Chapter 14:
Customer Loyalty &
Retention
Dr. K. Douglas Hoffman
Professor of Marketing
Colorado State University
Chapter 14 Learning Objectives
Discuss the relationship between customer
satisfaction and customer retention and
identify the reasons customers defect
Explain the importance and benefits
associated with the concept of customer
retention
Describe everyday useful customer retention
tactics
Identify the acceptable reasons to fire a
customer
Introduce traditional customer retention
programs and discuss the pros and cons
CUSTOMER DEFECTIONS
Businesses commonly lose 15% to
20% of their customers each year
Types of defectors
price defectors
product defectors
service defectors
market defectors
technological defectors
organizational defectors
SATISFACTION & DEFECTIONS
Satisfaction does not necessarily
translate into customer retention
high satisfaction/low loyalty
commodity products (no
differentiation)
consumer indifference (low
involvement)
many substitutes
SATISFACTION & DEFECTIONS
Satisfaction does not necessarily
translate into customer retention
low satisfaction/high retention
regulated monopoly (or few
substitutes)
dominant brand equity
high cost of switching
proprietary technology
COMMENTS ABOUT
CUSTOMER LOYALTY
The Leaky Bucket Theory
Replaces lost customers with new
customers
10% of customers tend to be loyal
100% of loyal customers are light purchasers
Polygamous Loyalty
Customer loyalty is generally divided among
a number of fixed brands
Frequent flyer cards…3.1/traveler
Double Jeopardy
Small brands/Smaller firms have fewer
buyers who buy less frequently.
CUSTOMER RETENTION
More futuristic than customer
satisfaction
Focuses marketing efforts to
current customers
The opposite of conquest
marketing
THE INCREASING IMPORTANCE OF
CUSTOMER RETENTION
Markets are stagnant
decrease in population growth
GNP growth increasing at a
decreasing rate
Increase in competition
relative parity
Rising costs of marketing
increase in the cost of advertising
loss of “share of voice”
THE INCREASING IMPORTANCE OF
CUSTOMER RETENTION
Changes within the channels of
distribution
distance marketing
Customers have changed
more informed
increasingly skeptical
THE BENEFITS OF CUSTOMER
RETENTION
Profits derived from sales
Reducing defections by 5% can boost
profits 25% to 85%
Profits from reduced operation costs
It is 3 to 5 times cheaper to keep a
customer than to recruit a new one
Profits from referrals
How Much Profit a Customer Generates Over Time
Source: Adapted from Frederick F. Reichheld and W. Earl Sasser, Jr., “Zero Defections: Quality
Comes to Services,” Harvard Business Review (September-October 1990, pp. 106-107.
CUSTOMER RETENTION TACTICS
Maintain the proper perspective
Build trusting relationships
Protect confidential information
Tell customers the truth
Provide full information (pros and cons)
Be dependable, courteous, and
considerate
Be actively involved in community
CUSTOMER RETENTION TACTICS
Monitor the service delivery
process
Properly install products and train
customers
Be there when you are needed the
most
Provide discretionary effort
IS IT ALWAYS WORTHWHILE
TO KEEP A CUSTOMER?
The account is no longer profitable
Contract conditions are no longer being
met
Customers demands are beyond
reasonable
Customer is abusive to the point that it
lowers employee morale
Customer’s reputation is so poor that it
tarnishes the reputation of the selling
firm
TRADITIONAL CUSTOMER
RETENTION PROGRAMS
Frequency Marketing
Primary goal is to encourage existing
customers to purchase more often
from the same provider
TRADITIONAL CUSTOMER
RETENTION PROGRAMS
Relationship Marketing
Marketing technique based on
developing
long-term relationships with
customers
Aftermarketing
Emphasizes the importance of
marketing efforts after the initial sale
has been made
TYPES OF SERVICE GUARANTEES
Implicit Guarantees
An unwritten, unspoken guarantee that
establishes an understanding between
the firm and its customer
Specific Result Guarantees
Guarantees that apply only to specific
steps or outputs in the service delivery
process
Unconditional Guarantee
A guarantee that promises complete
THE BENEFITS OF GUARANTEES
Customer-directed Benefits:
customers perceive a better value
perceived risk is lower
the firm is perceived as more reliable
helps consumers decide among
alternatives
helps consumers overcome resistance
helps to overcome negative word-of-
THE BENEFITS OF GUARANTEES
Organization-directed Benefits:
forces the firm to focus on the
customer’s definition of good service
the guarantee states a goal that is
communicated to employees and
customers
invoked guarantees provides a
measurable means of performance
THE BENEFITS OF GUARANTEES
Organization-directed Benefits
(cont’d):
forces the firm to examine its entire
service delivery system for failure
points
serves a source of pride and
motivation for team building
RISKS ASSOCIATED WITH
GUARANTEES
May be viewed as a “Tacky”
marketing ploy
Is guaranteed due to failures in the
past?
Customers may be too embarrassed
to invoke guarantee
Guarantee may encourage customers
not to complain
Documentation and time for actual
SUGGESTED CONDITIONS FOR
OFFERING SERVICE GUARANTEES
Prices are high
The costs of a negative outcome
are high
The service is customized
Brand recognition is difficult to
achieve
Buyer resistance is high