Thursday, January 31, 2008

Managing Customer Loyalty

You know the old saying, "It costs five-times more to get a new customer than to keep an existing customer." Well, it's true! And, it's relevant to whatever business that you're in. The multiplier may change but it is definitely much more profitable to keep and grow your customers than to continually lose them.

The telecommunications industry is very familiar with this issue. They call this type of customer loss "churn." In the 1990s, it was common to hear customer churn rates of almost 100%. In other words, telecommunications firms were losing an equal amount of customers that they gained. I think we can all agree that this was quite the frightening trend. Consumers and businesses became very price focused, and the telecom providers would come out with one promotion after another to "win-back" their customer's business -- totally based upon price. It was definitely war! I know -- I was there. I worked at AT&T during that time and it was brutal.

Here's what I saw to be the problem -- we didn't have the marketing tools to properly care for our customers. Once the salesperson won the customer back, the customer would get lost. Not only would they not get an offer of a better calling plan as their usage increased, if the plan they were on "expired," they'd automatically receive the most expensive pricing plan as a default and their bill would triple. And this was the thanks that they received for being a loyal customer. Nutty!

The problem still exists today -- and not just in telecommunications but in many industries. However, with Cable and traditional telecommunications companies going head-to-head for all services -- including internet and television -- it's happening again. It's a somewhat new set of competitors (some old, some new, some just under a new name), however, the business problem is exactly the same. It's even worsened because with all of the mergers and acquisitions in telecommunications, each firm has inherited a multitude of customer data warehouses, billing information, etc. This really makes it difficult to manage customer relationships without the right technology.

In a recent article from TMCnet, Arthur Middleton Hughes discusses the new "Triple Play" that these companies are competing with today to get the bulk of broadband, phone service and TV services from consumers and businesses. And the competition is, once again, fierce. Hughes argues that telecommunications firms can combat high churn rates simply by practicing sound database marketing strategy. Hughes states: "Using database marketing, it is possible to build a relationship with customers that will keep them from leaving. The secret? Personalized communications. If you can develop a dialog with your customers, they will rarely leave. "

We agree. Hughes also provides these 11 steps that a company can take to ensure that they don't lose their customers. We think that these are great suggestions that translate well across industries.

1. Review their price plans. Study each customer individually, and develop price plans for each of them that recognize their value and reward them. Don't make this a public announcement. Make it a personal message from you to each customer.
2. Use analytics to predict defection. With a modern database it is possible to identify potential churners with an accuracy of better than 90%. Once you know who is thinking of leaving, create a message with an offer that will head them off at the pass.
3. Cross Sell: Sell them a second product. This is why the Triple Play is important. Bundle the pricing of the second product with their current plan so that they end up better off. Make it expensive to switch back.
4. Thank them for their business. You can send a simple letter: "You have been a Verizon customer for five years on June 24th, Mr. Williams. We just wanted to thank you and to let you know how much we value your business. '
5. Don't rely on statement stuffers to communicate. Everyone knows that advertisements can be put into the envelope with the monthly bill. The postage is free. How wonderful! But don't fool yourself into thinking that this is a communication. Most people chuck out the junk that comes with the monthly statement. You must communicate with your customers to keep their loyalty, but this is not the best way. If you think it is, compare the response rate to statement stuffers with that of a personalized direct mail or email piece. Typically, a well-crafted personalized direct mail or email piece will generate several times the level of response and conversion of a statement stuffer. To be effective, however, the message must be personal: 'Dear Mr. Hughes.' And it must be offering the Next Best Product for Arthur Hughes determined by analytics, not the 'Product of the Month' that is sent to everyone.
6. Develop a customer contact strategy. Some companies have a policy of six touches per year, remembering that a bill is not a touch. Every one of these six touches should be personal, and as far as you can determine, of interest to the subscriber. Finally, they should promote one, and only one, product: shift to digital, or upgrade, or a better price plan. Don't give them a menu of choices. Give them a single specific offer. Study after study confirms that choice kills response.
7. Review each customer's situation on a daily basis in real time. Once a month is far too slow in this fast moving Telecom world. Modern databases can be updated several times a day. The updates are used to score all customers by their LTV and churn potential. The matrix can then be used to review each customer on a nightly basis, and develop automatic communications before it is too late.
8. Let customers manage their services themselves. As customers invest more of their time to managing their accounts they feel more committed to the relationship. Churn goes down.
9. Get customers to become advocates. Referred customers typically have a lower churn rate than the average customer. So set up a program to reward your customers for providing you with referrals that sign up for your service. Advocates have lower churn rates as well. So you will be getting double mileage out of a referral program.
10. Study the calendar. Churn typically happens mainly in certain months, or certain periods of time after the customer first signs up. When you know which are the most active churning months for each customer, mount an aggressive proactive campaign to head them off at the pass.
11. Study Usage. When usage suddenly drops or declines, you know that churn is coming.
While these 11 steps may seem a bit overwhelming at first, utilizing the correct marketing database tools can automate most or all of this for you. By taking the time to really understand what your needs are and the appropriate technology to fit those needs, you can not only stem your churn problem, but you can bury your competitors by keeping your customers loyal to your product/service.

Good luck in keeping all of your valuable customer relationships! Also, if you're interested in our white paper on effective data management, we'd be happy to share it with you.


Anonymous said...

You know the old saying, "It costs five-times more to get a new customer than to keep an existing customer." Well, it AIN'T true. Here's my argument why it isn't:

Nancy Arter said...

OK, OK . . . I should've read your post first, Anonymous! : )

You are absolutely correct -- it is very difficult to quantify exactly how much it costs to keep a customer than to retain a customer. It depends on the industry, the economic situation, the whole darn environment.

However, in the case of long distance telecommunications profitability in the 1990's (when a minute cost .30) . . . trust me when I say that AT&T had the data to back up this claim at that moment in time with their B2B customers.

The funny thing is, it stuck. Now I'm wondering who created the "legend" in the first place. : )

Thanks for your comment -- and I highly recommend taking a look at the link referenced. It's a great post with great comments!

zjj said...
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