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Delhi Business Review?Vol. 2, No. 2, July - December 2001

CUSTOMER RETENTION MANAGEMENT IN THE

INFORMATION ERA

Devashish Das Gupta

Snehashish Mukherjee

ITH the com ing of so m any m ultinat ionals customers did n’t hav e it so comfortable. Bu t

this comfort on the part of the customers has resulted in sleepless nights for the

com panies. Each m arketer is afraid of the customer switchin g from their to another’s

bran d. Delivering cust omer value has becom e the thin g for the ma rketers. However delivering

customer value involves many approaches. Here the researchers have tried to concentrate and

focus on a very important approach, which is the CRM or Customer Relationship Marketing

approach.

This paper seeks to present an insight into the critical areas of CRM and Loyalty. It also delves

into various CRM interventions av ailable in th e industry today. This paper endeavors to look into

aspects like Customer value, CRM ap proach, and va rious related concepts available. It’s a sincere

attempt on the part of the researchers to present an academic picture of the concept of Customer

Relationship marketing.

I n t r o d u c t i o nIn th e present a ge of cut t hr oat compet ition supplies far out nu mber t he dema nd for comm odities.

With th e ush ering of an era of economies of scale ther e ha s been a comm oditization of products

including that of expensive consumer dur ables. This has lead to a ra nge of bra nds a vailable at th e

disposal of the customer. This has pam pered the customer to such an extent tha t h e is always

demanding more from the m anufacturer.

Such a scenario has lead to the pr emise that customers will buy from t he firm th at they perceive

offers t he h ighest cust omer delivered value (Kotler, 2000). Coming t o Customer Delivered Value

it is th e difference between the Total Cu stomer Value an d Total Customer Cost. Cust omer Value

here den otes the su m of values of Product, Services, Per sonnel and Im age value. Customer cost

here r epresent s the su m of Moneta ry, Time, Ener gy and P sychic costs.

Take McDona ld’s. Everyda y an a verage of 38 million people visit its 23,500 restau ra nt s in 109

coun tr ies. People just do not visit them because th ey love ham burgers. In fact some oth er rest aur an ts

ma ke better ta sting ha mbur gers. Actually people value what McDona ld’s ter ms a s the QSCV or

quality, service, cleanliness an d value.

C u s t o m e r At t i t u d e – A S e q u e n t i a l Ch a n g eThere were da ys when people brought in pr oducts a nd sh owed it to the a we of the people around.

Then came th e time when people imagined things un ique and th e maker s obliged. Then cam e the

time when every little change signified a new product, a time when such a new product went

W

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Devashish Das Gupta & Snehashish Mukherjee

un noticed as a change. This is the changing mar ket scenar io. Yester day the shopkeepers comm an ded

price for innovative products, today with a ll their inn ovation, they ha ve to strive to be in the sight

and memory of their customers.

Diverting the attraction of the customer involved huge spending but with mixed results. After

some time, even this became a fight of sorts a s seen when prince vied for t he ha nd of the bea utiful

princess at a “swayam var.” It became sur vival of th e fittest . Then came an a rbitr ar y calculation,

which then was t rea ted as a fut ile exercise but whose results br ought to the forefront, something

which made everyone wonder a t th eir rat ionality. It was found t hat it was mu ch cheaper to retain

a customer t ha n th e cost of loosing him or mak ing an equivalent n um ber of new consu mers . Was

th is tru e, people wonder ed and finally calculated it t o be absolutely tru e.

C u s t o m e r S a t i s fa c t i o nInitially for compan ies either customers were ther e or not. Most compan ies refused to a cknowledge

that there was another segment of “can be.” While this is an easy categorization, the yes-no

relat ionsh ip misses the rea lity of customer-provider relat ionsh ip.

Ther e can be five st ages of cust omer ’s life cycle (Micha el, 1997) in an organ izat ion:

Acquisi t ion Winning the prospect; ma king of a prospective customer.

Re t e n t i on Keeping the customer to obtain the economic benefit of a long term

Relationship

Attri t ion Break ing down of loyalty; unfulfilled dema nd; problems a nd complaint s

causing customer t o reduce or ter mina te purcha se

Defec t ion Ending t he r elationship; the customer h as gone to a competitor for product

or ser vices

Re a c qu i s i t i on Getting th e customer back; new initiatives or problem corr ection result ing

in th e customer coming back to th e compa ny.

C u s t o m e r R e la t i o n s h i p Ma n a g e m e n t (C R M )It is the process of underst anding your customers’ needs a nd developing personalized r elationships

with th em in order to instil a sense of loyalty and r etent ion.

CRM makes customers feel respected, and feel that their needs are being addressed. It

involves an investm ent of time and effort for customer s to explain t heir pr eferences and needs t o

you.

Excellent customer service is a n ecessar y star ting point for CRM.

Customer reten tion is the key business issue to sta y ahead of its competitors increases profitability

and improves investor confidence. There ar e no simple solutions; companies m ust adopt a ggressive

str at egies, which cut a cross th e customer lifecycle and u nderp in all business pr ocesses.

To analyze the concept of CRM, we need to investigat e as t o why that customer is so importa nt –

the sam e one who makes us r un, innovate an d serve and is still not ha ppy.

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C R M I n t e r v e n t i o n sCust omer ret ent ion to sat isfaction is a par t of th e value delivery process and can be delivered by

keeping the following points in mind:

E xc e ll e n t c us t ome r s e rv i c e is a ne c e s sa ry s t a r t i ng po i n t – Better customer s ervice is the

watchword today. With compa nies literally roaming with fruit basket s under the customer s

nose for them to smell, you ha ve to ma ke th ose customers ea t your bask et.

In t e gra t i on o f s e rv i c e a c ros s cus t ome r c on t a c t po i n t s – In term s of the sam e fruit basket ,

you have to make sure that at any point of time, you can offer every type of fruit you grow.

Basically what is mean t is th at your wh ole product ra nge should be easily accessible to th e

customer.

De s ign i n t e r a c t i ve cus t om e r p r oc e s ses a c r o s s m e d i a – Pr ovide seamless s ervice acrossmedia. Tie together sales force, Inter net a nd call center for da ta collection, data s ha ring an d

service consist ency.

C u s t om e r D a t a b a s e – A compr ehensive cust omer data base is a strong founda tion for

understanding your customer. Collect and share data across all media of customer contact.

Everyt hing th at is discovered about customer s should be tr acked, especially needs, preferen ces,

and pur chase behavior. Inform at ion on dem ogra phics, psychograph ics, an d lifestyle are also

beneficial for segmen ta tion an d cross-sell programs .

Personal izat ion/Choice – Pr ovide your customers with choice on conten t, ser vice, and delivery

media. P rovide var ying levels of service and product offerings based on cust omer value, a nd

needs. Research is needed t o determine cust omer needs a nd expectations. A very good exam ple

can be given from Whirlpool, where th ey said – “you design our pr oducts,” wher ein th ey tr ied

to design their pr oducts; keeping consumer needs an d want s in their m inds.

Value-Added Ser vices – Consider t he individualized needs of your most valua ble business

customers to make them more efficient and/or more valuable to their clients. For example,

assist th em in customer business development and customer h andling. Conduct r esearch to

determ ine your business clients’ needs an d expecta tions.

Custom er Valua t ion Ana lyt ics – Two basic prem ises (also in CRM) ar e to trea t customer s

differently based on th eir value a nd t o increase cust omer value over time. Which consumer

needs how much effort to be reta ined and whether he should be reta ined is purely decided on

the s tu dy of various factors like loyalty, strin gency etc., called as Customer Values an d how

customer values are chan ging. All cust omers have a curr ent value 1 and a potential value2 – as

meas ur ed by your sha re of customers’ total business . Track customer r etent ion an d defection

ra tes to evaluate th e impact of your cust omer ret ention efforts.

Needs Analys is – Determine th e needs and expectations of your customers in term s of product

att ributes, ser vice, new products, tr ans actions, inform at ion an d documen ts pr ovided, website

featur es and cust omization. These needs sh ould be evaluat ed on basis of hiera rchy, time and

level of need. Its necessary sometimes to prioritize and make trade-offs between sets of

needs. Expecta tions are a more finite set of requirement s where t he tolerance level is high a nd

una cceptable per form an ce can be modelled t o expectation.

1 The amount of business a consumer is giving right now is his Current Value.

2 The amount of business we can expect from the consumer in future is his Potential Value.

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Cus t ome r Di a logue – Customer r esearch dialogue progra ms with select groups of cur rent or

defected cust omers. Dialogue programs with sma ll samples ar e revealing when you dr aw out

emotional, honest feedback. These quick programs offer high value. The most cost effective

appr oach is to have sk illed inter viewers t alk t o people by phone. Pyram id uses h ighly effective

interviewers who are seasoned professionals. Having an independent third party perform

ma rket r esear ch by speaking to your business and r etail cust omers allows for more tr ut hful

feedback and elimination of the bias in customer/provider per ceptions. Samples may be drawn

from your most valua ble existing customers or from those with th e highest potent ial value.

Lost Customer In te rviews – Find out why sh ifted consu mers ha ve switched, what competitors

they ha ve switched to, and wha t t hey th ink about t he competitors’ product/service bundle.

Win back some defectors, an d learn useful lessons t o prevent others from switching.

Compl a i n t D i sc overy – Pr oactively elicit complain ts from your m ost valuable customer s toidentify problems, ident ify possible defectors before th ey switch, an d deter mine t he r easons

for defections. Ninety to nin ety-eight per cent of defectors n ever initiat e a complaint , they just

switch. Remember t hat needs an d complaints chan ge over time.

Ind i v i dua l i ze d Ma r ke t i ng Ca m pa i gns (We i ns t e i n a nd J ohn son , 1999) – Design cross-

sell cam paigns bas ed on individualized needs in order to increase cust omer values (for exam ple:

A Lux soap with a Pepsodent Toothpaste at a reduced price package). Response rates are

typically in the vicinity of ten percent vs. two percent for other direct ma rket ing campaigns.

T ha n k You a n d Cr os s -Se l l Ca l ls – Tell your best customers that you appreciate their

business, attem pt to sell additional products that meet th eir needs and ask if there is anything

else tha t can be done for them . Are your best customer s wort h t he effort?

E m p l o y ee P r o g r a m s – Loyal employees ensu re loyal cust omers. It’s seen t ha t a compa nywith lesser turnover of employees has a lesser customer turnover because of the personal

contacts these employees develop with the customers. Empowerment of customer contact

personn el to sat isfy problems on the first contact.

Product and service at tributes a re important , but wha t is t he level of importa nce? Let the

customer describe these without structur e or prompting. These are th e att ributes tha t sh ould

be measured in customer satisfaction surveys. That is the major content of such surveys

conducted on wha t a consum er looks for in a pa rt icular type of product.

Let intermediaries3 explain what value-added services they need to help t hem sell or ser vice

their cust omers. The interm ediaries ar e the people who actua lly face the end consumer a nd

hence are in a better position to explain th e consum er psyche and wha t th ey actually expect

from a product.

L o y a l t y I n d e xCustomer sat isfaction does not guar an tee ret ention, loyalty does. Therefore, loyalty measu remen t

should be an ongoing supplement t o customer satisfaction measur ement.

Determine how loyal your customers ar e.

Benchma rk loyalty against competitors.

What factors lead t o your customer’s loyalty?

3 The intermediaries are the dealers, shopkeepers and sales force selling the product.

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C u s t o m e r L o y a lt yThe ter m “Cust omer loyalty” is explained a s th e purcha ses from the compa ny by its cust omers as

expressed as a per centage of th eir total pur chases from all suppliers of th e same pr oduct (Kotlar ,

2000). It is not about a customer being loyal like a best friend; customer loyalty describes the

tendency of a cust omer to choose one business or product over a nother for a pa rt icular need. It’s a

similar idea t o the packaged goods notion of bra nding, where customer s ma y be described as being

“brand loyal”.

Customer Loyalty has become an omn ipresent t erm for the resu lts of th e process happ ening in the

background of all the m ar keting app roaches where customer dat a is used. You can sa y “Relationship

Marketing” or “Database Marketing” or “Retention Marketing” or “Permission Marketing” or

“CRM”, and wh at you a re r eally talking about is tr ying to increase cust omer loyalty. Increased

customer loyalty is the end r esult, th e benefit, of th ese programs , which ar e all based on cust omer

retention techniques.

You probably care about h ow much you spen d on these m ar keting promotions. Ideally, inst ead of

blasting out expensive stu ff to customers, you would like to spend m oney on su ch customers who

ar e most likely to do what ever you wan t th em to, and not wast e money on th ose who are not.

Customer Profile (.com)

Many people think u sing your customer da ta is about creat ing a customer “profile”. It’s a h ot

topic. Everybody wan ts to do it. But what ’s a customer pr ofile? Here ar e two kinds of customer

profiles:

? Customer is m arr ied, has children, lives in a n upscale neighbourh ood, and reads Time magazine

? Customer visited th e site every day for t wo month s, but ha s not visited th e site at all in thepast two weeks

The first profile4 is demograph ic, a set of chara cteristics. The second profile is beha vior-based,

involving wha t t he customer is actua lly doing. Which seems m ore importan t t o you?

They’re both imp orta nt in t heir own ways. For someone selling advert ising, or deciding on cont ent

for a website, the first pr ofile is usu ally importan t, because it defines the mar ket for ad sa les and

provides clues to editorial direction. These ar e importan t considera tions in att ra cting cust omers

and gener at ing revenue in th e first s tages of an online project.

The second pr ofile is about a ction, behavior, and for anybody concern ed about wha t th eir customer s

ar e doing, is more importa nt t ha n th e first . Will th ey visit again? Will they buy again? These ar e

the qu estions answer ed by looking at beh avior. Cust omer behavior is a mu ch stronger pr edictor of

your futu re relat ionship with a customer t han demographic inform at ion 5 ever will be. You ha ve tolook at the data, the record of their behavior, and it will tell you things. It will tell you “I’m not

sat isfied”. It will tell you “I wan t t o buy more, give me a pu sh.” It will tell you “I thin k your conten t

is borin g”.

The second type of profile is more important in the longer run, because if the customer stops

buying from or visiting the sit e, you’re n ot going to have m uch of a chan ce to serve up th e customized

pages or ads based on any “profile” given to you. You could customize the product based on

4 Profile is basically the parameters on which you segregate your consumer segments.

5 Demographic factors are the physical attributes like age, sex etc.

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demographics or s elf-report ed sur vey data a nd customer s would never see th e resu lts if they don’t

come back customer behavior profiling is critical to a compa ny inter ested in r etainin g cust omers

and increasing their value.

Beh av i o r a l Aspec t o f CRMThis brings us t o th e behaviora l aspect of Cust omer Retent ion Mar keting. Compa ring sat isfaction

vs. customer reten tion, we observe tha t t hough largely considered to be synonymous, there a re

vast differences between the two simply based on their appr oach pat tern s. The former is tar geting

how to satisfy the customer so as t o hold him back. It suggests all th e measu res t hat facilitat e a

par t of customer r etent ion but cust omer ret ention also looks after t he recall of lost customer s and

how that is man aged. Thus, CRM is a more dynamic field th an CSM (Customer Sa tisfaction

Marketing).

C o m p e t i t or M o ve m e n t is another important part in the process to retain customers. Every

movement of the competitor should be monitored a nd counter acted effectively with better set of

advant ages visible to the customers.

So, arr iving at t he am algamation of the above points we ar rive at what has been so far referr ed as

CR M or C u s t o m e r R e t e n t i o n M a r k e t i n g . This is more popularly referred as r e l a t i onsh i p

m a r k e t i n g too.

Thus so far a s we can sum mar ize in layman term s from the a bove discussion so far key str ategies

in a ctual a ction would include:

? Incentives and ta riff bundles, which ta rget th e most profitable cust omers

? Loyalty schemes, which are a ppropriat e to the value of th e business, saved

? Acquisition stra tegies, which attr act th e right type of customer, reducing fra ud an d bad debt

? Pr oactive customer service

? A commitment to quality in all aspects of the business.

? Relationship Mark eting Overview

Relationship mar keting is about ha ving an indirect conversation with t he customer t hrough

analyzing their behavior over time. Relationship marketing uses the event-driven tactics of

customer r etention ma rketing, but treat s mar keting promotion as a process over time rat her t han

single unconnected events.

The relationship market ing process is usua lly defined as a series of stages, and ther e are m anydifferent names given to these stages, depending on the marketing perspective and the type of

business. For example, working from th e relat ionship beginning to the end:

Int era ction > Comm unication > Valua tion > Term inat ion

Awar eness > Comparison > Tran saction > Reinforcement > Advocacy

Suspect > Prospect > Customer > Pa rt ner > Advocate > Former Cust omer

During t his relat ionsh ip process, you customize progra ms for individual consum er groups an d th e

sta ge of the process they ar e going thr ough as opposed to some forms of dat abase m ar keting wher e

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everybody would get virtu ally the sa me pr omotions, with perha ps a change in offer. The stage in

the customer Lifecycle determ ines the a pproach used with th e cust omer.

A simple example of this would be sen ding new cust omers a “Welcome Mess age”, which might

have an incentive to make a second pur chase. If 60 days pass an d th e customer has not made a

second pu rchase, you would follow up with a ny alt erna tive like mail or per sonal conta ct etc. For

example LG, a few months ba ck, invited all those consumer s who had bought th eir products in th e

last one year, for a s how of a h it Hindi movie with th e added incentive of giving more prizes for

every additiona l product purcha sed within the next th ree month s on showing the t icket.

Let’s say a customer buys your pr oduct frequent ly and t hen just st ops. Something ha s happen ed.

They are un happy with th e content, or they have found a n alter nat ive source. Or perhaps they’re

just plain not int erest ed in the su bject an ymore. This inaction on th eir par t is a flag telling you

something has happened to change the way this customer th inks about your product a nd perha psyour service.

You should react t o this an d th en look for feedback from t he customer. If you improve the conten t,

send th em a n otice, and th e cust omer sta rt s visiting again, th e feedback has been given. The cycle

is complete until the next t ime the da ta indicates a chan ge in behavior, and you need to react to the

change.

Let’s say th is same customer th en ma kes a first pu rchase. This is an enormously importa nt piece

of dat a, because it indicates a very significan t chan ge in behavior. You have a new r elationship

now, a deeper one. You should rea ct an d look for feedback. You send a welcome messa ge, tha nk t he

customer for t he tr ust they ha ve displayed in your product, and provide a second purchase discount .

Then you await feedback from the customer, in the form of a second purchase, or increased

purchases. Perhaps you get negative feedback, a return of the first purchase. React to this new

feedback a nd r epeat t he pr ocess.

Another example would be to watch for an d r einforce changes in product affinity, as customers

tend t o begin with a certain t ype of purchase or conten t an d migrat e to a different a rea. It can be

beneficial to “steer ” customers t hr ough promotions a long th is path if the migra tion is profita ble to

the business.

C u s t o m e r R e t e n t i on M a r k e t i n g : S o m e T ou c h s t o n e sCustomer Retent ion Mar keting is a t actically driven approach based on customer beha vior. It’s

the core activity going on behind the s cenes in Relationsh ip Market ing, Loyalty Mark eting, Data base

Market ing, Permission Mark eting, and so forth. H ere’s t he bas ic philosophy of a r etention-oriented

marketer:

1. Past an d Current customer behavior is the best predictor of Futu re customer behavior. Think about it. In genera l, it is more often tr ue tha n not tr ue, and when it comes to action-orient ed

activities like making purchases and visiting web sites, the concept really shines. We are

ta lking about actu al beha vior h ere, not implied behavior. Being a 35-year-old woman is n ot

behavior; it’s a demographic char acteristic.

2. Customers want t o win at t he consuming game. They like to feel they are in contr ol 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

behavior an d feel good about doing it. Cus tomer s like t o “win”.

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

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something for t hem, a nd if it’s something t hat mak es th em feel good (like th ey are winnin g the

consu mer game) th en t hey’re m ore likely to do it. This t hought can be extended more ea sily to

a ph ysically brought over pr oduct in a ma ll.

3. Marketing is a conversation, Permission Marketing have pointed out (if you ha ven’t read

these works on this, you are doing yourself a disfavor). Marketing with customer data is a

highly evolved and valua ble conversat ion, but it ha s to be back and fort h between t he m ark eter

and t he customer, and you have to LISTEN to what th e cust omer is saying to you.

4. Retention Marketing is about allocating mar keting resources. All businesses have limited

resources. When you spen d Re1.00 on mar keting, you a re looking to make ba ck more tha n

Re1.00 in P ROFIT (not sa les). If you can ’t m ak e back Re1.00, th e Rupee is not worth spen ding.

Given m ultiple places to spend th e ma rket ing Rupee, if you can get back Rs.1.20 in one place

and only Re 0.90 in another , wouldn’t you r ath er spen d it wh ere you get Rs.1.20 back? Thisapproach is called Return on Investment, or ROI, and is the reason why you want to do

Retention Mar keting. Retention Mark eting is one of th e few mar keting met hods allowing you

to accurately measur e tru e ROI.

C u s t o m e r M od e l C on c e p tMarketers who use customer data often talk about “customer modeling” instead of customer

profiling. Modeling is kind of like profiling, but it is a ction orient ed. Models ar e not about a st at ic

sta te, like “Cust omer is 50 year s old”. Models ar e about a ction over tim e, like “If this customer

does not mak e a pur chase in the next 30 days, they are un likely to come back and m ake an y furt her

purchases”.

This kind of model sounds so myst ical, and it is. To see a mat hem at ical model predict customer

behavior is ast onishing, to say the least . The model says, “Do th is to these people and th ey will

likely do this”. The ma rket er goes out an d does what t he m odel says, and like magic, a good bunch

of th e customers do exactly what the m odel said th ey would. It works like a char m – u sua lly.

What is a m odel? Simply, it looks at cust omers who are engaging in cert ain beha vior a nd tr ies to

find a commonality in them. The ma rketer might say to the m anu factur er who designs the customer

model, “Here’s a list of our very best customers, a nd h ere’s a list of our form er best customers. Is

th ere an y behaviora l signa l a best customer gives before they stop shopping? What does the data

say?” And t hey will help you increase profits th rough un dersta nding how customers ar e likely to

behave.

You can use your models to answer some basic marketing questions about your customer base.

Questions you no doubt ha ve asked m any t imes yourself, such a s th e following:

The data is, in effect, speaking for the customer, telling you by its very existence (or non-existence) ther e ha s been a n a ction, an d it’s waiting for a rea ction. An action or inaction is a

raising of the han d by the customer, and the r etention oriented mark eter sees the r aised

han d, but also reacts to it, then looks for the h and to be raised again.

? Who do I m ail offers t o? When do I m ail th em? How often?

? Should I promote to some customers m ore often th an others? (Yes)

? How much incentive should I pr ovide to get a customer t o do someth ing?

? How can I tell when I’m losing a customer ?

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? How can I pu t a value on my cust omers an d the business a s a whole?

? Is my business s tr ong and health y, or becoming weaker?

? What can I expect in futu re sa les from my existing cust omers?

Measu r ing Cus tom er Loya l t y - The Ea sy Way

In t he ongoing sea rch for developing ways to mea sur e the su ccess of produ cts, stickiness, (or

the am ount of time a person spends for t he product), has been put forth as an importa nt

concept. Those in favor of using stickiness to measu re su ccess say t he longer a per son puts

time, the more interested and sa tisfied they are with what the pr oduct is offering. Is this

always tr ue?

Let’s th ink about t hat for a minu te. Why would a customer put in time for a product he doesn’t

like? Maybe he is searching for su bstitut e, maybe the pr oduct per form ance is bad everywhere

he goes etc. So maybe Hurdle point 6 is a good measur ement , maybe it’s not. But on a lar ge

scale it does somet imes give a good measu re.

Wouldn’t you like to be able to under sta nd h ow your website app eals to visitors or buyers over

time? If you could measu re th is kind of stickiness, you could ma ke adjust ment s to the site t o

encoura ge repeat visiting. Tran slating th is into products, it depends on th e value being offered

to the customer an d his requirem ent. This is where the mea sur e of value comes up.

Why does all this ma tt er? Becau se it’s been shown over and over tha t pas t consum er beha vior

is the best predictor of future behavior. Past behavior is a m uch better predictor of futu re

behavior than demographics ever will be. A visitor or buyer who repeats their behaviour is

more likely to cont inue r epeat ing it. So if th e percenta ge of your r epeat ing visitors or cust omers

is rising, then your future business will be stronger than it is today. If the percentage of

repeaters is falling, your business will be weaker in the future. These repeat behavior is a

strong indicator of customer loyalty to your site - it’s a model of “ likelihood to return” or

“likelihood to bu y aga in”.

There will be huge differences in r epeat r ate when examining t he first experience the customer

has with your product. You can use these differences to provide clues for product value

optimization 7. Using this very simple t echnique for tr acking the loyalty of your customers, at

least you will know ther e is a quest ion t o ask.

Customer Retention - Good mar keters have t wo objectives with any kind of customer retent ion

marketing:

1. Hold on to th e most valuable cust omers

2. Try to ma ke less valuable cust omers more valua ble

Retention mar keting program s are designed to react to an d prevent customer defection while

growing the overall valuat ion of the customer base.

6 Hurdle Rate - the percentage of customers demonstrating a certain level of the behavior being profiled.

7 That is to say that our product really provides optimum value to the consumer or needs to pull up in certainsectors.

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D a t a -D r i v e n M a r k e t i n gCustomer re ten t ion orien ted mar ket ing appr oach using customer beha vior profi les , no t

demographics, to determ ine the ta rgeting, timing, and cont ent of ma rket ing promotions.

Rul e s o f Da t a -Dr i ve n Ma r ke t i ng – Four r ules underlying all Data -Driven mar keting progra ms:

1. Data-Driven Marketing is about allocating mark eting resources. Customer profiles are used

to select ma rket ing approaches genera ting th e highest pr ofit, and t o avoid promotions with

th e lowest pr ofit.

2. Past and current customer behavior is t he best predictor of future customer behavior. Customer

profiles using dem ogra phic char acterist ics ar e not n ear ly as effective in pr edicting t he likelihood

of the next visit or pu rchase as pr ofiles of cust omer beha vior.

3. Customers want to win a t th e consum ing game. They like to “feel good” about decisions t hey

ma ke, and ma rket ing promotions (discount s, sweepstak es, special benefits, etc.) are designed

to encour age th ese feelings.

4 . Data-Driven market ing is a ll about :

Action – Reaction – Feedba ck – Repeat

Mar keting with customer da ta is a h ighly evolved an d valuable conversat ion, but it ha s to be back

and forth between the marketer and the customer, and you have to decipher to what customers

want to commun icate t o you thr ough their a ctions or non-actions.

Dat a is Spea king - If customer da ta is organ ized and visua lly displayed in specific ways, it can

“tell”, or s peak to, the dyna mics of a bu siness. The da ta is, in effect, speaking for t he customer ,

suggesting how and when pr omoting to specific cust omers a nd flagging potential pr oblems in t he

business.

CRV Mode l (ww w)More prominent ly known as t he Cust omer Response, Retention and Valua tion model it lays down

certa in fundament al guidelines for reta ining the customers on th e basis of their responses.

Certain Observed Rules:

1 . Cus tomers who pu rchased r e c e n t l y were more likely to buy again versus cust omers who had

not purchas ed in a while

2 . Cus tomers who pu rchased f r e q u e n t l y were more likely to buy again versus customer s who

had m ade just one or 2 pur chases

3 . Cu st om er s wh o h a d s p e n t t h e m o s t m o n e y in total were m ore likely to buy again. The most

valuable customers tended t o continue t o become even more valua ble.

This lays t he bas is for t he RF M model. The Recency, Fr equency, Monetar y value (RFM) model

works everywhere, in virtu ally every bus iness. And it works for just a bout any kind of “action-

oriented” behavior you ar e tr ying to get a customer t o repeat, wheth er it’s pur chases, visits, sign-

ups, sur veys, games or an ything else. I’m going to use pu rchases a nd visits as examples.

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A cust omer who has visited your site Recently (R) and Fr equently (F) and creat ed a lot of Moneta ry

Value (M) thr ough purcha ses is mu ch more likely to visit an d buy again. And, a h igh Recency /

Fr equency / Moneta ry Value (RFM) cust omer who s tops vi s i t ing is a cust omer who is finding

alter na tives to your site. It ma kes sense, doesn’t it?

Customer s who ha ve not visited or pur chased in a while are less inter ested in you th an cust omers

who have done one of these things r ecently. Put Recency, Fr equency, and Moneta ry Value together

an d you ha ve a prett y good indicator of inter est in your site a t t he customer level. This is valuable

inform at ion t o have.

Assuming the beh avior being ra nked (pur chase, visit) using RFM ha s economic value, the higher

the RF M score, the more profitable the customer is to the bus iness now and in the futu re. High

RFM customers are most likely to continue to purchase and visit, and they are most likely to

respond to ma rk eting promotions. The opposite is true for low RFM customers; th ey are th e leastlikely to purchas e or visit again an d the least likely to respond to mar keting promotions and a ny

similar activities directed a t them. For t hese r easons, RFM is closely related to an other customer

direct m ar ketin g concept: Lifetime Value (LTV). LTV is th e expected n et pr ofit a customer will

cont ribut e to your bu siness as long as the customer r emain s a customer. Becau se of the linka ge to

LTV, RFM techniques can be used as a pr oxy for the fut ur e profita bility of a bus iness.

High RFM customers represent future business potential, because the customers a re willing and

inter ested in doing low LTV, and a re a flag somethin g needs to be done with t hose cust omers t o

increase their value business with you, and have high LTV. Low RFM customers represent

dwindling business opport unit y.

Exam ple of a gra ph of cust omer Recency (time ela psed since last activity) based on last visit (or

page view) dat e. The nu mber of unique visitors is on t he left (y-axis) scale; the n umber of d a y s

s ince las t vi s it (or pa ge view) on the bottom (x-axis) scale. Customers ar e plott ed by the n um ber

of days since their last visit (page view) These guys have a great business. Virtually all their

customers have visited in the last 10 days!As is evident by the high rising part of the graph I

which extends to a value of ten a t th e x axis. This actua lly mea ns th at fifty lakh people (as on y

axis) have revisited the sit e within ten days (as on x-axis)

G r a p h I

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Now take a look at t his second gra ph below. Once again, a gra ph of customer Recency, based on

last visit (page view) date. Unique visitors a re on t he left (y-axis), and da ys of revisit (x-axis).

Int erpr eting th e above just 20 th ousand p eople (as on y-axis) revisited in th e first eighty days (as

on x-axis)

G r a p h I I

They’ll be lucky to keep the visitors th ey have. They need to mak e major changes.

Conc l us i on

Understanding customer retention is extremely important to the entire direct model of doingbusiness with consu mer s. The secret to good cust omer ret ention is to acquire t he right customers

in the first place. So und erst an ding cust omer reten tion is extremely import ant to the entire direct

selling m odel of doing bus iness with consu mers , both for customer acquisition and ret ention. Good

ret ention mar keter s have two objectives with a ny kind of customer ret ention mar keting:

1. Hold on to the most valuable customers

2. Try to make less valuable customers more valuable

To retain and increase the value of customers, you have to create marketing promotions and

execute th em. To do th is in t he m ost efficient a nd effective way, you h ave t o know the valu e of your

customers a nd t heir likelihood to respond to a pr omotion, for these t wo rea sons:

1. You don’t wan t t o waste m oney on pr omoting to low value customers because you can’t m ake

a pr ofit.

2. You don’t want to waste money promoting to customers who won’t r espond because th is is just

throwing money away.

At a t ime when th e proactive companies ar e thinking to remain out of red and m aintain a

compet itive edge it has t o emph asize on Cust omer Retent ion Mar keting. It’s not a new par adigm;

it’s simply a better one. It’s a pa th t o choose with th e added benefit tha t th e map of the pat h is easy

to follow.

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It is not good to settle into a set of opinions. It is a mistake to put forth effort and obtain some

understanding and then stop at that…. Do not rely on the following degree of understanding that

you have discovered, but sim ply thin k, “Th is is not enough.”

Ha r a -k i r i , T he Book o f Sa mu ra i

Ref e r ences Jimnovo: www.jimnovo.com

Kotler, Philip, (2000). Marketing Management, Millennium edition, Prentice Hall of India.

Lowenstein, Michael W., (1997). Customer Retention – An Integrated Process; Reprint.

McCarthy, Dennis C., (1997). The Loyalty Link; Reprint.

Payne, Adrian, Christopher, Martin, Clark, Moira and Peck, Helen, (1997). Relationship Marketing for Competitive

Advantage; reprinted version – 1996.

Weinstein, Art and Johnson, William C., (1999) Designing and Delivering Superior Customer Value; Reprint.

App e nd i x : Some Voca bu l a ry Use d i n CRM

H u r d l e R a t e – the per cent age of customers dem onstra ting a cert ain level of the behavior being

profiled. Looking at Hu rdle Rat es for certa in customer pr ofiles over time is pr edictive of fut ur e

str ength or weakness in a business . For more inform ation on using Hur dle Rat e techn iques, rea d

the “advan ced” articles a t t he end of th e Drilling Down Tour .

C u s t o m e r L i fe c y c le – predictable patterns in customer behavior occurring from the first

inter action with a bu siness th rough th e last. Time is th e most overlooked and u nder u tilized tool

in th e Data -Driven ma rket ing toolbox but one of th e most powerful. You can see th e str ength of tim e’s influence in th e import an ce of Recency, th e most powerful of th e modeling varia bles.

Life t ime Value (LTV) - the net profit a customer contributes to a business over the entire

Lifecycle. Genera lly calculated as gross mar gin or contr ibution to overhea d minu s t he pr omotional

costs of acquisition a nd r etent ion, including any discount s.

R F M – sta nds for Recency, Frequ ency, Moneta ry value. A method of ranking a customer r elative

to all other customers in t heir likelihood to respond to promotions and r ank ing the cust omer’s

futur e value to the compan y.

R OI – sta nds for Retur n on In vestment . In t he classic definition, it’s th e am ount of money spent

divided by the net profit generated over a defined length of time. More on ROI (from the Site

Method Tour).

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