A customer retention program can be a powerful tool in the arsenal of customer relationship management.

Retention is important to most companies because the cost of acquiring a new customer is far greater than the cost of maintaining a relationship with a current customer.

For many firms, customer profitability is skewed in such a way that losing the most profitable customers has a very serious effect.

In many banks, for example, the top 30 percent of customers (when ranked by profitability) can make up 100–150 percent of total customer profitability. That's right--the bottom eighty percent of customers may provide no profitability or, worse yet, destroy 50 percent of profitability.

In addition to saving profitable customers, retention programs allow companies to collect data about their customers. This data can be used to better understand, target, market to, and communicate with customers or to customize future interactions with customers.

Retention programs can be a relatively inexpensive means of making customers feel special, increase their purchases and recommend prospects.

Types of Programs

First, it must be noted that customer retention programs are not the same as customer relationship management programs.

Customer relationship management is not simply retention or customer service or marketing. CRM is a systematic business approach using information and on-going dialogue to build long lasting and mutually beneficial customer relationships.

CRM integrates data, technology, analyses and marketing and communications processes across all customer touch-points. In CRM, the customer is the building block for data management, reporting, goal setting, and measurement as well as business and marketing strategy, organization and technical infrastructure, and corporate culture and values over time and across all business units.

That being said, the basic types of customer retention programs are listed below.

In Discount Programs, customers receive a price cut on repeat purchases. For example, many insurance companies will offer a discount on auto insurance if a customer also has homeowner's insurance. These firms assume that customers are more likely to remain loyal if they own a greater breadth of the firms' products.

Loyalty Programs often taking the form of frequent flyer/frequent buyer programs, and are usually based on a points system. Points are given to customers for interactions they have with the company. Interactions may include making purchases, using a new channel (like a Web site or self-service kiosk), or referring prospective customers. Points can be redeemed for rewards or discounts.

Card-based Programs can be a specific type of points based or discount program. A popular type of card-based program may be used by your supermarket--your “valued customer” card can be swiped at the point of sale and you are offered immediate discount on purchases.

CRM and Customer Retention

Obviously CRM software is a crucial part of customer retention. What can a CRM system do and what can't it do in regards to customer retention?

First, let's define “CRM system.” Many firms think that when they purchase a sales force automation system or a customer service automation system they have purchased a CRM system.

However, a true CRM system also requires the ability to gather data about customers, store that data in a format that is easy to access, analyze the customer data, use this customer information to market to or communicate with customers. Usually, this means that a firm will use more than one piece of software to meet their analytic and operational CRM needs.

In terms of customer retention, the appropriate data capture, access and analysis system enables a firm to determine which customers it is most interested in retaining. Campaign management software enables the firm to target these customers and manage a variety of offers to encourage the customers to remain with the firm.

A sales force or customer service system can identify high-value customers to sales and service forces so these customers will benefit from individualized retention activities.

The Costs and Difficulties of Customer Retention Programs

In addition to the cost of administering retention programs (which can be rather expensive--producing cards and marketing materials, setting up points tracking systems, maintaining a customer service center or Web-site), the programs may end up offering rewards or discounts to customers who would have purchased products or services without an incentive. More than 87% of customers said they would purchase from a company even if they weren't in a program (International Research Project on Loyalty Programs, Retail Advertising and Marketing Association).

Regardless of the costs vs. the benefits of a customer retention strategy, like any customer relationship management activity, retention programs are often hamstrung by a lack of enterprise-wide direction. It is difficult to pinpoint who advocates the customer.

Typically, a firm will need to change in four areas to improve their focus on the customer:

• How the organization thinks--are the firm's success metrics centered on customers?
• How the organization works--are processes engineered around customers?
• How the organization is structured--does the form of the firm follow its function (to meet customer needs)?
• How culture manifests itself in the organization--does everyone in the firm think about, listen to, and respond to customers?

How to Overcome These Hurdles

Here's how a firm might effect change in the four problem areas:

How the organization thinks: Convert product-centric, channel-centric and other metrics to customer centric metrics over time. For instance, a firm may evolve from measuring sales volume alone, to measuring the customer value impact of new sales.

How the organization works: Begin to execute and measure pilot projects to test new processes, for example, developing a mini database for customer analysis and segmentation. Work with “customer owners” or advocates throughout the organization to establish business rules that create value for customers and the firm.

For example, develop a “fatigue rule” and do not contact customers more than “n” times per quarter. Develop business cases and use customer data in decision-making. Also, in addition to the economic analysis required before deciding to close an unprofitable store, determine which customers will be affected by the closing and how you will respond to them to retain them as loyal customers.

How the organization is structured: Does the form of the firm follow its function, that is, to meet customer needs? Save restructuring until the firm has changed processes and measures. This is an evolutionary process, not revolutionary, so simply adding customer advocates or customer segment managers to the organizational chart will not change the behavior of the firm or its value to customers.

How culture manifests itself in the organization: Does everyone in the firm think about, listen to, and respond to customers?

Make sure the CEO is the number one advocate of customer retention and CRM. Develop grass roots support for customer retention and CRM through changes in process, measurement, incentives, structure and language.