Perhaps most CRM programmes have, as a major part of their justification, improvements in customer retention. Personally, I've always liked to see retention within a broader context which one might call 'customer value maximisation', as customer retention will be impacted by previous inter-actions with the company. Recently, I was browsing the McKinsey Quarterly web-site (a great source of business-related articles at www.mckinseyquarterly.com) and came across an excellent article which explored this theme much more coherently than I have, and so I thought I'd share some of that thinking with you in this editorial. (Note that if you're new to the McKinsey site, you'll have to register before being able to access the detailed articles.)
I was pleased to see that I knew at least one of the authors – Tim Gokey, who I had the pleasure of working with back in the mid-90's when we were still defining what CRM was all about. Tim, and a McKinsey colleague, Stephanie Coyles, have undertaken a two-year study of 1,200 households to find out about companies in 16 industries covering, amongst others, airlines, banking, and consumer products. The study shows that improving the management of customer migration as a whole, by focusing not only on defections, but also on changes in customer spending can have as much as ten times more value than focusing on defections (customer retention) alone. Of course, this is particularly relevant in companies or industries with high frequency of customer purchases. Gokey and Coyles found at least four more factors which are of importance: the frequencies of other kinds of interactions, such as service calls; the emotional or financial importance of a purchase; the degree of differentiation among competitors' offerings; and ease of switching.
So what do the authors mean by customer migration, compared with customer retention? They propose that in addition to measuring levels of customer satisfaction, and customer retention, companies should measure customer migration – from the satisfied customers who spend more, to the downward migrators who spend less. This step is important because large amounts of value are at stake. They quote, for example, one retail bank, where 5% of current accounts customers defected annually, taking 10% of the bank's current accounts, and 3% of its total balances. But every year, the 35% of customers who reduced their balances significantly cost the bank 24% of its total balances, while the 35% who increased their balances, raised its total balances by 25%. In other words the 1% net growth covered a 'churn' in balances of 49%. This effect was not restricted to retail banking, but affected all 16 industries. For example a phone company found that 90% of its loyalty opportunities came from customers dropping features such as second lines or call waiting.
The main differences compared with a customer retention programme are two-fold: firstly, if you manage migration, you start trying to change customer behaviour much earlier in the downward path to customer attrition; and secondly, you have the opportunity to manage customers upwards, as well as downwards.
So how do we manage customer migration? Gokey and Coyle's research identifies a 6-part segmentation that again appears to apply across the 16 industries they examined. There are three 'loyal' segements, and three 'downward migrators'. If we start with the 'loyal' segments, the research highlights that customers are loyal because they are emotionally attached to their current provider, have rationally chosen it as their best option, or don't regard switching as worth the trouble. Note that this last segment ties in well with the research from the Centre for Customer Studies that we've highlighted in a previous editorial and presentation.
The downward migrators again have one of three reasons for spending less; their lifestyle has changed so they have developed new needs; they continually reassess their options and have found a better one; or they are actively dissatisfied, often due to a single bad experience. It should be clear, that there are three underlying attitudes that impact both positive and negative customer migration: emotions, inertia and deliberation. Deliberative customers are usually the largest group, representing on average 40% of all customers, perhaps not as high as one might expect. This average is, in a sense, misleading, as one of the more interesting findings of the research is that the proportion of different types of customer varies significantly by industry type. For example, deliberative customers who change their spending patterns because of factors like convenience, account for more than 70% of reduced spending by purchasers of casual apparel, but only 33% of reduced spending by mobile-phone customers. This emphasizes another point, I'm keen to push – CRM varies by industry and company, depending on the relationship customers have with particular companies.
So if we can identify these loyalty profiles in our customer base, how can we use them? Perhaps the most important point is that it encourages companies to realize that it is about understanding and managing all six loyalty segments, and that different tactics are required to manage each segment. If this is combined with a measure of customer value (both current and future) the profile helps a company prioritise its loyalty-building activities based on the value of each opportunity.
Perhaps a couple of examples from the article will help:
"One financial institution aimed all its loyalty efforts at increasing its customers' satisfaction. It did so measurably, made major investments to cut down on service failures (such as unanswered phones), and reduced the number of closed accounts. But the effect on overall growth was marginal, and the company's loyalty profile shows why: customers are spending less of their money at such financial institutions mainly because their needs are changing - for example, they might be sending their children to college. Deliberative behaviour, based on factors like prices and features, ran a close second. Here, as in most industries we studied, downward migration due to dissatisfaction represents a small proportion of the total loyalty opportunity."
The second example I know from personal involvement, as I've mentioned before on this site. In the car-hire industry, deliberators' concern with price is expanded to include other factors, particularly the time spent by a busy 'user-chooser' waiting for their car at the airport. The Hertz No 1 club has a number of features built in to save time for that user-chooser whenever they rent a car. Frequent travelers are encouraged to base their decisions about which car rental company to patronize, not only on price, but also on ability to save time.
Of course, the real bottom-line, is does this have any impact on the ROI from CRM. I can do little better than quote the authors themselves:
"By using a coordinated approach to understanding the many facets of loyalty and by tailoring tactics appropriately, several companies have reduced downward migration and defection by 20 to 30 percent. Consider the case of the retail bank that saw 50 percent of its annual balances in play because of migration. Even assuming that more than half of the change was due to factors the bank couldn't influence, and even if it managed to recapture only 20 percent of the rest, its top-line growth, currently in single digits, would rise by three to five points. Similarly, department stores using a coordinated approach have cut downward migration by 25 to 30 percent, leading to top-line gains comparable to a 1 to 2 percent increase in same-store sales, a key retailing metric generally in single digits. For banks and the many other industries with modest price-to-earnings ratios, increasing growth rates by the clearly feasible target of 3 percent should lead, within three years, to a 25 percent increase in market capitalization.
By focusing on migration and by understanding the motives that underlie customer loyalty, companies can increase that loyalty in a meaningful way."