Profit is crucial to the survival of any business organisation. A major influence on profit in the marketplace is customer satisfaction, which involves an understanding of the consumer's decision-making process with particular consideration for his needs, expectations and perceptions. If this
understanding is achieved and operations are carried out to ensure that customers are satisfied then the business can hope to establish multiple transactional relationships with its customers. Multiple transactions lead to customer retention. Customer retention is
invariably thus, the key to corporate profitability because it is only
multi-transactions that really guarantees profits. To operate
profitably, therefore, organisation must devise a deliberate customer
retention strategy. The broad purpose of such a strategy will include
some or all of the following:
increased income and profit by reducing rates of customer
defection;
reduced set-up and business origination costs by switching
emphasis from customer acquisition to customer retention;
Reduced real acquisition costs by increasing customer tenure and
referrals;
Increased revenue and profit by a corresponding increase in cross sales
penetration to existing customers;
measurement of the effectiveness and return on investment from service
and quality initiatives by tracking the incremental income from improved
rates of customer retention and the subsequent cross-sales and;
To develop tangible measures for customer service.
The trouble a company takes to devise a customer retention strategy
always comes with a payback: it enables the company analyse profitability
in a new way - viewing income and expenditure as accruals from distinct
customer groups. It also helps it generate data right down to the level of
specific customer segments, which thus improves the availability and
quality of relevant management information.
How does customer retention help a company gain tangible and
attributable improvement to profitability
It does this mainly in three ways: from gaining the benefits of customer
lifetime value. Lifetime value is the value that a customer or groups of
customers bring to a business over the expected life time of their
relationship with an organization measured in terms of financial
contribution. (Here a relationship is said to exist over the period where the
consumer remains an active customer of the organization). The next is the
gain and improvement in customer tenure - the elapsed time during which
the consumer remains a customer of the organization. For example a
customer who has held an active account for five years is simply said to
have tenure of five years and finally reduction in customer defection rate.
Customer defection rate is the rate at which a business losses customers. A
profitable customer is a person, household, or company that over time
yields a revenue stream that exceeds by an acceptable amount the
company's cost stream of attracting, selling, and servicing that customer.
Note here that the emphasis is on the lifetime stream of revenue and cost,
not on the profit from a particular transaction. Profitable business
operations depend on attracting and keeping profitable customers. Yet
every company loses money on some of its customers. The well-known 80 -
20 rule says that the top 20 percent of the customers may generate as much
as 80 percent of the company's profits. Sherden suggested amending the
rule to read 20 - 80 - 30, to reflect the idea that the top 20 percent of customers
generate 80 percent of the company's profits, half of which is lost serving
the bottom 30 percent of unprofitable customers.
For it to endure and produce desired results, a company customer
retention strategy must be a part of a company's business strategy. This
means that a company's customer retention strategy must be developed
and implemented in the context of the company's 'big picture'. The secret of
successful strategy is to start with a vision of the end product by asking
what is the organization trying to achieve What is its mission The
mission is a statement of purpose that precedes all other choices made. It is
a vision that influences how an organization competes and as a
consequence determines the choice of generic business strategy. Highlevel
corporate objectives follow on and a strategy is developed to achieve them.
These objectives are then cascaded down into the business functions to
ensure that there is a common direction and purpose throughout the
organization. At each level (mission, generic business strategy, corporate
objectives and strategy, and functional objectives and strategy)
management must review its commitment to customer retention in order to