There is little merit in growing the customer base aimlessly. The goal must be to retain existing customers and recruit new customers that have future profi t potential or are important for other strategic purposes. Not all customers are of equal importance. Some customers may not be worth recruiting or retaining at all, for example those who have a high cost-to-serve, are debtors, late payers or promiscuous in the sense that they switch
requently between suppliers. Other things being equal, a larger customer base does deliver better business performance. Similarly, as customer retention rates rise (or defection rates fall), so does the average tenure of a customer, as shown in Figure Tenure is the term used to describe the length of time a customer remains a customer. The impacts of small
improvements in customer retention are hugely magnifi ed at higher levels of retention. For example, improving the customer retention rate from 75 to 80 per cent grows average customer tenure from 10 to 12.5 years. Managing tenure by reducing defection rates can be critical. For example, it can take 13 years for utility customers to break even by recovering the costs of their initial recruitment. Managing customer retention and tenure intelligently
Generates two key benefits
for companies; reduced marketing costs and better customer insightImproving customer retention reduces a company’s marketing costs. Fewer dollars need to be spent replacing churned customers. For example, it has been estimated that it costs an advertising agency at least 20 times as much to recruit a new client than it does to retain an existing client. Major agencies can spend up to $4 million on research, strategic analysis and creative work in
pitching for one major client, with up to four creative teams working on different executions. An agency might incur these costs several times over as it pitches to several prospective clients to replace a lost client. In addition to reducing the costs of customer acquisition, cost-to-serve existing customers also tends to fall over time. Ultimately, as in some business-to-business markets, the relationship may become fully automated. Some supply-chain
relationships, for example, employ electronic data interchange (EDI) that fully automates the ordering, inventory and invoicing processes. EDI is a relationship investment that acts as an exit barrier. Better customer insight As customer tenure lengthens, suppliers are able to develop a better understanding of customer requirements and expectations. Customers also come to understand what a supplier can do for them. Consequently, suppliers become better
Placed to identify and satisfy customer
equirements profi tably, selling more product and service to the retained customer. Over time, as relationships deepen, trust and commitment between the parties is likely to grow. Under these circumstances, revenue and profi t streams from customers become more secure. One study, for example, shows that the average online clothing customer spends 67 per cent more, and grocery customers spend 23 per cent more, in months 31–36 of a relationship
they spend in months 0–6. 14 In sum, both the cost and revenue sides of the profi t equation are impacted by customer retention.Some companies employ a model that has been variously known as a value ladder 15 or value staircase 16 to help them understand where customers are positioned in terms of their tenure with the company. Customers typically buy from a portfolio of more or less equivalent offers or suppliers. For example, large and
medium-sized businesses often do business with more than one bank, and consumers may select a soft drink from a small portfolio of branded carbonated beverages. When customers climb the ladder, their value to your company grows. Your share of their portfolio expands. Put another way, your share of customer spending, or customer wallet, grows. In Table 2.1 we
Present a seven-stage customer
journey from suspect status to advocate statusAs in the Dwyer model cited earlier, not every customer progresses uniformly along the path from ‘ never-a-customer ’ to ‘ always-a-customer ’ . Some will have a long maturity phase (i.e. loyal customer); others will have a shorter life, perhaps never shifting from fi rst-time customer to repeat customer; others still might never convert from prospect to fi rsttimer. CRM software allows companies to trace
where customers are on this pathway and to allocate resources intelligently to advance suitable customers along the value trajectory. Costs and revenues vary from stage to stage of the journey. In the early stages, a company may invest signifi cant sums in converting a prospect into a fi rst-time customer. The investment in initiating a relationship may not be recovered for some time. For example, Reichheld and Sasser have shown that it takes a
credit-card company approaching two years to recover the costs of customer acquisition. 17 Another study shows that the average online clothing customer takes four purchases (12 months) to recover the costs of their acquisition, whereas grocery customers take 18 months to break even. 18 In later years, the transactions within the relationship may become highly routinized and very low cost to complete, because each party knows and trusts the other.One
Conclusion
in fi ve banking executives does not measure . Couple this with the per cent who do not measure portfolio or wallet share, and it is easy to see why cross-selling is such a challenge for fi nancial service providers. Unless a banker knows which of a customer’s fi nancial needs are being met, it is exceedingly diffi cult to suggest additional services. A robust business intelligence system can provide a fi nancial services fi rm with a 360 degree view of
the customer. Transactions can be consolidated with demographic and psychographic data, revenue and profi t measures, as well as with historical customer service incidents and queries. With this total picture, the provider can see the customer from multiple perspectives and craft programmes that will satisfy a broader range of client requirements. Part of this multifaceted view of the customer is the ability to aggregate multiple customers into a
household perspective. The benefi ts of this consolidated view are clear and strong. Multiple fi nancial service needs can be seen in total, investment opportunities can be tied to life events for cohabiting family members and marketing costs can be driven down by providing a single, comprehensive marketing message.Lifetime value (LTV), which is also known as customer lifetime value (CLV), is a measure of a customer’s, or customer segment’s, profi tgeneration
for a company. LTV can be defi ned as follows: Lifetime value is the present day value of all net margins earned from a relationship with a customer, customer segment or cohort. LTV can be estimated at the level of the individual customer, customer segment or cohort. A cohort of customers is a group that has some characteristic or set of characteristics in common. These might be customers recruited in a single year or recruited though a single campaign or
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