CHAPTER 6: CONSUMER RETENTION

6.1 Concept and Importance of Consumer Retention

Customers are indeed an asset to the firms (Hogan et al, 2002). A good customer base
ensures a continuous source of future revenue due to repeat purchases done by them
and cross- buying of other products offered by the service provider (Dawes, 2009). If
the firm is incurring costs to attract new customers then it is advisable for the firms to
maintain their existing customer base rather than continuously losing customers and
replenishing the lost customers. Current customers who buy more from the firm are of
greater worth than the customers who are new or those who shop less frequently. “In
the loyalty literature, retention means the number of customers who stay with the
provider in the course of an established period, for example a year” (Dawes, 2009).
Customer retention rates and customer share are important metrics in Customer
relationship management (Hoekstra et al, 1999; Reichheld, 1996). In the previous
literature there is evidence indicating that the strategies which can increase customer
share can also increase customer retention. However until recently only it is believed
that both the approaches require different strategies (Blattberg et al, 2001; Bolton et
al, 2002) (Table No.3)

Customer retention has helped us understand and implement store loyalty

programs(Agustin and Singh, 2005; Carter, 2008). In a nationwide customer retention
survey, majority of the respondents reported that 75% of the sales were from existing
customers (Carter, 2008). 98% of the respondents surveyed agreed to the importance
of customer loyalty but only half of them were aware of any customer loyalty
program being implemented at their firm. 73% of the firms said that they did not
measure customer loyalty (Ray and Chiagouris, 2009). Revenues from the loyal
customers continue to grow as the customers continue to be loyal to the firm(Sirohi et
al, 1998).
Companies spend more in attracting new customers rather than retaining the existing
ones. The front end function of attracting a new customer like substantial budget,
management attention and effort of marketing professionals is taken care of while the
backend function of retaining customers is usually neglected. It costs six times more
to get a new customer then retaining an existing one. Some companies maintain
incoming of new customers to cover up regular loss of existing ones. Customer

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retention is now emerging as an important area of analysis and planning. Designing an

optimal customer portfolio, designing a special marketing mix and modifying the
organisation can help build good relationship with the existing customers (Rosenberg
and Czepiel, 1992). Companies uninterested in retaining existing customers and
looking for new ones is similar to throwing a needle in the Haystack, finding it , again
throwing it and then looking for it. The time and money spent in attracting a new
customer is not worth if you cannot keep them. It is recommended that “there needs to
be a different marketing mix for retaining customers: product extras, reinforcing
promotions, sales force connections, specialized distribution, and post-purchase
communication”.

All those firms which practise relationship marketing, customer retention have
become their primary goal (Gronroos, 1991; Coviello et al., 2002).While customer
retention might have a different meaning and measurement for different industries
and firms(Aspinall et al., 2001), there is an agreement for the fact that focus on
customer retention can generate several economic benefits (Dawkins and Reichheld,
1990; Reichheld, 1996; Buttle, 2004; Ang and Buttle, 2006) Customer’s estimation of
use of their service provider in future is an indicator of customer retention (Lin and
Wu, 2011). Customer retention usually is described in the context of behavioural
intention to return to an organisation and willingness to recommend the organisation
to others (Swan and Oliver, 1989; Zeithaml et al, 1996).It refers to “customer’s
intention to repurchase a service from the service provider “(Morgan and Hunt, 1994).
Customer retention is “customer’s intention to stay loyal with the service provider
especially in the context of switching costs” (Edward and Sahadev, 2011). Customer
retention is the inclination of the customers to stay with the service provider in future
(Ranaweera and Prabhu, 2003) .Zeithaml et al (1996) have used the term “future
behavioural intentions” synonymous with customer retention. As per Zineldin (2000)
retention is defined as “a commitment to continue to do business or exchange with a
particular company on an ongoing basis”. Retention can be also defined as “
customer’s liking, identification, commitment, trust, willingness to recommend and
repurchase intentions with the first four being emotional-cognitive retention
constructs and the last two being behavioural intentions” (Stauss et al , 2001).
Customer retention refers to a long-term commitment on the part of the customer and
the firm to maintain the relationship (Wilson, 1995). As per Jeng and Bailey (2012)

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customer retention refers to a customer engaging in a contract, either formal or

informal, over a period of time, which includes repeated transactions. Therefore
Retaining old customers costs less than acquiring new ones. Unprofitable customers
and those customers whose needs cannot be fulfilled by the company should not be
retained (Reichheld, 1996). Retention is achieved by good service and good
relationships (Hansemark and Albinsson, 2004).Primary aim of customer retention is
to achieve zero defections from profitable customers (Reichheld, 1996).

Customer retention has been found to affect company profitability (Desai and
Mahajan, 1998) and market share (Appiah-Adu, 1999) to a great extent. Employees
regard customer satisfaction (Stauss et al, 2001) and customer retention (Levesque
and Mc Dougall, 1996) as their business goals. Customer satisfaction has been found
to affect customer retention (Rust et al, 1992) but satisfaction may or may not lead to
retention. Customer satisfaction for a company might increase while customer
retention levels can remain same (Lowenstein, 1995). Companies applying customer
retention strategies are more successful than the ones applying customer satisfaction
strategies (Knox, 1998). From the perspective of service quality, to retain the
customers it is essential to improve the level of service quality and satisfaction among
the customers (Berry and Parasuraman, 1991; Zeithaml and Bitner, 1996). From the
perspective of industrial marketing, to retain the customers it is essential to form
multiple bonds like financial, social and structural bonds (Ahmad and Buttle, 2002).
Reichheld (1996) said that to bulid a loyal customer base it is essential to build a loyal
inventory of employees as well as investors both of who have the vision of
maintaining long term relationships. “Employees who are themselves not loyal are
unlikely to build an inventory of customers who are loyal”. To keep Employee morale
and loyalty high it is essential to maintain job satisfaction among them and reward
them adequately whenever they achieve customer retention targets.
As per Reichheld (1996) “The customers who glide into your arms for a minimal
price discount are the same customers who dance away with someone else at the
slightest enticement”. Customer retention strategies must be aimed at only those
customers who rebuy. This involves sending discount coupons to only few selected
customers and designing special programs to attract such valuable customers.
It is the employee attitude which determines whether the customer is satisfied and that
they would be retained or not .It is the effort of the employees to create customer

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satisfaction and hence it’s essential for them to effectively respond to customer needs
(Potter and Brotman, 1994). Human Resource Practices also have an impact on the
employee performance and in turn customer outcomes. Through proper training
employees gain an understanding of the firm’s policies and practices for the products
and thus they are better able to deliver this knowledge to customers. Those employees
who felt that the HR Practices like employee training, job autonomy etc had an impact
on their work performance were more bonded to their organisation and felt that their
organisation promoted a service climate. Service climate is related to employee
performance which in turn is related to customer retention .Customer retention in turn
reflects the probability of the customers to return to organisation and recommend the
organisation to others (Salanova et al, 2005). However little is known about as to
how employee attitude and experience affect customer satisfaction and retention
(Hansemark and Albinsson, 2004).
“A company is more likely to retain a customer by encouraging complaints and then
address them, than by assuming that the customer is satisfied. Satisfied and properly
served customers are more likely to return to an organisation than are dissatisfied
customers who could choose simply to go elsewhere” (Ovenden, 1995). More is the
customers satisfaction and trust in the service provider more is their retention
(Ranaweera and Prabhu, 2003). Service quality is seen as an important factor for
promoting customer retention (Venetis and Ghauri, 2004).
“Satisfaction with a service is positively related to repurchase intention” (Diaz and
Ruiz, 2002). Loyalty is a result of customer satisfaction (Oliver, 1997). It is essential
for the firms to retain their customers .Such customers use a variety of products and
services of the firm and become loyal. They spread positive word of mouth to the new
customers (Hofmeister et al., n.d.) and influence non-complaining customers by the
process of memetic diffusion (a process through which one individual influences
other to adopt a belief) (Crosier et al,1999; Crosier and Erdogan, 2001).
There has been found to be a positive relationship between service qualities and
repurchase intention. Higher level of service quality leads to greater repurchase
intention and lower level of service quality leads to switching behaviour, complaining
and non-use of products/services (Blerry et al, 2009). A study conducted by Ennew
and Binks (1996) in the banking sector showed that service quality was an important
factor contributing to organization’s ability to retain loyal customers and hence
improving organization’s performance. Kangis and Zhang (2000) also highlighted the

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importance of service quality in promoting customer retention and continued business

generation from customers in the banking sector.
Tripathi (2012) has defined the term “Customer engagement” in the context of a
brand as the ability of the marketer to make the brand not only desirable, attractive
and preferable to the customer but also do whatever is required to make the consumer
associated, interested and involved with the brand. The term customer engagement
appears to be synonymous with customer retention in the context of a retail store. On
the similar lines the factors and dimensions associated with customer engagement also
appears to be same. So we will use the term customer retention for the remaining
description.
The challenge for the marketer is to make the consumers realize that the retail store is
worth their time, money, effort and commitment to be involved. Customer retention is
the process of building, nurturing and maintaining relationships. It is an effort to
improve the customer lifetime value (CLV) and customer equity over the lifetime of a
retail store. Company sales executive must redirect their roles from merely achieving
sales targets to building more engaged customers (Smith and Rutigliano, 2003) .Sales
would be a consequence of retaining such engaged customers. No service provider
can afford to let the customers go having got them once. But still this happens because
retailers neglect keeping the customers engaged and allow them to be influenced by
competition. Relationships should be such that customers want to experience it again
and again and to create such relationships it is essential for the marketers to
understand the needs of the consumer and markets and then decide how they need to
be fulfilled through their products and services.

6.2 Dimensions of customer engagement/ Consumer Retention

Customer engagement has several dimensions. It is imperative to take these
dimensions into account to relate it with the importance of retaining customers,
building customer equity and fighting competition.

1. Product/service involvement
Switching costs for the customer are getting lower day by day since most of the
products and services are getting similar (me-too’s) (Sedley, 2006). “The customer,
who is more emotionally attached to the product than other’s,is likely to be more
committed and more willing to be an evangelist for the product” (Tripathi, 2012).

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2. Purchase frequency
Frequent purchase and repeated use of the product and services of the retail store
makes the customer loyal and encourages future repeat purchases. Companies must
not take such customers for granted and ensure optimum level of service quality and
consistency in the service delivery process.

3. Frequency of service interactions

For cementing the engagement process it is necessary to have positive service
interactions every time a customer visits the retail store. This helps build positive
attitude in the customer. One negative interaction and all the good work done at
different stages would be nullified. The quality of personnel, infrastructure, resources
etc all plays a role in building this engagement.

4. Word of mouth
Positive experiences with the retailer make the consumers spread positive word of
mouth for the retailer. A positively disposed and motivated consumer facilitates the
engagement process. Companies must excel in their marketing efforts and service
delivery process to enable the consumers spread positive word of mouth.

5. Velocity
Regular updation of service delivery processes, sales promotions, advertising
campaigns and market expansions are some mechanisms which companies adopt to
influence consumer’s mind.

6.3 Building customer engagement/ Consumer Retention

Customers have more product and service choice than ever before. Better market
offerings seem to influence the customers regularly. A marketer’s focus has to shift to
value creation and this could happen if the customer itself is involved in the value
creation process (Prahlad and Ramaswamy, 2004). This will create engaged
customers who will be the best ambassador for your company. But how this
engagement or retention is build up? A number of factors are responsible for this as
stated below:
a)Confidence- Customer must have confidence in the retailer. They must be able to
trust the retail store, its products, brand, services, employees etc.

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b) Integrity – Consumers must feel that they are being treated fairly by the company.
Unfair practices make the customer lose confidence in the company.
c) Pride – Consumers must feel proud in using the service and products of the retailer
and recommend the retailer on the basis of their own positive experiences. Marketers
who take care of their loyal customers benefit from such customers in the form of
repeat purchases and customer evangelism.

Companies must have processes in place to track performance throughout the

customer lifecycle. It is not sufficient to satisfy the customers only once. Defining and
measuring customer loyalty is an issue which the companies must take care of.
Companies must have a definite metrics to keep track of their success in comparison
to other companies. Metrics become outdated with time so they also need to be
changed regularly.
Customer Retention is found to be a function of customer’s future intentions
(Andreassen, 2001). Dissatisfaction with service recovery increases customer
switching from the service provider (Keaveney,1995).Good service recovery efforts
can turn angry customers into loyal customers. It will create more positive image in
the minds of the customers then if nothing as such had happened. Service recovery
serves as an opportunity for service providers to increase customer retention (Hart et
al, 1990). Effective complaint handling can affect customer retention rates, decrease
spreading of negative word of mouth and improve performance (Fomell and
Wemerfelt 1987; Kelley et al, 1994). Eccles and Durand (1998) also stated that
effective service recovery would increase customer retention. Hirschman (1970) has
said that loyal customers are more likely to complain, less likely to exit and do
negative word of mouth when dissatisfied with a product. It has also been found that
if a company is able to reduce the number of customer complaints then it is likely that
it will lead to increased customer loyalty (Fornell, 1992; Tax et al, 1998)
It is five times more costly to attract a new customer then to retain an existing one
(Desatnick, 1988). So Service providers should encourage the current customers to
complain. Through these firms get a chance to remedy the customer’s problems and
this in turn leads to customer retention (Blodgett et al, 1995). Customers whose
problems are resolved satisfactorily tend to pay regular visits to the retail store and
spread positive word of mouth. Whereas on the other hand customer’s whose

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problems are not resolved satisfactorily may not pay repeat visits and instead spread
negative word of mouth (Folkes, 1984a).

S.N Definition Author Year

“Refers to a customer engaging in a contract, either
Jeng and
1 formal or informal, over a period of time, which 2012
Bailey
includes repeated transactions.”
“Customer’s estimation of use of their service provider Lin and Wu
2011
in future”.
2
“Customer’s intention to stay loyal with the service Edward and
2011
provider especially in the context of switching costs” Sahadev
“The number of customers who stay with the provider
3 in the course of an established period, for example a Dawes 2009
year”
“The inclination of the customers to stay with the Ranaweera
4 2003
service provider in future” and Prabhu
“Customer’s liking, identification, commitment, trust,
willingness to recommend and repurchase intentions
5 with the first four being emotional-cognitive retention Stauss et al 2001
constructs and the last two being behavioural
intentions”

“A commitment to continue to do business or exchange

6 Zineldin 2000
with a particular company on an ongoing basis”

“ Long-term commitment on the part of the customer

7 Wilson 1995
and the firm to maintain the relationship”

“Customer’s intention to repurchase a service from the Morgan and

8 1994
service provider “ Hunt
Swan
&Oliver
“Intention to return to an organisation and willingness 1989
9 Zeithaml,
to recommend the organisation to others” 1996
Berry, &
Parasurman
Table 3: Definitions of Customer retention as given by different authors

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