Leaky Bucket Theory

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Leaky Bucket Theory

What is The Leaky Bucket Theory?

The leaky bucket theory is an analogy used to understand the concept and correlation of customer relationship management and how to increase customer lifetime value and customer retention. The theory uses a bucket that has several holes in the base to represent the customer retention mechanism. If we look at the pictorial depiction of the concept, on one end, the water is constantly flowing into the bucket which represents the acquisition of customers. On the other end, the holes at the base or water leaking from it shows the customers lost to the firm/churn. Where the amount of water in the bucket represents the total customer base of the firm at that time.

The leaky bucket theory indicates that companies are always losing customers, so to maintain share, you have to win an equal number of new customers to keep the bucket full and maintain equilibrium. This could be achieved through improved customer acquisition or working on customer retention. 

The idea is designed to highlight that the firm has two approaches it can take to maximize the amount of water in the bucket (the size of the customer base), by focusing on the techniques to hold the existing customers or fill the bucket with new customers. All businesses lose customers, and some businesses lose customers at a faster rate than others, which means that their churn rate is higher than others.

Therefore, the leaky bucket theory is a good analogy for the marketing challenge that firms face in determining the proportion of their marketing expenditure and efforts focused on acquiring new customers versus retaining existing customers.

The leaky bucket theory is the model that seeks to describe the process of customer gain and loss, otherwise known as customer churn.
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What are the strategies to increase customer retention and fix the leaky bucket?

As we understand the importance of customer retention, the following are the ways companies can retain their customers. 

1. Setting customer expectations

The sigma rule is not to set customer expectations too high. Over-promising and under-delivering never work for a brand in the long run. If the experience during the first contact is not good, such a customer would not return to make another purchase and might never consider the brand in the future.

2. Communicate and Engage with your customers

Communication is the key to customer success. Communicate regularly with your customers and speak their language and try to engage them at various touchpoints during the journey. Know them well and personalize conversations accordingly to win over customers. Conversational AI can be used to enhance engagements and automate conversations with customers. 

3. Build trust and loyalty 

The ultimate goal of any organization is to boost sales, and sales often come from repeat customers. Companies should focus on ways to foster trust and build a sustainable relationship with customers. Chatbots can be used to run loyalty programs and send offers to customers across various platforms like social media and WhatsApp. That might help customers connect with brands and continue the business. 

4. Delight your customers

Humans love surprises. Going above and beyond builds strong relationships and loyalty with customers. With customers, analytics and insight companies can personalize communication, remind customers or customize the offering that might help the customer sustain the brand and continue doing the business. 

5. Be proactive in solving customer queries

The quality of customer support defines the brand offering in totality. You can't abandon customers once they checkout from the website or place an order. Proactively communicating and solving their queries (product manuals, FAQs) might help you retain the water in the bucket. You can enhance the quality of your customer support with Engati's AI-enabled solutions.

How Conversational AI can help you fix the leaky bucket?

1. Customer Acquisition

AI-driven chatbots can assist and engage customers at every touchpoint in the customer purchase journey and increase the credibility of the brand by being responsive and solving queries. A huge portion of customers drops out of the loop if in case they don't receive answers to their queries. These chatbots ease the process of customer acquisition and drive them to make their first transaction. Chatbots can help companies engage with their customers and get their insight by asking them questions, conducting surveys, and even playing quizzes.

2. Customer Support

These automated bots can provide customer service and support round the clock without depending on human intervention. Customer support can make or break your brand and is an important element for retaining customers. Of various other factors of why customers abandon brands, one of the primary reasons is when they feel unheard. Chatbots help you to proactively engage with customers and resolve their queries 24/7. Conversational AI chatbots can handle the load and handle domestic and international customers without putting pressure on customer support representative teams. 

3. Customer Behavior

Knowing your customer can reduce the problem of customer churn and reduce the rate drastically. Conversation AI can understand and track customer behaviour based on the mood, intent, and interest of your customers throughout the purchase journey and give you insights that can be used for retention strategies. These chatbots can build stronger relationships with customers by providing personalized assistance throughout the customer journey that helps the brand turn customers to brand loyalists.

4. Customer Engagement

Conversational artificial intelligence can mimic humans and turn conversations more human-like. Bots powered by NLP can master the art of communication with constant learning. They learn and grow in their intelligence based on their interactions and past engagements with customers and keep the contextuality of the chats. These engagements help customers build trust with the company and increase the chances of them retaining the brand. It might seem farfetched, but conversational AI can really help brands retain customers and fix the leaky bucket at the base.

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