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Using Customer Intelligence to Support a Customer-Focused Strategy

  • March 01 2004, 1:00am EST
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Author's note: Many critics cite a lack of focus on business strategy and organizational change as the root cause for failed customer relationship management (CRM) engagements. In the following months, we will discuss how customer intelligence supports the strategic development, operational execution and organizational challenges to ensure CRM projects meet expectations. This column discusses how customer intelligence can support a customer-focused strategy through customer loyalty initiatives.

Recently, organizations have been rejuvenating or accelerating their focus on customer loyalty within their CRM initiatives. The economic hardships during the past few years caused buyers to be less plentiful and more judicious in their spending. Companies realized that not only were there fewer customers to go around, but also that the cost of acquiring new customers was much higher than the cost of retaining current customers.

Despite tight budgets, organizations began to realize the importance of customer loyalty and many built, rebuilt and/or modified loyalty strategies to increase customer retention and ensure consistent revenue streams.

Customer loyalty programs enable organizations to identify and categorize their customers and create a connection between customer loyalty drivers and the events, interactions and experiences that impact loyalty. Customer intelligence systems supply the analytical processes needed to design, execute and evaluate these customer loyalty initiatives.

To understand how customer intelligence enhances an organization's customer loyalty strategy, it helps to understand how loyalty strategies are built. This column addresses the four steps of building a customer loyalty program and explains how a customer intelligence system supports it.

The Four Steps of Executing a Customer Loyalty Program

Segmenting the Customer Base

A segmentation analysis helps companies identify the underlying factors of customer loyalty. It enables them to understand what various sets of customers want and what they actually do to get it. For example, specific segment profiles may describe which channels customers prefer to utilize, expected service levels, how often the customers want to be contacted, what messages may resonate with them, what is important and valuable to them, and how they currently utilize a company's services. Understanding these traits help companies build sales, service and marketing programs that meet and exceed these customer expectations, which should generate satisfaction and long-term loyalty.

To begin a segmentation analysis, organizations need to gather attitudinal information of their customers by developing different profiles of each customer segment. This can be done using market research techniques (surveys, focus groups, etc.) to determine what different customers need, want and value. In addition, companies need to use behavior information (creating clusters, etc.) for gathering transactional information such as purchases and customer service inquiries.

Once the customer base has been segmented, organizations may want to cross-reference customer segments with customer value metrics to understand the differential value of their customers within each segment.

Figure 1 depicts a simplified segmentation analysis of an airline, where each segment represents the airline's platinum, gold and non-premier status customers. Each status level is based on usage of airline services (e.g., miles traveled). The airline can also drill down to a more complex level by profiling its customers within each segment (e.g., business traveler, leisure traveler, demographics, specific destination traveler, etc.).

Figure 1: Customer Segments and Customer Value

Cross-referencing flying miles with value/profitability allows the airline to more easily understand its customers. For example, the airline is able to discern that a platinum customer who always makes reservations three weeks in advance is not as profitable as a customer with the same amount of miles buying at the last minute. The airline may determine that the latter customer is a Segment 1/high- value customer, whereas the customer who purchases in advance may be a Segment 1/medium-value customer. Segmentation analyses such as these have caused many major airlines to consider applying fewer miles to customers with advanced purchases and more miles to last-minute customers.

Identifying Specific Loyalty Drivers

Once their customers have been segmented and analyzed, companies need to define the key triggers that drive loyalty.

To do so, it is usually helpful to first define loyalty. Many companies may find this difficult. Retention metrics such as churn may be a good start. However, other metrics may be more impactful, such as the likelihood to switch companies given an opportunity, or the likelihood of recommending the product or service to another customer/prospect.

Once a company understands its definition of loyalty, it can identify the triggers of loyalty –­ for example, what drives customer recommendations/referrals?

Companies should identify three to five key areas that each of their customer segments value. Some areas may be segment-specific, while others may be shared across segments with different priority levels.

For example, loyalty drivers for a healthcare insurance company may include the ability to simply understand and utilize their plan, smooth claims processing and good doctors in the network.

Loyalty drivers for a major newspaper may include pricing pricing, the ability to use multiple channels to access information, customer service and promotional programs.

Developing a Customer Life Cycle

Segmentation and loyalty drivers help companies understand their customers –­ what they like and what motivates them. However, to develop a successful customer loyalty strategy, companies must also understand which customer experiences can be positively impacted (from a relationship and profitability perspective) by applying the customer knowledge they've gained. One framework that identifies these opportunities is a customer life cycle.

By developing a customer life cycle, companies can define and understand different customer interactions, from acquisition to churn. A sample life cycle may include:

  • Education: introduction to a company that turns into interest
  • Comparison: interest in a product or service that turns into intent
  • Purchase: intent that turns into buying an actual product or service
  • Activate: setting up a product or service once it has been purchased
  • Service: support of the product/service once it has been activated
  • Restore: returning to the service after leaving

Figure 2: Customer Life Cycle Development

Complex life cycles may also identify segment-specific activities for each step that relate back to the different customer loyalty drivers, priorities, needs and wants uncovered during segmentation. For example, a cable company may be able to shorten the life cycle of its high-value customers by combining purchase and activate life cycle segments –­ a high-value customer can set up activation at the same time he/she purchases a satellite receiver. Additionally, a company may not participate in restore efforts for its low value customers.

Identifying Loyalty Events

At this stage, companies have identified their different customer segments and the drivers of loyalty within those segments. In addition, they understand the life cycle of interactions that support customer acquisition and retention.

Companies now need to identify the specific processes, interactions, channels and events within their respective customer life cycles that have the greatest impact on customer loyalty. Loyalty events help organizations focus their time, financial and human resources on specific scenarios that have a direct correlation to revenue and profits. They are critical to an organization, as they may hinder or advance each customer's loyalty to the organization depending on the customer's individual experience. Each loyalty event should directly relate to specific loyalty drivers. When companies do not address a customer's specific expectations or anxieties at crucial times, customers will look for alternatives (competitors, etc.) to fulfill their wants and needs.

Examples of loyalty events for a healthcare insurance company may include first claims experience, discrepancies between benefits received and benefits expected, and searching for a doctor in the network.

For a major newspaper's advertising sales department, they may include first ad placement, coordination of creative or advertising inventory and questions of value received or potential customers reached.

Using Customer Intelligence to Understand Customer Loyalty

When the four steps of a customer loyalty strategy have been executed, companies will be able to understand the analytical processes necessary to support their customer loyalty initiatives. Customer intelligence tools supply these analytical processes and increase the effectiveness of loyalty programs by consistently monitoring customer segments, loyalty events and loyalty drivers. They enable companies to understand the volatility and performance of their customer loyalty program's guiding principles.

Companies implementing customer loyalty programs without a customer intelligence system typically do not understand the performance of the program and have difficulty fine-tuning it over time.

In general, there are at least three main categories of analytical processes: segmentation support, loyalty driver support and loyalty event support.

From a segmentation support perspective, the system should:

  • Contain information to identify and place customers in segments.
  • Calculate customer value for each customer.
  • Predict prospects' segments or future value.
  • Predict future segments and future value for current customers.
  • Provide segment information as both a dimension in analysis as well as a driver for interactions such as marketing programs, sales targeting or customer service routing.

From a loyalty driver support perspective, the system should determine:

  • Which loyalty drivers are most important.
  • How loyalty drivers map to loyalty events and which drivers have the most impact for each loyalty event.
  • Which loyalty drivers most impact retention.
  • Whether loyalty drivers are consistent or volatile over time.

From a loyalty event support perspective, the system should:

  • Capture and evaluate information and impact of loyalty events. For example, do specific segments stay with the organization longer based on specific interactions?
  • Track loyalty events at the segment level.
  • Correlate retention metrics with loyalty events.
  • Enhance the experience at each loyalty event by making recommendations (offers, products, pricing), providing segment or value information, or otherwise personalizing the experience.

Customer loyalty programs enable organizations to identify and categorize their customers and create a connection between customer loyalty drivers and the events, interactions and experiences that impact loyalty.
Customer intelligence tools provide the analytical processes necessary to support a customer loyalty program. They increase the effectiveness of loyalty programs by consistently monitoring customer segments, loyalty events and loyalty drivers. In addition, they enable companies to understand the volatility and performance of their customer loyalty programs' guiding principles.

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