DR.RANA M.

ZAKI Fall Semester 2023/2024

 Chapter 4

Managing the customer life cycle:

Customer Retention and Development
 Chapter Objectives
• By the end of this chapter you will understand:
• What is meant by the terms ‘customer retention’ and ‘customer
development’.
• The economics of customer retention.
• How to select which customers to target for retention.
• The distinction between positive and negative customer retention strategies.
• Several strategies for improving customer retention performance.
• Several strategies for growing customer value.
• CRM technologies that facilitate growth in customer value.

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Chapter Objectives

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 Introduction
• The core stages in the customer lifecycle are
customer acquisition, customer retention and
customer development. In the last chapter we
explored customer acquisition.

• In this chapter, we turn to customer retention

and development.

• The major strategic purpose of CRM is to

manage a company’s relationships with
customers profitably through three stages of
the customer lifecycle: customer acquisition,
customer retention and customer
development.
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What is customer retention?
• Customer retention is the maintenance of continuous trading
relationships with customers over the long term. Customer retention
is the mirror image of customer defection or churn. High retention is
equivalent to low defection.
• Conventionally, customer retention is defined as follows:
Customer retention is the number of customers doing
business with a firm at the end of a financial year
expressed as percentage of those who were active
customers at the beginning of the year.
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What is customer retention?

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Three measures of customer retention
1. Raw customer retention rate. This is the number of customers doing
business with a firm at the end of a trading period expressed as a
percentage of those who were active customers at the beginning of the
period.
2. Sales-adjusted retention rate. This is the value of sales achieved
from the retained customers expressed as a percentage of the sales
achieved from all customers who were active at the beginning of the
period.
3. Profit-adjusted retention rate. This is the profit earned from the
retained customers expressed as a percentage of the profit earned
from all customers who were active at the beginning of the period. 8
Let's consider a fictional company, ABC Electronics, and
assume the following data for a given trading period
• Active customers at the
beginning of the period:
10,000
• Active customers at the end
of the period: 8,500
• Sales achieved from all
customers at the beginning of
the period: $1 million
• Sales achieved from retained
customers: $800,000
• Profit earned from all
customers at the beginning of
the period: $200,000
• Profit earned from retained
customers: $160,000
• Based on this data, we can calculate the customer retention
rates:
• Raw customer retention rate:
Raw retention rate = (Active customers at the end of the period /
Active customers at the beginning of the period) x 100
Raw retention rate = (8,500 / 10,000) x 100
Raw retention rate = 85%
• Sales-adjusted retention rate:
Sales-adjusted retention rate = (Sales achieved from retained
customers / Sales achieved from all customers at the beginning of
the period) x 100
Sales-adjusted retention rate = ($800,000 / $1,000,000) x 100
Sales-adjusted retention rate = 80%
• Profit-adjusted retention rate:
Profit-adjusted retention rate = (Profit earned from retained
customers / Profit earned from all customers at the beginning of
the period) x 100
Profit-adjusted retention rate = ($160,000 / $200,000) x 100
Profit-adjusted retention rate = 80%
Customer Retention Plans
1. Which customers should be targeted for retention?
2. What customer retention objectives should be set?
3. What retention strategies will be used?
4. How will the performance of the retention plan be
measured?
Which customers to retain?
• Strategically significant customer (SSC):
• High life-time value customers.
• High volume customers.
• Benchmarks.
• Inspirations.
• Door openers
• But ----- these may also be attractive to your competitors.
Which customers to retain?
• High future lifetime value customers. These high CLV customers will contribute significantly to
the company’s profitability in the future.
• High volume customers. These customers might not generate much profit, but they are
strategically significant because of their absorption of fixed costs, and the economies of scale
they generate to keep unit costs low.
• Benchmark customers. These are customers that other customers follow.
• Inspirations. These are customers that bring about improvement in the supplier’s business.
They may identify new applications for a product, product improvements or opportunities for cost
reductions.
• Door openers. These are customers that allow the supplier to gain access to a new market. This
may be done for no initial profit, but with a view to proving credentials for further expansion.
 Which customers to retain?
• High future lifetime value customers. Amazon Prime members: Amazon has built a loyal customer base through its
Prime membership program. Prime members tend to spend more and make more frequent purchases, contributing
significantly to Amazon's profitability.
Apple iPhone users: Apple has a strong customer base of iPhone users who tend to be loyal and continue purchasing
Apple products over time, contributing to Apple's success and profitability
• High volume customers. Walmart is known for its large customer base and high sales volume. While profit margins
may be relatively low, Walmart's scale and ability to absorb fixed costs allows them to keep unit costs low and maintain
competitive prices.
• Benchmark customers. Nippon Conlux supplies the hardware and software for Coca-Cola’s vending operation.
Whilst they might not make much margin from that relationship, it has allowed them to gain access to many other
markets. ‘If we are good enough for Coke, we are good enough for you’, is the implied promise. Some IT companies
create ‘reference sites’ at some of their more demanding customers.
• Inspirations. Toyota has a reputation for actively seeking feedback from customers and using it to improve their
products and processes. Customer feedback has led to product improvements, cost reductions, and the identification
of new applications for their vehicles.
• Door openers. Huawei, a Chinese technology company, has partnered with telecom operators in various countries to
gain access to new markets for their smartphones and telecommunications equipment. They may initially offer
competitive pricing or incentives to enter a market and establish their credentials for further expansion.
Customer Retention VS. Value Retention
• Customer retention refers to the ability of a company to retain its existing
customers over a specific period. It focuses on maintaining a strong
relationship with customers to encourage repeat purchases and loyalty,
thereby reducing customer churn or attrition.

• Value retention, on the other hand, refers to the ability of a company to

retain the value generated from its customers. It goes beyond customer
retention and emphasizes maximizing the value or profitability derived from
customers over time. Value retention involves strategies that aim to increase
customer lifetime value, such as upselling, cross-selling, and providing
additional services or offerings to existing customers.
Customer Retention VS. Value Retention
• Customer Retention: Netflix has been successful in retaining its customers by offering a
compelling and convenient streaming service. They invest in creating original content
and curating a vast library of movies and TV shows to keep customers engaged and
satisfied. By continuously adding new content, personalizing recommendations, and
providing a seamless user experience, Netflix has been able to retain a large customer
base.
• Value Retention: Netflix not only focuses on retaining customers but also on maximizing
the value they generate from each customer. They achieve this through various
strategies, such as personalized recommendations that encourage customers to
discover and watch more content, pricing tiers that allow customers to upgrade for
additional features, and investing in high-quality original content that attracts new
subscribers and justifies price increases. By continually expanding its customer base and
increasing the average revenue per user, Netflix demonstrates a strong commitment to
value retention.
Strategies for customer retention
Positive customer retention Negative customer retention
strategies strategies
Delight customers Create exist barriers
Create customer-perceived Enforce the contract
added value
Create social and structural Extract switching penalties
bonds
Create customer engagement
Negative Customer Retention
• Negative customer retention strategies involve creating barriers or implementing tactics
that make it difficult for customers to switch to a competitor or terminate their relationship
with a company. These strategies aim to discourage customer churn by imposing
contract obligations, enforcing penalties, or making the switching process inconvenient
or costly for customers.
• Creating Exit Barriers: Companies may employ tactics to make it challenging for
customers to leave their services or products. This can include long-term contracts with
automatic renewal clauses, complex cancellation processes, or requiring advanced
notice for termination.
Example: Cable and satellite TV providers often use long-term contracts with early
termination fees to discourage customers from canceling their subscriptions. These
contracts may have significant penalties for canceling before the contract term expires,
making it financially burdensome for customers to switch to alternative providers.
Negative Customer Retention
• Enforcing the Contract: Companies may strictly enforce
contractual obligations and terms to discourage customers from
seeking alternatives. This can involve actively monitoring customer
behavior, imposing penalties for non-compliance, or making it
difficult for customers to deviate from the agreed-upon terms.
• Example: Mobile phone service providers sometimes enforce
strict data usage limits and charge excessive fees for
exceeding those limits. By strictly enforcing these limits and
imposing penalties, providers discourage customers from
switching to other providers offering more generous data plans.
.
Negative Customer Retention
• Extracting Switching Penalties: Some companies may impose
switching penalties as a deterrent to customer churn. These
penalties can come in the form of high cancellation fees, loss of
loyalty program benefits, or the forfeiture of prepaid amounts or
deposits.
• Example: Fitness clubs or gyms may require customers to sign
long-term contracts with significant cancellation fees. These
fees act as switching penalties, making it financially
burdensome for customers to terminate their memberships and
encouraging them to continue paying for the service.
Positive customer retention strategies
(Customer Delight  )
• Customer delight occurs when the customer’s perception of their
experience of doing business with you exceeds their expectation. In
formulaic terms:
• CD = P > E
• where CD = Customer Delight, P = Perception of performance, and
E = Expectation.
• This formula implies that customer delight can be influenced in two
ways: by managing expectations or by managing performance.
 Positive customer retention strategies –
Kano’s delight model
• Noriaki Kano has developed a product quality model that distinguishes between three
forms of quality.
• Basic qualities are those that the customer routinely expects in the product. These
expectations are often unexpressed until the product fails. For example, a car’s engine
should start first time every time, and the sunroof should not leak.
• The second form is linear quality. These are attributes of which the customer wants more
or less. For example, more comfort, better fuel economy and reduced noise levels.
Marketing research can usually identify these requirements. Better performance on these
attributes generates better customer satisfaction.
• The third form is attractive quality. These are attributes that surprise, delight and excite
customers. They are answers to latent, unarticulated needs and are often difficult to
identify in marketing research.
 Positive customer retention strategies –
Kano’s delight model
• Basic Quality: Basic quality attributes are the
fundamental features that customers expect as a
minimum requirement. These attributes are
necessary for customer satisfaction, but their
presence alone does not lead to customer delight. If
these attributes are not met, it can result in
significant dissatisfaction.
• Linear Quality: Linear quality attributes have a direct
relationship with customer satisfaction. As the level
of these attributes increases, so does customer
satisfaction. Similarly, if these attributes decrease,
customer satisfaction decreases as well.
• Attractive Quality: Attractive quality attributes are
unexpected or innovative features that go beyond
customer expectations. These attributes have the
potential to surprise and delight customers, creating
a positive emotional response and differentiation
from competitors.
• Example: In the context of a smartphone, basic quality attributes
would include functions like making calls, sending text
messages, and accessing the internet. Customers expect these
features to work reliably and consistently. If a smartphone fails
to perform these basic functions, it would lead to customer
dissatisfaction.
• Example: Continuing with the smartphone example, a larger
screen size, improved battery life, and faster processing speed
would be considered linear quality attributes. Increasing these
attributes would generally lead to higher customer satisfaction,
while decreasing them would result in lower satisfaction levels.
• Example: In the smartphone industry, features like facial
recognition, augmented reality capabilities, or advanced camera
technology can be considered attractive quality attributes.
These features are not typically expected by customers but can
generate excitement and differentiate a smartphone from
competitors, leading to increased satisfaction and customer
delight.
 Positive customer retention strategies
Add customer- perceived value
• Companies can explore ways for customers to experience additional
value as they buy and use products and services.
• The ideal is to enable additional value to be experienced by
customers without creating additional costs for the supplier. If costs
are incurred then customers may be expected to contribute towards
cost recovery. For example, an online customer community may be
expected to generate a revenue stream from its membership.
• There are three common forms of value-adding programmes:
loyalty schemes, customer communities and sales promotions.
 Positive customer retention strategies
Add customer- perceived value
1- Loyalty Schemes

• Loyalty schemes reward customers for their patronage. A

loyalty scheme or programme can be defined as follows:

A loyalty scheme is a customer management programme

that offers delayed or immediate incremental rewards to
customers for their cumulative patronage.
 Positive customer retention strategies
Add customer- perceived value
1- Loyalty Schemes
• Today’s CRM-enabled loyalty schemes owe their structure to the frequent
flier programmes (FFP) that started with American Airlines’ Advantage
programme in 1981.
• The airline made a strategic decision to use its spare capacity as a resource to generate
customer loyalty. Airlines are high fixed cost businesses. Costs do not change much, regardless
of whether the load factor is 25 per cent or 95 per cent. American Airlines knew that filling empty
seats would have little impact on costs, but could impact significantly on future demand. The
airline searched its reservation system, SABRE, for details of frequent fliers in order to offer them
the reward of free flights.
 Positive customer retention strategies
Add customer- perceived value
1- Loyalty Schemes

• This basic model has migrated from airlines into many other B2C sectors – hotels,
restaurants, retail, car hire, gas stations and bookstores, for example. It has also
transferred into B2B contexts with many suppliers offering loyalty rewards to long-
term customers.
• The mechanics of these schemes have changed over time. Initially, stamps were
collected.
• The first card-based schemes were anonymous; that is, they carried no personal data, not
even the name of the participant.
• Then magnetic stripe cards were introduced, followed by chip-embedded cards that carried a
lot of personal and transactional data. Innovators developed their own individual schemes.
• Eventually, these transformed into linked schemes, in which, for example, it was possible to
collect air miles from various participating companies such as gas stations, credit cards and
food retailers.
 Positive customer retention strategies
Add customer- perceived value
1- Loyalty Schemes
• Current schemes are massively different from
the early programmes. .
• Loyalty programmes provide added value to
consumers at two points: during credit
acquisition and at redemption. Although the
credits have no material value until they are
redeemed, they may deliver some pre-
redemption psychological benefits to
customers, such as a sense of belonging and
of being valued, and an enjoyable anticipation
of desirable future events.
 Positive customer retention strategies
Add customer- perceived value
2- Customer Clubs
• Customer clubs have been established by many
organizations. A customer club can be defined as
follows:
A customer club is a company-run membership
organization that offers a range of value-adding benefits
exclusively to members.
 Positive customer retention strategies
Add customer- perceived value
2- Customer Clubs
• The initial costs of establishing a club can be quite high but thereafter most clubs are
expected to cover their operating expenses and, preferably, return a profit. Research
suggests that customer clubs are successful at promoting customer retention.
• To become a member and obtain benefits, clubs require customers to register. With these
personal details, the company is able to begin interaction with customers, learn more
about them, and develop customized offers and services for them.
• Customer clubs only succeed if members experience benefits they value. Club managers
can assemble and offer a range of value-adding services and products that, given the
availability of customer data, can be personalized to segment or individual level. Among
the more common benefits of club membership are access to member-only products and
services, alerts about upcoming new and improved products, discounts, magazines and
special offers.
• For example, IKEA FAMILY, the home furnishing retailer’s club, offers members discounts
on selected IKEA products, restaurant and service offers, a free home furnishing magazine
quarterly, free product insurance and news updates via email.
Positive customer retention strategies
Add customer- perceived value
3- Sales Promotion
 Bonding
• The next positive customer retention strategy is customer bonding. B2B researchers have identified many
different forms of bond between customers and suppliers. These include interpersonal bonds, technology
bonds (as in electronic data interchange – EDI), legal bonds and process bonds. These different forms can be
split into two major categories: social and structural.

Social Bonds Structural Bonds

Social bonds are Structural bonds are
found in positive established when
interpersonal companies and
relationships customers commit
between people. resources to a
Positive relationship. Generally,
interpersonal these resources yield
relationships are mutual benefits for the
characterized by participants.
high levels of trust
and commitment.
 Build Customer engagement
• The final positive strategy for improving customer retention is to build
customer engagement.
• Various studies have indicated that customer satisfaction is not enough to
ensure customer longevity.
• Customer engagement can be thought of as a multidimensional construct
composed of four elements: cognitive engagement, affective engagement,
behavioural engagement and social engagement.
• The cognitive and affective elements reflect the experiences and feelings of
customers, and
• the behavioural and social elements capture brand or organizational participation by
consumers, beyond merely buying the firms’ offerings
 Customer Relationship Management (CRM)
technologies
• Customer Relationship Management (CRM) technologies enable companies to collect, analyze, and
leverage customer data to enhance customer interactions and relationships. Some CRM
technologies that can facilitate growth in customer value include:
• Customer Data Platforms (CDPs): CDPs consolidate customer data from multiple sources, allowing
companies to gain a comprehensive view of their customers and deliver personalized experiences.
• Marketing Automation: Marketing automation platforms help streamline and automate marketing
processes, allowing companies to deliver targeted messages and campaigns based on customer
behavior and preferences.
• Predictive Analytics: Predictive analytics tools utilize customer data and machine learning
algorithms to identify patterns, trends, and future behaviors, enabling companies to make data-
driven decisions and personalized recommendations.
• Social CRM: Social CRM platforms integrate social media data with traditional customer data,
enabling companies to engage with customers on social platforms and gain insights into their
preferences and sentiments.