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Model of Customer Retention
The customer retention process actually begins during acquisition, which creates customer expectations, including perceptions of product value and uniqueness. Initial product usage determines whether these expectations are met. Then other factors, such as ease of exit, ease of purchase, and customer service, come into play. Together these factors affect long-term customer behavior and determine the relationship between seller and buyer.

In this model, there are seven determinants of customer retention:

1. Customer expectations versus the delivered quality of the prod¬uct or service
2. Value
3. Product uniqueness and suitability
4. Loyalty mechanisms
5. Ease of purchase
6. Customer service
7. Ease of exit (lock-out provisions)

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The following subsections briefly explain how each variable affects cus¬tomer retention.

Customers do not simply evaluate a product or service on its own merits. They evaluate it relative to their expectations. This is a crucial issue, because through its market communications a firm sets customer expectations. When customer expectations are too high (though this can generate initial trial) and the delivered product does not meet those expectations, the customer will not repeat-purchase. Thus a critical factor in determining retention is the difference between the customer's expectations and the delivered quality of the product or service.

You can download excellent powerpoint slides on marketing management and customer strategy strategy HERE. Raising expectation levels generates trial, but overly high expectations contribute to low retention. A firm must strike the optimal bal¬ance between expectations and delivered quality.

Here, we define value as quality divided by price. A firm can provide greater value either by offering higher quality and matching the competition on price or by offering the same quality at a lower price. Unfortunately, firms often try to justify higher prices by arguing that they provide greater quality. But quality is difficult to define and measure. From a customer equity perspective, firms should trade off the potential price premium against the risk of customer defection—and the resulting loss of substantial retention equity.

The more different (or less substitutable) a product is, the greater the retention rate. When a customer has access to almost identical products or services, the probability of purchasing any particular one decreases significantly.

In addition, it is critical that products remain relevant to customers. Just as the use of "acquisition products" is important in obtaining new customer assets, so too companies should ensure that their product portfolios contain "retention" offerings that customers can trade up to as they proceed through their life cycles.

Loyalty mechanisms can generate high retention rates even when competing products or services are almost identical. The airlines have used frequent-flyer programs to generate high degrees of loyalty even though their services are very similar. Retailers now use frequent-shopper cards or credit cards to induce customer loyalty. Neiman-Marcus has its In Circle card, which offers special services to its better customers. Target, a mass discounter, entices customers to use its credit card by donating 1 percent of their purchases to education. Such loyalty mechanisms, which link usage and rewards, can become very powerful generators of retention.

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Some products and services are very difficult to find or purchase, which hurts retention. For example, a customer will not regularly buy a specialty brand of stocking if it is not widely available, even if the product is highly differentiated.

Ease of purchase is not only a consideration for retail companies; manufacturers of specialty industrial components also need to make sure that their products are easily available to buyers. W.W. Grainger addresses this problem by widely distributing specialty suppliers' prod¬ucts to the construction industry. Aeroquip, a maker of specialty hoses and fittings, invested in retail stores because it found that customers needed its products quickly. Because of the emergency nature of fixing a broken hose, if their customers could not obtain Aeroquip's brand within a short time period, they changed brands.

Clearly, customer service is an important factor in customer retention. In some recent studies, customer service was the most important determinant of whether or not a customer would defect from a firm. But defining customer service is not as easy for a company to do as it may seem.

Customer service has many components, and many parts of an organization provide it. Accounting provides customer service when it solves a customer's billing problems, logistics handles customer service problems when the product is not delivered, and engineering provides customer service when it shows a customer how to utilize the equipment more efficiently or how to increase production-line speed through a minor product modification. Customer service opportunities are pervasive in any organization.

The issue becomes how best to manage the process. No simple answer exists. Some companies have customer service representatives who are responsible for handling all customer problems. Other companies decentralize the process. For the customer equity-oriented manager, evaluating the range of service options comes down to three questions:

• What customers will this service approach retain, and for how long?
• What is the potential asset value of those customers?
• Does the retention equity created exceed the service cost?

Exit barriers offer one strategy for increasing retention. Examples of these barriers include programs that reward continued use based on historical usage; product-design characteristics that make it difficult to change suppliers; and product-learning curves that make it costly to switch to competing products.

Source of Reference:
Robert C. Blattberg, Gary Getz, and Jacquelyn S. Thomas, Customer Equity: Building and Managing Relationships As Valuable Assets, Harvard Business School Press. You can obtain this fine book here

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You can download excellent powerpoint slides on marketing management and customer strategy strategy HERE.