Customer Retention and Customer Winback Strategies (for ABF)

“Update on non-monetary approach to integrate customers with strong emotional

ties to become sustainable clients”

By:

Assist. Prof. Dr. Burin T. Sriwong

Director of Social and Health System Management Program,

Faculty of Pharmacy, Silpakorn University

CUSTOMER RETENTION & CUSTOMER WIN-BACK STRATEGIES

29th -30th April 2009 At Grand Sukhumvit Hotel

Bangkok

Overview

Definition

Understand non-monetary approach

Key factors of non-monetary approach

Tools and techniques for customers’ emotional building and loyalty

Establishing non-monetary program and set up goal micro and macro level

How to measure cost-effectiveness and find indicators to evaluate program

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Definition

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What is Loyalty?

Loyalty is a deeply held commitment to re-buy or re-patronize a preferred product or service

in the future despite situational influences and marketing efforts having the potential to cause

switching behavior.

(Philip Kotler 2509)

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Customer Retention Strategy

Customer Retention strategy is the activity that the selling organization undertakes to reduce c

ustomer account defection .

The success of this activity is when the customer account places an additional order before a 12-month period has expired . Note that ideally these orders will need to contribute similar financial amounts to the previous 12 months.

It can also be described as a series of actions that the selling organization undertakes to reduce defections.

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Customer Win-back Strategy

Customer Win-back Strategy can mean anything from trying to recover a once valuable customer to trying to restart a relationship with a once-promising prospect

(John Gaffney 2009)

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Customer Win-back

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Non-monetary approach are used to reward participants for excellent behavior through opportunities.

Non-monetary incentives may include flexible work hours, payroll or premium contributions, training, health savings or reimbursement accounts, or even paid sabbaticals .

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Key factors of non-monetary approach

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Key factors of non-monetary approachFigure 1: Mapping between relationship motives and values

Source: Bernd Heinrich. “Transforming strategic goals of CRM into process goals and activities” Business Process Management Journal,Vol.11, No. 6, 2005, pp: 709-723 10


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1. Build aFoundationfor Loyalty

2. Create LoyaltyBonds

3. Reduce Churn Drivers

CustomerLoyalty

Be selective in acquisition

Conduct churn diagnosticSegment the market

Use effective tiering of service.

Deliver quality service.

Deepen the relationshipGive loyalty

rewards

Build higher level bonds

Implement complaint handling and service recovery

Address key churn drivers

Increase switching costs

Enabled through: Frontline staff Account

managers Membership

programs CRM Systems

Figure 2 :The Wheel of Loyalty

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1. Building a Foundation for Loyalty

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Customer Needs and Company Capabilities

Identify and target the right customers

How do customer needs relate to operations elements?

How well can service personnel meet expectations of different types of customers?

Can company match or exceed competing services that are directed at same types of customers?

Should result in a superior service offering in the eyes of those customers who value what firm has to offer

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Searching for Value—Not Just Volume

Focus on number of customers served as well as value of each customer Heavy users who buy more frequently and in larger volumes

are more profitable than occasional users Avoid targeting customers who buy based on lowest price

• Firms that are highly focused and selective in their acquisition of customers grow faster

• “Right customers” are not always high spenders Can come from a large group of people that no other

supplier is serving well

• Different segments offer different value

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Effective Tiering of Service The Customer Pyramid (Fig 3)

Which segment sees high value in our offer, spends more with us over time, costs less to maintain, and spreads positive word-of-mouth?

Which segment costs us time, effort, and money, yet does not provide return we want? Which segment is difficult to do business with?Lead

Iron

Gold

Platinum

Good Relationship Customers

Poor Relationship Customers

Source: Valarie A Zeithaml, Roland T Rust, and Katharine N. Lemon, “The Customer Pyramid: Creating and Serving Profitable Customers,” California Management Review 43, no. 4, Summer 2001, pp.118–142.

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The Customer Satisfaction Loyalty Relationship (Fig 4)

0

20

40

60

80

100

1 2 3 4 5

Lo

yalt

y (R

eten

tio

n)

VeryDissatisfied

Dissatisfied Neither Satisfied VerySatisfied

Satisfaction

Near Apostle

Zone of Defection

Zone of Indifference

Zone of Affection

Terrorist

Apostle

Source: Adapted from Thomas O. Jones and W. Earl Sasser, Jr., “Why Satisfied Customers Defect,” Harvard Business Review, November-December 1995, p. 91.

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2. Creating Loyalty Bonds

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Strategies for Developing Loyalty Bonds with Customers (1)

Deepening the relationship

Bundling/cross-selling services makes switching a major effort that customer is unwilling to undertake unless extremely dissatisfied with service provider

Customers benefit from consolidating their purchasing of various services from the same provider

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Strategies for Developing Loyalty Bonds with Customers (2) Reward-based Bonds

Incentives that offer rewards based on frequency of purchase, value of purchase, or combination of both

Financial bonds

― Discounts on purchases, loyalty program rewards (e.g., frequent flier miles), cash-back programs

Non-financial rewards

― Priority to loyalty program members for waitlists and queues in call centers: higher baggage allowances, priority upgrading, access to airport lounges for frequent flyers

Intangible rewards

― Special recognition and appreciation, tiered loyalty programs

Reward-based loyalty programs are relatively easy to copy and rarely provide a sustained competitive advantage

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Social Bonds

Based on personal relationships between providers and customers

Harder to build and imitate and thus, better chance of retention in the long term

Customization Bonds

Customized service for loyal customers

― e.g., Starbucks Customers may find it

hard to adjust to another service provider who cannot customize service

Source: PAL Library; Asset ID: AAFHKTO0

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Structural Bonds

Mostly seen in B2B settings Stimulate loyalty through structural relationships between

provider and customer

― Joint investments in projects and sharing of information, processes and equipment

Can be seen in B2C environment too― Airlines—SMS check-in, SMS e-mail alerts for flight

arrival and departure times

Difficult for competition to draw customers away when they have integrated their way of doing things with existing supplier

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3. Strategies for Reducing Customer Defections

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Analyze Customer Defections and Monitor Declining Accounts

Understand reasons for customer switching

Churn diagnostics common in mobile phone industry

Analysis of data warehouse information on churned and declining customers

Exit interviews: ― Ask a short set of questions when customer cancels

account; in-depth interviews of former customers by third party agency

Churn Alert Systems: ― Monitor activity in individual customer accounts to

predict impending customer switching― Proactive detention efforts—send voucher, customer

service representative calls customer

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What Drives Customers to Switch?(Fig 5)

Source: Adapted from Susan M. Keaveney, “Customer Switching Behavior in Service Industries: An Exploratory Study,” Journal of Marketing 59 (April 1995), pp. 71–82.

Core Service Failure• Service Mistakes• Billing Errors• Service Catastrophe

Service Encounter Failures• Uncaring• Impolite• Unresponsive• Unknowledgeable

Response to Service Failure• Negative Response• No Response• Reluctant Response

Pricing• High Price• Price Increases• Unfair Pricing• Deceptive Pricing

Inconvenience• Location/Hours• Wait for Appointment• Wait for Service

Competition• Found Better Service

Service Failure/Recovery Value Proposition

ServiceSwitching

Involuntary Switching• Customer Moved• Provider Closed

Ethical Problems• Cheat• Hard Sell

• Unsafe• Conflict of Interest

Others

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Addressing Key Churn Drivers

Delivery quality Minimize inconvenience and nonmonetary

costs Fair and transparent pricing Industry specific drivers

Cellular phone industry: Handset replacement a common reason for subscribers discontinuing services—offer proactive handset replacement programs

Reactive measures Save teams: Specially trained call center staff to deal

with customers who want to cancel their accounts

Be careful about how save teams are rewarded

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Other Ways to Reduce Churn

Implement effective complaint handling and service recovery procedures

Increase switching costs

Natural switching costs

― For example, changing primary bank account—many related services tied to account

Can be created by instituting contractual penalties for switching

― Must be careful not to be perceived as holding customers hostage

― High switching barriers and poor service quality likely to generate negative attitudes and word of mouth

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Establishing non-monetary program and set up goal micro and macro

level

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Creating Customer Bonds by Membership Relationships and Loyalty Programs (1)

Transform discrete transactions into relationships

Discrete transactions: Each usage involves payment to service supplier by an essentially "anonymous" consumer

Membership cards: Capture transactions, communicate customer preferences to frontline

Loyalty reward programs increasingly used by all businesses in response to competition

― Frequent fliers program—rewards dominated in miles

Customers may get frustrated with reward programs

― For example: Feel excluded from rewards program because of low balances, rewards seen as having little value, cumbersome redemption process

Don’t lose sight of broader goals of offering high service quality, nor allow service to other customers to deteriorate

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Create Customer Bonds by Membership Relationships and Loyalty Programs (2)

How customers perceive reward programs

Brand loyalty versus deal loyalty Buyers value rewards according to:

― Cash value of redemption award

― Range of choice among rewards

― Aspirational value of rewards

― Amount of usage required to obtain award

― Psychological benefits of belonging to reward program

Timing

― Send customers periodic updates on account status and progress towards particular milestones

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How to measure cost-effectiveness and find indicators to evaluate

program

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Assessing the Value of a Loyal Customer (1)

Must not assume that loyal customers are always more profitable than those making one-time transactions

Costs ―Not all types of services incur heavy promotional

expenditures to attract a new customer ―Walk-in traffic more important at times

Revenue―Large customers may expect price discounts in

return for loyalty―Revenues don’t necessarily increase with time

for all types of customers

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Profit impact of a customer varies according to stage of service in product life cycle

For example referrals and negative word-of-mouth have a higher impact in early stages

Tasks

Determine costs and revenues for customers from different market segments at different points in their customer lifecycles

Predict future profitability

Assessing the Value of a Loyal Customer (2)

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Measuring Customer Equity:Lifetime Value of Each Customer

Acquisition revenues less costs Revenues (application fee + initial purchase) Costs (marketing + credit check + account set up)

Projected annual revenues and costs Revenues (annual fee + sales + service fees + value of

referrals) Costs (account management + cost of sales + write-offs)

Value of referrals Percentage of customers influenced by other customers Other marketing activities that drew the firm to an individual’s

attention

Net Present Value

Sum anticipated annual values (future profits) Suitably discounted each year into the future

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Gap Between Actual and Potential Customer Value

What is current purchasing behavior of customers in each target segment?

What would be impact on sales and profits if they exhibited ideal behavior profile of:

(1) buying all services offered by the firm, (2) using these to the exclusion of any purchases from

competitors, (3) paying full price?

How long, on average, do customers remain with firm?

What impact would it have if they remained customers for life?

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Summary (1)

Customer loyalty as an important driver of profitability for firms so firms need toAssess value of loyal customerNarrow gap between actual and potential

customer value

To understand the customer-firm relationship, firms should establish a relationship with customers by creating “membership” relationships

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Summary (2)

Wheel of Loyalty shows how firms can: Build a foundation of loyalty

Create loyalty bonds

reduce churn drivers

Building a foundation of loyalty involves: Good fit between customer needs and capabilities

Searching for value, not just volume

Tiering services effectively

Obtaining customer satisfaction through service quality

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Summary (3)

Customer loyalty bonds include: Reward-based bonds Social bonds Customization bonds Structural bonds

Bonds can also be created through membership relationships and loyalty programs

Strategies for reducing customer defections include: Analyzing customer defections and monitoring declining

accounts Addressing key churn drivers Implementing effective complaint-handling and service

recovery procedures Increasing switching costs

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References

Philip Kotler and Kevin Lane Keller. “Marketing Management 13th Edition” Pearson Prentice Halls 2009.

Christopher Lovelock and John Wirtz. “Service Marketing 6th Edition” Pearson Prentice Halls 2007.

Bernd Heinrich. “Transforming strategic goals of CRM into process goals and activities” Business Process Management Journal,Vol.11, No. 6, 2005, pp: -709723

John Gaffney. “Customer win-back strategies represent revenue opportunity in tight market“ 2009

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Customer Retention and Customer Winback Strategies (for ABF)

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