Traditionally, marketing management has relied on permutations and combinations of the marketing mix elements (product, price, place and promotion) to achieve market dominance through enhanced market share by acquiring new customers. This approach considers the formation of homogenous segments of relatively heterogeneous customers. It does not take into account the history of association between the customer and the seller and hence does not reveal the actual buying behaviour of the customer. Aggressive branding and promotions are other tactics used by sellers adopting the traditional marketing approach. But brands with the highest market share are not always the most profitable. In some cases, they may even be unprofitable.

The relationship marketing approach on the other hand, focuses on customer retention, encouraging increased spends and on long-term relationships with customers. Gronroos, a research scholar, has stated - ‘Marketing is to establish, maintain and enhance relationships with customers and other parties at a profit so that the objectives of the parties involved are met. This is done by a mutual exchange and fulfillment of promises'.

Customer retention should thus become a part of the strategic marketing planning process of any firm. It is important to define customer retention and also to understand how it can be measured.

Definition of customer retention
Since customer retention is of prime importance, it is imperative to understand what any organisation should retain. Table 1 illustrates the type of variables that ought to be retained.

Both attitudinal and behavioural variables need to be understood when studying customer retention. Attitude variables act as antecedents in most cases of behavioural changes. So it is inappropriate to consider only one variable as explaining customer retention. It is generally a resultant composite of multiple variables.

The definition of customer retention should take into consideration its appropriateness to the business of the firm. There are issues regarding whether the absolute number of customers or their relative purchases should be considered for definition purpose. An associated concern is whether the purchases should be in terms of volume or value. Research has also indicated that the definition of customer retention that is in terms of percentage share of customer savings, borrowings, spending, or purchases is more useful than just absolute numbers of customers.

Table 1: The assortment of variables that can be retained

Hidden defections have also to be kept track of. An example of hidden defection is that the growth in sales to a particular retained customer is slower than the growth of the market. Appropriateness of definition thus leads us to the issue of measurement of customer retention.

Measurement of customer retention
It is important to measure customer retention since this helps set benchmarks and gauge performance against this benchmark. Without measuring customer retention it cannot be managed.

Studies have shown that a relatively small percentage increase in the customer retention rate can lead to a large increase in the net present value of customers. Crude retention rate is the absolute percentage of customers that are retained. For example, if the number of customers drops from 1000 to 900, the crude rate is 90 per cent. A better measure is the weighted retention rate in which the customers are weighted by the volume of purchases made by each of them. The ‘lifetime value' (LTV) is a useful concept in measuring customer retention. The LTV of a customer depicts the customer's net present value to the seller. In this kind of analysis the cost of acquiring a customer is taken as a sunk cost. The only costs considered are the selling and servicing costs for a customer. The aim of the seller is to achieve a positive level of revenues as against these costs. By assuming the period of future sustained relationship, the net value of cash flows and a suitable discount rate (this is taken after accounting for the company's cost of capital and risk), the LTV for a customer is arrived at.

LTV is a difficult concept to operationalise. There is no clarity about what the lifetime of a consumer is - it can be age, working life, product life cycle, etc. Estimating the value through studying the past is also not precise. Assuming purchase probabilities into the future is also not easy. Moreover, carrying out this exercise for each and every individual customer is a long and tedious process. Hence, if carried out at an aggregate group level, questions about who should actually be the constituents of the group play a significant role.

Benefits of customer retention
Customer retention affects both revenues and cost in the equation of profitability

Profit = Revenue - Cost

Revenues are enhanced due to increased sales and costs are lowered due to lesser generation and marketing costs of such revenues.
Scholars have outlined six economic benefits of customer retention:
a) savings on customer acquisition or replacement costs,
b) a guarantee of base profits as existing customers are likely to have a minimum spend per period,
c) growth in per customer revenue over time,
d) a reduction in relative operating costs as firms can spread the cost over many more customers and over a longer period,
e) free of charge referrals of new customers from existing customers, and
f) price premiums as current customers usually do not wait for promotions or price reductions before they make their purchases.
Certain non-economic benefits from customer retention are increased customer trust, commitment and cooperation.

Strategies for retaining customers
In service marketing, customer retention has been conceptualised as resulting from customer perceptions of service quality and customer satisfaction. Scholars have advocated four steps as essential to retain customers:
a) define the market structure,
b) segment the customer base and determine segment value,
c) identify the segments' service needs, and
d) implement a segmented service strategy.

It is important to retain employees and investors in order to retain customers. Disloyal employees are not motivated enough to build a base of loyal customers. Similarly, disloyal investors will not be interested in building long-term relationships. The team of customers, employees and investors must hence share a common vision of a long-term relationship.

It is important for the firm to understand the reasons that make customers switch. Some of the reasons could be price, inconvenience, core service failure, failed employee responses to service failure, ethical problems, involuntary factors, competitive issues and service encounter failures. Understanding the causes of switching will help the firm develop barriers to prevent switching.
Interviewing former customers is another way to understand why they switched. This can provide information that is specific and actionable.

Studies have revealed six types of defectors. These are:
a) Price defectors, who switch to a low-priced competitor,
b) Product defectors, who defect to a superior product offered by a competitor,
c) Service defectors, who leave due to poor service,
d) Market defectors, who are lost but not to any other business - they may go out of business or to another market,
e) Technological defectors, who switch to products offered by companies outside the industry, and
f) Organisational defectors, who switch due to internal or external politics.

Analysing complaint and service data is a good method to identify problems and understand why customers defect. Analysis should be statistical and should be fairly detailed in order to understand the underlying patterns of the problems.
Strategic bundling is another way of erecting a barrier against defections that can lead to enhanced customer retention. A bundle is a group of products or services offered as a single cost saving and convenient package. A customer who opts for a bundle will not switch to a competitor even if he is offered a better deal on a single item of the bundle.

Usage analysis is a method that can be effectively used to help in customer retention. Segmenting markets by consumption can provide valuable insights into the mix of customers. Heavy users are more valuable than the medium or light ones and appropriate marketing strategies have to be devised to retain them. Similarly in the business context, we find the Pareto Principle or the 80/20 rule in operation. Key accounts that comprise about 20 per cent of the business customers are responsible for about 80 per cent of the sales generated. Such heavy and key users are prone to poaching by competitors. Hence it is important to concentrate advertising, promotion, sales and communication efforts on this segment. Medium customers should be targeted with revenue enhancement strategies through phone calls and e-mails. The light or unprofitable customers should be served in new ways to upgrade them. In some cases, the unprofitable customers might also have to be ignored.

The strategies for retaining customers are a function of the nature of the product, the stage of the product life cycle, and the buying behaviour of the customers.
The relationships between the core elements that create value in an organisation can be depicted as shown in Figure 1. Customer value affects customer satisfaction, which in turn affects loyalty. Customer loyalty affects customer retention. Loyalty of the customer increases with customer satisfaction at an increasing rate. Segmentation of customers should be done by satisfaction levels, prior to the strategising of retention activities.

Beyond customer retention
It is not enough to just retain customers through prevention of defections. Positive changes in customer spending can have ten times the impact of customer retention. It has been found that a lot more of customers decrease their spending than defect. Managing this downward migration in spends is a challenge. This is more important in industries where the customer deals with more than one company for the same product or service. An example is the credit card industry where a customer can have credit cards of more than one company. Managing this kind of migration effectively helps stop the downward spiral and brings about a reversal in spends towards higher figures.

Customer satisfaction, measured broadly, can indicate the likelihood of customers defecting. But it does not help understand what makes customers loyal. Loyalty may be related to the difficulty of finding a replacement. Customer satisfaction measurement alone does not explain the tendencies of customers to change their spending patterns. Spending patterns may change as a result of changes in lives, changes in what the company or its competitors are offering. Thus, it is crucial to understand what factors actually drive loyalty.

Researchers have combined the different degrees of loyalty exhibited with the spending patterns, into six customer segments. Figure 2 illustrates these in detail.
Three of these segments, the loyalists, either maintain or increase their spends. Loyalists may be emotionally attached to their brands (emotive loyalists), don't feel like taking the trouble to switch (inertial loyalists) or rationally choose the best option (deliberative loyalists). The remaining three segments are the downward migrators who spend less. Downward migrators may do so since their lifestyles have changed (lifestyle downward migrators), rationally reassess their options and needs (deliberative downward migrators) or may be actively dissatisfied with the product or service (dissatisfied downward migrators).
The emotive loyalists are least likely to defect. Inertial loyalists too are unlikely to switch easily. Thus, retention activities aimed at the deliberative loyalists are the most rewarding.

Loyalty profiling is influenced by factors such as the frequency of purchase, the frequency of interactions such as service calls, the emotional or financial importance of a purchase, the degree of differentiation among competitive offerings, and the ease of switching.

The loyalty profiles consisting of the six segments illustrated above help develop different tactics to address different segments. When this is combined with customer-value analysis, the company can concentrate on loyalty building by assessing the size of each opportunity. Downward migration has been reduced by 20 to 30 per cent by companies who have understood the many facets of customer retention and loyalty.
Customer retention and arresting downward migration thus hold the key to superior business performance.

References:
1. Weinstein, Art, 'Customer retention: A usage segmentation and customer value approach', Journal of Targeting, Measurement and Analysis for Marketing, Vol. 10, 3, 2002
2. Aspinall, Edward, Nancarrow, Clive, Stone, Merlin, 'The meaning and measurement of customer retention,' Journal of Targeting, Measurement and Analysis for Marketing, Vol. 10, 1, 2001
3. Wayland, Robert E., Cole, Paul M., 'Turn Customer Service into Customer Profitability,' Management Review, July 1994
4. Ahmad, Rizal, Buttle, Francis, 'Customer retention: a potentially potent marketing management strategy,' Journal of Strategic Marketing, 9, 2001
5. Coyles, Stephanie, Gokey, Timothy C., 'Customer retention is not enough,' The McKinsey Quarterly, 2002 Number 2
6. DeSouza, Glenn, 'Designing a Customer Retention Plan,' The Journal of Business Strategy, March/April 1992