CRM: pay attention to retention

Customer relationship management (CRM) has been getting a lot of flack lately. But there's nothing inherently wrong with the technology. Enterprises have just been ignoring customer retention strategies.

Part of the problem is the traditional market adoption cycle for new enterprise applications, which goes something like this:

• Talking it Up: introduce a new application category and let your marketing team hype the heck out of it so that it grows like Jack's beanstalk.
• The Fall: customers become disillusioned when the technology is poorly applied and doesn't live up to unrealistic expectations.
• The Recovery: the technology matures as vendors improve features and as customers learn to apply best practices to produce a good return on investment.

CRM is in the second phase--a fall from grace. Over the last year or so there have been reports showing that CRM has high failure rates.

Part of the problem is that many enterprises deploy CRM systems without first developing a customer strategy. Indeed, poor business decision-making will account for the failure of nearly 75 percent of all CRM projects through 2004, according to Gartner.

Possible strategies include improving the efficiency of customer interactions, acquiring new customers, increasing customer revenues and profitability, or retaining existing customers.

Of those four strategies, the last is often overlooked. Giving customer retention short shrift may be one of the biggest strategic mistakes enterprises make. A recent Gartner study surveyed the CRM priorities of 117 U.S. retail marketing departments in the financial services industry and found that 43 percent focused on new customer acquisition, 30 percent focused on cross-selling, while only 9 percent focused on retention.

Sometimes an acquisition strategy can make sense.

"Acquisition is critical for companies in fast growing markets-if you don't keep up, a competitor will gain economies of scale and skill that will hurt future sales," explains Giga Information Group analyst Erin Kinikin. An acquisition focus is also important for companies serving markets with high churn rates.

But too many companies are over-focused on acquisition. For one thing, that's an expensive mistake. It cost five times as much to find a new customer as it does to keep an old one, according to Gartner, which estimates the cost of customer acquisition to be $280 a head, versus a mere $57 a head for customer retention.

"If you are losing high-value customers, the costs go up substantially to acquire a new customer and grow that relationship to the same level," says Kimberly Collins, a research director at Gartner. "Besides, once they leave it's too hard to win them back."

The other flaw in an acquisition-focused strategy is it overlooks life cycle. Each enterprise's relationship with each customer is a cycle that begins with acquisition, is perpetuated with retention, and is improved with cross-selling. And customers that engage in cross-selling are usually more profitable.

"Too many companies try to jumpstart revenue with CRM but cross-selling doesn't work if you focus on it too soon," advises Collins. She points out that "if customers aren't happy they are less susceptible to cross-selling."It's especially important to focus on retention during slow economic times. "In this economy, retention is absolutely the right strategy," says Forrester analyst Eric Schmitt.

Ultimately, the heart of any retention strategy is a genuine commitment to customer service.

"Despite all of the 'customers are our most valuable asset' mission statements prevalent in most corporations, the vast majority of today's companies are running their support operations as cost centers, as opposed to profit centers," says Christopher Selland, managing director of CRM consultancy Reservoir Partners. This point of view inevitably leads to a relentless attempt to reduce the costs associated with customer service rather than improving service to increase retention.

There are several things companies can do to hone in their CRM on retention:

• Pay attention to what customers want and give them more of it. For example, if they use your site mostly to buy gifts then you should adjust marketing and promotions accordingly.
• E-mail newsletters are one of the most effective ways to keep customers engaged. But practice effective e-mail retention tactics to make sure customers actually want to receive your newsletter--otherwise they'll be seen as spam.
• It doesn't make sense to try and retain all customers. Some customers are unreceptive to cross-selling and any attempt to force them into it will just be a waste of money. Be sure your CRM analytics are set up to identify customers who aren't biting the cross-selling bait.
• Watch for changes in customer behavior, such as reduced buying frequency or purchase amounts, which can be warning signs of dissatisfaction. This requires enterprises to build a CRM system that combines analytic capabilities with some form of event-triggering mechanism. Analytics are available from a variety of business intelligence and ERP vendors such as Business Objects, Cognos, Oracle, and PeopleSoft. Event-triggering software is available from vendors such as e.piphany and NCR.
• Once your system has rooted out dissatisfied customers, you also need a program to take action. Strategies can be as simple as sending special discounts or as complex as having a service agent examine a customer's file and contact them to see if they have any unresolved issues. For example, some financial institutions ask their local branches to call customers identified as being at risk, according to Gartner's Collins.

CRM will emerge from its fall as more enterprises develop well thought out customer strategies and align their technology accordingly. For most companies, focusing on retention will be the right direction.

Why aren't more companies focusing their CRM efforts on retention? E-mail Adrian or TalkBack below.