Every business likes to tell its clients that it values their custom. But some customers are more valuable than others and one of the benefits touted by CRM vendors is that it can help identify the most valuable customers and ensure their continuing loyalty.

Churn, the attrition or loss of customers, has become a big problem in many industries. In retail financial services, for example, many companies have been much more concerned about acquiring new customers than retaining existing ones.

Nick Hewson, of CRM consultancy Hewson Group, says these land-grab sales techniques may boost the top line but they do little to help long-term profitability. ”In financial services, they do not incentivise sales staff to get customers with the greatest lifetime value,” he says.

The cost of acquiring customers is high, he points out, and it can be difficult to recoup that cost unless the customer is retained for a minimum length of time.

In mobile telecommunications, churn is also a huge problem. The market is saturated in many countries, the number of operators is growing and the basic service – voice telephony – is perceived to be a commodity.

One obvious way to combat this problem is to acquire more loyal customers. But few businesses are brave enough to turn away new business simply because they suspect the customer is likely to jump ship as soon as they get a better deal. Sooner or later, even the most loyal of customers will start looking at rival offers. Some businesses have, therefore, turned to CRM technology to predict which customers are most likely to defect.

This technology-centred approach to reducing churn has been criticised for distracting businesses from addressing the root causes of customer dissatisfaction.

”If you need a churn prediction system to tell you that your customers are unhappy then your organisation has deep problems,” says Jeff Gordon, senior vice-president of advanced development at Convergys, the US billing and customer care company.

Fans of churn prediction argue that it acts as an early warning system, giving the business time to prepare incentives that will hopefully prevent the customer from leaving.

Of course, there are some ”high risk” customers who will leave regardless of what incentives are offered, usually because they have had a bad experience that has irredeemably soured their faith in the company.

According to a recent Harris Interactive study, 68 per cent of respondents will never go back to a company as the result of a negative experience.

”Its an exercise in futility to try to prevent these customers from leaving,” says Mr Gordon.

Conversely, there are customers who will stay with the company even if they are not offered incentives.

And then, of course, there are customers – a surprisingly large group in many cases – that the company should allow to leave because they are unprofitable.

Vilfredo Pareto, an Italian-Swiss socio-economist, derived the 80-20 rule, also known as the Pareto Principle, and it finds ready application in marketing, where 20 per cent of customers generate 80 per cent of profits.

Of course, it is relatively easy to identify your top customers and keep them sweet. The difficulty is knowing how to treat the remaining 80 per cent as the category lumps together a huge range of customers with differing circumstances, needs and spending patterns, which may, in addition, change over time.

Banks have long known to look beyond the meagre balances and overdraft problems that characterise students’ financial affairs and instead look ahead to the enhanced future earning potential that a college degree promises. This is an example of the concept of lifetime value (LTV), and it is key to building customer loyalty, argues Mr Hewson.

”A 25-year-old may not be that profitable today but you can still make a case for keeping the customer,” he says.

The heavy investments that businesses have made in CRM have undoubtedly helped improve the operational side of sales and marketing. But these systems do not take a lifetime view of the customer and they do not necessarily help businesses better understand what offers to make to specific customers.

Consultants McKinsey recently did a study on the US wireless industry that identified two fundamental challenges that CRM fails to address: a poor understanding of customer economics; and customer segmentation techniques that are too broad to be useful.

McKinsey’s solution, called Customer Lifecycle Management (CLM), requires businesses to quantify the LTV of each customer and to look beyond typical market research to segment customers using much finer ”micro-segmentation” techniques.

For example, the so-called ”youth” market is so broad as to be of little real use to most marketers. It encompasses users with widely different usage and spending patterns, some of whom may not even be young – they simply signed up for a youth-oriented service in the past.

McKinsey argues that the data needed to enable micro-segmentation probably already exist although they are probably spread across various databases.

Getting the data into a single datamart is a necessary first step to improving the customer experience, as every ”contact point” in the organisation – retail outlets, call centre or website – will share a single up-to-date picture of the customer.

Another concept key to CLM is to abandon one-size-fits-all marketing strategies. Businesses need to consider carefully the implications of offering a new product to different micro-segments.

McKinsey gives the example of ”bundles”, which are popular in the telecoms industry. Bundled service offerings can cannibalise existing revenue revenues and drive up support costs, so telecom providers need to weigh up the expected benefits against the costs of providing them for each micro-segment.

McKinsey says that it has tried CLM with several companies and obtained earnings before interest, tax, depreciation and amortisation improvements of 3 to 5 per cent over the first 12 months, and gains of 20 to 25 per cent by the end of the second year.

Convergys has incorporated CLM into a new product offering, the Lifetime Value Optimiser, which takes McKinsey’s theory and transforms it into an operational system to help businesses maximise the LTV of each customer and improve loyalty.

Mr Gordon of Convergys gives the example of a long-time customer with a good payment record who misses a payment by one day. Because the customer has a high LTV and the late payment is a one-off event, the system could send an e-mail or SMS message telling the customer about the oversight and offering to waive the penalty fee if payment is made the following day.

Such proactive and seemingly personalised attention can boost customer loyalty, Mr Gordon argues, by creating the impression of ”high-touch” customer service even when the processes are, in reality, heavily automated.