Retaining Customers Part IV: Parting Comments

This is a guest post by Bill Bleuel, PhD, Professor of Decision Sciences.

This is the last of a series of four blogs devoted to the topic of customer retention. Read Part 1, Part 2 and Part 3.

The key to competing for retention is to quantify and understand the connections between loyalty and profits.

How to use measurements as tools to ensure integrity, accountability and decision-making relative to the development and implementation of your customer retention program is one of the most important considerations to retain customers.

Keep your tracking systems relevant and flexible so they function as assets to building and refining your retention strategy.
Finally, close the customer partnership loop with effective communication activities.

Critical measurements and Calculations

1. Know your customers.
   • Determine the true cost of each type of customer, from loyal to transient.
   • Compile a customer baseline and data base.
   • Employees are customers: Measure their service performance.
2. Identify where and how often customer expectations have not been met.
   • Conduct a gap analysis to quantify the discrepancy between customer expectations and what you have delivered.
   • Focus on core causes to preempt defections. (This is a topic for future blogs)
3. Assess your ability to handle customer complaints and inquiries.
   • Conduct a baseline analysis of lost sales and lost profits.
   • Quantify the effectiveness of your recovery process in reducing defections and retaining customers.
   • Determine the potential payback for prevention and service improvement.
   • Calculate the impact of improved quality and service through ROI calculations.

Assessment: To Fix or Not To Fix?

The goal for any business is to make a profit. Because everything cannot be a priority, you need to decide objectively where, when and how to invest your valuable resources of time, energy,and money. In the1994 article, “Putting the Service-Profit Chain to Work,” in the Harvard Business Review, the authors suggest that customer loyalty and profits result from an interdependent process. (Read summary here)

“Customer loyalty drives profitability and growth; customer satisfaction drives customer loyalty; value drives customer satisfaction; employee productivity drives value; employee loyalty drives productivity; employee satisfaction drives loyalty; internal quality drives employee satisfaction; and leadership underlies the organization’s success.”

This is a powerful description of how loyalty is created.

Remember, customers leave because they are disappointed in some way. Because the relationships among the essential facets of your business cycle are interdependent, it is critical that you monitor, understand and respond to gaps between expectations, experiences and perceptions for customers as well as employees.

Consider the following issues in assessing the financial impact of various elements of customer loyalty relative to profitability.

Customer Retention Measurement:

1. Define your best (loyal) customer in terms of depth of relationship (number/frequency of services used), market share and percent of budget spent with your company.
2. Determine the cost of a customer (revenue stream, repeat sales, incremental sales, referral revenue, price premiums, profitability).
3. Determine the percentage of business development expenditures focused on customer retention.
4. Calculate the break-even point for each type of customer (loyal to transient). Do you really know which customers are loyal and which are transient?
5. Assess your service value (cost and benefit to the customer) and include the customer’s evaluation (their expectation, experience, perception).
6. Establish feedback loops between the company and your customer to understand exactly what happens with customer comments, suggestions and complaints.
7. What action do you take to solve problems? How do you encourage customer feedback and involvement?
8. Collect objective, consistent, independent data through surveys (verbal or written), letters, field reports, service phone logs, focus groups.

How Do You Use This Information To Improve Customer Service and Satisfaction?

Here are some simple steps to get you started:

1. Determine the gap between your customers’ expectation and their perception of their experience (i.e. reliability, timeliness, empathy, accuracy, competence, cost).
2. Learn the truth about defections:
   • What do they cost?
   • Why do your customers leave?
   • Where do they go?
3. Assess your recovery process for service errors. To what extent are front- line employees authorized and encouraged to solve problems on the spot?
4. Evaluate employee productivity through evaluations, customer interaction and feedback to quantify the quality and quantity of their performance.
5. Evaluate your company activities and interactive communication systems relative to employee loyalty.
6. Identify employee retention levels by calculating attrition rates, recruitment and training costs, lost sales and/or productivity. (High employee turnover is a clue that all is not well.)
7. Monitor employee satisfaction through surveys, interviews, roundtable meetings, customer feedback, peer and management feedback.
8. Determine specific employee selection criteria based on company values, priorities and hiring instruments, such as interviews, testing, academic and experiential qualifications and recommendations.
9. Establish employee recognition activities such as rewards and incentives which are awarded based on quality and quantity of work performance.
10. Evaluate the quality of work life correlated with corporate culture and values.
11. Develop and articulate corporate culture parameters and expectations (creative, conservative, participatory, elitist, learning, managed, open, closed, motivated by mission, motivated by fear).

To what extent do these elements correlate with your company’s profit and growth? What are the salient issues for your company? Which are the most difficult issues? To what extent are these issues interdependent?

Service Measurements As Ammunition

Quality service, used as an integral part of your retention strategy, provides a powerful barrier against competitive threats. To monitor your service performance and results effectively, use the gap analysis process (discussed in detail in Part 2) to quantify and evaluate discrepancies between your customers’ expectations, experience and perceptions.

Identify and Prioritize

Use this critical information from the gap analysis to identify and prioritize your customers’ specific problems, needs and desires. Once you have obtained accurate data, analyze the potential payback of preventing a problem, correcting a situation or seizing an opportunity.

Finally, calculate the annual return on investment (ROI) for each type of critical service encounter and assess each for its positive influence on loyalty and/or impact on potential defections. This is just a reminder of taking care of the important few and not spending resources on problems that have little or no impact on your business.

Customer Rewards as Communication

In order to be effective, a customer reward program designed to improve loyalty and retention should meet certain specific criteria. For instance, just because your customer needs something that you’re not currently providing doesn’t mean that you should immediately develop that capability.

Determine which of your customers’ needs you can meet profitably, effectively and successfully and never mind the rest.

In the Harvard Business Review article, “Do Rewards Really Create Loyalty?” Louise O’Brien and Charles Jones recommend the development of “a program through which customers are continually educated about the rewards of loyalty and motivated to earn them.”

Recognize that such a program can only accelerate loyal behavior if planned and implemented as part of a sustained management strategy.

Five Elements of a Successful Retention Program

O’Brien and Jones postulate that a successful retention program includes five basic elements that provide value from the customer’s perspective:

1. Cash Value (What would your customer have to pay in cash to acquire it?);
2. Choice of Redemption Options (discounts, frequency incentives, rebates);
3. Aspirational Value (reward what motivates a customer to change their behavior, such as consolidation of purchases, add-on products or services arid achievement of higher volume levels);
4. Relevance (Does your customer care about the reward and can they earn it in a timely fashion?);
5. Convenience (Is it relatively simple for your customer to respond?).

The goal is to reward your customers for their increased business through creation of a win-win partnership. Because successful marketing relationships derive from customers and their needs rather than with one’s own product or service, you cannot run a business by only listening to the opinions and assumptions inside your company.

Isadore Sharp, CEO of the Four Seasons luxurt hotel chain, wisely observed in Fortune magazine that “Managing a service business through internal reports is like playing tennis while keeping your eyes on the score board.”

In a partnership, one cannot command trust; one must earn trust. To develop trust and build meaningful partnerships with your customers, start by asking them what they want.

• What are your customers’ objectives?
• What are their values?
• What are their ways of doing business?

But don’t ask these questions unless you are prepared to hear their answers and take appropriate action. Failing to respect your customers, discounting their needs, perceptions and experience is one guaranteed way to drive them into the arms of your competition.

In short, never take your customers for granted! Examine all aspects of your business from your customer’s perspective and invest only in what directly benefits your customers or solves problems identified by them.

And finally, measure your results, refine your operations and communicate what you’re doing.

The bottom line to customer retention is to build your company that efficiently provides the products and services that your customers need and want. Eliminate all aspects of your company that dilute this effort.

This post first appeared on Dr. Bleuel’s blog, The Customer Institute, on May 22, 2008.

---

Related Resources in the Graziadio Business Report

Cultivating the Customer Asset by William Bleuel, PhD

Customer Satisfaction Measurement by Charles W. Fojtik, DBA, and John D. Nicks, PhD

Calculating the Strategic Value of Customer Satisfaction by Chic Fojtik, PhD

Retaining Customers Part III: Invest to Prevent Customer Defections

This is a guest post by Bill Bleuel, PhD, Professor of Decision Sciences.

This is the third of a series of four blogs devoted to the topic of customer retention. Read Part 1 and Part 2.

Every customer that you keep represents at least three that you don’t have to attract. Numerous research studies indicate that the cost of acquiring a new customer usually runs from two to four times the annual cost of keeping an existing customer. Obviously, an effective customer retention strategy translates into profits.

It has been estimated that most companies spend about 98 percent of their time reacting to problems and less than 2 percent preventing them. The first, most important, way to prevent customer defections is to identify and define each problem from the customer’s vantage point. This blog suggests several ways to retain customers once you understand the problems and their ramifications.

Superior service and database management provide your best defense against customer defections. Service provides the opportunity to solve customer problems and build partnerships; the database serves as a vehicle to personalize customer communication and enhance your relationships.

Establish a Customer Baseline

In order to develop a successful retention program, you must have accurate and complete information about your customers. In my experience, at least 5 percent of the information in a typical customer database is inaccurate. Errors translate into wasted money, customer aggravation and loss of credibility.

You should know the following basic information about your customer base:

• Number of current customers
• Average number of new customers you expect to acquire within the next month/quarter/year
• Average number of existing customers you expect to lose within the next month/quarter/year
  • Where will those customers go?
  • Why will they leave you?
  • How will you know they’ve left?
  • What will you do to retrieve them?

Customer Service as a Retention Strategy

A successful service strategy serves two vital functions: defense and opportunity.

1. Defense: Quality service provides a powerful barrier against competitive threats because it gives you the chance to:
   • Ensure your customer’s successful experience with your products;
   • Demonstrate your competence, expertise and reliability;
   • Discover customer needs, problems and desires; and
   • Earn credibility and respect.
2. Opportunity: Quality service also provides the opportunity to:
   • Build a meaningful, interactive relationship with each customer;
   • Earn their good will and trust; and
   • Motivate purchase/re-purchase decisions.

Both ingredients are critical to developing and sustaining a genuine interactive partnership.

The delivery of consistent quality service requires an unmitigated commitment to delighting customers. A superior customer service attitude must permeate an organization, where all persons take responsibility for participating and contributing fully to the enterprise.

Everyone within the organization must follow the guideline that, when a problem does arise, “fix the customer first,” then solve the customer’s problem. This sequence supports the goal of building customer partnerships that will endure over time, rather than reacting to a series of isolated problems.

The best ideas and plans are useless without people to implement them. In order to achieve an attitude of respect and concern toward customers, your organization must invest in each employee over time. Customer service is a multifaceted process that occurs inside and outside the boundaries of an organization. When employees have the training, tools, support, and appreciation of their company, they are eager to act in the mutual best interest of the company and the customer.

Understanding Customer Defections

Usually, customers defect because they are disappointed, they feel let down, and their expectations are not met. If you don’t really know what customers value, how can you possibly succeed in delighting them?

Customer expectations derive from wishes and wants as much as actual needs. This explains why customer satisfaction does not guarantee customer loyalty. You may respond adequately to a customer’s specific service need but fail to understand their expectations and their desires.

For example, the real issue may be that a customer wants to feel appreciated for giving you their service business when any number of other competitors could comply. Unless you ferret out their expectations, you may miss opportunities to delight your customers. Or you may realize the customer’s wish to be appreciated but not know what “appreciation” means to the customer.

The key to pre-empting defections is to focus on the root causes.

Customers defect for two primary reasons:

1. The need for your product or service has ceased, or
2. Your offering has failed to satisfy their needs in some way.

Some of the less obvious barriers to customer retention may be understood by answering the following questions:

• Are defections seasonal?
• Are there price differentials during the product/service lifecycle?
• Do defections have a pattern: location, person, lifecycle phase?
• Is there a correlation between retention rates and price changes?
• What is the industry norm for customer longevity?
• Which company has the best retention rate? Why?
• In what specific ways do your customers feel valued and appreciated?
• In what ways do your customers feel your complacency or indifference?
• In what ways do your customers feel intimidated and/or ignored?

Defections of good customers cost you dearly. You lose base profit as well as profit from incremental purchases, profit from reduced operating expenses, profit from referrals and profit from price premiums.

Christine S. Filip, president of marketing, design, and public relations firm, The Success Group, wrote in the CPA Journal that when a good customer leaves, you will need at least three new ones to replace the revenue stream.

It is estimated that defecting customers will tell eight to 10 people about their negative experience with your company. One in five will tell 20 people.

Conversely, a referral from a loyal customer has a 92 percent retention rate vs. 68 percent for a customer acquired from advertising.

This is just one measure that indicates the value of word-of-mouth impact.

Database Marketing

An accurate, comprehensive database enables one-on-one marketing to your best customers. When you communicate individually with your customer, that communication tells them that you know them, remember them and care about their needs.

Personal attention, empathy and extra effort will work to:

• Increase response rates,
• Provide direction for product and service development efforts,
• Improve sales forecasting,
• Provide opportunities to test your marketing mix, and
• Support your marketing decision making process.

In order to function as a viable resource, a company must have an effective marketing database that includes:

• ID of customers and prospects by name and address,
• Individual account numbers for each customer,
• Relevant demographic information,
• Purchase information such as transactions, payment records, records of inquiries and interactions with the company, product preferences and interests, competitive usage, and information about corporate culture.

Obviously, this data is virtually worthless unless you can manipulate and manage it to discern trends, patterns, and histories. Only then can you capitalize on successes, identify concerns and use the information as the basis for decision-making.

Customers want to feel like individuals, not prospects, consumers or targets. A good customer database can provide a foundation upon which to build authentic customer partnerships through welcoming new customers, thanking existing customers and inviting new prospects to begin a relationship with you.

The database can be used further to:

• Examine purchase behavior information to forecast incremental sales and profit potential;
• Correlate, cross-reference, and analyze data to understand customer preferences and trends;
• Personalize messages, identify and contact new customers, enhance cross- selling opportunities and sell more (and more often) to existing customers;
• Provide special benefits and services not available to the general public; and
• Speak with one congruent, consistent voice (image and vision) through collateral material, letters, press releases, signs, graphics and departmental communications.

Survey Data as Intelligence

Building and maintaining a current, accurate, comprehensive customer data base is much more easily said than done. Compilation, management, and maintenance requires a significant allocation of resources (people, time, money), along with a total commitment to customer service and retention throughout your company.

The goal is to increase your ability to offer each of your best customers the products and services they need and want, as well as to identify and communicate with potential customers who have similar characteristics.

Proprietary customer information can be collected through:

• Customer interaction records (purchase transactions, service calls, payment history);
• Customer surveys (written and verbal) that measure satisfaction, loyalty, intent to purchase, perception of quality, expectations and outcomes; and
• Focus groups (targeted population segments).

Secondary data, such as industry statistics and census data, provides a general context and reference for comparisons, market share calculations, trend analysis, and other strategic marketing functions.

Of course, the most difficult task is to gather accurate competitive information and substantive new customer information. I suggest creative ethical sleuthing and discerning investment in well-chosen targeted research.

A few important things to remember about customer surveys:

• Define clearly what you intend to measure (satisfaction, dissatisfaction, loyalty, retention, quality, service), and why you want to know it.
• Experience your company from your customer’s perspective.
• Understand the following:
  • The relative scale of loyalty within your customer base;
  • The strength of your relationship relative to your competition;
  • The relevant antecedents to loyalty;
  • he relative effect of various interactions, activities and consequences.

Because profitability depends on what customers actually do, not what they say they will do, you should include a process for reconciling customers’ intentions with their actions.

Building customer loyalty and improving retention have significant implications for profitability.

According to Filip’s article, a 5 percent improvement in retention rates can raise profits from 15 percent to 50 percent.

The most profitable firms enjoy retention rates of 93 to 95 percent; the average firm has a 78 percent to 85 percent retention rate. The cost of finding a new customer is five to six times more expensive than keeping a current one, so it behooves you to manage your customer retention rates proactively.

• Pay close attention to your best customers. Act quickly (within 24 hours) on their requests and dissents.
• Stay in touch with your customers. Be willing to hear accurately and integrate their feedback throughout your company.
• Find out exactly why a customer defected. Act immediately to determine the possibility of rectifying the situation.

People seek relationships (personal and business) that are caring, honest and respectful. Superb service provides the foundation from which to develop and maintain genuine partnerships with your customers. In many companies, the customer service personnel have more contact with customers than the sales people.

Another point that is often overlooked is that customer service personnel get inside the customer organization much easier than the sales people who most often have to get in through the front door. The customer service personnel usually bypass the front door and go directly to the area with a problem. Once inside, it is not uncommon for the customer service personnel to understand what is going on inside the customer organization.

Build your customer database right. Record everything that your customers do, say or buy, then use the information to fine-tune future communications. As you develop trust and credibility with your customers, they will reward you with their business and their referrals.

The bottom line is that companies need to understand the value of keeping a customer. Secondly, companies should spend more time and energy to preventing problems. Finally, companies should keep an accurate data base of their customers.

When do you resort to defensive or angry responses with customers?

Leave your answers in the comments!

This post first appeared on Dr. Bleuel’s blog, The Customer Institute, on May 17, 2008.

---

Related Resources in the Graziadio Business Report

Cultivating the Customer Asset by William Bleuel, PhD

Customer Satisfaction Measurement by Charles W. Fojtik, DBA, and John D. Nicks, PhD

Calculating the Strategic Value of Customer Satisfaction by Chic Fojtik, PhD

Retaining Customers Part II: The Flight of the “Service Zombies”

This is a guest post by Bill Bleuel, PhD, Professor of Decision Sciences.

This is the second of a series of four blogs devoted to the topic of customer retention. To read Part 1, click here.

Employees get excited when management demonstrates a serious commitment to listening to customers and staff’s suggestions for serving them. Building customer loyalty is everyone’s responsibility and everyone’s input is critical. Sharing information is as critical as collecting it: Empowered employees delight in delivering superior personalized service.

Author Peter Drucker points out that, “When people are held responsible, they act responsibly.”

How can you hire terrific, responsible employees?

• Articulate clearly your company values.
• Identify the aspects of a customer service attitude you desire.
• Interview and screen to elicit information about alignment of the person’s philosophical attitudes, principles, values and behaviors with your priorities. Look for employees who like to deal with people.
• Train employees about your corporate philosophy, product knowledge and productivity skills.

When was the last time you encountered a “service zombie?”

Management consultant Karl Albrecht writes about those apparently apathetic, unfriendly, robotic frontline service employees in a Quality Digest article. He suggests that when people are emotionally overworked, they adopt normal defense mechanisms to contend with emotional fatigue or psychological burnout. The contact intensity of interacting with an endless stream of people, handling work-related feelings and situations, and the stress of listening and solving customer problems on-the-spot results in a desire for people to disconnect, distance, or defend themselves. Obviously, customers interpret such behavior critically because they are quite entitled to be selfishly preoccupied with their own needs and concerns.

Managers must acknowledge the difficulties inherent in service systems involving these types of interpersonal dynamics. Employee training should include the development of problem-solving skills, dealing effectively with all types of people, listening and communication skills, and win-win negotiation techniques. Managers need to genuinely listen, appreciate and guide front-line workers with compassion, respect and wisdom.

If your employees believe you are providing fair, honest, consistent, intelligent leadership, you will earn their loyalty. Leadership demonstrating competence and personal commitment earns trust. True loyalty derives from adherence to strong principles and values, congruence between words and actions, and clear respectful communication within a collaborative environment that values the contributions of all persons toward common goals.

Vendors as customers

Many companies fail to recognize their key vendors as important customers. The Wal-Mart alliance with Procter and Gamble stands as an excellent example of a synergistic, strategic and profitable partnership. Vendors treated as valued customers can collaborate to solve problems, share in risks, investments, and gains. Strategic horizontal and vertical alliances with your primary vendors can significantly enhance your marketing muscle in terms of time, labor and cost savings.

You will realize enormous dividends when you care for, and keep, every one of your best customers. To accomplish this feat, understand and speak to them as individuals, offer them many advantages and give them good reasons to stay with you.

The strength of a business partnership is based on customer attitudes and repeat patronage. No matter how often a customer buys, there is no guarantee that the customer will choose you next time. Value is always perceived relative to alternatives available at the time.

A framework for retention

Seek first to understand your customers. This may require attitude re-adjustment within your company. Everyone needs to listen openly, with a view towards understanding your customer’s perspective and expectations. In effect, stand in your customer’s shoes, sit in your customer’s chair, experience your company from the customer’s perspective — top management included. Become your own mystery shopper.

To assess the worth of a group of repeat customers, calculate the cumulative effect of your marketing strategies and investments in acquiring and maintaining customer relationships and loyalty. Use a cash-flow analysis to measure the impact of improving customer retention in the same way you measure anything else.

Measure your specific customer satisfaction issues against industry and competitive benchmarks. The list of measurement criteria will be derived from substantive and personalized research about your customer perceptions, expectations and experiences.

Gather relevant data from customers. Listen to customers directly about their needs, problems and product/service expectations. Do not rely on management intuition and assumptions.

Ask former customers in what ways their needs were not met. Ask customers what problems they have not yet expressed. Identify critical incidents for each customer need or performance problem. Determine how effective each need was met, at each point of contact from your customer’s perspective using a five-point rating scale for each performance attribute and critical incident. Assess customer loyalty levels with a five-point scale, having customers rate you overall and indicate the likelihood they will continue to buy in the future.

Expected returns

To measure the impact of customer retention through improved quality and service, calculate the expected return on investment.

John Goodman, president of the U.S. arm of customer experience research firm TARP, suggests using five pieces of data:

1. The profit value of a customer
2. The number of customers who experience problems
3. The percentage of customers who bother to complain about problems
4. The impact of problems on loyalty
5. The impact of your service system on loyalty

Understand the data

Sort the performance attributes and critical incidents into two groups — positive influence on loyalty, and impact of potential defections.

Correlate the low scores and high scores. Don’t be fooled! Satisfaction is quite a passive state. Understand the core process for each issue; know the real reasons why you succeed and the real reasons why you have a problem.

To assess your risk, conduct a gap analysis to determine the discrepancy between customer expectations and what you have delivered:

Step 1: Quantify your customer needs, expectations, perceptions and values.

Step 2: Measure the relative importance of each component of service:

1. Expected levels of service
2. Unacceptable levels of service
3. Perceptions of service provided by you and by your competitors, and
4. Customer’s priorities for improvement

Step 3: Calculate the most critical aspects of customer service, using a gap analysis, to determine the relative importance of improvement priorities.

Step 4: Deploy your resources quickly arid directly to the attributes and critical incidents that affect loyalty and retention.

Step 5: Measure the effects of your actions.

Step 6: Give the improvements a chance to work, and then communicate with your customers about what you’ve done.

Step 7: Measure again, evaluate again, and take corrective action.

Indication of priorities

The key here is to determine the relative importance of various critical incidents by determining the correlation between specific problems and customer retention.

Compute the cost or impact of a particular problem by multiplying the ‘frequency of the problem’ by the ‘percentage of customers who indicate they may not repurchase or recommend the product or service.’

By performing a number of these calculations, you will have a bottom-line, customer-driven indication of priorities.

Successful service companies must put employees and customers first, period! Service managers must understand the factors that drive profitability: Successful companies understand that they must invest in people, technology supporting front-line workers, effective recruiting and training practices, and compensation linked to performance for employees at every level.

The challenge is to create innovative measurement techniques to calibrate the impact of employee satisfaction, loyalty, and productivity on the value of products and services delivered to customers in order to determine the corresponding impact on profitability and growth.

The bottom line is that customer retention is not about feelings; rather, it is a dollars-and-cents issue.

There are some customers that are better fired than coddled. Yes, I said it. There are some customers that must be fired (of course in a very humane way), but this is a subject left for a future blog.

Look out for the next two parts in this series:

Part 3: Investing in Customer Solutions

Part 4: Using Customer Data Effectively

This post first appeared on Dr. Bleuel’s blog, The Customer Institute, on May 9, 2008.

---

Related Resources in the Graziadio Business Report

Cultivating the Customer Asset by William Bleuel, PhD

Customer Satisfaction Measurement by Charles W. Fojtik, DBA, and John D. Nicks, PhD

Putting Performance and Happiness Together in the Workplace by Charles D. Kerns, PhD