Customer retention

According to Buchanan and Gilles (1990), the increased profitability associated with customer retention efforts occurs because...

* The cost of acquisition occur only at the beginning of a relationship, so the longer the relationship, the lower the amortized cost.

* Account maintenance costs decline as a percentage of total costs (or as a percentage of revenue).

* Long-term customers tend to be less inclined to switch, and also tend to be less price sensitive. This can result in stable unit sales volume and increases in dollar-sales volume.

* Long-term customers may initiate free word of mouth promotions and referrals.

* Long-term customers are more likely to purchase ancillary products and high margin supplemental products.

* Customers that stay with you tend to be satisfied with the relationship and are less likely to switch to competitors, making it difficult for competitors to enter the market or gain market share.

* Regular customers tend to be less expensive to service because they are familiar with the process, require less "education", and are consistent in their order placement.

* Increased customer retention and loyalty makes the employees' jobs easier and more satisfying. In turn, happy employees feed back into better customer satisfaction in a virtuous circle.

Relationship marketers speak of the "relationship ladder of customer loyalty". It groups types of customers according to their level of loyalty. The ladder's first rung consists of "prospects", that is, people that have not purchased yet but are likely to in the future. This is followed by the successive rungs of "customer", "client", "supporter", "advocate", and "partner". The relationship marketer's objective is to "help" customers get as high up the ladder as possible. This usually involves providing more personalized service and by providing service quality that exceeds expectations at each step.

Customer retention efforts involve considerations such as the following...

1. Customer valuation - Gordon (1999) describes how to value customers and categorize them according to their financial and strategic value so that companies can decide where to invest for deeper relationships and which relationships served differently or even terminated.

2. Customer retention measurement - Dawkins and Reichheld (1990) calculated a company's "customer retention rate". This is simply the percentage of customers at the beginning of the year that are still customers by the end of the year. In accordance with this statistic, an increase in retention rate from 80% to 90% is associated with a doubling of the average life of a customer relationship from 5 to 10 years. This ratio can be used to make comparisons between products, between market segments, and over time.

3. Determine reasons for defection - Look for the root causes, not mere symptoms. This involves probing for details when talking to former customers. Other techniques include the analysis of customers' complaints and competitive benchmarking (see competitor analysis).

4. Develop and implement a corrective plan - This could involve actions to improve employee practices, using benchmarking to determine best corrective practices, visible endorsement of top management, adjustments to the company's reward and recognition systems, and the use of "recovery teams" to eliminate the causes of defections.

A technique to calculate the value to a firm of a sustained customer relationship has been developed. This calculation is typically called customer lifetime value.

Retention strategies also build barriers to customer switching. This can be done by product bundling (that is, combining several products or services into one "package" and offering them at a single price), cross selling (that is, selling related products to current customers), cross promotions (that is, giving discounts or other promotional incentives to purchasers of related products), loyalty programs (that is, giving incentives for frequent purchases), increasing switching costs (that is, adding termination costs, such as mortgage termination fees), and integrating computer systems of multiple organizations (primarily in industrial marketing).

Many relationship marketers use a team-based approach. The rationale is that the more points of contact between the organizations, the stronger will be the bond, and the more secure the relationship.

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