Customer retention

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Customer retention refers to the ability of a company or product to retain its customers over some specified period. [1] High customer retention means customers of the product or business tend to return to, continue to buy or in some other way not defect to another product or business, or to non-use entirely. Selling organizations generally attempt to reduce customer defections. Customer retention starts with the first contact an organization has with a customer and continues throughout the entire lifetime of a relationship and successful retention efforts take this entire lifecycle into account. A company's ability to attract and retain new customers is related not only to its product or services, but also to the way it services its existing customers, the value the customers actually perceive as a result of utilizing the solutions, and the reputation it creates within and across the marketplace.

Contents

Successful customer retention involves more than giving the customer what they expect. Generating loyal advocates of the brand might mean exceeding customer expectations. Creating customer loyalty puts 'customer value rather than maximizing profits and shareholder value at the center of business strategy'. [1] The key differentiation in a competitive environment is often the delivery of a consistently high standard of customer service. Furthermore, in the emerging world of Customer Success, retention is a major objective. [2]

Customer retention has a direct impact on profitability. Research by John Fleming and Jim Asplund indicates that engaged customers generate 1.7 times more revenue than normal customers while having engaged employees and engaged customers return a revenue gain of 3.4 times the norm.

Measurement

The measurement of customer retention should distinguish between behavioral intentions and actual customer behaviors. The use of behavioral intentions as an indicator of customer retention is based on the premise that intentions are a strong predictor of future behaviors, such that customers who express a stronger repurchase intention toward a brand or firm will also exhibit stronger corresponding behaviors. Customer repurchase and retention behaviors can be measured in a variety of different ways which are enumerated in several award-winning articles published in the marketing discipline. The different studies that also involve different metrics to measure customer repurchase intention and actual repurchase behaviors are summarized in a series of review papers such as Keiningham and colleagues (2007), [3] Gupta and Zeithunil, and Valarie Zeithaml. "Customer metrics and their impact on financial performance." Marketing Science 25, no. 6 (2006): 718-739.</ref> and Morgan and Rego (2006). [4] These studies point to the following general conclusions:

  1. Customer satisfaction is a strong predictor of both customer repurchase intentions and repurchase behavior
  2. Repurchase intentions are statistically significant, and positively associated with repurchase behavior: as people's repurchase intention increases, so does their likelihood to actually repurchase the brand. However, the magnitude of the association, though positive, is moderate to weak—suggesting that intentions and behaviors are not interchangeable constructs to measure customer retention.
  3. The association between different retention metrics is not always straightforward. It can be (a) non-linear exhibiting increasing or diminishing returns, (b) different for different customer segments), and also vary by type of industry.
  4. Customer retention is a strong predictor of a firm's financial success, both using accounting and stock market metrics. A study of a Brazilian bank showed that bank branches that were more adept at efficiently satisfying and retaining customers were more profitable than their counterparts that did one or the other but not both. [4]

In terms of measurement, the intention measures can typically be obtained using scale items embedded in a customer survey. The retention behaviors must be measured using secondary data such as/ accounting measures of the volume (amount and financial value) and frequency with which a customer purchases the firm's goods or services. This requires that the firm should have a strong customer information management department that can capture all the relevant metrics that may be needed for analysis. In a typical firm, these may come from a diverse set of departments such as accounting, sales, marketing, finance, logistics, and other customer research.[ citation needed ]

Antecedents and drivers

Customer retention is an outcome that is the result of several different antecedents as described below.

  1. Customer satisfaction: Research shows that customer satisfaction is a direct driver of customer retention in a wide variety of industries. Despite the claims made by some one-off studies, the bulk of the evidence is unambiguously clear: there is a positive association between customer satisfaction and customer retention/ though the magnitude of the association can vary based on a whole host of factors such as customer, product, and industry characteristics. Some companies and individuals have created mathematical models to evaluate customer satisfaction. [5]
  2. Customer delight: Some scholars argue that in today's competitive world, merely satisfying customers is not enough; firms need to delight customers by providing exceptionally strong service. It is delighted customers who are likely to stay with the firm, and improve overall customer retention. [6] More recently, it has been argued that customer delight may be more strongly applicable to hedonic goods and services rather than for utilitarian products and services.[ citation needed ]
  3. Customer switching costs: Burnham, Frels, and Mahajan [7] (2003, p. 110) define switching costs as "one-time costs that customers associate with the process of switching from one provider to another." Customers usually encounter three types of switching costs: (1) financial switching costs (e.g., fees to break contract, lost reward points); (2) procedural switching costs (time, effort, and uncertainty in locating, adopting, and using a new brand/provider); and (3) relational switching costs (personal relationships and identification with brand and employees). A recent meta-analysis examined 233 effects from over 133,000 customers and found that all three types of switching costs increased customer retention—however, relational switching costs have the strongest association with customer repurchase intentions and behavior.
  4. Customer relationship management: Acknowledging the social and relational aspects—especially those embedded in services—it has been argued that firms can increase retention by focusing on managing customer relationships. Relationship management occurs when firms can take a longer-terms perspective, rather than a transactional perspective to managing their customer base. However, all long-term customers are not profitable, and worth retaining; sometimes, short-term transactional customers can be more profitable for the firm. [8] As such, companies may have to strategically develop a framework to manage unprofitable customers.

Customer lifetime value

Customer lifetime value enables an organization to calculate the net present value of the profit an organization will realize on a customer over a given period of time. Retention Rate is the percentage of the total number of customers retained in context to the customers that approached for cancelation.

Standardization of customer service

Published standards exist to help organizations deliver process-driven customer satisfaction and Customer Success in order to increase the lifespan of a customer. The International Customer Service Institute (TICSI) has released The International Standard for Service Excellence (TISSE 2012). TISSE 2012 enables organizations to focus their attention on delivering excellence in the management of customer service, whilst at the same time providing recognition of success through a 3rd Party certification scheme. TISSE 2012 focuses an organization's attention on delivering increased customer satisfaction by helping the organization through a Service Quality Model. TISSE Service Quality Model uses the 5 P's - Policy, Processes, People, Premises, Product/Service, as well as performance measurement. The implementation of a customer service standard leads to improved customer service practices, underlying operating procedures and eventually, higher levels of customer satisfaction, which in turn increases customer loyalty and customer retention. [9]

See also

Related Research Articles

Customer relationship management (CRM) is a process in which a business or other organization administers its interactions with customers, typically using data analysis to study large amounts of information.

Marketing management is the strategic organizational discipline which focuses on the practical application of marketing orientation, techniques and methods inside enterprises and organizations and on the management of a firm's marketing resources and activities.

In marketing, customer lifetime value, lifetime customer value (LCV), or life-time value (LTV) is a prognostication of the net profit contributed to the whole future relationship with a customer. The prediction model can have varying levels of sophistication and accuracy, ranging from a crude heuristic to the use of complex predictive analytics techniques.

Database marketing is a form of direct marketing that uses databases of customers or potential customers to generate personalized communications in order to promote a product or service for marketing purposes. The method of communication can be any addressable medium, as in direct marketing.

<span class="mw-page-title-main">Consumer behaviour</span> Study of individuals, groups, or organisations and all the activities associated with consuming

Consumer behaviour is the study of individuals, groups, or organisations and all the activities associated with the purchase, use and disposal of goods and services. Consumer behaviour consists of how the consumer's emotions, attitudes, and preferences affect buying behaviour. Consumer behaviour emerged in the 1940–1950s as a distinct sub-discipline of marketing, but has become an interdisciplinary social science that blends elements from psychology, sociology, social anthropology, anthropology, ethnography, ethnology, marketing, and economics.

Relationship marketing is a form of marketing developed from direct response marketing campaigns that emphasizes customer retention and satisfaction rather than sales transactions. It differentiates from other forms of marketing in that it recognises the long-term value of customer relationships and extends communication beyond intrusive advertising and sales promotional messages. With the growth of the Internet and mobile platforms, relationship marketing has continued to evolve as technology opens more collaborative and social communication channels such as tools for managing relationships with customers that go beyond demographics and customer service data collection. Relationship marketing extends to include inbound marketing, a combination of search optimization and strategic content, public relations, social media and application development.

Switching barriers or switching costs are terms used in microeconomics, strategic management, and marketing. They may be defined as the disadvantages or expenses consumers feel they experience, along with the economic and psychological costs of switching from one alternative to another. For example, when telephone service providers also offer Internet access as a package deal they are adding value to their service. A barrier to switching is then formed as swapping internet services providers is a time consuming effort.

The loyalty business model is a business model used in strategic management in which company resources are employed so as to increase the loyalty of customers and other stakeholders in the expectation that corporate objectives will be met or surpassed. A typical example of this type of model is: quality of product or service leads to customer satisfaction, which leads to customer loyalty, which leads to profitability.

<span class="mw-page-title-main">Brand loyalty</span> Marketing term for a consumers emotional attachment to a given brand

In marketing, brand loyalty describes a consumer's positive feelings towards a brand and their dedication to purchasing the brand's products and/or services repeatedly regardless of deficiencies, a competitor's actions, or changes in the environment. It can also be demonstrated with other behaviors such as positive word-of-mouth advocacy. Corporate brand loyalty is where an individual buys products from the same manufacturer repeatedly and without wavering, rather than from other suppliers. Loyalty implies dedication and should not be confused with habit, its less-than-emotional engagement and commitment. Businesses whose financial and ethical values rest in large part on their brand loyalty are said to use the loyalty business model.

Customer satisfaction is a term frequently used in marketing to evaluate customer experience. It is a measure of how products and services supplied by a company meet or surpass customer expectation. Customer satisfaction is defined as "the number of customers, or percentage of total customers, whose reported experience with a firm, its products, or its services (ratings) exceeds specified satisfaction goals." Enhancing customer satisfaction and fostering customer loyalty are pivotal for businesses, given the significant importance of improving the balance between customer attitudes before and after the consumption process.

Net promoter score (NPS) is a market research metric that is based on a single survey question asking respondents to rate the likelihood that they would recommend a company, product, or a service to a friend or colleague. The NPS is a proprietary instrument developed by Fred Reichheld, who owns the registered NPS trademark in conjunction with Bain & Company and Satmetrix. Its popularity and broad use have been attributed to its simplicity and transparent methodology.

Customer attrition, also known as customer churn, customer turnover, or customer defection, is the loss of clients or customers.

The following outline is provided as an overview of and topical guide to marketing:

Customer engagement is an interaction between an external consumer/customer and an organization through various online or offline channels. According to Hollebeek, Srivastava and Chen S-D logic-Definition of customer engagement is "a customer’s motivationally driven, volitional investment of operant resources, and operand resources into brand interactions," which applies to online and offline engagement.

Customer analytics is a process by which data from customer behavior is used to help make key business decisions via market segmentation and predictive analytics. This information is used by businesses for direct marketing, site selection, and customer relationship management. Marketing provides services in order to satisfy customers. With that in mind, the productive system is considered from its beginning at the production level, to the end of the cycle at the consumer. Customer analytics plays an important role in the prediction of customer behavior.

Share of wallet (SOW) is a survey method used in performance management that helps managers understand the amount of business a company gets from specific customers.

Consumer-generated advertising is advertising on consumer generated media. This term is generally used to refer to sponsored content on blogs, wikis, forums, social networking services, and individual websites. This sponsored content is also known as sponsored posts, paid posts, or sponsored reviews. The content includes links that point to the home page or specific product pages of the website of the sponsor. Examples include Diet Coke and Mentos videos, the "Crush on Obama" video, and Star Wars fan films. Companies that have employed consumer-generated ads include Subaru North America, McDonald's, Rose Parade, and Toyota North America.

The service recovery paradox (SRP) is a situation in which a customer thinks more highly of a company after the company has corrected a problem with their service, compared to how they would regard the company if non-faulty service had been provided. The main reason behind this thinking is that successful recovery of a faulty service increases the assurance and confidence from the customer.

Service quality (SQ), in its contemporary conceptualisation, is a comparison of perceived expectations (E) of a service with perceived performance (P), giving rise to the equation SQ = P − E. This conceptualistion of service quality has its origins in the expectancy-disconfirmation paradigm.

Dwayne D. Gremler is a social scientist, academic, and author. He is a Professor of Marketing, Distinguished Teaching Professor, and Distinguished Research Professor in the Schmidthorst College of Business at Bowling Green State University. He is a co-author of the textbook Services Marketing: Integrating Customer Focus Across the Firm, now in its 8th edition.

References

  1. 1 2 Vroman, H. William; Reichheld, Frederick F. (1996). "The Loyalty Effect: The Hidden Force Behind Growth, Profits, and Lasting Value". Academy of Management Perspectives. Harvard Business School Press. 10 (1): 88–90. doi:10.5465/ame.1996.9603293227. ISSN   1558-9080.
  2. ↑ Mehta, Nick; Steinman, Dan; Murphy, Lincoln (2016-02-16). Customer Success: How Innovative Companies Are Reducing Churn and Growing Recurring Revenue. John Wiley & Sons. p. 84. ISBN   978-1-119-16830-0.
  3. ↑ Keiningham, Timothy L., Bruce Cooil, Lerzan Aksoy, Tor W. Andreassen, and Jay Weiner. "The value of different customer satisfaction and loyalty metrics in predicting customer retention, recommendation, and share-of-wallet." Managing Service Quality: An International Journal 17, no. 4 (2007): 361-384.
  4. 1 2 Morgan, Neil A., and Lopo Leotte Rego. "The value of different customer satisfaction and loyalty metrics in predicting business performance." Marketing Science 25, no. 5 (2006): 426-439.
  5. ↑ Rust, Roland (1993). "Customer satisfaction, customer retention, and market share". Journal of Retailing. 69 (2): 193–215. doi:10.1016/0022-4359(93)90003-2.
  6. ↑ Oliver, Richard L., Roland T. Rust, and Sajeev Varki. "Customer delight: foundations, findings, and managerial insight." Journal of Retailing 73, no. 3 (1997): 311-336.
  7. ↑ Burnham, Thomas A., Judy K. Frels, and Vijay Mahajan (2003), "Consumer Switching Costs: A Typology, Antecedents, and Consequences," Journal of the Academy of Marketing Science, 31 (2), 109−27.
  8. ↑ Reinartz, Werner J., and V. Kumar. "The impact of customer relationship characteristics on profitable lifetime duration." Journal of marketing 67, no. 1 (2003): 77-99.
  9. ↑ The International Customer Service Standard (2009), TICSS2009, The International Customer Service Institute
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