Customer Retention

Which Customers to Retain?

Graphics courtesy of feedierOpens in new window

Simply, the customers who have greatest strategic value to your company are prime candidates for your retention efforts. These are the customers who have high customer lifetime value (CLV)Opens in new window, or are otherwise strategically significant as high volume customers, benchmarks, inspirations or door openers.

You need to bear in mind that there may be a considerable cost of customer retention. Your most valued customers are also likely to be very attractive to your competitors. If the costs of retaining customers become too great then they might lose their status as strategically significant.

The level of commitment between your customer and you will figure in the decision about which customers to retain. If the customer is highly committed, they will be impervious to the appeals of competitors, and you will not need to invest so much in their retention. On the other hand, if you have highly significant customers who are not committed, you may want to invest considerable sums in their retention.

Some companies prefer to focus their retention efforts on their recently acquired customers. They often have grater future lifetime value potential than longer tenure customers.

There is some evidence that retention rates rise over time, so if defections can be prevented in the early stages of a relationshipOpens in new window, there will be a pay-off in future revenue streams and profitability.

Another justification for focusing on recently acquired customers comes from research into service failures. When customers experience service failure, they may be more forgiving if they have a history of good service with the service provider.

In other words, customers who have been recently acquired and let down are more likely to defect or reduce their spending than customers who have a satisfactory history with the supplier.

There is also some evidence that the most valuable customers change over time. The UK retail organization, John Lewis PartnershipOpens in new window, for example, has found that 50 percent of profits are produced by 5 percent of their customers, but that the composition of the 5 percent changes year on year.

The company uses data from its loyalty program and credit card to identify the 5 percent, and directs its retention efforts accordingly. John Lewis’s “Never Knowingly Undersold” market positioning is about “a relationship with a customer over a lifetime, making a trade-off between making slightly more money on the sale of the fork versus the lifetime value that comes from the trust you can engender by making sure that the fork is sold at a price which is no greater than it could be, if bought anywhere else.”

Retention efforts where there is portfolio purchasing can be very difficult.

Should effort be directed at retaining the high-share customer with whom you have a profitable relationship, the medium-share customer from whom you might lose additional share to competitors or the low-share customer from whom there is considerable CLV potential?

The answer will depend on the current value of the customer, the potential for growing that value and the cost of maintaining and developing the relationship.