Keeping Customers without Giving Away the Farm
Customer retention has generally been managed by focusing on three factors: churn rate, cost of retention, and the ongoing value of the customer relationship. For example, if a Communications Service Provider wanted to reduce churn rate, the choices were either to provide more expensive “goodies” or offer more attractive (and usually less profitable) services. If a CSP wanted to increase ARPU, then the choice was either an increase in churn rate or an increase in retention costs.
There have been a few seismic shifts in the market that have allowed providers to both increase ARPU and reduce churn. One example is the impact on a provider’s performance if they were fortunate enough to sign up with Apple for an exclusive deal on the first iPhone.
But like earthquakes, these events are rare, hard to predict and not reproducible. No one (except perhaps Apple CEO Tim Cook) knows when the next iPhone-sized event is going to happen, so companies need to look elsewhere to drive consistent and long-term performance improvements. The good news is there are methods to break out of this retention conundrum that can help deliver consistent improvement.
One approach is a concept that originates in negotiation theory. Most negotiation is distributive –what we think of as traditional haggling. For one party to gain, the other must lose. However, a smarter method is to use an integrative approach where you work out the constituent components of the negotiation and determine the value placed on each item by all involved parties. The total can then be divided up to ensure both parties get what’s most important to them.
The classic example is a negotiation over an orange. Following a distributive approach each party could end up with half of the orange. Sounds good, but what if one person wants to bake a cake using the rind while the other wants to make some juice with the pulp? With an integrative approach, the baker ends up with all the peel and the juicer with all the segments. Both sides win and the effect is an increase in the total value of the orange. Applied to customer retention, providers don’t have to lose in one area to win in another.
How can you take an integrated approach to your retention strategy?
- Work with each customer individually to understand their unique needs and desires.
- Determine the value of each offer for that specific customer, i.e. what part of the orange do they want? This is where predictive analytics is used to determine the probability for each customer to take each offer and the expected impact on that customer’s risk of churn.
- Determine the profitability of each component, or part of the “orange” to the service provider – this is based on the impact on the customer lifetime value calculated for each product for each customer.
There are a few service providers that have managed to achieve this consistently and have seen phenomenal results.
Over the next few weeks, I’ll share additional approaches to improve your retention efforts. In the interim, watch this on-demand webinar for more information on this concept and other best practices for implementing retention strategies throughout the customer lifecycle.
Download the 6 Retention Strategies to Save Your Customer Relationships eBook and see how modest improvements in retention performance can drive massive improvements in margin and shareholder value.