Wednesday, May 7, 2008

Retaining customers

Never, never, never take a customer for granted — I mean it! Throughout the past year, I have written about customer satisfaction and its permutations (customer loyalty, customer partnerships, customer bonding, tracking and measurements and employee loyalty). Now I want to talk about customer retention, the key to profitability and longevity.
The importance of retention becomes evident once you understand clearly the relationship between customer loyalty and profits. Some large companies estimate that as much as 95 percent of their profits derive from long-term customers. Many other companies know that a mere 5 percent decrease in customer defections can boost profits any where from 25 percent to 95 percent.
The decision to cultivate a highly loyal customer base must be integral to all aspects of a company’s business strategy. You must know who your best customers are and what it takes to keep them. Then, you must meet, exceed and anticipate their needs better than the competition and give them reasons to buy more. Retention depends on what customers actually do, not necessarily on what they say they will do. Customer loyalty implies a conscious choice to remain faithful.

First in a series - this blog.
This is the first of a series of four blogs devoted to the topic of customer retention. Here I will talk about retention, what it is, and why it drives successful business operations. The three subsequent blogs will present a conceptual framework for issues, rationale, cost models, and examples for use in developing and maintaining a loyal and profitable customer-base.

Blog #2: Business assessment
I will next examine business from the perspective of the customer’s perception and expectations. You cannot hold customers through contact alone; you must interact with them as individuals in ways that are meaningful to them. Who are your customers? Are they groups, such as consumers, employees and vendors? Are they types, such as product-based transactional encounters or relationship-based repeat purchasers? Which among each group are your “best” customers and how do you know?
What does each want and how do you know? What does each expect and how do you know? What are the characteristics of your second-best and next-best customers?
I will discuss the core processes of service, data collection and analysis, surveys, and company and industry baselines. I will also include calculations to determine the market impact of increased customer retention and the expected return on investment for problem prevention and improved service quality.

Blog #3: Solution investment
The third blog will address the process of investment in solving problems, as identified by your customers. It has been estimated that most companies spend about 98 percent of their time reacting to problems and less than 2 percent preventing them. In the spirit of problem prevention, I will offer suggestions for customer defection protection, effective one-on-one database marketing, assessment of the cost of solving, and not solving, problems.

Blog #4: Measure and Refine
The final article in the customer retention series will discuss measurement systems and their purposes, what kinds of measurements are important and the effective use of data in decision-making. I will suggest ways to keep your systems relevant and flexible so they are assets to the building and refinement processes of your customer retention program. I will discuss how to close the customer partnership loop with communication.

A customer-driven approach to business examines products and services in terms of customer perceptions and expectations.

Customer retention can be defined as the ability to consistently meet or exceed customer needs, wants and expectations throughout the life cycle of the customer-company relationship which results in repurchase loyalty and positive word-of-mouth comments.

Tracking system & measurements
Several elements that are required to build an effective tracking system: 1) it must be easy to administer; 2) it must provide reliable data; 3) it must focus on the customer’s priorities; 4) simple reports should tell managers where and how to allocate their resources for maximum benefit.

John Goodman, President of TARP U.S., suggests that customer satisfaction and customer loyalty are the operational measurement standards of customer expectations.
A comprehensive retention program focuses on two essential measurements. The first measurement requires the identification of where and how often customer expectations have not been met.

William A. Sherden, in an article in Small Business Reports, recommended the development of a timeline for a typical customer relationship that identifies each key event and interaction starting with the initial sales contact and ending with the loss of the customer. He wants to use the information to analyze customer defection trends and identify warning signals. Once each issue is understood clearly, then develop solutions to resolve the core process problems.

Goodman, in an article in National Productivity Review suggested presenting customers with a list of potential problems or questions, across a broad range of transaction types, then soliciting which and how many, problems or questions they have experienced. The key points to remember are that: 1) you must evaluate each critical incident, where your company interacts with your customer, and determine accurately the nature and ex tent of problems where they occur; and 2) whatever the customer says is a problem, is a problem.

The second measurement should determine your company’s ability to handle customer complaints and inquiries. This includes obtaining a baseline indication of the extent to which your existing recovery process reduces defections or helps retain customers who might otherwise defect to the competition.
Comparisons against industry baselines will improve your frame of reference. The financial consequences of problems and customer-response systems can be determined by measuring word-of-mouth behavior. This can also be used as an indicator of future profitability.

Pre-empt defections
Customer loyalty provides strong protection against competitive threats. The strength of your business relationships are reflected in your customers’ attitudes, repeat patronage and their word-of-mouth endorsements.

Focus on the core causes of defections rather than triggers and warnings signals, after the fact. Some of the best ways to pre-empt customer defections include: 1) monitoring customer expectations, needs and desires, 2) monitoring the gap(s) between customer expectations, benefits, needs and experience, 3) removing the gaps and satisfying your customer’s expectations, needs and desires better than the competition, and 4) removing the customer’s perception of gaps between expectations and experience.

From an analytical perspective, compare the value of your products and services against competing offerings to assess, and thoroughly understand, defections.
Determine the relative significance of antecedent factors and the possibility of different outcomes. Identify and compare the variables of your best customers as compared to next-best customers relative to defections. Compare your defection statistics with key competitors and the industry baseline.

The key point to be made here is that most companies do NOT measure the number of customer defections nor do they analyze why customers leave.

A retention tool
Active listening, for the sole purpose of understanding, is the most important aspect of effective business communication. A thorough and accurate understanding of your customers’ expectations, from their perspective, can give you the necessary information to avoid, or solve, problems. This is the best consulting advice a company can get and it costs nothing! Armed with this critical information you can delight customers, develop needed products, or make adjustments to enhance their interactions with your organization.

When you really understand your customers and earn their trust and respect you derive many substantial rewards: 1) you deepen the relationship and begin a partnership; 2) you earn the opportunity to serve them; 3) you learn how, what, how much, and when to sell to them; 4) you reduce the opportunity for your competitors to penetrate your customer base and even your potential customers.

Companies that manage customer relationships successfully over time, take an integrated approach to management which includes marketing, information technology, market research and quality operations (manufacturing and/or service) and financial operations. A successful company recognizes that, after the first sale, it has an opportunity to begin a relationship which may develop into a partnership. Pursue any activity that preserves or enhances the relationship with your most valuable asset, your customer.

As Peter Drucker points out, “The customer is the only reason for any business to exist.” I couldn’t have said it any better!

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