Eircom is one of Ireland’s biggest telecommunications service providers with over two million fixed-line and mobile customers, just under 5,000 employees and an annual turnover of around €1.5 billion. Eircom has 20 per cent share of the country’s mobile market, and 40 per cent of the broadband market. Ireland’s economic recession following the 2008 financial crisis led to increasing competition between mobile network operators and higher levels of customer churn as customers sought better value.
Eircom routinely collects structured data on important issues for customers, such as dropped calls, and customer satisfaction with service interactions, such as customer on-boarding onto the network. The company’s customer satisfaction instrument allows customers to explain in free-text boxes why they have assigned a particular satisfaction score. Eircom has a team of analysts working with data mining tools that allow them to explore both structured and unstructured data. Text analytics help eircom to understand customer sentiment at different points along their journey, as reported in the free-text boxes.
Eircom uses automated churn prediction modelling to enable a quick response when a customer’s patterns of behaviour indicate a high probability of churn. Eircom has also improved in-store processes and staff training. The analytics team discovered that customer experience during the on-boarding process had a significant effect on the likelihood of churn.
As a result, eircom introduced a new in-store process to enhance the on-boarding experience, based on improving the import of contacts from an old phone to a new one.
CASE STUDY 2.1
UNDERSTANDING RELATIONSHIPS
Managing customer retention and tenure intelligently generates two key benefits for companies – reduced marketing costs, and better customer insight.
Reduced marketing costs
Improving customer retention reduces a company’s marketing costs. Fewer dollars need to be spent replacing churned customers.13For example, it has been estimated that it costs an advertising agency at least 20 times as much to recruit a new client than to retain an existing client. Major agencies can spend up to $4 million on research, strategic analysis and creative work in pitching for one major international client, with up to four creative teams working on different executions. An agency might incur these costs several times over as it pitches to several prospective clients to replace a lost client.14In addition to reducing the costs of customer acquisition, costs-to-serve existing customers also tend to fall over time. Ultimately, as in some business-to-business markets, the relationship may become fully automated.
Some supply-chain relationships, for example, employ electronic data interchange (EDI). EDI is the computer-to-computer exchange of business documents in a standard electronic format – such as ANSI, EDIFACT, TRADACOMS and XML – between business partners.
EDI fully automates the ordering, inventory and invoicing processes. EDI is a relationship investment that acts as an exit barrier.
Better customer insight
As customer tenure lengthens, suppliers are able to develop a better understanding of customer requirements and expectations. Customers also come to understand what a supplier can do for them. Consequently, suppliers are better placed to identify and satisfy customer requirements profitably, selling more product and service to the retained customer.
Table 2.2 Retention rate and average customer tenure Customer retention rate Average customer tenure
(%) (years)
50 2
67 3
75 4
80 5
90 10
92 12.5
95 20
96 25
97 33.3
98 50
99 100
UNDERSTANDING CUSTOMER RELATIONSHIPS
Over time, as relationships deepen, trust and commitment between the parties is likely to grow. Under these circumstances, revenue and profit streams from customers become more secure. One study, for example, shows that the average online clothing customer spends 67 per cent more, and grocery customers spend 23 per cent more, in months 31–36 of a relationship than in months 0–6.15 McKinsey has found that retained customers are significantly less likely to shop around for a new auto insurance policy than newly recruited customers. Retention is improved if car insurance is bundled with another insurance product.16
In sum, both the cost and revenue sides of the profit equation are impacted by customer retention.
Some companies employ a model that has been variously known as a value ladder17or value staircase18to help them understand where customers are positioned in terms of their tenure with the company. Customers typically buy from a portfolio of more-or-less equivalent offers or suppliers. For example, large and medium-sized businesses often do business with more than one bank, and consumers may select a soft drink from a small portfolio of branded carbonated beverages. When customers climb the ladder, their value to your company grows. Your share of their portfolio expands. Put another way, your share of customer spending, or customer wallet, grows. In Table 2.1 we present a seven-stage customer journey from suspect status to advocate status.
As in the Dwyer model cited earlier, not every customer progresses uniformly along the path from ‘never-a-customer’ to ‘always-a-customer’. Some may have a long maturity phase (i.e. loyal customer) and others will have a shorter life, perhaps never shifting from first-time customer to repeat customer; others might never convert from prospect to first-timer. CRM software allows companies to trace where customers are on this pathway and to allocate resources intelligently to advance suitable customers along the value trajectory.
Costs and revenues vary from stage to stage of the journey. In the early stages, a company may invest significant sums in converting a prospect into a first-time customer. The investment in initiating a relationship may not be recovered for some time. For example, Reichheld and Sasser have shown that it takes a credit card company approaching two years
Table 2.3 The customer journey
Suspect Does the potential customer fit your target market profile?
Prospect The customer fits the target market profile and is being approached for the first time.
First-time customer The customer makes a first purchase.
Repeat customer The customer makes additional purchases. Your offer plays a minor role in the customer’s portfolio.
Majority customer The customer selects your company as supplier of choice. You occupy a significant place in the customer’s portfolio.
Loyal customer The customer is resistant to switching suppliers, and has a strong positive attitude to your company or offer.
Advocate The customer generates additional referral dollars through positive word-of-mouth.
UNDERSTANDING RELATIONSHIPS
to recover the costs of customer acquisition.19Another study shows that the average online clothing customer takes four purchases (12 months) to recover the costs of their acquisition, whereas online grocery customers take 18 months to break even.20