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Managing individual customer relationships has a profound effect on enhancing long-term customer loyalty, thereby increasing the enterprise's long-term profitability. Relationship strategies, for example, have a substantial effect on customer retention in the financial services sector. A study conducted by Peppers & Rogers Group (with Roper Starch Worldwide) found that—looking at a group of “satisfied customers”—only 1% of consumers who rate their financial services provider high on relationship management say they are likely to switch away products to competitors. One-fourth of consumers (26%) who rate their primary financial services provider as low on relationship management attributes say they are likely to switch away one or more products during the next 12 months. The financial implications of these findings are staggering (see Exhibit 2.2). Using a conservative average annual profitability per household for U.S. retail banks of $100, a reduction in attrition of 9% represents over $700 million in incremental profits for all U.S. households with accounts. If an individual financial institution with 20,000 customers can reduce attrition by 9 percentage points by providing excellent customer relationship management (e.g., recognizing returning customers, anticipating their needs, etc.), that institution can increase profits by $180,000. For a similar-size financial institution with an average household profitability of $500, the increase in profitability climbs to $900,000.

EXHIBIT 2.2 Benefits of CRM in Financial Services

Source: Peppers & Rogers Group, Roper Starch Worldwide survey.

Retaining customers is more beneficial to the enterprise for another reason: Acquiring new customers is costly. Consider the customer acquisition cost (CAC) for the banking industry. Averaging across channels, banks can spend at least $303 to replace each customer who defects.²⁶ So if a bank has a clientele of 50,000 customers and loses 5% of those customers each year, it would need to spend $757,500 or more each year simply to maintain its customer base.²⁷ Many Internet startup companies, without any brand-name recognition, faced an early demise during the 2000–2001 dot-com bubble bust, largely because they could not recoup the costs associated with acquiring new customers. The typical Internet pure-play spent an average of $82 to acquire one customer in 1999, a 95% increase over the $42 spent on average in 1998.²⁸ Much of that increase can be attributed to the dot-com companies' struggle to build brand awareness during 1999, which caused web-based firms to increase offline advertising spending by an astounding 518%. Based on marketing costs related to their online business, in 1999, offline-based companies spent an average of $12 to acquire a new customer, down from $22 the previous year. Online firms spent an unsustainable 119% of their revenues on marketing in 1999. Even with the advantages of established brands, offline companies spent a still-high 36%.

The problem is simple arithmetic. Given the high cost of customer acquisition, a company can never realize any potential profit from most customers, especially if a customer leaves the franchise.

The problem is simple arithmetic. Given the high cost of customer acquisition, a company can never realize any potential profit from most customers, especially if a customer leaves the franchise. High levels of customer churn trouble all types of enterprises, not just those in the online and wireless industries. The problem partly results from the way companies reward sales representatives: with scalable commissions and bonuses for acquiring the most customers. Fact is, many reps have little, if any, incentive for keeping and growing an established customer. In some cases, if a customer leaves, the sales representative can even be rewarded for bringing the same customer back again!

Although it's always somebody's designated mission to get new customers, too many companies still don't have anybody responsible for making sure this or that particular customer sticks around or becomes profitable. Often, a service company with high levels of churn needs to rethink not only how its reps engage in customer relationships but also how they are rewarded (or not) for nurturing those relationships and for increasing the long-term value to the enterprise of particular customers. Throughout this book, we will see that becoming a customer-value enterprise can be difficult, depending on the category. It is a strategy that can never be handled by one particular department within the enterprise. Managing customer relationships and experiences is an ongoing process—one that requires the support and involvement of every functional area in the organization, from the upper echelons of management through production and finance, to each sales representative or contact-center operator.

EXHIBIT 2.3 Customer Acquisition Costs (2020)

Industry	Cost
Travel	$7
Retail	$10
Consumer Goods	$22
Manufacturing	$83
Transportation	$98
Marketing Agency	$141
Financial	$175
Technology (Hardware)	$182
Real Estate	$213
Banking/Insurance	$303
Telecom	$315
Technology (Software)	$395

Source: Rishabh Rathi, “Customer Acquisition Cost by Industry: How to Calculate CAC?” February 14, 2022, available at https://startuptalky.com/cac-by-industry/, accessed February 24, 2022.

Customer-driven competition requires enterprises to integrate five principal business functions into their overall customer strategy:

1 Financial custodianship of the customer base. The customer-strategy enterprise treats the customer base as its primary asset and carefully manages the investment it makes in this asset, moving toward balancing the value of this asset to the long-term as well as the short-term success of the company.

2 Production, logistics, and service delivery. Enterprises must be capable of customizing their offerings to the needs and preferences of each individual customer. The Learning Relationship with a customer is useful only to the extent that interaction from the customer is actually incorporated in the way the enterprise behaves toward that customer.

3 Marketing communications, customer service, and interaction. Marketing communications and all forms of customer interaction and connectivity need to be combined into a unified function to ensure seamless individual customer dialogue, which includes remembering everything that already happened with this customer anywhere in the organization, so the next interaction can pick up where the last one left off.

4 Sales distribution and channel management. A difficult challenge is to transform a distribution system that was created to disseminate standardized products at uniform prices into one that delivers customized products at individualized prices. Disintermediation of the distribution network by leaping over the middleman is sometimes one solution to selling to individual customers.

5 Organizational management strategy. Enterprises must organize themselves internally by placing managers in charge of customers and customer relationships rather than of just products and programs.²⁹

We'll talk a lot more about this in Chapter 13.