CHAPTER 3

CUSTOMER RETENTION STRATEGIES:

A THEORETICAL FRAMEWORK

The easiest way to grow your customers is not to lose them

3.1 INTRODUCTION
From the last decade and a half, customer retention has become the central
topic of most of the companies in their decisions related to marketing and
management. As the name suggests, customer retention strategies are
implemented by the organisations to hold on its existing customer base. Van den
Poel and Larivie (2005), in their work, argue that such strategies improve the
profitability of the companies by reducing customer acquisition cost. In simple
terms, customer retention is defined as retention activities that a selling company
undertakes for reducing customer defections. The process of customer retention
starts when the customer comes in contact with the organisation for the first time
and continuous to maintain the relationship through the entire lifetime (Larivie
and Poel, 2005)1. Reichheld and Kenny (1990); Schmittlein (1995) and Reichheld
(1996) in their research study found that if a company goes for attracting new
customers instead of retaining the existing customers, it will not be able to
increase their sales and profit levels. The authors found that it is because the
process of attracting customers is very costly and is not very rewarding.
Reichheld and Schefter (2000) also found that by a mere increase of 5 percent in
customer retention rate, companies can increase their profit by 25 to 30 percent.
This means, with a small shift in customer retention rates, companies can make
the greater increase in their profit margins that will further accelerate over time.
The present chapter deals with the customer retention, its evolution, theories,
factors affecting customer retention and various types of customer retention
strategies (Reichheld and Schefter, 2000)2.
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3.2 MARKETING
The previous chapter of this report defines marketing as a means of
communication between an organisation and its customers with the sole aim of
selling the products and services to consumers. Thus, it can be said that the key
aspect of marketing is communicating the unique selling point (USP) or value of
the product or service. In the views of both Philip Kotler and American Marketing
Association, marketing is the activity, set of institutions, and processes for
creating, communicating, delivering, and exchanging offerings that have value for
customers, clients, partners, and society at large (Burnett, 2008)3. Thus, it can be
argued that the purpose of every business is to "find and keep customers", and
companies can achieve this only by creating competitive advantage. Therefore,
organisations have to convince its potential customers that what they are offering
is the most suitable product that will meet all their needs and desire at that point of
time. If the company delivers this advantage continuously to the customers,
eventually they will not think of switching to other alternatives and will become its
loyal customers. For example, some customers drive only Audi, brush their teeth
with only Colgate, uses only Apple computer, etc. This shows the loyalty of the
customers towards that particular brand as now they have blind faith in the brand
and never think of any alternatives. However, it is impossible for a brand to
achieve this without an effective marketing program. Thus, it means that the role
of marketing is to provide support for identifying, satisfying and retaining
customers (Burnett, 2008)3.

It is not easy to define marketing. Till date there is no universal definition

of marketing as for advertising agencies marketing is an advertisement, for event
marketers, it is events, for salespeople, it is knocking on doors, and for direct
mailers, it is direct mail. Thus, one can argue that marketing is like, to a person
with a hammer, everything looks like a nail.

From the above discussion, it can be concluded that marketing is nothing

but a way of thinking about business, rather focusing on a bundle of techniques.
Marketing is not only related to selling products and services, and collecting
money, rather it is a way of connecting people with products and services and
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customers with companies. This connection is like an organic tissue, always

growing or dying, and can't be in a steady state. In addition to this, this
relationship is fragile like a tissue paper.

3.3 THE EVOLUTION OF RELATIONSHIP MARKETING

Although the notion relationship marketing is rising as a new
phenomenon, such marketing activities are practised back to the pre-industrial
era. The concept of relationship marketing was first put up by Berry (1983). In his
research work, Berry (1983) found that companies have started valuing their
existing customers, and they have started taking customer relationship as an asset
to the business that can enhance the customer base and profitability of the firms.
In simple words, one can state that relationship marketing deals with creating and
enhancing the relationship with the customers of the companies for sustainable
benefits. Kotler (1997) also feels that it is beneficial for the companies to build
long-term relationships with their customers, rather than to focus only on
transactional based strategies as retaining customers will prove profitable for the
companies (Kotler, 1997)4.

Earlier marketing activities of all the companies were limited to

transactional marketing. Under transactional marketing, companies focus only on
the single point of sale transactions. Its means, the sole aim of the organisations
were only to maximise the individual sales and efficiency rather than establishing
a long-term relationship with their customers. The approach of transactional
marketing was mainly based on four traditional elements of marketing, that is,

• Product: Coming up with a product that meets the demand of the

customers.

• Price: Deciding the price of the product so that it attracts consumers and is
equally profitable for the company.

• Placement: To develop an effective supply chain.

• Promotion: To highlight the unique selling point (USP) of the product so

that it appeals to the customers (Kotler, 1997)4.
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3.3.1 Transactional Marketing vs. Relationship Marketing

For many years, companies based their marketing activities on the

transactional model of marketing. However, with the passage of time,
organisations realised the importance of bringing change in their marketing
activities, and thus this is the inception of another model of marketing, that is,
relationship marketing. Now the marketing activities focus more on customer
retention, rather than customer acquisition. Thus, in relationship market,
customers became the centre of attraction (Arabian, 2015)5. Table 3.1 discusses
the main differences between the transactional marketing and relationship
marketing:

Table 3.1: Comparison between Transactional Marketing and

Relationship Marketing

Transactional Marketing Relationship Marketing

Focuses on single point of sale Focuses on establishing long-term

transactions relationship with the customers

Emphasis is on maximising the volume

Emphasis is on all the stakeholders
of individual sales and efficiency

It is product benefits as well as

It is product features oriented
system solutions oriented

It has short time horizon It has long-term horizon

It has little customer focus It has higher customer focus

Information is content of Information is product of

communication communication

Low contact with customers High contact with customers

(Source: Arabian, 2015)5
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Figure 3.1: The Transactional Marketing and Relationship Marketing Continuum

(Source: Gronroos, 1995)6
In the words of Gronroos (1994), relationship marketing is far better than
transactional marketing. Gronoors (1994) states that relationship marketing aims
at identifying, establishing, maintaining and enhancing and, if necessary,
terminating the relationship with the stakeholders and customers through the
mutual exchange and fulfilment of promises. This is done so as to meet the
objectives of all the parties, without loss to anyone (Gronroos, 1994)6. Ford
(1980) and Anderson (2001) also feel that customer retention is critical for the
companies in their marketing strategies. According to Ford (1980), relationship
marketing must have two essential aspects, firstly, there must be mutual benefit
from the contact, and secondly, both the parties must be committed to a long-term
relationship. In the views of Egan (2011), relationship marketing focuses on both
customer retention and acquisition strategies. According to Egan, relationship
marketing encourages retention marketing first and, later on, acquisition
marketing. Further, it is better to practice relationship marketing rather than
transactional marketing in saturated markets (Egan, 2011)7.

3.3.2 Benefits of Relationship Marketing over Transactional

Marketing
Relationship marketing offers several benefits over transactional marketing.
Firstly, it is always cheaper to retain an existing customer than to attract a new
customer. Secondly, it provides higher value to the customers. It is an integrated
approach to marketing, service and quality and thus, helps the companies in
gaining a competitive advantage over the others. Another advantage
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of relationship marketing is that long term customers may do referrals and viral
promotion for the companies. Moreover, with time, because of relationship
marketing, customers tend to increase their purchases, and there is less need for
the companies to offer certain price promotion to the retained customers (Arabian,
2015)5.

With time, more and more corporate are inclining towards relationship
marketing approach. Club Card introduced by Tesco and Nectar Card launched by
Sainsbury are the biggest examples in this series. Every purchase made by the
customer results in accumulation of points that tempts customer for more and
more shopping, additionally, data collected through such cards are used by
companies to get an idea of buying habits of their customers. Through this,
companies can design customised marketing strategies and send gifts and cards to
the customers on certain special occasion (Arabian, 2015)5.

Thus, relationship marketing has brought a noteworthy paradigm swing in

the marketing. That is a shift from thinking solely in terms of competition and
conflict towards thinking in terms of the corporation and mutual interdependence.
Relationship marketing emphasis on benefits for all the parties involved in the
supply chain that is suppliers, employees, distributors, dealers and retailers so that
best value can be delivered to the targeted customers.

3.3.3 Characteristics of Relationship Marketing

• It emphasises on customers and other stakeholders rather than on products

and services of the company.

• It primarily focuses on customer retention rather than customer

acquisition.

• It is based on cross-functional terms and not on the departmental level

work.

• It emphasises more on learning and listening than on talking (Hunt, Arnett

and Madhavaram, 2006)8.
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Unlike transactional marketing, relationship marketing calls for new

practices regarding the four Ps of marketing as stated below:

• Product:

> Products are customised as per the needs and desire of customers

> With the corporation of suppliers and distributors, company designs and
develops new products

• Price:

> The price of the products is according to the features and services desired
by the customers and the relationship they maintain with the customers.

> In the case of B2B marketing, there are higher chances of negotiation as
products and services are customised as demanded by the customers
(O'Malley and Tynan, 2000)9.

• Placement:

> It focuses more on direct marketing to the customers rather than involving
middlemen.

> This aspect of marketing provides an opportunity to the customers to select

from alternatives in terms of the order, payment and service.

• Promotion:

> In this kind of marketing, there is more emphasis on individual

communication with the customers.

> It favours integrated marketing communications.

> It facilitates joint planning, information exchange, payments and ordering

(O'Malley and Tynan, 2000)9.

3.4 Relationship Marketing and Customer Retention

In the last decade and a half, firms have started focusing on relationship
marketing as a core marketing strategy for establishing a long-term and profitable
relationship with the customers that is beneficial for both the company and the
customers. Walsh, Gilmore and Carson (2004), in their study over the banks
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found that banks perform activities related to relationship marketing for attracting,
retaining and interacting with their more profitable clients. Thus, according to
them, customer retention can be defined as 'zero defection' or 'no-switching' of the
profitable customers of the organisations to their competitors (Sigala, 2008)10. On
the other hand, Menon and O'Connor (2007) define customer retention as the
longevity of customer's relationship with the firm. Walsh, Gilmore and Carson
(2004) and Menon and O'Connor (2007) in their studies found that factors that are
responsible for influencing customer retention and bank's relationship marketing
include knowledgeability, communication, personalization, empowerment,
technology, fees and ethical behaviour.

Thus, customer retention is defined as a process or set of steps taken to

reduce customer churn rate or defection. Whenever a company retains a customer,
it is retaining their lifetime value, that is, the value of their future relationship with
its business. Therefore, retaining customers means retaining lifetime value of the
customers in terms of their spending power as well as their power to influence
another customer who can prove to be potential customers for the business.
However, the main question is how companies can retain their customers? The
answer is, by understanding the customer journey, that is, the lifecycle of a
customer. Through this way, a company can identify its weaknesses and strengths
to deliver better services to the customers. So, before retaining customers, it is
essential for the companies to understand why their customers are exiting to their
industry peers (Hau and Ngo, 2012)11.

3.4.1 Customer Life Cycle

Before moving further with the discussion on customer retention, here it is
essential to explain customer life cycle, as on the basis of this only, companies can
calculate customer lifetime value and can retain their customers. The concept of
customer life cycle has come from the practice of customer relationship
management (CRM). In CRM, customer life cycle was used for mapping different
stages which a customer undergoes while considering a service or product to the
actual purchase made and to the post-purchase stages. Companies are using the
concept of customer life cycle for different business functions such as optimising
the customer experience, marketing and management (Tukel and Dixit, 2013)12.
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Thus, customer lifetime value (CLV) is defined as the prediction of the

total value generated by the customers during entire customer life cycle. Both
customer life cycle and customer lifetime value possess several benefits for
business in terms of budgeting, segmentation, and prioritisation and to improve and
forecast the health of the company. In addition to this, these two terms also play a
crucial role in marketing ROI.

3.4.2 Customer Life Cycle in a Digital Context

A customer life cycle consists of different stages and can be defined
through various methods. The most common approach is that of Jim Sterne and
Matt Cutler (2000). In their paper, E-Metrics, Business Metrics for the New
Economy, Jim Sterne and Matt Cutler (2000) proposed different ways of
calculating the customer lifetime value. The customer life cycle proposed by them
is as follows:

Figure 3.2: The Customer Lifecycle

(Source: Clerck, 2014)13

Reach: The first stage of the customer lifecycle is a reach. In this

companies try to attract its potential clients from whom it has designed the
products and services.
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Acquisition: In the acquisition stage, companies attract and bring the

customers, into the influence sphere of the organisation that was attracted in the
previous stage (Clerck, 2014)13.

Conversion: In this stage, as once the company has reached to its

customers and has established a relationship with them, the customers decided to
make the ultimate decision of purchase.

Retention: This stage comes when the customer decides to buy a product
or service for the second time from the same provider. It can be either the same
product or service or cross-selling or up-selling (Tsai et al., 2013)14.

Loyalty: All companies desire to reach to this stage in the customer

lifecycle. At this stage, the customer becomes more than a customer, or in other
words, it can be said that the customer becomes a brand advocate or a loyal
partner.

3.4.3 Buyer Journeys and Customer Relations

Figure 3.3: Customer Lifecycle loop

(Source: Clerck, 2014)13
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In a practical scenario, things are more complicated and complex in

comparison to the models. The buyer journey of a customer is ever evolving and
thus is not a linear model. The advent of social media has given more choice and
power to the customers. Now it is not possible for the organisations to completely
monitor the buying journey and decisions of their customers. With the invention
of several advertisement platforms, it is impossible for the companies to determine
from which promotional channel the customers have got information regarding
products and services (Ekinci, Uray and Ulengin, 2014)15.

3.5 CUSTOMER RETENTION

3.5.1 Meaning and Definition

Nowadays customer retention is of prime importance as it is necessary to

understand what an organisation should do to retain its customer. Retention can be
defined as the continued possession, use or control of something. The main
purpose of a corporation behind practising customer retention strategy is to reduce
customer defections. Customer retention starts when an organisation has the first
contact with the client, and it continues throughout the lifetime. The goodwill of
the organisation increases if the organisation can retain and attract the customers
and exceeds their expectations (Singh, 2006)16.

Customer retention also refers to the number of relationships which an

organisation can maintain on a long-term basis. It is a very natural and simple
concept that if the customers are feeling delighted satisfied and communicated
regularly; they will keep coming back to the organisation. The cost of acquiring a
new customer is several times more than that of retaining an existing customer.
There are varieties of strategies and tools are available for retaining the customer,
among these tools, the most necessary tools are providing quality products and
services (Terblanche and Hofmeyr, 2005)17.

The primary aim of retention strategy is to build a strong customer base and
to prevent them from drifting towards other organisation for the same product or
service.
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3.5.2 Importance of Customer Retention Strategy

• It helps in building strong relations with the customers

As stated earlier, serving a repeat customer is more beneficial for the

company rather than acquiring a new one. Thus, it is very important for the
retailers to maintain hormonal relations with their customers. In this
regards retention strategies play an important role as through such
strategies companies can provide benefits to its customers without
affecting its cash flow. If customers get good quality products and services
at competitive price, they get satisfied and remain loyal to a particular
player. Thus, retention strategies are fruitful in building a strong relation
with the customers.

• It enhances the goodwill of a brand

Retention strategies involve giving extra or added benefits to the
customers at the same price. In the present business environment,
companies can attract and retain its loyal and potential customers only if
they deliver something new and unique or extra to its customers as
competitive price. If the company is able to deliver such benefits to the
customers

• It identifies future needs of the customers

Several retention strategies involve collecting personal information of the

customers and their shopping patterns. For example, if a company has its
loyalty cards, it collects information of the customers and with every
purchase of that particular customer they update the profile of the
customers. On the basis of this information, companies can determine the
market trend and thus can identify the future needs of the customers.

• It identifies and explores various sales opportunities

Customer retention strategy is beneficial for the companies. It plays a huge

role in increasing the sales and profits for the firms. For example, if a
retailer is able to offer various attractive strategies to its customers, it is
able to attract more and more customers. Thus, the retention strategy helps
the retailers to design and explore various sales opportunities.
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• It rectifies the flaws within the organisation's policies and processes

Many times it may be the case that any strategy designed by the company
is not able to achieve its purpose. In that case, retention strategies such as
club cards can help the companies to accumulate information regarding the
customers and thus can design the strategies as per their shopping
behaviour.

• Through this customers can easily provide feedback to the companies

Many customer retention strategies help the retailers to collect data

regarding the shopping pattern of the customers. Companies record the
items that are frequently purchased by the customers and on that basis
determine the needs and wants of the customers. Moreover, through such
strategies customers can also provide feedback to the companies regarding
their products and services.

• Organisations can increase revenue and reduce acquisition costs of the

customers

As discussed in the earlier parts of this work, it is beneficial for the

retailers to serve existing customers rather than attracting new or potential
customers. Through such scheme, companies can earn the loyalty of the
customers and thus can increase their revenue streams. Moreover, if the
companies have a huge base of loyal customers, there is no need for
looking new customers and thus they can save a lot on acquisition cost
(Woo and Fock, 2004)18.

3.5.3 Retention Strategies Followed By Retail Stores

For the long-term success of any business, customer retention strategy
plays a very significant role. If an organisation has strong customer retention
strategies, then it can quickly attain its goals and achieve higher customer lifetime
value. It is quite cheaper to retain an existing loyal customer than to acquire a new
one (Tamana, 2008)19. Following are the different types of retention strategies
practised by the Indian Retail stores:
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• Implementing a Customer Loyalty Program: It is a great way to retain the

customers by providing them rewards for their repeat purchase. The
rewards can be in the form of discount coupons, reward points, vouchers,
early access to the sale, etc. If the customer is loyal towards the store, then
the firm should reward and show appreciation towards the customers for
choosing it against its competitors.

• Sales Promotion: For acquiring new customers, sales promotion strategy is

quite useful. To encourage customers for a repeat purchase, sales
promotion technique should be used. For Examples – rebate or cash back,
premiums for regular purchase, collection schemes and so on (Kavaldeep,
2008)20.

• Training of employees: Various training programs are carried out by the

organisations so that their employees can easily learn about the new
product and services, team building skills, social skills, etc. It will also
help in reducing employee turnover rate. With the execution of these types
of training programs, the organisation can easily create the atmosphere of
integrity which can be easily identified by the customers as well as by the
employees.

• Customer Satisfaction Surveys: Customer surveys are the best tools for
identifying the points of improvement in a customer’s experience and also
help in identifying the customers' needs. Various survey techniques like-
feedback forms, suggestion drop box, etc. can be practised by the
companies for this purpose (Shweta, 2008)21.

• Excellent Customer Services: To keep the customers happy and satisfied,

the business organisation should provide extraordinary services to their
customers. It includes on-time delivery, best after-sales services, keep in
touch with the customers and ask about their experience with the product,
connect with your customers through social media sites & emails and
regularly update the customers for the new products and services (Shweta,
2008)21.
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• Membership Cards: This is the newest way of attracting and retaining

customers to shop from the same players. Retailers nowadays are issuing
membership or loyalty cards to its customers to retain them and to
motivate them for a repeat purchase. Through such membership cards,
companies give points to the customers which they can redeem on their
next shopping and thus gets discounts equal to the points available in their
cards.

• Seamless Online and Offline Experiences: Another strategy that

companies are practising these days is offering seamless online
experience. Now customers can get their desired products and services
just in one click. They do not even have to leave the comfort of their chair
and home or office. The online platform has provided retailers with an
opportunity to remain 24*7 in touch with the customers and serve them in
a better manner.

• Integrating Technology for Retaining Customers: With the advancement

of technology, more and more companies are integrating their operations
with technology to deliver better results. In this line, retailers are
integrating technology into their daily operations. The best example of
this is the beacons. With the help of this device, retailers can
communicate with the customer's smartphone while they go through the
entire store. Moreover, such devices also communicate relevant
promotions and product details to the customers. In addition to this, Home
Depot and Instacart are also gaining popularity among retailers for
retaining their customers.

3.6 THEORIES REGARDING THE FACTORS INFLUENCING

CUSTOMER RETENTION

Till date, several types of research have been conducted on factors

influencing customer retention, but most of them have focused on the customer's
point of view. The main reason behind this is that researchers feel customer
retention as the tendency of the customers to stick with the same service provider
and thus is regarded as a behavioural factor (Ranaweera and Prabhu, 2003)22. The
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subsequent paragraphs will focus on models and frameworks illustrating the

factors influencing customer retention based on customers' point of view. In this
regards, for main theories, namely, Richard's (1996) conversion model, Sharma
and Patterson's (1999) relationship commitment model, Ranaweera and Prabhu's
(2003) holistic approach and Ranaweera and Neely's (2003) holistic approach
have been selected.

3.6.1 Factors in Relationship Commitment Model

Sharma and Patterson (1999) suggested a model illustrating determinants
of relationship commitment. This model includes three factors such as functional
quality, technical quality and communication quality. All these factors get affected
by trust in a relationship that affects relationship commitment. Figure 3.4
illustrates the conceptual model of the determinants of relationship commitment.

Figure 3.4: Conceptual Model of the Determinants of Relationship Commitment

(Source: Sharma and Patterson, 1999)

• Trust: In general terms, trust is defined as the belief that the service
provider can be relied on to behave in such a way that the long-term
interests of the buyer will be served (Crosby et al., 1990)23. It shows one's
confidence in and reliance on the person and process. Thus, the greater is
the level of trust; the stronger is the relationship commitment. According
to Morgan and Hunt (1994), trust has a positive relation to the extent
through which the firms share similar values. Further, Ganesan (1994)
argues that customer satisfaction is the trust booster for firms.
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• Service Quality: In the view of Sharma and Patterson (1999) service

quality is divided into two main components: functional quality and
technical quality. Technical quality is related to the core service or actual
outcomes as perceived by the customers. At this point, the competency of
the service provider to achieve the best return on investment for the
customers is given importance. In other words, technical quality is relevant
to the promised service. On the other hand, functional quality deals with
what service is delivered and how the service is delivered to the customers.
In other words, it concerns with the interaction between the customer and
the service provider and is highly subjective in nature. Furthermore,
quality of the service delivery is also affected by the level of trust, both in
terms of technical and functional quality. Moreover, it is argued that the
greater the perceived technical quality, the stronger is the trust in the
relationship, and the greater the perceived quality of the advisor, the
stronger is the level of trust in the relationship. This means that the greater
the quality is perceived, the stronger is the relationship commitment
(Sharma and Patterson, 1999)24.

• Communication Effectiveness: It is defined as all kinds of meaningful and

timely formal and informal interaction between an advisor and a client in
an empathetic manner. The aim of communication effectiveness is to keep
the clients up-to-date about their information in most convenient manner.
It is essential to have a strong communication with the clients to ensure
clients have complete knowledge regarding their investments and the
financial risks and outcomes. Further, effective communication also helps
customers to get through the ups and downs of variable investment
performances. Thus, the greater is the communication effectiveness; the
stronger is the relationship commitment (Sharma and Patterson, 1999)24.
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3.6.2 A Holistic Approach to Satisfaction, Trust and Switching

Barriers
Ranaweera and Prabhu (2003) proposed a holistic approach that examines
the combined effects of switching barriers, trust and satisfaction on customer
retention. According to them, customer retention is the propensity for customers
to stay with their service providers. This framework has two functions; the first
function is to determine the effects of the three variables on customer retention
independently and the second function is to examine the interaction effects that
trust and switching barriers have on customer retention in the presence of
satisfaction.

• Customer Satisfaction: According to Ranaweera and Prabhu (2003), higher

the level of satisfaction, higher is the level of retention. Several types of
research have shown that if the customers have greater satisfaction level,
they remain loyal to the firms (Fornell, 1992)25. Thus, more and more
firms are putting greater efforts on managing and increasing customer
satisfaction (Ranaweera and Prabhu, 2003). In the views of Patterson,
Johnson and Spreng (1997), satisfied customers create sustainable
advantages for the firms in the competitive environments. Anderson and
Sullivan (1993) states that "investing in customer satisfaction is like taking
out an insurance policy. If some hardship is temporarily befallen the firm,
customers will be more likely to remain loyal". According to Patterson et
al., (1997), customer dissatisfaction is defined as the difference between an
individual's pre-purchase expectations and post purchase performance of
the service or product. Ranaweera and Neely (2003) argues that earlier the
researchers focused more on customer satisfaction as a measure to
determine service quality. However, nowadays, customer retention cannot
be determined by simply studying only customer satisfaction, now
companies also have to consider customer behaviour such as their
repurchase habits. They feel that companies need to start with customer
satisfaction to retain a customer, but it is not the only influencing factor.
Richards (1996), in his research,
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found that there are chances that even a satisfied customer can drift
towards other service provider and sometimes even a dissatisfied customer
will remain loyal to the firm (Ranaweera and Neely, 2003)26.

• Trust: Trust exists when one party has confidence in the integrity and
reliability of the other party. Ranaweera and Prahu (2003) in their work
found that many times even after satisfying the customer, companies were
failed to retain the customers. This shows that satisfaction is the not only
single influencing factor behind long-term customer commitment with the
company. They also found that certain cost incurs in terminating the
relationship, thus once the relationship is established, there are lesser
chances of its terminations (Ranaweera and Prabhu, 2003)22. Gounaris
(2003) believes trust to be a crucial element in establishing any
relationship. Higher is the level of trust on the supplier; greater will be the
perceived value of the relationship. Thus, there are higher chances of
customer loyalty. Moreover, in business to business (B2B) services, trust
plays an important role in developing relationship. Thus, trust is a result of
gradual dependence on the relationship resulting from mutual adaption to
the other party's needs (Gounaris, 2003)27.

• Perceived Switching Barriers: These are conceptualised as customer's

assessment of opportunities and resources needed to switch from one
service provider to other and the constraints preventing it (Ranaweera and
Prabhu, 2003)22. Thus, it can be assumed that the higher is the level of
perceived cost; the higher is the probability for the customers to remain
loyal. Morgan and Hunt (1994) also discussed the factor of switching and
termination cost that influences the relationship between the client and
service provider. However, they perceived switching cost as being only of
economical nature. On the other hand, Sharma and Patterson (2000) found
switching cost as being in addition to economic nature of both emotional
and psychological nature. According to them, switching cost results from
social bonds, trust and personal rapport. They also feel that, even if the
customers are not satisfied with the services of the provider, switching cost
may act as psychological exit barrier.
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3.6.3 Factors in the Conversion Model

Richards (1996) proposed a conversion model based on the fact that

satisfaction is not the only factor in retaining a customer. He further argues that
there are chances that satisfied customer will leave, and dissatisfied customers
remain with the company. Thus, firms need to focus more on customer
commitment rather than only customer satisfaction. The author feels that customer
satisfaction helps in making customer committed. He also identified three more
factors that drive commitment.

• The level of Involvement: It is the first factor identified. According to it, if

more and more customers are involved in the given choice, they will
choose more carefully, and there is a higher chance that they remain stick
to it. This means, even if the customer is dissatisfied but involved,
initially they will try and repair the relationship rather than looking for
alternatives. On the other hand, if the customer is both dissatisfied and
uninvolved, there are higher chances that they will look out for
alternatives. This shows that through involvement companies can create a
willingness to tolerate dissatisfaction (Richards, 1996)28. According to
Backet et al., (2000), customer involvement integrates several subsets
such as level of contact, customer participation and customer control. If
the customers are involved in the decision making, they have more
confidence in the service provider.

• The Attraction of Alternatives: the Second factor identified by Richards

(1996) is the attraction of the alternatives. It means, more the alternatives
attract, there are higher chances that dissatisfied customers will switch
their service provider. On the other hand, if the alternatives are not that
good, in spite of dissatisfaction, the conversion may get delayed.
Moreover, if the alternatives attract, there are chances that even satisfied
customers may get drifted to other service providers. Sharma and Patterson
(2000), in their study, found that if the customers are not aware
 87

of alternatives, or if the alternatives are not attractive, they may continue

with the same service provider even if they are dissatisfied. Contrary to
this, if the customers are aware of price, service, quality and technical
outcomes of differentiated service, they tend to be less committed to the
single service provider.

• The extent of Ambivalence: The third factor is the insecurity caused by the
range of choices. According to Richards (1996), customers must compare
and review the advantages and disadvantages of each alternative service
provider. In many cases, customers are not in a position to decide whether
to stay or leave the service provider. Such situation makes the clients less
committed and may delay conversion.

3.6.4 A Holistic Approach to Quality, Price, Indifference and

Inertia

A holistic approach to customer retention was proposed by Ranaweera and

Neely (2003), incorporating service quality perceptions, inertia, customer
indifference and price perceptions.

• Service Quality: Ranaweera and Neely (2003) found that there is a positive
link between customer repurchasing intentions and perceived service
quality. This is in line with the findings of Zeithalm and Bitner (1996) and
Zeithalm (1988). According to them, service quality is a consumer's
appraisal of a service's overall superiority and excellence. They also
propose that service customers give more importance to the quality of
service rather than on the cost.

• Price: Ranaweera and Neely (2003) proposed a hypothesis that the better
the perceived price is, the greater is the level of repurchase intentions, yet
limited research has been conducted on the correlation between customer
retention and price perception. Ranaweera and Neely (2003) found a
direct relationship between customer behavioural intentions and price
perceptions.
 88

• Inertia: Ranaweera and Neely (2003) stated that the higher the level of
inertia, the greater is the level of repurchase intentions. Their definition is
based on the definition of Huang and Yu (1999). According to them, there
is a distinction between loyalty and inertia by the level of consciousness.
Thus, the feel that research on customer retention must not be a limit to
conscious decisions, but must also include involuntary customer
relationships or non-conscious ones. This shows that the greater the
degrees of inertia, the more likely the customers are to be sensitive to
promotions or similar attempts by the competitors to attract them.

• Customer Indifference: Ranaweera and Neely (2003) state that the higher
the level of customer indifference, the greater is the level of repurchase
intentions. According to them, customers who are satisfied with a certain
service provider and have a certain level of indifference, they show
resistance from switching as their service expectations are fulfilled.

3.7 THEORIES REGARDING CUSTOMER RETENTION

STRATEGIES AND PROCESSES

As discussed above, customer retention has gained lot of significance in

the past decade. In the views of Reichheld (1996), the growing popularity of this
term has attracted several researchers to conduct studies on customer retention
rate, relationship marketing, customer share in customer relationship management
(CRM) and many other topics related to relationship marketing. Different
companies have different strategies depending on their philosophies, goals and
long-term plans. Thus different organisations practice different customer retention
strategies to retain their customers. Once the firm identifies the most suitable
retention strategy, it will stick with it to achieve its goals (Zeithaml and Bitner,
1996)29.
 89

3.7.1 Value Creating Process

Every firm needs to follow the certain well-defined process to effectively
implement its strategies for retaining its customers. Such process is known as the
value creation process. The below chart summarises and illustrates a value creating
processes:

Figure 3.5: Value Creating Processes

(Source: Lowendahl, 1997)30

• The ability of the firm to sell a credible promise: The first process shows
the ability of the firm to sell a credible promise to the client firm. It is
essential that professional services deliver credibility as one cannot
evaluate such services. At the time of the business transaction, seller
makes several promises and credibility of promises is affected by the
firm's reputation. Moreover, credibility is also affected by the professional
assigned by the company and success of previous projects. This phase of
the process also involves negotiation and expectations. Thus, service
providers must make only those promises that they can keep (Lowendahl,
1997)30.
 90

• The set of activities required to deliver the promise: The second phase of
the value creating process includes the set of activities that are required to
deliver the promises; it involves both client and the professional assigned
to the task. The service provider needs to look up at the service quality and
efficiency of delivery.
• The learning from the project: In the third and final phase of the process,
service provider evaluates the outcome and learning from the process and
uses these learning for improving quality and efficiency for future.
However, Lowendahl (1997) argued that the final phase of the process is
neglected by the majority of the professional service firms (Lowendahl,
1997)30.

Lowendahl (1997) states that the process mentioned above exist in every
service sector; however, it is more complex for the professional service provider,
as such services are highly customised and required constant communication with
the client. Moreover, it is difficult for the client to evaluate the credibility of the
promise as it involves asymmetric information. In addition to this, such services
have a high dependency on the individual and non-interchangeable professionals.

3.7.2 The Three Levels of Retention Strategies

Berry and Parasuraman (1991) and Zeithalm and Binter (1996), in their
work, proposed a framework for understanding the types of retention strategies.
Table 3.2 below represents the framework that displays three levels of customer
retention. Each level brings the customer closer to the organisations. Further, an
increase in the level demands greater customization of services.

Table 3.2: Three Levels of Retention Strategies

Level Types of Marketing Degree of Primary Potential for
Bond(s) Orientation Service Marketing Mix Sustained
Customization Element Competitive
Differentiation
1 Financial Customer Low Price Low
2 Financial Client Medium Personal Medium
and Social Communications
3 Financial, Client Medium to Service High
Social and High Delivery
Structural
(Source: Berry and Parasuraman, 1991; Zeithalm and Binter, 1996)31
 91

• Level 1: At the first level, the only bond between the customer and firm is
financial. Through financial incentive, customers expect lower prices for
bulk purchase or lower price as they are maintaining a long-term
relationship with the customer (Berry and Parasuraman, 1991)31. For
example, various financial incentives and reward points are given to
regular customers. Berry and Parasuraman (1991) believe that such
measures are practised by companies as they are inexpensive and help
them to achieve their short term objectives. However, through such
measure, companies cannot achieve long-term goals, as, although financial
incentives are important for the customers, it can be imitated by the
competitor as the price is the only customised part of the marketing mix
(Zeithalm and Binter, 1996)29.
• Level 2: At this level, there are two types of incentives that tie a customer
with the firm. These are financial and social incentives. Here, the term
customer is replaced by the client as companies try to meet their needs and
demands. Thus, companies provide more customised services to the clients
and try to maintain better communication with them. Thus, through this,
organisations maintain both social and financial bonds with the customers.
It is further assumed that maintain social bond is of greater importance for
the player delivering professional services and health care services. It is
further argued that technology plays a crucial role in creating and
maintaining a social bond as through this, companies can develop
personalised customer information system and can update it regularly. It
can be said that such social bonds do not guarantees customer's permanent
relationship with the company; however, it makes it difficult for the
competitors to imitate such incentives as it involves both financial and
social incentives. Further, it is the social bond that sticks the customers
with the same provider if the competitor's incentives are not very attractive
(Zeithalm and Binter, 1996)29.

• Level 3: This level represents the strategies that are near to impossible for
the competitors to imitate. At this level, the customer and firm are linked
with financial, social and structural bonds that are created by delivering
 92

highly customised services and to provide certain rights to the customers

in the service delivery system. Thus, companies never lose a chance to
retain a customer, however, at times, it customer may develop some fear if
they remain stick to the same company, there are chances they may miss
other advantages and opportunities delivered by the competitors in the
future (Zeithalm and Binter, 1996)29.

3.7.3 Monitoring Customer Relationship

Zeithalm and Binter (1996), in their study, concluded that companies keep
on monitoring and evaluating their retention strategies for developing a strong
relationship with the customers. Thus, they identified two ways through which
companies can monitor customer relationship; these were; 'customer database' and
'relation survey'. In addition to these, there are some other marketing research
instruments also such as customer visits, lost customer survey, complaint booking
trailer call and so on. Through all these instruments companies can create a profile
of its customer relationship.

• Relationship Surveys: Majority of the companies conduct a relationship

survey on their customers once a year. In such surveys, existing customers
of the firm are surveyed to evaluate their perceptions regarding service
quality, value for money and satisfaction as against to competitors
(Zeithalm and Binter, 1996)29. Further, companies maintain constant
communication with their loyal customers through telephone and face to
face interaction.

• Customer Data Base: In the views of Zeithalm and Binter (1996),

companies can formulate effective customer retention strategies only if
they maintain a well-established customer database. The database should
include customer information such as their name contact details, their
shopping pattern, purchasing behaviour, their preferences, their revenue
rate and related cost and so on. Further, the database should also include
the information related to the termination of the relationship when the
customer leaves the firm and switch to another service provider.
 93

3.7.4 Loyalty Programs and Customer Clubs

• Loyalty Programs: Relationship marketing is the best activity practised by

the firms for maximising their customer retention metrics. Such marketing
activities include loyalty programs, direct mailing and frequency reward
programs (Waarden, 2008)32. According to Yi and Jeon (2003), companies
formulate loyalty programs with the aim of repeat purchase by the
customers and thus results in customer retention. In the views of Bolton,
Kannan and Bramlett (2000), nowadays majority of the service industries
are practising loyalty reward programs. The main reason for introducing
such schemes is to increase customer retention by delivering greater
satisfaction and values to the loyal customers. Fornell (1992) and
Reichheld (1996), in their studies, found that loyalty programs are
designed to deliver better satisfaction and value to the customers, and thus
results in higher profits. This is the reason several service industries highly
practice such programs. For example, American Express gives free airline
tickets to its customers who have heavily used its cards during a six
months period. Similarly, O'Brien and Jones (1995) found that if
companies succeed in properly executing loyalty programs, they will be
able to increase their retention rate. However, before introducing such
programs, companies need to ensure that financial outcomes of the
programs must exceed the investment made in the program.

• Customer Clubs: Another retention activity practised by several service

providers is customer clubs. Blomqvist, Dahl and Haeger (1993) believe
although several companies are practising this strategy, there is a dearth of
literature on this subject. According to Blomqvist, Dahl and Haeger (1993),
Club cards create a formal relationship with the customers and thus only
important customers are part of it. In the views of Stauss et al. (2001), such
schemes are one of the most important and cost incentive elements of
customer retention system and offer several advantages to club members
for better customer satisfaction and loyalty. Club cards aimed at
 94

delivering different benefits to the customers so as to increase satisfaction

and loyalty. Stauss et al. (2001) further argue that customer interaction
effect, customer knowledge effect, and customer benefit effect help in
achieving customer retention through club cards.

+ Customer Interaction Effect: It tells about the frequency of

interaction between the customer and the firm. It is achieved
through continuous communication and feedback activities (Stauss
et al., 2001)33.

+ Customer Knowledge Effect: It means firms are increasing their

knowledge about the customer. For this, companies keep detailed
information about the customer in their database and keep it
updating. On the basis of this, companies design customised
strategies for the customers (Butscher, 1998)34. Thus, it can be said
that customer interaction effect is a precondition for customer
knowledge effect.

+ Customer Benefit Effect: It tells whether the customers enrolled in

the club card scheme are receiving specific advantages or benefits
from the firm. According to Stauss et al. (2001), customers will enrol
in club card scheme only if their cost-benefit calculation is positive. It
means their benefits must exceed costs. Thus, under such schemes,
companies need to deliver attractive and better services to the
customers. For customer benefit effect also, customer interaction
effect plays a significant role.

3.7.5 Effective Recovery System

Zeithalm and Bitner (1996) contend that despite the fact that organisations
need to "do it right the first time" as it is the thing that clients incline toward; it is
still entirely unavoidable for disappointments and oversights to happen. It is when
botches and disappointments happen that clients have a justifiable reason
motivation to switch suppliers furthermore to advise others not to utilise the
 95

administration. Accordingly, powerful recuperation gets to be the key to keeping

up the relationship. On the off chance that the firm falls flat in recuperation, it will
misdirect the client twice, and in this manner, a percentage of the essentials that are
basic in making a compelling conveyance are the accompanying concurring:

• Track and Anticipate Recovery Opportunities: Firms need to make

frameworks that empower them to recognise disappointments, and they
additionally need to see this as a chance to spare and hold client
connections as opposed to an issue. It is those clients who gripe that is the
'friend' of the firm as the individuals who do not whine for the most part do
not return. Just observing the grumblings is insufficient, the firm likewise
needs to listen to the clients and be dynamic in the looking for potential
disappointing factors (Zeithalm and Bitner, 1996)29.

• Take Care of Customer Problems on the Front Lines: According to the

clients, a standout amongst the best recuperations is the point at which
they get direct on the spot critical thinking by a bleeding edge labourer.
This can be accomplished by for example giving so as to apologise to the
client and a clarification or an answer for the issue, for example, a
discount. Regardless of what the arrangement, the clients ordinarily need it
immediately without making a lot of telephones calls and so on (Zeithalm
and Bitner, 1996)29.

• Solve Problems Quickly: Once the issue has been recognised, the firm
needs to act rapidly and attempt to take care of it on the grounds that if the
issue is not understood, it can heighten rapidly. The best arrangement is to
expect the issue before it happens and in that way astonish the clients.

• Empower the Front Line to Solve Problems: Recovery preparing may be a

key for administration giving representatives. As clients, for the most part,
need the issue to be taken care immediately. It is essential for the cutting
edge representatives to be gifted and have power furthermore to be spurred
to take part in viable recuperation.
 96

• Learn from Recovery Experiences: Problem determination encounters

likewise give data on approaches to enhancing client benefit and ought to
consequently not be overlooked.

3.8 SUMMARY
Marketing is nothing but a way of thinking about business, rather focusing
on a bundle of techniques. It is not only related to selling products and services,
and collecting money, rather it is a way of connecting people with products and
services and customers with companies. Marketing is practised by the
organisations for communicating the unique selling point (USP) or value of the
product or service.

For many years, companies based their marketing activities on the

transactional model of marketing. However, with the passage of time,
organisations realised the importance of bringing change in their marketing
activities, and thus this is the inception of another model of marketing, that is,
relationship marketing. Under transactional marketing, companies focus only on
the single point of sale transactions; however, relationship marketing activities
focus more on customer retention, rather than customer acquisition

Customer retention is defined as retention activities that a selling company

undertakes for reducing customer defections. The process of customer retention
starts when the customer comes in contact with the organisation for the first time
and continuous to maintain the relationship through the entire lifetime.
 97
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