Implementing a Customer Retention Management Process

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Explanation by lecturer Johan Kleingeld from Edge Consulting, an expert on customer service.

In order to implement a Customer Retention Management (CRM) strategy, a key dimension is the question of customer service and the way in which it is perceived by the customer. Customer service can be defined as a task, other than pro-active selling, that involves interactions with the customers in person, by telecommunication, or by mail. It is designed, performed, and communicated with two goals in mind: operational efficiency and customer satisfaction. The quality of customer service is determined and evaluated by the customer, and this affects the desirability of a relationship with the organisation. Customer service creates the moments of truth with the customer, and these service encounters need to be managed by the organisation. Service encounters and CRM are thus associated.

Successful implementation requires specific actions on the part of the organisation. The implementation of a CRM strategy, as proposed by Peppers, Rogers & Dorf (1999), comprise four steps, namely the identification of customers, the differentiation of service, interaction with customers, and the differentiation among customers.

Step 1: The Identification of Customers

The identification of customers enables the organisations to select those customers that they regard as being strategically significant and who they believe can contribute to the success of the organisation. These customers have unique needs and due to their value to the organisation, will have products developed to meet these needs. It must be possible to identify these customers and so obtain as much detail as possible. This involves collecting as much data as possible in order to obtain as clear a picture as possible of the customer and their profile. This may require the development of a database or the continued maintenance of a database in order to ensure that the data stays as recent as possible. Having this information enables the organisation to determine those customers that have been with the organisation for a long period and those that have recently started using the products and services of the organisation.

Step 2: The Differentiation of Service

The differentiation of service implies that different customers receive a different level of service and a different product from the organisation, depending on the value to the organisation and their specific needs.

This requires the organisation to identify the top (or most significant) customers and adapt service accordingly.

Identification of these top customers takes place using sales figures or by calculating the CLV associated with each customer. As the organisation is aware of the value of their customers, service levels can be adjusted accordingly.

Customer lifetime value (CLV): The present value of the future cash flows attributed to the customer during his/her entire relationship with the company. Inputs include:

Churn rate - the percentage of customers who end their relationship with a company in a given period. One minus the churn rate is the retention rate. Most models can be written using either churn rate or retention rate. If the model uses only one churn rate, the assumption is that the churn rate is constant across the life of the customer relationship.

Discount rate - the cost of capital used to discount future revenue from a customer. Discounting is an advanced topic that is frequently ignored in customer lifetime value calculations. The current interest rate is sometimes used as a simple (but incorrect) proxy for discount rate.

Contribution margin - defined as selling price minus variable cost, is a measure of the ability of a company to cover variable costs with revenue. The amount leftover, the contribution, covers fixed costs or is profit.

Retention cost - the amount of money a company has to spend in a given period to retain an existing customer. Retention costs include customer support, billing, promotional incentives, etc.

Period - the unit of time into which a customer relationship is divided for analysis. A year is the most commonly used period. Customer lifetime value is a multi-period calculation, usually stretching 3–7 years into the future. In practice, analysis beyond this point is viewed as too speculative to be reliable. The number of periods used in the calculation is sometimes referred to as the model horizon.

Step 3: Interaction with Customers

This step refers to the importance of interacting with the customer in relationship building efforts through a variety of communication tools and technologies. This is necessary as the relationship can only develop and be sustained if there is communication with the customers regarding their needs, perceptions and desires. This involves developing methods of communication proactively with customers regarding the organisation’s products and attempting to initiate dialogue with customers. The customers with whom communication takes place are not necessarily all the customers, but only those that the organisation regards as being strategically significant.

This interaction with the organisation increases the expectations of the customers regarding the service received as well as the quality of the relationship.

Step 4: Customisation of Product, Services and Communication

Customisation is carried out by the organisation in order to ensure that customer needs are met. It requires that the organisation adapts its product, service or communication in such as way have something unique for each customer. Communication can be customised to address the specific needs and profile the customer, and organisation also makes use of personalisation as part of this process. Products can be customised as to the specific desires that the customer has of the organisation. In the case of the financial services, it refers to the product package that is offered to the customer. The purpose of customisation is to increase customer satisfaction, and the loyalty that is exhibited by customers.

Activity

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