Customer retention management: a reflection of
theory and practice
Keywords
Relationship marketing,
Customer satisfaction, Retention
Abstract
Customer retention is increasingly
being seen as an important
managerial issue, especially in the
context of saturated market or
lower growth of the number of new
customers. It has also been
acknowledged as a key objective
of relationship marketing,
primarily because of its potential
in delivering superior relationship
economics, i.e. it costs less to
retain than to acquire new
customers. This paper reports an
investigation, through case
studies, that is concerned with
testing whether or not a
theoretical position relating to
strategies for retaining customers
reflects practices in four firms.
The assumption is that
generalised theories, which imply
universal applicability, tend to
overlook the distinctive impact of
contextualised business
conditions on effective customer
retention strategies. The paper
recommends that both
theoreticians and managers
should consider ``business
context'' in developing and
implementing customer retention
strategies.
Marketing Intelligence &
Planning
20/3 [2002] 149±161
# MCB UP Limited
[ISSN 0263-4503]
[DOI 10.1108/02634500210428003]
Rizal Ahmad
Canterbury Business School, The University, Canterbury, Kent
Francis Buttle
Macquarie Graduate School of Management, Macquarie University,
Sydney, Australia
Introduction
The advent of 4Ps marketing theory in the
early 1960s, on the back of large-scale
industrial development and mass production,
influenced the way marketers saw their
customers. Customers, under this traditional
or classical approach, are seen as groups of
homogeneous potential buyers with the same
needs. Marketers then predicted what
customers needed, produced the products
and pushed them to their customers through
their distributors or drew the customers
towards the points of sale by manipulating
the 4Ps marketing mix: price, place,
promotion and product. Traditional
marketing approach still dominated the
thinking of both teachers and practitioners of
marketing. Researchers, however, began to
realise the inadequacy of this classical
approach in explaining emerging marketing
management phenomena specifically from
the industrial marketing perspective
(HaÊkansson, 1982; Ford, 1997); and service
marketing perspective (Berry, 1983;
GroÈnroos, 1990) ± a perspective that was
recognised even earlier by managers, in
practice (Shostack, 1977). Maintaining
long-term relationships re-emerged as an
important mission for businesses.
Multinational companies and leading
advocates of mass marketing approaches, for
example, Lever Brothers and Elida Gibbs,
also began to restructure their marketing
departments and appoint managers to give
attention to their existing customers. They
did away with brand managers, and set up
development teams responsible for
maintaining relations with retailers across
companies' brands (The Economist, 1994,
pp. 79-80).
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The tangible effects of companies'
commitment to retaining customers were
first published by Dawkins and Reichheld
(1990) who claim that higher retention rate
leads to higher net present value of
customers. The attraction of customer
retention management continued to be
prominently advanced in subsequent related
papers and a book (Reichheld and Sasser,
1990; Reichheld and Kenny, 1990; Reichheld,
1993, 1994, 1996). Reichheld (1996) provides
comprehensive details of Bain & Company's
prescriptions (etic) of managing customer
retention, drawn from its consultants'
observations of clients' practices. The
benefits of customer retention, as
experienced by clients and Bain & Company,
were cited frequently by marketing scholars,
which reflected their acknowledgements of
its theoretical and practical relevance (see
for example, Kotler et al., 1999, p. 483;
McDonald, 1999, p. 390; Gummeson, 1999,
p. 188; Peck et al., 1999, p. 46).
If customer retention leads to higher
profitability, as Dawkins and Reichheld
claimed, do companies proactively retain
their customers? How do companies, in
practice, keep their customers? What are
the gaps between theories and practice? Can
the espoused strategies, particularly those
proposed by Reichheld (1996), be applied in
these companies? These are the questions
that this paper attempts to answer. This
paper reports a case study of four
companies that examined the prevailing
emic in these firms as compared to the etic
espoused by Reichheld (1996). This is part of
an intensive study that explored ``how'' and
``why'' contextual conditions shaped the
way firms retain their customers in the way
they did.
The current issue and full text archive of this journal is available at
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[ 149 ]
Rizal Ahmad and
Francis Buttle
Customer retention
management: a reflection of
theory and practice
Marketing Intelligence &
Planning
20/3 [2002] 149±161
[ 150 ]
Objectives
The main concern of this paper is to assess
whether customer retention practices, in
four different contexts, match up to
Reichheld's propositions. Reichheld's core
proposition is that building and sustaining
customer loyalty require a three-pronged
approach:
1 retaining employees;
2 retaining investors; and
3 retaining customers.
Theoretical positions on customer
retention management
Theoretical positions relating to customer
retention management emerged from three
main perspectives:
1 service marketing;
2 industrial marketing; and
3 general management.
From the service marketing perspective, the
way to retain customers is to improve
customer service quality and satisfaction
(Berry and Parasuraman, 1991; Zeithaml and
Bitner, 1996, p. 176). In a related study, Ennew
and Binks (1996) examined the links between
customer retention/defection and service
quality in the context of relationships
between banks and their small business
customers in the UK. Their findings support
the hypothesis that retention is influenced by
service quality, in terms of both functional
and technical, and customer relationships.
They also found that trust in customer-banks
relationships has the largest impact on
potential defection, followed by general
product features. The investigation,
however, did not provide indications of the
financial impacts retention had on the banks'
profitability and it is implied to refer to
branch-based banking where customers'
expectations on relationships are likely to be
greater than telephone or Internet banking.
From the industrial marketing
perspective, the way to retain customers is
by forging multi-level bonds comprising
financial, social and structural bonds.
Turnbull and Wilson (1989) examined,
through a case study, the potential benefits of
protecting profitable customer relationships
through not just social, but also structural
bonds in the context of industrial marketing.
Social bonds, according to Turnbull and
Wilson, refer to positive interpersonal
relationships between the buyer and seller.
Although they did not provide an explicit
definition of structural bonds they implied,
through their illustrations, that structural
bonds refer to relationships that are built
upon joint investments which cannot be
retrieved when the relationship ends. This
may be due to the complexity of the
relationships and the cost of changing to
another supplier. In terms of training of
technicians, for example, a switch to another
type of machine would require total
retraining of these technicians. Structural
bonds, therefore, had helped create value to
the customers by saving the costs of
retraining or making a new investment with
a new supplier.
From a general management perspective,
DeSouza (1992), Rosenberg and Czepiel (1984),
and Reichheld (1996) offer theoretical
positions drawn from their observation and
consulting experience. DeSouza (1992)
advocates retention measurement and the
implementation of measures of preventing
customers from defecting by learning from
former customers, analysing complaints and
service data, and identifying and raising
barriers to customers' switching. Rosenberg
and Czepiel (1984) advocate an analysis of the
firm's customer portfolio with a view to
creating a specified balance of them which
may include the first time buyers, repeat
buyers, switched away then return, and last
time buyers, and reorganising the firm for
customer retention. Reichheld (1996)
advocates the pursuit of a three-pronged
approach of keeping investors, employees
and customers and the adjustment of the
firm's mission, which should be about
creating value for its three above mentioned
constituencies. His idea rests on the notion
that disloyal employees are not likely able to
build an inventory of loyal customers, and
disloyal investors do not support long term
relationship programmes.
Further empirical works carried out thus
far were attempts to study and model the
mechanics of customer retention, in terms of
its potential cause and effects of customer
retention to companies (Page et al., 1996;
Payne and Frow, 1997). Page et al. (1996), in
their retrospective study, investigate the
relationship between customer's age or
tenure and customer's contribution and the
firm's market share in an industrial
marketing context. They then explore the
role of customer defection probability and
customer's contribution as a function of
customer age or tenure and use sensitivity
analysis to simulate the effect of reducing
defection rate against increasing new
customer acquisition on customer
contribution and the firm's market share.
Rizal Ahmad and
Francis Buttle
Customer retention
management: a reflection of
theory and practice
Marketing Intelligence &
Planning
20/3 [2002] 149±161
Based on their study, they suggest that new
and existing customers should be treated
with different marketing mix strategies in
terms of six dimensions:
1 product and service design;
2 pricing;
3 sales;
4 advertising;
5 direct marketing; and
6 distribution.
Payne and Frow (1997) examined customer
retention in the context of a major UK
electricity supplier. Specifically, they
modelled the probable impact of marketing
programmes that focused on either retention
or acquisition in terms of four input
variables, namely number of customers,
retention rates, profit per customer and cost
of acquisition. Based on their simulation,
they then suggest that retention strategies
need to be based on the understanding of the
relative profitability of different segments
(the economics of retention), existing mass
marketing strategies need to be replaced by
those based on identifiable value
propositions, and retention management
programmes should be aimed at specific
segments that are presently or potentially
profitable. Page et al. (1996) and Payne and
Frow (1997) acknowledge that customer
retention brought tangible financial benefits
to firms and that existing, potential and new
customers should be treated differently.
The general route authors tend to take in
conceptualising and theorising customer
retention phenomena is by aggregating their
extensive observations both from empirical
studies, literature reviews, managerial
experience and consulting experience into
generalised structured models which they
claimed to have universal application. In the
context of customer retention management,
the suggestion that high retention rate leads
to higher customer value and firms'
profitability is too simplistic, and it would be
misleading to suggest that firms should aim
to increase their customer retention rate in
order to increase their profitability. The
relationship between retention rate and
profitability may be only a positive
correlation rather than cause and effect.
Storbacka et al. (1994) recognise that
antecedents of customer relationship
profitability are complex and not as
``straight-forward'' as to suggest service
quality leads to customer satisfaction and
satisfaction leads to customer relationship
profitability. This complexity has to do with
the different ways individual customers
make value judgements, as well as the
mediation of other relationship factors such
as relationship strength and relationship
longevity. These relationship factors, in turn,
are affected by other factors, which,
Storbacka et al. (1994) claim, include
customers' commitment, bonds, critical
episodes, and patronage concentration.
Oliver (1997, pp. 403-5) also recognises the
complexity of the antecedents of profitability.
He argues that profitability can be shown to
follow from not only the direct effects due to
quality, satisfaction and loyalty, but also the
mediated effects of quality and satisfaction
through loyalty. Added to this complexity is
the issue of customers' preference for
relationships. Barnes (1995) raises issues on
customers' and also other stakeholders'
perspectives of relationship marketing which
have implications on customer retention
management.
The applicability of service marketing and
industrial marketing perspectives of
managing customer retention, perhaps, have
been debated more widely than the general
management perspective, including that of
Reichheld (1996), and that is despite his
pioneering work (Dawkins and Reichheld,
1990). With the emphasis of understanding
the influence of context to business practices
as opposed to aggregated behaviour, we focus
our case study analysis with the application
of one theoretical position, which we take to
be the most influential, and that of
Reichheld's (1996). We shall now elaborate
Reichheld's position in greater detail.
Reichheld's theoretical position on
customer retention strategies
Reichheld's (1996) proposition rests on the
notion that loyal employees and loyal
investors are likely able to build an
inventory of loyal customers, and that
customers will only stay if they had a good
value proposition. The emphasis is thus on
maintaining a team of not only loyal
customers (Reichheld, 1996, Ch. 3), but also
employees (Reichheld, 1996, Ch. 4) and
investors (Reichheld, 1996, Ch. 6) that share
the same vision of long term relationship.
In terms of attracting and retaining
customers, firms are reminded to be aware of
the different ``loyalty coefficient'' ± the
amount of economic forces[1] needed to move
different kinds of customers. The easiest to
win is likely to be the one who will be the
quickest to defect. According to Reichheld
(1996, p. 82):
The customers who glide into your arms for a
minimal price discount are the same
[ 151 ]
Rizal Ahmad and
Francis Buttle
Customer retention
management: a reflection of
theory and practice
Marketing Intelligence &
Planning
20/3 [2002] 149±161
[ 152 ]
customers who dance away with someone else
at the slightest enticement.
Reichheld acknowledges that not all
customers prefer a long-term relationship.
There are, however, customers who not
only prefer stable long-term relationships,
but also inherently spend more, pay
promptly and require less service. Success
in retaining customers, according to
Reichheld, is attributed to a
combination of strategies being pursued
such as:
. Define and measure retention. This should
be done with consideration to the context
of the business: the product, the industry,
and the customers. A customer is not
necessarily the same as the bank account
number or an insurance policy number,
and eating at another restaurant does not
necessarily amount to a defection.
. Looking for loyalty in the right places with
a focus of getting the ``right'' customers and
not just a lot of them. He cites, as an
example, MBNA, a credit card company,
which marketed its credit cards through
affinity groups. MBNA then developed an
ability to single out the profitable
individuals within each group.
. Changing the channels of distribution. He
cites, as an example, State Farm ± an
insurance company which built a special
marketing partnership with its own
agents who sold State Farm products
exclusively rather than with independent
agents.
. Minimising adverse selection of customers
through creative filtering. He cites, as an
example, Progressive Insurance, which
encouraged agents to locate their offices
in out-of-the-way office buildings and
never in the retail locations with high
traffic, to avoid young motor-cycle drivers
who tended to shop as impulsively as they
drove.
. Rewarding the sales force for retaining
customers, not just winning new customers.
Taking an example from Reichheld (1994),
Great-West Life Assurance Co. paid 50 per
cent premium to group-health insurance
brokers who hit customer retention
targets.
. Paying for continuity, not just conquests,
and this may involve using coupons or
vouchers to discriminate and reward
customers that re-buy. He cites, as an
example, Staples ± a superstore that sells
office supplies, which tracked the pattern
of purchases of its customers and sent
discount coupons to a few chosen
customers.
. Designing special programmes to attract
and hold the most valuable customers.
Basically giving differentiated attention.
In terms of attracting and retaining the right
employees, Reichheld argues that employees
who are not loyal are unlikely to build an
inventory of customers who are loyal. Long
serving employees, according to Reichheld,
generate seven economic effects:
1 they reduce your aggregate hiring costs;
2 they restrain training expenditure;
3 they are generally more efficient;
4 they are much better at finding and
recruiting the best customers;
5 they retain customers by producing better
products and value;
6 they are sources of customer referrals;
and
7 they are sources of employee referrals.
The success in attracting and retaining
employees, he discovered, is attributed to
the firm's efforts in pursuing strategies
such as:
. Recruiting staff carefully, staff who will
maintain and improve the character and
integrity of the firm. He cites, as an
example, A.G. Edwards, a stockbroker,
which, did not look for ``supermen'' or
``wonderwomen'' of sales, but individuals
who shared its philosophy, one who will
act as an agent for the customers. It
wanted someone with the desired
character, someone who shared its values
and fit into its culture.
. Designing career paths for maximum
productivity. Simply by getting employees
to stay, Reichheld argues, will not
necessarily produce superior economics.
He cites, as an example, Chick-fil-A, the
chain of quick-service, shopping-mall
restaurants, which did not rotate
managers, as that would destroy the
relationships that they have developed
with employees and customers.
. Adopting a concept of partnership that
aligns the company's interests with the
employees. Referring back to Chick-fil-A,
its growth, according to Reichheld, was
determined by the availability of first rate
management candidates and their ability
to generate cash.
. Dedicating themselves to their cause or the
``golden rule'', such as the principle of
treating employees the way you want to be
treated, which may include fairness in
executive compensation. Chick-fil-A,
according to Reichheld, shared profits
from its outlets with its respective
managers, and A.G. Edwards did not
Rizal Ahmad and
Francis Buttle
Customer retention
management: a reflection of
theory and practice
Marketing Intelligence &
Planning
20/3 [2002] 149±161
develop its own investment product to
avoid potential for a conflict of interest.
A.G. Edwards tried to understand why a
broker left and performed exit interviews
to search for the root causes of employees'
dissatisfaction.
. Making a proactive effort to keep its best
employees. State Farm, for instance,
remained loyal to its agent-partners and
never sent mail to an agent's customers
unless they (the agents) saw fit.
In attracting and keeping investors,
Reichheld argues that a focus on short-term
return to satisfy short-term investors makes
the process of keeping employees and
customers for the long term more difficult, as
that requires long-term investment in people
and systems. Short-term investors, in
Reichheld's view, are a hindrance to building
long-term relationships with customers.
Short-term investors' demand for consistent
high annual return on investment is
achieved at the expense of investment on
technology and employees, and tends to
restrict the firm's ability to provide
consistently high quality products and
services to customers. Long-term investors
are argued to bring value beyond their cash
to include their understanding about the
business. Long-term investors, he argues, can
be attracted and retained by picking them
with care by:
. educating current investors;
. shifting the investor mix towards
institutions that avoid investment churn;
and
. attracting the right kind of core owner, i.e.
those that have a long-term view.
Firms, in Reichheld's view, need to search
continuously and consistently for initiatives
that offer a better value proposition than
their competitors. Customer value,
Reichheld contends, can be measured, and
efforts for retention should be directed at
those with relatively high net present value.
In addition, it is important to not just keep
the customers, but also to obtain a larger
share of the customers' total purchases or
spending.
Research method
In this research, we, first, wanted to
understand how firms retain their
customers, and second, to assess if their
practices or emic match up to the etic
espoused by Reichheld (1996). A case study
research strategy, a strategy that is also
consistent with Yin (1994), Stoecker (1991),
and Eisenhardt (1989), was operationalised.
Yin (1994) argues for the use of case study to
investigate the ``how'' and ``why'', while
Stoecker (1991) suggests that the case study
method should be used for research projects
that attempt to explain holistically the
dynamics of a certain historical period of a
particular social unit. The case study method
also, according to Eisenhardt (1989),
focuses on understanding the dynamics
present within single settings, in this
case the dynamic of customer retention
practices.
Each case study focused only on one
specific area of the business (see Table I) ± a
deliberate choice in limiting the boundary of
the research in order to help ensure that each
piece of research achieved greater ``depth''
rather than ``breadth''. A case study protocol
was prepared for each case as suggested by
Yin (1994) and data were gathered through
interviews, meetings, non-participants'
observations, and reviews of company
documents.
The four case study companies, which
were chosen from an initial nine candidates,
agreed to co-operate because they saw the
relevance of the topic ``customer retention'' to
their business. They also wanted to obtain an
``outsider's'' view on the way they retained
their business customers. We did not select
all sample cases from the same industry
because we wanted to capture the impacts of
idiosyncrasies of the business customers in
the various business contexts.
Interviewees were selected by the
``snowball'' method whereby interviewees
were asked to recommend others who may be
able to provide answers to the research
questions. In some cases, the researcher went
back and forth between informants. The
process precipitated the formulation of new
specific questions to be asked that had not
been identified prior to the study. It also led
to seeking relevant documentary evidence. In
total, 68 interviews, 25 meetings, and 32
non-participant observations were carried
out. Interviews were transcribed and field
notes on meetings and observations were
taken. These transcriptions and field notes
were kept and managed with the use of
``NUD*IST''[2]. This study was carried out
between May 1997 and May 1998. The names
of the companies and, in some cases, the
products, were disguised for confidentiality
reasons. We also made slight adjustments to
the financial figures, which has no
significant effect on the findings or
conclusion of the study.
[ 153 ]
Rizal Ahmad and
Francis Buttle
Customer retention
management: a reflection of
theory and practice
Marketing Intelligence &
Planning
20/3 [2002] 149±161
Table I
The focus of the case study research in the respective firms
Participating firms Specific area of the business that the case study focuses on
NFB Retention of ``corporate direct'' (CD) business customers. CD is current account, which
pays interest on credit balances. It handles mainly non-cash customers' payments and
deposits. Customers use the post, fax and telephones rather than bank branches to
request or receive the services
SUK Retention of office equipment dealers. Office equipment refers to electronic office
machines such as fax machines, computer printers, and typewriters. Dealers are
independent dealers, which also sell other brands of office machines
HDoX Retention of the industrial bulk users of hydrogen peroxide. Hydrogen peroxide is a
chemical with a wide range of purposes, from bleaching of textiles to treatment of
industrial effluents
NIA Retention of concessionaires that operate businesses from the airport terminal
buildings. A concessionaire operates a trading site, which may be a shop, a desk
counter, or a vending machine. Concessionaires provide services such as currency
exchange or sell products such as foods

sectors and expecting a strike rate of 0.15 per

Findings
Case study one ± NFB
The context of NFB's CD business
NFB is a high street clearing bank in the UK
that has begun to offer a wider range of
telephone-based banking services. NFB
expanded its corporate banking business by
launching Corporate Direct (CD) in October
1995. Two years later CD had 7,265 accounts
with aggregate deposits totalling £67 million.
NFB aimed to have 30,000 accounts by the
year 2000 and it expected every CD customer
to maintain an average minimum balance of
£2,000. CD was a low cost ``no frills'' current
account product that paid interest on credit
balances. It was targeted only at business
customers, who wanted low cost ``basic''
banking services such as making and
receiving payments by cheque and had no
need for overdrafts or loans. The idea behind
this product was that the cost of providing
banking services would be recouped
primarily from net yield on customers'
deposits (the primary source of income from
CD) as well as the commissions and fees. As
NFB expected all elements of costs and
income, except net yield, to remain stable, its
key source of increases in profit comes from
increases in credit balances. It costs NFB
about £200 to enlist one CD account and
approximately £150 to keep them per year.
These average costs vary depending on the
method of recruitment and total number of
customers. After two years in operation, CD
began to break even.
Retention practices at NFB
In attracting new account applicants, NFB
did not look at what Reichheld terms as ``the
right places'' but rather ``cast the net'' by
sending mail shots to targeted industrial
[ 154 ]
cent (1.5 accounts per 1,000 mailings). NFB
dealt with CD customers directly through its
centralised service centre instead of going
through its branches. NFB did not employ
any form of creative filtering such as the use
of customers' recommendations. It,
nevertheless, set specific criteria for account
opening, i.e. only for customers with explicit
needs and banking behaviours that CD was
designed for, which is to handle cheque
(non-cash) receipt and payments. Customers
that require extensive financial advice,
overdrafts, and frequently deposit cash were
offered alternative products that they have to
pay for. NFB did not cross sell CD to its
existing business customers and did not have
any proactive strategy that encouraged
referrals from them.
In managing existing customers, NFB did
not use any form of incentives that reward
frequent users and it also did not have a
special programme to attract and hold the
most valuable customers. NFB did not study
and establish the characteristics of its loyal
and less loyal customers. NFB assumed that
all CD customers have the same purpose for
using CD and share the same buying
behaviours. It therefore treated all of them in
the same way. NFB's marketing staff earned
fixed salaries that were not tied up to any
retention targets.
The CD service team comprised both
permanent and part-time staff that provided
80 per cent and 20 per cent of the total man-
hour respectively. Permanent staff who were
qualified for promotion were either moved
up in their grades within CD service team or
allowed to take other jobs within NFB. Newly
hired staff were mainly for the lower
positions (grade 4), relative to CD's team
leader (grade 10). NFB also hired part time as
Rizal Ahmad and
Francis Buttle
Customer retention
management: a reflection of
theory and practice
Marketing Intelligence &
Planning
20/3 [2002] 149±161
well as temporary staff comprising mainly
students on holiday. NFB did not set specific
goals for its service staff other than
emphasising the need to provide the ``best''
service, which also included managing
customers' complaints. NFB also did not
designate agents or named team members to
specific customers. Any members of the CD
service team, in other words, may serve any
CD customers.
The retention of investors was not a major
concern in NFB. NFB's shares were not
traded in the stock exchange and hence do
not change hands in the way a public listed
company would experience. It is wholly
owned by a holding company.
Case study two ± SUK
The context of SUK's business
SUK's principal business was selling a range
of ``Soong'' brand industrial equipment and
business machines comprising various
models of:
. computer printers;
. facsimile machines (fax machines);
. multi-function machines;
. typewriters;
. word processors; and
. electronic labelling machines.
The dealer channel was one of five channels
used to distribute these business machines.
The market size for computer printers and
fax machines in 1997, two important groups
of products to SUK in terms of sales, is
estimated at £765m and £172m respectively
(Key Note, 1997a, b). The market was very
competitive with no single player
dominating the market. In the past
four years between 1992 and 1996, SUK had
been chalking up steady increases in
annual turnover of between 5.1 per cent and
10.5 per cent and business machines
accounted for approximately 75 per cent of
SUK's sales. The share of its sales through
the dealer channel, however, has been
declining from 19.9 per cent in 1993 to
14 per cent in 1996.
Retention practices at SUK
SUK supplied its dealers both directly and
indirectly through their buying groups.
Recruiting new dealers was not a priority to
SUK and it was limited to those located in
geographical areas where SUK had no
representation. It treated every application
individually, based on the prevailing
circumstance such as the location, the
business strategies and its philosophy of
doing business rather than on strict
guidelines. SUK offered existing dealers the
opportunity to set up a new dealership in a
newly identified geographical area before it
invited new dealers. In retaining dealers,
SUK did not study and establish the
characteristics of its loyal and less loyal
dealers. Instead, it aimed to provide all the
necessary support to every dealer as it
assumed that all dealers would continue to
buy from SUK if these dealers were provided
with the necessary support. For credit
control purposes, however, SUK has written
guidelines, which specify how to set up and
close a customer (dealer) account. Sales
representatives earned fixed salaries plus
commissions based on aggregate sales,
regardless of whether those sales were to new
dealers or existing dealers. Finally, SUK also
did not have a special programme to attract
and hold the most valuable customers in
terms of profitability to SUK. The larger the
sales volume that a dealer achieved (not
necessarily profit), the greater likelihood
that it would receive a higher rate of price
discount and preferential treatment. Top
dealers by turnover, for instance, were
visited more frequently by the sales
representatives, invited to attend dialogues,
given priority for the allocation of new
stocks, and consulted prior to implementing
new services or procedures.
SUK hired sales representatives based on
their work experiences and third party
recommendations. Selected candidates were
then put on a 12 months trial. Its dealer
management team comprised only
permanent staff comprising the general
manager office products division, the dealer
manager, and a team of six sales
representatives. Five field technical service
representatives, belonging to the technical
division, provided technical support to these
dealers as well as end-users, distributors and
direct buyers. Sales representatives were
also rotated from one position to another
within SUK depending on the circumstances
such as their interests, performance and
vacancies. SUK has its own way of designing
a career path for its sales staff. Qualified
sales representatives have, in the past, been
assigned to higher responsibility jobs such as
the national sales manager for a certain
product. SUK, nevertheless, also hired staff
from its distributors. SUK did not set specific
goals for its sales representatives apart from
sales target. The emphasis placed upon these
sales representatives was for them to achieve
their individual budgeted sales targets and
help to achieve SUK's targets for various
products. A sale representative was
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[ 156 ]
designated to manage a group of dealers
located within a specific geographical area.
The retention of investors was also not a
major concern in SUK as its shares or stocks
did not change hands. It is a wholly owned
subsidiary of Soon Yang Europe, which in
turn is wholly owned by a large original
equipment manufacturer based in the Far
East. SUK, in this case, has to continue to
ensure that it consistently meets the targeted
annual budgeted sales targets, in terms of
volume and £ value of sales, of all of its
product range[3].
Case study three ± HDoX
The context of HDoX's business of selling
hydrogen peroxide
HDoX is a chemical firm and part of a global
network of HDoX International business
operations that span 19 countries, ten of
which are in Europe. HDoX produced
hydrogen peroxide, a chemical with wide
applications such as bleaching and
disinfecting of food processing equipment,
and in industries such as paper and pulps,
textiles, metals, consumer products,
chemicals and electronics. It is also used as
input for the production of persalts ±
inorganic peroxides that are used in making
bleaching agents in detergent powders and
dry bleach powder. Apart from hydrogen
peroxide, HDoX also produces other
peroxygen products such as persalts and
PAA. The market for hydrogen peroxide is
generally ``passive'' and demand in the UK is
``predictable''. The main industrial users and
their consumption are widely known by
suppliers.
Retention practices at HDoX
HDoX was not concerned with measuring
customer retention rate as Reichheld
envisaged. Customer retention in HDoX is
not merely about keeping customers active,
but also maintaining the largest share
possible of the customers' spending on
hydrogen peroxide. HDoX was conscious of
the different drivers of retention amongst its
customers. It invested in a relationship with
its potential customers long before they
started to use hydrogen peroxide. It, for
example, took HDoX two years to recruit TK
Tissues, which produces tissue paper and
recycles waste papers, and PZ Weed, a
producer of weed killer. HDoX studied how
its customers use hydrogen peroxide, by
assessing their technical capabilities and
hence the level of their dependency on HDoX.
From its understanding of its customers'
business and dependency on hydrogen
peroxide, it further set an appropriate price
and an appropriate time to negotiate for an
increase. It, for instance, successfully
increased the price supplied to HCV Textiles
by £26 per tonne in February 1998 and by £15
per tonne to TK Tissues a month later. It
participated in trade conferences and
exhibitions in its attempt to look for potential
loyal customers. In addition, it promoted
hydrogen peroxide for other applications
within the companies (existing bulk users).
Since there were not many bulk users
around, HDoX, in reality, can not be too
choosy. HDoX also has a product stewardship
programme that provided comprehensive
technical support to valuable customers.
HDoX has in the past been proactive in
developing its technical people through
training and tertiary education. Intense
market competition, resulting from excess
supply, falling prices and profitability,
unfortunately, forced HDoX to trim its
workforce. HDoX maximised the
productivity of its staff by combining the
sales and technical support roles (on specific
industry/industries) to one person i.e.
respective ASM.
The retention of investors was not a major
concern for HDoX as the HDoX International
Group wholly owns it. HDoX, however, only
represents a small investment. The group has
chemical plants and business interests in
several other countries in continental
Europe, Canada, South America, Asia and
the USA. HDoX shares do not change hands
like companies that are listed in the stock
exchanges. The concern, perhaps, is the
retention of investors in the HDoX
International Group.
Case study four ± NIA
The context of NIA's retail business
Retail business at NIA, for the financial year
1997/98, contributed 23 per cent (£47.5m) of its
total income, in terms of share of sales by
retail concessionaires. These sales come from
discretionary spending by passengers and
other airport users as opposed to aviation
incomes or user related charges such as
aircraft parking charges. NIA had 48
concessionaires operating from more than 80
shops or trading locations. Non-aviation
incomes such as concessions are important
to NIA in view of legislative restrictions on
price increases on aviation charges thereby
limiting the growth of income from this
source.
The core product, in its retail business,
essentially, is a trading or retail site located
in its three airport terminals at NIA. These
sites have two main features. First, they have
Rizal Ahmad and
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a consistent and predictable supply of
customers, which in the financial year 1997/
1998 delivered 13.5 million passengers, 72 per
cent of whom were passengers travelling on
chartered flights. Passengers are ``captive''
customers to retailers as they are ``trapped''
at the airport departure or waiting halls. The
``right'' for retailers to sell products or
services to this ``captive'' market is secured
for a certain number of years, normally
ranging between three and five years,
depending on the terms of the contracts. The
second feature is the retail environment,
which can be described in terms of the
ambience of the physical facilities, the
restrictive or ``controlled'' competition
amongst retailers within the airport, and the
co-operation between the concessionaires
and NIA as well as between concessionaires
themselves.
NIA charged rents not in terms of £/ft2 of
space that retailers occupied, but in terms of
percentage of concessionaires' turnover, and
this varies from 3 per cent to 70 per cent
depending on the services or products sold
and profit margins made. NIA imposed, on all
retailers, trading conditions covering areas
such as:
. opening times;
. product display;
. promotions;
. manning level; and
. price levels.
They were expected to be open for a
minimum of 12 hours per day during the
winter season and service at least 90 per cent
of all passengers/flights. Opening times
during summer were longer and some, such
as the food caterer and duty free shops, are
expected to open 24 hours a day.
Retention practices at NIA
NIA attempted to look for potential
concessionaires at the ``right'' places. NIA
established the profile of retailers that it
wished to attract. It then invited potential
concessionaires to tender or submit their
bids for a specific business proposition, for
instance, a gift shop. ``Good'' concessionaires
were identified by studying their existing
performance and also from their proposals.
In the case of well known retailers, NIA
approached them rather than waiting for
them to apply. NIA generally has the
privilege of choosing which retailer should
be recruited and retained. NIA, in choosing
successful bidders, did not give preference to
existing concessionaires on the basis of their
tenure with NIA. There have been many
cases where existing concessionaires won the
tenders to renew their existing contracts as
well as for new businesses. The tendering
process enabled NIA to minimise the adverse
selection of concessionaires. This has helped
ensure that only those who are familiar with
retailing at an airport and have the ability to
trade at an airport are considered.
In managing concessionaires, NIA neither
attempted to make concessionaires at other
airports switch to NIA nor prevented existing
concessionaires from leaving.
Concessionaires were free to operate in more
than one airport and hence it was not
necessary for NIA to have exclusive
relationships with them. NIA owned and
controlled all trading spaces at the airport
and no other companies were permitted to do
the same. NIA did not give any form of
financial incentives that rewarded
concessionaires for being with the airport for
a long time or for achieving exceptional
performance. Although NIA treated every
concessionaire individually, it focused its
attention on the ``big-four'', i.e. its two duty
free operators, a food caterer and a
newspaper and tobacco concessionaire,
which together account for 81 per cent of NIA
retail concessions income.
The retail department recruited additional
employees mainly from the internal labour
market, unless and if suitable candidates
were not available, which in the past was
limited to senior management positions such
as the general managers and directors.
Although NIA did make certain jobs, for
instance baggage handling, redundant, as a
result of business reorganisation, it did not,
as a policy, lay staff off or offer redundancy
payments. Redundant employees were
absorbed into other areas including the retail
department. NIA, from time to time, sent its
retail staff on attachments with the
concessionaires to learn about their
businesses. Staff of the retail department and
the NIA as a whole earned fixed salaries but
they were not linked to any retention targets
or amount of rental income. NIA has been
accredited with the ``investor in people''
award, which certifies that staff training
needs have been identified and met for all
except one of its subsidiary companies, with
200 staff.
Retaining investors was not a concern in
NIA, as a consortium of local governments
wholly owns it and its shares or stocks were
not listed in the stock exchange. Its shares did
not change hands in the way a publicly listed
company would have experienced. In this
case, NIA benefited from a continuity and
consistency in shareholders' expectations.
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[ 158 ]
These expectations were favourable return on
investment that would enable NIA to finance
future developments and ensure a balanced
development that would help promote socio-
economic development in the region.
Discussion
Theory on customer retention can guide
managers to develop customer retention
strategies. There are, however, practical
implementation issues that need to be
addressed with respect to the situation in the
firm concerned. Some of them were found
relevant to the practical needs of the firms,
while others were not. Measuring retention
in terms of retention rate was not always
relevant. Such a measure was more useful in
NFB's context where the economics of
retention can be calculated easily. In the case
of SUK, the focus of its selling activity was on
quantity or volume targets. SUK was under
pressure from Soon Yang Europe (SYE) to
achieve unit sales targets and was not
interested in measuring the profitability of
its relationships with dealers. As a ``selling
arm'' of SYE, SUK had to sell all ranges of
products regardless of the profit margin, and
paid for them at a price set by SYE.
Reduction in the number of dealers, which
the statistics may show as a defection, could
also be attributed to these dealers joining a
buying group and, as a consequence, buying
``Soong'' brand products through their
buying groups. In the case of NIA,
maintaining working relationships with
concessionaires, which was geared to benefit
both parties in terms of higher sales and
rents, was more relevant than achieving a
higher retention rate.
The idea of allocating resources to keep the
most profitable customers is not always
practical. In the case of NIA, the duty and
tax-free concessionaires were its most
profitable customers. The passengers and
other airport users, as end customers to
retail businesses at NIA, however, do not
always have the need to purchase duty and
tax free products. Some passengers only need
a place to leave their luggage overnight, a
packet of take-away sandwiches or a few
stamps. The rental income on these services
or products may not be as high as on the duty
and tax-free products but these services and
products are important to passengers and are
part and parcel of the product mix in an
airport. The consequence of neglecting such
needs would be a negative impression on
passengers and possibly encourage them to
use alternative airports in view of the limited
services and products. NIA, therefore, also
has to allocate its resources to other
businesses even though those were only able
to pay relatively low rental rates.
Retaining staff per se can be counter-
productive, especially when their skills and
experience are incompatible with the new
business activity a firm is pursuing, as in the
case of NIA, which as a local government
owned firm, had the obligation of providing
permanent employment. In the case of HDoX,
it had little option but to make some of its
employees redundant, even though they were
skilful and technically competence.
Theoretical positions such as Reichheld
(1996) provide many ``tips'' as to how business
customers may be retained. Some of these
tips were found to be applicable and useful.
In their present contexts, Reichheld's
prescriptions appear applicable to address
some of the customer retention issues. In
NFB, the idea of doing retrospective analysis
of customers' banking behaviours and
consequent profitability or losses is of
practical relevance. A scheme to reward
customers for staying and employees for
achieving retention targets also appears
relevant, especially when customer
recruitment remains as an important
activity in NFB. Similarly, Reichheld's
suggestion of looking for loyalty at the right
places such as business associations may be
useful in reducing the probability of
defection. In the case of SUK, the key to
profitable dealer retention lies with its sales
representatives and post sales support and
SUK will have to improve and sustain
employees' loyalty. Profitability, in this case,
has to be seen in a wider context of ``Soong''
group of companies where profit tended to be
kept at its head office or its manufacturing
plants in the Far East. In the case of HDoX,
customer retention was extremely crucial,
especially when the number of customers
was small and widely known. However,
because of the different customers'
perceptions of ``value'' on hydrogen peroxide,
HDoX's success in retaining them profitably
was dependent on its ability to augment and
differentiate its product offering between
different customers (Ahmad and Buttle, 1999)
and charge them accordingly. In NIA, the
driver of success in its retail business did not
hinge on making concessionaires stay but on
keeping its relationships with them under
tight control, i.e. monitoring their trading
activities closely (Ahmad and Buttle, 1998).
By pursuing ``well-controlled'' relationships
with its concessionaires, NIA was able to
``unlock'' the potential value of its ``complete''
Rizal Ahmad and
Francis Buttle
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management: a reflection of
theory and practice
Marketing Intelligence &
Planning
20/3 [2002] 149±161
product ± a retail site at an international
airport. This product, if sold separately, i.e.
as individual shop lots that gave independent
retailers the freedom to sell what they
wanted, is unlikely to produce the same
aggregate of income.
The relevance of Reichheld's theoretical
position in the future, however, will depend
on the nature of their contexts at that time.
CD customers may become more ``technology
oriented'' and prefer to use the Internet for
banking. The technology of the product may,
at that stage, be a dominant influencing
factor. In the distribution of office
equipment, large direct sales companies such
as Dell Computers may decide to sell similar
office equipment products on a large scale. In
airports' management, major airlines may,
in future, insist on having their own retail
space in NIA that is dedicated to serving the
needs of its key groups of travellers.
External factors can limit the ability of the
management to pursue preferred customer
retention strategies. In the case of NIA, it was
not able to offer airlines landing slots or rights
at its airport without the approval of
government authorities, thereby limiting its
ability to enhance the product it can offer to
concessionaires. It was also not able to invest
freely due to its inability to raise private
borrowings. In the case of HDoX, adding value
to its commodity product was extremely
challenging in the environment of strong
sterling pounds as compared to most
European currencies, particularly the German
mark (10 per cent appreciation between 1994-
1997). These factors made locally produced
hydrogen peroxide relatively more expensive.
It is also not always practical to maximise
profitability of relationships with customers,
especially when firms are expected to
support their shareholders' goals, such as
achieving a large volume or quantity of sales
(like in the case of SUK); or to support
economic development in the geographic
region or provide employment, as in the case
of NIA. NIA, therefore, avoided launching
aggressive sales promotions that could be
perceived as deliberately directed at luring
shoppers from nearby shopping centres and
only kept employees who produce superior
economics. Rewarding employees on the
basis of retention of customers may also not
be possible, especially when the specific
employees had no total control over the
drivers of profitability. In the case of HDoX,
limiting sales only to profitable customers or
by suspending unprofitable sales to large
volume users will drastically reduce the
volume of production. That will result in a
reduced contribution to fixed manufacturing
costs and inflict financial losses.
Customer retention activities may demand
further investment in resources. This,
however, is not always possible. In the
context of NFB, CD was deliberately
developed and was to be delivered at the
lowest possible cost. Containing costs,
therefore, is a major consideration in
deciding the nature of further investment on
customer retention activities.
What appears to be an appropriate practice
in one firm may be inappropriate in another,
even though they both operate in the same
industry. Influence of investors can be
significant. Investors in Hewlett Packard ± a
competitor of SUK, for instance, may, on the
contrary, favour the pursuit of profit rather
than market share and hence may influence
its sales offices in the UK to pursue different
retention strategies.
Conclusions
The benefits of customer retention have been
well documented, and so were the theories on
customer retention, particularly from the
service and industrial marketing
perspectives. Retention strategies based on
such theoretical underpinnings gained
recognition for their simplicity and their
potential for generalised application.
Alternative ideas drawn from practitioners'
experience and observations also emerged on
the back of the growing popularity of
customer retention management. There have
been other studies, however, which suggest
the connections between customer retention
and firm's profitability is tenuous and there
are dangers in accepting a generalised
customer retention solution. A
contextualised approach to developing and
implementing strategies for retention, which
this paper wishes to highlight, is an
alternative and purposeful approach. Our
research findings suggest that firms should
consider practical implementation issues
such as the goals of owners, nature of the
product sold and the type of customers they
attempt to retain. It also supports the idea of
not only treating customers individually or
at least by the similarity in buying
behaviours, but also applying strategies that
are adaptive to the dynamics of seller-buyer
relations such as those experienced by NIA
and HDoX. The significant contribution this
study makes to theory is that ``context''
should be considered when espousing and
adopting customer retention strategy.
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management: a reflection of
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[ 160 ]
Further research
An intensive research such as one that we
report in this paper has the potential of
providing in-depth understanding of the
motivation behind adopting specific
customer retention strategies under specific
business conditions. Further similar studies
on practices of firms under different business
conditions could be useful in testing the
robustness of a particular theoretical
position, which pave the way for purposeful
practical applications. Our case studies are
limited to firms serving the UK markets.
Factors such as business culture can be a
significant contextual attribute that shapes
the choice of customer retention strategy.
Notes
1 Reichheld indicates price discount and the
resultant switching behaviour as a form of
measurement.
2 NUD*IST (Non-numerical Unstructured Data
Indexing, Searching and Theorising) is a
software that has been designed to aid users in
handling non-numerical and unstructured
data in qualitative analysis by supporting the
processes of coding data in an index system,
searching text or patterns of coding, and
theorising about data. See Richards and
Richards (1991) for a description and
explanation of NUD*IST and Weitzman and
Miles (1995) for a review on the software. A
new version, however, has since been
introduced.
3 A national sales manager is responsible for
each of the four product groups: computer
printers; facsimile machines; electronic
labeling machines; and typewriters and word
processing. Each sales representative also has
an aggregate sales target for his/her sales
territory but with no specific breakdown by
products.
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