written by Yusuf Bekiroğlu - CRM Asst. Manager in Akbank
It is believed that in today’s harsh competitive environment in banking sector, banks need to adopt the fundamentals of Analytic Customer Relationship Management to achieve better positions in their customers’ minds so as to gain competitive advantage in the market. By the time, customers are becoming more conscious, which triggers banking sector to be more sophisticated, and to use highly sophisticated analytic behaviour models which segment the customer base into atomic and meaningful units.
Together with these atomic and meaningful units, companies can identify the needs of each segment. According to customer needs, marketing and sales activities such as customized campaigns, channel based communications, permission marketing, event and alert management, and customer service/product fulfillments can be prioritized and organized.
In the current competitive business world, for all lines of business, customer acquisition, attrition, retention and deepening in the customer and in general terms Customer Life Cycle Management are the key factors for creating and managing the dynamic Customer Relationship.
As Gupta and Lehmann (2003) cited, customers are the base entities for firms to generate profits. Hence, it has been obligatory for banks to move from product centric to customer centric organizations and design strategies to improve customer experience which are basicly service quality, customer satisfaction, customer retention and customer loyalty (Keiningham& Aksoy&Bejou,2006). These developments in the sector led to the birth of a new concept which is Customer Lifetime Value (CLV).
V.Kumar (2006) briefly explains CLV as the value the customer brings to firm over his/her life. In fact, the reason for the birth of CLV is simple. Strategies which are to understand the real value of customers have been impracticable over time. Before CLV method has been worldwide famous, strategies such as RFM, Past Customer Value and Share-Of Wallet were commonly used to compute customer’s future value. V.Kumar (2006) states that these strategies have common drawbacks such as all of these strategies are not-forward looking and do not involve prediction about customers’ future and just cover past purchase behaviours and past profitability of customers. It is shown that past profitibility and contribution from customers are not enough to outline future strategies (Reinartz & Kumar,2003).
It is crucial for companies to compute CLV in order to define their customer centric strategies. According to Keiningham,Aksoy and Bejou (2006), with CLV strategy, companies are able to define their best customers, so that they can execute right marketing activities for properly targeted people. What we mean by that is that segmentation is changing with the new business world and every customer is becoming an asset for companies to understand. (Rust, Lemon and Zeithmal, 2004). Companies are trying hard to offer customized campaigns / offers to customers in order to meet their increasing demands. Not only customers’ preferences but also companies’ strategies are changing. Thus, in this dynamic business world, in every second, it is becoming hard to acquire, develop, retain customers and prevent them from attrition / defection.
According to CLV computed, companies can decide how much resource to allocate for each customer and decide which customers to let go. According to Reicheld, Markey and Hopton (2000) customers who stay in a company for a long time tend to spend more over time, cost less to serve and have greater propensity to buy different kinds of products whereas customers who are at a company for a short term period are more likely to leave the company. These hypothesis brings us to another important point, which customers to retain and which customers to be divested (Mittal&Sarkees,2006). According to researches, it is clear that some customers make little or no contribution to companies’ profits. So, with CLV method, importance on strategy has moved from product to customer which led to selection of customers – which customer to acquire-, customized offers– growth-, and to predict which customers are likely to defect and what can be done about it, or should we just let them go(Gupta&Lehhman,2006).
Customer Lifetime Value concept, starts with inspring and acquring new customers. At acquisition stage, early interaction may include campaigns such as welcome / inform messages. During that period, it is obligatory for companies to really understand the customer behaviour in order to make good predictions about future behaviour of an ordinary customer. At that stage, questionnaries are good examples of creating good relationship with customers. After acquiring the customer, it is important to deepen the customer relationship. To be able to maintain a solid and consistent relationship, it is crucial to know your customer portfolio, the value of your customers, the level of satisfaction and the behavior in certain situations.
In fact, customer retention has a significant impact on a company’s profitability. Gupta et al. (2004) claims that a 1% improvement in retention can increase firm value by 5%. Therefore, firms interested in maximizing lifetime value and long-term profitability should pay attention to determinants of customer defection. How a firm can increase the customer life time basically depends on improving service quality, creating loyalty, segmentation based on their current and potential value to the institution, their value, product needs and channel preferences.
As CLV calculated by companies, firms should try to look for new strategies in order to increase a customer’s lifetime value. Increase in customers lifetime value can be done by two different approaches stated by V. Kumar (2006). First strategy is being offensive in order to increase the portfolio of customer base and get potentially valuable customers. This part also includes the growth process of a existing customer. Getting in touch with a new customer at early stages will both increase the potential of increased CLV and most probably avoid customer attrition.
In contrast with offensive marketing strategies, companies should also set up potential actions in order to reduce customer exit. Simply, defensive strategy should include offers to possible defect customer to dissuade their decision. Both defensive and offensive strategies should be taken into consideration equally by companies to enhance marketing actions.
Besides being active defensively and offensively, firms should decide how to handle customers who have churn risk. V.Kumar (2006) briefly explains the basics of customer defection problem. If a customer would like to leave the company, as a company we should decide whether to intervene, which customers to intervene, when to intervene, through which channels to intervene and what to offer. Here is the another important point coming into the stage. Modeling is the significant portion of Analytical CRM. By modeling we can predict customer attrition, propensities and cross-sell opportunities. Models can give us some ideas about customers’ future trends but it would be inaccurate to say that the results of the models will predict the real customer behavior in all accuracy. Kamakura et al. (2005) claims that models are better at explaining customer behaviorthan predicting the future. Modeling customer behavior entails analyzing many variables and the variables may quickly change due to the current highly competitive business dynamics. However, as an example, propensity modeling can be done with better accuracy compared to attrition modeling.
To avoid customer attrition and retain the customer, companies must observe their customers in terms of their transaction balances, product holdings, transaction behaviors, personal preferences, product and service propensities, whether the customer has dormant accounts, is making large withdrawals, is transferring money to other bank or has reduced contacts with the current bank.
Besides these strategies, another important issue – loyalty - is becoming a major topic of companies. It is believed that, loyal customers are tend to spend more, have greater balances and are not cost sensitive. Hence, creating loyal customers and designing personalized campaigns are the only way for companies to grow,to direct its customers to reach their full potential (Blattberg&Deighton,1996). But the problem is in this point, loyalty programs are costly because of initial,promotional,reward expenses and time,budget, labour constraints. (Uncles&Dowling&Hammond,2006).
Although, loyalty programs are costly and sometimes inefficient, because of hightened competition, companies are forced to design these kind of programs in order to attract and retain their companies. With CLV approach, companies are able to create customized loyalty programs at customer level and this approach helps companies to allocate its recources optimally such as targeting right customers with right product.(V.Kumar,2006). Misuse of CLV method may increase the burden on companies and lead to inefficient return from marketing activities and resulting in lower return of investment.
In conclusion, CLV helps the firm to treat each customer differently based on their contribution rather than treating all the customers in the same way. And also calculating customer lifetime value helps the firm to know how much it can invest in retaining the customer so as to achieve positive return on investment. With a well computed CLV, we are able to know what to sell, when and to whom to sell as mentioned in Kumar,Venkatesan and Reinartz(2006)’s article. Managing the customer life cycle is only possible through knowing customer behavior, and defining and communicating the stages of the life cycle to the customer. The progress of the customer in the life cycle can change, and it is important to carry out solid strategies when it comes to attrition, retention, growth in the customer base and cultivating loyalty.
References
Blattberg,R.C & Deighton,J. (1996). Manage Market by The Customer Equity Test. Harvard Business Review,73,136-144
Gupta, S. & Lehmann, D.R. (2003). Customers as assets. Journal of Interactive Marketing, 17 (1), 9-24
Gupta,Sunil,Donald R. Lehmann, And Jennifer Ames Stuart,. (2004). “Valuing Customers,”Journal of Marketing Research 41(1),7-18
Gupta, S. & Lehmann, D.R. (2006). Customer Lifetime Value and Firm Valuation, Journal of Relationship Marketing,Vol.5, No.2/3,pp.87-110
Keiningham, Timothy L., Lerzan Aksoy, David Bejou (2006). How Customer Lifetime Value is Changing How Business is Managed”, Journal of Relationship Marketing,Vol.5, No.2/3,pp.1-6,
Kumar (2006). CLV:The Databased Approach, Journal of Relationship Marketing,Vol.5, No.2/3,pp.7-35
Kumar,V.,Venkatesan R.,& Reinartz,W.J.(2006). Knowing What to Sell When to Whom,Harvard Business Review, pp. 131-137
M.D. Uncles, G.R. Dowling, and K. Hammond, “Customer Loyalty and Customer Loyalty
Programs,” Journal of Consumer Marketing, 20/4 (2003): 294-316.
Mitttal,V.,Sarkees,( 2006) Customer Divestment, Journal of Relationship Marketing, Vol.5, No.2/3,pp.71-8
Reicheld,F.F.,Markey, R.G.,Jr.,&Hopton,C.(2000). The Loyalty Effect-The Relationship Between Loyalty and Profits. European Business Journal,12,134
Reinartz,W.J. & Kumar, V.(2003). The Impact of Customer Relationship Characteristics on Profitable Lifetime Duration. Journal of Marketing,67(1),77-99
Rust,R.T Lemon,K.N.,&Zeithaml, V.A. (2004). Return on Marketing:Using Customer Equity to Focus Marketing Strategy.Journal of Marketing,68,109-127
Wagner Kamakura, Carl F. Mela, Asım Ansari,Anand Bodapati, Pete Fader, Raghuram Iyengar,Prasad Naik,Scott Neslin, Baohong Sun, Peter C. Verhoef,Michel Wedel And Ron Wilcox,.(2005).”Choice Models and Customer Relationship Management,”Marketing Letters 16:3/4,279-291
