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Customer retention: a potentially potent marketing management strategy
Rizal Ahmad; Francis Buttle
To cite this Article Ahmad, Rizal and Buttle, Francis(2001) 'Customer retention: a potentially potent marketing
management strategy', Journal of Strategic Marketing, 9: 1, 29 — 45
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Customer retention: a potentially potent
marketing management strategy
RIZAL AHMAD
Canterbury Business School, University of Kent at Canterbury, Kent CT2 7PE, UK
FRANCIS BUTTLE
Manchester Business School, Booth Street West, Manchester M15 6PB, UK
Th e tra dit io nal m arketing a p proach ad vo cates the m arketing m i x pr inciples a nd th e
que st for m arket s har e dom ina nce t hroug h m ass m a r keting techn iq ues and a focus on
new c ust om e r acq uis it io n. This app r oac h ha s g uid ed m anage rs for decades in p la n ning
and im plem enting the ir market ing stra t eg ies . However, s eve ra l au thors ha ve dra wn
att ention t o t he in a deq u acies of t he tra d it io nal m a r ke ting a p p roa c h, whic h led to t he
bir th of rela t io nsh ip m arketing (RM). RM ad vo cate s su pplier± cu s tom er interact io n an d
m a int aining long - ter m r elation s hips w it h a f ocu s on cus t om er reten tion. Custo m er
re tentio n, in t he tr aditiona l m arket in g a p p roa c h, is h owever s een a s th e `e nd’ r a ther
th an th e m eans to deliver ing long-ter m pro® ta b ility to ® r m s. T his pa p er disc usse s
key issues p ert a in in g to cu stom er r etent ion m ana g em ent , nam ely its de® nition, for m s
of m easure, bene ® ts and p otent ia l s tra teg ies f or app lication . It u ses e xa m ples from a
var ie ty of co ntext s. It is pro pos ed tha t custo m e r ret en tion should be pa r t of the st rat eg ic
m a r keting p l annin g p roc ess . Cu stom er reten tion, we envisage, is a p otent ia lly p ote nt
m a r keting m ana gem en t st rateg y . Furth er resea rch is also rec om m en ded .
KEYWORDS: Relationship marketing; customer retention; marketing plans
INTRODUCTION
Dawkins and Reichheld (1990) brought the tangible advantages of retaining customers into
prominence. Based on their consulting experience, they claimed that a 5% increase in retention
rate led to an increase in the net present value of customers of between 25 and 85% in a
wide range of industries, from credit card to insurance brokerage and from motor services to
of® ce building management. Despite its potential bene® ts, customer retention did not obtain
much attention in strateg ic or marketing planning processes. Grant’ s (1995, p. 122) classi® cation
of resources, for instance, ignored customers as an important resource or asset and, hence,
his recommended strategic planning process did not consider the value of relationships with
existing customers. An earnings-based forecast using expected income streams from existing
customers is known to have been used successfully in valuing a company and its eventual
take over (Stewart, 1996, p. 26). Empirical research that investigates the relationship between
JOURNAL OF STRATEGIC MARKETING 9 29–45 (2001)
Journal of Strategic Ma rketing ISSN 0965± 254X print/ISSN 1466± 4488 online 2001 Taylor & Francis Ltd
http://www.tandf.co.u k/journals
DOI: 10.1080/09652540010011466
Downloaded By: [Macquarie University] At: 00:33 21 December 2010
customer retention practices and pro® tability is also lacking. Empirical works carried out thus
far have been limited to attempts to model the mechanics of customer retention in terms of
their potential causes and effects of customer retention to companies (Page et al., 1996; Payne
and Frow, 1997). These authors acknowledged that customer retention has brought tangible
® nancial bene® ts to ® rms and that existing, new and potential customers should be treated
differently. However, very few organizations, as Payne and Frow (1999) reported, have measured
the economic value of their customer retention strateg ies.
This paper probes the subject of `customer retention’ further and concludes that it should
be integ rated into the strategic marketing planning processes of ® rms. We beg in by discussing
the main differentiating aspects of the traditional and relationship marketing (RM) approaches
and the similar ity of their end goal ± pro® t for ® r ms. The traditional approach, on the one hand,
generally tends to emphasize acquiring new customers and increasing market share, partitioning
heterogeneous customers into homogenous segments and using brands to promote products
and attract new customers. We claim that ® rms advocating the traditional marketing approach
have failed to realize the potential bene® ts of keeping their customers. RM, on the other
hand, generally tends to emphasize keeping existing customers, increasing share of customers’
spend and maintaining long-term relationships with individual customers. We then highlight
the signi® cance of customer retention, offer our interpretation of the term customer retention,
and raise issues pertaining to its measurement. Customer retention, we argue, offers ® rms a
number of bene® ts. We also discuss potential strategies that may be used to retain customers. We
acknowledge that `one size does not ® t all’ and the situation of a ® rm can be an important
determinant of the timeliness and appropriateness of particular potential strategies. We conclude
by conceptualizing a framework which may help ® rms determine a ® t between their business
situations in terms of their products and markets and potential strategies for retaining their
customers. Finally, we identify the implications of our arguments to practitioners and theor ists.
THE INADEQUACIES OF THE TRADITIONAL MARKETING APPROACH
AND THE EMERGENCE OF THE RM APPROACH
The traditional marketing approach, which is sometimes referred to as a conventional or classical
marketing approach, states that ® rms should determine customers needs and wants. Customers
should be organized into market segments for which the ® rms should develop products.
Firms should then organize their functional activities in order to satisfy the targeted segments.
Marketers in turn assume that they can exert unilateral control over their customers through
timely manipulations of the `4Ps’ or other elements of the marketing mix, particularly with
the use of ® nancial rewards such as price discounts, gifts and promotions. (The 4Ps model of the
marketing mix was popularized by McCarthy (1960) and comprises price, place, promotion
and product.) The traditional approach considers customer loyalty or attachment to a brand as a
key outcome of its marketing activities.
The three main aspects of the traditional marketing approach that we wish to highlight are
now explained. The ® rst is the focus on acquiring new customers in order to increase market
share. The goal of market share dominance is promoted by the PIMS (Pro® t Impact of Market
Strategy) programme of research. The PIMS principles have offered de® nitive ways of allocating
resources in order to produce a required return on investment (ROI) for more than a decade
(Buzzell and Gale, 1987, Chapter 1). PIMS analysis, for example, shows how a ® rm’s ROI is
determined by 22 pro® t in¯ uences (Buzzell and Gale, 1987, p. 274). As a result, the recom-
mended PIMS process of analysing and allocating a ® rm’s resources has suggested that ® rms
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focus on those activities directed at customer acquisition. A persistent quest for dominating the
market by way of controlling the largest market share could be, as British Airways (BA) exper i-
enced, counter-productive. The European Commission recently found BA guilty of illegal sales
practices and ® ned it £4.5 million. BA was found to have abused its dominant position in the
market by offering ® delity bonuses to travel agents who funnelled large numbers of passengers
into its ¯ ights ± a practice which Virgin (one of its rivals) claimed amounts to wiping out com-
petitors (The Times, 1999, p. 1). The second aspect of the traditional marketing approach is par-
titioning heterogeneous customers into homogenous segments. This marketing connection was
reiterated by Webster (1991, p. 97) who further stressed that segmentation was at the heart of
every strategic marketing decision. This process was also illustrated by McDonald’s (1999) detailed
prescription for developing marketing plans. He pointed out that a market is an aggregation of
all goods or services, the capability of which for satisfying customer needs may be manipulated
by `tweaking’ the marketing mix. In McDonald’s (1999) methodology, the customer audit pro-
cess examines customers as targeted segments to be won. We view this as a prospective analysis
of the market. A prospective analysis clearly does not examine the actual pro® tability of sellers’
past associations with their customers and does not take into account customers’ actual buying
behaviours. In the credit card industry, for example, consumers belonging to the AB socio-
economic g roups are usually offered a relatively high credit limit as card issuers tend to assume
they are more pro® table than those belonging to the C1,C2 segment. In reality, it is common for
those in the latter group to use their cards more frequently and maintain large unpaid balances.
The Co-operative Bank’s analysis of its Visa customers found that pro® table customers were those
who either used the card frequently or maintained high unpaid balances, thereby generating
processing fees and interest income, respectively. It has now redirected its marketing effort
towards this group of customers (Kaplan, 1995). The traditional approach, as a result of paying
more attention to potential rather than existing customers, can be inef® cient and ineffective.
American Express credit card customers, for instance, were showered with promotional
brochures and telephone contacts from multiple sales staff, each from different product groups or
departments (Buss, 1999), which not only inconvenienced customers but was also unnecessar ily
wasteful. McDonald’ s (1999) objective setting process, as a result of the ¯ aw in the customer
auditing process, did not recognize the need for setting customer retention goals and strategies.
The third aspect of the traditional marketing approach is using brands to promote products
and attract customers. According to Hallberg (1995), all consumers are not created equal and
only a small number of buyers contribute to the pro® tability of brands. Hallberg (1995)
observed that, for most categor ies of products, only one-third of buyers account for at least two-
thirds of the volume of sales and this `high-pro® t segment’ delivers six to ten times as much as
the low-pro® t segment.
Brands with a large market share are not always more pro® table than brands of products with
a small market share. In many cases, those brands that have a large market share are either less
pro® table or even unpro® table. Large-scale consumer promotions on established and frequently
purchased branded grocery products have also been found to have no noticeable effect on
subsequent sales (Ehrenberg et al., 1994). The weakness of the traditional marketing approach
with respect to brand management has, in practice, been recognized by managers. In the FMCG
(fast moving consumer goods) market, in which mass marketing principles should theoretically
be most relevant, managers have not found that the pursuit of market share per se produces a
favourable outcome. FMCG companies, such as Lever Brothers and Elida Gibbs, have started to
restructure their marketing departments and appoint managers in order to give attention to their
existing customers. They have set up development teams who are responsible for maintaining
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relations with retailers across their company’ s brands and have done away with brand managers
(The Economist, 1994, pp. 79± 80).
We will now turn our attention to the RM approach. Many authors over the past 20 years
have argued for the inadequacy of the traditional marketing approach (Booms and Bitner,
1981; Ber ry, 1983; Gummesson, 1987; Grönroos, 1990, 1991, 1994a,b; Ber ry and Parasuraman,
1991; Christopher et al., 1991; Brownlie and Saren, 1992; Webster, 1992; Payne, 1995). As a
result, an alternative marketing approach, namely RM, has emerged. In its early conception,
Grönroos (1990) de® ned RM as follows:
Marketing is to establish, maintain and enhance relationships with customers and other parties at a
pro® t so that the objectives of the parties involved are met. This is done by a mutual exchange and
ful® lment of promises. (p. 5).
However, RM’s de® nition, conceptual content and practical implications continue to be
debated. Six years after its conception, RM had yet to acquire an uncontested status and
meaning (Buttle, 1996, p. 13). The appropriateness of RM has also been disputed (Blois, 1996)
and so has the robustness of its underlying concepts (Saren and Tzokas, 1998). A decade later,
theorists were still unsuccessful in producing an integ rated theory. Harker (1999) examined a
collection of 26 de® nitions and concluded that a `true’ and complete integration of RM theory
must wait until a coherent understanding of its fundamental concepts has been developed. In
practice, researchers have found that the traditional marketing paradigm has not actually shifted.
Brodie et al. (1997) found that, although some ® rms favoured pursuing RM’s pr inciples, their
marketing practices still re¯ ected the elements of transactional marketing. RM and transactional
marketing are in fact pursued alongside each other. However, a later study suggested that
managers had begun to accept RM in terms of Grönroos’ (1996) propositions (Coviello
and Brodie, 1998). This research found that managers’ perceptions of the relevance of RM was
in¯ uenced by the business conditions they faced. They appeared cautious about RM’ s practical
relevance to their speci® c businesses.
The six markets model, which was conceptualized by Christopher et al. (1991) and later
explained more comprehensively in Peck et al. (1999), provides a framework for further under-
standing and application. Under the six markets model, RM is seen as a cluster of six markets,
comprising internal, referral, in¯ uence, supplier and alliance, recruitment and customer markets,
which is considered to be at the centre of all marketing activities. This broader perspective
of RM is consistent with early proponents of RM such as Grönroos (1990) and Gummesson
(1987). In his recent book, Gummesson (1999, p. 9) reiterated that RM should be viewed as
more than just the activities of specialized departments and that RM will have no positive effect
on ® rms unless their top management accept relationship values as a natural vantage point.
In the era of `knowledge-based’ economy, it was also timely that Saren and Tzokas (2000)
raised the usefulness of RM in creating unique, dif® cult to imitate knowledge through the pro-
cesses of interaction and dialogue. Knowledge about customers, we agree, can only be enhanced
if ® rms are able to maintain lasting relationships with their customers. The RM approach, in
contrast to the traditional approach, emphasizes interactions with customers and the preservation
of long-ter m relationships. Its goal is to retain customers for the long-term.
THE SIGNIFICANCE OF CUSTOMER RETENTION TO FIRMS
The end goal of a ® rm’s marketing activities in the pro® t sector, irrespective of the way sales
are made, whether by transactional encounters or relationships, is making pro ® t. From RM’s
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perspective, successful ® rms are those which manage to turn their customers into clients (Berry
and Parasuraman, 1991) and from prospects into partners (Christopher et al., 1991; Peck et al.,
1999). Others such as Vandermerwe (1996) have pointed out that successful ® r ms are those that
`own’ their customers and pursue ongoing values for them.
Fornell and Wernerfelt (1987) emphasized that marketing resources may be better spent
on keeping existing customers than acquiring new ones. This was based on the assumption
that existing customers are pro® table and they cost less to keep than to replace. Firms therefore
have to be aware of the pro® tability of not just their products but also their customers. Contrary
to its belief, the Co-operative Bank found that its independent ® nancial advice and the sale of
associated investment products were not pro® table and contr ibuted to the high expense levels
associated with staff time (Kaplan, 1995). The overwhelming argument for customer retention
is that it is cheaper to retain than to acquire new customers (Rosenberg and Czepiel, 1984;
Blattberg and Deighton, 1996; Fites, 1996; Murphy, 1996; Vandermerwe, 1996, p. 24). Payne
and Frow (1999) illustrated how an additional £5.5 million increase in expenditure, when
directed at increasing the number of `very satis® ed’ existing customers, could result in an
£18 million increase in pro® tability. They computed that the additional expenditure would
increase the number of `very satis® ed’ customers by 6%. This increase would in turn result in a
corresponding 4.8% increase in customer retention.
Customer retention clearly deserves some attention and should form a part of a ® rm’ s
strategic marketing goals rather than simply being seen as the end result of `good’ marketing
management. However, ® rms attempting to integrate customer retention goals and strategies
into their strategic planning process need to consider practical issues. We have identi® ed two
major practical issues: de® ning the term `retention’ and measuring customer retention.
DEFINING CUSTOMER RETENTION
Customer retention can be seen as the mirror image of customer defection, where a high reten-
tion rate has the same signi® cance as a low defection rate. Customer retention management can
be problematic if it is not de® ned precisely in a way appropriate to the ® rm’s business. Should
retention be de® ned in terms of absolute numbers of customers or their relative purchases?
Should purchases be measured in terms of value or volume? For a ® rm which sells standardized
products or services that have a predictable and unifor m pattern of usage or consumption and
large numbers of users, such as domestic electr icity, a retrospective segmentation approach may
be a suitable method. In this approach, customers can be divided into cohorts that share similar
expected switching behaviour, spending levels and customer pro® les. This approach has been
used by an electricity ® rm and was reported on by Payne and Frow (1999). The same form
of measure is not appropriate for a ® rm which sells products or services tailored to the needs of
its customers, such as ® nancial services and insurance or ® rms which sell products having few
users, such as speciality chemicals. De® ning customer retention in terms of percentage share of
customer savings, borrowing, spend or purchasing may be more useful instead of in ter ms of the
absolute numbers of customers. A bank customer may have several accounts with the same bank
and may decide to close one of them. In the insurance industry, a policyholder may have several
policies and may decide to cancel or replace a policy with another. An insurance company tends
to regard an insurance policy as a customer and, hence, when a policy is cancelled for non-
payment and later renewed, the new policy is taken to mean a new customer. It is misleading to
treat either case as a defection. Alternatively, a customer may still keep an account but transfer
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a substantial amount of money to an account in another bank or buy additional insurance
coverage from another company. In these cases, the customer’s existing bank and insurance
company are, unknowingly, experiencing a defection.
The use of agg regate ® gures and averages in calculating retention rates can be problematic
and as misleading as treating bank accounts or insurance policies as customers. This is because,
between them, customers may have signi® cantly different spending power and buying
behaviours. It is not unusual for a small proportion of customers to account for a large propor-
tion of company revenue. In a study of retail banks’ segmentation by pro ® tability , Storbacka
(1997) found that 20% of their customer base accounted for 90% of their total customer
base pro® tability. Hence, customers from the remaining 80% of the customer base were either
unpro® table or contributed to an insigni® cant amount of pro® t. Moreover, defection rates tend
to be much higher for new customers than long tenure customers (Reichheld, 1996). This
means that a high proportion of new customers could bring down the rate of retention and vice
versa. In some cases, suppliers are unable to detect hidden defections of their customers. Hidden
defections occur when ® rms f ail to recognize a slower growth in sales to a particular retained
customer relative to the growth of the market. As an illustration, dealers in of® ce equipment
buy different brands of comparable or substitute laser printers from a number of suppliers. A
high retention rate of dealers, in terms of the absolute number of dealers, in this circumstance is
misleading as hidden defections are not considered. In order to help overcome the problem of
hidden defections, a supplier could monitor sales penetration of their customers or their share of
customers’ purchases over and above the average level of sales. An issue related to the de® nition
of customer retention is therefore measurement of customer retention.
MEASURING CUSTOMER RETENTION
Dawkins and Reichheld’s (1990) seminal paper on customer retention implied that a relatively
small percentage increase in the retention rate can lead to a large increase in the net present
value of customers. This suggests that customer retention may be measured in terms of absolute
number of those staying as a percentage of the original number over a speci® c period, for
example 1 year. DeSouza (1992) refer red to this form of measure as a crude rate. However, this
method poses a further question. How do we determine `a period’? Some products, such as cars,
clearly have longer purchasing cycles than others, for example tyres.
The appropriate interval at which a retention rate should be measured, therefore, need not
necessar ily be 1 year but, as Stewart (1996, pp. 35± 6) argued, depends on the nature of the
business and, more speci® cally, on the repurchase cycle appropriate in the industry. It would be
misleading to suggest that `A’ has defected if `A’ has not purchased a new car in year 2 when the
usual repurchase cycle of a new car is 3 years. It is therefore more meaningful for car dealers to
measure customer retention every 3 years instead of every 12 months.
A much more complex computation arises when (1) customers have multiple suppliers, (2)
a few customers have a disproportionate spend relative to other customers and (3) individual
customers have several accounts with a single supplier. A building contractor may buy br icks
from several different sources depending on their proximity to its building sites. A newspr int
paper company, which needs to import pulp, may buy 70% from a main supplier and the
remaining 30% from three separate suppliers. A bank customer may have several accounts with a
single bank. In the ® rst two scenar ios, it is essential for a supplier to recognize the relative
importance of a particular customer vis-à-vis other customers. DeSouza (1992) suggested a
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measure of a weighted retention rate rather than a crude retention rate. A weighted retention
rate refers to the rate that recognizes the relative importance of the buyers in terms of the
volume of sales. If a defected customer had unit purchases that were double the average of
all customers, his/her weighted retention rate should also be doubled or counted as equivalent
to two customers. In addition, suppliers may also have to account for customers’ relative
importance in terms of potential growth in their demand. This may be measured in terms of the
growth in their spend relative to the growth in the market.
In the third scenar io, capturing a targeted proportion of the total spend of an individual
customer is a much more useful measure than merely ensuring that accounts are not closed.
Using the same illustration, the bank may aim to capture the largest proportion of its customer’s
`lifetime value’ (LTV) in terms of needs for banking products and services. The LTV of a
customer refers to the customer’s net present value to a seller. If the cost of attracting a customer
is considered as a `sunk cost’ then the focus can be directed at achieving a surplus of revenue on
the costs of selling and servicing the customer. If the period of relationship and future revenues
and costs can be projected then the net value can be calculated and discounted at a chosen
discount rate (usually a rate that takes into account the company’s cost of capital and risk) in
order to arrive at the LTV of a particular customer.
Several authors have recognized the importance of the concept of LTV. According to Dwyer
(1989), customer LTV is an important construct in designing and planning a customer acquisi-
tion programme. Many researchers have studied its managerial implications in direct marketing
(Dwyer, 1989; Wang and Splegel, 1994; Keane and Wang, 1995) and broader managerial appli-
cations (Wayland and Cole, 1997, Chapter 4; Berger and Nasr, 1998). Berger and Nasr (1998)
discussed LTV in the context of ® ve scenarios, i.e. with different combinations of assumptions
such as discrete cash ¯ ows, continuous cash ¯ ows and histor ical purchasing behaviour. Wayland
and Cole (1997) discussed a general application based on their consulting experience.
Although in theory LTV is a useful form of measure, in practice it is dif® cult to implement.
The ® rst dif® culty lies in the lifetime construct. How do we determine the span of lifetime? For
a consumer, should it be his/her nominal age or working life? For a ® rm, would the expected
life of the products it sells be a suitable measure of customer lifetime? Clearly, the important
consideration that a supplier should examine is the ability of a particular customer to continue
to purchase or consume its products or use its services. The second dif® culty lies in the process
of building value information (Magson, 1998). Over what time period, in the past or in the
future, should the data on value be captured and calculated? Historical data give actual values but
may be of limited use. Histor ical data on costs or spend become useful for the future only if we
can regard past purchasing behaviours as reliable indications of future purchasing behaviours.
Estimated future data, on the other hand, gives predicted value, which the ® r m may or may not
be able to realize. There is also a problem in estimating purchase probabilities , particularly for
new products. A combination of both historical and estimated data, when possible, is probably
the most sensible method. The next problem in collecting data pertains to determining the level
of customers to be analysed? Doing it at an individual level would be tedious and may not be
worthwhile, although it would give a clear indication of the pro® tability of every customer.
Doing it at a segment or campaign level is more convenient but it assumes an aggregation of
buying behaviours. Finally, how should a ® rm determine the appropriate discount rate? What is
the cost of capital to a particular ® rm and how do ® rms assess their risk?
We have thus far dealt with the quantitative measure of customer retention. How do we
account for the qualitative elements? Customer defection is the other side of the same coin
but suppliers do not always have control over the reasons for all defections. Individuals die and
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companies are declared bankrupt, cease to operate or change their activities. Keaveney (1995)
identi® ed ethical problems and involuntary factors as two causes of customer switching
behaviour which providers of service are not able to control. A bank customer who does not
approve of the use of interest in calculating and charg ing loans or rewarding savings may thus
switch to another bank that offers an alternative way of charging for borrowing. The reasons
for defecting or staying vary from one customer to another. A substantial number of satis® ed
restaurant patrons switch to other restaurants regularly, perhaps because they like to try different
foods or atmospheres. Domestic electricity consumers stay with a particular electricity company
because they do not have an alternative supplier. However, these electricity customers may
minimize their use of electricity in preference for gas whilst waiting for the opportunity to
switch to another supplier as soon as one becomes available. Hence, to suggest that an electricity
company has a high retention rate is as misleading as to say that a restaurant has a high defection
rate.
Nevertheless, quantitative measure of retention and defection rates can be a good starting
point in the process of understanding customer retention. However, this will become more
complex when a ® rm offers a wide range of products to many different customers. The optimal
measure of customer retention would be one that is able to measure not only the absolute,
crude or relative retention rate but, also and more importantly, it would be one that contributes
to increases in the suppliers’ present and future pro® tability. In using customer retention as
a marketing strategy, ® rms have to establish continuous seller± buyer associations that can be
connected to their pro® tability.
THE BENEFITS OF RETAINING CUSTOMERS
Our discussion of the bene® ts of retaining customers takes the same form as our discussion of
customer retention, i.e. it is both quantitative and qualitative or, more speci® cally, it addresses
both economic bene® ts and non-economic bene® ts. Arguments which justify the strategy of
retaining customers as opposed to acquiring new customers are underpinned by micro-
economic theory and, in particular, the concept of customer LTV. The assumption is that,
in a relationship, a seller seeks to minimize their costs and maximize their revenues. Customer
retention affects both elements of the pro® tability equation, where
Pro® t = Revenue - Expenses or Cost
Customer retention helps increase revenue through increases in sales volume and/or premium
prices as well as reducing the expenses or costs of generating those revenues. An increase in
retention rate has been argued to have led to a corresponding increase in pro® t (Dawkins and
Reichheld, 1990; Reichheld and Kenny, 1990; Reichheld and Sasser, 1990; Reichheld, 1993,
1996, Chapter 2). Reichheld (1996) identi® ed six economic bene® ts of retaining customers: (1)
savings on customers’ acquisition or replacement costs, (2) a guarantee of base pro® ts as existing
customers are likely to have a minimum spend per period, (3) g rowth in per-customer revenue
as, over a period of time, existing customers are likely to earn more, have more varied needs and
spend more, (4) a reduction in relative operating costs as the ® rms can spread the cost over many
more customers and over a longer period, (5) free of charge referrals of new customers from
existing customers which would otherwise be costly in terms of commissions or introductory
fees and (6) price premiums as existing customers do not usually wait for promotions or price
reductions before deciding to purchase, in particular with new models or versions of existing
products.
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The assertion that retention has non-economic bene® ts is underpinned by behavioural or
psycholog ical arguments. Morgan and Hunt (1994) argued that, in a network comprising partner-
ships with external parties, namely buyers, suppliers, competitors, gover nments and non-pro® t
organizations and with internal parties, namely employees, departments and business units,
commitment and trust in relationships engender cooperation, acquiescence, a reduced tendency
to leave the network, reduced uncertainty and the belief that con¯ ict will be functional (when
disputes are resolved amicably). Existing customers can not only provide feedback about
products and services, but also work together with suppliers to add value to a particular product
by improving its functional features or by modifying the manufacturing or work processes which
use the product. HDoX, a producer of hydrogen peroxide, achieved this through the cooperation
of its customers. For example, HDoX and Of® ce Furnishing, one of its customers, jointly
modi® ed Of® ce Furnishing’s textiles bleaching process (Ahmad and Buttle, 1999). The modi® ed
process, which used hydrogen peroxide instead of chlor ine, only required a two-step instead
of a three-step process. This resulted in a shorter process time and a shorter overall production
cycle. It also used less water and consumed less power, which further reduced the customer’s
production cost. Such cooperation reduced the inclination of Of® ce Furnishing to quit the
relationship.
POTENTIAL STRATEGIES FOR RETAINING CUSTOMERS
We have identi® ed strategies for retaining customers in three ways: conceptual strateg ies based
on extant theories, best practices strategies as reported by specialists and pragmatic strategies
as observed in companies. In terms of extant theories, we considered lessons from services
marketing industr ial marketing, and business-to-business marketing perspectives. From the
service marketing perspective, customer retention has been conceptualized as a consequence of
customer-perceived service quality and customer satisfaction (Berry and Parasuraman, 1991;
Zeithaml and Bitner, 1996, p. 176). A provider of services, based on such a cause-and-effect
model, could therefore focus on progressively closing the gaps between customer expectations
and experiences of service quality. Based on a survey of service providers, Payne and Frow
(1999) offered a four-step framework: de® ne the market structure, segment the customer base
and determine segment value, identify segments’ service needs and implement a segmented ser-
vice strategy. They claimed that the framework enables ® rms to allocate appropriate budgets to
various segments of customers according to their projected lifetime pro® tability.
From the industrial marketing perspective, core products are often of little signi® cance to
potential buyers. Augmented products such as technical advice and long-term costs of main-
tenance and operation tend to be more important than functional features and selling price.
Turnbull and Wilson (1989) argued that ® rms should protect their pro® table customer relation-
ships through not only social but also structural bonds. Social bonds, according to Turnbull and
Wilson (1989), refer to positive interpersonal relationships between employees in the buyer and
seller organizations. Although they did not provide an explicit de® nition of structural bonds they
implied through their illustrations that structural bonds are built upon joint investments which
cannot be retrieved when the relationship ends. Structural bonds therefore help create value for
customers by saving the costs of retraining or making a new investment with a new supplier.
There are many ways of developing structural bonds apart from providing technical support.
For example, HDoX invested in a telemetry and electronic data interchange system that
enabled it to monitor the level of inventory at its buyer’s storage tank directly. The company
automatically sends new supplies when the volume in the tank f alls below a speci® c stock level.
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A starting point for the development of relationships and, hence, bonding is to create inter-
dependencies between supplier and customer (Tur nbull et al., 1996). These interdependencie s
are built upon the resources that these ® rms possess, the activities that they perform or the actors
that represent them (Håkansson and Snehota, 1994). Resources may be in the for m of ® nancial,
network position and skills or a set of technolog ies. Activities refer to what they jointly do such
as research and development. While the industr ial marketing perspective acknowledges the
nature of the product to be an important determinant of the process of buying (Jackson, 1985),
the business-to-business (B2B) marketing perspective recognizes the nature of customers, i.e. that
businesses have multiple and interconnected relationships (Ford et al., 1998). The key argument
of this perspective is that marketing to businesses involves managing interconnected relationships
between buyers, sellers, competitors and third parties and, hence, is open to the possibilities
of interconnected multi-interdependencies. The marketing of industr ial products and to B2B
marketing are similar in some regards: they both emphasize bonding, interdependencies and
relationships. (For further discussion on a perspective of the possible linkages and overlaps
between a number of theoretical positions relating to B2B bonding, see Buttle et al. (1999).)
Potential strategies that re¯ ect best practices in industry were drawn primarily from consulting
experience. According to Reichheld (1996), head of Bain & Co.’s customer retention practice,
`successful’ ® rms retain their customers, not just by focusing on customer retention, but also
employee and investor retention. He proposed a three-pronged approach to managing customer
retention which involves ® nding and acquiring the right customers, employees and investors
(Reichheld, 1996, Chapters 3, 4 and 6). Reichheld’s (1996) idea rests on the notion that disloyal
employees are probably not able to build an inventory of loyal customers and disloyal investors
do not support long-ter m relationship programmes. He emphasized the need for maintaining a
team of customers, employees and investors that share the same vision of a long-ter m relation-
ship. In acquiring new customers, he reminded ® rms to be aware of the different `loyalty co-
ef® cients’. According to Reichheld (1996, p. 64), a loyalty coef® cient refers to the economic
forces or ® nancial costs of moving or switching customers from one supplier to another. While
some customers will defect for a 2% discount in price, others will not move for a 20%
discount. According to Reichheld (1996), one of the ways of knowing the loyalty coef® cients
of customers is by analysing customers’ past behaviours. Northern Insurance, for instance,
discovered that different segments of customers exhibited average retention rates in the range
of 72± 94%. Referring to customers’ behaviour, the easiest to win is likely to be the one who
will be the quickest to defect. In Reichheld’s (1996) words, `The customers who glide into your
arms for a minimal price discount are the same customers who dance away with someone else at
the slightest enticement’ (p. 82).
Although not all customers prefer long-term relationships there are those who prefer
stable long-term relationships, inherently spend more, pay promptly and require less service.
Long-serving employees, Reichheld (1996) added, generate several economic bene® ts: not only
are they much better at ® nding and recruiting the best customers, but they retain customers by
producing better products and value and they are sources of customer refer rals. Central to his
approach was the need for ® rms to search continuously and consistently for initiatives that offer
a better value proposition than their competitors.
Potential strateg ies for managing customer retention have also emerged from observations of
management practice. DeSouza (1992) offered strategies that measure retention in terms of both
crude and weighted rates. This involves interviewing former customers, analysing complaint and
service data and identifying switching behaviour. With the use of computers, ® rms should have
little dif® culty in calculating and reporting both crude and weighted rates. However, they need
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to be aware that a large unit volume of sales does not necessarily translate into correspondingly
large pro® t as it is not unusual for large buyers to obtain substantial price discounts or demand
high levels of service. In addition to measuring retention, ® rms should consider interviewing
former customers in order to learn their reasons for defecting. Customer defections may have
been caused not by the ® rm itself, but by factors beyond its control.
DeSouza (1992) identi® ed six types of defectors: (1) pr ice ± for a lower price, (2) product ±
for a superior product, (3) service ± for a better service, (4) market ± for a different market, for
example a transport company which has moved out of road haulage and, therefore, no longer
buys trailers, (5) technological ± a customer that has converted from using one technology to
another, for example from dedicated word processors to multipurpose personal computers and
(6) organizational ± switches due to political pressure. However, ® rms could ® nd it dif® cult to
persuade their former customers to agree to interviews. Moreover, a long lapse of time between
defecting and the interview could make it dif® cult for for mer customers to recall their reasons
for switching. The third component of DeSouza’s (1992) strategy was analysing complaint and
service data. This can provide clues for service and product improvement. Polaroid, the camera
maker, has used complaint information in order to make its cameras more user fr iendly.
However, this is only possible if such data have been collected, built into a customer information
® le, analysed and made accessible to relevant parties. Call centre agents at the Advance Bank,
for example, capture information about their customers during their conversations or as they
handle customers’ requests with the use of multitask work stations (Jelassi and Enders, 1999).
Data including the likes and dislikes of individual customers are then instantaneously made
available on screen to other agents. This enables other agents to tailor their conversations,
for instance by not offering products which the customer has already said they did not want.
The ® nal component is identifying switching behaviour. This means moving beyond resolving
problems to learning from companies beyond the ® r m’ s industry. The use of electronic data
interchange (EDI) in logistics management, strateg ic bundling of products and services in con-
struction, banking and insurance and the team approach in consulting in order to forge a lasting
bond with clients are some of the ways of creating switching barriers.
Customers stay and defect for all sort of reasons. Keaveney (1995) identi® ed eight causes of
switching behaviour in service industries: pr ice, inconvenience, core service failures, f ailed
employee responses to service failure, ethical problems, involuntar y factors, competitive issues
and service encounter failures. She discovered that six of the eight causes of switching behaviour
are controllable by the service provider. This ® nding offers an opportunity for ® rms to develop
barr iers for preventing customers from switching.
It is probably unrealistic to expect all customers to stay inde® nitely. Not only do customers
buy on a portfolio basis, but ® rms have to accept that a proportion of their customers will leave
from time to time for a number of reasons. A strategy that would enable ® rms to cope with
this situation is customer portfolio management. It involves an analysis of the ® rm’s customer
portfolio with a view to creating a speci® ed balance of customer groups before reorganizing the
® rm for customer retention (Rosenberg and Czepiel, 1984). A customer portfolio could com-
prise several groups of customers each with different buying behaviours, such as the ® rst-time
buyers, repeat buyers, switched-away-then-return buyers and last-time buyers. Three factors
need to be considered when ® rms seek the optimal balance in their portfolio. First, how readily
can consumers perceive the product differences. Rosenberg and Czepiel (1984) argued that,
when products are selected on the basis of `objective ’ superior ity, such as luxury cars, keeping
customers is relatively easier than if they are selected on the basis of `subjective’ criter ia, such as
cosmetics. The ® rms then apply a customer-retaining marketing mix and reorganize themselves
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for customer retention. Some examples of retention tactics are giving product extras, reinforcing
promotions, providing sales force connections, providing specialized distribution and providing
post-purchase communication. Reorganization for customer retention involves setting an
acceptable target for customer turnover, establishing executive accountability for keeping
customers and improving internal coordination by targeting promotional strategies towards
repeat usage.
TIMELINESS AND APPROPRIATENESS OF STRATEGIES FOR A FIRM’S
SITUATION
Customer retention, we have argued, should be an important business goal. However, the choice
of appropriate strateg ies may be in¯ uenced by the nature of the product, the stage of the
product in the life cycle, and customers’ buying behaviours. In medicare services, it is not viable
to concentrate on providing services to the most pro® table segment as this will result in neglect
in other areas of disease management (McStravic, 1996). In corporate banking, the credit-driven
cultures and short-term pro® t requirements of management and shareholders has resulted in a
lack of real commitment to long-term relationships. This has dr iven banks to pursue short-term
opportunistic behaviours (Schell, 1996). Certain products or services, such as funeral services
or heart surgery, are most unlikely to be purchased repeatedly by the same customer. In some
cases, a service or a product has little or no use to the same customer beyond a certain time such
as introductory music lessons or Year 2000 compliance software. Under those circumstances
customer retention is not likely to be given the same attention as acquisition. One could also
argue that it is not necessary to be overly concerned with customer retention if the products
being sold generate dependency such as medicine. Customers will repurchase them regardless of
retention efforts.
When a ® rm enters a new market it patently makes sense to focus on acquiring new
customers. This was the case for NFB when it entered the market for telephone banking for
businesses (Buttle and Ahmad, 1998) and Egg, the Internet banking arm of Prudential, when
it entered the direct consumer banking and ® nancial services market. Egg successfully attracted
800 000 customers (savers) within 2 years and later attracted 175 000 credit card customers within
6 months. They were lured by the relatively favourable interest rates Egg charges (Daily Telegraph,
2000, p. 25).
Sellers may also ® nd it futile to attempt to retain certain organizational customers due to
their buying behaviours. Government departments in the UK, for example, adopt compulsory
competitive tendering (CCT) as their mechanism for making purchasing decisions where pr ice
is the primary consideration. Government purchasing of defence equipment, warships and
military aircraft also tends to have an extremely long purchasing interval. Purchasing decisions
are usually preceded by a period of lengthy negotiations involving several parties. Under these
circumstances sellers tend to be more interested in winning tenders and maximizing pro® ts from
a particular sale or contract.
Recent developments in information technology have enabled a new form of relationship
building that goes beyond the basic exchange of services and physical products and beyond
the ® nancial, social and structural aspects of buyer± seller relationships. Potential customers,
for example, may be drawn into the website of a portal or gateway Internet service provider
such as Freeserve, which in turn provides hyperlinks to various suppliers of goods or provider s
of services. Customers are thus encouraged to continue to purchase from the same suppliers
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because of the information links. Most recently, General Motors, Ford and DaimlerChrysler
have been cooperating in order to put their procurement needs onto a single electronic trade
exchange which will involve tens of thousands of suppliers (Financial Times, 2000).
CONCLUSIONS
Customer retention management has the potential for delivering substantial bene® ts to ® rms in
terms of long-term pro® tability. The economic bene® t is easily justi® ed in ter ms of enhancing
LTV. Firms also enjoy non-economic bene® ts from enhanced customer trust, commitment and
cooperation.
However, there are three issues which ® rms should address before embarking on a strategy
of retaining their existing customers. First, they should de® ne customer retention in terms
appropriate to their business. Second, they should select appropriate measures of customer
retention. A suitable form of measure is one that is not only practical and cost-effective to
implement, but also able to show the impacts of retention on pro® tability. Third, ® rms should
develop and implement strateg ies that are appropriate to their business context. We offer three
sets of potential strategies for ® rms depending on the markets they serve: FMCG consumers,
service consumers and industrial buyers (see Table 1). We acknowledge that these strategies are
broad and, hence, they have to be ® ne-tuned to ® t the ® r m’ s particular business situation.
Customer retention management would not give ® rms substantial bene® ts if it were seen
merely as an outcome of marketing activities that pursue market share domination. However, it
could offer ® rms competitive advantage if it were seen as a long term strategy for managing
existing customers; it is potentially a potent marketing management strategy.
The conclusions of this paper have important implications for both practitioners and theorists.
It is timely for practitioners to move beyond gaining a larger market share, satisfying market
segments and developing brand preference in order to secure lasting customer patronage and
pro® tability. We do not claim that all ® rms should emphasize customer retention. However, we
wish to reiterate that customer retention has a number of potential bene® ts that are far too
rewarding for ® rms to ignore. In our view, ® rms should consider integrating customer retention
into their strategic marketing planning process and set it as one of their primary goals.
This discussion highlights the potential drawbacks of prescriptive theories which claim to
have generalized application. The traditional marketing approach, which advocates the pursuit
of a large market share, market partitioning and promotion of brands, has not been left un-
challenged either. Customer retention has the potential to become a more potent strategy than
customer acquisition. The key questions are not whether ® rms should retain their customers, but
rather under what circumstances, in terms of product and market and how best to manage them
in terms of the appropriate strategies. This leads to our ideas for further research.
(1) If RM were argued to be appropriate for service and industrial customers, will customer
retention, a key goal of RM, be of practical relevance in all services and industrial contexts?
By the same token, is it of limited value to all ® r ms pursuing the traditional marketing
approach?
(2) Customer retention practices are likely to differ between ® rms selling different products or
services to the same market, similar products or services to different markets and different
products to different markets. Is there a universal taxonomy of customer retention practices?
(3) If customer retention practices are dictated by business situations, what are the particular
contextual conditions which have signi® cant in¯ uence on the choice of retention practices?
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TAB L E 1. A framework for determining the appropriateness of potential strategies to a
particular business situation
Markets
Products/
Services
Usage of products
and services
Suitable forms
of measure of
retention
Potential sets of
strategies for managing
customer retention
Consumers
of fast
moving
consumer
goods
Mainly
standardized
Mainly uniform
and predictable
Mainly in terms of
crude rate –
percentage of
absolute number
of customers
retained or defected
Dividing customers into
groups which share
similar buying
behaviours
May use standard price
and brands to attract
and keep these groups
of customers
Focus on deriving
economic bene ts
Adjust marketing mix to
attract, retain and
develop particular
groups of customers
Consumers
of services
Partly
standardized
Partly
customized
Partly uniform
and predictable
Partly uctuating
Partly in terms of
crude rate –
percentage of
absolute number
of customers
retained or defected.
Partly in terms of
weighted rate –
taking into account
the share of
spends and also LTV
Focus on deriving both
economic and non-
economic bene ts
Focus on developing and
maintaining social
bonds with individual
customers
Focus on improving
service quality
Consider grouping
customers of standard
services by their
consumption and
purchasing behaviours
Maintain both standard
and exible pricing
Business as
users of
physical
goods
and
services
Mainly
customized
Mainly uctuating Mainly in terms of
weighted rate –
taking into
account the
share of volume
and value of
purchases and
also their LTV
Focus on deriving both
economic and non-
economic bene ts
Focus on developing and
maintaining both
social and structural
bonds
Focus on creating
multilevel customers’
dependency
Focus on providing a
total value of
proposition
Maintains exibility in
pricing
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(4) As companies have begun to implement customer retention programmes, how successful
have they been? What are the enablers or barriers to success? How is success measured?
(5) What are the relationships, if any, between contextualized customer retention practices and
business performance? When do particular retention practices work more effectively
in delivering higher retention rates and more ef® ciently in delivering greater pro® tability to
a ® rm?
Finally, it is not our intention at this stage of our research to suggest a generalized application
of our ideas or a framework for developing customer retention strategies. We do think that it is
the context of the ® rm that determines the appropriateness of strateg ies and that, we envisage,
will become clearer as more research is carried out.
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