Strategic Switching

Graphics image courtesy of Netbase QuidOpens in new window Companies may encounter evidence of strategic switching by customers. These are customers who shift their allegiances from one supplier to another in pursuit of a better deal.

Banks know that their promotional pricing stimulates hot money. This is money that is moved from account to account across the banking industry in search of a better rate of interest. Sometimes the money may only be in an account overnight.

An amiable telecoms company, discovered that about 70 percent of customers newly acquired from competitors stayed for four months or less. These customers had been acquired when the telecoms company mailed a cheque valued at $25, $75 or more to competitors’ customers.

When the cheque was banked, this automatically triggered the transfer of service to the telecoms company. A few months later these customers again switched suppliers when another deal was offered and the cheque was already cashed.

Having learned from the experience, the telecoms company fixed the problem by adjusting the promotion. Instead of mailing an immediately cashable cheque, its promotion was relaunched as a “staged rebate” promotion. The accounts of new customers who stayed for 3, 9 and 13 months were credited with sums equivalent to the cheque value that would previously have been set.

Sometimes, you can think of a customer that has been regained a second or further time as a new customer. For example, if a couple were to have a second child after four years, they would most likely have been removed from the mother-and-baby databases. A new record would have to be created. The customer would need to be targeted afresh. In portfolio markets, a customer who has not purchased in Quarter 1 may be treated as a new customer for promotional purposes in Quarter 2, as the company attempts to reactivate the customer.

The Conversion Model

Jan Hofmeyr has developed The Conversion Model. It contains a battery of questions designed to assess whether a customer is likely to switch.

Commitment, in turn, is a function of satisfaction with the brand or offer, the attractiveness of alternatives and involvement in the brand or offer.

Involvement is low if the product or its usage context is relatively unimportant to customers. The Conversion Model allows customers to be segmented into four subsets according to their level of commitment: entrenched, average, shallow, convertible. There are two clusters of committed customers and two of uncommitted customers, as follows:

Committed customers:

• Entrenched customers are unlikely to switch in the foreseeable future.
• Average customers are unlikely to change in the short term but may switch in the medium term.

Uncommitted customers:

• Shallow customers have a lower commitment than average, and some of them are already considering alternatives.
• Convertible customers are most likely to defect.

Hofmeyr suggests that companies can measure customer commitment by asking just four questions:

1. How happy are you with < whatever it is >?
2. Is this relationship something that you care about?
3. Is there any other < whatever it is > that appeals to you?
4. If so, how different is the one < whatever > from the other?

Non-customers are also segmented according to commitment scores into four availability subsets: available, ambivalent, weakly unavailable and strongly unavailable. There are two clusters that are open and two that are unavailable, as follows:

Open non-customers:

• Available non-customers prefer the alternative to their current offer though they have not yet switched, and are ready to switch.
• Ambivalent non-customers are as attracted to the alternative as they are to their current brand.

Unavailable non-customers:

• Weakly unavailable non-customers prefer their current brands.
• Strongly unavailable non-customers have a strong preference for their current brands.

Hofmeyr claims that these profiles can be used to guide both acquisitionOpens in new window and retention strategiesOpens in new window. He suggests that where the number of open non-customers is greater than the number of uncommitted customers, companies should focus strongly on customer acquisition.

Companies need to nurture their relationships with committed customers, reassuring them that their decision is wise, and finding ways to enrich and enhance their customer experience.

The strategy for uncommitted customers is to investigate why there is a low level of commitment and address the causes. Maybe it is a low-involvement category, or maybe customers are dissatisfied with their experience. Whether companies should appeal to open non-customers depends upon the value they can generate.

Finally there are many potential reasons why some market segments are composed of unavailable non-customers. They may have tried your offer, and didn’t find it satisfying; they may be committed to their current brand or supplier; they may be aware of your offer but find it unappealing; or, they may simply be unaware of your offer.

You might be able to fix this last problem with advertisingOpens in new window or other forms of customer communication, shifting these non-customers from the unavailable cluster to the open cluster.

Customer experience research might reveal what customers do not like about your offer or doing business with you, and give you some clues about how to make their experience more satisfying.

A core principle of CRM is that customer-related data are used to target acquisition efforts accurately. By contrast, poorly targeted acquisition efforts waste marketing budget and may alienate more prospects than they gain through irrelevant and untimely messaging. We now move on to discuss the practice of new customer prospectingOpens in new window in the next post.