Customer retention is the activity that a selling organization undertakes in order to reduce customer defections. Successful customer retention starts with the first contact an organization has with a customer and continues throughout the entire lifetime of a relationship. A company’s ability to attract and retain new customers, is not only related to its product or services, but strongly related to the way it services its existing customers and the reputation it creates within and across the marketplace.
Customer retention is more than giving the customer what they expect, it’s about exceeding their expectations so that they become loyal advocates for your brand. Creating customer loyalty puts ‘customer value rather than maximizing profits and shareholder value at the center of business strategy’. The key differentiation in a competitive environment is often the delivery of a consistently high standard of customer service.
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 returns a revenue gain of 3.4 times the norm.
Customer Retention: 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: Mittal & Frennea (2012), Keiningham and colleagues (2007), Gupta and Zeithaml (2006), Mittal and Kamakura (2001), and Morgan and Rego (2006). 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 significantly, 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. Other studies have shown a strong association between higher customer retention and stock-market performance of a firm.
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.
Customer Retention: 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.
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. 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
3) Customer switching costs: Burnham, Frels, and Mahajan (2003, p. 110) define switching costs as “onetime 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, it should be noted that all long-term customers are not profitable, and worth retaining; sometimes, short-term transactional customers can be more profitable for the firm. 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 cancellation.
Standardization of customer service
Published standards exist to help organizations deliver process driven customer satisfaction 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.
- Customer Loyalty
- Customer Service
- The International Customer Service Institute
- Optimove Customer Retention Software
- Serial switcher
- Customer attrition
- Churn rate
- What is Customer Retention?
- Reicheld, Frederick (1996). "The Loyalty Effect: The hidden force behind growth, profits and lasting value". Watertown MA.: Business Harvard Review.
- Mittal, Vikas and Frennea, Carly, Chapter 16 - Managing Customer Satisfaction (2012). Mittal, Vikas & Carly Frennea (2012) "16- Managing Customer Satisfaction," Handbook of Marketing Strategy, Venky Shankar and Gregory Carpenter (Eds.), 261. Available at SSRN: http://ssrn.com/abstract=2345484
- 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.
- Gupta, Sunil, and Valarie Zeithaml. "Customer metrics and their impact on financial performance." Marketing Science 25, no. 6 (2006): 718-739.
- Mittal, Vikas, and Wagner A. Kamakura. "Satisfaction, repurchase intent, and repurchase behavior: Investigating the moderating effect of customer characteristics." Journal of marketing research 38, no. 1 (2001): 131-142. Available at SSRN: http://ssrn.com/abstract=2344925
- 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.
- Anderson, Eugene W., and Vikas Mittal. "Strengthening the satisfaction-profit chain." Journal of service research 3, no. 2 (2000): 107-120. Available at SSRN: http://ssrn.com/abstract=2345327
- Mittal, Vikas, and Carly Frennea. "Customer satisfaction: a strategic review and guidelines for managers." MSI Fast Forward Series, Marketing Science Institute, Cambridge, MA (2010). Available at SSRN: http://ssrn.com/abstract=2345469
- Kamakura, Wagner A., Vikas Mittal, Fernando De Rosa, and Jose Afonso Mazzon. "Assessing the service-profit chain." Marketing science 21, no. 3 (2002): 294-317. Available at SSRN: http://ssrn.com/abstract=2344873
- Mittal, Vikas & Carly Frennea (2012) "16- Managing Customer Satisfaction," Handbook of Marketing Strategy, Venky Shankar and Gregory Carpenter (Eds.), 261. Available at SSRN: http://ssrn.com/abstract=2345484
- 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.
- Pallas, Florian and Mittal, Vikas and Groening, Christopher, Allocation of Resources to Customer Satisfaction and Delight Based on Utilitarian and Hedonic Benefits (2014). Journal of Research in Marketing, Vol. 2 (1), 106-112 . Available at SSRN: http://ssrn.com/abstract=2404450
- 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.
- Blut, Markus and Frennea, Carly and Mittal, Vikas and Mothersbaugh, David L., How Procedural, Financial and Relational Switching Costs Affect Customer Satisfaction, Repurchase Intentions, and Repurchase Behavior: A Meta-Analysis (January 20, 2015). International Journal of Research in Marketing, Forthcoming. Available at SSRN: http://ssrn.com/abstract=2553402
- Timothy Bohling, Douglas Bowman, Steve LaValle, Vikas Mittal, Das Naryandas, Girish Ramani, & Rajan Varadarajan. 2006. "CRM Implementation: Effectiveness Issues and Insights" Journal of Service Research, 9(2), November, 184-194.. Available at SSRN: http://ssrn.com/abstract=2343756
- 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.
- Mittal, Vikas and Sarkees, Matthew and Murshed, Feisal, The Right Way to Manage Unprofitable Customers (April 1, 2008). Harvard Business Review, Vol. 86, No. 4, 2008. Available at SSRN: http://ssrn.com/abstract=2341784
- The International Customer Service Standard (2009), TICSS2009, The International Customer Service Institute