Statistical Methods in Customer Relationship Management

2.3 The Significance of Customer Retention

The increases in customer data collection, storage, and analysis have impacted not only the customer acquisition process, but also customer retention. This is evident from that fact that since the early 1960s, companies have changed their focus from short-term acquisition and transactions to long-term relationships and CLV [9]. In fact, retention studies indicate that for every 1% improvement in customer retention rate, a firm's value increases by 5% [10]. However, as important as customer retention may be in adopting a CRM strategy, it is important to note that many factors must be taken into account during the decision and process of customer retention.

Who to retain can often be a difficult question to answer. This is because the cost of retaining some customers can exceed their future profitability and thus make them unprofitable customers. When to engage in the process of customer retention is also an important component. As a result, firms must monitor their acquired customers appropriately to ensure that their customer loyalty is sustained for a long period of time. Finally, identifying how much to spend on a customer is arguably the most important piece of the customer retention puzzle. It is very easy for firms to over-communicate with a customer and spend more on his/her retention than the customer will ultimately give back to the firm in value.

Identifying who to retain has become more intricate with advances in data modeling ...