Study Reports

Want to nearly double your company’s
profitability without having
to cut costs, increase prices, or
find new customers? Impossible? Not
according to some studies, which show
that even a small improvement in customer
retention can increase profitability by as
much as 95%. Imagine—sharply higher
profits, simply by holding onto your existing
customers.
The fact is, it’s far more expensive to find
new customers than to keep your current
ones happy. But in this ear of global competitiveness,
most companies focus on cutting
costs—often with unintended results.
Pushing cost targets to extremes can lead to
customer service issues: slow response
times, late orders, quality problems, and
higher error rates. The result? Unhappy
customers who are more likely to stray.
Time and again, studies show that a single
bad experience can sour a customer permanently,
and put even a long-term
relationship at risk.
Customer retention matters. Think about
the lifetime value of a customer—everything
they’ll ever buy from you, not just
today but this year and in the future. Add to
this the high cost of acquiring a new customer,
estimated at 20 times greater than
the cost of keeping an existing one. None of
this is news, nor is it rocket science, and yet
time and time again companies make shortsighted
blunders:
• A long-distance carrier offers low introductory
rates to new customers while
ignoring existing customers.
• An Internet service provider has poor
customer service, long hold times, and
“technical support” staff with no technical
training or experience.
• A manufacturer sends the wrong order
or delivers it late, without an apology or
an explanation.
• A restaurant manager keeps diners
waiting, despite a reservation, or quibbles
with them over a service issue,
instead of graciously sending over free
drinks to smooth things over.
Unfortunately, some companies would
rather haggle over price or service issues
than keep good customers happy. But disgruntled
customers can quickly become
ex-customers, which leads to reduced revenues,
increased marketing costs, and lower
profits.
How can companies prevent this “cycle of
doom”? First, be strategic in your cost cutting
instead of cutting budgets across the
board. Understand the trade-offs in customer
service that cost cuts can lead
to—and think again. Make sure that shortterm
savings don’t jeopardize long-term
sales and profitability.
Second, make customer retention an integral
part of your company’s overall
corporate strategy and culture, not simply
an initiative driven by the customer service
group. How? By making sure that the entire
workforce understands and reinforces the
importance of customer retention—not
just customer satisfaction or customer service.
Ensure that all employees who interact
with customers—whether in sales, marketing,
customer service, technical support,
billing, finance, or simply answering the phone—understand the power they have
to make customers feel welcomed and valued.
By ensuring that every experience a
customer has with your company is a positive
one, you’ll increase the odds of
continued loyalty.
To succeed, customer retention must be
a top-down, company-wide initiative. Truly
committing to customer retention is hard
work, because it affects virtually every aspect
of your organization. But the ultimate payback
in sustainable growth and profitability
makes the effort worthwhile. The path to
customer retention involves seven key steps.
Step 1: Define Your Customer
Retention Goals and Strategy
First, identify your company’s current
retention rate. Then, define your new retention
goal, taking into consideration your
industry, competition, and market conditions.
Be clear about your retention strategy.
Is your focus on simply retaining customers,
or on expanding the depth and
breadth of products and services that customers
purchase? If the latter is part of
your plan, you’ll want to define new revenue
targets for customer accounts. And
you’ll most likely want to train customer-facing
employees to spot and leverage
cross-selling opportunities. For example,
a wireless service provider might offer
bonuses to employees who get customers to
upgrade the number of minutes they sign
up for, or add new services such as Internet
connectivity, text messaging, or international
roaming. Or the company might
offer promotions or discounts to increase
usage.
At the end of the day you’ll want to be
able to answer the question “How successful
was our retention strategy?” In other
words, did you achieve your retention goals,
boost per-customer revenues, and increase
profitability?
Step 2: Segment Your Customer Base
Not all customers are created equal. In
most companies, the “80/20” rule applies:
20% of customers account for 80% of sales.
This valuable 20% should be targeted for
special treatment. Hilton Hotel’s
HHonors® program stratifies customers
clearly and visibly as non-members, Blue,
Silver, Gold, or Diamond members, with
rewards increasing by level. Diamond members—
typically more profitable, frequent
business travelers—merit bonus points,
airline miles, room upgrades, and other
value-added services designed to keep them
coming back. The stratified membership
program provides an incentive for travelers
to increase their patronage.
Be careful, though. Don’t look only at
sales volume; analyze total account revenues
against cost to service for a more
complete picture of overall account profitability.
You may be surprised at how little
your company actually makes on some customers
once you factor in price concessions,
regular demands for special treatment, or
excessive needs for customer support, all of
which can erode profit margins. Then there
are the chronic complainers, for whom
nothing is ever quite right. Recognize that
not all customers may be worth saving.
There are exceptions, though—situations in
which any and all customers are welcome.
A purely volume-driven business, for example,
or a high-tech company trying to gain
critical mass for a first-mover advantage.
But for most companies, segmenting
accounts by volume and profitability is critical
for focusing customer retention efforts.
A note of caution: Always treat even lowvalue
customers with respect and care. You
never know what their true span of influence
might be. A home PC user who calls
in for technical support may be in charge of
corporate IT purchases at work, willing to
recommend your products based on a positive
home user experience.
Step 3: Identify Key Needs
and Performance Gaps
What do your customers need and value?
Low prices? Convenience? Customized
solutions? Service agents who call them by
name? Unless you know, the services you
provide may not be what they really want.
If a customer values low prices, and you
focus on quick delivery instead, your customer
may soon be looking elsewhere.
Marketing research firms can tell you what
consumers generally value: a reasonable
price, product or service quality, and good
customer service. But the best way to find
out what your most valued customers real- ly want is to ask them—and then listen closely to their answers. This alone shows
that you care about them and their business.
The dialogue you start can strengthen
the customer relationship and lead to longterm
loyalty.
Then measure how well you’re meeting
the key needs you’ve identified, so you can
pinpoint areas for improvement, set
improvement goals, and quantify the results
of your efforts. For example, if customers
are irritated by long hold times, start by
documenting the average wait time. Then,
set a goal for improvement—say, to
decrease hold times from five minutes to
one minute. Or if customers complain
about repeated hand-offs when trying to
resolve a problem, and the need to recap the
situation each time to a different agent,
rework the process so that one person handles
a problem until it’s resolved.
Step 4: Develop Programs to
Improve Performance
The hardest part of a customer retention
program is committing to—and following
through with—the changes needed to meet
the customer needs and performance goals
you’ve identified. Band-aids are rarely sufficient;
many changes require fundamental
restructuring, a significant investment, and
employee training. Improving on-time
delivery, for example, may require rethinking
your supply chain. Improving customer
service may mean new hires and major
retraining across all customer-facing areas.
Effective change programs must be driven
top-down. The company’s leadership
team must make it clear that customer
retention is a priority across the organization.
Processes must be put in place that
ensure reliable and consistent execution.
When appropriate, test new programs with
a subset of target customers to iron out
any operational or process issues. By involving
customers in your improvement efforts,
you increase the likelihood of getting their
buy-in and show that you’re serious about
meeting their needs.
Step 5: Monitor Changes in
Customer Behavior
Studies consistently show that changes in
customer behavior can signal a relationship
that’s at risk. Take notice when a
customer starts buying in smaller volume,
drops a product, or changes services or
service levels. Or when the frequency of
purchases changes. Look too for any
increase in service calls, which could signal
usage problems. By catching these changes
early, you can take immediate action to halt
a potential customer defection. Stage an
intervention by contacting the customer
and finding out what needs aren’t being
met and how you can do better. These situations
are an opportunity to strengthen
the customer relationship before it deteriorates
and to improve retention overall.
Positive changes in buying behavior offer
another opportunity. A customer who
begins buying in higher volume or adding
services may have new needs that you can
recognize and develop. By being there early,
you can meet those needs, build loyalty,
and beat the competition.
Step 6: Make It Hard for
Your Customers to Leave
Some products and services are inherently
“sticky” because they demand a
significant upfront investment in time,
money, or research. For example, once a
global company purchases and deploys a
sophisticated telecommunications solution,
a change of vendors is difficult.
But it’s fairly easy for most customers to
take their business elsewhere—unless you
can make the cost of switching seem high.
A classic example of locking in customers
is the success of the airlines’ frequent flyer
programs. Banks have done a good job of
locking in customers by adding services
like automatic bill payment and account
aggregation, and improving convenience
with grocery store branches and Internet
banking.
Other companies find that collaborating
with key customers and setting up mechanisms
for sharing information or
integrating systems can improve retention.
Computer hardware manufacturers hang
onto customers by building modular components
that are easily upgraded from one
platform to the next. Carefully observe what
works in other industries—it may be applicable
to your own.
Special discounts, membership programs, or purchase bonuses can also build
loyalty and drive volume. Some companies
reward their “special customers” by inviting
them to invitation-only events like golf outings,
“meet the CEO” luncheons, special
sporting events, or appreciation dinners.
Other ways to lock in customers:
• Customize and personalize your products
or services. Customers are less
likely to leave if you make your offerings
difficult to live without, hard to
recreate with other vendors, or highly
tailored to their specific needs. Any
product or service that allows users to
program in special settings or information
can create a strong barrier to
switching. The value of the technology
itself becomes almost secondary to the
added value the customer gains by tailoring
it to specific needs. For example,
Internet portals like Excite, Yahoo!, and
MSN allow users to customize their
homepages to track stock holdings,
sports teams, and other interests. Once
they’ve set their preferences—and gotten
used to the look and feel of a
particular portal—users are unlikely
to switch.
• Make life easier for your customers.
Many customers value convenience. A
dry cleaner that picks up and delivers,
a hotel that offers airport pick-up service—
touches like these can make a big
difference for time-starved, hassleaverse
customers. Or, try automating
ongoing customer transactions by offering
such services as online bill paying,
streamlined check in/check out, or
automatic reminders for equipment
maintenance.
• Make it more fun or more pleasurable to
do business. One company—a video
production firm—found that the way to
customers’ hearts was through their
stomachs. The company’s in-house
chef was a major draw. Although many
competing firms had more convenient
locations, clients were willing to make
the trip because of the food.
• Rethink your contract or payment terms.
Another way to hold onto customers
is to introduce contracts with penalties
for early termination. This can be
especially effective in industries with
high turnover, or “churn.” For example,
many wireless providers are
migrating from one- to two-year service
contracts. Other companies are holding
onto customers longer by replacing
monthly payment plans with one annual
payment or advance payment plans.
Such programs may lower revenues
slightly overall, but can increase customer
“stickiness.”
Step 7: Measure Progress
Toward Improvement
Customer retention efforts must be ongoing.
Don’t drop the ball once your
performance improvement programs are in
place. Measure your company’s progress
toward the metrics defined in Step 4 above,
and toward overall retention goals. Make
retention a company-wide challenge by
posting progress charts. Even better, calculate
and report the bottom-line impact
of the changes on a regular basis, so that
employees can see the results of their
efforts.
These seven steps will put you on the
right track toward keeping your most valuable
customers. Don’t be surprised if your
company’s customer retention efforts lead
to positive word-of-mouth and customer
recommendations that continue to boost
your business, a far cry from the “cycle of
doom” that misguided cost-cutting measures
can lead to. By resisting the urge to cut
the wrong costs, companies can help maintain
revenues and profitability—even in
difficult economic times.