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
- 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.
- 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)
- 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:
- 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.
- Determine the cost of a customer (revenue stream, repeat sales, incremental sales, referral revenue, price premiums, profitability).
- Determine the percentage of business development expenditures focused on customer retention.
- 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?
- Assess your service value (cost and benefit to the customer) and include the customer’s evaluation (their expectation, experience, perception).
- Establish feedback loops between the company and your customer to understand exactly what happens with customer comments, suggestions and complaints.
- What action do you take to solve problems? How do you encourage customer feedback and involvement?
- 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:
- Determine the gap between your customers’ expectation and their perception of their experience (i.e. reliability, timeliness, empathy, accuracy, competence, cost).
- Learn the truth about defections:
- What do they cost?
- Why do your customers leave?
- Where do they go?
- Assess your recovery process for service errors. To what extent are front- line employees authorized and encouraged to solve problems on the spot?
- Evaluate employee productivity through evaluations, customer interaction and feedback to quantify the quality and quantity of their performance.
- Evaluate your company activities and interactive communication systems relative to employee loyalty.
- 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.)
- Monitor employee satisfaction through surveys, interviews, roundtable meetings, customer feedback, peer and management feedback.
- Determine specific employee selection criteria based on company values, priorities and hiring instruments, such as interviews, testing, academic and experiential qualifications and recommendations.
- Establish employee recognition activities such as rewards and incentives which are awarded based on quality and quantity of work performance.
- Evaluate the quality of work life correlated with corporate culture and values.
- 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:
- Cash Value (What would your customer have to pay in cash to acquire it?);
- Choice of Redemption Options (discounts, frequency incentives, rebates);
- 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);
- Relevance (Does your customer care about the reward and can they earn it in a timely fashion?);
- 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 my 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