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Unit 6: Customer Retention

Notes
Did u know? On an average, businesses spend six times more to acquire new customers
than to keep them. Therefore, many firms are now paying more attention to their
relationships with existing customers to retain them and increase their share of customer’s
purchases.
The practice of relationship marketing also has the potential to improve marketing productivity
through improved marketing efficiencies and effectiveness.
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 differentiator in a competitive environment is more often than not
the delivery of a consistently high standard of customer service.
An important distinction can be made between strategies that lock the customer in by penalizing
their exit from a relationship, and strategies that reward a customer for remaining in a
relationship. The former are generally considered negative, and the latter positive customer
retention strategies.

6.2.1 Negative Retention Strategies

Negative customer retention strategies impose high switching costs on customers, discouraging
defection.
In a B2C context, mortgage companies have commonly recruited new customers with attractive
discounted interest rates. When the honeymoon period is over, these customers may want to
switch to another provider, only to discover that they will be hit with early redemption and exit
penalties. Customers wishing to switch retail banks find that it is less simple than anticipated:
direct debits and standing orders have to be reorganized. In a B2B context, a customer may have
agreed a deal to purchase a given volume of raw material at a quoted price. Some way through
the contract a lower cost supplier makes a better offer. The customer wants to switch but finds
that there are penalty clauses in the contract. The new supplier is unwilling to buy the customer
out of the contract by paying the penalties.

Some customers find that these switching costs are so high that they remain customers although
unwillingly. The danger from CRM practitioners is that negative customer retention strategies
produced customers who feel trapped. They are likely to agitate to be freed from their obligations,
taking up much management time. Also, they may utter negative word-of-mouth. They are
unlikely to do further business with that supplier. Companies that pursue these strategies argue
that customers need to be aware of what they are buying and the contracts they sign. The Total
Cost of Ownership (TCO) of a mortgage can include early redemption costs.

When presented with a dissatisfied customer who is complaining about high relationship exit
costs, companies have a choice. They can either enforce the terms and conditions, or not. The
latter path is more attractive when the customer is strategically significant particularly if the
company can make an offer that matches that of the prospective new supplier.

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