MANAGING THE

CUSTOMER LIFECYCLE:
CUSTOMER RETENTION AND
DEVELOPMENT

Chapter 9
 Chapter 9 Outline
 What is Customer Retention?
 Manage Customer Retention or Value Retention?
 Positive Customer Retention Strategies
 Learning from Research into Customer
Commitment
 Strategies for Customer Development
 Strategies for Terminating Customer Relationships
 What is Customer Retention?
 Customer retention is the maintenance of continuous
business relationships with customers over the long
term.
 Customer retention is the opposite of customer
defection or churn.
 The traditional definition of customer retention is the
number of customers doing business with a company
at the end of a financial year, expressed as percentage
of those who were active customers at the beginning
of the year.
 What is Customer Retention?
 However, the appropriate time period over which
retention rate should be measured is not always
one year.
 The time period should depend on the repurchase
cycle.
 Example: Car insurance and magazine
subscriptions are bought on an yearly basis. Carpet
tiles and cars are not.
 What is Customer Retention?
 The use of aggregates and averages in calculating
customer retention rates may not give an accurate
picture of customer retention and defection. Why?
 Because customers differ in their sales, costs-to-
serve and buying behaviors.
 It is not uncommon for a small number of
customers to account for a large percentage of
company revenue.
 Manage Customer Retention
or Value Retention?

 Companies should focus on retaining customers

that contribute value. What does this mean?
 This mean that companies’ focus should not be on
retention of customers alone, but on retention of
share of wallet.
 Example: In the banking industry, it might be more
important for companies to focus on managing the
overall downward migration of customer spending
than managing customer retention.
 Manage Customer Retention
or Value Retention?

 Changes in buying behavior may have a bigger

impact on customer value than defection.
 Example: One bank lost 3 per cent of its total
balances when 5 per cent of checking account
customers defected in a year.
 On the other hand, the same bank lost 24 per cent
of its total balances when 35 per cent of customers
decreased the amounts deposited in their checking
accounts.
 Positive Customer Retention
Strategies

 The following are some positive customer

retention strategies:
 1) Customer delight
 2) Add customer-perceived value
 3) Bonding
 4) Customer Engagement
 Positive Customer Retention
Strategies

 1) Customer delight: Delighting customers, or

exceeding customer expectations is achieved by going
beyond what would normally satisfy the customer.
 Customer delight happens when the customer’s
perception of their experience of doing business with a
company exceeds their expectation.
 In formulaic terms:
 CD =P > E
 where CD =customer delight, P=perception and E=
expectation.
 Positive Customer Retention
Strategies

 The formula in the previous slide indicates that

customer delight can be influenced in two ways:
 By managing expectations
 By managing performance
 Positive Customer Retention
Strategies

 2) Add customer-perceived value:

 There are three popular types of value-adding
programs: They are:
 1) Loyalty schemes
 2) Customer clubs
 3) Sales promotions
 Positive Customer Retention
Strategies

 1) Loyalty schemes: reward customers for doing business

with a company.
 The more a customer spends, the higher the reward.
 Example: Frequent flier programmes (FFP)
 2) Customer clubs: are company-run membership
organization that offers a range of value-adding benefits
exclusively to members.
 Example: IKEA FAMILY, the home furnishing retailer’s
club, provides members discounts on certain IKEA products, a
free home furnishing magazine quarterly, news updates via e-
mail and discounts on exclusive IKEA FAMILY products.
 Positive Customer Retention
Strategies

 3) Sales promotions: is defined as any behavior-

triggering temporary incentive targeted at
prospects, customers, channel partners or
salespeople.
 Retention-oriented sales promotions encourage the
customers to repeat their purchase.
 Example of Sales retention-oriented sales
promotion: rebate or cash back, in-pack or on-
pack voucher, and collection schemes.
Example of Cash Back Sales Promotion
 Positive Customer Retention
Strategies

 3) Bonding: The are two main categories of

customer bonding: They are
1) Social Bonds
2) Structural Bonds
 Positive Customer Retention
Strategies

 1) Social Bonds: occur when positive

interpersonal relationships develops between
people on both sides of the customer-supplier
partnership.
 High levels of trust and commitment are key to
positive interpersonal relationships.
 Strong social bonds can develop between
employees in companies having similar sizes,
cultures and locations.
 Positive Customer Retention
Strategies

 For example: small and medium-sized businesses

usually prefer to do business with similar sized
companies, and Japanese companies prefer to do
business with other Japanese companies.
 Geographic bonds occurs when companies in a
trading area cooperate to support each other.
 Social bonds characterized by trust usually precede
the establishment of structural bonds.
 Positive Customer Retention
Strategies

 2) Structural Bonds: occur when companies and

customers commit resources to a relationship.
 For example: a joint customer-supplier quality
team can work on improving quality compliance
which will benefit both companies.
 Resources committed to a relationship may or may
not be recoverable if the relationship ends.
 For example: investments made in training a
customer’s employees can not be recovered.
 Positive Customer Retention
Strategies

 An important feature of structural bonding is

investment in modifications to suit the other party.
 Suppliers can modify any part of the offer – product,
process, price and inventory levels to fit with the
customer’s needs.
 Customers can also invest in modification to fit with
their suppliers.
 For example: Customers can modify their
manufacturing processes to suit supplier’s product or
technology.
 Positive Customer Retention
Strategies

 4) Customer Engagement: Several studies

have shown that customer satisfaction is not
enough to ensure customer retention.
 For example: A report showed that 65 to 85 per
cent of customers who recently defected where
satisfied with their previous suppliers.
 Having satisfied customers in today business
environment is just a basic requirement of being in
the game.
 Positive Customer Retention
Strategies

 Customers who are highly engaged have high

levels of emotional or rational attachment or
commitment to a brand, experience or organization.
 What does this mean?
 This means that these customers are highly unlikely
to switch to others brands.
 Learning from Research into
Customer Commitment

 Three different types of commitment have been

identified from various research. They are
 1) Instrumental Commitment
 2) Relational Commitment
 3) Values-based Commitment
 Learning from Research into
Customer Commitment

 1) Instrumental Commitment : this

happens when customers are convinced that no
other offer or company could do a better job of
meeting their needs than a certain company.
 Example: When a customer thinks that his or her
bank has the best products, the best access, the best
processes, the lowest interest rates on loans, and
the best reputation, he or she is committed.
 Learning from Research into
Customer Commitment

 2) Relational Commitment: this type of

commitment occurs when customers become very
attached to a company’s people.
 An emotional tie may be developed with an
individual person, a work group or the company as a
whole.
 These emotional attachment occur because customers
feel that employees at the company they do business
with ‘ go the extra mile ’ to completely satisfy them.
 Learning from Research into
Customer Commitment

 3) Values-based Commitment: this type

of commitment occurs when customers become
committed because their values are aligned with
those of the company.
 Example: Co-operative Bank is positioned in the
UK retail banking market as the ethical bank.
 Strategies for Customer
Development

 The following are some CRM technologies that are

useful for customer development purposes:
 Campaign management software
 Event-based marketing
 Data mining
 Customization
 Channel integration
 Integrated customer communications
 Marketing optimization
 Strategies for Terminating
Customer Relationships

 There are a number of strategies for terminating

customers: They are:
 1) Raise prices: Where price is customized this is a
possible option.
 Example: When banks introduce transaction fees for
unprofitable customers.
 2) Unbundle the offer: Companies could take a
bundled value proposition and unbundle it and then
reprice the components and reoffer it to the customer.
 Strategies for Terminating
Customer Relationships

 3) Respecify the product: this involves redesigning

the product so that it is no longer appealing to the
customer or customers that the company wants to
terminate.
 For example: the airline BA made a strategic
decision to focus on frequent-flying business
travellers who they regarded as high value.
 The airline redesigned the cabins in their fleet,
decreasing the number of seats allocated to economy
travellers.
 Strategies for Terminating
Customer Relationships

 4) Reorganize sales, marketing and service

departments: This is done in order to longer focus
on the segments or customers that the company
wants to terminate.
 Example: Companies could stop running
marketing campaigns targeted at the customers that
they want to terminate.
 Companies can prevent salespeople from calling on
these customers.
 Strategies for Terminating
Customer Relationships

 5) Introduce ABC class service: Companies could

migrate customers down the service ladder from high
quality face-to-face service from account teams, to
sales representatives, or even further to contact center
or web-based self-service.
 This reduces the cost from the relationship and may
convert an unprofitable customer into a profitable one.
 For example: Frontier Bank, introduced a no-frills
telephone account for business customers who needed
no cash processing facilities.
 Strategies for Terminating
Customer Relationships

 There are three types of behavioral approaches

that companies use with regards to terminating
their customers: They are:
 1) Hardliners: These companies have very active
strategies with regards to terminating unprofitable
relationships, including the regular clearance of
their customer portfolio.
 Strategies for Terminating
Customer Relationships

 2) Appeasers: These companies take a more

cautious approach regarding the termination of
unprofitable relationships because of strategic
considerations such as not losing customers to their
competition.
 3) The undecided: These companies are reluctant
to terminate unprofitable relationships due to the
costs of attracting new customers.
 Reference
 Buttle, F., & Maklan S. (2019). Customer
Relationship Management: Concepts &
Technologies, 4th edition, Routledge.