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Launching Profits with Customer Loyalty
Nothing builds a business like customer retention and cultivation.
For the rest of the April 2000 issue of CRM magazine please click here
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"Customer retention isn't everything, it's the only thing!"

So states the mantra of DataSage-and perhaps it should be your company's rallying slogan as well. While the 1980s and 1990s witnessed companies slashing costs to shore up profits, smart businesses now are looking to increase revenue streams. Customer retention does both. "Financial analysis of the cost of customer acquisition versus the cost of retention has shown that keeping customers can be a more profitable strategy," says Kelly Conway, president and CEO of eLoyalty, a Chicago-based CRM consulting firm. "It can cost four to seven times more to replace a current customer than it does to keep one." Loyal customers translate into lower marketing costs, increased revenue over that customer's lifetime relationship with your company (car dealers estimate that a loyal customer is worth up to $400,000 over a lifetime), more referrals and, perhaps most importantly, helping your company understand how it can improve its performance.

The Scorecard
More competitors. Shorter product life cycles. An explosion of new technologies. New distribution channels. These are some of the primary factors that are driving CEOs and senior management to focus on customer-retention strategies as a key weapon for differentiating their companies from competitors and building shareholder value.

Arthur Hughes, vice president of The Database Marketing Institute in Arlington, Va., agrees. "While the length of customer relationships depends on which industry you're in, in general, people are shopping around much more than they used to. Because of the Internet, they are now much more aware of other alternatives and offers."

Shorter customer relationships result in lost profits. "The Horizon Group recently did a study about attrition in retail that showed that each year 25 to 40 percent of a retailer's core customers attrite," says Paul Cataldo, vice president of marketing for DataSage, Reading, Mass. "When you quantify that for a $100 million retailer, it's losing $25 million to $40 million of revenue each year."

Choosing Your Team
While customer retention is key to profitability, a few conundrums remain. For example, how do you determine the profitability of your customers? "You would think it would be a trivial task, but it's actually complicated," says Mark Turchan, senior vice president of loyalty strategy for eLoyalty. First, you must know which products or services a customer purchases-then for each product and service, how many times he has interacted with your company by calling your call center, visiting a teller, sending a letter. The tough part is calculating the cost of each of those interactions and comparing those totals with your planned profit margin. "You're really calculating a P&L statement on a customer-by-customer basis," Turchan says.

You're likely to find that some customers are costing you money. "The reality is, not all customers are created equal," says eLoyalty's Conway. "Frequently, a small group of customers has a disproportionately greater value to the organization." Turchan tells the story of a client, a bank that had 60,000 customers who did nothing at the bank but maintain safety deposit boxes. These single-service customers cost the bank $20 per household each year.

"The bank had two options," says Turchan, "it could reprice the product, or it could go to those households and cross-sell other products-savings accounts, loans, credit cards. This bank discovered that it had a gold mine it hadn't tapped into-and didn't even know existed-until it analyzed its customer data."

In addition to trying to turn unprofitable customers into revenue streams by cross- or up-selling, you may wish to hold onto some customers for other reasons. Prestigious customers can provide valuable references; when you're entering a new market or developing new technological fronts, developing a critical mass may provide economies in scale or credibility. However, you may find a customer is unable to meet your criteria for retention. David Garcia, president of CustomerSoft in Denver, recommends that you treat unprofitable customers almost the same way you would treat an unproductive employee. First, your organization must have a clear definition of what defines profitability. Then, just as you would with an employee, you communicate that definition to the customer and identify gaps in the current relationship. Together, you set goals and timelines. If you can't resolve the differences, then you mutually agree to no longer work together.

"Smart companies are now developing customer profiles-what products customers should purchase, how much, when-so they can 'hire' the right customer to begin with," says Garcia.

Keeping Your MVCs
Unfortunately, it's not that easy to keep your most valuable customers once you've identified them. "Having a high-quality product or service is number one," says Don Peppers, a partner at Peppers and Rogers Group/Marketing 1to1, headquartered in stamford, Conn. "The problem is that most companies are focused on quality already; so it's not a guarantor of loyalty." Companies also tend to rely on promotions such as frequent-buyer programs, discounts and rebates to build loyalty. "That's not a bad short-term strategy," says Peppers, "but it is a bad long-term strategy because you're teaching customers to expect a deal."

CustomerSoft's Garcia explains, "The product itself is not the end-all. It's about the customer, about whether you're helping customers resolve business issues. It's really a paradigm shift. "Smart companies will look at customer interactions across the enterprise rather than at individual product inquiries to continuously increase value to the customers," says Garcia. "One-to-one marketing has been terrific for business-to-consumer selling. I haven't seen it as broadly used within the business-to-business market, but more and more people are recognizing it as a huge opportunity."

Peppers explains, "Companies don't wake up one day and want to be a one-to-one company. They say, 'We have a customer loyalty problem,' or 'We have a unit margin problem.' Sooner or later, you end up in the church of one-to-one because that's the only way to solve those problems."

Martha Rogers, a partner at Peppers and Rogers Group, says, "In response to industrial-age technology, businesses have learned to think in a mass-marketing mode. They think transactionally: 'What can we trade?'

Instead, the process of creating customer loyalty is more about making it easier for them to do business with you and more difficult for them to go elsewhere.

"It's about customer learning relationships," she continues. "Each time I talk with you, I can identify you immediately and act on knowledge based on what you've told me before. Each time we talk, I ask for feedback: 'Did you like the product this way? Would it be better that way?' We get further and further up the learning curve, and after a while, you're getting a product from me that you can't get anywhere else because you helped me create it."

And CRM technology will solve your customer-retention problems, right? Wrong. "Technology is not the answer," says Peppers. "It is a means to the answer. The solution is buried deep within the business processes and culture within your organization. You need to measure and evaluate the right things."

"It's a mistake to think you can take a database of people and slice and dice and make the right offer to the right customer at the right time," warns Arthur Hughes of The Database Marketing Institute. "Sales will increase only if you're communicating and delivering something of interest to that particular customer."

"Selectivity is the key to success," says eLoyalty's Conway. The availability of technology such as data warehousing and data mining makes it possible to creatively segment customers and understand the value, potential and nuances of each group and each individual.

"Organizations know who their largest customers are, but virtually no one has a systematic way of valuing or scoring customers in terms of their economic value," Conway says. According to Conway, five common components of value are:

  • Long-term value (net present value of lifelong purchases)
  • Sphere of influence (ability to generate positive word of mouth or referrals)
  • Growth potential
  • History
  • Life events

Once you determine the value of different customers, it's time to tally what drives their buying behavior. Most retailers use collaborative filtering to group shoppers into broad categories-and make equally broad buying predictions, says Cataldo of DataSage. "Instead, software that allows for individualization lets you learn about what an online consumer wants by capturing and analyzing every click and transaction-effectively capturing what we call buyer's DNA. You then can score that customer on how much convenience, price, brand and other attributes affect her buying decision, and create an individual virtual store for each consumer with only the goods and services she wants and none of the ads, content or offers she doesn't. These same concepts translate to almost any industry. The most important thing is to make sure your software has a powerful, analytical engine."

Don't leave any potential points of customer contact uncovered. Customers should be tracked across all areas of an organization, says Garcia, not just those contacts that occur with the customer support center. Customers often go directly to sales, marketing, accounting or some other area of the organization. A customer's record isn't complete unless every contact with that customer is recorded and available to everyone in the company.

Finally, how should you allocate your marketing dollars? "The newer the customer, the more likely he or she is to leave-it's a mathematical fact," says Peppers. "Attrition is front-loaded; so focusing retention efforts on newer customers is one way to prioritize."

Cross-selling is another viable option. "The more of your products customers use, the longer they'll stay and the more loyal they'll be," says Hughes. "Customers begin to identify with a company-'This is my bank.' 'This is my store.'-when they've invested in more areas."

Retention: The Only Thing
In today's competitive business world, customers are the most precious asset a company has. Retaining customers has proven rewards, and personalization/one-to-one marketing are excellent ways to keep customers happy.

"Companies that use personalization techniques well can see 25 to 40 percent increases in revenues and doubled or tripled response rates to their promotions as well as increased transaction sizes," promises DataSage's Cataldo.

Those companies that learn how to use and get the most value out of customer information systems will be able to acquire the most customers at the lowest cost and retain the most customers with higher profits. They will be the winners in the new economy.

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