1. Customer Loyalty and Retention
Chapter 14
Customer Loyalty and Retention

2. 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.
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

3. 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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4. 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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5. 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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6. 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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7. What Is Customer Retention?
Focuses the firm’s marketing efforts toward current customers
The opposite of conquest marketing
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8. Figure 14.1: Cost of New vs. Old Customers: The Leaky Bucket
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9. 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
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

10. 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
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

11. 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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12. Figure 14.2: Why Customers Are More Profitable Over Time
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13. 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.

14. Determining the Lifetime Value of a Customer
Lifetime value (LTV) of a customer
Average Lifetime Value = (Average Sale) × (Estimated Number of Times Customers Reorder)
Lifetime profit (LTP) of a customer
Average Profit Value = (Average Profit per Sale) × (Estimated Number of Times Customers Reorder)
Customer acquisition point
Break-Even Customer Acquisition Cost = (Average Lifetime Profit) + (Average Customer Acquisition Cost)
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15. 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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16. Customer Retention Programs
Frequency marketing: marketing technique that strives to make existing customers purchase more often from the same provider
Relationship marketing: marketing technique based on developing long-term relationships with customers
Aftermarketing: marketing technique that emphasizes marketing after the initial sale has been made
Service guarantees
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17. 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
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

18. 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
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

19. 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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20. 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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21. Figure 14.4: Reducing Defections by 5 Percent Boosts Profits 25 to 85 Percent
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22. 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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23. 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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24. 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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25. Figure 14.5: A Credit Card Company’s Defection Curve
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26. Defector Types Price defectors Product defectors Service defectors
Market defectors
Technological defectors
Organizational defectors
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.