Business Essays - Literature Customer Retention

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Literature Customer Retention


In compiling this literature review, the author has deliberately cast a wide net. This has not only included both major and "less prestigious" journals, but also practitioner magazines and self-help websites. Customer retention is clearly marketing topic of considerable current and practical interest.

Whilst some of what has been written is of dubious value, and some isn't actually even about customer retention at all, it is felt that ideas put forward should be allowed to stand on their merits. Insights by practitioners can often provide useful illumination of academic theory, and it is only by bringing them together that the full picture can be appreciated.

The Rise of Customer Retention

The sole purpose of a business Peter Drucker (1973) once famously claimed was “to create a customer”. Marketing has traditionally focused on market share and customer acquisition rather than on retaining existing customers and on building long-lasting relationships with them (Kotler, 2003). However, keeping the customer has become regarded as equally, if not more important, since (Badgett et al., 2004) reported that a 5 per cent increase in customer retention generated an increase in customer net present value of between 25 per cent and 95 per cent across a wide range of business environments.

Research done by Gupta et al. (2004) found that a 1 per cent increase in customer retention had almost five times more impact on firm value than a 1 per cent change in discount rate or cost of capital. As a result of these researches, the business case for marketers to focus on the management of customer retention became more clearly established.

Because of this, there is a growing recognition now that customers, like products, have a life-cycle that companies can attempt to manage and they can be acquired, retained and grown in value over time. Freeland (2003) points out that customers climb a value staircase or value ladder from suspect, prospect and first-time customer, to majority customer and ultimately to partner or advocate status.

In response to these changes there has been a new emphasis on defensive marketing, which focuses on holding on to existing customers and getting more custom from them (higher “share of customer”), in contrast to activities which focus on winning new customers. One of the reasons for the great popularity of customer retention is the recognition that losing a customer means in fact more than a single sale: It means losing the entire stream of purchases that this particular customer would make over a lifetime of patronage (Kotler and Keller,2006).

More recently, market share has been gradually losing its importance as marketing’s wisdom of focusing solely on customer acquisition (hoping that this effort will compensate for high levels of defection) is now being seriously questioned and considered as very high risk since ever more players enter an increasingly crowded marketplace (Baker,2000). Today's banks find themselves more and more in a situation in which they have to build professional customer retention management systems.

There are two main reasons for doing so; on the one hand, the costs of gaining new customers in highly competitive markets are increasing considerably. On the other hand, the profitability of an individual customer grows permanently with the duration of the business-relationship (Liu & Lai, 2004 ; pg 398). Customer retention attempts to win a slightly larger share of the customer’s spend than would otherwise be the case (McAlexander,2006).

In spite of this, according to Weinstein (2002, p. 259), most companies spend a majority of their time, energy and resources chasing new business. 80% or more of marketing budgets are often earmarked for getting new business” (Weinstein, 2002, p. 260). This is in line with Payne and Frow’s (1999) finding that only 23 per cent of marketing budgets in UK organizations is spent on customer retention.

Aspinall et al. (2001), in contrast, found that 54 per cent of companies reported that customer retention was more important than customer acquisition. Support for retaining customers in the marketing literature (e.g. Ahmad and Buttle, 2002) is extensive. The benefits of retaining customers to the organisation are higher margins and faster growth, derived from the notion that the longer a customer stays with an organisation, generally the higher the profit.

The significance of retaining customers is not new to marketing, as Drucker (1963) believed that marketing is as much concerned with retaining as well as acquiring customers. However, as competition has intensified and markets become saturated, an awareness of the benefits of retention has grown, particularly in the retailing of financial services.

Benefits of Customer Retention

Dawes and Swailes (1999) explain that successful customer retention circumvents the costs of seeking new and potentially risky customers, and allows organizations to focus more accurately on the needs of their existing customers by building relationships (p36). Researchers have also pointed out that customer retention has a significant impact on profitability and positive customer satisfaction and leads to superior financial performance.

This is because firms with high customer retention rates tend to have lower costs, maintain more profitable long-term relationships, and enjoy substantial word-of-mouth advertising (p92). Reynolds (2002) suggests that once a company acquires a group of customers, it can retain that group by making them feel special through customer recognition. Reichheld (2006) in his article ‘Learning from Customer Defections’ identified that longer a customer stays with a company, the more they are worth as in the long-term customers buy more, take less of a company’s time, are less sensitive to price, and bring in new customers.

If a customer is retained in a business there is certainly a steady flow of revenue to the business, moreover, there are chances to increase the existing revenue by cross selling or up-selling activities. In addition to this, acquiring a new customer can be a much more onerous and expensive task than keeping an existing one.

When banks focus on individual customers by establishing a relationship and encouraging satisfaction and loyalty they have more chances to increase and retain their customer base. Relation banking can be seen as a vehicle to increase single-brand loyalty, decrease price sensitivity, induce greater consumer resistance to counter bank offers or counter arguments (from advertising or bank sales-people), dampen the desire to consider alternative banks, encourage word-of-mouth support and endorsement, attract a larger pool of customers, and/or increase the amount of product bought.

It can lead to more purchases more often, give the ability to mass customize communication, minimize waste, helps promote trust and attempts to win a slightly larger share of the customer’s spend (Ongena, S., and Smith,2000). Relationship leads to loyalty, and loyal customers are supposed to buy more, pay higher prices and bring in new customers through word-of-mouth support (Morgan et al.,2000).

However, some of these “profitability-arguments” related to relationship banking have been challenged by Reinartz and Kumar (2002), who compared the behaviour, revenue, and profitability of more than 16,000 individual and corporate customers over a four-year period, concluding that they discovered little or no evidence to suggest that customers who buy on a steady basis are necessarily cheaper to serve, less price sensitive, or particularly effective at bringing in new business.

They also found that a considerable amount of loyal customers were only marginally profitable, while a large percentage of short-term customers were very profitable. Woolf (1996) argues that greater success comes from a strategy based firmly on understanding customer economics and only secondarily on customer loyalty and building relationships. However, despite their criticism, even critics themselves have suggested that customer loyalty (relationship) is a worthy contributor to the shareholder value of a company(Houston, 1999;pg33), and that “firms are encouraged to study their position and options in the pursuit of this goal”(Oliver,1999; pg37).

The Lifetime Value Concept

Customer retention has also given rise to the concept of Customer lifetime value (CLV or LTV) which represents the net present value of profits, coming from the individual customer from a flow of transactions over time. Novo (2006) describes Customer lifetime value (LTV) as the present value of the stream of future profits expected over the customers’ lifetime purchases. Companies can look at their investments in terms of cost per sale, rate of customer retention and also conversion of prospects. LTV is also used as a convenient yardstick of performance, however, it has tended to become a bit too much of a 'holy grail' for corporate, marketing and sales executives, to the extent that entire conferences and seminars are often devoted to helping optimize it (Romano & Fjermesta, 2003; pg 233).

It is important to retain customers, but not at the cost of other essential marketing activities. Putting customers into key categories helps to clarify analysis and acts as the basis for marketing activities designed to improve customer lifetime value. While the importance of calculating the Customer Lifetime value in deciding the retention strategies cannot be questioned, some writers are of the view that measuring the lifetime value can sometimes be complicated as it involves a lot of analytical forecasting.

Knox et al (2003; pg 207) argue that ‘calculating Customer lifetime value is problematic because it involves forecasting what amounts of what products customers will buy in the future years, and what the sales, administration and logistics costs will be. Because profits in future years are progressively less valuable (because of inflation) and less certain, a discount rate has to be applied. The higher the discount rate, the less valuable future profits will be’.

Customer Retention and the rise of relationship banking (RM)

The objectives of relationship marketing is to identify and establish, maintain and enhance and, when necessary terminate relationships with customers and other stakeholders, at a profit so that the objective of all parties involved are met. This is done by a mutual exchange and fulfillment of promises. Kabiraj et al. (2004) in their study of relationship practices in India noted that the Indian banking sector can only stay competitive by building lifelong partnerships with their customers. Relationship banking techniques can be employed to develop an ongoing dialog with customers, integrated across all contact points.

Knox et al. (2003, p. 19) addressed that RM is a strategic approach designed to improve stakeholder value through developing appropriate relationships with key customers and customer segments and involves an enterprise-wide marketing strategy and technology platform. If done correctly, it enables organizations to retain the loyalty of their customers. It is about managing and monitoring customer behavior and has the potential to change a customer's relationship with the banking organization and increase revenue (Dyche, 2002, pg.4).

In today's economic condition, relationship banking can help to provide a sense of personal service without an actual person (Seybold, 2007). They allow banking organizations to integrate customer interaction channels and provide consistency in their interactions with customers, generate better customer intelligence, customize their offerings and communications to customers, manage customer interactions and relationships more effectively, and manage the customer portfolio by assessing the lifetime value of customers (Ely, 2006).

Relationship Marketing/banking is not a new concept, its roots lie in the marketing basics of repeat purchase, customer retention and customer loyalty. Traditionally followed by retailers, the concept is slowly spilling over to the banking and financial services industry. Berger (2005) describes relationship banking as an attempt to advance the sales culture in bank marketing beyond order taking to a more pro-active form of direct selling which includes knowing more about the customer needs and tailoring products and services to suit individual requirements.

Its goal is to establish a long term, intimate and relatively open relationship between banks and its customers. Eg Commercial banks and other financial institutions attempt to apply the concept of relationship banking through Personal Banker and Private Banking programs (Stauss & Schoeler, 2004; pg 147). In this way, they are able to understand their customer, give personal advice and develop proximity with the customer.

Customer retention has been shown to be a primary goal in firms that practice relationship marketing (Coviello et al., 2002). While the precise meaning and measurement of customer retention can vary between industries and firms (Aspinall et al., 2001) there appears to be a general consensus that focusing on customer retention can yield several economic benefits (Buttle, 2004). As customer tenure lengthens, the volumes purchased grow and customer referrals increase. Simultaneously, relationship maintenance costs fall as both customer and supplier learn more about each other.

Because fewer customers churn, customer replacement costs fall. Finally, retained customers may pay higher prices than newly acquired customers, and are less likely to receive discounted offers that are often made to acquire new customers. All of these conditions combine to increase the net present value of retained customers. Lindgreen et al. (2000, p. 295), computed that it can be up to ten times more expensive to win a customer than to retain a customer and the cost of bringing a new customer to the same level of profitability as the lost one is up to 16 times more.

Although a number of authorities have suggested that relationship marketing represents a paradigm shift (Christopher et al., 1991; Sheth and Parvatiyar, 1995) from a longer established transactional orientation to customer management, Gronroos (2000, p. 23) noted that the relational perspective on marketing is in fact “older than the transaction perspective in marketing” and is “probably as old as the history of trade and commerce”. There has been growing interest in relational aspects of customer management.

Relationship banking permits businesses to leverage information from their databases to achieve customer retention and to cross-sell new products and services to existing customers which is why they are synonymous to existing customer promotion. It is believed that companies that implement relationship banking practices make better relationships with their customers, achieve loyal customers and a substantial payback, increased revenue and reduced cost (Blery & Michalakopoulos, 2006). Relationship banking when successfully deployed can have a dramatic effect on bottom-line performance.

There are two main aims of relationship banking. One is to increase revenue by raising purchase levels and/or increasing the range of products. A second aim is more defensive, by building a closer bond between the banking organization and current customer banks hope to maintain their customer base (retention). The whole idea of relationship banking is based on the argument that profits can be increased significantly by achieving either of these two aims.

In today's economic climate building relationships can help banks to do more with less by providing a sense of personal service without an actual person. (Roberts, 2004) Relationship banking seeks to identify and talk to individual customers on a massive scale and this torrential flow of live transactional data offers the possibility to transform how banks manage their business.

While it is not important to retain customers, it is important to retain the right customers in the business. Overtime, choices must be made as to which customers to acquire, which ones to develop and which ones to retain. It is true that not all customers are worth retaining, since from a long-term perspective not everyone is equally profitable.

It is important to know if a currently unprofitable customer would generate a future profit stream, if an investment were made in enhancing the customers’ satisfaction. These problems can be addressed by profiling customers and making investments in those who offer the desirable growth and profit potential. (Subhash C. Jain 2005, p278)

Relational Exchange and Customer Loyalty

RM forms the bridge between the banking organisation and the customer, by means of reinforcing linkages, responding to customer needs and serving micro-segments (Berry, 2002; Hennig-Thurau, 2000). Freeland (2003) who has observed and contributed to this body of literature, comments: ‘Marketing practice has increasingly turned towards alliances, partnerships and other forms of relationship marketing, whose success requires effective co-operation.

Interpretations of RM vary (Brodie et al., 1997), but common themes are that relationships are based on power being distributed equally between partners (Liu & Lai, 2004) and that both the buyer and the seller are active in a rich, multi-dimensional exchange. Further elements that mediate successful relationships are trust and commitment (Garbarino and Johnson, 2006) in which trust is conceptualised as a belief that the partner in the exchange will fulfil the perceived obligations of a relationship.

Where the focus is on individual customers, loyalty and retention initiatives can be seen as vehicles to increase single-brand loyalty, decrease price sensitivity, induce greater consumer resistance to counter offers or counter arguments (from advertising or sales-people), dampen the desire to consider alternative brands, encourage word-of-mouth support and endorsement, attract a larger pool of customers, and/or increase the amount of product bought( Bolton et al., 2000)

Two aims of customer retention programs stand out, one is to increase sales revenues by raising purchase/usage levels, and/or increasing the range of products bought from the supplier. A second aim is more defensive, by building a closer bond between the brand and current customers it is hoped to maintain the current customer base.

Loyalty and retention initiatives can lead to more purchases more often, give the ability to mass customize marketing communication, minimize waste and help promote trust. It attempts to win a slightly larger share of the customer’s spend than would otherwise be the case if the additional value of the scheme were not offered (McAlexander,2002).

Research will analyze in greater detail the ways in which retention initiatives can transform the bank’s business and help make strategic business decisions, which is the purpose of the research (to evaluate retention as a key marketing strategy). One of the reasons for the great popularity of customer retention is the recognition that losing a customer means in fact more than a single sale: It means losing the entire stream of purchases that this particular customer would make over a lifetime of patronage – also known as the “customer lifetime value”(Kotler and Armstrong,2001).

Role of Employees Within the Retention Process

Another area of research would be the employee involvement in the customer retention process. In the Journal of Marketing Management, Buttle (2004) stresses on the importance of the front line employees. He argues that employees have the power to take actions which provide immediate customer satisfaction and thereby reinforce customer retention. This necessitates actively managing interactions between customer and staff and instigating improvements to the external quality of service by increasing the levels of internal service which staffs receive from within the organization from support departments and technology.

(p153) Robert Heller (2005; og 117) insists that the most vital statistic for retaining a customer in any business is its employees. He quotes “that a satisfied worker creates a satisfied customer and higher financial returns: and that, by the same token, disgruntled staff lead to customer dissatisfaction”. A research by staff at Sears, the US retailing giant in 2006, established a convincing and clear correlation between employee attitudes, customer attitudes and financial results.

The research showed that for every 5 units of improvement in employee attitudes, there were 1.3 units of gain on the 'customer impression' index. Moreover, the latter added up to a 0.5% increase in sales over what they would otherwise have been.This outlines the obvious linkage between employee attitudes and customer retention. Therefore, if a business wants to retain its customers, along with devising strategies for customer satisfaction, it has to bear in mind that, employee satisfaction is equally important.

The reseserch will analyze the role played by employees in Citibank in promoting customer retention. Researchers have argued that both customer facing and back office staff have a role to play in customer retention. The study will examine the ways in which the staff in Citibank performs their role and the effect it has on customer retention.

Customer Clubs

Some banks make the use of customer clubs as a strategic instrument for creating customer retention. Customer clubs are communities of current customers that are initiated and organized by companies (Diller, 1997; Butscher, 1997; Butscher and MuÈller, 1999). The current customers are approached for a potential membership to enable a steady direct communication and to intensify the relationship during the total time of business relation (Tomzcak and Dittrich, 1999).

As an institutionalized form of added-value services, they aim at offering club members a wide range of benefits and increase customer satisfaction and loyalty. The goal of customer club is to improve the general operational profitability by customer retention. A customer club is regarded as a suitable platform to increase the interaction frequency between the bank and the customer (customer interaction effect) by creating contact and feedback opportunities.

By doing so, a close contact is built around the client throughout the entire customer life cycle (Coviello et al., 2002; pg 8). A central objective of customer clubs is the augmentation of organizational knowledge about the customer (customer knowledge effect).

With each customer contact starting from account opening the organization receives detailed information about the personal situation, interests and demand structures of the account holders. These insights are collected in a global member data base and linked with further customer data, which form the basis for individualized marketing measures (Ganesh et al., 2006; pg 65).

However, some argue that it has to be considered that the set up and development of a customer club requires considerable investments. Whereas the cost effects of these investments are obvious and can be calculated rather easily, there is no certainty with respect to the existence and degree of the expected loyalty effects.

Also, the customer's willingness for a membership depends on the fact whether a distinct advantage is offered to them as customers are only willing to supply data and participate actively in the club membership, if their individual cost-benefit-calculation leads to a positive result (Gupta et al., 2005; pg 7). Therefore the customer club must offer a bundle of exclusive services, which are attractive for the target group from either a financial, material or communicative perspective.

Retention measures and process

Banking organizations in the vanguard are making several proactive changes in their service capabilities. They are developing diagnostics to understand what their customers need and value. They are examining what they need to do to retain customers and then train their people accordingly and are reinforcing service-oriented behaviours. Banks are exploring how to anticipate and respond successfully to differences in customer requirements between geographies.

They are leveraging the intimate product knowledge of technical people and other staff and teaching them about the critical role they play in customer retention. Some financial service organizations are also teaming up sales, service and technical experts much farther upstream in a customer relationship in ways that are cost-effective and value added (Johnston, 2005; pg 211). It is also worth pointing out that the service component of forward thinking banking organizations is no longer relegated to one department containing the lowest-paid people.

Major Banks use technology to accomplish menial tasks quickly, allowing everyone in the organization the time to enhance their skills as salespeople, research and development contacts and potential consultants on complex jobs (Morrman et al., 2002; pg 314). Research done by Nyer (2007) showed that everyone who interacts with customers must become an active agent for customer retention.

A number of organizational processes can be associated with customer retention, including customer satisfaction measurement process, customer retention planning process, quality assurance process, win-back processes and the complaints-handling process. The notion that companies should engage in planning if they want to achieve desired business outcomes is deeply embedded in modernist management literature.

Retention metrics

Despite the scarcity of research into customer retention planning, investigators and commentators have begun to report on a number of related questions, such as how to define and measure customer retention, how to segment customers for customer retention efforts, and what strategies to employ to recover at-risk or lost customers. Aspinall et al. (2001) investigated the issue of definition and measurement of customer retention. They found that customer retention was particularly an issue in larger banking organizations but absence of measurable indicators makes it harder to gauge the impact of strategy implementation on customer retention.

Buttle (2004) found that banks can employ one or more of several types of retention-related KPIs – raw, sales-adjusted, or profit-adjusted customer retention metrics. Banks that adopt raw customer retention metrics focus on the retention of a given percentage or number of customers, regardless of value. Banks that use sales or profit-adjusted retention metrics will focus their efforts on customers that generate higher levels of sales or profit. Coyles and Gorkey’s (2002) research also notes the significance of focusing on the retention of profitable customers, rather than all customers.

They suggest that it may be more important for banks to focus on managing the overall downward migration of customer spending than customer retention in its own right. They note that many more customers change their behaviour than defect, so the former typically account for larger changes in value (Coyles and Gorkey, 2002, p. 80). They report the case of one bank that lost 3 per cent of its total balances when 5 per cent of checking account customers defected in a year, but lost 24 per cent of its total balances when 35 per cent of customers reduced the amounts deposited in their checking accounts.

Another question that researchers have attempted to answer concerns the focus of companies’ customer retention efforts (Koch, 1998; Ganesh et al., 2000). Should retention of every customer be the goal, or should retention efforts be focused on subsets or even individuals? A report by PricewaterhouseCoopers (2002) observes that poor management of customer churn is a major value destroyer and that the key to prevention is to predict and avert attrition of the “right customers”.

The “right customers” are those that contribute most significantly to the achievement of the company’s objectives. The implication of there being “right” and “wrong” customers to retain is that companies are advised to segment their customer base for retention efforts in much the same way that they would segment the market for acquisition efforts (Weinstein, 2002). Evans (2002) suggests that the right customers are those with the highest residual lifetime value.

Although there has been little investigation of customer retention planning processes, there has been considerable attention paid to assessing the role and effectiveness of retention strategies and tactics directed towards valued, at-risk or lost customers.

For example, a number of researchers have examined the contribution of relationship marketing instruments such as loyalty programs and customer clubs to customer retention outcomes (O’Brien and Jones, 1995; Dowling and Uncles, 1997; Stauss et al., 2001; Verhoef, 2003). Others have examined the development of customer attachment to organizations (Moorman et al., 1992; Oliver, 1999; Hofmeyr and Rice, 2000).

The research will look into the retention KPIs of Citibank and assess whether the KPIs accurately measure retention.

Type of banking relationships

Banking relationships can be economic and social. Economic content deals with the economic benefits and costs of participating in the relationship. Customers are only willing to participate actively in a relationship if their individual cost-benefit calculation leads to a positive result (Stauss & Seidel, 2005).

Social content suggests that although economics may indicate a prosperous relationship, no relationship can be successful in the long-term without a social environment that nurtures communication, honesty, fair play and an awareness of mutual interests and therefore relationships should accommodate opportunities for interactions so that friendships may be developed.

Building a customer retention strategy

Setting up a strategy around customer retention requires careful planning and should include detailed plans and methods for customer identification and registration, segmentation and reward design. In order to be a source of sustainable competitive advantage, the banking organization developing the strategy must always take into account what its loyal customers value, since loyalty and retention is inextricably linked to the creation of value (Morgan et al, 2000).

The strategy should make sure that it directly supports the value proposition. A value proposition is “the full positioning of a brand , the full mix of benefits upon which it is positioned” and the answer to the customer’s question “Why should I buy your brand?”(Kotler & Armstrong,2001). Moreover, in order to be viable, a retention strategy must build and sustain noticeable differences in its offerings that are difficult to copy, since a lack of differentiation removes any potential of competitive advantage – which is anything but easy in banking., where first movers are quickly imitated (Morgan,2001).

It must be considered that the retention strategy do not exist in a vacuum, but should be a coherent element of the bank’s overall strategy and capabilities. The strategy should take into account the nature of the business, its market position, goals, and the competitive landscape.

There is still some confusion regarding the nature, scope, role and influence of customer retention initiatives. From a functional perspective, many marketers believe that the route to customer retention is through the operation of a number of mechanistic, tactical initiatives such as loyalty cards, points schemes, events and promotions. It is hoped that customer incentives and rewards are a sufficient basis to build loyalty, have a positive impact on retention, generate knowledge and change customer behaviour.

On the other hand, an organizational perspective views customer retention as a total firm customer orientation – one that seeks to integrate and align multiple sources, processes and activities for creating superior customer value on a consistent basis.

Although the applied marketing literature suggests that there are very high expectations for retention initiatives, in reality they are surprisingly ineffective and it has been suggested that almost 50% of them miss their business objectives partly or completely (Weinstein, 2006). Too often, retention programs appear to lack clear goals or are not tied to overall business strategy which is what makes ineffectual and ineffective. As the banking sector matures, there is increasing saturation and cannibalization of retention effects, making it difficult for smaller programs to compete effectively.

Academics also believe that there is a false assumption within the marketing circles that every customer is keen to develop an intense and devoted relationship with them. Also, one must question whether the proliferation of retention initiatives, whether they represent real value creation or are simply a case of “keeping up with the neighbours.” (Kadar & Kotanko, 2004).

Researchers have also argued that for retention to be a success, it has to implemented as a company wide strategy. The task of retaining customers should not be left solely to the marketing department. Berry (2002) highlights the important role of customer service teams in retaining customers. Customer service serve as the first point of contact with the customer and relationships can be made or broken down at this very juncture.

Customer retention should be one of the objectives of the customer service and the agents Key Performance Indicators should contain retention metrics. Human Resources also play a vital role in customer retention as their task is to make sure the employees are motivated and satisfied in the role that they perform. With an increased importance on retention, it is widely believed that reducing employee attrition can serve a useful survival strategy for organizations.

When an employee exits, the organization loses much more than just the employee and the associated cost (training costs etc). It loses the knowledge and expertise which the employee has acquired over the years and the rapport which they have established with the team members. What is more concerning, is, when the employee joins a competitor, because then they can recommend the best practices to the competitors which can work to their advantage.

The adherents of customer retention argue that retaining customers improves profitability, mainly by reducing the costs incurred in acquiring new customers (Clark, 2005). The prime objective of customer retention is to achieve “zero defections” of profitable customers (Tzokas, 2001), so that customer “churn” is minimised, in other words the acquisition and subsequent loss of customers. In addition, customer retention incorporates the notion of offering these retained customers goods or services that are thought likely to meet their needs (Dyche, 2005).

The benefits of customer retention have particular relevance to established financial service retailers in India, who face challenging market conditions of fierce competition and growing consumer mobility. In spite of the benefits to the organisation in retaining customers, there is limited empirical research on how retention is actually practised by companies. This research aims to contribute to an understanding of how customer retention is practised, by banking organisations.

Overview of the Indian Financial Services sector

Indian banking has undergone massive changes in the wake of rapid liberalization. Competition has increased with the entry of private sector and foreign banks. The Public sector banks, which once had more than 90 percent of customer accounts has seen its share reduce to less than 60 percent. Although State Bank of India (the largest public sector Bank) still has the major share, its customer base is reducing in the wake of stiff competition from ICICI (biggest private sector bank in India).


The Indian banking sector is divided in to public sector banks (composed of bigger players like State Bank of India, Punjab National Bank etc), private sector banks (ICICI, HDFC, UTI etc) and banks with foreign ownership (Citibank, HSBC, Lloyds TSB etc). Public sector banks still have the major share of customers and a more loyal customer base but they are facing stiff competition from the new private and foreign banks. Their market share is sliding down and so in the customer share.

The private and foreign banks which sprang as a result of the dismantling of entry barriers in the industry, have lean organization structure and have been able to invest in the latest technology to effectively target their customers. With technology as a key driver, these banks are able to exploit opportunities in cross-selling products, meet customer requirements and enhance profitability and efficiency. With growing customer demands, the focus is now shifting to high quality and better services.

Private and Foreign banks are now offering innovative products and services like convenience banking, ATMs, inter bank connections. This has made customer acquisition even more difficult and the focus has shifted on to holding existing customers which has given rise to the concept of relationship banking, which up till now, has largely been restricted to the retail sector.

There is an increasing need for banks to better their own performance levels as the increasingly competitive and complex nature of Indian banking industry has made banks to focus on the key profit drivers which have led to a change of focus to retention banking or promoting to existing customers. Banks in India have lately realized that building strong customer relationships is crucial to their success. They are increasingly trying to promote, establish, maintain and strengthen relationships with the existing customers.


Banks have to keep in mind that merely establishing a relationship with the customer will not reap dividends. Through this relationship, they have to make customers loyal and change their banking habits which are not a very easy task. For this, they have to make sure that their relationship building process in not based on bribery (price) but based on emotion. They have to focus on intrinsic rather than extrinsic rewards and slowly distance themselves from price discounts.

Relationship building is also a listening relationship and the process should try to understand the customer, communicate value to them and should be a symbol of commitment. Above all, banks have to remember that relationship building is not a mutually exclusive process and relies heavily on basic business drivers like product, quality, service, price etc. If relationship banking is to be a long term success, banks have to regard this as a strategic tool of the business reflecting the brand’s core strengths.