Presented by:

TM
Vendor Guru

Tips for Cost-Effective Customer

Retention Management
by Gina Pogol
Table of Contents

Executive Summary....................................................................................................... 3

Introduction.................................................................................................................

Customer Loyalty Doesn’t Have to be Expensive................................................................ 4

1. What does a new customer cost? ................................................................................. 5

2. Creating loyal customers cost less and adds more value.................................................. 5
3. Profiling Existing Customers Helps To Find Better Customers............................................ 5

Balancing Retention vs. Acquisition.................................................................................. 6

Affordable Solutions....................................................................................................... 6

Identifying The Most Cost Effective CRM Solution For Your Organization................................ 7

Conclusion.................................................................................................................... 8

About the Author........................................................................................................... 8

Sources....................................................................................................................... 8

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Executive Summary

Customer Relationship Management (CRM) is a concept as old as trade itself. Keeping customers
apprised of new products, remembering their likes and dislikes, promptly resolving issues, and giving
them chances to vent and offer feedback are customer-centric concepts that were probably used by the
best iterant peddlers of the dark ages. The major difference between doing business years ago and
today is the speed at which we not only can service our customers, but the speed with which our
customers expect to be serviced.

Customers today are much more demanding in their expectations of how they are serviced and the levels
of service they will get. More often than not, a level playing field between many businesses means the
only real differentiation and competitive advantages we can develop and sustain will be the relationships
we forge with our customers. Many good businesses have made the mistake of assuming that they don’t
have the advantages of knowing their clientele personally because of the rapid pace at which we do
business today and the driving force to sell sell sell.

The truth of the matter is that with the right tools and business processes in place, it becomes quite easy
to gather the customer details needed to easily develop and maintain those precious relationships with
our clients that ultimately translate into key differentiation and competitive advantage. It’s been highly
documented over the years that it costs between 6 and 10 times more to acquire a new customer than it
is to retain an existing one, and by implementing a solid CRM solution and work processes that leverage
it, your business can continue to grow from within.

Today we have an abundance of CRM solutions to choose from. Some are relatively inexpensive and lack
some key functionality, while others require huge investments in time, planning, resources and money.
These larger solutions are often overkill for all but the largest of enterprises and so it becomes a
challenge to strike the right balance between a cost effective solution that delivers the desired results
and throwing away time, money and resources.

A truly cost effective CRM solution that will serve a large majority of businesses does not need to include
sophisticated telephony functionality, screen pops, and call management. Unless your organization is a
major call center and your business is that of telephone support, these features would be an unnecessary
investment. There are many other components to large CRM systems that add costs yet will go unused
by most organizations, and knowing which features to trim and which to keep will allow you to deploy a
cost effective solution that will serve all of your customers needs.

This white paper examines the details of how to gain improved customer retention and acquisition for a
lower overall investment by defining basic CRM functionality needed by most organizations to achieve
their customer goals and objectives.

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Introduction

Some companies with high customer churn rates or a more transactional sales style focus primarily on
bringing new customers in the door, while those with longer business cycles or more relationship-
building sales processes concentrate on retention. Both acquisition and retention are crucial to
long-term business success and growth, but the majority of businesses regardless of sales approach
can gain significant benefits by focusing on retention and selling back into their existing customer base.
This is the primary objective of a CRM solution. Attracting, nurturing and capturing new customers is a
secondary function of a CRM solution and fortunately most of today’s solutions handle these tasks
equally well for little or no additional cost.

Acquisition is generally more expensive than retention, and effective acquisition promotions such as
offering generous incentives to new customers can backfire with existing clients. Marketing campaigns
and prospecting done in a hap-hazard and uncontrolled manner can cost much more than their
incremental benefit. It is within these areas that a CRM solution will lower your cost of acquisition by
providing the tools that your sales and marketing teams can leverage to acquire new customers while
expending the least effort and cost.

Additional key components of customer acquisition are the metrics needed to make cost effective
decisions. Having the data readily available to analyze marketing campaigns and expenditures over time
vs. actual new client adds is vital to an organization. The CRM solution will handle these reports and
indicators easily while retaining the relationship building history and data throughout the life of your
new client. This makes the job of transitioning from new client to valued customer a seamless affair.

Retention and loyalty usually cost less, and effective retention can actually enhance acquisition, because
existing customers who feel valued will spend more and are generous with word of mouth
recommendations. Additionally, identifying and getting to know your most profitable customers helps to
fine-tune strategies for acquiring more high-value clients.

According to Stratescapes, the top 5 goals of retailers implementing CRM systems are: revenue,
loyalty, ROI, retention, and acquisition. All 5 of these goals are somewhat intertwined, but the glue
holding them all together is retention. If we were to take “retention” out of the business sense and
apply it to the customer and what it means from a customer centric perspective we would end up with
“loyalty”. So in essence “retention” on the business side must equal “loyalty” on the customer side.

Customer Loyalty Doesn’t Have to be Expensive

Today’s customers may never see the physical sites of the businesses with which they interact. Goods
and services are purchased globally from home or office over the internet. When customers shop at a
brick and mortar store it’s because they like to be able to touch and feel products or try them on for fit
before buying. However, chances are very high that they’ve done research online to find the best
pricing and service deals. They’ll use that research and information to ensure that they are getting the
best deal and service. Companies unable to compete on price and service had better have darn good
relationships with customers.

The high speed and dynamic nature of business today has removed most advantages enjoyed by
businesses years ago. Today there are hundreds if not more competitors all vying for the attention of a
finite number of buyers. While price is often a big factor in purchasing decisions, strong customer
loyalty can mean the difference between a customer that is willing to pay a little extra and one that
goes with the lowest price

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1. What does a new customer cost?

Most businesses focus on organic growth as the path to long-term success, and that means adding new
customers and growing their base. This means spending upfront to get a new client–advertising,
promotions, rebates, discounts, and marketing campaigns–with the expectation that the lifetime value
of that customer will exceed the cost of acquisition. Unfortunately, customers are a finite resource. As a
business grows, so does the incremental cost of acquiring each new customer.

Though the cost varies from one industry to another, and most firms don’t break acquisition and retention
costs into hard numbers, historical data suggests that incremental customer acquisition costs range from
approximately $32 for companies with physical locations (brick-and-mortar companies) to $81 for
Internet-based companies.

These costs are only the beginning. By focusing on acquisition excessively, a company can erode the
value of its existing client base and diminish future revenue. For example, while a mass mailing and email
campaign may plump up sales initially, it can also annoy customers and make them more likely to ignore
future solicitations. Promotions designed to bring on new clients with incentives not offered to existing
ones can undermine customer retention efforts and increase costs on the back end.

Calculating the value of that new customer must take into account two different revenue streams–the
immediate near-term increase to a company’s bottom line, and the value of future long-term cash flows.
Tapping into that second stream is where customer retention strategies take over.

2. Creating loyal customers cost less and adds more value

The processes of acquiring new customers and retaining existing customers cannot be completely
separated. The data around these two areas tends to overlap. As a result, CRM solutions will often include
both. Unfortunately, shareholder demand for immediate results on quarterly reports leads to a short-term
orientation and a desire for immediate sales boosts even at the risk of undermining future cash flows. So,
companies put more emphasis on the more expensive--and frequently less productive–acquisition
process.

Research by customer loyalty experts suggests that it costs approximately six to ten times as much to
pitch to a new client as it does to sell to an existing loyal customer. It can be projected that spending
between $32 and $81 to bring in a new customer means it will cost a maximum of between $5.33 and
$13.50 to maintain that customer relationship, and a maximum of $3.20 to $8.10.Furthermore, loyal
customers help acquire new ones–first, by word of mouth. Extensive research shows that satisfied
customers tell between 4 and 10 people about their experience, and a 2003 article in Advertising Age
claims that 71% of customers surveyed claimed that “word of mouth” was a top consideration in
deciding to purchase from a company. Conversely, adverse “word of mouth” can devastate a business and
lose exactly the type of customers who are potentially the most profitable.

3. Profiling Existing Customers Helps To Find Better Customers

Some retailers have achieved remarkable success by using their CRM systems to get to know their
customers better. By capturing and analyzing RFM (recency, frequency, and monetary) data, as well as
lifestyle data through customer surveys, and demographic information through customer addresses and
phone numbers, companies are able to calculate the value of each customer and determine how they
acquired their highest value “super customers.” For example, rental car industry research was able to
determine that the top .2% of their customers provided 25% of their business. Rental agencies putting
this information to work would save on marketing by targeting this narrow strip of ultra-high value clients
for promotion and loyalty rewards, while using less expensive, broad-based strategies for lower-value
clients.

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CRM solutions make it possible to find out who the “super customers” are, and most importantly where
they come from, so companies can directly target similar prospects with the expectation of acquiring
more high-value clients and wasting fewer resources on lower-value prospects. However, in order to have
“super customers” to analyze, a firm would first have to acquire and retain them. This retention strategy
and profiling forms the basis for future high-value client acquisition.

Balancing Retention vs. Acquisition

All customers are not valued equally. By tracking the costs of acquisition and retention efforts, and
determining the value of each customer’s immediate and future income stream, companies can calculate
their Return on Customer (ROC). Over time, changes in the ROC help evaluate the success of the mix of
acquisition and retention efforts. A successful marketing plan increases ROC over time by focusing
efforts on retaining and acquiring high value clients. CRM solutions help companies with data collection and
analysis, and allow companies to identify and drop counterproductive efforts. It can actually be quite cost
effective for some companies to “fire” clients, particularly in the professional services industry where bad
customers can end up draining profits and actually costing money in the long term.

Research shows that continually flogging an existing customer base for increased sales results in
diminished returns over time. New clients are needed to provide growth, and existing ones must be
retained with service and personalized attention rather than an avalanche of sales pitches. CRM solutions
help track expenses and customer behavior as well as aid the service end of the sales process.
Using automated workflow and processes create personalized customer touches just enough to not be
annoying, but rather complementary to their needs. Customer communication planned around important
customer events such as birthdays, anniversaries, graduations, and holidays may only occur 4 or 5 times
a year, but will generate far more loyalty and value than a weekly discount mailer.

Affordable Solutions

Many customers these days expect discounts in exchange for their loyalty, with 60% citing extrinsic or
“hard” rewards such as discounts and freebies as their top reason for enrolling in loyalty programs. CRM
solutions can help firms direct their most generous discounts toward their highest-value customers.

Surprisingly, intrinsic or “soft” benefits–like feeling appreciated, valued, and receiving advance notice of
special sales–are less expensive to provide and sometimes more successful than hard benefits at
reinforcing customer purchasing behavior.

A department store in Canada tested this successfully by mailing a thank-you note to its best customers.
There were no special offers or coupons; the note simply thanked them for being loyal shoppers and invited
them to return soon. The customers responded by boosting sales by 20% over a control group who did not
receive a mailing.

Other CRM strategies for current customers include point-of-sale promotions, such as register coupons
issued for discounts on future visits, and upselling based on purchasing behavior. For example, a customer
who buys puppy food may later receive a mailed promotion offering obedience training classes.

CRM also works to track customer complaint and resolution, and to capture the history of a client’s ongoing
relationship with the company. Studies show that customers who complain are actually doing the company
a favor–giving the firm a chance to show it cares and responds. In fact, one conducted by the Society
of Consumer Affairs Professionals in Business Australia Inc. (SOCAP) concluded that effective complaint
handling methods can create “significant marketing advantages.” Often, complainers who are happy with
the company response are converted to fans, and the type of customer who complains is also the type most
likely to generate lots of word of mouth feedback.

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Properly implemented CRM can take a customer complaint, pass it to an appropriate department, and
make sure that anyone who speaks with that customer knows what the problem and the status of its
solution is. Tracking of common problems can lead to the compilation of FAQs and knowledge base
articles, make them available to clients, and reduce call center activity and costs. Adept handling of
customer complaints is key to client retention and satisfaction.

Identifying the Most Cost Effective CRM Solution for Your Organization

CRM software solutions are available for companies of all sizes and come in all forms, from in-house
developed proprietary systems, to customizable enterprise products, to smaller packages with core CRM
features. Companies can save upfront procurement and deployment costs by taking advantage of the
growing number of hosted CRM solutions.

AMR Research estimates that 40% of companies use hosted CRM systems, while the remainder use
premises-based solutions. Hosted solutions are gaining popularity and are becoming increasingly secure,
reliable and priced lower. Growing competition in the hosted space has brought the costs down to $5 per
user per month in many instances. At these prices there is no reason for any company to delay using a
CRM solution.

The real key to finding the right CRM solution for any organization comes from analyzing its existing
pre-CRM processes and workflow.

•Take the time to gather sales, marketing, service, and executive teams for a lengthy business
analysis.

•Identify all of the existing processes that affect new customer acquisition, existing customer
nurture processes, customer service processes, and executive analytical processes.

•Map out existing processes to allow the organization to identify the key components the CRM
solution will need to have in order to fit into the existing business model. Only then will it be fea
sible to go out and navigate the CRM landscape to narrow down options.

•Resist the temptation to deploy a solution with functionality above and beyond needs. A large
majority of businesses that have deployed CRM solutions are only using roughly 30% of the
capabilities of the system they own, yet those added features were part of the overall solution
price and implementation.

•Finally, encourage across the board acceptance of the chosen CRM to ensure its successful
implementation.

Executive sponsorship and commitment is needed to ensure that employees are well trained and
understand the goals of the solution and each of their role in the overall success. CRM solutions that fit
into existing business applications to offer a seamless user experience offer the greatest path to success
and ease of use.

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Conclusion

Organizations that focus on raw revenue metrics and growth through pure customer adds run the risk of
losing existing customers. With customer acquisition costs significantly outrunning retention costs it makes
sense for companies to direct significant efforts towards retention. Additionally, loyal clients can aid in
acquisition of new clients and provide data to facilitate targeting of higher value clients. In order to strike an
appropriate balance, analysis of the costs of customer acquisition and retention, as well as the customers’
long term value is critical. CRM solutions are vital in retention efforts as they can help in both the collection
of needed data for analysis and enhancing the actual level of service to existing clients. With CRM
solutions readily available for businesses of all sizes and budgets, organizations that want to gain a
competitive advantage can easily choose and deploy a cost-effective CRM solution that will maximize their
return on customer, strike an appropriate acquisition and retention effort balance, identify their
highest-value clients, and increase loyalty through incentives and service.

About the Author

Gina Pogol writes for an online media company, specializing in business and finance, and has a BS in
Financial Management from the University of Nevada. She formerly worked for Experian as a business
credit systems consultant and with Deloitte and Touche as an accountant.

Sources:
1. Australian Sports Commission (1999) Turning Complaints into Customer Loyalty
2. Click Z Network (2002) CRM Meets Search
3. CRMAdvocate (2005) Customer Retention
4. CRM News and Information (2007) AMR Research
5. DStar (2001) CRM Programs Hot New Business Issue
6. Peppers and Rogers (2005) “Hail to the Customer,” by Sales & Marketing Management 157.10
7. Stauffer, D. (2001) “What Customer-Centric Really Means,” Harvard Management Update Article.
8. Stratescapes (2003) The New Retail Reality
9. Stratescapes (2002) Trim Your CRM Budget and Get Better Results
10. Supply and Demand Executive (2001) Seeing the Value in CRM
11. TechTarget (2005) Return On Customer
12. TMCnet (2007) Selecting VoIP Solutions
13. Wreden, N. (2005) All About Branding

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