The Customer Retention As A Biggest Market Challenge

Published Date: 02 Nov 2017

ABSTRACT

In this paper, the research has projected a conceptual framework to investigate customer retention as a biggest market challenge in financial services. In order to drive sustainable competitive advantage, customer retention must be on top of the all marketing strategies. The world has taken up the emergence of the service sector as high flying contributed to its financial system over the last few decades. Many countries have experienced a remarkable revolution in the role and significance of services in the service sector of their economies. The success of service industry depends upon high quality relationships of customers with their service providing firms. As the cost of getting hold of new customers and fierce competition increases, the main focus of service industry’s marketing strategic efforts is on customer retention. This study is an attempt to examine the drivers inducing customer retention in the banking sector. The drivers of customer retention programs are dynamic. The Indian banking industry is now operating in a dynamic confronts relating to both customer base and performance. To grip on the service sector, drivers like service quality, customer loyalty, switching cost, customer satisfaction etc. to be considered. In a bid to fortify relationships with their customers marketers are screening rehabilitated results in customer retention programs. In order to smooth the progress of managerial action, we discuss what are those drivers and how are these connected to the customer retention. Our approach and findings have meaningful inferences for managing customer retention in the financial services industry.

Introduction

The banking industry is extremely spirited, with banks not only contending among each other, but also with financial institutions and non banks (Kaynak and Kucukemiroglu, 1992; Hull, 2002). The majority of the bank’s product developments is easy to replicate and when banks providing nearly indistinguishable services, they can differentiate themselves on the core of price and quality. For that reason, customer retention is potentially an effective contrivance that banks can exercise to gain a strategic pro and survive in today’s escalating banking competitive situation.

The world has taken up the emergence of the service sector as high-flying contributor to its financial system over the last few decades. Many countries have experienced a remarkable revolution in the role and significance of services in the service sector of their economies (Sharma, 2002; Edwards and Croker, 2001; Nankervis and Pearson, 2002). The success of service industry depends upon high quality relationships of customers with the service providing firms (Panda, 2003) which determines the retention level of customer. As the cost of obtaining new customers and fierce competition increases, the main focus of service industry’s marketing strategic efforts is on customer retention (Fornell, 1992). It was strongly advocated by previous researchers to adopt customer retention as a performance indicator and formulate marketing strategies related to retention of customers after considering the impact of its variables or drivers i.e. Service quality, customer loyalty, customer satisfaction and switching barriers. The service management considers such variables as antecedents of customer retention especially the service quality and switching barriers.

The contention for customer retention is moderately straightforward. Company’s day to day focus of their strategic efforts on customer retention is increasing and service quality as cost of acquiring is five times more than retaining an existing one and quality satisfaction is the most important aspect of customer satisfaction. This is because the outlay of attaining customers is incurred only in the beginning juncture of the commercial relationships (Reichheld and Kenny, 1990) Research has shown that customer retention influences organizational results such as performance superiority increasing sales profit (Duncan and Elliot, 2002), the service quality of banks, improving customer relationship with service providers that overall increases the profitability (Reichheld and Sasser, 1990), enhances corporate image, promote customer loyalty (Newman, 2001; Szymigin and Carrigan, 2001; Caruana, 2002; Ehigie, 2006). Delivering high quality service to their customers by service providers is a key to sustainable competitive advantage and ensures the survival in today’s fierce competitive banking environment. In the present era of the challenging economy and competitive business environment, customer retention is critical factor in an organization. If they don’t give their customers any good reason to stay, bank’s competitors would give them a very strong reason to leave. Customer retention is that marketer’s activity which triggers the buyers’ repurchase intent.

During the last two decades, there have been rapid improvements in the financial system of India. Due to liberalization and privatization, the banking sector has become dynamic and fastest growing service sector subject to day-by-day increasing competition with great potential. The Indian banking industry at present is going on through a dynamic phase where both customer and bank’s performance, service quality, customer retention, switching costs, customer loyalty are now the major challenges. The service quality, customer satisfaction, customer loyalty and switching barriers are the drivers which affect customer retention strategies. Only because of these variables, customer retention is considered as a major factor for market share and profitability. Due to globalization, public sector banks are required to restate their service quality parameters in order to regain their market share and compete with private sector bank’s corporate image.

The financial reforms in banking sector started in 1991, put lots of pressures and challenges before the banking industry of India as never earlier. In 1969 and 1980, the ownership of commercial banks was transferred to the government after the nationalization of commercial banks. Then, the government decided the pattern for directing the flow of credit and determining the way of credit flows to some specific sectors of the banking industry. With the passage of time, the prevailing market conditions created a mindset, where everyone started to look for guidance for everything like an approval on confirmation of their actions taken from the higher authority. The banking personnel have lost their zeal, competitiveness and stopped thinking and operating like a business organization (Mishra et al., 2010). In the aftermath of worldwide financial crisis, the banking sector of India has been well-regarded and applauded globally for its resilience to get ahead of the crisis. There are a number of factors responsible for its success, namely, strict and prudent norms and regulations which end result is enhanced productivity, well – organized banking industry and also made banks stronger and healthier.

With privatization and globalization, the banking sector of India has become too competitive due to tech-savvy private banks and diversification of foreign bank’s operations where ‘one for all’ and ‘all for one’ principle is being followed on. To cope up with emerging market conditions , banking sector starts changing their business practices like developing customer loyalty programs, marketing strategies for customer retention, start giving attention to the perceived service quality of the bank’s services and products and adopting a distinct and unique approach to hold on their customers and meet future challenges (Mishra et al. ,2010). In a cut-throat competitive financial market, customer service has become most important non price factor (Kotler, 2003). Hence, banks are required to develop a customer focused approach for their future survival and existence in the banking sector.

While there have been several studies emphasizing the implication of customer retention in the banking industry, there has been little research examining the constructs that could lead to customer retention. This research has projected a conceptual framework to investigate customer retention as a bigger market challenge in financial services. In order to drive sustainable competitive advantage, customer retention must be on top of the all marketing strategies. The Indian banking industry is now operating in a dynamic confronts relating to both customer base and performance. Grip on the service sector, drivers like service quality, customer loyalty, switching cost, customer satisfaction etc. to be considered. In a bid to fortify relationships with their customers marketers are screening rehabilitated results in customer retention programs. In order to smooth the progress of managerial action, we discuss what are those drivers and how are these connected to the customer retention.

Review of literature

Competitive advantage

In a highly spirited cut throat market, the shortest route to single out is through the development of brands and active promotion to both intermediaries and final consumers (Parasuraman, 1997). In the long period, branding, targeting and positioning all would be much more valuable if the supplier had certain sustainable advantage to offer consumers (Baker, 1993). The same is also manifested in the banking industry, where many banks are offering more or less the indistinguishable products for nearly one and the same prices. Unless a bank can extend its product quality beyond the core service with additional and potential service features and value, it is unlikely to gain a sustainable competitive advantage (Chang, Chan, and Leck, 1997). Thus the most likely way to both retain customers and improve profitability is by adding value via strategy of distinction (Baker, 2003) while increasing margins through higher prices.

Today’s customers do not just buy core quality products or services; they also buy a variety of added value or benefits. This forces the service providers such as banks to adopt a customer retention as a bigger market challenge and should also adopt a market orientation approach that identifies consumer needs and designs new products and redesigns current ones ( Ennew and Binks, 1996; Woodruff, 1997). Further competitive pressures then push other financial firms to actively target consumer segments by integrating service quality, brand loyalty, and customer retention strategies (Ennew and Binks, 1996)

Customer loyalty

As identified by previous researchers, the significance of customer loyalty towards service providers is that it is very much linked with firm’s continued survival. The customer loyalty is a combination of customer’s favorable attitude and repurchase behavior (Kim, Park and Jeong, 2004). The customer loyalty is very significant as it is closely related to the company’s survival and strong future growth (Fornell, 1992; Ahmad and Buttle, 2002). The favorable customer’s attitudes states the beliefs like buying additional products and services from the same company or repurchase intentions of the customers, their willingness to recommend the company’s name to others, showing resistance of switching to another rival company (Cronin and Taylor, 1992; Narayandas, 1996; Prus and Brandt, 1995) and customer’s willingness to pay price premiums. While the behavioral concept of customer loyalty states the customer’s repeat purchase probability. It is the customer’s intention and willingness to repurchase the product / service from the same company, suggesting the company’s name to others and exhibiting a long term choice chances for the brand (Feick, Lee and Lee, 2001). Therefore, customer loyalty is viewed as a strength which conceptualizes the relationship between individual’s relative attitudes and repurchase intent (Dick and Basu, 1994). In study of service management literature, it is found that loyalty is mainly defined according to behavioral aspect and the most of the customer’s loyalty studies were operationalised behaviorally. The customer loyalty shows an intended behavior for the product or service or for the company. Hence, it can be concluded that customer loyalty is nothing but just a mindset of the customer’s favorable attitude towards a service providing firm and depicts their long term relationship to repurchase the products and services of same firm and recommending names of firm to others (Pearson, 1996).

Customer loyalty and customer satisfaction are inseparable parts of the customer retention process. The primary result of customer loyalty is customer retention. By reducing acquisition costs of new customers, customer retention improves the profitability. The customer retention strategies major focus must be on zero defections of profitable customers. There is a difference between a loyal customer and retained customer. The concept of customer inertia implies that customers can only be retained; they do not express any loyalty towards service providers. Beyond doubt, loyal customers are more adhered to increase the number of purchases and less price-sensitive. Customer satisfaction with bank’s product and services plays a vital role in generating loyalty that could be absent in retention situation. Hence, customer loyalty is distinct from simple repurchase buyer’s intent. The customer loyalty and customer retention is not same.

Customer satisfaction

Customer satisfaction has been researched widely in the field of marketing. It is one of the most generally used customer-centric matrix by bank manager for the reason that it is of a generic nature and widely accepted measurability for all types of products and services. Customer satisfaction refers to the customer response to the state of satisfaction and customer opinion of the fulfilled state (Oliver, 1997). It is an emotional response to the dissimilarity between what a customer expects and what he gets on the subject of fulfillment of any desire, need. Customer satisfaction is the result of service quality, as satisfaction deals with the expectations of customers what the service is likely to be whereas service quality refers to the desire and ideal i.e. What the service should be. The relationship exists between the desired outcomes and customer satisfaction, customer loyalty and customer retention. A customer plays an important role in the banking industry. In fact, only customer is a profit center and else is overhead. Customer is the one which actually uses the products and services. Therefore, it is very significant for any bank to make an impression on customers with the high –class and better quality services who in rank become the ambassadors in the market. Hence, customer satisfaction is a very vital element which has a great influence on customer retention strategies.

Higher customer satisfaction level leads to so many benefits for a service provider. It reinforces customer loyalty and inhibit customer churn, lesser the customers’ price sensitivity, buy additional products, stay loyal longer, less affected by competitors, lower the cost of acquisition of new customers and failed marketing, advances the effectiveness of advertising and at last , enhances corporate reputation (Fornell, 1992; Zineldin, 2000). Customers’ own perception regarding service quality is the key factor which determines the customer satisfaction (Zeithamal and Bitner, 1996). As a broad-spectrum rule, customer loyalty and customer satisfaction are very closely correlated. Customer satisfaction is an antecedent of customer loyalty. It also puts off the customer churn and merges retention (Fornell, 1992; Zeithamal and Bitner, 1996). Customer satisfaction and customer retention are critical factors as both are linked to profits. Satisfaction increases customer retention. Customer retention depends upon the relationship between the parties i.e. Customer and service provider. But some authors argue that even satisfied customers van switch their providers as a satisfied customer may or may not intend to get back to the organization. Hence, satisfaction does not lead to increase in customer retention. Even not all retained customers are satisfied with the services; they still remain with the provider only for the reason that there is a lack of alternatives available to such customers (Lowenstein, 1995; Reichheld and Aspinall, 1993; Eriksson and Lofmark Vaghult, 2000).

In industry, where the causal products have turn out to be commodity-like, quality of services depends profoundly upon the quality of its workforce. This is well recognizable in a study of Leeds (1992), who acknowledged that inexact 40 percent of customers switched their banks for the reason of what they considered to be poor service. This study also demonstrated that increased use of service quality/sales and professional behavior improved customer satisfaction and reduced customer attrition. Presently, organizations need to know how to keep their customers, even if they appear to be satisfied. Reichheld (1996) puts forward that unsatisfied customers may prefer not to defect, because they do not expect to receive better services elsewhere. Moreover, satisfied customers may look for other service providers because they strongly believe that they might receive better services elsewhere.

Switching barriers

The growing competition in today’s global market shows that it is highly significant for companies to retain their existing customers. Switching barriers plays a role of an adjusting variable that defines the relationship between customer retention, customer satisfaction and loyalty. The concept of switching barriers is used as the marketing strategies which make switching costly for its customer to another organization. Such barriers make customer defection costly and difficult. Switching barriers comprise of interpersonal relationships perceived switching cost and attractiveness of alternatives.

Interpersonal relationships means social and psychological relationship that is noticeable itself as intimacy, trust, communication and care. It refers to the power of personal tie up that develops between customers and their service providers. The interpersonal relationship is highly significant in the services given a high degree of personal bonding, heterogeneity of service results, customers play the high-flying role in service production (Bowen, 1986) The switching cost includes transaction cost, set-up cost, pre-switching cost, emotional cost, learning cost, search cost and loyal customer discounts (Fornell, 1992). The attractiveness of alternatives refers to service quality that the customer expects to the present service provider in best available alternative. It is linked with the notion of service differentiation – providing value added and unique service to the customers whom their competitors do not offer (Jones, 1998; Kim et al., 2004).

The switching barriers are defined as a difficulty faced by a customer who is dissatisfied with existing service, and then switch to the other service provider. Hence, the higher the switching barrier, more the customer would be forced to continue their relationship with existing service provider. Such barriers give customers some disincentives to leave the current organization. If switching cost is high, that is the most important factor which binds the service providers and its clients.

The customer satisfaction does not predict the longevity of customer relationship with service providers (Curasi and Kennedy, 2002). Switching cost is a very important driver or construct of customer retention that results in secure and long-lasting relationships of customers with service providers (Bendapudi and Berry, 1997; Dick and Basu, 1994; Ganesan, 1994). So far, the major focus of previous research scholars was on customer satisfaction and / or commitment as a main motivational factor for customer’s long term relationships with service providers (Garbarino and Johnson, 1999; Morgan and Hunt, 1994; Szymanski and David, 2001). In order to keep up their customers in relationship with service providers, the firm stressed upon satisfaction as a primary retention tool (Fornell, 1992). On the contrary, the influence of switching cost is higher on customer repurchase more intent than satisfaction. So, switching barriers and switching cost is highly significant issue for a marketing strategy that identifies the strategies and factors influencing the relationship of customers with firms and that may also makes switching costly. So therefore, switching barriers are very significant as they can strive hard for greater customer retention and also help the service firms to handle the short term fluctuations in the quality of services provided by the firms, otherwise that can result in customer defection.

Service Quality

Service industries plays very pivotal role in the overall economy of India. In India, one of the most important problems is the quality of service that the personnel are facing today. In order to explore ways through which banks can differentiate themselves from others rivals and maintain trustworthy and long term relationships with their customers, various researches have stressed upon the importance and influence of service quality on the bank’s performance (Gronroos, 1983; Parasuraman, Zeithamal and Berry, 1988; Rust and Oliver, 1994). Service quality by most researched areas of service marketing (Fisk et al., 1993). In today’s world of cut-throat and fierce competition , the key to sustainable competitive advantage lies in delivery advantage service results in satisfied and loyal customer (Shemwell et al. , 1998) Ionna (2002) further proposed that product segregation is unfeasible in a competitive environment like the banking industry, bank administration have a propensity to differentiate their firm from competitors by way of service quality. Service quality is imperative element influencing customer’s satisfaction level in the banking industry. In banking, quality is a multi-variable perception, which embraces contradictory types of ease, reliability, services portfolio, and vitally, the staff delivering the service.

Service quality perceptions and customer retention could be a reasonable preposition in the absence of non-linear relationship between customer retention and customer satisfaction in the retail sector along with or no switching barriers (Jones and Sasser, 1995; Mittal and Kamakura, 2001). Then, a debate was initiated on SERVQUAL vs. SERVPERF on the appraisal of service quality perceptions was the most important study that failed to link the customer behavioral intentions with service quality perceptions. Using another measure of service quality, they found only customer satisfaction determines the customer repurchase behavioral intentions not service quality perceptions (Cronin and Taylor, 1990). Then, relationship between the service quality perceptions and repurchase intentions is also studied (Ranaweera and Nelly, 2003).

In the contemporary information era, customer service has become a demanding question in any service industry as there are many insubstantial that state the customer’s satisfaction. Various marketing campaigns and the advertisement which seems to induce sharp and sensitive customers, response comes to zero if the service standards do not complement the service quality expectations of the customers. When it is about banking industry, the job is even more confronting as it is mandatory for banks to provide improved and well-organized customer satisfaction to go with the expectations of existing and new customers for retaining them. Customer satisfaction is an antecedent of service quality which leads to customer retention. So, the pre-requisite of customer retention is service quality (Ranaweera and Nelly, 2003) but it is a necessity rather than a mandatory condition.