| Experts Corner |  How can I reduce the risk of a security breach when a customer calls?
John P. Joseph, VP Corporate Marketing, Envox Worldwide
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The Danger of Defection
Andrew Greenyer, Marketing Director EMEA, Group 1 Software
 Over the last fifteen years, the cult of customer retention has gone from strength to strength. For many industries, winning new customers consumes far less intellectual effort than keeping the ones you already have, and developing their value to your organisation. Much modelling effort goes into predicting which customers are likely to defect, as well as building strategies to stop them doing so. Research from Pitney Bowes tells us that by the end of 2005 more effort will be going into marketing to existing customers than is devoted to winning new ones – a watershed moment in marketing.
Since Reicheld’s over-quoted (some say unscientific) assertion that a 5% increase in loyalty can lead to a 25-85% increase in profitability, the cult of customer retention has continued within the marketing community. Yet just because a company manages to keep customers, does not mean that it is also capable of developing the value of those customers.
Yet the world is becoming generally more mobile and less loyal. Back in 2003 – the last time that we commissioned research on the subject – the all industries average customer defection rate was 16.9% per annum. Now our annual average has risen to 19.1%. No wonder marketers are becoming obsessed with retention strategies.
This year’s study commissioned by Group 1 Software (fieldwork by MarketingUK) amongst the country’s top 1000 companies, also describes sector variations in defection rates.
Other pieces of received wisdom are also being toppled. Traditionally, pundits have regarded the range of key industries studied in this report as being highly polarised as far as customer ‘churn’ is concerned. Banking was always labelled low churn, and Mobile Telecoms high churn. Our study shows that whilst Mobile Telecoms still heads the field, the supposedly massive rates of customer inertia in Banking is no longer a given.
The importance of customer profiling
In an atmosphere of high or habitual defection rates, the importance of customer profiling becomes paramount. In the first place, the community of habitual switchers must be identified so that retention effort is not expended on those who will defect anyway. These serial switchers have now been given names such as “rate surfers”, “card collectors”, and so on, depending on the particular industry.
At the other end of the spectrum, high value (or high potential value), high inertia customers must be made to feel special and further products or services relevant to their needs offered to them under the aegis of a brand that they obviously value. It is the role of data-driven marketing techniques to identify all the shades of loyalty, value and inertia in between these more obvious behaviour polarities, and help develop strategies to keep and develop customer value.
Implementing such strategies requires a truly integrated approach to the customer across all ‘touchpoints’ with the company — face-to-face, mail, phone, email, website, SMS, and even bills, statements and customer correspondence. Every communication that a customer has with the company needs be consistent, relevant and develop customer satisfaction and value at the same time. Otherwise a terse letter, or a rude assistant, or an inappropriate phonecall can undermine all the other investment and hard work that has been put into managing the customer relationship.
Other barriers to CRM falling
In another study this year by TotalDM, a barometer of ‘CRM Commitment’ was established, in the form of the proportion of the UK’s top 500 companies with a Head of CRM. The average came in at approaching half (44%). We may conclude, therefore, that in many cases, measurable return on CRM investment has to be proved before a company will appoint a Head of CRM into a senior directorial role (regardless of whether this is an internal promotion or an external hire). In this sense, Heads of CRM penetration is acting as a real indicator of commitment. CRM initiatives have been taken, hard bottom-line results measured, and ongoing metrics put in place, before CRM management is afforded senior status.
In parallel, we have seen significant advances in cheaply and quickly drawing customer information out of legacy systems (billing, finance, order management, EPOS, stock management, etc). Formerly, pulling such information was cumbersome and expensive. Special interfaces had to be programmed in to extract the data without causing the legacy line-of-business system to fall over (and result in, say, the tills failing, or bills not being sent on time).
This was a particular problem for volatile industries (Telecoms, Retail, Travel & Leisure) where the customer data you needed to analyse and apply to campaigns today might not be the same as your requirements six months later. Firms simply couldn’t afford the cost of writing new interfaces twice a year. That barrier no longer exists thanks to a relatively new software category called ‘extract, transform and load’ (ETL). In layman’s terms, this software allows non-technical people to build new data input filters on the fly, and inexpensively.
Not only can customer data now be easily extracted from all around the enterprise, but existing customer communications can be harnessed for marketing purposes. What are called ‘print streams’ for statements, bills, order confirmations, customer letters and so on, can now be manipulated to include marketing messages tailored to the individual recipient, taking advantage of all the sophisticated analysis and segmentation that takes place at the database level.
This is another example of matching personalised marketing analysis with real-life physical delivery of those offers to the recipient through a medium that can reach the bulk of the customer base. The importance of this development is that its incremental cost for the marketer is minimal, yet research we commissioned at the end of 2004 shows it can produce response rates akin to stand-alone direct marketing campaigns, delivering tangibly contributing to return on investment. Another hurdle bites the dust.
What about the major disincentive of the capital cost of a CRM investment? Again, things have moved on here. After experiencing a massive downturn in sales in 2002-2003, CRM software vendors pulled themselves together and started to explore alternative sales models.
A range of options came to market, including the hosted (ASP) charged on a service rental basis, low-cost defeatured start-up packages, and even charging per transaction (like a database bureau traditionally does). The result is that the upfront cost of investing in CRM has fallen, making the whole scene more acceptable to careful CFOs at larger organisation, as well as stacking up financially for smaller organisations.
Outsourcing of whole CRM business processes has also grown. The traditional outsourcing focus has been on the call centre. Recently, however, database bureau businesses have transformed themselves into outsourced analysis departments, campaign management back-offices, or database hosts. According to data management specialist CDMS, campaign management outsourcing is used by over one third of top UK corporations. In short then, costs have fallen, the need for capital commitment has crumbled, and liquidity has been assisted through the option of monthly service charge payments to an outsource provider.
Conclusion
In conclusion then, publicly quoted companies in the key industry sectors we studied are under particular pressure to measurably grow their customer bases, exposed as they are to market sentiment and shareholder scrutiny. Strategies to stem defection are therefore critical to growing the customer base for the lowest possible investment. In that sense Reicheld was right — it is far less expensive to keep a good customer than to win a new one.
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