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Written By: Foresight Software, Inc.
Increased Customer Loyalty and Profitability Drive High Return on Customer
Customer loyalty is a critical business strategy for today's companies to
understand. Companies that have a good reputation for "excellent service"
will also have a happier customer base with a higher degree of loyalty and
repeat business. Jill Griffin, in her book on Customer Loyalty writes, "To
maintain a dependable clientele and curtail the expense of wooing new
customers, businesses must go beyond customer satisfaction and take steps to
ensure greater loyalty."
This paper will show how customer loyalty is the key for getting the highest
ROC (Return on Customer) for your business.
How does a company know if they truly understand their customer? A good start
would be to take the following Customer Retention quiz.
Then, if you find you don't have the answers to these questions, you are more
than likely, out of touch with your customer base.
Customer Retention Quiz
- Do you know what percentage of customers you lose each year? Yes No
- Could you name the top three reasons customers leave you each year? Yes No
- Do you have a communicated customer retention plan in place? Yes No
- Do you have written customer service quality and service training standards
in place? Yes No
- Do you have efficient service systems in place to support your customers?
Yes No
- Do you know what percentage of your customer's business you are getting? Yes No
- Did greater than 50% of your customers come back for more products over the
year? Yes No
- Do you have customer measurement and tracking systems in place? Yes No
- Do you have an internal ranking system for your customers? Yes No
Understanding Your Customer
Customers are not all the same. Each customer is complex with different
needs, value systems and expectations. One basic need all customers share is
a high level of customer service that allows them to save time and money.
This is the key to customer loyalty. And customer loyalty is ultimately a
main profitability enabler for any company.
Studies have shown that a loyal customer will provide two-to-three times more
repeat business. According to Fredrick Reinchheld, author of The Loyalty
Effect, it can cost six times as much to acquire a new customer as it does to
keep a customer. In addition, loyal customers will reference your company to
new prospects and these referrals have a higher probability of remaining
loyal long-term customers. Ultimately, with customer satisfaction, your
market position will strengthen by keeping these customers away from the
competition. This makes your products less price sensitive. In order to reach
this stage, a company must understand how to maintain customer loyalty.
Laura Patterson, director of marketing for Evolutionary Technologies, Austin,
Texas, says that to manage customer loyalty, it is important to first
identify which customers provide the most amount of profit for your business.
You can do this by segmenting your customers and grouping them by their
profitability factors. You also have to know your value proposition. This
will allow you to understand what type of services has the most potential to
affect loyalty among your profitable customers. Once you know this, you can
better target your profiled customer segment. The ultimate goal is to
increase your share of their business and to lock out the competition.
The are many positive results of managing and retaining customers through
excellent customer service. Below are four main benefits that Jill Griffin
discusses in her article on The Internet's Expanding Role in Building
Customer Loyalty (Direct Marketing, November 1996).
- Remarketing activities decrease because referrals are high resulting in
lower customer acquisition amounts.
- Transaction costs are lower since contract negotiations and order
processing costs will decrease the more a customer trusts your business. In
other words, it costs less to resell loyal customers because the actual cost
per sale is reduced.
- Customer turnover rate decreases resulting in fewer lost customers to
replace.
- Finally, the overall effect within your company will be positive. Studies
have shown that the best employees prefer to work for companies that deliver
superior value.
Lifetime Value of a Customer
According to Robert C. Blattberg, author of the article Managing the Firm
Using Lifetime-Customer Value (Chain Store Age Executive, January 1998), the
definition of LCV or the Lifetime Customer Value is the sum of all future
customer revenue streams MINUS the product and servicing costs, acquisition
costs and remarketing costs. More simply, the value of a pleased customer who
values your customer service lowers the cost of future service to that
customer. Customer loyalty promotes increased LCV, which ultimately drives
company profitability growth. Organizations that understand and adopt LCV
will be able to provide shareholders with above average rates of return.
How does a company start to put together an LCV database?
Blattberg explains that first, a company must obtain a detailed database of
customers. This should include the purchase history of the customer--the
what, where, when, how much, and most importantly WHY the customer has used
the company in the past. It is also important to have the customer's
interaction data, service calls/results, campaigns, promotions and account
manager correspondence. Before addressing your LCV database, you need to know
which customers are critical to the future of your company.
Measuring the Relationship
Organizations must have the appropriate measurement tools in order to be able
to know what customers are worth. According to Vic Hunter, author of Business
to Business Marketing: Creating a Community of Customers, it is important to
assess your customers using some method of measuring their value to your
organization. You can rank your customer by a number of criteria including;
revenue, purchase pattern or product/service penetration The most important
criterion is profitability.
To successfully measure your customer relationships, first determine the
profitable customers. Then track the performance of the customer
relationships over twelve month intervals. Finally, develop "what if"
scenarios for additional product/services sold into relationships.
Once you have identified your target customers, determine what can make these
customers, loyal customers. Don't try to be all things to all people. A
company must focus on service processes that are valuable to customers. Move
the focus from serving the customer to caring about the customer.
Within your own organization, foster self-responsibility in every position
and reward the staff and customers for this responsibility. For example, have
games or contests with marketing tools like tickets, clubs and specific
events. If you stay within the office, utilize the web with web seminars. If
you can, get out of the office and meet the customers. Communication is the
key. Valuable customers deserve face to face communication.
Once you have met your customer, bring in the customer to your company. Don't
make the customer an "other." Some ideas from JoAnna Brandi, author of
Winning at Customer Retention-101 Ways to Keep 'em Happy, Keep 'em Loyal and
Keep 'em Coming Back, include: creating customer images, stories, pictures
and reserving a "chair' for the customers in company meetings. Customer
retention plans and activities are central factors in bringing in customer
value. Involve the customer in fixing problems as well. Creating a
relationship and building loyalty will lead to the profitability of that
contract or customer.
Foresight Software's ROC System
In order to increase profitability, a company must understand that ROC or
customer satisfaction is a direct precursor to company profitability. In
order to accomplish a high ROC, a company must have the technology to
implement appropriate customer interaction practices.
Foresight Software's Service Management System automates and integrates help
desk, call management, contract administration, field service, inventory
logistics, repair center and financial management operations within service
organizations. The company also offers Enterprise Resource Planning modules,
which are fully integrated to the company's Service Management System. The
ERP modules provide a solution for mid size companies who require
manufacturing, distribution, financial, human resource and service
operations.
Service Management System can contribute to ROC because it can show you who
your best customers are based on their revenue. Service Management System
lets you look at all of your customer information by product, contract,
repair frequency and financial contributions.
Always remember that ROC is the key driver of cash flow in an organization.
Understanding the power of customer loyalty and maintaining that loyalty will
enhance your customer's loyalty and improve the relationship. In a company,
this focus of ROC is not restricted to a particular department or division.
It is an enterprise wide concern.
ROC and TERM
Retaining and maintaining customer relationships is a company wide obligation
and is only successful if the company is equipped with the resources to
integrate their sales and marketing or "front office" concerns with their
business and support or "back office" operations. TERM (Technology Enabled
Relationship Management) is a new concept developed by Gartner Group that is
emerging as a new way to address overall systems management. It is a process
and technology re-engineering effort.
The business of servicing customers has changed over the past few years.
Service has become a key differentiator, and for many companies, an important
competitive advantage. TERM provides a model for these progressive service
and manufacturing organizations. TERM allows companies to more effectively
manage their own business on their own terms. It allows the companies to
increase their service organization's productivity in order to allow their
customers easier access to service and information. TERM allows the company
to integrate their front office to the back office thus allowing customers to
receive superior service.
If a company wants to become more profitable, it needs satisfied customers to
increase its profitability. To involve the enterprise, the company needs to
ensure that business operations are integrated with sales and marketing
departments. ROC value programs can only work if there is an enterprise-wide
solution that totally integrates back office with front office systems.
Only then can a company offer the best service to their customers. This leads
to happier, more productive and loyal customers, which ultimately means
increased profitability for the company.
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