Inertial loyalist: Has been satisfied with services received. Does not believe a better offer is available in the marketplace. Renews contract without

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1 PBM Marketing and Sales Practice PBM Marketing & Sales Practice Building a Retention Strategy around Client Loyalty Categories March 2003 Todd Gibson PhD, Director and Practice Leader PBM Marketing and Sales Practice The Pharmacy Benefit Management Institute reports that over 40% of PBM clients are considering switching vendors when their current contract expires. What high value strategies can account management executives deploy in this environment to ensure retention of their key accounts? For the first time last year, the Pharmacy Benefit Management Institute (PBMI) included a question addressing client loyalty in its annual survey of plan sponsors. When asked to rate the likelihood of contract renewal with their current PBM, 59% of respondents said they were very likely to renew, 9% were very unlikely, and 33% were not sure.* Account management executives should take seriously the fact that 42% of clients are at risk. (We define an at risk client as one that reports being very unlikely to renew a contract or not being sure of a willingness to renew.) But some broader perspective would be useful here. How serious for the industry is the fact that two out of five clients would entertain the idea of switching vendors at the point of contract renewal? What does recent thinking on client loyalty have to teach PBM account management about how it should service clients to maximize retention rates? And what new opportunities for improving retention does this information provide? A Framework for Addressing the Issue of Client Loyalty One framework that Princeton Consultants has found useful for analyzing client loyalty stratifies clients into two major groups loyalists and migrators. Each of these groups is then further segmented into three sub-groups. The loyalist group is composed of emotive loyalists, inertial loyalists, and deliberative loyalists while the migrators group consists of deliberative migrators, lifecycle migrators, and dissatisfied migrators. (See Figure 1.) PBM clients falling into each category could be illustrated as follows: Emotive loyalist: A satisfied client and a strong proponent of the brand. Proactively seeks opportunities to tell other potential purchasers about positive experiences with the PBM. * Numbers do not total 100% due to rounding. Copies of the survey s results are available through PBMI s website, 1

2 Inertial loyalist: Has been satisfied with services received. Does not believe a better offer is available in the marketplace. Renews contract without putting it out to bid. Deliberative loyalist: Mostly satisfied with the relationship, but believes that the market must be evaluated by putting out an RFP at contract renewal. May give the current vendor a strong inside track. Predisposed to sticking with the current PBM. Deliberative migrator: Not wholly dissatisfied with the relationship, but believes there may be a better offer in the market. Willing to make a serious consideration of other vendors at contract renewal. Can be persuaded to move to a new vendor, but also willing to entertain an enhanced offer from the current PBM. Lifecycle migrator: Forced to move to another vendor due to reasons extraneous to the current relationship such as being acquired by another company. Dissatisfied migrator: A client so dissatisfied with current pricing, service, and/or support that it actively looks to move to a new vendor. The current PBM may or may not be given an opportunity to bid on contract renewal. If the opportunity is given, the current vendor is not provided with an inside track. Because of the way PBMI s client loyalty question was formulated, respondents to the survey cannot be placed into exactly one category of this framework. They can, however, be mapped to it in a rough manner. Emotive and inertial loyalists would have responded that they are very likely to renew their contracts. Lifecycle and dissatisfied migrators would have been very unlikely to renew. And deliberative loyalists and deliberative migrators would not have been sure. Note that PBM clients who are unsure about re- Figure 1: A framework for analyzing customer loyalty 2

3 newing their contract can be either loyalists or migrators, and as such can be predisposed to either staying or leaving. The way in which PBMI formulated its questionnaire makes it difficult to determine an unsure client s bias toward contract renewal. Cross-Industry Comparison of At-Risk Client Percentages While the framework described above for characterizing clients has been adopted by many marketers in recent years, there is relatively little hard data available on how a client base should be expected to stratify into each category. Additionally, the data that are publicly available come from the world of consumer goods and services, not from business-to-business relationships. Although there are these weaknesses in the available data, looking at it does prove interesting. As we see in Figure 2, the likelihood of repurchasing reported by PBM clients compares very favorably to other industries. (For comparative purposes, we have transposed the data on consumer goods and services from the six loyalist vs. migrator categories into the three contract renewal categories used in the PBMI survey.) It is reassuring to see that a 42% at-risk figure places the PBM industry in a tier with consumer products and services that have the most loyal customers and the lowest rates of defection to competitors products. Additionally, business-to-business vendors such as PBMs are exposed to somewhat less risk from client migration than are providers of consumer goods and services. There are three reasons for this. First, the PBM client s decision point is very infrequent. Contract durations are measured in multiple-year increments unlike the daily decision point faced by soft drink purchasers, the weekly decision point faced by grocery store shoppers, or the annual decision faced by cell-phone users signing a year-long service agreement. Second, because most contracts are exclusive (TPA clients come to mind as a notable exception), PBMs do not typically need to worry about maintaining and increasing client wallet share in addition to losing customers. Third, the barriers PBM clients face if they should switch vendors are much more significant than they are for a purchaser of soft drinks or laundry detergent. High barriers to switching tend to keep clients with their current vendors. It would seem, then, that the client loyalty data coming from the PBMI survey show that the PBM industry as a whole is not facing a client loyalty crisis and, indeed, is well positioned in comparison to other industries. But the fact that 42% of PBM clients would consider migrating at contract renewal is still challenging for the PBM executives charged with client retention. Fortunately, the framework we have used for analyzing client loyalty points the way toward an opportunity for PBMs that are interested in developing a cost-effective, proactive strategy for improving retention. Improve Retention by Focusing on the Deliberators Any account management executive worried about retention will be keen to know about clients that are unlikely to renew their contract. While it is useful for account managers to know what percentage of their client base (and, specifically, which of their clients) is not likely to renew, having this information and acting on it may not deliver desirable outcomes. If a current client self-identifies as being unlikely to renew a contract, there is almost nothing that can be done to strengthen the relationship and retain the business. The window of opportunity with that client has closed. Devoting additional resources to the client relationship will provide rapidly diminishing returns. Rather than focusing on dissatisfied clients that 3 Copyright 2003 Princeton Consultants Inc. All rights reserved. 2/25/03

4 are eager to move their contract, or on clients that are being forced to move by external reasons, account managers should focus their attention in areas where that effort can achieve results. They should devote additional resources to clients that are not sure if they will renew the deliberative loyalists and the deliberative migrators. These clients are prone to evaluating the PBM objectively against competitors in the marketplace, and it is possible to influence their opinion with facts presented over time. Identifying and working to keep these deliberative clients can make a dramatic impact on retention rates. Defining and Implementing a Retention Plan for Deliberators The first step in defining a retention strategy focused on deliberators is, of course, to develop an understanding of where each key account falls within the six client loyalty categories. Front-line account managers may have a sense for how their clients will be positioned, but frequently the account manager has a different perspective on the client s satisfaction than the client does. Clients need to be asked sharply crafted questions about disposition toward the PBM by a neutral, perhaps third-party, individual who is not their dayto-day contact at the PBM. This ensures that their responses will be honest and candid. Based on their responses, clients can be identified as belonging to one of the six groups. Once an understanding has been gained of how the book of business stratifies into loyalty categories, the interview responses should be analyzed to determine the major factors that differentiate deliberative migrators from deliberative loyalists and deliberative loyalists from inertial loyalists. These factors will be the starting point for developing a retention strategy. Every retention strategy must be customized based on the percent of the book of business that is at risk and the issues that have placed these clients at risk. Although there is no off-the-shelf retention strategy that will work for all PBMs, the central element of almost all retention strategies will probably be the same service enhancements. On a recent engagement we spoke with a wide variety of PBM clients and their consultants about the factors that go into their decisions during the contracting process. Almost all stressed that for them contracting decisions come down to two major factors, pricing and service. For important accounts today almost all PBMs are putting forward pricing models that are within a 1 2% range. No PBM is considered a market leader on price. Service, then, becomes the factor that wins and retains business. As a result, almost any retention strategy will have, at its core, a customized approach to service delivery and will need to be driven by the account management organization on a day-in, day-out basis. Make deliberative migrators the primary focus of any retention plan. Deliberative migrators are the group most prone to leaving that may still able to be influenced to remain. These are typically the accounts that are viewed as ours to lose that somehow do get lost. To ensure that these clients do not move to a competitor, the retention plan should focus on providing them with additional outreach to demonstrate the PBM s commitment to meeting their needs and retaining their business. Regular communication should be sent to clients in this group on the status of action items included in the retention plan that will have an impact on them. Account managers for clients in this group should be instructed to provide frequent, personalized outreach to them. Deliberative loyalists should receive secondary focus in the retention plan. They, too, should receive a heightened level of service. This group, as well, should receive regular communication on status of the action items included in the retention plan and should receive more frequent personalized outreach from their account management team. 4

5 Figure 2: Client likelihood of repurchasing a product or service 5 Cellular Telephone 5 PBM Marketing & Sales Practice

6 Maintain the inertial and emotive loyalists. Because of their strong tendency to remain with their PBM, clients identified as inertial and emotive loyalists will not need to receive much additional attention and focus in the retention plan and in related activities. It may be enough to communicate to them on the status of initiatives and action steps benefiting them that have been undertaken specifically for the deliberators. This communication can work to build good will among members of the group by showing them that their PBM is committed to providing ongoing quality improvement. Customized to the current client situation and probably including a heavy account service focus, the retention strategy must be clear and broadly communicated within the account management organization. Following this delineation, management must be committed to delivering on the strategy and must be willing to make additional resources available where needed. Once the strategy is defined and rolled out, clients account managers should receive incentives to deliver on that strategy on a regular basis. The Value of Changing Clients Disposition A successful retention strategy will not only keep existing clients in the short term, but it will also change their attitude toward their PBM and improve long-term retention. Through the deployment of a successful retention strategy, a deliberative migrator can be trans- Figure 3: The benefits of moving clients to higher loyalty categories BENEFITS Significant public relations upside Client retention less of a concern Reduce risk that client will put contract out to bid Can persuade an uncertain client to retain current vendor by improving service satisfaction levels Little opportunity to influence behavior since departure is caused by external circumstances Client may be determined to move to a new vendor Retention efforts may be misplaced 6

7 formed into a deliberative loyalist. This client may still think it valuable to check the market, but with high satisfaction levels on service, the client may not believe a better vendor is available and may become predisposed to retaining the current vendor instead of departing for a new one. Similarly, deliberative loyalists can be transformed into inertial loyalists. If a deliberative loyalist is shown that pricing across the vendor marketplace is relatively consistent and that current service levels are more than acceptable, this type of client will become less prone to putting the contract out to bid. Additionally, certain inertial loyalists can be turned into emotive loyalists. The public relations value of evincing this transformation may be great, but for improving retention rates the additional deployment of service resources may not seem justified. This approach means letting noisy, unsatisfied clients go when their contract expires. Devoting additional resources to clients of this type will not provide long-term benefit. Instead, account management resources should be deployed toward clients that show the possibility of becoming more loyal over time. Determining current clients disposition toward their PBM, assigning them to a client loyalty category, developing a plan for moving key clients into higher loyalty categories, and then executing that plan will lead to improved retention in the short term and increased client persistency over time. As the PBM industry has consolidated and saturated the market, client retention has gained critical importance. Servicing clients to keep them through their next renewal period has become the key focus of account management. By identifying deliberative clients and developing a retention strategy focused on them, savvy PBMs will be able to deploy their limited account management resources wisely and optimize the return on their client service investment. The PBM Marketing & Sales Practice The PBM Marketing and Sales Practice provides PBM executives with the competitive intelligence and market research required to grow their books of business. As one of the only consulting practices dedicated specifically to the industry, we are uniquely situated to deliver exceptional results for our clients. We specialize in identifying untapped market niches, launching new products, and conducting PBM purchaser studies that provide keen insights into client satisfaction and how PBM services are received in the marketplace. We also help implement operational change with the latest in information technology solutions. About Princeton Consultants Inc. From our offices in Princeton, NJ and New York City, we have partnered with top-tier health management and pharmaceutical companies, including Medco Health Solutions, Cigna Pharmacy Management, Pfizer, Novartis, and Pharmacia. We have also designed and developed solutions in the highly regulated financial services industry, e.g. Prudential Financial, Goldman Sachs, and AXA Financial. Since the firm s founding in 1981, Princeton Consultants has grown on its reputation for quality and cost-effectiveness. Repeatedly cited by the press for the unusual caliber of our staff, we are invited by over 90% of our clients to work on additional assignments. To accomplish this, we provide an integrated high-quality service that combines Information Technology and Management Consulting. Contact Us We always welcome the opportunity to meet with PBM executives to discuss practical ways to improve client retention and increase the number of covered lives. For more information, please contact: Todd Gibson, PhD Director & Practice Leader PBM Marketing & Sales Practice (212) ext. 454 tgibson@princeton.com 7

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