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Which Customers to Retain? Simply, the customers who have greatest strategic value to your company are prime candidates for your retention efforts. These are the customers who have high CLV, or are otherwise strategically significant as high volume customers, benchmarks, inspirations or door openers, as described in more detail at the end of Chapter 5. You need to bear in mind that there may be a considerable cost of customer retention. Your most valued customers are also likely to be very attractive to your competitors. If the costs of retaining customers become too great then they might lose their status as strategically significant. The level of commitment between your customer and you will figure in the decision about which customers to retain. If the customer is highly committed, they will be impervious to the appeals of competitors, and you will not need to invest so much in their retention. On the other hand, if you have highly significant customers who are not committed, you may want to invest considerable sums in their retention. Some companies prefer to focus their retention efforts on their recently acquired customers. They often have greater future lifetime value potential than longer tenure customers. There is some evidence that retention rates rise over time, so if defections can be prevented in the early stages of a relationship, there will be a pay-off in future revenue streams and profitability5 Another justification for focusing on recently acquired customers comes from research into service failures. When customers experience service failure, they may be more forgiving if they have a history of good service with the service provider. In other words, customers who have been recently acquired and let down are more likely to defect or reduce their spending than customers who have a satisfactory history with the supplier There is also some evidence that the most valuable customers change over time. The UK retail organization, John Lewis Partnership, for example, has found that 50 per cent of profits are produced by 5 per cent of their customers, but that the composition of the 5 per cent changes year on year. The company uses data from its loyalty programme and credit card to identify the 5 per cent, and directs its retention efforts accordingly.1 John Lewis’s ‘Never Knowingly Undersold’ market positioning is about ‘a relationship with a customer over a lifetime, making a trade-off between making slightly more money on the sale of the fork versus the lifetime value that comes from the trust you can engender by making sure that the fork is sold at a price which is no greater than it could be, if bought anywhere else’ Retention efforts where there is portfolio purchasing can be very difficult. Should effort be directed at retaining the high-share customer with whom you have a profitable relationship, the medium-share customer from whom you might lose additional share to competitors or the low-share customer from whom there is considerable CLV potential? The answer will depend on the current value of the customer, the potential for growing that value and the cost of maintaining and developing the relationship. Strategies for Customer Retention Positive and negative retention strategies An important distinction can be made between strategies that lock the customer in by penalizing their exit from a relationship, and strategies that reward a customer for remaining in a relationship. The former are generally considered negative, and the latter positive customer retention strategies. Negative customer retention strategies impose high switching costs on customers, discouraging their defection. In a B2C context, mortgage companies have commonly recruited new customers with attractive discounted interest rates. When the honeymoon period is over, these customers may want to switch to another provider, only to discover that they will be hit with early redemption and exit penalties. Customers wishing to switch retail banks find that it is less simple than anticipated: direct debits and standing orders have to be reorganized. In a B2B context, a customer may have agreed to purchase a given volume of raw material at a quoted price. Some way through the contract a lower cost supplier makes a better offer. The customer wants to switch but finds that there are penalty clauses in the contract. The new supplier is unwilling to buy the customer out of the contract by paying the penalties. Some customers find these switching costs are so high that they remain customers, though unwillingly. The danger for CRM practitioners is that negative customer retention strategies produce customers who feel trapped. They are likely to agitate to be freed from their obligations, taking up much management time. Also, they are likely to utter negative word-of-mouth; in today’s social media environment it is easier than ever and highly effective. They are unlikely to do further business with that supplier. Companies that pursue these strategies argue that customers need to be aware of what they are buying and the contracts they sign. They argue that the total cost of ownership (TCO) of a mortgage should and does include early redemption costs. When presented with dissatisfied customers complaining about high relationship exit (switching) costs, companies have a choice. They can either enforce the terms and conditions, or not. The latter path is more attractive when the customer is strategically significant, particularly if the company can make an offer that matches that of the prospective new supplier

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