Most senior managers in a business talk of developing customer or brand loyalty. The principle is that the longer you keep a customer, the more you earn from them. To survive in the long-term, you need to develop high lifetime value.
However, loyalty is fickle. Successive academic studies have shown that even the most loyal of customers will switch to a competitor if the believe there is better value on offer.
In this blog we have also discussed that there is no longer a product which is purely defined by the definition goods. All products have a service element and often the opportunity to differentiate goods from those of competitors and to add distinctive value.
This makes it odd that in some sectors little is done to retain customers and customer service is, quite frankly appalling. For example how many of us have been stuck on the telephone line for what seems like an age to a bank or utility firms call centre with no ‘call back’ option.
Then there are industries where customer retention seems to be an alien concept and customer lifetime value appears to be the last thought of company directors. The car insurance industry is one such sector. The aim appears to be to get consumers to switch every year by only offering discount to new customers.
In business to business markets, where there are often fewer customers, higher purchase costs and complicated contracts, there is often a constant battle to adapt and improve service capabilities and product functionality. In such markets, customer retention is the key to business growth and survival.
Senior managers shouldn’t confuse customer or brand loyalty with customer retention. You don’t develop brand loyalty strategies, you develop customer retention strategies.
So how do you develop customer retention:
- Target Customers: Not all customers are worth building a relationship with over the longer-term. Some customers are habitual brand switchers. Some will not generate significant lifetime value; they will not provide sufficient income or their service demands incur excessive costs. Some customers; disruptive ‘zombies’; may actually disrupt service provision and affect a firm’s relationship with other more profitable customers. This is a classic marketing segmentation and targeting approach. You should aim to retain, high value, frequent use, loyalty-prone customer groups who recognise your product as having high service values and utility. You need to identify those customers in that group who are most likely to defect to competitors and ask whether they are worth retaining. You then need to build a value-added strategy to meet those customers demands. For loyalty-prone customers, it is important to maintain communication bonds. It is worth remembering the Pareto principle that 80% of turnover comes from 20% of your customer base.
- Bonding: You need various levels of strategy to bond customers and service providers together. You need to select the level of strategy most appropriate for the bond with each customer:
- Level One: You bond through financial incentives. You provide discounts for bulk purchase or you provide a loyalty scheme for repeat purchase. However, such financial incentives are easily copied by competitors.
- Level Two: You develop more than just price incentives; you build sustainable competitive advantages through the creation of social as well as financial bonds. Customer service encounters are often also social encounters. To build social bonds, you require frequent communication. You need to provide community of service through and entertainment activities. for some customers you need to make them feel that they are being treated as an individual. For example, Harley Davidson runs events for their owner’s club; Las Vegas casinos offer ‘High Rollers’ the use of luxury suites and special tables.
- Level Three: You need to develop financial, social and structural bonds. The relationship should feel more like a partnership than that of a supplier and a customer. This often involves the creation of bonds which tie the customer to your company. For example some logistics firms provide customers with packing equipment which only works with the logistics firm’s systems.. Such structural bonds often create formidable barriers against customer switching and new competitors entering the market.
- Internal Marketing: To build high quality service delivery, you need high quality performance from employees. Recruitment and employee selection is often key to bonding as is employee retention. Retained employees often develop expert knowledge about your products and services. You need to provide high quality staff training. You need effective communication channels with your staff and they need to be appropriately motivated. Staff need to have technical competence but they also must be able to relate to customers. All your staff, from your receptionist to your engineers, are part-time marketers.
- Promise Fulfilment: You must make credible realistic promises, keep those promises and give your staff the knowledge and equipment to deliver upon them. this is the keystone of maintaining customer relationships. They are the cues to match customer expectations and to avoid customer disappointment, dissatisfaction and defection to competitors. The mantra should be ‘under-promise; over-deliver’. First impressions count so your first contact with customers is critical. For example, Marriot Hotels have a ‘first ten minutes strategy’ to ensure the relationship with hotel guests gets off on the right foot.
- Building Trust: Customer retention relies on building trust. Services are intangible. To ensure retention you need to keep in touch with customers and modify services to respect their views. This means providing guarantees which inspire confidence and which reduce perceived purchase risk. Your policies need to be considered fair by consumers. Staff must recognise required high levels of conduct with consumers.
- Service Recovery: Solving problems can restore customer trust. Ideally, potential problems should be eliminated before they actually happen; but that isn’t always possible. If incidents occur, systems should be capable of modification so those incidents cannot be repeated. This means having a quality assurance system capable of adaptation such as Kaizen or Six Sigma. Systems should be tracked to identify service failures. Customers should be encouraged to report problems. Monitor complaints and their resolution. Follow up on service provision. Most importantly, train and empower your staff to deal with problems and complaints before they escalate. Successful resolution of a complaint can actually increase a customer’s positivity about a service provider. This is called the recovery paradox. But if the complaint recurs, the increased positivity can dissolve into dissatisfaction and recrimination. Service recovery can encourage organisational learning and service staff should be motivated to report problems. Effective service recovery systems can increase customer retention.