loyalty is closely associated with customer relationships and may, in certain cases, be directly related to the level of each customer's satisfaction over time.24 According to James Barnes, satisfaction is tied to what the customer gets from dealing with a company as compared with what they have to commit to those dealings or interactions.25 For now, it's enough to know that the customer satisfaction issue is controversial—maybe even problematic. There are issues of relativity (are laptop users just harder to satisfy than desktop users, or are they really less satisfied?) and skew (is the satisfaction score the result of a bunch of people who are more or less satisfied, or a bimodal group whose members either love or hate the product?). Barnes believes that by increasing the value that the customer perceives in each interaction with the company, enterprises are more likely to increase customer satisfaction levels, leading to higher customer retention rates. When customers are retained because they enjoy the service they are receiving, they are more likely to become loyal customers. This loyalty leads to repeat buying and increased share of customer. (We will discuss more about the differences between emotional loyalty and behavioral loyalty, as well as ways to measure loyalty and retention, later in the chapter.)
The Financial Payoff of Building Customer Relationships in Financial Services
Managing individual customer relationships has a profound effect on enhancing long-term customer loyalty, thereby increasing the enterprise's long-term profitability. Relationship strategies, for example, have a substantial effect on customer retention in the financial services sector. A study conducted by Peppers & Rogers Group (with Roper Starch Worldwide) found that—looking at a group of “satisfied customers”—only 1% of consumers who rate their financial services provider high on relationship management say they are likely to switch away products to competitors. One-fourth of consumers (26%) who rate their primary financial services provider as low on relationship management attributes say they are likely to switch away one or more products during the next 12 months. The financial implications of these findings are staggering (see Exhibit 2.2). Using a conservative average annual profitability per household for U.S. retail banks of $100, a reduction in attrition of 9% represents over $700 million in incremental profits for all U.S. households with accounts. If an individual financial institution with 20,000 customers can reduce attrition by 9 percentage points by providing excellent customer relationship management (e.g., recognizing returning customers, anticipating their needs, etc.), that institution can increase profits by $180,000. For a similar-size financial institution with an average household profitability of $500, the increase in profitability climbs to $900,000.
EXHIBIT 2.2 Benefits of CRM in Financial Services
Source: Peppers & Rogers Group, Roper Starch Worldwide survey.
Retaining customers is more beneficial to the enterprise for another reason: Acquiring new customers is costly. Consider the customer acquisition cost (CAC) for the banking industry. Averaging across channels, banks can spend at least $303 to replace each customer who defects.26 So if a bank has a clientele of 50,000 customers and loses 5% of those customers each year, it would need to spend $757,500 or more each year simply to maintain its customer base.27 Many Internet startup companies, without any brand-name recognition, faced an early demise during the 2000–2001 dot-com bubble bust, largely because they could not recoup the costs associated with acquiring new customers. The typical Internet pure-play spent an average of $82 to acquire one customer in 1999, a 95% increase over the $42 spent on average in 1998.28 Much of that increase can be attributed to the dot-com companies' struggle to build brand awareness during 1999, which caused web-based firms to increase offline advertising spending by an astounding 518%. Based on marketing costs related to their online business, in 1999, offline-based companies spent an average of $12 to acquire a new customer, down from $22 the previous year. Online firms spent an unsustainable 119% of their revenues on marketing in 1999. Even with the advantages of established brands, offline companies spent a still-high 36%.
The problem is simple arithmetic. Given the high cost of customer acquisition, a company can never realize any potential profit from most customers, especially if a customer leaves the franchise.
The problem is simple arithmetic. Given the high cost of customer acquisition, a company can never realize any potential profit from most customers, especially if a customer leaves the franchise. High levels of customer churn trouble all types of enterprises, not just those in the online and wireless industries. The problem partly results from the way companies reward sales representatives: with scalable commissions and bonuses for acquiring the most customers. Fact is, many reps have little, if any, incentive for keeping and growing an established customer. In some cases, if a customer leaves, the sales representative can even be rewarded for bringing the same customer back again!
Although it's always somebody's designated mission to get new customers, too many companies still don't have anybody responsible for making sure this or that particular customer sticks around or becomes profitable. Often, a service company with high levels of churn needs to rethink not only how its reps engage in customer relationships but also how they are rewarded (or not) for nurturing those relationships and for increasing the long-term value to the enterprise of particular customers. Throughout this book, we will see that becoming a customer-value enterprise can be difficult, depending on the category. It is a strategy that can never be handled by one particular department within the enterprise. Managing customer relationships and experiences is an ongoing process—one that requires the support and involvement of every functional area in the organization, from the upper echelons of management through production and finance, to each sales representative or contact-center operator.
EXHIBIT 2.3 Customer Acquisition Costs (2020)
| Industry | Cost |
|---|---|
| Travel | $7 |
| Retail | $10 |
| Consumer Goods | $22 |
| Manufacturing | $83 |
| Transportation | $98 |
| Marketing Agency | $141 |
| Financial | $175 |
| Technology (Hardware) | $182 |
| Real Estate | $213 |
| Banking/Insurance | $303 |
| Telecom | $315 |
| Technology (Software) | $395 |
Source: Rishabh Rathi, “Customer Acquisition Cost by Industry: How to Calculate CAC?” February 14, 2022, available at https://startuptalky.com/cac-by-industry/,
