Customer Retention: The New Rules

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There is no doubt the process of managing customers continues to evolve. But is the emphasis also changing from customer management to vendor management by customers?


We all get comfortable with what we are used to doing. We think we are in control. But what if someone else decided to select the shoes we wear every day? We have grown comfortable with selecting our shoes in the morning, so do we really want that kind of change?


As marketers, we have gotten used to deciding what is good for our customers and how and when we communicate with them. However, there is a subtle but growing movement toward high-profile customers managing their vendors.


Suddenly - through the Internet - the world of products and services is totally accessible to customers. Traditional lines are blurring. Products and services are becoming more commoditized. One rental car is more or less the same as the other, just as the inside of airline fuselages are similar. Prices are the same, more or less, for Gateway vs. Dell, and they all run just as well.


If you are still happy with how you are doing things, move to the next article that will describe how to be slightly more effective in your work. Slight improvements are important. But so is being ready for the future. If you are ready for the next step, then read on.


Online companies are enjoying ever-increasing numbers of visitors and shoppers. So why are they still hemorrhaging money? A recent McKinsey & Co. study of accounting books at e-commerce companies found that the e-firms spend more on customer acquisition than they are likely to make in profit from a typical customer. Sites attract eyeballs and occasionally turn a transaction, but they have difficulty getting people to return. And we all know return customers are the key to profitability.


Less than 5 percent of e-commerce site visitors buy something. Yet companies spend an average of $250 on marketing and advertising to acquire one customer. Gross income from a typical customer (after operating costs are deducted from money the customer spent) is $24.50 in the first quarter and $52.50 in every subsequent quarter in which he is a customer. However, two-thirds of buyers don't make a repeat purchase, so the typical e-commerce firm does not make money from the average customer.


Brick-and-mortar companies discovered early in the 1990s that this makes no sense. Today, the historical standard of return on investment is turning into EBITA, or earnings before tax and amortization. The point is: There is a new metric. ROI, an old standard, looks at how much it costs to contact, get a response and make a sale.


In other findings, McKinsey reported that European firms tend to achieve higher levels of e-business success sooner than their U.S. counterparts. Additionally, European firms are better at turning new customers into repeat customers and have greater success in keeping them. McKinsey thinks this is because European companies are learning from their U.S. peers. European Net users tend to be early adopters, and there is less competition in Europe for online consumer dollars.


While American companies remain preoccupied with expanding and fighting each other for the same customers, European firms are either buying out U.S. firms or supplying products and services worldwide. The European companies are thinking about world customer-centric delivery, and they are likely to grow and prosper. Europeans have dealt with language barriers and customs for centuries. They've learned how to ship to market and adapt to local cultures. So they may be in a better position to think global marketing. Time will tell. Holding them back are restrictive governmental regulations and infrastructure.


Because customer acquisition is so expensive, and because e-companies are under pressure to remain profitable, maximizing opportunities with customers they have already acquired is vital to their existence. The most successful companies will be those that learn how their customers want to interact and to make purchases, and communicate with each customer accordingly.


Understanding your current customers' buying behavior is critical to maximizing revenue, profits and shareholder value. Customer retention practices can give you the knowledge to increase the value to customers and win more of your customers' purchase decisions.


Value delivered to customers is the outcome of organizationwide efforts that require a deep understanding of customer needs and expectations. Successful companies use this understanding to design work processes that provide superior value to customers.


To achieve a truly customer-centric approach, you must think differently. You must construct your databases to replicate answers to the questions and needs of your customers and prospects. It's a funny thing about customers. Once they have given a company personal information, they expect the company to remember that information. The customers don't care if they gave their information to another division or a different department.


A customer-friendly database is organized around how a customer thinks and wants to organize his information. To help you rethink what you should be doing, take these steps:


o Think about how you would address a worldwide prospect and customer file. If you don't, someone else already is.


o Move on to your conventional customer. Does your database identify the most loyal and best customers?


Can a database based on metrics such as EBITA, ROI and tracking identify customers who may be lost to attrition or those with potentially high value?


Most importantly, is your future database set to react to customers' needs, offer timely communication and be responsive interactively?


It is common knowledge that customer defection rates at many U.S. companies approach or exceed 20 percent a year. At this rate, only half of the original customer base will remain after three years. Think of the impact on cash flow and profitability. As a result, many companies are exploring or implementing customer retention strategies. However, few companies devote the resources necessary to make significant and sustainable improvements in customer retention, because the financial opportunity of the proposed improvements has not been adequately quantified and communicated throughout the organization.


Improving customer retention requires significantly more than a series of customer loyalty programs or short-term campaigns. Maximizing customer retention requires answers to the following:


• Who are the right customers?


• What are the right offerings?


• What is the right timing to deliver what they want?


One of the initial steps is to define and measure defection - a task that is not as easy as it might appear. Don't look for canned software to do it all for you. In most cases, the software can only deliver the quality that exists within the database and then within the enterprise.


In general, operationalizing the definition of defection requires an in-depth knowledge of the customer/defector. In order to measure and track - and even predict - defection, an organization must be in continual contact with the customer and must have the necessary systems and processes to commit customer-level information into institutional memory.


As many companies have learned, contacting and tracking the entire customer base are seldom feasible financially. Fortunately, it is also unnecessary. A typical company derives 80 percent of its profit from 20 percent of its customer base. The 80-20 rule allows an organization to focus its limited retention resources on a relatively small portion of the customer base, while still influencing the vast majority of customer profit.


Therefore, part of the solution is to identify, contact and track your high-value customers. Another part of the solution in a true loyalty marketing program is to identify the lower-value customers with high potential and nurture those relationships.


Activity-based costing of customers, with its process focus, helps firms concentrate on profit processes such as bill payment or airport check-in. But this operations-focused niche will take a back seat to customer-base costing, which makes a direct link between customer behavior, insight and action. To plan for customer-based costing, firms will need to modify customer relationship management platforms and initiatives to tie into financial applications. New customer-level EBITA will rely on cost vs. revenue associated with individual accounts. Amortizing the cost of the CRM system over a period of time, efficiencies and reduction of human interface will be part of the cost reductions.


Firms must apply weights to the relative value of marketing, sales and customer service to tie in the metrics. Existing data silos, such as product marketing groups, must use these measurements to configure customer-centric offers that the customer has requested.


To be ready, it is necessary to rethink. Don't get too comfortable with the old paradigm of company-driven marketing. Today, the customer is shaping the battle plan.
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