Page 163 - Marketing Management

140 PART 3 CONNECTING WITH CUSTOMERS

2. Distinguish the causes of customer attrition and identify those that can be managed better. Not
much can be done about customers who leave the region or go out of business, but much can be
done about those driven away by poor service, shoddy products, or high prices. 73
3. Compare the lost customer’s lifetime value to the costs of reducing the defection rate. As long
as the cost to discourage defection is lower than the lost profit, spend the money to try to re-
tain the customer.

RETENTION DYNAMICS Figure 5.4 shows the main steps in attracting and retaining
customers in terms of a funnel and some sample questions to measure customer progress through
the funnel. The marketing funnel identifies the percentage of the potential target market at each
stage in the decision process, from merely aware to highly loyal. Consumers must move through
each stage before becoming loyal customers. Some marketers extend the funnel to include loyal
customers who are brand advocates or even partners with the firm.
By calculating conversion rates—the percentage of customers at one stage who move to the
next—the funnel allows marketers to identify any bottleneck stage or barrier to building a loyal
customer franchise. If the percentage of recent users is significantly lower than triers, for instance,
something might be wrong with the product or service that prevents repeat buying.
The funnel also emphasizes how important it is not just to attract new customers, but to retain
and cultivate existing ones. Satisfied customers are the company’s customer relationship capital. If
the company were sold, the acquiring company would pay not only for the plant and equipment
and brand name, but also for the delivered customer base, the number and value of customers who
will do business with the new firm. Consider this data about customer retention: 74
• Acquiring new customers can cost five times more than satisfying and retaining current ones. It
requires a great deal of effort to induce satisfied customers to switch from their current suppliers.
• The average company loses 10 percent of its customers each year.
• A 5 percent reduction in the customer defection rate can increase profits by 25 percent to
85 percent, depending on the industry.
• Profit rate tends to increase over the life of the retained customer due to increased purchases,
referrals, price premiums, and reduced operating costs to service.
MANAGING THE CUSTOMER BASE Customer profitability analysis and the marketing
funnel help marketers decide how to manage groups of customers that vary in loyalty, profitability,
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and other factors. A key driver of shareholder value is the aggregate value of the customer base.
Winning companies improve that value by excelling at strategies like the following:
• Reducing the rate of customer defection. Selecting and training employees to be knowledge-
able and friendly increases the likelihood that customers’ shopping questions will be answered
satisfactorily. Whole Foods, the world’s largest retailer of natural and organic foods, woos
customers with a commitment to market the best foods and a team concept for employees.
• Increasing the longevity of the customer relationship. The more engaged with the company, the
more likely a customer is to stick around. Nearly 65 percent of new Honda purchases replace an
older Honda. Drivers cited Honda’s reputation for creating safe vehicles with high resale value.

|Fig. 5.4|
The Marketing
Funnel Recent user Regular user
Target Open Trier (e.g., Once (e.g., At least Most
market Aware to trial (nonrejec- in past once every often used Loyal
ters) 3 months) 2 weeks)
• I always
• I am a • I use this use this
• I have • I have brand
• I am open used the regular brand as
• I have tried the user but most often long as
heard of to trying brand and brand in this is not even it is
the brand
the brand. would use the past my most though I available.
but have 3 months
again but often do use
not done but am other
so. have not not a used
done so in brand. brands.
regular
the past
3 months. user.