What price customer retention?

Pricing is one of the most sophisticated uses of data in many organisations – and also one of the most closely-guarded secrets. Organisations can achieve significant competitive advantage if they get their pricing models right. They can also lose a lot of money if their price positioning is out of line with the market.

That is why companies in highly competitive markets deploy huge data resources and highly-skilled analysts in their pricing departments. BT runs probably the largest outsourced analytical data warehouse in the UK, using Kognitio, to handle the vast array of pricing issues it faces.

Like all telcos, it does not just have to adjust its tariffs to reflect the marketplace. It also needs to reconcile the actual calls made by subscribers with the payments it is owed from other networks. Where calls come in from another network, it needs to be paid. All telcos suffer from having calls that can not be accurately tracked back to the right originator, so anything that can reduce this unresolved residue will improve margins.

Pricing is also vulnerable to competitor action. When O2 entered the mobile market in 2001, for example, it set low tariffs in order to win market share. That had a highly destructive effect on what its rivals had assumed about their revenue streams.

This is where the analytical work done by pricing departments needs to have a loop into the marketing function. Advanced marketers feel proud when they have got to the point of using net present value or customer lifetime value to drive their activities. What these models do is calculate the future revenues that might be gained from a customer, often discounted back to current cash values, in order to decide how much it is worth spending to keep or acquire that customer.

So what happens to your CRM programme if a rival changes the pricing model in your market? The money you have assumed will flow from a customer may no longer be there if the company has to discount their service in order to retain them.

How often have you seen retention activity reined in on the basis that prices have changed? Too rarely is this connection recognised and understood. Yet it is being calculated elsewhere in the business and could make a massive difference to the bottom line if applied to marketing.

There is no shortage of reasons for cutting back on marketing budgets. But changes to price should be seen as one of the most important, because the evidence is there to prove it is the right thing to do.