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Established
ycle
Customer
C
Life er relationship)
er
New Customer
custom
ustom
C ofthe
Responder
(phases
Prospect
High
Marriage
Children
Working
Retired
School
Customer’s Life Cycle
(phases in the lifetimes of customers)
Figure 14.2 There are two customer life cycles.
The Customer’s Life Cycle: Life Stages
The customer’s life cycle consists of events external to the customer relationship that represent milestones in the life of each individual customer. These milestones consist of events large and small, familiar to everyone.
The perspective of the customer’s life stages is useful because people—even business people—understand these events and how they affect individual customers. For instance, moving is a significant event. When people move, they often purchase new furniture, subscribe to the local paper, open a new bank account, and so on. Knowing who is moving is useful for targeting such individuals, especially for furniture dealers, newspapers, and banks (among others). This is true for many other life events as well, from graduating from high school and college, to getting married, having children, changing jobs, retiring, and so on. Understanding these life stages enables companies to define products and messages that resonate with particular groups of people.
For a small business, this is not a problem. A wedding gown shop specializes in wedding gowns; such a business grows not because women get married more often, but through recommendations. Similarly, moving companies do not need to encourage their recent customers to relocate; they need to bring in new customers.
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Larger businesses, on the other hand, rarely have business plans that focus exclusively on one life stage. They want to use life stage information to develop products and enhance marketing messages, but there are some complications. The first is that customers’ particular circumstances are usually not readily available in corporate databases. One solution is to augment databases with purchased information. Of course, such appended data elements are never available for every customer, and, although such appended data is readily available in the United States, it may not be available in jurisdictions with different privacy laws. And, such external sources of data indicate events that have occurred in the past, making the customer’s current life stage a matter of inference.
Even when customers go out of their way to provide useful information, companies often simply forget it. For instance, when customers move, they provide the new address to replace the old. How many companies keep both addresses? And how many of these companies then determine whether the customer is moving up or moving down, by using appended demographics or census data to measure the wealth of the neighborhood? The answer is very few, if any.
Similarly, many women change their names when they get married and provide such information to the companies they do business with. At some point after two people wed, the couple starts to combine their finances, for instance by having one checking account instead of two. Most companies do not record when a customer changes her name, losing the opportunity to provide targeted messaging for changing financial circumstances.
In practice, managing customer relationships based on life stages is difficult:
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It is difficult to identify events in a timely manner.
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Many events are one-time, or very rare.
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Life stage events are generally unpredictable and out of your control.
These shortcomings do not render them useless, by any means, because life stages provide a critical understanding of how to reach customers with a particular message. Advertisers, for instance, are likely to include different messages, depending on the target audience of the medium. However, in the interest of developing long-term relationships with customers, we want to ask if there is a way to improve on the use of the customer’s life cycle.
Customer Life Cycle
The customer life cycle provides another dimension to understanding customers. This focuses specifically on the business relationship, based on the observation that the customer relationship evolves over time. Although each
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business is different, the customer relationship places customers into five major phases, as shown in Figure 14.3:
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Prospects are people in the target market who are not yet customers.
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Responders are prospects who have exhibited some interest, for instance, by filling out an application or registering on a Web site.
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New customers are responders who have made a commitment, usually an agreement to pay, such as having made a first purchase, having signed a contract, or having registered at a site with some personal information.
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Established customers are those new customers who return, for whom the relationship is hopefully broadening or deepening.
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Former customers are those who have left, either as a result of voluntary attrition (because they have defected to a competitor or no longer see value in the product), forced attrition (because they have not paid their bills), or expected attrition (because they are no longer in the target market, for instance, because they have moved).
The precise definition of the phases depends on each particular business.
For an e-media site, for instance, a prospect may be anyone on the Web; a responder, someone who has visited the site; a new customer, someone who has registered; and an established customer a repeat visitor. Former customers are those who have not returned within some length of time that depends on the nature of the site. For other businesses, the definitions might be quite different. Life insurance companies, for instance, have a target market. Responders are those who fill out an application—and then often have their blood taken for blood tests. New customers are those applicants who are accepted, and established customers are those who pay their premiums for insurance payments.
Former
Customers
High
Value
Voluntary
Churn
Target
New
High
Responder
Customer
Market
Customer
Potential
Forced
Rest of
Low Value
Churn
World
Figure 14.3 The customer life cycle progresses through different stages.
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Subscription Relationships versus Event-Based
Relationships
Another dimension of the customer life-cycle relationship is the commitment inherent in a transaction. Consider the following ways of being a telephone customer:
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Making a call at a payphone
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Purchasing a prepaid telephone card for a set number of minutes
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Buying a prepaid mobile telephone
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Choosing a long distance carrier
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Buying a postpay mobile phone with no fixed term contract
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Buying a mobile phone with a contract
The first three are examples of event-based relationships. The last three are examples of subscription-based relationships. The next two sections explore the characteristics of these relationships in more detail.
T I P An ongoing billing relationship is a good sign of an ongoing subscription relationship. Such ongoing customer relationships offer the opportunity for engaging in a dialog with customers in the course of business activities.
Event-Based Relationships
Event-based relationships are one-time commitments on the part of the customer. The customer may or may not return. In the above examples, the telephone company may not have much information at all about the customer, especially if the customer paid in cash. Such anonymous transactions still have information; however, there is clearly little opportunity for providing direct messages to customers who have provided no contact information.
When event-based relationships predominate, companies usually communicate with prospects by broadcasting messages widely (for instance in media advertising, free standing inserts, Web ads, and the like) rather than targeting messages at individuals. In these cases, analytic work is very focused on product, geography, and time, because these are three things known about customers’ transactions.
Of course, broadcast advertising is not the only way to reach prospects.
Couponing through the mail or on the Web is another way. Pharmaceutical companies in the United States have become adept at encouraging prospective customers to call in to get more information—while the company gathers a bit of information about the caller.
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Sometimes, event-based relationships imply a business-to-business relationship with an intermediary. Once again, pharmaceutical companies provide an example, since much of their marketing budget is spent on medical providers, encouraging them to prescribe certain drugs.
Subscription-Based Relationships
Subscription-based relationships provide more natural opportunities to understand customers. In the list given earlier, the last three examples all have ongoing billing relationships where customers have agreed to pay for a service over time. A subscription relationship offers the opportunity for future cash flow (the stream of future customer payments) and many opportunities for interacting with each customer.
For the purposes of this discussion, subscription-based relationships are those where there is a continuous relationship with a customer over time. This may take the form of a billing relationship, but it also might take the form of a retailing affinity card or a registration at a Web site.
In some cases, the billing relationship is a subscription of some sort, which leaves little room to up-sell or cross-sell. So, a customer who has subscribed to a magazine may have little opportunity for an expanded relationship. Of course, there is some opportunity. The magazine customer could purchase a gift subscription or buy branded products. However, the future cash flow is pretty much determined by the current composition of products.