Benefits of Customer Retention and Reichheld’s Loyalty Management Strategy

Evidently, nowadays we all are observing the global economic turmoil and stagnation in
many countries and global industries, which inevitably leads to the increasing competition
between the market players and more active search for the opportunities to improve the
performance, as Thurik and Audretsch (2002) states. One of the most prolific ways of increasing
the performance of enterprises during the period of tightening economy is shifting attention to
providing better service and improving the customer retention, as Datamonitor (2008) says.
Another reason for this shift in attention is increasing costs of advertising while striving to
maintain the marketing budget on a certain level, as Jain and Singh (2002) says. Truly, with
growing global uncertainties to a new unprecedented level during the last years, Johnson
(2011) says that the shift in concentration at the organizational level from the acquisition to
retention of customer has never been stronger for almost all the industries globally. These
alterations are also accompanied by the global changes within the channels of distribution, and
new innovations in this area which are now implemented in the range of industries cased by
such reasons as increasing competition, creation of the new markets and rapid technological
development (Kalafatis 2004; Chu et al 2007; Lucy 2010; Roso 2011)

To add, the increasing penetration of the internet and improving the customers' skills of
searching necessary information about the products, alternatives and products specifications
make them very informed and thus rather skeptical to any of the products or service offered
comparing to the recent times, on the one hand (Clemons 2007; Poncibò and Incardona 2007;
de Souza 2011). On the other hand, this situation can be an opportunity for increasing the sales
since the new, better-informed customers demonstrate the higher consumption of the
products in the long run, comparing with less informed one, if the company will be able to
retain them (Gu et al 2002; Inderst and Peitz 2008).

So, what are the benefits of increased customer retention? Reichheld and Sasser (1990)
found out that the length of the time of the relationship with customers is directly related to
the profits in the companies engaged in service industry. Reichheld (1996) states that the 5%
reduction in the rate of customer reduction can result in the increase of the profits by 25% or
even 85%, depending on the industry. Gupta et al (2004) demonstrate that increase of the
retention only by 1% can increase the value of the company by 5%. Saunders (1999), as the

Miraziz Bazarov 2011 Миразиз Базаров

result of surveying more than 900 working in different industries suggested the fact that
targeting a goal of increasing customer retention and improving loyalty in the general
company’s strategy is proved to be 60% more profitable comparing with the strategies without
these goals. Reichheld (1996) also suggests that a 5% increase in customer retention leads to
the increase in average NPV of between 35% and 95%, significantly enhancing the profitability
of a company. Wallick (2011) also suggests that customer loyalty increases the revenues, sales,
market share and therefore profits of the company. Customers Focus Consulting (2003)
suggests that long-term customer relations harshly decrease the strength of competitors and
threat exposed from them. Reichheld (1996) also says that sustainable growth of the company
and it high level of approval by society attracts and keeps the best employer, and experienced
employees further reduce costs and improve quality.

Another approach to defining the benefits of increasing customer retention were

proposed by Villanueva and Hanssens (2007), who after the extensive research found out five
main advantages of properly implemented customer retention policy:

1. It is much cheaper to retain customers than to acquire them.

2. The costs of serving long-life customers are less than the costs of serving new customers.
3. Long-life customers significantly improve the reputation and increase the brand value of the
company, therefore attracting new customers via word-of-mouth advertising.
4. Long-life customers are usually less price sensitive than the new customers and in some
cases they are ready to pay higher prices
5. Long-life customers are more likely to buy more from the company, so that the company can
increase their assortment considerably.

So, if the benefits of high class and well developed retention and increasing loyalty
programs are well defined it is important to analyze the ways of gaining customers’ loyalty and
enhancing customers’ retention.

Weinstein & Johnson (1999) cites Pine II et al who state that the long customers
retained in an organizations increase the profitability of the organizations, because of the
enhanced customer purchasing behavior, lowered operational costs, readiness of the
customers to pay additional premiums, customer referrals, as well as the lowered customer
acquisition costs for the organization, and suggest that at least 75% of an organization’s
marketing budget should be allocated to customer retention strategy and strengthening these
relationships. But the increase of the spending is just the first step, well-tried and trusted
framework or strategies for increasing retention and loyalty should be implemented to make
the spending worthwhile.
Miraziz Bazarov 2011 Миразиз Базаров
One of the most prominent, convenient and trusted strategies in this field is the Reichheld’s
(1996) Loyalty Management Strategy who proposed the several steps that should be done in
this area, thus providing the framework for the creating the strategy:

1. Building the superior customer value proposition

Slater and Narver (1994) note the importance of building properly developed value proposition
that offers targeted customers the highest and superior value comparing with the competitor's
ones. This can be done by enhancing the quality of the products and their performance, in
addition to the design, implementing zero defects police and improving the quality of service at
ach point when customer contact the company, so retail intermediaries should be also
managed correctly ( Slater and Narver 1994; Parasuraman 1997)

2. Finding the right customer

The next step is also evident, since the proper targeting at inherently loyal to particular value
proposition customers who prefer more stable and long term relationships are considered to
be a starting point for creating the audience of loyal profitable customers, who spend more and
require less. (Anderson et al 2006; Jones and Sasser 1995). Jones and Sasser (1995) however
give a warning that the value should be targeted to the consumers who will consider company’s
proposition as more valuable, comparing with competitors' ones, they also warns about well-
developed fitting the strength of the company with the required needs of the targeted
customers.

3. Earning customer loyalty

Reichheld (1996) says that the main aim of this step is increasing lifetime value and
customers retentions. So, earning customer loyalty can be done my managing the loyalty via
proposing customer-value in the products offer, service quality, employees’ motivations
programs and well-defined pricing policies (O’Malley 1998; Dick and Basu 1994)

4. Finding the right employees

Employee management is an integral part of managing customer value and relationship

management, therefore a company should be very selective while finding the most appropriate
employees, since they have to be highly productive and competitive, they also should share
company's values, as Payne and Holt (2001), in addition to Woodruff (1997) says. They also

Miraziz Bazarov 2011 Миразиз Базаров

suggest developing the strategy of attracting, motivating and rewarding the employees which
deliver costumer value, and this is especially important for service companies.

5. Earning employee loyalty

Timm (2011) suggest that one of the most important factors in building the loyalty of
customers is earning employee loyalty. Thus can be done via investing into the trainings and
career devolvement of the employees, creating the structure that will help to expose the most
of the employees’ abilities and reward them accordingly, and addition to the development of
the reward system which is dependent on the performance of the whole company (Reichheld
1993; Timm 2011)

6. Gaining the cost advantage via enhanced productivity

Schuler and MacMillan (1984) and Reichheld (1996) say that enhanced employee and
customer loyalty leads to the creation of ‘productivity surplus’, when employees can receive
higher salaries and modest bonuses, which are allocated to the main incentives. It is also
important to notice that reducing the costs should not be done by decreasing the salaries and
quality of the raw materials or equipment, instead all the assets should be enabled to produce
very high value via increased incentives and salaries and point increase of the expenses on
quality of the assets (Peteraf 1993; Reichheld 1996; Anderson et al 1997). For example,
Reichheld quotes of Henry Ford who said: “Cutting wages does not reduce costs – it increases
them. The only way to get a low cost product is to pay a high price for a high grade of human
service”

7. Finding the right investors

Reichheld (1996) says that mutual and private-owned companies are considered to be more
appropriate investors since they are targeting to stable growth in the long -term. On the other
hand, investments accrued from stick market expectation have generally negative influence on
long-term and stable growth. Reichheld (1993), (1996) also notes that growth should be
considered from the point of delivering customer value, and not shareholders one.

8. Earning investor loyalty.

In order to earn the loyalty of investors, a company has to develop trusted reputation
via paying the fair return to the investors before the decision over the managers' bonuses, in

Miraziz Bazarov 2011 Миразиз Базаров

addition to the development of the system when managers are encouraged to re-invest the
profits to create the maximum value to both customers and investors (Finnie and Randall 2002;
Helm 2007)

To summarize, the literature review has clearly demonstrated that improving customer
retention leads to indisputable enhancement of the performance. This was supported by the
range of the sources and researches, which were using various approaches, strategies and areas
of the studies related to customer retention and loyalty. So, in case if the benefits of adopting
the program for increasing the customers retaining are evident, the next step is to create such a
program. Therefore, the literature review was then aimed at the analysis of the sources that
support and provide the additional information about the framework of Loyalty Management
Strategy proposed by Reichheld. The literature reviews therefore demonstrated that this
strategy is considered to be viable and useful in worsening economic conditions, which is
observing nowadays.

Miraziz Bazarov 2011 Миразиз Базаров

References:

Anderson E., Fornell C. and Rust T.R., 1997. Customer Satisfaction, Productivity, and
Profitability: Differences between Goods and Services, Marketing Science,16(2), pp. 129-145

Anderson J., Narus J. and van Rossum W, 2006. Customer Value Propositions in Business
Markets, Harward Business Review, [online] ,
http://www.supersmous.co.za/DownloadFiles/QuadS-HBR-value-propositions.pdf, viewed: 16
December 2011

Audretsch D.B. and Thurik R., 2002. What's New About the New Economy? Sources of Growth
in the Managed and Entrepreneurial Economies, [pdf], available at :
http://www.spea.indiana.edu/ids/pdfholder/issn-01-1.pdf , viewed: 16 December 2011

Clemons A., 2007. Resonance Marketing in the Age of the Truly Informed Consumer: Creating
Profits through Differentiation and Delight, [pdf], available at :
http://opim.wharton.upenn.edu/~clemons/blogs/resonanceblog.pdf , viewed: 17 December
2011

Chu J., Chintagunta P.K. and Vilcassim N.J., 2007. Assessing the Economic Value of Distribution
Channels: An Application to the Personal Computer Industry, [online], available at :
http://www.marketingpower.com/AboutAMA/Pages/AMA%20Publications/AMA%20Journals/J
ournal%20of%20Marketing%20Research/TOCs/summary%20feb%2007/Assessingjmrfeb07.asp
x , viewed: 16 December 2011

Datamonitor, 2008. CRM in the Contact Center and the Emergence of the Unified Agent
Desktop, [pdf], available at : http://www.jacada.com/whitepapers/pdfs/Datamonitor_CRM-in-
Contact-Center-Emergence-of-Unified-Agent-Desktop.pdf, viewed: 16 December 2011

Dick A. and Basu K, 1994. Journal of the Academy of Marketing Science 22(2):99-113

Gu, B., Hitt, L.M. and Clemons, E.K., 2002. Does Online Product Information Increase Consumer
Demand? An Empirical Investigation (September 2002)

Jain D. and Singh S., 2002. Customer Lifetime Value Research In Marketing: A Review and
Future Dairections, [pdf], available at :
http://dmlab.snu.ac.kr/zboard/data/dmlab_seminar_CRM/Customer_lifetime_value_research_
in_marketing_A_review_and_future_directions.pdf , viewed: 16 December 2011

Inderst R., and Peitz M., 2008. Selling Service Plans to Differentially Informed Customers, [pdf],
available at : http://www.wiwi.uni-
frankfurt.de/profs/inderst/Theory/consumer_information_inderst_peitz_may08.pdf, viewed:
16 December 2011

Miraziz Bazarov 2011 Миразиз Базаров

 de Souza M, 2011. Are mobile consumers better informed than salespeople?, [online]
available at : http://blog.creamglobal.com/right_brain_left_brain/2011/12/are-mobile-
consumers-better-informed-than-salespeople.html, viewed: 16 December 2011

Gupta, S., Lehmann, D. R., & Stuart, J. A. (2004). Valuing customers. Journal of Marketing
Research, 41(1), 7-18.

Reichheld, F. F., & Sasser, W. E. (1990). Zero defections: Quality comes to services. Harvard
Business Review, [online], available at : http://hbr.org/1990/09/zero-defections-quality-comes-
to-services/ar/1, viewed: 16 December 2011

Reichheld, F .F. (1996). The loyalty effect, presentation, [online], available at :

http://www.slideshare.net/SteveRaybould/the-loyalty-effect, viewed: 16 December 2011

Saunders, J. (1999). Manufacturers build on CRM. Computing Canada, 25(32), 17-18

Customer Focus Consulting, 2003. Customer Satisfaction, Loyalty And Profit - Understanding
The Links, [online],
http://www.customerfocusconsult.com/articles/articles_template.asp?ID=3, viewed: 16
December 2011

Jones T. and Sasser E.m, 1995. Why Satisfied Customers Defect, Harvard Business Review, [pdf],
available at : http://download.microsoft.com/download/a/e/0/ae0b3074-466e-4876-84d8-
dcdf3f928da4/Why_Satisfied_Customer_Defect.pdf, viewed: 16 December 2011

Kalafatis S., 2004. Buyer–seller relationships along channels of distribution, Industrial Marketing
Management, 31(3).

Lucy J., 2010. Changing Channels of Distribution, [pdf], available at :

http://ewweb.com/economy/news/electric_changing_channels_distribution/, viewed: 16
December 2011

Lisa O’Malley, (1998) "Can loyalty schemes really build loyalty?", Marketing Intelligence &
Planning, Vol. 16 Iss: 1, pp.47 - 55

Parasuraman A., 1997, Reflections on gaining competitive advantage through customer value,
[online], available at : http://www.springerlink.com/content/t5776l2219408416/, viewed: 16
December 2011

Payne, A. and Holt, S. (2001), Diagnosing Customer Value: Integrating the Value Process and
Relationship Marketing. British Journal of Management, 12: 159–182.

Peteraf, M. A., 1993, The cornerstones of competitive advantage: A resource-based view.

Strategic Management Journal, 14: 179–191.

Pine II, Joseph B., Peppers, Don & Rogers, Martha (1995). Do you want to keep your customers
forever? Harvard Business Review, [pdf], available at :

Miraziz Bazarov 2011 Миразиз Базаров

http://marketing.pun.aptaracorp.com/elearning/1ML_Demo105/HBSP_Service_Success/resour
ces/pdfs/do_you_want.pdf, viewed: 16 December 2011

Poncibò C. and Incardona R., 2007. The Average Consumer, the Unfair Commercial Practices
Directive, and the Cognitive Revolution. Journal of Consumer Policy, Issue 30

Reichheld F., 1993. Loyalty Based Management, Harvard Business Review, [pdf], available at :
http://marketing.pun.aptaracorp.com/elearning/1ML_Demo105/HBSP_Service_Success/modul
e01/reading/pdfs/loy_article.pdf, viewed: 16 December 2011

Roso W., 2011. Changing distribution channels, [online], available at :

http://www.ceoforum.com.au/article-detail.cfm?cid=10723&t=/Walter-Roso-STIHL/Changing-
distribution-channels , viewed: 16 December 2011

Schuler, R. S. and MacMillan, I. C. 1984, Gaining competitive advantage through human

resource management practices. Human Resource Management, 23: 241–255.

Slater S.F. and Narver J., 1994. Market Orientation, Customer Value, and Superior Performance,
[pdf], available at :
http://academics.eckerd.edu/instructor/trasorrj/Consumer%20behavior/Consumer%20Behavio
r%20Articles/Value/Market%20Orientation.pdf, viewed: 16 December 2011

Timm P., 2011. Eight Essential Ingredients to Build Customer Loyalty, [online], available at :
http://www.businessknowhow.com/manage/eightkeyingredients.htm , viewed: 16 December
2011

Villanueva, J., and Hanssens, D. M., 2007. Customer equity: Measurement, management and
research opportunities. Foundations and Trends in Marketing, 1(1), 1–95. Retrieved November
18, 2008, from

Wallick S.H., 2011. Benefits of Customer Loyalty Programs, [online] , available at :

http://smallbusiness.yahoo.com/advisor/benefits-of-customer-loyalty-programs.html, viewed:
16 December 2011

Weinstein, A. and Johnson, W. C. 1999. Designing and delivering superior customer value:
concepts, cases, and applications. Boca Raton: CRC Press LLC.

Woodruff R., 1997. Customer value: The next source for competitive advantage, available at :
[online], http://www.springerlink.com/content/387342265x0422lq/, viewed: 16 December
2011

Miraziz Bazarov 2011 Миразиз Базаров