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2009-06-25: Cultivate Relationships to Increase Margins

A critical component of customer relationship management (CRM) - and yet often overlooked - is the cultivation of existing customers. We've seen it all too often; companies spend nearly all of their time and scarce resources trying to attract new customers - while existing customers are largely ignored. This practice can be costly in terms of lower profitability and higher customer turnover rates. Companies seeking to improve their CRM practices should look no further than cultivating existing customer relationships.

The Importance of Cultivation

All too often, businesses large and small become focused on one simple thing: attracting new customers. While this is an important dynamic for real business growth, it can become toxic if it is overemphasized and becomes the ONLY focal point for the business.

Customer acquisition is often the most costly and least profitable component of the overall customer experience. Companies throw promotions, price discounts, or free products and services at potential new customers - all of which can quickly hike up acquisition costs and squeeze profitability.

Don't Make a Loss Leader be a Total Loss

We see examples of high acquisition costs every day. Grocery stores and other retailers are famous for offering loss leaders - popular products or commodities at an unprofitable price - in order to get customers in the door. Mobile phone companies subsidize new phone sales - again unprofitably - in order to land more subscribers. Even car dealers often sell new cars at very narrow margins in an attempt to land longer-term service relationships.

High-cost acquisition programs can be effective in landing new customers. However, in order to make the practice profitable, companies must focus more attention on taking care of existing customers and building meaningful and lasting relationships. Simply put, incremental revenue generated from an existing customer can be achieved at nominal costs. As a result, the cultivation phase - or back end - of the customer experience process can often be the most profitable.

Customer cultivation is important for one very important reason; it can significantly improve the customer lifetime value for your company. Customer lifetime value - simply put - represents the total revenue collected from a customer less any costs to acquire, serve and support the customer over the life of their relationship with your company.

Cultivate Your Relationships to Improve Your Margins

For example, if we commit $140.00 to acquire a customer that buys a $150.00 MP3 music player, we have made a margin of only $10.00. However, if we can develop and nurture the customer relationship at a nominal cost of only $50.00, they may turn around and spend $300.00 dollars on music downloads, gifts for friends, and related products over the next year - a respectable margin of $250.00.

If a meaningful customer relationship was never established after the initial transaction, then the lifetime value of the customer is a measly $10.00. However, by cultivating the relationship and obtaining additional follow-on revenue in our example, we increase the customer lifetime value to $260.00 from $10.00 - a healthy increase of 2600%!

How to Cultivate

Every new customer transaction plants a seed. What your company does with that seed can make a significant impact on future profitability. Will the seed lay there and be forgotten? Or will it be fed, watered, and nourished into a lush asset that bears fruit on a regular basis?

In order to get the most out of your customer relationships, you need to cultivate what you sow:

* Relate: Relate with your customers through regular and meaningful contact, observations, and ongoing interactions.
* Retain: Retain your customers by creating barriers to switching to a competitor and create an atmosphere of exclusivity.
* Expand: Expand your relationship with your customers by offering complimentary products and services on an ongoing basis.
* Innovate: Keep your customers excited and engaged by surprising them with new product innovations or special bundles that are tailored just for them.
* Analyze: Analyze your customer behaviors and cultivation activities to predict and anticipate future wants and needs.

Very few companies get customer cultivation right the first time. Doing it effectively can take strong leadership, a clear vision, and an effective measurement system to continuously evaluate customer lifetime value. However, those companies that do it right can reap significant rewards.

About the Author

Robert Howard is the Founder and Chief Executive of ClearBrick LLC, a leading provider of customer experience business solutions, research, and online customer experience advice.

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