The Economics of Customer Loyalty
Traditional accounting seldom captures the value of loyal customers.
This information is never contained in an organizations financial data.
Yet, loyal customers are one of the organizations most valuable assets.
From the American Management Association: Considering a million dollars in business over a 10 year period with a 10% inflation rate, an organization can improve revenues by 49% with a 10% increase in customer retention.
Fredrick Reichheld, in his book The Loyalty Effect, reports a 5% increase in customer retention can potentially boost profits by 25-125% due to:
- Lower acquisition cost - It costs 5-7 times as much to acquire a new customer as to retain a current one.
- Increased base profit - Customers are willing to pay higher prices for products and services when complemented by superior service.
- Reduced price premiums - Loss leaders make up a smaller percentage of long-term customer purchases when
customers are less attracted to price sensitive offers by competitors.
- Increased referrals - People tend to associate with people like themselves. Referred customers fit well with the goods and services offered.
- Decreased employee churn - Retained customers tend to be pleased with the value they receive and their satisfaction becomes a source of pride, energy, and allegiance for employees.
The Economics of Service Recovery
Service recovery is another profit center that receives little or no attention from accountants.
However, well-managed service recovery increases profitability as it can generate revenues many times greater than the cost of recovery:
- On the average most organizations report a loss of approximately 50% of their customer base every 5 years.
- Out of every five customers that experiences a problem will leave and purchase elsewhere the next time he/she goes into the
- If complaints are handled in a matter that satisfies, complaining customers will have loyalty approaching customers having no
problems at all.
- If distraught customers are at least pacified, the organization has a good chance to retain the customer.
- If customers leave dissatisfied, their potential loyalty is reduced to a level below what it was before the organization tried to solve the problem.
In many industries, a complaining customer whose problem is solved becomes more loyal than a customer with no problem.
Bad service recovery impacts others because they are influenced by word of mouth.
If a transaction is small a satisfied customer will share his experience with five people while a dissatisfied customer tells ten people.
If the transaction is considered large the figures increase to eight for a satisfied customer and 16 for a customer that is dissatisfied.
Simple CRM: The Foundation
A system for Simple CRM begins to take shape when the intrinsic value for the system is established with the support the organization.
The following people launch the system at inception, pilot the system
implementation, then measure, manage, and maximize the system once it is up and operating to optimize each
customer's value package:
Management - without management's full support and commitment the system will wither away.
Management must commit to start the system and not walk away.
Chief Service Officer (if applicable) - appointed by the CEO, the CSO becomes the customer's voice and advocate in all
Customer Service Committee - The committee is made up of a cross section of employees with different
job responsibilities who develop process and procedure to guide the system.
Simple CRM: Stage I - Measure
Stage I is extremely comprehensive as it is the driving force behind Simple CRM.
Developing Service Metrics:
A management tool for measuring, managing, and maximizing levels of service to which the organization aspires.
Customer defection rates are defined and the lost profits are determined.
Customers are ranked by their value and likelihood to defect.
Determining Customer Requirements:
To provide genuine service quality organizations need to ask customers what they require, what they expect,
and what they consider good service. These results are compared with the service
Evaluating Internal Customers:
This is the corporate scoreboard. It identifies, from the employee's perspective, service strengths as well as
areas need improvement.
Reviewing Organizational Service Policy:
Ensures service policy benefits the organization as well as its customers and ensures service policy is specific and easily understood.
Pinpointing Highly Valued Service:
Blueprints customer valued high-impact service in advance for the most notable and sensitive customer transactions.
This prevents unmet expectations and encourages service behavior meeting or exceeding
Simple CRM: Stage II - Manage
To the customer the true acid test for quality service is not when things go well, rather, it's the way the organization responds and manages service recovery when things go wrong.
Stage II is designed to give organizations a competitive edge that recognizes service problems as golden opportunities so they can respond to them effectively to manage and maximize future relationships with disappointed
Drafting a Customer Retention Statement:
Communicates the way as well as the things that need to be done by the organization to create a service value package that impresses and retains customers.
Documenting a Customer Bill of Rights:
Announces clearly those service attributes all customers are entitled too during all service contacts and under all situations.
Revising Job Descriptions:
Illustrates to all employees how their job responsibilities, no matter how far removed from actual customer contact, impact customer service
in important ways.
Setting Service Standards:
Puts into action repeatable, step-by-step measurable activities and behaviors for molding the company image into one that offers service in a consistent
Implementing Complaint Management:
When complaints are managed properly they become a tool that not only reduces costly customer defections but serve the organization as a platform for improving service quality and achieving business goals. There are three major outcomes of a complaint management system
- The system identifies customer problems, complaints, and inconveniences
- The system resolves problems effectively - short-term on the spot as customers share their dissatisfaction, and long-term by scrutinizing customer data.
- The system helps the organization learn from the recovery experience - and utilizes
complaints and solutions as a tool for continuous improvement.
Recovering with At-risk Customers:
Organizations, as part of their service recovery plan need service tools that reach out to at-risk customers, with a promise of redress and a demonstration of sincere concern.
A customer retention program is initiated and results measured, with the goal of decreasing the likelihood to defect scores of high value
customers over time.
Reactivating Lost Customers:
Writing off lost customers is replaced with a productive and profitable customer win-back program. High value defected customers are identified and an outreach program begins.
You can't build the Simple CRM system to be customer-centered without quality people to manage and deliver the system. Stage II contains Performance
Training - three sessions specifically developed to improve service productivity, performance, and accountability:
- The Basics of Dazzling
and Delighting Customers
- Complaints Are Golden Opportunities
- Service Management
Techniques That Get Results
Simple CRM: Stage III - Maximize
When the measurement and tracking systems are in place, the policies and procedures tuned for customer-centric care, and the employees are trained in service excellence, Simple CRM becomes a customer retention machine.
"Trip Wire Reporting" is instituted to warn managers and employees about high value customers who are becoming more likely to defect.
Retention and recapture marketing programs are fine-tuned to deliver maximum profits at minimum cost, and the whole organization is in continuous learning mode.
Because Simple CRM is designed from the ground up to be based on customer value and likelihood to defect scoring, real bottom dollar profit benefits can be measured and quantified in the system.
Management and employees learn how to fine-tune the system by reacting to the Trip Wire reporting and plugging any service and quality gaps in the system, resulting in ongoing continuous improvement.