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

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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
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

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

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However, apart from gathering informationa in order to identify the drive for customer
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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http://www.tesco.com/clubcard/clubcard/what.asp

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