November 08 Customer retention is the key to long term profitability not customer acquisition……….

Research has shown:

• Increasing customer retention by 5% can boost profits by up to 85% in the medium term, through reduced costs of repeat purchases and up/cross selling.
• Customers are not always profitable from day one, in some industries it can take 2 or more years to generate a positive cash flow.
• It can cost up your business up to 30 times more to win new customers - if you consider acquisition costs such as advertising, direct mail, pr, sales force, account set-up

Companies, particularly in the financial services sector, have long recognised that customers represent a major investment and have adopted a long term view of customer relationships and associated cash flows. They do not think in terms of single orders but the long term value of the customer in the form of multiple repeat purchases. This philosophy can be adopted by most organisations by taking a wider view of their business and possible product portfolio.

This long term view of customer relationships underlies Customer Relationship Management (CRM). At New Mindset we consider CRM to be:

“…a strategic program driving a universal approach to creating and developing long term profitable customer relationships through routine activities.”

Embedded within this definition are some key concepts:

Strategic program CRM does not just happen. It requires a clear directive and the assignment of resources and organisation priorities.
Universal approach CRM extends across the entire organisation. Every department is involved in the ‘supply chain’ and impacts on the product or service delivered to the end-customer. Each department must look to focus on its customers, i.e. next in the supply chain, seeking opportunities to-add value.
Profitable Some customers will never be profitable and will, in fact, be a constant drain on resources. Such customers should be released and the saved resources diverted to developing revenues with more lucrative ones, through segmentation and adaptations to the marketing mix for each group.
Create and develop relationships Strong relationships form when you understand and adapt to the needs, motives, and behaviours of the other. The organisation must build this understanding and shape its proposition to fit customer needs – even to the extent of spotting changes and providing a solution before the customer even realises they have a different need.
Routine activity Implement the processes, routines and systems to ensure that customers are contacted at regular and appropriate times, for example subscription renewals or information on new offers. Also ensure that information relating to their needs, drivers and purchase patterns is recorded for analysis and action. Without building this customer focus into day-to-day operations CRM will not happen.



















Many organisations introducing CRM fail, however, to capitalise on its ability to generate increased profit. Traditionally, emphasis has been on tracking satisfaction levels and monitoring levels/reasons underlying defection. This approach has serious limitations in managing customer relationships, profitability and revenues.

• Monitoring satisfaction levels often fail to identify customer’s whose expenditures are changing, i.e. migrating, until it’s too late and the customer defects to another supplier.
• Understanding the reasons underlying customer defection to undertake remedial changes is useful. Unfortunately, though, you’ve still lost the customer and associated revenues and have to go through the costly process of recruiting a replacement.

Customer retention and expenditure is determined by their service experiences and loyalty to you. Where competition is low, active dissatisfaction with individual suppliers is prime in driving customer defection or migration. As competition increases, with suppliers delivering increased choice and minimum levels of satisfaction, other factors come to play in determining customer loyalty towards individual suppliers. These factors include; changes to personal circumstances, your company offer and your competitor offer.

Understanding these factors and interaction allows you to develop loyalty profiles. These can be used to segment and classify your customer base. A number of segmentation models been developed in an attempt to categorise the individual customer groups and develop the individual objectives and action plan for the individual segments. Mckinsey’s, a leading international consultancy, analysed customer across 12 separate industries and developed the structure below.








Downward Migrators Loyalists
Dissatisfied Deliberative Lifestyle Deliberative Inertial Emotive
3%* 7% 4% 42% 20% 23%
Actively Dissatisfied

May re-evaluate spend because of experience Freq. reassess spend decisions

Choose alt. brand on rationale criteria Re-assesses decisions because of changing needs Freq review spend decisions

Reaffirm brand on rationale criteria Infreq. reassess decisions

Don’t generally consider change Rarely asses decisions

Strongly feel chosen brand is best for them

Spend more than average



* Percentiles represent number of customers in each category, across an average customer base, and are a weighted average of Mckinsey statistics drawn from 5000 organisations across 12 industry sectors.

Segmenting the customer base, helps understand:

1. Which groups of customers are most likely to defect, reduce expenditure and what value of revenue is under threat
2. What alternate strategies, tactics and appeals should be adopted for each of the individual segments to safeguard revenues by reducing defection and migration. Individual initiatives will not appeal to all of the sectors.
3. Which customers are positioned to purchase additional higher value products.

Customer defections and migrations can be reduced by up to 30% by active management, with massive impact on underlying profitability . Customer expenditures change (migrate) over time, for a variety of reasons. Monitoring expenditure patterns and taking action permits:

• Rebuilding revenues with customers who reduce spend, for whatever reason
• Recovery of customers before they defect to another supplier
• Up-selling higher volumes and cross selling other products.

CRM in summary

• CRM as we have defined is key to building medium/long term profit and value in your business. It forms the core of the business strategy and its revenue development programs and is NOT simply an IT ‘customer database’ initiative.
• A stand-alone ‘customer database’ can become an expensive white elephant if it is not built into an organisation’s ongoing operations.
• Whilst customer acquisition must be undertaken, to offset natural customer churn, precedence should be given to customer retention. Selling to existing customers is significantly cheaper and more profitable than winning new customers.
• In reality, you are ‘standing still’ and losing money if you lose customers as fast as you win them.


Want to know more about how New Mindset can help you to improve profitability by increasing customer retention - call now on 01276 537 282 or email andy.hamer@new-mindset.com .