Chapter 14

Customer
Loyalty and
Retention
 Chapter Objectives

• Understand the differences between the service

marketing concepts of loyalty and retention and the
relationship between the two.
• Discuss why the concept of customer retention has
become increasingly important.
• Master successful tactics for retaining existing
customers.
• Describe emerging customer retention programs.
• Explain defection management.

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 Opening Vignette: Harrah’s
• Harrah’s Entertainment is the world’s largest provider of branded casino
entertainment
• Harrah’s was one of the first companies in the gaming industry to use a
loyalty program to identify and reward its best and most loyal customers
• Rewards include speedy check-ins, free rooms, free food, spa treatments,
and show tickets
• Over 75 percent of its gaming revenues are tracked by the card
• The loyalty program has increased cross-market play
• Harrah’s now offers reward points to nongamblers who spend money on
entertainment, restaurants, and other services
• Harrah’s generates approximately 20 percent of its revenues from
nongambling sources and is serious about expanding its nongambling
offerings

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 What Is Customer Loyalty?

• Customer loyalty: reflects an emotional attachment as

well as a business attachment to the service firm
• Customer loyalty is a deeper conviction to the firm than
pure retention alone
• Customer satisfaction does not always equate to
customer retention
– Consider cases where:
• Customers are not satisfied, yet they are retained
• Customers are satisfied, yet they defect to competitive offerings

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 Strategies for Cultivating
Customer Loyalty

• Developing a proper perspective

• Staying in touch
• Providing discretionary effort
• Leading through top-down loyalty
• Training and empowering employees
• Providing incentives
• Remembering your customers’ purchases

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 Strategies for Cultivating
Customer Loyalty (cont’d)

• Building trust through reliability

• Flexibility
• Replace technology with humans
• Be great with names
• Being available when you’re needed the
most

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 What Is Customer Retention?

• Customer retention: focusing the firm’s

marketing efforts toward the existing
customer base
• The opposite of conquest marketing
– Conquest marketing: a marketing strategy for
constantly seeking new customers by offering
discounts and markdowns and developing
promotions that encourage new business

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Figure 14.1: Cost of New vs. Old Customers: The
Leaky Bucket

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 The Importance of
Customer Retention

• Markets are stagnant

– In many places, population growth has slowed
• Consequently, there are not as many new customers as there once were,
and those customers who do exist are in many cases spending less

• Increase in competition
– Relative parity and lack of differential advantage of goods and
services on the market
– Deregulated industries that now must compete for customers in an
open market
– The growth of online alternatives
– Accessible market information that is available to more firms

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 The Importance of
Customer Retention (cont’d)

• Rising costs of marketing

– Increase in the cost of mass marketing advertising
– Loss of “share of voice”
• Changes in the channels of distribution
– Distance marketing
– Use of market intermediaries
• Today’s customers have changed
– Compared with past generations, typical customers today:
• Are more informed about purchasing decisions
• Are increasingly skeptical about the average firm’s concern for their business
• Command more discretionary income

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 The Benefits of
Customer Retention

• Profits derived from sales

– Repeat customers are more willing to pay more for purchases and
purchase more often in situations where the uncertainty of the outcome
is lessened or removed
– Reducing defections can have a profound effect on a firm’s profitability
• Profits from reduced operating costs
– It is three to five times cheaper to keep a customer than to recruit a new
one
– Long-term customers tend to have lower maintenance costs
• Profits from referrals
– Satisfied customers often refer businesses to their friends and family

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Figure 14.2: Why Customers Are
More Profitable Over Time

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Figure 14.3:
Why E-Shoppers Come Back

© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Determining the Lifetime
Value of a Customer

• Lifetime value (LTV) of a customer: the average dollar amount per sale
multiplied by the average number of times customers reorder (discounted to
the present)
Average Lifetime Value = (Average Sale) × (Estimated Number of Times Customers
Reorder)
• Lifetime profit (LTP) of a customer: the average profit per sale multiplied by
the average number of times customers reorder (discounted to the present)
Average Profit Value = (Average Profit per Sale) × (Estimated Number of Times
Customers Reorder)
• Customer acquisition point: the monetary amount spent on marketing and
other activities to acquire a new customer
Break-Even Customer Acquisition Cost = (Average Lifetime Profit) + (Average
Customer Acquisition Cost)

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 Is It Always Worthwhile
to Keep a Customer?

• Guidelines for severing relationships with customers

include:
– The account is no longer profitable
– Conditions specified in the sales contract are no longer being
met
– Customers are abusive to the point that it lowers employee
morale
– Customer demands are beyond reasonable, and fulfilling those
demands would result in poor service for the remaining
customer base
– The customer’s reputation is so poor that associating with the
customer tarnishes the image and reputation of the selling firm

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 Customer Retention Programs:
Frequency Marketing

• Frequency marketing: marketing technique that strives

to make existing customers purchase more often from the
same provider
• Customers become more productive as they increase the
frequency of their purchases with the same provider

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 Customer Retention Programs:
Relationship Marketing

• Relationship marketing: marketing technique based on developing long-

term relationships with customers
• Takes place on two levels
1. Macro
• Firms recognize that the marketing activity affects:
– Customer markets
– Employee markets
– Supplier markets
– Internal markets
– Influencer markets

2. Micro
• Recognizes that the focus of marketing is changing from completing the single transaction
and other conquest marketing practices to building a long-term relationship with existing
customers

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 Customer Retention Programs:
Aftermarketing

• Aftermarketing: marketing technique that emphasizes marketing after the

initial sale has been made
• Techniques include:
– Identifying customers and building a customer database so that customers can be
easily contacted after the sale has been completed
– Measuring customer satisfaction and continuously making improvements based
on customer feedback
– Establishing formal customer communication programs, such as newsletters that
convey information on how the company is using customer feedback in its
continuous improvement efforts
– Creating an aftermarketing culture throughout the firm that reinforces the
importance of maintaining a relationship with the customer after the initial sale

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 Customer Retention Programs:
Service Guarantees

• Facilitate three worthwhile goals:

1. Reinforce customer loyalty
2. Build market share
3. Motivate the firm offering the guarantee to
improve its overall service quality

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 Types of Guarantees

• Unconditional guarantee: a guarantee that

promises complete customer satisfaction and, at
a minimum, a full refund or complete, no-cost
problem resolution
• Specific result guarantee: a guarantee that
applies only to specific steps or outputs in the
service delivery process
• Implicit guarantee: an unwritten, unspoken
guarantee that establishes an understanding
between the firm and its customers

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 Benefits of Unconditional Guarantees

• Customer-directed benefits:
– Customers perceive they are getting a better value
– The consumer perceives the risk to be more reliable
– The guarantee helps consumers decide when comparing competing
choices; consequently, the guarantee serves as a differential advantage
– The guarantee helps in overcoming customer resistance toward making
the purchase
– The guarantee reinforces customer loyalty, increases sales, and builds
market share
– A good guarantee can overcome negative word-of-mouth advertising
– The guarantee can lead to brand recognition and differentiation;
consequently, a higher price can be commanded

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 Benefits of Unconditional
Guarantees (cont’d)

• Organization-directed benefits:
– The guarantee forces the firm to focus on the customer’s
definition of good service as opposed to the firm’s own definition
– In and of itself, the guarantee states a clear performance goal
that is communicated to employees and customers
– Guarantees that are invoked provide a measurable means of
tracking poor service
– Offering the guarantee forces the firm to examine its entire
service delivery system for failure points
– The guarantee can be a source of pride and provide a motive for
team building within the firm

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Professional Service Guarantees

• Professional service guarantees are most

effective when:
– 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

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Figure 14.4: Reducing Defections by 5
Percent Boosts Profits 25 to 85 Percent

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 Defection Management:
Developing a Zero Defection Culture

• Defection management: a systematic

process that actively attempts to retain
customers before they defect
• Reducing the defection rate by even 5
percent can boost profits 25 percent to 85
percent, depending on the industry

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 Zero Defects versus Zero Defections

• Zero defects model

– Used in manufacturing
– Strives for no defects in goods produced
– Does not work well in the service sector
• Zero defections
– Used by service providers
– Strives for no customer defections to
competitors

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 The Importance of
Defection Management

• Businesses commonly lose 15 to 20

percent of their customers each year
• Reducing customer defections is
associated with immediate payoffs

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 Figure 14.5: A Credit Card
Company’s Defection Curve

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 Defector Types

• Price defectors: customers who switch to competitors for lower-priced

goods and services
• Product defectors: customers who switch to competitors who offer
superior goods and services
• Service defectors: customers who defect due to poor customer service
• Market defectors: customers who exit the market due to relocation or
business failure
• Technological defectors: customers who switch to products outside the
facility
• Organizational defectors: customer who leave due to political
considerations inside the firm, such as reciprocal buying arrangements

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 The Defection Management Process

1. Communicate to employees the importance of retaining current

customers and the benefits obtained by reducing defections
2. Train employees in defection management; defection
management involves
– Gathering customer information
– Providing specific instructions about what to do with the information
– Instructing employees in how to react to the information
– Encouraging employees to respond to the information
3. Tie incentives to defection rates
4. Consider creating switching barriers that discourage defections

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