Customer Relationship Management, Second Edition
Chapter 9, Managing the customer lifecycle: Customer retention and development
Research shows that there are three forms of customer commitment: relational commitment, instrumental commitment and value-based commitment. In this chapter, learn about all three types of customer commitment and get key performance indicators (KPIs) for customer retention programs.
Customer Relationship Management, Chapter 9
Table of contents:
Customer retention management
Customer retention vs. value retention
Creating positive customer retention strategies
Understanding customer commitment
Customer development and termination strategies
Learning from research into customer commitment
A number of authorities have urged companies to work on developing customer commitment so that they develop a strong attachment to, or engagement with, a brand or company.
Three different forms of commitment have been identified: instrumental, relational, and values-based.
1. Instrumental commitment: this occurs when customers are convinced that no other offer or company could do a better job of meeting their needs. They are not just very satisfied, but unbeatably satisfied. All expressed and latent needs have been met. When a customer feels 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.
2. Relational commitment: customers can become highly attached to a company's people. An emotional tie may be formed with an individual person, a work group or the generalized company as a whole. Customers who talk about ' my banker ' or ' my mechanic ' or ' my builder ' are expressing this attachment. They feel a sense of personal identification with that individual. Often, these are employees who ' break the rules' or ' go the extra mile ' to completely satisfy customers. They are reliable, competent, empathic and responsive. When these employees recover an at-risk customer, they create a friend. Customer-focused organizations make heroes out of these individuals. They are feted and celebrated. For example, American Express tells the story of a customer service agent who responded to a call from a customer who had been robbed, by arranging to have replacement travellers checks delivered personally to the customer. The CSA also confirmed the customer's hotel reservation, arranged for a car to collect the customer from the phone booth and notified the police, all above and beyond the call of duty. Customers can also become attached to a work group. In banking, for example, some customers are highly committed to a specific branch and prefer not to transact elsewhere. Finally, customers can become attached to an organization as a whole, believing its people to be better than competitors on dimensions that are important to the customer. They may provide ' the best service ' or be ' the friendliest people'.
3. Values-based commitment: customers become committed when their values are aligned with those of the company. Values can be defined as follows:
Values are core beliefs that transcend context and serve to organize and direct attitudes and behaviours.
Customers have many and varied core beliefs, such as environmental consciousness, honesty, child protection, independence, family-centredness and so on. Many of these reflect cultural norms. Where these values coincide with those of an organization, the customer may become committed to the organization. Companies that are accused of using child labour, damaging the environment or otherwise acting unethically place themselves at risk. Nestlé had been accused of marketing infant formula in African countries where the infrastructure made its use dangerous. Many babies died as mothers used unclean water and unsterilized equipment. This is estimated to have cost the company $40 million. Sales of Shell fuel were estimated to have fallen between 20 and 50 per cent during the Brent Spar boycott. The company had planned to decommission the 4000 tonne Brent Spar oil platform by dumping it into the North Sea. Just as customers can take action against companies that they feel are in beach of their values, they can also commit to companies that mirror with their values. Research supports the claim that there is a hierarchical relationship from values, to attitudes, to purchase intention, and ultimately to purchase.
A number of companies benefit from values-based commitment: Body Shop, John Lewis, Harley Davidson, Co-operative Bank and Virgin.
- Body Shop International, the health and beauty retailer, was founded by Anita and Gordon
Roddick. The company's values include a refusal to source products tested on animals, and support
for community trade, human rights and the environment. A successful and influential business was
developed on the back of these values. Body Shop influenced other retailers to become more
sensitive to these issues.
- The John Lewis Partnership is a UK-based department store with a 140-year history. It is
a mutual organization, owned by its staff and incorporated as a trust. Profits are not distributed
to external shareholders; they are shared with employees who are regarded as partners. The company
is reputed to look after these partners very well including, for example, having a final salary
- Harley Davidson, the US motorcycle manufacturer, has a phenomenally committed customer
base. When Harley riders replace their bikes, 95 percent buy another Harley. The bike is a central
part of a lifestyle that is grounded on fraternity, independence and rebellion. Image is critical
to the Harley rider. In the US, the average age of a Harley rider is 47 (up from 38 a decade ago),
the median income is US$83,000 and the typical cruiser bike costs $17,000. The challenge of Harley
is to develop value propositions that appeal to a younger customer.
- Co-operative Bank is positioned in the UK retail banking market as the ethical bank. The
mutually-owned bank believes its ethical stance is directly responsible for about 20 percent of
pre-tax profits. One third of the bank's customers moved to the bank because of its ethical and
- The Virgin Group is a family of over 200 privately owned strategic business units
ranging from airline to rail, cosmetics, cola, telecommunications, music and financial services. In
2006 group sales reached £10 billion. The values of the Virgin brand are integrity, value for
money, quality and fun. Virgin Group is chaired by its founder, the renegade but highly visible Sir
Richard Branson. Customers are attracted to the brand because of its reputation for fairness,
simplicity and transparency. Customers trust the brand and rely on it in markets that are new to
them. For example, Virgin was a late mover into the UKs indexed linked mutual fund marketplace. It
still managed to become market leader in 12 months, despite having no history as a financial
Highly engaged customers are more involved with your brand or company. This not only implies frequent purchasing, but also other attributes of what might be called ' corporate citizenship ' , such as being an unpaid advocate by uttering positive word-of-mouth, providing frequent feedback on their experiences, participating in company research, contributing to new product or service development, being more forgiving if the company makes a mistake or service fails, and participating in online communities and user groups.
The outcome of higher levels of engagement, it is claimed, is a more durable customer relationship. One report, for example, indicates that the rate of account closures at a bank were 37 percent lower for emotionally engaged customers than for rationally satisfied customers.
Context makes a difference
Context makes a difference to customer retention in two ways. First, there are some circumstances when customer acquisition makes more, indeed the only, sense as a strategic goal. Secondly, customer retention strategies will vary according to the environment in which the company competes.
When launching a new product or opening up a new market a company's focus has to be on customer acquisition. In contexts where there are one-off purchases such as funerals, infrequent purchases such as heart surgery, or unique conditions such as gave rise to the demand for Y2K compliance software, customer retention is subordinate to acquisition.
The impact of contextual conditions on the choice and timing of customer retention practices has not been thoroughly researched. However, we can see that a number of contextual considerations impact on customer retention practices:
- Number of competitors: in some industries there is a notable lack of competitors,
meaning that companies do not suffer badly from customer
churn. This typically applies in state-provided services such as education and utilities such
as gas, electricity, rail and telecommunications, whether deregulated or not. When customers are
dissatisfied they have no competitor to turn to. They may also believe that the competitors in the
market are not truly differentiated by their service standards. In other words, each supplier is as
bad as the others. The result is inertia.
- Corporate culture: in corporate banking, the short-term profit requirement of both
management and shareholders has resulted in a lack of genuine commitment to relationship banking.
Banks have been very opportunistic in their preference for transactional credit-based relationships
- Channel configuration: sellers may not have the opportunity to maintain direct
relationships with the ultimate buyers and users of their products. Instead, they may rely on their
intermediaries. Caterpillar, for example, does not have a relationship with the contractors who use
their equipment. Instead, it works in partnership with about 1500 independent dealers around the
world to provide customer service, training, field support and inventories of spare parts.
- Purchasing practices: the purchasing procedures adopted by buyers can also make the
practice of customer retention futile. Customers do not always want relationships with their
suppliers. For example, towards the end of the 1990s, government departments in the UK and
elsewhere adopted compulsory competitive tendering (CCT) as their mechanism for making purchasing
decisions. The process is designed to prevent corrupt relationships developing and to ensure that
tax-payers get good value for money, i.e. pay a low price for the services rendered. Every year or
so, current suppliers and other vendors are invited to pitch for the business. Price is often the
primary consideration for the choice of supplier.
- Ownership expectations: the demands of business owners can subordinate customer
retention to other goals. For example, Korean office equipment manufacturers are very focused on
sales volumes. They require their wholly-owned overseas distributors to buy quotas of product from
Korea and sell them in the served market, regardless of whether the products are well-matched to
local market conditions and customer requirements. The distributors are put in a position of having
to create demand against competitors that do a better job of understanding and meeting customer
- Ethical concerns: public sector medical service providers cannot simply focus on their
most profitable customers or products. This would result in the neglect of some patients and a
failure to address other areas of disease management. Private sector providers do not necessarily
face this problem. The Shouldice Hospital in Ontario specializes in hernia repairs. Their website,
www.shouldice.com , reports that they have repaired 300,000 hernias over a 60 year period, with a
99 percent success rate. They even organize annual reunions. Recently, these events have been
attended by 1000 satisfied patients.
Key performance indicators of customer retention programmes
CRM practitioners are concerned with achieving a number of key performance indicators (KPIs) for these customer retention activities, among them:
- raw customer retention rate
- raw customer retention rate in each customer segment
- sales-adjusted retention rate
- sales-adjusted retention rate in each customer segment
- profit-adjusted retention rate
- profit-adjusted retention rate in each customer segment
- cost of customer retention
- share of wallet of the retained customers
- customer churn rate per product category, sales region or channel
- cost-effectiveness of customer retention tactics
The choice of KPI will vary according to context. Some companies do not have enough data to compute raw retention rate per segment. Others may not know their share of wallet (share of customer spending on the category).
The role of research
Companies can reduce levels of customer churn by researching a number of questions:
1. Why are customers churning?
2. Are there any lead indicators of impending defection?
3. What can be done to address the root causes?
The first question can be answered by contacting and investigating a sample of former customers to find out why they took their business elsewhere.
Customers defect for all sort of reasons, not all of which can be foreseen, prevented or managed by a company. For example, Susan Keaveney identified eight causes of switching behaviours in service industries generally: price, inconvenience, core service failures, failed employee responses to service failure, ethical problems, involuntary factors, competitive issues and service encounter failures. Only six of these eight causes of switching behaviours can be influenced by the service provider. Another industry-specific study found that between 20 percent and 25 percent of supermarket shoppers changed their primary store in a 12 month period. Twenty-four percent of switchers changed allegiance because a new competitive store had opened, 14 percent because they had moved house, 11 percent for better quality and 10 percent for better choice.
The second question attempts to find out if customers give any early warning signals of impending defection. If these were identified the company could take pre-emptive action. Signals might include the following:
- reduced RFM scores (recency–frequency–monetary value)
- non-response to a carefully targeted offer
- reduced levels of customer satisfaction
- dissatisfaction with complaint handling
- reduced share of customer (e.g. customer only fl ies one leg of an international fl ight on
- inbound calls for technical or product-related information
- late payment of an invoice
- querying an invoice
- customer touchpoints are changed, e.g. store closes, change of website address
- customer change of address
Customer researchers are also advised to analyse the reasons for customer defection, and to identify the root causes. Sometimes these can be remedied by management. For example, if you lose customers because of the time taken to deal with a complaint, management can audit and overhaul the complaints management process. This might involve identifying the channels and touchpoints through which complaints enter the business, updating complaints database management, or training and empowering frontline staff. Root causes can be analysed by customer segment, channel and product. The 80:20 rule may be applicable. In other words, it may be possible to eliminate 80 percent of the causes of customer defections with relative ease.
Continue to the next section: Customer development and termination strategies
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This was first published in November 2008