Excellent Powerpoint Slides on Marketing and Strategy

Customer Life Cycle

Customer equity management recognizes that customer-firm relationships, like all relationships, evolve over time. Prospects, new buyers, and long-time customers do not have the same needs, and as their relationships with a company change, so do their expectations and behavior. The concept of the customer life cycle provides a framework for understanding and managing these differences.

Stage 1: Prospects
Prospects are not yet customers, but they represent potential value. (Highly qualified prospects are particularly important.) Firms need to manage them as they would initial customers. That said, prospects pose unique problems: Should they be offered prices below those given to existing customers? What level of sales effort should they receive? What type of communication should be offered to them regarding the quality and the value of the firm's offerings?

These questions are very important, often in ways that firms do not expect. For example, marketing communications that create overly high expectations among prospects adversely affect retention once these customers have made a few purchases and been disappointed. A firm that makes this mistake ends up with high acquisition rates but low retention rates. Too few firms recognize that the marketing tactics used during the prospect stage have repercussions throughout the customer-firm relationship.

Stage 2: First-Time Buyers
Customers move into this stage after making one purchase. These newly acquired customers usually have the lowest retention rates within a firm's customer base. Although they have signaled that the firm's products meet their specifications, they are still in the evaluation stage. They need to learn whether the products and customer service levels meet their expectations.

If the product meets expectations and remains above the quality cutoff, the customer will continue to purchase and be retained as long as the product's value is maintained. If the product does not meet expectations, the customer will stop purchasing and defect. During these early repeat purchases, just one product failure (in which the product falls below the customer's quality cutoff) generally will cause defection.

Stage 3: Early Repeat Buyers
Customers advance to this stage after making one repeat purchase. These customers are more likely to buy again than first-time buyers, and sales per customer increase as they gain confidence with the firm. However, although two to three repeat purchases indicate satisfaction with the product, these early repeat buyers are still evaluating the rela¬tionship. If the firm provides poor service or the product does not meet expectations, they may defect.

Firms rarely identify this stage in the customer life cycle. Early repeat buyers may not be as vulnerable as first-time buyers, but they still have lower retention rates than core customers who have repeat-purchased many times, and must be managed accordingly.

Stage 4: Core Customers
Customers enter the core customer stage after they begin to repeat-purchase regularly. The firm's product or service meets their required specifications and value. Unless a major problem arises with the purchasing process, these customers rarely reevaluate the firm's product. An occasional product failure will not automatically cause defection; numerous positive experiences serve as a basis for the customer's expectations and carry him or her through the disap¬pointing experience. In fact, at this stage, expectations change only slightly each time the customer uses the product. Only in bid busi¬nesses or at contract renewals do these customers evaluate their deci¬sions systematically.

The core customer stage has the highest retention rates and the highest sales per customer. These customers are special and should be treated as such. Ironically, some firms de-emphasize their core cus¬tomers because of these high retention rates. Management does not see these customers as problems and so pays less attention to them.

Source of Reference:
Robert C. Blattberg, Gary Getz, and Jacquelyn S. Thomas, Customer Equity: Building and Managing Relationships As Valuable Assets, Harvard Business School Press. You can obtain this fine book here