CUSTOMER RETENTION - A MOST PREFERRED STRATEGY FOR BANKS. Varsha Jain

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1 Available at Volume I, Issue IX September 2013 Article ID # 1914 ORIGINAL ARTICLE CUSTOMER RETENTION - A MOST PREFERRED STRATEGY FOR BANKS Varsha Jain Lecturer, Daronacharya Government College, Gurgaon (Haryana) Managing customers is one of the most important dimensions of marketing. An existing business is confronted mainly with the following twin strategies- (a) Creation of new customers; and (b) Retention of existing customers Creating customers is a process of attracting new customers while retention of customers involves creation of satisfaction and loyalty among the existing customers. The new company efforts are directed towards converting prospective customers into first time customers and the retention part start at a later stage when first time customers are converted into satisfied, repeat and loyal customers who praise and recommend our products and services to their friends/relatives for purchase. The main challenge lies in customer retention as these days, more and more new concerns are coming to the market with innovative ideas and efforts to woo other concerns customers. It is not easy as well, as there is not too much difference in the quality and price of most of the products and services available in the market and hence customers can think of switching to other concerns even on flimsy grounds. Even for a new business, it is equally important as initially it has to create customers through creating demand in the market and then strive hard to retain them. Customers retention is important from cost angle also. Das Narayandas 1 of Harward Business School, an authority on business of loyalty says, The basic product is a commodity---this means that there are multiple sources that the customer can buy from and in fact does so. Retaining customers is very important when the cost of acquiring them is much greater than the cost of retaining them. The cost of creating a new customer has been estimated to be five-six times more than that of retaining an existing customer. In addition, long-term customers offer the following benefits- (i) They buy more and take less of the seller s time. (ii) They are less sensitive to price. (iii) They create positive image and bring more new customers for the business. (iv) Profits per customer increase with customers longevity, because the longer the customers are with a company, the more willing they are to pay premium prices, make referrals, demand less hand holding and spend more money. The more a company can do to strengthen customers relationship, the more cost effective its marketing efforts will be. Therefore, the retailing firms first use their marketing resources to keep existing customers rather than to attract new ones 2. As a consequence, retaining customers becomes a priority and there are compelling reasons for managers to consider more carefully the factors that might increase customer retention rates. Escalating costs of attracting new customers and rising global competition has forced firms to devise strategies for establishing long lasting mutually beneficial relations with the existing customers. Almost all authorities on marketing support this view. Peter Drucker 3 also put Copyright Varsha Jain. This is an open access refereed article distributed under the Creative Common Attribution License which permits unrestricted use, distribution and reproduction in any medium, provided the original work is properly cited. 88

2 adequate focus on retention when he says, The basic purpose of an organization is to create customers and retain them Customer retention is not only a cost effective and profitable strategy, but in to day s business world it has become a compulsion. This is especially true when we know that 80 per cent of our sales come from 20 per cent of our customers and with these statistics, it is imperative to give adequate attention to such customers to achieve zero defection at least in their cases. It is also surprising why most marketing and sales campaigns are designed for new customers 4. Customers retention is just managing customers loyalty. Experts while talking of customers relationship management are talking directly or indirectly about customers retention. A few such instances have been reproduced as under- Berry and Parasuraman 5 were more straight when they said, that relationship marketing concerns, attracting, developing and retaining customer relationships Jackson B Bund 6 refers to relationship marketing as, marketing oriented toward strong, never lasting relationships with individual account Doyle and Roth 7 state that the goal of relationship selling is to earn the position of preferred supplier by developing trust in key accounts over a period of time. 1. Customers retention practices are not new to industry and trade. It is as old as marketing itself. Ever since the marketing of goods started, the sellers adopted various methods to retain existing customers. They kept close association even personal contacts with them so that they may not shift to other shops. Brand loyalty is nothing but a relationship built with efforts and goodwill and who bother than company s marketing people to create, sustain and interpret this relationship. Lawyers, tax consultants, insurers, physicians, non-profit organizations and bankers all followed practices for retaining existing customers/clients. In these cases, the concept has got more acceptability and brought out the newer requirements and challenges for the marketing function with customers retention driving philosophies. S. Ramesh 8 G.M. Retail Strategy, BPCL says We felt the customers coming regularly need to be rewarded. The second reason was we did not have any data about customers. We now identify and reward loyal customers and tailor our offerings more significantly In India also, such practices are very common. Airlines, in addition to offering bonus points for each journey, offer their repeat customers special treatment, not just more miles but better servicefaster check-in, quick check out. Indian Airlines offer Frequent Flyer card which allows a customer to accumulate miles when he travels and after a specified accumulated miles, he gets free airline ticket. Banks have special privileges for their large deposit holders. Publisher of Business Today offers a special discount of Rs. 200 to the existing subscribers to assure their renewal of subscription. Similar cards are given by hotels, restaurants, retailers, etc. Reliance Communication has come out with concession in rates for mobile phone services for the shareholders of group companies thus ensuring their continued loyalty with the group. Some hotels in India and abroad give special discount coupon to the customers to be used at the time of their next visit to the hotel. VLCC launched a customer loyalty program titled Way of Life which offers its members and their families benefits on a wide of VLCC products and services and also reward points accrual with a clear relationship between amount of usage and value of redemption and it is in a way a customers loyalty and retention exercise. Other benefits/privileges are also given to such preferred customers by so many other enterprizes. All this is part of their customer retention strategies. It is worth noting that L.L. Bean s 9 original promise to his customers more than 80 years ago, what he called his Golden Rule, is now held up as a standard for others to emulate. Everything we sell is backed by 100% guarantee. We do not want you to have anything from L.L. Bean that is not completely satisfactory. Return anything you bought from us at any time for any reason if it proves otherwise Though customers retention or customers loyalty is not totally new in management thinking, for a 89

3 fairly long period, it was not at all a desired priority in most companies and in some cases, it was not a part of basic marketing strategy. It was even ignored by the academicians though they indirectly dealt it in detail. Customers retention has thus emerged as a new thrust area. Bank business is no exception to all this. Banks now are normal business enterprises and work like that. Their product is services they offer and they too work for profit. They too have equal concern for customer retention and bank managers now usually talk of customer retention. Banks in some developed countries are offering nearly identical products and have reached saturation and can increase business by fighting for other banks business. Bank management in such cases naturally strives hard to retain as many customers in order to remain viable. Banking sector, an important segment of society has undergone radical changes in recent years thanks to liberalization, privatization and globalization policies of our economy. Its role has also assumed a new dimension which is evident from the fact that even cessation of banking activity for a day or two is sufficient to completely paralyze the normal working of business & industry, and even the overall economy. Immediately after liberalization, banking sector found itself in a highly competitive and rapidly changing environment. Not only the number of banks and their branches both in public and private sector increased, the nature, type and quality of services have also improved considerably. The relevance of innovations and aggressive marketing in banks has come to the fore as never before. The coming years will put pressure on banks to retain the various market segments in face of continuous onslaught from other banks and non banking financial institutions. The objective has been to improve efficiency & customer satisfaction, and also to attract more and more new customers who otherwise may not be feeling the need for bank services. This relationship building approach had been very common ever since the inception of banking services at all. The focus of marketing has moved from transactions to acquiring new customers, satisfying and retaining them Customer satisfaction and consequently customer retention is increasingly becoming a corporate goal as more and more enterprises are striving for quality products and services. Ajay Kelkar 10, Head, Marketing, HDFC Bank says, Most of the people treat loyalty programmes like mass media, but on a smaller scale. It does not work that way. You need to personalize elements otherwise it is just another customer acquisition drive. Most loyalty programmes are like an omelette now with six or seven things thrown in-discounts, cars on offer, newsletters. ICICI Bank s Executive Director V Vaidyanathan 11 said that a customer s relationship with a bank is like dating. In the early stages, both the customer and the bank try to understand each other and as time passes, they start taking each other for granted, so the bank s customer relationship management needs to be in shape to retain customers. Customer retention management has broader area and refers to all marketing and other activities directed towards identifying, establishing, developing and sustaining long lasting, trusting, mutually beneficial and successful relationship between the firm and its customers. In the service sector, specifically the banking, customer retention process is now more important and challenging in our country than ever before. In most banks, the top 10 percent of the customers actually generate 150 percent or more of the total profit. How is this possible? Simply puts, banks actually lose money on some customers, so some of the profits generated on the top ten percent customers actually compensate for the losses incurred on transactions with the least profitable customers. Thus it is critical that banks know how to identify and keep their top customers and to improve their relationship with the rest of their customer base. Sheshunoff s 12 Customer Retention strategy of Maximizing customer lifetime Profitability gives you a proven system for improving your bank wide approach to identify and nurturing your best customers. Consumer is the king though very old maxim, still hold good. Client satisfaction is a must for every organization be it a productive unit or marketing or a service provider like a bank. 90

4 Since the products and services offered by banks can be easily duplicated and banks are providing nearly identical services, they can only distinguish themselves on the basis of price and quality. Need of such strategy arises due to the following: (i) Due to inherent risk associated in banking where a small fall in its service quality affects the existing customers morale and business of bank significantly (ii) Due to innovations in providing newer types of services thereby attracting other banks customers (iii) Due to increased competition resulting from liberalization To retain existing customers, commercial banks come out with innovative practices. They should take care of some basics elaborated as under. Basic rule about customers retention strategies Bank must assess what the customers want and how they perceive bank services. What are their emerging expectations and how the same can be satisfied on continuous basis? The real performance indicator is customers satisfaction and loyalty. Satisfied customer is most valuable asset for a business. Das Narayandas 13 of Harward Business School, an authority on business of loyalty says, A loyalty program is not about giving customers price breaks which is what most firms do. The more important thing is to collect and then use the information (buying patterns, frequency of purchases, personal preferences) on loyal customers to create more value and therefore greater differentiation. He cautions that giving repeat customers lower prices just serves to make them a very pricesensitive lot who switch the instant someone else offers some attractive deal. A way to prevent it is to create switching costs for instance airlines miles, which are not transferable Another golden rule he advocates is to restrict loyalty activities only to the best customers say to 80/20 rule i.e. offer such benefits to the 20 per cent of your customer base that get you 80 percent of your profits, not revenue. Doyle and Roth 14 state that the goal of relationship selling is to earn the position of preferred supplier by developing trust in key accounts over a period of time. Key accounts here mean these 20 per cent accounts. Case studies in India and abroad indicate that loyal customers are the biggest spenders. Sanjay Badhe 15, Director Operations, Shoppers Stop, concludes that per cent of sales of shoppers stop come from customers who are members of the loyalty program First Citizen s Club However, managing and sustaining such loyalty is easier said than done. Marketing is the key to success for all enterprises whether in trading, manufacturing or service sector. In service sector, its relevance is much more with the more than proportionate expansion in services sector, specifically the banking services sector. Earlier, almost all banks were in public sector and the general public had no choice. But now there are banks, purely public, purely private, foreign and joint sector each competing with each other not for attracting more and more new customers but for retaining the existing customers as well. The later part concerning the retention of existing customers is more important, given the limited market size of new clients and the tough competition among banks for attracting them. Besides using advertisement, bank personnel often build customer relationship through customer interactions and through involvement in community activities. For example, some banks associate themselves with big clients like universities, colleges, schools, hospitals and sport bodies in tree plantation drive doing community service and at the same time cementing their relationship with them. Similarly, some banks like State bank of India, State bank of Patiala, HDFC Bank, Punjab National Bank, etc. sponsor events like blood donation camp and thus strengthen their relationship with the institution concerned which happens to be their client as well. Besides such occasional events, banks are also doing a lot in this direction and a few such instances are as under- (i) Arranging periodically meetings of senior officers with the customers to resolve their 91

5 complaints on the spot (ii) Offering newly introduced services like ATM, credit card etc. free or at subsidized rates. (iii) Offering bill/draft/cheque collection facility at par or at lower charges to the existing customers though it mainly confine to big customers (iv) Encouraging/directing branch managers to listen and resolve customer s complaint immediately. Keeping complaint boxes as well for this purpose. Such practices have important place in banks operation. Jones & Sasser 16 suggested that, Zero defection of profitable customers to be the main objective of a concern if it wants to attain higher profitability. This is the type of approach a bank should have for attaining its goal of customer retention. REFERENCES 1 Reichheld, F.F.(1996), Learning from Customer Defections, Harvard Business Review, March/April, pp Rust, Roland T. and Anthony J. Zahorik (1993), "Customer Satisfaction, Customer Retention, and Market Share," Journal of Retailing, 69 pp Suja, R. Nair (2004), Consumer Behaviour & Marketing Research (Himalya) p Reichheld, F.F.(1996), Learning from Customer Defections, Harvard Business Review, March/April, pp Berry, Leonard L and Parasuraman, A (1991), Marketing Services (The Free Press, New York), p Jackson, Barabara Bund (1985), Winning and keeping industrial customers (Lexington books), p Doyle, Stephen X and George T Roth (1992) Selling and sales management in action: The use of insight coaching to improve relationship selling Journal of Personal Selling and Sales Management- Vol-12 pp Economic Times, 24 Sept Kotler, Philip (1998), Marketing Management, Analysis, planning, implementation & control (Prentice Hall, New Delhi), pp.9 & Economic Times, 24 Sept Economic Times, 30 May 2007 p Greg Tommerdahl, CPA and David J.,Mangan-Customer Retention: Maximising Lifetime Profitability Manual p Economic Times, 24 Sept Doyle, Stephen X and George T Roth (1992) Selling and sales management in action: The use of insight coaching to improve relationship selling Journal of Personal Selling and Sales Management- Vol-12 pp Economic Times, 24 Sept Jones T.O and Sasser W.E (1995) Why satisfied Customers defect Harvard Business Review, Nov-Dec, pp