Customer Retention Is Very Crucial In Business

Published Date: 02 Nov 2017

Customer retention is very crucial in any business that hopes to thrive in a highly competitive and flooded business market. Attraction of customers is said to be more difficult than retention and this is where the issue of customer relation management comes in. Research shows that retaining one existing customer is six to seven more times profitable than attracting a new one. Since retention and satisfaction of customers is not as difficult as attracting them, what should a business be doing in order to ensure that retention does not become a giant task in the course of business? To get a deeper grasp of customer retention in relation to business success, this paper analyzes the meaning and importance of customer retention in relation to strategic management, customer satisfaction, customer behavior, active customers, retention marketing and customer relation management (Adam1).

Customer retention has been defined as the process of consciously and constantly making efforts towards reducing customer defection and increasing their loyalty towards a given business enterprise. Customer retention begins at the time the business establishes the first contact with a potential customer and continues throughout the entire lifespan of the enterprise. Customer retention is enhanced by customer satisfaction, which comes about as a result of giving the customer more than they ask for or expect. It’s more about the value of the customer, more than it is about making profits. Customer retention is the centre of strategic planning and management. In the book Customer relationship Management: a global perspective, Gerhard, Riad, Jason and Vidyaranya (80) say that customer retention is a system of activities aimed at making a customer gain an advantage positioning through the transaction process, hence making them ready for successive purchasing.

However, it should be realized that there are two forms of customer retention, one of which is voluntary and very effective, and another that is almost compulsive and can make the customers leave any time they are presented with a better alternative. The first form of customer retention is loyalty, which is purely voluntary and customer-driven, meaning that customers choose to remain with a given company even when they have the opportunity to move or shop elsewhere. The other form is constrained, meaning that customers only lack factual or legal possibility on which they can move from a given company or service provider to another. However, with allowing and favorable conditions, they would move without a second thought. In this situation, loyalty is provider initiated meaning that the business or market conditions impose conditions that make leaving impossible or expensive (Derek and Tanniru 48).

Customer satisfaction

As earlier mentioned customer retention is more about giving the customer more than they ask for or expect. This means that a business enterprise needs to keep going out of its way to keep the customer happy and hence coming back for more. It is all about creating customer loyalty, which is associated with maximizing profits and establishing a market presence.

Customer behavior and active customers

It has been said that past and current customer behavior is the best determinant of future customer behavior. In other words, the probability of customer retention is best determined by the past and current loyalty levels of the said customer. In relation to this aspect, business owners or managers need to differentiate between potential customers and actual buyers from the business. For example, for a business that offers it services online, it could establish two categories of clients; those who visit the website but never make purchases, and those that visit the website for the sole purpose of making purchases. Even though those who make the purchases may not be the targeted market audience, they are much better retained than those who do not make purchases though they may comprise the target market. Business owners and managers ought to keep in mind that 80% of their sales come from 20% of their customers. Thus, any strategic plans made should focus on those that make the purchases (have an impact on profits) more than those who do not, though they are potential buyers. By watching the reactions of such two sets of customers, it is very easy to predict loyalty of defection as it applies.

Active customers can be classified as the happy retained customers. In other words, the like to win and they feel good about their behavior (loyalty towards a given business). Their loyalty is based on the fact that the business with which they associate constantly delivers superior value constantly compared to its competitors. Active customers’ loyalty is enhanced by activities designed to keep them feeling like winners. For example, promotions and loyalty incentives like discounts, membership cards and programs, after-sales-services, event oriented communication, technical support and sweepstakes encourage such active behaviour to thrive and remain active with the business. If such behavior is not encouraged, customers will find a reason to leave and competitors will find a reason to attract them (Derek and Tanniru, 58).

Customer relationship management in relation to customer retention

Customer is always king- this is a common adage that implies that the needs of the customer should always be met first before any other objective of the business. As such, a customer needs to constantly be kept happy and listened to. Customer relation management is a term that implies a combination of business strategies and technological approaches that seek to understand customers in terms of who they are, what they do and what they like. The significance of customer relation management is relation to customer retention is to link human resources and technology to bring out the best in customer behavior and their value as well. The major objectives that a business can realize through application of customer relation management include finding, attracting, and winning, nurturing new and retaining already existing customers. This goes a long way in reducing costs in marketing and client service. Customer relation management becomes relatively easy when the human resource department of any business strongly believes that the business should be aligned towards customer retention, loyalty and satisfaction ((Mary 12).

Retention marketing

Marketing refers to the promotional strategies that a business employs, with an aim of making it stand out from competitors and hence more appealing to its customers. Retention marketing is hence all about employing action, reaction, feedback and repetition with an aim of getting instant feedback between the marketer and the customer, all of which is aimed at establishing the best way forward in promotion of customer loyalty. For example, say a customer makes a purchase on day one of the month and takes a total of twenty days to make another purchase. Another customer makes a purchase on day one as well, but by day thirty has not returned to make another purchase. With such information, a marketer is likely to predict which customer is likely to be retained and which one is not, and hence, this data will enable the marketer to take the appropriate steps towards enhancing customer retention for this one customer who has a latency period of twenty days. The data gives the course of action to be taken, while the reaction from the customers acts as the feedback and will determine whether the action should be repeated, modified or done away with altogether (Mary 12).

Customer retention and strategic management as a process

As discussed, it is evident that customer retention forms the heart of any business and calls for meaningful and well thought-of planning. Customer retention is a process that calls for careful planning, and not merely a one-time event. The process requires consideration for a number of steps that comprise the strategic planning process for any business that hopes to be successful. It all begins by targeting the right customers with the right value propositions. In her book Customer retention is a Process, not an Event, Mary Pilecki (2007, p.5) says that a business should be able to define the customer types it desires, or on another note, those it does not desire. This is made more possible by having analytical tools that can help the business to determine the profitable customers and those that are not and knowing what to do with each. These analytical tools are target, service, acquisition and development. In other words, is the target market interested in the brand, what price can best facilitate their retention, what services are best suited for the target and does the target help in profit maximization and what triggers and alerts are there for their loyalty? The next step in strategic planning for customer retention is starting a positive relationship with customers through acquisition. Acquisition is what basically determines the level of customer loyalty and is the process by which a value-based pricing is determined. Pricing needs to be competitive for the business to gain competitive advantage above its competitors in the market. The next step which is more of customer relationship management entails incorporating customer advocacy into day-to-day service. Nothing makes a customer feel so valued than to have their opinion counted in the decision making process especially on issues that affect their daily interaction with the business. Common processes, no matter what channel is used to transact, should leave the customer feeling satisfied and assured that they will always get the same satisfactory result regardless of the channel used. Customer advocacy also implies giving relevant offers to the entire customer base. For example, by establishing the transaction behavior of a customer, their credit score, bill pay activity and other business activities, the business is able to establish the most appropriate offer that will suit the next expressed need of the client. Data analysis should be able to facilitate the process of determining the next product to introduce or offer to the customer. Faster problem resolution can also not be undermined in terms of its efficiency in improving customer relation management and consequent customer retention. Problem resolution should be characterized by simplicity, transparency, benevolence and trustworthiness.

The fourth crucial step towards customer retention is to develop relationships to increase loyalty. This can be achieved though a number of steps like profitability evaluation, financial check-ups, alerts and triggers and establishment of loyalty programs.

What are the drivers of customer retention?

According to Adam Ramshaw in his online article, ‘what drives customer retention (1), customer retention is a factor that is crucial to any business and has four motivators behind it which are improving customer loyalty, preventing customer loss, lowering overall costs and increasing total revenue. The interrelationship of these four factors and their overall outcome is illustrated in the diagram below.

Retrieved from http://www.genroe.com/what-drives-customer-retention

The four factors above are interrelated in the manner that ability to improve customer loyalty means that it would be hard for competitors to steal away a business’ customers, hence the business will incur lower costs in advertisements, increase customer revenue through increased transactions and consequently maximize profits. Customer loyalty is enhanced through customer handling services that are geared towards customer satisfaction, effective conflict resolution and high quality service delivery. Loyalty can be experienced at three levels; emotional loyalty, price loyalty and monopoly loyalty. Loss prevention is driven by attrition management, which basically implies having a keen eye on customer behavior and being able to detect when customers are likely to defect, and taking the necessary measures towards stopping the defection. Customer loss has a direct impact on reducing loss in terms of revenue. Win back is also a strategy that can be applied to prevent customer loss. It is the ability to retain a customer who had earlier stated that they no longer want to associate with the business. If corrective measures are made to deal with the attitude of the client, win back is normally a very effective method of preventing revenue loss. Successful win back strategies round back to informed customer relations management, where the customers needs are met according to specifications (Bryan 26).

Cost reduction as a driving force towards customer retention means that customer touch points must effectively be managed to minimize costs to service and communicate with customers. Businesses that are keen on management of customer contact points know when and how to communicate with customers so that they maximize on the process while at the same time avoiding unnecessary costs on communication, especially when the correct media is used. Increasing revenue as a motivator to customer retention calls for two approaches which are up sell and cross sell. Cross sell refers to a process of selling additional products and services by a company to an existing customer in addition to that which the customer is already willing to buy. This is done with an am of increasing revenue and it becomes easier when the customers being dealt with are loyal to the business. Up selling on the other hand refers to adding value to a product in order to make the client more attracted to it, hence making them buy more of the product. Adding value to a product or service is more of a customer-oriented process, more than a product oriented. The process entails talking to the customer with interest, rather than chatting with them. Talking to a customer in this context means listening and responding effectively. Up selling also means knowing the product as a seller and knowing how it meets the customers’ needs. Other aspects of up selling include taking note of when a customer touches, picks or talks about a service and product and taking the chance to suggest other items in relation to that one, not deciding what a customer can or cannot afford, accessorizing the product, being specific, handing the product to the client, closing the deal and giving the client the assurance that they made the right choice in buying the product or service (Madaan14).

Conclusion

Customer retention sometimes does not come easy because a lot of planning and resources has to go into it. Consider the fact that the employees in the business have to be trained on customer relations and handling and you will get a feel of what it means to have an effective team that can handle customer retention. In terms of strategic planning, customer retention should be the reference point of determining what aspects of business management to incorporate into the planning. As Gerhard (81) says, there are many causes to customer retention but those that stand out are situational causes, psychosocial causes, functional and economic causes as described in the paper.

Work cited

Adam Ramshaw, What Drives Customer Retention? Retrieved on 13th November 2010 from http://www.genroe.com/what-drives-customer-retention

Bryan Foss., CRM in financial services: a practical guide to making customer relationship management work, New York, Kogan Page Publishers 2002.

Derek Allen. and Tanniru Rao., Analysis of customer satisfaction data: a comprehensive guide to multivariate statistical analysis in customer satisfaction, loyalty, and service quality research, Atlanta, American Society for Quality, 2000

Gerhard Raab, Riad Ajami, Jason Goddard and Vidyaranya Gargeya, Customer relationship management: a global perspective, London, Gower Publishing, Ltd. 2008

Madaan, Fundamentals of Retailing. London, Tata McGraw-Hill, 2010

Mary Pilecki, Customer Retention is a Process not an Event, New York, John and Sons Publishers Inc, 2007