Customer Retention, Acquisition, and Expectations Lecture Notes PDF

 **UNIT 7: CUSTOMER RETENTION, ACQUISITION, AND EXPECTATION** **SUBTOPICS** - Customer Retention - Customer Acquisition - Customer Expectation **LEARNING OBJECTIVES** At the end of the unit, the students will be able to: 1. Discuss the meaning of customer retentio...

 **UNIT 7: CUSTOMER RETENTION, ACQUISITION, AND EXPECTATION** **SUBTOPICS** - Customer Retention - Customer Acquisition - Customer Expectation **LEARNING OBJECTIVES** At the end of the unit, the students will be able to: 1. Discuss the meaning of customer retention; 2. Understand the mechanism of customer retention; 3. Identify the expectations of customers; 4. Analyze the importance of customer retention; and 5. Explain the management and delivery of customer expectations. **TOPIC DISCUSSION** Medical science teaches us the "life is in the blood". When blood stops flowing, life stops very quickly. It is the same with our businesses; customers are the life blood of our business. When we stop having a "flow" of customers, our business will die very soon. So, it is very important to acquire and keep customers. Our business is not about ourselves, it is about our customers. The focus of your business shouldn't be on yourself; rather it should focus on your customers. They are not really interested in how long you have been in business or how much education you have. Customers are interested in what your business can do or provide for them. We call these "customer benefits". Customer retention is critical to any organization\'s effectiveness. A customer-centric approach to marketing helps retain customers and re-engage lost customers. An organization must study the needs of various market segments and design marketing programs that are tailored to the segments. Customers expect more from the company than just the product, which the company must thoroughly research in order to bridge the gap between customer expectations and firm delivery. **Customer Retention** The business ecosystem has transformed how companies manage relationships and streamline operations. Relationship building is emerging as the primary marketing activity for businesses operating in highly competitive environments. **Customer retention** is the activity that a selling organization undertakes in order to reduce customer defections. Successful customer retention starts with the first contact an organization has with a customer and continues throughout the entire lifetime of a relationship. A company\'s ability to attract and retain new customers is not only determined by its product or services, but also by how it treats its existing customers and the reputation it builds within and across the marketplace. Customer retention is more than giving the customer what they expect; it's about exceeding their expectations so that they become loyal advocates for your brand. Creating customer loyalty puts 'customer value rather than maximizing profits and shareholder value at the centre of business strategy'. The key differentiator in a competitive environment is more often than not the delivery of a consistently high standard of customer service. a. **Negative and Positive Retention Strategies** Customer delight is not just about responding to tickets or providing the minimum required service for customers to purchase your product. It is the process of exceeding a customer\'s expectations to create a positive experience with your product or brand. It isn't just providing basic service --- it's going the extra mile. The Kano model is a technique developed by Professor Noriaki Kano that categorizes product and service features in terms of their impact on customer satisfaction. This helps organizations prioritize areas that they need to focus on to enhance customer satisfaction. As shown in the figure below, Kano's analysis suggests that customers can be delighted in two ways: by enhancing linear qualities beyond expectations and by creating innovative attractive qualities.  - ***Dissatisfiers*** are basic attributes that customers expect to be present. These "must be" attributes or hygiene factors are taken for granted and will trigger dissatisfaction if unfulfilled. - ***Satisfiers*** are attributes that generate satisfaction when fulfilled, and dissatisfaction when not fulfilled. Improvement in performance on these attributes produces higher level of satisfaction. - ***Delighters*** are exciting features that customers do not expect but are delighted when they find them. +-----------------------------------+-----------------------------------+ | **Negative** | **Positive** | +-----------------------------------+-----------------------------------+ | - high switching costs | - meeting and exceeding | | | customer expectations | +-----------------------------------+-----------------------------------+ | - discouraging defection | - finding ways to add value | +-----------------------------------+-----------------------------------+ | - produced customers who feel | - creating social and | | trapped | structural bonds | +-----------------------------------+-----------------------------------+ | | - building commitment | +-----------------------------------+-----------------------------------+ b. **Trends in Customer Retention** Retaining and developing customers has long been a critical success factor for businesses. In that sense, Customer Relationship Management is not new, previously falling under the guise of customer satisfaction. Worldwide, service organizations have been pioneers in developing cause retention strategies. 1. **Innovative Measures:** Banks have relationship managers for select customers, airlines have frequent flyer programs to reward loyal customers, credit card companies offer redeemable bonus points for increased card usage, telecom service operators provide customized services to their heavy users, and hotels have personalized services for their regular guests. It is, however, with the rapid rise of new entrants into the market place and increased competition that companies in other sectors have recognized the business potential within a captured base. 2. **Improved Operating Performance:** Sluggish growth rates, intensifying competition and technological developments businesses induced to reduce costs and improve their effectiveness. Business process reengineering, automation and downsizing reduced the manpower costs. Financial restructuring and efficient fund management reduced the financial costs. Production and operation costs have been reduced trough Total Quality Management (TQM), Just in Time (JIT) inventory, Flexible Manufacturing Systems (FMS) and efficient Supply Chain Management (SCM). 3. **Increased Focus:** However, reduction in costs alone is no longer enough or is necessarily an effective strategy. In facing the competitive threats, such as new entrants, pricing pressures, technology along with the related costs and also including the time lags in procuring, maintaining and strengthening one's market, more and more organizations are realizing that the traditional marketing model is no longer effective. With a flood of new entrants offering quality products and services at lower prices, many sectors have been turned into commodity markets. In a market place where loyalty has plummeted and the cost of acquiring new customers is prohibitive, companies have turned to their current customers in an attempt not only to retain them but also to exploit the potential within. This has enabled them not only to respond to the threats in their market place but also positioned them strategically to take advantage of the opportunities available.  c. **Keys for Customer Retention** 1. **Sales Force Automation (SFA):** CRM also incorporates enhanced Sales Force Automation (SFA) functionality. SFA puts account information directly in the hands of field sales staff, making them responsible for maintaining it and thus helps them to be more productive. Now, as part of CRM, SFA is also focused on cultivating customer relationships and improving customer satisfaction. 2. **Total Quality Management (TQM):** TQM has been another driving force. TQM is aimed at improving quality and reducing costs. The TQM philosophy has been prevalent in many companies, which find it necessary to involve both suppliers and customers for implementing TQM at all levels of the value chain. Companies like IBM, Motorola, General Motors, Xerox, Ford and Toyota are consistent users of TQM and hence also of CRM. Other programs like JIT supply and MRP (Material Resource Planning) have also made for the use of interdependent relationship between supplier and customer. 3. **Systems Selling Approach (SSA):** SSA is yet another factor which has become more common with the advent of digital technology and complex products. The systems selling approach involves the integration of parts, supplies and the sale of services along with a particular capital equipment. In the capital goods market, customers appreciate the idea of system integration. Sellers have been able to sell augmented products and services. This has also been extended to consumer-packaged goods and services sector. 4. **Key Account Management (KAM):** Another offshoot of CRM has been the development of Key Account Management Program as some companies insisted upon new purchasing approaches like national contracts and master purchasing agreements to be adopted by vendors. 5. **Supply Chain Management (SCM):** Regarding suppliers' loyalty, again it has been observed that it pays more to develop closer relations with a few suppliers than to deal with more vendors. More often marketers find it beneficial to retain existing customers for life rather than making a one-time sale to several new customers. 6. **Global Account Management Programs (GAMP)**: An extension of CRM is reflected in the emerging trend of large internationally oriented companies to become global. For this purpose, such companies are seeking the assistance of vendor's co-operating and collaborating solutions for global operations. This has made it obligatory for markets interested in the business of global companies, to adopt CRM programs, particularly global account management programs. 7. **Knowledge Management (KM):** Knowledge about customers is a pre-requisite for CRM. Indeed, in depth knowledge of the customer's habits, desires, needs and the analysis of their cognitive effective behavior and attributes need to be applied through CRM to develop and design marketing strategies as well as to develop ad cultivate interaction and relationship with customers for mutual benefit. Finally, it is recognizable that customers' expectations have changed significantly in recent years. With the advent of new technology and increased availability of new and advanced product features and services, consumers are least prepared to compromise their preferences for quality of products/services. Cross selling and up selling are possible to a greater extent for customers, if they are loyal and committed to the firm and its offerings. d. **Customer Loyalty** 1. **Customer Satisfaction:** People develop belief about what they expect to happen before they make a choice. Customer satisfaction is a post-purchase or post-choice evaluation that results from a comparison between those pre-purchase expectations and actual performance. Fulfilment of an expectation is confirmation. If there is a disconfirmation expectation are not met. Dissatisfied customers may complain, choose never to purchase the transactional experience is thus seen to result in confirmation or disconfirmation yet for most organizations, the goal is to measure and manage customer satisfaction with the cumulative experiences customers have with the brand, product, organization, or location. 2. **Emotional Bonding:** The second component of the model shown in the figure above builds on the idea that, over time customer loyalty requires emotional bonding. Customers have a positive brand affect, which is an affinity with the brand, or they have a company attachment, which means they like the company. 3. **Trust:** Trust the third component of the model, it is interrelated with emotional bonding. Trust exist when one party has confidence that he or she can rely on the other exchange partner. Trust can be defined as the willingness of the customer to rely on the organization or brand to perform its stated function. Trust reduces uncertainty/risk and is viewed as a carefully thought out process, whereas brand affect may be an instantaneous response. In many situations, trust means a customer believes that the marketer is reliable and has integrity. 4. **Choice Reduction and Habit:** Contrary to traditional economic theory, consumer research shows that people have a natural tendency to reduce choices. In fact, consumers like to reduce their choices to a manageable set, usually not more than three. People feel comfortable with familiar brands and well-known situations that have been rewarding. Part of customer loyalty, such as the absence of brand switching behavior is based on an accumulation of experiences over time. 5. **History with the Company:** Final component of customer loyalty involves the customer's history with the company. One's history with the company influences one's habits. But we should draw a distinction between repeat behavior and contact history with the company and its image. A positive corporate image -- the perception of the organization as a whole -- can have a favorable impact on customer loyalty, creating habitual responses to the company name itself. Wal-Mart, for example is known for everyday low prices while another department store, such as Nordstrom, may be known for excellent customer service. Thus, perceptions of the company's historical image can impact customer intentions, loyalty and likelihood of buying. The CRM system, however, is usually more focused on a customer's actual purchasing history. e. **Four Customer Characteristics** A traditional approach of product and service development is to obtain information form representative customers at the centre of the intended target market. Companies often obtain information about customer needs only, and assign manufacturers with the task of generating ideas for solutions leading to new products. Company employees are required to translate needs into solutions that should fit these needs. Lead users present strong needs that will become general in a market place months or years in the future. As there are no products or services available on the market to fulfil their needs, lead users often develop a solution on their own and can therefore provide design data as well. Consequently, the lead user process takes a different approach from that of traditional methods, collecting information about both needs and solutions from the leading edges of the target market and from markets facing similar problems in a more extreme form. In slow-moving industrial markets, "average users" may provide satisfactory input to the development process. Four customer characteristics were used including technical attractiveness, financial attractiveness, closeness and relationship with the customer, and lead user characteristics. They found that financially attractive customers, lead users, and close customers have a positive impact on new product success. Technically attractive customer, on the other hand, had a negative impact on new product success. A possible explanation is that they have needs that are different from those of the market in general and therefore can mislead the company. **Customer Acquisition** One of the primary areas of growth for an organization is the acquisition of new customers. Customer acquisition involves identification of potential customers, understanding their strengths and weaknesses, risk assessment and formulation of an acquisition strategy. The explosion of customer segments, products, media vehicles, and distribution channels coupled with intense competition bent on growth has made the acquisition of new customers more complex, costlier, and less effective than ever. **Customer acquisition** involves identification of potential customers, understanding their strengths and weaknesses, risk assessment and formulation of an acquisition strategy. When the results of an acquisition campaign are evaluated, there are often different kinds of responses that need to be considered. The responses that come in as a result of a marketing campaign are called "response behaviors." The use of the word "behavior" is important because the way in which different people respond to a particular marketing message can vary. How a customer behaves as a result of the campaign needs to take into consideration this variation. A response behavior defines a distinct kind of customer action and categorizes the different possibilities so that they can be further analyzed and reported on. a. **General Types of Response Behavior** 1. **Binary Response Behaviors:** the customer response is either a yes or no. If someone is sent a catalogue, did they buy something from the catalogue or not? At the highest level, this is often the kind of response that is talked about. Binary response behaviors do not convey any subtle distinctions between customer actions, and these distinctions are not always necessary for effective marketing campaigns. 2. **Categorical Response Behavior:** it allows for multiple behaviors to be defined. The rules that define the behavior are arbitrary and are based on the kind of business you are involved in. Going back to the example of sending out b. **Categories of Response Behavior** 1. **Customer inquiry:** The customer asks for more information about your products or services. This is a good start. The customer is definitely interested in your products -- it could signal the beginning of a long-term customer relationship. You might also want to track conversions, which are follow-ups to inquiries that result in the purchase of a product. 2. **Purchase of the offered product or products:** This is the usual definition of success. You offered your products to someone, and they decided to buy one or more of them. Within this category of response behavior, there can be many different kinds of responses. As mentioned earlier, both "purchased men's clothing" and "purchased women's clothing" fit within this category. 3. **Purchase of a product different that the ones offered:** Despite the fact that the customer purchased one of your products, it wasn't the one you offered. You might have offered the deluxe product and they chose to purchase the standard model (or vice-versa). In some sense, this is very valuable response because you now have data on a customer/product combination that you would not otherwise have collected. c. **Customer Acquisition Strategy** 1. **Support Acquisition:** Most acquisition marketing campaigns begin with the prospect list. A prospect list is simply a list of customers that have been selected because they are likely to be interested in your products or services. 2. **Test Campaigns:** Once you have a list of prospect customers, there is still some work that needs to be done before you can create predictive models for customer acquisition. Unless you have data available from previous acquisition campaigns, you will need to send out a test campaign in order to collect data for analysis. 3. **Evaluating Test Campaign:** Once you have started your test campaign, the job of collecting and categorizing the response behavior begins. Immediately after the campaign offers go out, you need to track responses. The nature of the response process is such that responses tend to trickle in over time, which means that the campaign can go on forever. In most real-world situations, though, there is a threshold after which you no longer look for responses. At that time, any customers on the prospect list that have not responded are deemed "non-responses." Before the threshold, customers who have not responded are in a state of limbo, somewhere between a response and a non-response. 4. **Building Data Mining Models using Response Behavior:** With the test campaign response data in hand; the actual mining of customer response behavior can begin. The first part of this process requires you to choose which behavior you are interested in predicting, and at what level of granularity. The level at which the predictive models work should reflect the kinds of offers that you can make, not the kinds of responses that you can track. It might be useful (for reporting purposes) to track catalogue clothing purchases down to the level of color and size. If all catalogues are the same, however, it really doesn't matter what the specifics of a customer purchase for the data mining analysis. In this case (all catalogues are the same), binary response prediction is the way to go. If separate men's and women's catalogues are available, analyzing response behavior at the gender level would be appropriate. In either case, it is a straightforward process to turn the lower-level categorical behavior into a set of responses at the desired level of granularity. If there is overlapping response behavior, the duplicates should be removed prior to mining. d. **Common Mistakes in Customer Acquisition Strategies** 1. **Confusion Regarding New Customer:** Marketing professionals have long recognized the semantic confusion over the concept of "new." The question is what is a 'new' customer? The most frequent answer is that a new customer is someone new to the community. Individuals just moving into the community are important to the business, and most retailers would like to capture as many of these new customers as possible. However, "new to the community" constitutes a narrow definition that leads many retailers to mistakenly underestimate the opportunity to attract new customers. 2. **Targeting Promotional Messages Poorly:** Often, retailers that pursue an active customer acquisition strategy tend to have a marketing strategy so broad that it produces little success. These broad customer acquisition programs tend to use newspapers as their primary marketing medium. In some markets, newspaper advertising efforts are supported by television or radio advertising. 3. **Paying Inadequate Attention to New Customer Products:** The new customer promotional programs of many businesses tend to focus on one product. This approach fails to recognize the variety of circumstances individuals and households face in purchasing new products. To succeed, it is necessary to promote a number of different products that meet the customer's specific needs. 4. **Failing to Offer Price Appeals:** While marketing arenas are intensely competitive with consumers increasingly demanding discounts, coupons and other price benefits when making decisions; many retailers' customer acquisition programs ignore the importance of price appeals. 5. **Failing to Offer Premiums:** Premiums operate at two levels within customer acquisition programs. The first involves the prospective customer, and the second involves the current customer. Many customer acquisition programs do not offer an attractive, immediate incentive to which prospective customers may respond, despite substantial evidence that such premiums motivate prospective customers to take immediate action. Substantial evidence also exists that premiums are cost-effective in customer acquisition programs. e. **Customer Acquisition Cost** Customer acquisition cost is the cost associated with convincing a consumer to buy your product or service, including research, marketing, and advertising costs. An important business metric, customer acquisition cost should be considered along with other data, especially the value of the customer to the company and the resulting Return on Investment (ROI) of acquisition. The calculation of customer valuation helps a company decide how much of its resources can be profitably spent on a particular customer. Customer acquisition cost is calculated by dividing total acquisition expenses by total new customers.   Customer acquisition management is a term used to describe the methodologies and systems to manage customer prospects and inquiries, generally generated by a variety of marketing techniques. It can be considered the connectivity between advertising and customer relationship management. This critical connectivity facilitates the acquisition of targeted customers, in the most effective fashion. Customer acquisition management has many similarities to lead management. Sometimes missing from lead management definitions, but always included in customer acquisition management, is a closed loop reporting system. Such a reporting system typically allows the organization to quantify the effectiveness of results of various promotional activities. This allows organizations to realize continuous improvements in both promotional activities and customer acquisition systems. f. **Customer Acquisition Funnel** A customer acquisition funnel breaks down a customer\'s journey before they make a final purchase decision. The stages are: awareness, interest, consideration, intent, evaluation, and purchase. **Stage 1: Awareness** This is your first interaction with your target market. Whether it\'s through paid advertising, a marketing campaign, paid social media, direct conversations, or other customer acquisition strategies, this is the time to put your best foot forward and make a good first impression on your ideal customer. To get the most out of this stage, use as many acquisition channels as your marketing budget allows. **Stage 2: Interest** Once you have eyeballs on your product, it\'s time to generate interest. How will you convert those wandering eyes into leads? By convincing people that your product is exactly what they\'re looking for. Help them understand that your product is solving a problem they desperately want a solution for.  **Stage 3: Consideration** Once you\'ve positioned your brand as the perfect solution for your target audience\'s problem, the next step is to go head-to-head with your competitors. Customers who reach the consideration stage will begin to compare your product with similar offerings from other businesses. It\'s up to you to prove that your product is superior. You can steer them in the right direction by having a conversation while you have their attention.   **Stage 4: Intent** The line between consideration and intent can be quite blurry. As customers inch toward their final decision, they\'ll begin to show more signs of buyer intent. Perhaps they\'ll check some third-party reviews, visit your website to learn more about it, or even interact with your social media accounts. **Stage 5: Evaluation** By this point, your new customers are actively weighing the pros and cons of your product. They have already selected you as their ideal product, in comparison to your competitors, and are in the final stage of their decision-making. In this stage, they may request a trial or demo of your product to really get a feel for it before continuing onto the last step of the buying process. **Stage 6: Purchase** In the final stage of customer acquisition, you\'ll want to make your customer\'s life as simple as possible. Keep in contact with your customer throughout the customer\'s lifetime to make sure they are satisfied. The best way to retain customers is to build a strong relationship with them. They will in turn advocate for your brand. Your happy customers support your lead generation. **Customer Expectation** **Customer expectations** are beliefs about service delivery that serve as standards or reference points against which performance is judged. Because customers compare their perceptions of performance with these reference points when evaluating service quality, thorough knowledge about customer expectations is critical to services marketers. Knowing what the customer expects is the first and possibly most critical step in delivering good quality service. Being wrong about what customers want can mean losing a customer's business when another company hits the target exactly. Being wrong can also mean expending money, time and other resources on things that do not count to the customer. Being wrong can even mean not surviving in a fiercely competitive market. a. **Types of Customer Expectation** 1. **Explicit:** These are defined expectations the target audience has about your product or service. For example, when customers visit your store or website, they'll expect specific products to be within a certain price range. 2. **Implicit:** These are customer assumptions around what doing business with your company will be like based on what they know of other businesses. Implicit expectations can also be influenced by whoever recommended a business to them. 3. **Interpersonal:** These describe customers' expectations for personal interactions with your team members. Interpersonal expectations include in-person, phone, and live chat support interactions. 4. **Digital:** These are expectations for how you will handle interactions on your website, on your social platforms, or via email. Digital expectations apply to how easy the channel is to navigate and how simple it is to make orders or reservations. 5. **Dynamic performance:** This refers to how customers expect your product or service to change over time to match their evolving needs. Businesses need to b. **Zone Tolerance** Services are heterogeneous in that performance may vary across providers, across employees from the same provider, and even with the same service employee. The extent to which customers recognize and are willing to accept this variation is called the zone of tolerance. Zone Tolerance provides a range within which customers are willing to accept any variations in the delivery of service. The zone of tolerance varies from customer to customer. It is the gap between two levels of customer expectations -- the desired service and adequate service. c. **Expectation Management Strategies** Managing expectations explicitly may not be a daily praxis in most organizations. Companies that tend to be past-oriented use the laissez-faire strategy where attention is paid neither to changing conditions, needs and/or wants on the customer's side nor inside own organization. The traditional ways of doing things seem to be good enough for the management. However, in today's turbulent business context this strategy is a 'highway to heaven'. 1. **Intro-Reactive Strategy:** This strategy is utilized when paying attention to and reacting on expectation issues raised by employees or business units inside an organization. This strategy focuses on contemporary action on a short-term basis; it is a strategy of 'extinguishing a fire'. This situation occurs mainly when existing expectations, whatever kind they may be, are not met in an everyday praxis. Meeting the defeat in budget allocations, delays and mistakes in internal deliveries, quality failures in products, disappointments in career opportunities etc. are examples of situations where the unmet expectations may be sources of intra-firm conflicts. 2. **Co-Reactive Strategy:** It refers to a situation where all relation parties in a dyad or network act on short term basis and expectations become an issue mainly in case of a business transaction or when parties express their dissatisfaction, i.e. complain. Then and only then, issues are negotiated to settle the somehow adverse situation. This is the case in many buyer-seller relations where no commitment exists. 3. **Intro-Proactive Strategy:** This focuses heavily on the future of a company or organization and the well-being of the staff. They recognize the role of satisfied, innovative employees, and deploy their creativeness to develop the company. A genuine intercommunication exists; organizational research is a solid part of the overall action, not an ad-hoc hobby. Knowledge acquired by the research is implemented in 4. **Extro-Proactive Strategy:** are dividable into extro-introproactive and extro-interproactive depending on the number of collective actors considered. Extro-introproactive parties pay a considerable attention on the future expectations of the other party or parties in a relation while being only reactive to the expectations of their own company and employees. Extro-interproactive strategists deploy a wider perspective to the contextual expectations, for instance, those of the industries and societies. Tactics in implementing this strategy add to the earlier mentioned one's leadership to the extent that is needed to 'keep the engines going without ongoing maintenance'. 5. **Co-Proactive Strategy:** Managing expectations is the one needed in committed relationships. From the managerial point of view, both management and leadership play crucial roles. The parties understand the importance of intercommunication both inside their organization as well as in other stakeholder relations. All kinds of expectations are identified as well as their role in the future of intra-organizational, customer and other relations. The process of expectation development must be familiar to the organization's all management levels. This is crucial because, as we have stated earlier, otherwise we may fall into a trap of taking things for granted and not paying enough attention to important issues. In long institutionalized relationships this may be the fact. However, in the new competition companies have to 'earn' even their relationships over and over again. **Sources:** - *Customer expectations: Definition, types, and tips*. (2024, May 2). Zendesk. https://www.zendesk.com/blog/customer-expectations-meet-rising-demands/ - *Kano Model -- Dissatisfiers, satisfiers, delighters \| MM*. (n.d.). MarketingMind. - *Customer Acquisition Funnel: The Easiest guide*. (n.d.). https://glass.io/blog/customer-acquisition-funnel-guide - Customer Relationship Management: A Strategic Perspective, G Shainesh, Jagdish N Sheth - - - [http://www.journalofaccountancy.com/Issues/2008/Dec/ManagingCustomer Profitability.html](http://www.journalofaccountancy.com/Issues/2008/Dec/ManagingCustomer%20Profitability.html) -