Keeping Customers in a Crummy Economy

With recession expectations growing, some companies are taking extraordinary steps to hold on to customers

Even before the U.S. economic outlook darkened as the gravity of the financial crisis came into focus, companies started to get more aggressive in their attempts to hold onto old customers and attract new ones. Telephone companies' offers for two months of free service and reduced rates, discounted gym membership renewals, and generous gift cards from high-end department stores all underscore a pervasive fear on Main Street: With the uncertainty around the credit seize-up, consumers may be digging in for a long hibernation.

In upstate New York and other rural communities it serves, Frontier Communications (FTR) is even sending sales representatives door-to-door to persuade customers to lock in another year's worth of service at a discount rate. Those visits are effective where customers are often two-income families with busy lives, and many of those drop-ins are scheduled in advance, says Brigid Smith, a company spokeswoman. "We're sensitive to what this financial crisis means to them and we have to communicate with them," she says.

It's not only because of the gloomier economic picture that Frontier and other telephone companies are trying harder to hold onto customers. Ongoing attrition of users to more advanced technologies, like wireless, and poaching by cable companies have also called for more aggressive retention efforts. Verizon Communications (VZ) estimates an average loss of 8% to 9% of its customer landlines a year over the past few years, most of them going exclusively wireless or switching to service from a voice over IP (VOIP) or cable company, says spokesman Bill Kule. The barrage of competition from cable operators was a key impetus for Verizon's fiber-optic service, called FiOS, which bundles voice, high-speed Internet, and television service together into a triple-play package, which had been connected in more than 7 million households by the end of June.

Verizon has long been pitching promotional offers at "customers on the precipice of leaving," says Kule, but those became more urgent after the company saw bigger than expected departures of both broadband and voice customers during the second quarter. Since July, it's been offering all three services for the price of two to keep customers thinking about switching and to win back residential and small business customers who have already left, says Kule. Verizon is also urging customers to sign up for at least a one-year plan, hoping it will help them stick, he adds.

Sinking Economy…Cable Company Boost?

The tougher economy may have put cable service providers more squarely in the catbird seat, relieving some pressure to offer perks to customers. Their rationale: Subscribers to premium cable channels and pay-per-view events have arguably already chosen to cut their entertainment expenses and trade down—by staying home, says Christopher King, a telco analyst at Stifel Nicolaus (SF).

Long before the financial crisis tripped off new alarms last month, DirecTV (DTV) had initiated a program to retain customers, who sign up for either 18 months of standard service or two years for advanced service with features such as high-definition. "We're always looking at customers who are about to roll off their commitment, and there are groups we do go after with commitment-renewal efforts," using free digital video recorders or HD boxes as incentives, says Paul Guyardo, DirecTV's chief sales and marketing officer.

More often than not these efforts are directed at customers who live in areas where cable competition is more cutthroat. The company also discourages switching by charging early termination fees—generally $150 to $250—that are pro-rated according to how much time remains on a contract.

With a longer and deeper recession looming larger on the horizon, telephone and cable providers will be more inclined to use prices to differentiate themselves from their rivals, predicts King at Stifel Nicolaus.

Tough Task for Car Dealers

For big-ticket items like cars, keeping customers coming requires a more Herculean effort. With larger banks increasingly unwilling to approve car loans even to applicants whose credit scores used to be regarded as stellar, it's up to the manufacturers to risk filling the gap by financing less creditworthy customers, or "buying deep," as auto industry analyst Brett Hoselton at Keybanc Capital Markets (KEY) calls it. Carmakers can also offer a bigger discount so that the remaining cost meets the threshold of 90% of the manufacturer's suggested retail price that financing organizations generally require, he adds.

Car dealerships are starting to create their own incentives by narrowing their profit margins, in some cases giving up the profit they used to make on the financing terms, which can reduce the customer's monthly payments. Dealers are happy just to make a sale, says Jack Sayer, managing partner at Sayer Partners, a consultant to car dealerships and a former car dealer himself.

The best dealers he works with are aggressively contacting current customers three months before their leases or financing contracts are due to expire and preparing them for the tougher challenges of getting financing. For them, retaining customers requires as much outreach to potential financing sources as to the customers themselves. Dealers are now courting the smaller local banks that are still eager for business—banks that dealers wouldn't have felt as confident using in the past, says Sayer. They're also contacting local credit unions, which are typically less aggressive about drumming up new business than banks. "[It gives dealers] another source for financing and it also works in reverse," he says. "These credit unions are sending you customers and they usually have pre-approval of $25,000. This generally doesn't happen with bank customers."

Subscribing to services such as DealerTrak, an Internet-based credit application system, is another way for dealers to expand their lists of potential financing sources. It allows them to submit a customer's application to 1,000 banks all at once instead of faxing it to them individually, says Sayer. He also encourages clients who may have been resistant to using the Internet to make their Web sites more user-friendly, including posting information about customers' financing options.

Seeking Access to Affluent Customers

Health clubs like Life Time Fitness (LTM) seem to be among the most pro-active companies when it comes to customer retention. Life Time eschews long-term contracts and discount offers in favor of more lavish customer service, facilities, equipment, and features like children's centers—replete with computers, basketball courts, and climbing equipment—where parents can securely park kids under 12 while they work out.

"There's more stickiness in the membership base already because of the family component in the membership," says Laura Richardson, an analyst at BB&T Capital Markets (BBT). "The best way to retain a customer is to get them more fully involved in the club, using it as frequently and broadly as possible." (BB&T Capital Markets expects to receive or intends to seek compensation for investment banking services from Life Time in the next three months.)

Life Time is beefing up its customer connectivity program by bolstering its online advantage club, through which members get discount offers on everything from groceries to cellular service to vacation resorts from a network of nearly 100 partners who want access to Life Time's affluent customer base, says Scott Lutz, Life Time's chief marketing officer.

"In a tough economy, people start justifying every spend they make," says Lutz. "We make it easier for you to justify [that expense] because you can only get this discount if you're a member of Life Time. We allow it to fit your budget."

Veering Off the Yellow Brick Road

Department stores are also getting more desperate to keep customers engaged. In addition to buying customer lists from credit-card companies, some upscale retailers are offering gift cards for $150 or more after a $1,000 purchase, and turning their stores into entertainment venues to boost store traffic, says Patricia Pao, chief executive of Pao Principle, a retail consulting firm in New York.

For a Wizard of Oz theme party during New York's annual Fashion Week in September, Saks (SKS) brought in top shoe designers to create their renderings of the MGM film version's iconic ruby slippers, an event that probably cost Saks an additional couple of hundred thousand dollars, Pao estimates. She doubts such attention-grabbing tactics are working since sales at stores open at least one year continue to be extremely weak. With comparable sales already faltering for a year before the Lehman Brothers collapse and other recent events, "it's going to be very hard for [retailers] to retain their customers, or just to get them in the door," she says.

Aggressive markdowns on prices are also occurring much earlier than in the past, she notes, with fall merchandise already being advertised at 60% off at the start of October. "[Stores] are going to start doing markdowns [on Christmas items] by the middle of November" rather than waiting until the traditional day after Thanksgiving.

Says Pao: "I guarantee you're not going to see Black Friday anymore."

Before it's here, it's on the Bloomberg Terminal.