopardizing existing customer relations and ensuring a smooth transition of a new
customer to loyal long term customer.
A focus on customer retention enables a company to achieve maximum positive
results with regards to ROI, loyalty, acquisition, and revenue. Customer retention

60

is the common thread that runs through all CRM objectives and most of all,
profitability.
CRM systems empower a business to efficiently retain customers by providing
data on customer history, identifying valuable customers, niche customers, and
frequent customers as well. The information extracted from the data is used to
execute the two most crucial steps in retaining customer loyalty. These are
ensuring customer satisfaction and being proactive with customer relationships.
Customer satisfaction means promising and then delivering on your promise,
getting it right the first time, and ensuring successful problem resolution when it
occurs. Proactive initiatives with CRM implies offering that little bit extra to your
customers, going beyond the defined deliverables and making the customer feel
good about doing business with you. This is KEY.

A FEW CUSTOMER RETENTION POINTERS

1. Customer retention can be achieved at a low cost by implementing CRM
in a structured manner.
2. Awareness of the distinguishing features of your business, and offering the
customer a great experience reduces your dependence on having to
compete on price. There is slack when service is that good.
3. Activities for broadening the existing customer base and retaining
customers are not to be seen in isolation; they complement and often
overlap each other.
4. You should track the cost of acquisition and retention as well as calculate
the Return on Customer (ROC). This aids in developing balanced
marketing strategies.
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5. Existing processes related to acquiring new customers, nurturing existing

relations, and analysis of CRM data should be on par with the industry best
practices.

TYPES OF PROGRAMS
First, it must be noted that customer retention programs are not the same as
customer relationship management programs. More people understood that
customer relationship management is not simply retention or customer service or
marketing. CRM is a systematic business approach using information and ongoing dialogue to build long lasting and mutually beneficial customer
relationships.
CRM integrates data, technology, analyses and marketing and communications
processes across all customer touch-points. In CRM, the customer is the building
block for data management, reporting, goal setting, and measurement as well as
business and marketing strategy, organization and technical infrastructure, and
corporate culture and values over time and across all business units.
That said, the basic types of customer retention programs are listed below.
CRM and Customer Retention
Obviously CRM software is a crucial part of customer retention. What can a CRM
system do and what can't it do in regards to customer retention?
First, lets define CRM system. Many firms think that when they purchase a
sales force automation system or a customer service automation system they have
purchased a CRM system. However, a true CRM system also requires the ability
to gather data about customers, store that data in a format that is easy to access,
analyze the customer data, use this customer information to market to or
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communicate with customers. Usually, this means that a firm will use more than
one piece of software to meet their analytic and operational CRM needs.
In terms of customer retention, the appropriate data capture, access and analysis
system enables a firm to determine which customers it is most interested in
retaining. Campaign management software enables the firm to target these
customers and manage a variety of offers to encourage the customers to remain
with the firm. A sales force or customer service system can identify high-value
customers to sales and service forces so these customers will benefit from
individualized retention activities.

THE COSTS AND DIFFICULTIES OF CUSTOMER RETENTION

PROGRAMS
In addition to the cost of administering retention programs (which can be rather
expensive producing cards and marketing materials, setting up points tracking
systems, maintaining a customer service center or Web-site), the programs may
end up offering rewards or discounts to customers who would have purchased
products or services without an incentive. More than 87% of customers said they
would purchase from a company even if they werent in a program (International
Research Project on Loyalty Programs, Retail Advertising and Marketing
Association).
Regardless of the costs vs. the benefits of a customer retention strategy, like any
customer relationship management activity, retention programs are often
hamstrung by a lack of enterprise-wide direction. It is difficult to pinpoint who
advocates the customer.

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Typically, a firm will need to change in four areas to improve their focus on the
customer:

How the organization thinks are the firms success metrics centered on
customers?

How the organization works are processes engineered around customers?

How the organization is structured does the form of the firm follow its
function (to meet customer needs)?

How culture manifests itself in the organization does everyone in the

firm think about, listen to, and respond to customers?

HOW TO OVERCOME THESE HURDLES

Heres how a firm might effect change in the four problem areas:
How the organization thinks: Convert product-centric, channel-centric and other
metrics to customer centric metrics over time. For instance, a firm may evolve
from measuring sales volume alone, to measuring the customer value impact of
new sales.
How the organization works:Begin to execute and measure pilot projects to test
new processes, for example, developing a mini database for customer analysis and
segmentation. Work with customer owners or advocates throughout the
organization to establish business rules that create value for customers and the
firm, for example, develop a fatigue rule and do not contact customers more
than n times per quarter. Develop business cases and use customer data in
decision-making.

64

For example, in addition to the economic analysis required before deciding to

close an unprofitable store, determine which customers will be affected by the
closing and how you will respond to them to retain them as loyal customers.
How the organization is structured: Does the form of the firm follow its function,
that is, to meet customer needs? Save restructuring until the firm has changed
processes and measures. This is an evolutionary process, not revolutionary, so
simply adding customer advocates or customer segment managers to the
organizational chart will not change the behavior of the firm or its value to
customers.
How culture manifests itself in the organization: Does everyone in the firm think
about, listen to, and respond to customers? Make sure the CEO is the number one
advocate of customer retention and CRM. Develop grass roots support for
customer retention and CRM through changes in process, measurement,
incentives, structure and language.
Ro works with Quaero clients to execute their CRM strategies by optimizing their
technology choices, improving their use of customer data and refining their
marketing approaches. Her clients include leaders in the financial services,
telecommunications and pharmaceutical industries. Prior to Quaero, Ro worked at
Tillinghast-Towers Perrin, where she was Senior Consultant, and Furash &
Company, where she was a Principal. Previously, as Senior Vice President, Retail
Marketing and Analysis at Signet Bank, she developed and implemented
profitable customer acquisition and retention programs as well as led marketing
teams, managed deposit portfolio growth, and oversaw branch sales.

65

THE ROLE OF SURVEYS IN CUSTOMER RETENTION PROGRAMS

It can take hundreds of dollars in advertising for some businesses to acquire each
new customer. Surprisingly, many businesses focus exclusively on acquiring new
customers, and expend little effort in retaining existing customers. A customer
retention program consists of three main items:

A focus on satisfying current customers,

A means of measuring why customers leave,

A planned effort to prevent customers from leaving once they express a

desire to do so.

Perhaps you are lucky enough to know the names of your customers. If you do,
and you are in a business in which your customers have accounts, you have an
opportunity that other businesses do not; you can easily find out why your
customers are leaving. This can be done through a closed account survey.
Such a survey can be implemented at the time an account is closed, or shortly
afterwards. Some of the basic issues addressed in such a survey include the
following:
How satisfied was the customer? What is the customer's reason for leaving?
Typical reasons would include:

Poor service,

Pricing,

Change of address,

Customer no longer has a need for the service,

Customer received a better offer from a competitor.

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For any of the above reasons for leaving mentioned by a customer, further
questions would be asked to better understand the reason. For example, you would
want to find out the specifics surrounding poor service, the actual price charged by
a competitor, the specific offer received by a competitor, the name of the
competitor to whom the customer is going, how they heard of the competitor's
offer, etc. Armed with this information, you can formulate a customer retention
program, which, depending upon the reasons customers are leaving, might consist
of one or more of the following:

A program to address service concerns to prevent additional customers

from leaving,

An evaluation of current pricing,

An evaluation of competitors' advertising campaigns and determine

whether a marketing response is warranted,

Development of an "exit interview" (a specialized closed account survey)

to determine why a customer is leaving and to attempt to prevent the
customer from leaving at that time through "counter-offers.".

An effective customer retention program, which includes a detailed understanding

of why customers are leaving, can generate more revenue for you than a large
increase in advertising expenditures. For example, if you spend $50,000 to bring
in 2000 new customers per year, it costs you $25 in advertising for each new
customer. If you have a customer base of 8000 households and a 20% customer
turnover rate, you lose 1600 customers per year, for a net gain of 400. If through a
customer retention program, you can reduce your customer turnover from 20% to
15%, you'll retain an additional 400 customers per year and increase your net gain

67

to 800. Without a customer retention program, this net gain of 400 would have
required an additional advertising expenditure of $50,000.
A customer retention program doesn't have to be expensive. The costs would
include a modest survey, a series of "scripts" written to entice customers to stay, a
few moments of time on the part of each employee who closes accounts, and a
modest counter-offer.

RETENTION & LOYALTY PROGRAM DESIGN

Jim's Intro: Marketing Agencies / Consulting Groups with clients in need of a
customer retention or loyalty program should beware of the following issues when
selecting a vendor.
Here's a few interesting facts from the world of Customer Retention & Loyalty:
A rebate program (get a $5 coupon back for every $150 you purchase, for
example) is not a retention or loyalty program. It's a profit destroying program
which significantly lowers the margin of your best customers and drives little or
no incremental profit among others.
Better service does not by itself increase customer retention or loyalty. Rather,
good service is the minimum requirement needed to operate a profitable customer
retention or loyalty program. If your service stinks, adding a customer retention
or loyalty program will make it much, much worse. Trust me. If you want
examples, call me. Been there, done that. I won't design a program for a
company with rotten service (anymore), period.
Customer retention and loyalty programs are supposed to be profitable, and the
well designed ones are. You can very accurately model the financial benefits of a
program before it is implemented. If you are talking with someone who says this
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kind of modeling is not possible, then one of the following scenarios is probably
true:

You don't have nearly enough data on your customers, and should not even
be thinking of a retention or loyalty program at this juncture. I can help
you with this, by telling you what data you need and providing ideas for
the collection of it.

You have the data but you don't know how to extract the information you
need from it in order to do the modeling. I can help you with this too, by
creating the proper Metrics and Reporting you need.

The people you are talking with just don't know what they are doing, and
are trying to sell you some kind of idea that is not a real retention or
loyalty program. I can't help you with this, unless you want to use
somebody else for your design.

Customer Retention and Loyalty programs can be very, very profitable. The
problem is most people simply do not understand how to design them correctly,
and do not understand the need for tracking, analysis, and program refreshment to
keep the profitability ball rolling.
Many customer retention and loyalty programs begin life as profitable efforts, but
are left to wither and grow stale, ultimately resulting in negative profitability. If
you need to redesign an existing program properly, I can help you.
Finally, CRM is only a failure because people don't know enough about their
customers before they implement, and end up putting too much cost in up front. If
you are thinking of going the CRM route, the best thing you could possibly do for
yourself is put in a customer retention program first. The program will tell you

69

what you really need from a CRM perspective, and save you a ton of money down
the road. Try it, you'll like it.

RESEARCH METHODOLOGY
Research is common parlance refresh to a search for knowledge. One can also
define research as a scientific and systematic search for pertinent information on a
specific topic.
In fact, research is an art of scientific investigation. The Advanced Learners
dictionary of current English lay down the meaning research as a careful
investigation and inquiry especially through search for new facts in any branch
knowledge.

Research is an academic activity and as such the term should be used in a

technical sense. According to Clifford woody research comprises defining and
redefining problems, formulating hypothesis or suggested solutions; collecting,
organizing and evaluating data; making deductions and reaching conclusion; and
at last carefully testing the conclusion to determine whether they fit the
formulating hypothesis.

The systematic approach concerning generalization and the formulation of theory

is also research. As such the term Research refers to the systematic method
consisting of enunciating the problem, formulating a hypothesis, collecting the
facts of data, analyzing the facts and reaching certain conclusion either in the form

70

of solution towards the concerned problem or certain in certain generalization for

some theoretical formulation.

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TYPES OF RESEARCH
There are the following types of research, which are as follows.
1. Descriptive vs. Analytical: Descriptive research includes surveys and factfinding enquiries of different kinds. The majors purpose of descriptive research is
description the set of affairs it exists at present.
In analytical research, on the other hand, the research has to use facts or
information already available, and analyze these to use fact or information already
available, and analyze these to make a critical evaluation of material.
2. Applied vs. Fundamental: Research can either be applied research or
fundamental research. Applied research aims at finding a solution for an
immediate problem facing a society or and industrial / Business origination,
Whereas Fundamental research is mainly concern with generalization
and with the formulation of a theory.
3. Quantitative vs. Qualitative:

Quantitative research is based on the

measurement of quantity or amount. It is applicable to phenomena that can be

expressed in terms of quantity. Qualitative research, on the other hand is
concerned with Qualitative phenomenon, that is, phenomenon relating to or
involving quality or kind.
4. Conceptual vs. Empirical: Conceptual research is that related some abstract
idea or theory. It is generally used by philosophers and thinkers to develop new
concepts or to reinterpret existing ones.
On the other hand, Empirical research realizes on experience or
observation alone, often without due regard for system and theory. It is a data
based research.

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RESEARCH DESIGN
A research design is the arrangement of conditions for collection and
analyses of data in a manner that aims to combined relevance to the research
purpose with economy in procedure. In fact, the research design is the
conceptual structure within which research is conducted; it is constitute the
blue print for the collection, measurement and analyses of data.

DATA SOURCES
The task of data collection begins after a research problem has been defined
and research design/plan chalked out. While deciding about the method of
data collection to be used for study, the researcher should keep in mind two
types of data.

1. Primary data
2. Secondary data

1. Primary data: These data are collected afresh

& for the first time and thus

happen to be original in character.

2. Secondary data: These data are already collected by someone else and which
have already been passed through the statistical process. The researcher would
have to decide which sort of data he would be using for his study and accordingly
he will have to select one or other method of data collection.

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COLLECTION OF PRIMARY DATA

We collect primary data during the course of doing experiments in an
experimental research but in case we do research of the descriptive nature and
perform surveys, whether sample survey or census surveys, then we can obtain
primary datas either through observation or through personal interviews. This in
other words means that there are several other methods of collecting data,
particularly in surveys & descriptive researches. Important ones are:
1. Observation method
2. Interview method
3. Through questionnaire
4. Through schedules
5. Other methods

COLLECTION OF SECONDARY DATA

Secondary data means data that are already available i.e.; they refer to data, which
have already been collected and analyzed by someone else. When the researcher
utilizes secondary data, then he has to look into various sources from where he
can obtain them. In this case he is certainly not confronted with the problems that
are usually associated with the collection of original data. Secondary data may
either be published data or unpublished data. Usually published data are available
in:

Various publications of central, state and local governments

Various publications of foreign governments or of international bodies and

their subsidiary organizations

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Technical and trade journals

Books, magazines and newspapers etc

Reports and publication of various associations connected with business

and industry, banks, stock exchanges etc.

Reports prepared by research scholars, universities, economists etc

Public records and statistics, historical documents

Our project is based on secondary data also which we have collected from various
sources

Annual reports

Websites

Journals

In this research project, secondary data were used. Magazines, journals, annual
reports, statements and periodicals were consulted to fetch the information
about Venture Capital in India. Research project is also based on the
information collected from various websites and e-links.

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ANALYSIS & FINDINGS

REASONS FOR CUSTOMER SWITCHING

The reasons for customer switching can be identified as following:

1. Pricing (High price, unfair pricing, deceptive pricing)

2. Inconvenience (Wait for service, wait for appointment)
3. Core service failure (Service mistakes, Billing errors)
4. Service encounter failure (Uncaring, impolite, unresponsive behavior)
5. Response to service failure (Negative response, no response, reluctant
response)
6. Competition (Found better service)
7. Ethical problem (Cheating, Unsafe)
8. Involuntary switching (customer moved, provider closed)

An important aspect of the above is that six out of the eight service switching
factors are controllable from a service organizations point of view.

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STRATEGIES FOR CUSTOMER RETENTION

(A) Complaint Management System

Any worthwhile complaints management system has to have following basic

features:
a) Visibility: Customer should know where to complain.
b) Accessibility: Customer should know how to complain. As a rule of
thumb, the more formal the system for lodging complaints, the less
accessible it is to customers.
c) Responsiveness: Complaints need to be dealt quickly. The quicker the
complaints are dealt with, the higher the customer satisfaction.
d) Customer-focused approach: A service provider who adopts customerfocused approach, invites complaints and indicates commitment of
resolving complaints by its words and actions in all fairness.
e) Accountability: Someone in the organization has to take responsibility for
complaint handling.
f) Continuous Improvement: This is about looking at the root causes and
fixing them.

A good complaint management system must ensure that that complainant is kept
informed, the staff understands the complaint processes, complaints are taken
seriously and employees are empowered to deal with situations.

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(B) Service Recovery Strategies

Consider the following incident regarding an airlines (British Airways). An

aircraft door was left open in a rainstorm before take off and a passenger near the
door unfortunately got showered. The flight attendant not only did everything that
was routine- offered to have the customers garments cleaned and made sure that
a customer relations representative contacted the customer later to demonstrate
that they

genuinely cared- but also made special gesture by offering the

passenger a complimentary choice of certain tax free goods.

It is very important for service companies to have service recovery strategies

which can be applied in case of service failure. The following steps are useful in
an effective service recovery system.

1. Measure the costs of effective service recovery. It should include the

indirect cost also, when a customer departs unhappily.
2. Break customer silence and listen closely for complaints.
3. Act fast.
4. Train and empower employees. The front line people must be trained and
empowered by the organization.
5. Close the customer feedback loop.

(C) Managing Customer Waiting

Sometimes, it is not possible to match demand & capacity, and hence waiting by
customers becomes inevitable. While reducing waiting time is important for a

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marketer, it is equally if not more, important to reduce the customers perceived

waiting time. If a customers perceived waiting time is less, he will be more
satisfied with the service.
Various ways of managing customer waiting are as follows:

1. The organization should analyze its operational processes in order to

identify and remove inefficiencies or bottlenecks, if any.
2. In case waiting cannot be avoided, a reservation system can be used.
3. Since unoccupied time feels longer than occupied time, keep customer
occupied by installing distractions that entertain and physically involve
them. For example, TV sets, magazines reading material can be provided
in waiting area.
4. Provide waiting duration information i.e. information about the expected
length of wait and/or queuing information i.e. a customers position in
queue with continuous update.
5. If unexpected delays occur, explanation should be given to the customer.
This helps in reducing uncertainty and customer irritation. The key is to
impress upon the customer that he has not been forgotten. Simple things
like providing a glass of water or a cup of tea to the waiting customer can
do wonders.
6. Keep resources not serving customer out of sight. This can be done by
keeping idle employees out of view and conducting activities that do not
involve customer interactions out of customers sight.
7. Try to reduce pre-service waiting time by transferring some of the preservice waiting to the service encounter phase.
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8. A smiling service person who knows his job well can be very helpful in
overcoming many negative effects of waiting. Therefore, training and
incentive/ rewards for providing good service should be made.

IMPORTANCE OF CUSTOMER RETENTION

Why are customers more profitable for service firms over a period of time? There
are a number of reasons for this. To begin with, to acquire a customer a company
incurs promotional costs like advertising, sales promotion etc. It is said that it
costs five times more to attract a new customer than retaining one. The
operating cost decreases when a customer stays. Services being rich in experience
and credence qualities, it takes some time for customers to get accustomed to it
and once they are used to the service and are satisfied with the service provider
,they tend to purchase more over a period of time.

As they remain satisfied with a service provider, they spread a positive word of
mouth, which is very effective in case of services for attracting new customers.
Longer the customer stays with an organization, more the organization knows
about him, which enables it to offer customized services which make it difficult
for the customer to defect. This may even provide opportunities to the
organization to charge price premium by offering individualized services which
may be difficult for the competitors to offer.

Considering the importance of retaining customers in service business, Reichheld

& Sasser coined a term Zero Defection. They highlighted that companies can

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boost profits by almost 100% by retaining just 5% more of their customers.

Further, it is also very important to understand the life time value of a customer.
For example, if an average customer of BSNL pays Rs. 500 per month and stays
with the company for 20 years., his average lifetime value will be Rs. 500x 12x
20=Rs. 1,20,000. Further, if by a positive word of mouth, he brings just one more
customer to the organization, his value to the organization doubles. Therefore, it is
important for all the employees in the organization to understand the life time
value of their customers. Once they understand it, they will treat the customer
accordingly and will focus on building relationship with the very people who keep
them in business.

WHY CUSTOMER RETENTION?

In today's competitive business world and challenging economy, retaining your
customer base is critical to your success. If you don't give your customers some
good reasons to stay, your competitors will give them a reason to leave. Customer
retention and satisfaction drive profits. It's far less expensive to cultivate your
existing customer base and sell more services to them than it is to seek new,
single-transaction customers. Most surveys across industries show that keeping
one existing customer is five to seven times more profitable than attracting one
new one.

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WELL LOOK AT THE VARIOUS FINDINGS OF RETAINING

CUSTOMERS IN GREATER DETAIL.

Possibility of repeat business

This is probably the most obvious advantage of customer retention. Effective

services that lead to customer satisfaction will make your customer coming
back to you again, thus giving you repeat business. Repeat business is a winwin proposition for the business / service provider and the customer. The
business reduces the cost of customer acquisition, while the customer reduces
the cost of finding a reliable vendor and thus also saves on costs associated
with switching vendors.

Reduced costs for customer acquisition

Acquiring a customer has certain associated costs. These include the costs
associated with advertising, following up, sales demos, travel and meeting
costs etc. Having a repeat customer means that the customer is already aware
of your processes and can predict a certain quality of output, thus minimising
the costs involved in new customer acquisition. Having a repeat customer also
has the potential to open up another channel to advertise your business word
of mouth. Word of mouth advertising / recommendations are perhaps the most
important outcome of having a satisfied customer.

Fostering greater interaction between business and customer

Todays markets are increasingly moving away from mass produced standard
products and services, towards a more customised market, where products and

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services are tailored to meet customers specific requirements. Having a repeat

customer is an opportunity for you to build a more focused relationship based
on your customers specific needs and requirements. Being ensured of having
a customer who comes back, you have more confidence to suggest
improvements, provide insights to better understand their needs and
consequently design products and services that are relevant. Having a repeat
business also provides an opportunity for the buyer and the seller to co-create
products and services.

Having more delighted customers

Effective customer retention strategies allow you to move from the zone of
customer satisfaction to customer delight. Studies have shown that customer
delight is achieved only when there is a perfect synergy between the buyer and
seller when the seller understands exactly what the buyer needs and the
buyer understands what the seller can deliver exactly what he needs. If you are
able to delight your customers, you have better chances of them coming back
to you, since they now know why you are different from the rest of
competition.

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CONCLUSION
Todays customers are becoming harder to please. They are smarter, more price
conscious, more demanding, less forgiving and they are approached by many
more competitors with equal or better offers. The challenge is not to produce
satisfied customers; several competitors can do this. The challenge is to produce
delighted and loyal customers. If these customers are retained with the
organization, they become really profitable by way of increase in purchasing,
reduced operating costs, price premiums and through referrals. Too many
companies suffer from customer churn i.e. high customer defection. It is like
adding water to a leaking bucket. Various strategies such as measuring customer
life time value, efficient complaint management system and service recovery
strategies can be really helpful in retaining customers.
This is the way that lifetime value analysis is used to test the validity of loyalty
building strategies before serious money is spent on them. In the past, companies
have had to bull ahead and try new ideas without any really good way of
measuring the effectiveness. Lifetime value gives them a valuable tool. It is a
forward looking concept. Where do these numbers come from? Some of them are
estimates based on previous tests. Some are assumptions that can be tested
through experience. A key consideration is that they are all testable numbers. A
year later, we can look back and find out exactly what our retention, referral and
spending rates were. We can improve our projections. We can try out new ideas on
small segments of our customer database, either geographically or by spending
segment. When we have made our mistakes and have learned what works, then we
expand our strategies to larger segments of our customer base.

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Lifetime value analysis provides a basis for getting the annual marketing budget
approved. Advertising has to rely on awareness estimates. Database Marketing
relies on strong, specific, provable numbers which can be quite convincing to a
CFO when he understands them. More and more companies today are using
lifetime value analysis to test and improve their retention strategies.
The availability of CRM packages come across a wide price spectrum, which
means that companies of all sizes and budget capabilities; can deploy CRM to
work on customer retention. Companies that neglect customer retention, and lay
greater stress on customer acquisitions will find that an existing customer base
dwindles within time. The best approach is to work on both customer loyalty and
customer retention.

CUSTOMER RETENTION PROGRAMS

What a customer retention program is, what it isnt, and how it can help your
business.
Customer retention programs can be a powerful tool in the arsenal of customer
relationship management. Customer retention is important to most companies
because the cost of acquiring a new customer is far greater than the cost of
maintaining a relationship with a current customer.

For many firms, customer profitability is skewed in such a way that losing
the most profitable customers has a very serious effect. In many banks, for
example, the top 30 percent of customers (when ranked by profitability)
can make up 100150 percent of total customer profitability. Thats right -the bottom eighty percent of customers may provide no profitability or,
worse yet, destroy 50 percent of profitability.
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In addition to saving profitable customers, retention programs allow

companies to collect data about their customers. This data can be used to
better understand, target, market to, and communicate with customers or to
customize future interactions with customers. Retention programs can be a
relatively inexpensive means of making customers feel special, increase
their purchases and recommend prospects.

In Discount Programs, customers receive a price cut on repeat purchases.

For example, many insurance companies will offer a discount on auto
insurance if a customer also has homeowners insurance. These firms
assume that customers are more likely to remain loyal if they own a
greater breadth of the firms products.

Loyalty Programs often taking the form of frequent flyer/frequent buyer

programs, and are usually based on a points system. Points are given to
customers for interactions they have with the company. Interactions may
include making purchases, using a new channel (like a Web site or selfservice kiosk), or referring prospective customers. Points can be redeemed
for rewards or discounts.

Card-based Programs can be a specific type of points based or discount

program. A popular type of card-based program may be used by your
supermarket, where your valued customer card can be swiped at the
point of sale and you are offered immediate discount on purchases.

This is the way that lifetime value analysis is used to test the validity of
loyalty building strategies before serious money is spent on them. In the
past, companies have had to bull ahead and try new ideas without any

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really good way of measuring the effectiveness. Lifetime value gives them
a valuable tool. It is a forward looking concept. Where do these numbers
come from? Some of them are estimates based on previous tests. Some are
assumptions that can be tested through experience. A key consideration is
that they are all testable numbers. A year later, we can look back and find
out exactly what our retention, referral and spending rates were. We can
improve our projections. We can try out new ideas on small segments of
our customer database, either geographically or by spending segment.
When we have made our mistakes and have learned what works, then we
expand our strategies to larger segments of our customer base.

Lifetime value analysis provides a basis for getting the annual marketing
budget approved. Advertising has to rely on awareness estimates. Database
Marketing relies on strong, specific, provable numbers which can be quite
convincing to a CFO when he understands them. More and more
companies today are using lifetime value analysis to test and improve their
retention strategies.

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SUGGESTIONS
What efforts can be adopted to increase Customer Retention?

Right from the inception itself there are several efforts any business needs
to take in order to ensure that the customer is on its list of priorities. And
not just on its list of priorities but one of the very first. It can do this in
several ways. For starters a company needs to ask itself several questions
like - What information it would like to have about its customers? How it
intends to use this information? What is the most productive way to use it
so as to benefit the customer? Are there any other ways in which it can
make the experience of its customers a better one? Does it have the
necessary resources and technology needed to implement CRM? What
other resources does it need to increase customer retention?

Customer appreciation is a forgotten task. Despite the fact that engaging in

this will go a long way in mitigating customer loss, organizations fail to
make it a part of their business process and employees fail to incorporate
this in their dealings with the customer. This needs to be done at all stages.

Another failure on the part of businesses in claiming customer loyalty is

their inability to educate the customer about the product. Or shall we say
reluctance rather than inability? Why do companies hesitate when this
effort on their part can undoubtedly go a long way in alleviating their
customer retention problems? The hesitance occurs due to the time
constraints and cost involved. Businesses believe that if they shirk this
duty they will not pay a price. That is a wrong assumption. Attempting to

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educate the customer about the product will go a long way in bettering the
customer experience for him

One of the ways in which organizations can assist their customer loyalty
programs is by ensuring that their customers get to share their positive
experiences with other customers thereby boosting customer retention.

Customer feedback is fundamental and essential in any attempt to

understand the customer and succeed at customer retention. What happens
when a company encourages feedback from its customers is that they are
equipped with additional customer knowledge and can avail of the
valuable suggestions and advice that is got through customer feedback
alone. It is the only means by which the company gets to know the exact
picture of how customers feel about the enterprise. Efforts towards
improvement can only be made after this is had.

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LIMITATIONS
1. Good time was spent in persuading and collecting the matter.
2.

Sometimes there was a problem of server in college.

3. No magazines and books were available in the library.

4. Heavy cost was incurred in the preparation of the report.
5. No extra resources were available to collect the matter except net.
6. Lack of availability of up to date data.
7. Much detail required for the report was not available easily.

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BIBLIOGRAPHY

Books:

Kothari C.R Research MethodologySecond Edition,Wishwa

PraKashan,2000

Gupta S.L., Marketing Research, Excel Books

Kotler Philip, Marketing Management: Prentice Hall of India Pvt.

Webliography:

http://www.major-media.com/learning-resources/customer-retentionlit.htm

http://www.jimnovo.com/Customer-Retention-more.htm

http://www.entrepreneur.com/sales/customerservice/index115864.html

http://en.wikipedia.org/wiki/Customer_retention

http://marketing.about.com/cs/customerservice/a/crmstrategy.htm

http://searchcrm.techtarget.com/generic/0,295582,sid11_gci1312331,00.ht
ml

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