This series of articles focus on small business sustainability.
According to Grönroos (1990), “The traditional marketing approach has failed to realize the potential benefits of keeping their customers. On the other hand, Relationship Marketing (RM) focuses on maintaining existing customers, increasing the share of customers spending, and sustaining long-term relationships with individual customers.”
That is where the development of retention marketing strategies comes in. For businesses to effectively compete in today’s dynamic market, RM serves as an integral strategic tool that aids in the ever-changing customer demands and preferences.
RM promotes supplier and customer engagement and sustains long-term relationships with a focus on customer retention. So, what is customer retention, and how to measure it?
The first and most important action for any business is to define customer retention management precisely in a way applicable to the organization's business. Customer retention management can become complicated if this step is not done correctly. For example, should retention be decided by absolute numbers of customers or their comparative purchases? Should purchases be evaluated by value or volume?
"When companies pay customers to remain customers, it is part of a customer retention program. Likewise, when companies invest in activities that increase customers' willingness to pay, they have a customer loyalty program." (Frei. F. (2009).
Measuring Customer Retention
Before measuring customer retention, the company must first understand its customers' Lifetime Value (LTV). The LTV of a customer refers to the customer's net present value to a seller.
Although, in theory, Lifetime Value is a useful measure, it is not easy to execute in practice. The difficulty stems from the lifetime construct. How do we define the span of a lifetime? For a consumer, should it be nominal age or working life? Therefore, the LTV must be clearly defined based on the lifetime construct of the organization's customers.
Companies invest in customer retention strategies for two main objectives to:
retain loyal customers
and increase profitability.
Customer retention affects both facets of the profitability equation (cost and revenue), where: Profit = Revenue - Expenses or Cost.
Moreover, customer retention supports revenue growth through increases in sales volume and/or premium prices and reduces the expenses or costs of generating those revenues.
Nonetheless, customer retention ought to be a worthwhile business goal. However, the selection of appropriate strategies can influence the nature of the product, the phase of the product in the life cycle, and customers’ purchasing behaviors.
It is customary for a fraction of customers to account for a significant share of company revenue. For example, a study of retail banks’ segmentation based on profitability found that 20% of their client base accounted for 90% of their total client base profitability. Therefore, clients from the remaining 80% of the client base were either unprofitable or contributed a marginal amount of profit.
Conclusion
Customer retention management can provide substantial tangible and intangible benefits to companies in the aspect of long-term profitability, improved customer trust, engagement, and cooperation.
We do not proclaim that all businesses should concentrate on customer retention. However, reiterate that customer retention has many potential returns that are much too rewarding for companies to disregard.
Companies should integrate customer retention into their strategic marketing planning process and make it one of their principal goals.
Customer retention can become a more powerful strategy than customer acquisition. So is it not whether companies should maintain their customers, but under what conditions, from the perspective of product and market, and what is the best way to manage them from the standpoint of appropriate strategies.