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The strength of numbers

Flows & Retention

Customer Retention
Customer retention is a challenge for all modern companies. Retaining customers is generally more profitable than acquiring new ones. The main strategic objective of CRM is to manage, in order to obtain profits, a relationship between the company and its customers through three stages of the customer's life cycle: customer acquisition, customer retention and customer development.

A customer retention strategy aims to keep a high proportion of high-value customers by reducing customer defection and a customer development strategy aimed at increasing the value of these customers retained by the company.

Customer retention is the maintenance of continuous relationships with customers in the long term.

Companies must focus on retaining customers who contribute to value creation (Buttle, 2009). Sometimes this will mean that you will not have to concentrate on retaining all customers by themselves, but on a part of the portfolio. Changes in buying behavior may be responsible for large changes in customer value rather than defection.

For example, a bank lost 3% of its turnover when it lost 5% of its customers' accounts in one year, but lost 24% when 35% of customers reduced the amount of deposits in their accounts. The need to manage changes, rather than defection, is particularly important when customers engage in their purchases with more than one supplier.

Increasing customer retention is an important goal for most CRM implementations. Its definition and measurement is important for all issues related to sales, value and profit previously discussed. It is important to remember that the main purpose of focusing on customer retention is to ensure that the company maintains relationships with customers who bring added value.

It may not be useful and profitable to maintain relationships with all customers; some may be too expensive to serve, others may use the strategy to continually change in search of the best offer. These could be destructors of value and not value creators.

There is a strong economic argument for customer retention. This topic is as follows:

increase in purchases: over time, customers increasingly know their suppliers. If the relationship is satisfactory, trust grows while risks and uncertainties are reduced. Therefore, customers entrust the bulk of their spending to these suppliers with whom they have a proven satisfactory relationship. Furthermore, by developing the suppliers a relationship of intimacy with the client, they can obtain greater profits by selling other products.

  1. Lower customer management costs over time: initial relationship costs can be significantly higher. It may take several years to make enough profits to recover these acquisition costs. For example, it may take six years to recover the costs of obtaining a new customer for a bank. In B2B (business to business) in particular, the cost of maintaining a relationship such as sales and service costs may be relatively lower than the costs of obtaining a new customer. Furthermore, there is a high possibility that the client will become more profitable in the period and hold it for a long time. These relationship maintenance costs can be significantly reduced or even eliminated if the parties are approaching over time. In the B2B context once the process is automated, transaction costs are effectively eliminated. In B2C (Business to Consumer), especially in retail, the assertion that acquisition costs generally exceed maintenance costs is difficult to prove. This in particular because it is really difficult to isolate and measure acquisition costs.

  2. Prosecutor customers: Customers who willingly purchase most of the products from a preferred supplier are generally more satisfied with customers who do not. They are therefore more positive and with word of mouth they influence the attitude and behavior of others. Research shows that customers who buy frequently are strong promoters. For example, customers who buy clothing online once recommend it to three people; after ten purchases they will have advised him to seven. In consumer electronics, those who buy once recommend it to four. Suggested clients spend around 50 to 75% of the referrer's spending in the first three years of their relationship. New customers are more likely to be enthusiastic about their recent experience than they do with old customers who are already used to it.

  3. Premium prices: customers who are satisfied in their relationship can reward suppliers by paying a higher price. This is because their perception of value does not depend only on the price. Customers in a lasting relationship are also less sensitive to the appeal of lower prices offered by competitors.

These conditions mean that regular customers are generally more profitable than new ones. Guided by their experience as consultants, Dawkins and Reicheld report that the 5% increase in the customer retention rate leads to an increase in the net present value of customers between 25 and 95% in a wide range of sectors, including credit cards. credit, insurance, automobiles and management of office building.

In short, customer retention leads us to evaluate which customers should retain customers who have greater strategic value for the company.

These are customers who are however strategically significant for other reasons. The maintenance cost can be substantial. The most valuable customers are attractive for the competition as well. If the cost of retaining customers becomes too big then they would lose their strategically significant status. The level of constraint / commitment between customers and the company is important in deciding which customers to retain. If customers are very constrained, they will hardly be attractive to competitors and it will not be necessary to invest a lot to retain them. On the other hand, if you have important customers who are not bound in any way, it will be advisable to invest considerable sums to keep them. Some companies prefer to focus their efforts on newly purchased customers.

There is evidence that the retention rate increases over time, so if defections can be prevented in the first stage of the relationship, significant future revenues may occur.

A further justification for focusing on newly acquired clients comes from research into service failure. When there is a failure of a customer's experience of a service, it is easier than forgiving if they have a history of good services obtained from the supplier. In other words, customers who recently bought and were disappointed are more likely to reduce their spending than customers who have a history of satisfaction with the supplier.

On which customers focus their efforts is not an easy choice. Should we focus on the high share of customers with whom we have a profitable relationship, on the average share of customers for whom we may lose additional shares in favor of competitors or on the small share that has a high lifetime value potential? The answer will depend on the customer's current value, the growth potential of this value and the cost of maintaining and developing the relationship

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