Churn Management on Retail Industry

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Introduction

With the rapid development of economic globalization, market competition has

become more and more keen and cruel, homogenization of products is more and more

manifest. Meanwhile, customers needs have become increasingly diverse and

personalization. In this market circumstances, "customer--focused" management

concept has been take into account by many enterprises. Customer is the source of

profits, establish and maintain the relationship with consumers has been the only and

most important foundation for enterprises gain the unique competitive advantages.

"Customer relationship management" (CRM) was build on this situation. Customer

churn, one core element in CRM, has become the most pressing matter in today's

competitive business market.

Retail business is a industry that directly facing ultimate customers. Customers can

easily switch from one company to its competitor's company by better value of goods

and services. Customers loyal or not, will directly related to the enterprises' survival

and development. Losing a large amount of customer means losing a lot of revenue.

What is more, the new customer acquisition costs is much higher than to retain an

existing one . Therefore, reducing customer churn has risen to the top of corporate

agendas everywhere.

In this paper, we will mainly focus on the current situation of customer churn and

retention in customer relationship management.   Choose retail industry, Tesco as an

example to show how would it solve this kind of problem.  Finally we will analysis the

reason why customer defect and how would retail industry predict and prevent churn

based on previous evidences.  Though all of that, this paper is aiming at finding

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solutions for managers to predict, manage and reduce churn.

Literature Reviews

As customer is the most important value for the business, it is important for companies

to understand how important is customer relationship marketing as a managerial

method to target customer as the centre of a company's processes and practices,

regardless which business industry. With the resources from latest technology or using

different strategic planning and technique, which both externally and internally build

up relationship that increase profit for a company.

The Customer relationship management helps company to increase profitability from

the interaction aspect with customer in additional of selling the product at the same

time, through a better understanding of customer's need, it would also build up

customer value and their loyalty toward the company. Therefore if a company is able

to identify customer's buying pattern it would be easier for company to understand

what they need, then through the pattern company will be able to predict and come up

with idea in order to keep their customer by to making them receive additional

satisfaction from what they expected from their buying experience, which they would

be delighted with the service and product therefore less likely to churn (Salwan, 2007)

Businesses nowadays focus on how to retain their customers as customer defection is a

serious concern for them, therefore it is important to be able to have an accurate

prediction on defection in order to prevent it happens, as it is more costly to attract new

valuable customers than keeping the existing customer the company has. There is a

huge impact of customer defection on company revenue. The influence of defection

on service-based company is far beyond company scale, market share and marginal

cost. The longer the relationship between company and customer lasting, the higher

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the revenue that company earning. If company can retain 5 more customer, the profit

growth will 100%.

There have been empirical observation indicated that customer tend to change their

consuming behaviour pattern before their action of defection. In order to detect

defection,companies in service industry such as telecommunication, internet service

companies tend to use data mining techniques as a process to gather data of customer’s

behaviour pattern in order to predict and prevent defection, such as using a dynamic

procedure by integrating data-mining technique using bother past and current customer

behaviour data to form a self-organizing map(Kim, 2005). Or using data - mining

tournament (Neslin, Gupta, Kamakura, Lu and Mascon, 2006) which has the adventage

on the insight, generalizability due to the wide range of participants and database can

provide a better accuracy of the method. The problem is Neslin (2006)'s research

using data mining tournament to gather date has cash reward as a price for the winner

amount of participant, which the financial reward incentive factor might lead to

concern on the accuracy as some participants might be aiming at winning the prize

therefore manipulated the result during data gathering process which should be taken

into account for consideration on the accuracy.

Also, short term customers and the switchers type of customers who constantly product

or service companies for a better benefit incentives is a serious concern for business

too, especially those company without effective and accurate customer database

therefore the companies are unable to identify those customer won't return anymore.

Therefore if the company has an effective customer database then they will be able to

response to the churn problem by trying to keep the short term customer for a slightly

longer period for while they come up with idea that can make customer willing to stay

for a longer term of relationship with the business(Barnes, 2006).

However, apart from gathering informationa in order to identify the drive for customer

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detection in churn is not enough for to prevent defection. It is also important to

understand why they want to change and end the relationship with the

company(Bortfeldt, 2008), data mining might be able to indicate which group of

customer is more likely to churn but it doesn’t provide an insight of the reason behind

the data. Loyal is one of the linkage to the defection and customer churning factor

(Gummesson, 2002)

There are 2 aspects on loyalty. "One is behavioural loyalty, based on the number of

purchases and measures by monitoring the frequency of such purchases and any brand

switching; another one is attitudinal loyalty, it's incorporating with consumer

preferences and disposition toward brands to determine levels of loyalty" (Javalgi and

Moberg, 1997).

Case study: Tesco Clubcard

* Various of products and services

Tesco, the giant and most successful supermarket chain in the UK and one of the top 3

retailer in the world. The number of loyal customers increased manifold since the

loyalty scheme (Clubcard) was launched in 1995 by offering points on purchases and

giving a small rebate to loyal shoppers. According to Bolton et al.(2000) the goal of

loyalty scheme is to establish a higher level of customer retention in profitable

segments by providing increased satisfaction and value to cretin customers. "In 1996

Tesco created a student card and another card for mothers, with offers suited to their

needs. Tesco then added a travel service through a partnership with Lunn Poly, giving

discounts off high-street prices. It also combined its card with Visa through the Royal

Bank of Scotland, and offered discounts on DIY goods through well-known home

improvement chain B&Q. In 1997 it added a full range of financial services, and the

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Tesco Direct service. In 1998, after the UK's deregulation of utilities, Tesco began to

offer electricity and telecommunications products and services. Also in that year,

clothing was added to the range through Next. By this time, Tesco had identified 108

customer market segments. This year 2000, a joint undertaking with General Motors

allows customers to buy cars from Tesco." (Temporal and Lee, 2001). The expansion

of Tesco is one of the world’s most successful exponents of Customer Relationship

Management (CRM). As Tesco build up lots of relationship with other industry and

provide a wide range of goods and services, it has set up a "Tesco net", where

customers can get almost everything they need with a competitive price. This method

can attract more customers, made the existing customers more loyal and effectively

reduce customer churn.

* Data mining

By analyzing customers purchasing behaviour, collected from Dunnhumby (data based

on purchasing time, items and value), it allowed Tesco to target individual customers

(the rifle shot approach), instead of targeting them as a group (the carpet bombing

approach). "For Tesco, a points system is not just electronic sales promotion. It only

becomes a loyalty mechanic when you use the data to add relevance to the customers'

life" said by Humby (2004). Every customer will fell himself is special and the

recommendation by Tesco is only for him, that can raise customer satisfaction and

keep a good retention rate. Since the customers received coupons that matched their

buying patterns, over 20% of Tesco's coupons were redeemed - as against the industry

average of 0.5%. Tesco knows that really understanding customers' needs and

satisfying them are the most important factors for keepping customers loyalty and

reducing customer churn. As a result of Tesco's efforts to delight the customer, its

profits and market share figures rose tremendously over time, making it a prime

example of how technology, coupled with a human touch, can provide customers with

a great experience.

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* Problems

But Tesco is not an invincible company. Although each customer visited its stores had

increased significantly over the years, but the average purchase per visit had not gone

up as much as it would have liked to see. The Clubcard scheme is easy to copy, such

as Morrison's has morrison's saving stems and Sainsbury has loyalty card. As Tesco

has moving away from its core business within UK (thrust on non-food, utility

services, online travel services) and was globalizing rapidly (ntering China and Japan)

in recent years, the leading position in supermarket may oscillatory in the UK.

Recommendation and Conclusion

In conclusion, to meet customer needs and make them satisfy is the corn concept of

set up customer loyalty and decrease customer churn. there is no one off best method

on data gathering because method used by companies from service industry can be

more technical and complicated due to the nature of the business itself, as for retail

industry the data gathering can be used by promoting loyalty card with discount

incentive which allow companies to keep track on customer’s pattern combined with

marketing strategy like promotions and membership upgrade. Therefore when

business need to have churn management it is important that they focus on more than

one aspect, apart from the reason of customer churning but also need to choose careful

for an accuracy and appropriate data gathering method, then combine with strategy

from other managerial strategy in order to come up with the effective churn

management idea for their own business industry to gain a better competitive

advantage in the business market.

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References

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Bolton, R.N., Kanna, P. K. And Bramlett, M. D .(2000). Implications of loyalty programme membership and service experience for customer retention and value.' Journal of marketing science. 28, 95-108.

Bortfeldt, A. (2008) Intelligent Decision Support - Intelligente Entscheidungsunterstützung: Current Challenges and Approaches - Aktuelle Herausforderungen und Lösungsansätze. Frankfurt: Garbler Verlag. pp.243.

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http://www.tesco.com/clubcard/clubcard/what.asp

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