The quality of customer service plays a significant role in every profit-making business. It not only determines the ability (or lack) of a firm to attract and maintain its clients but also influences the bottom line of the firm. How can a firm retain its customers? How can it ensure the loyalty of its customers even in the face of stiff competition in the market? These are some of the questions that management of firms have to contend with on a daily basis. The aim of this report is to analyse customers and their needs specifically in the financial services industry. The report will assess the factors which greatly determine the retention of customers in a financial services firm, the importance of customer retention to financial services organizations, the loyalty ladder model, as well as the customer lifetime value of a firm. It is hoped that the report will provide useful information that will help financial organizations to retain its customers and achieve its bottom line goals.
Every business in existence normally has a target audience. Increased competition and diversification in the financial industry requires the players in the industry to be strategic in dealing with their customers to ensure that their needs are met, priorities are considered and loyalty is achieved. This report focuses on the factors that form the basis for customer retention and examines the loyalty ladder model and its application in retaining customers in various relationship stages. It also explores customer lifetime value and its importance in customer retention to organizations offering financial services.
Factors on which customer retention relies
Customer retention is the actual act of satisfying and maintaining customers. It is what normally leads to customer loyalty. Research shows that not only is the cost of retention lower compared to new attractions, but also that the level of customer profitability to a firm increases with the increase in the length of period they deal with the firm (Reichheld & Sasser, 1990). Effective retention of customers requires certain crucial factors. First, it is reliant on customer service. The manner in which customers are treated, their general judgment of a financial organization’s ability to meet their financial needs at reasonable costs while providing convenience and matching up to the core values helps them gauge the service quality. Service in this sector is measured in terms of products and services offered and delivery channels in place (Evans 2002). Customer service considers the overall effect; psychologically, physically, cognitively and emotionally (Retail Banking Survey, 2007). The value, respect and worthiness accorded to a customer are first portrayed in dealings with representatives of the firms. Gupta, Lehmann and Stuart (2004) emphasize on the importance of valuing customers. They assert that valuing customers allows valuation of firms which reveals an increment in retention rate of 1% attributable. According to Retail Banking Survey (2007), customer service is efficient when done in confidence and speed with lowered costs of transactions.
Customer retention is highly dependent on customer satisfaction. Once a customer approaches a financial services organization, s/he usually anticipates that their need would be met. Satisfaction comes through the use of customer-generic approaches in dealing with them as individuals independently by getting to understand what they seek from the firm then offering a product that best suits them (Evans, 2002). This case applies especially since society has people with differences in terms of age, culture, financial needs and expectations. Customers whose needs are met are satisfied and develop confidence in the firm so as to entrust their future financial needs to them. Retention comes in when a customer is assured of the firm’s ability to handle future needs and to grow with them while taking advantage of opportunities such as technology to meet their financial needs
Trust is very necessary in customer retention. Once a financial services organization has satisfied the needs of customers, the relationship is based on the firm’s reliability in meeting its word. Trust means that the customer has to be assured that the firm has his/her best interests at heart (Ahmad & Buttle, 2001). Retention also relies on channels of support available to the customer. The delivery channels of a financial firm have to meet the needs of the customers while providing convenience and point of action by promptly handling matters of the customer. This has currently been enhanced through branch networks to reach the locality of the customers, call centres to answer the queries of the customers, and use of other technological advancements that provide flexibility in financial services delivery (Retail Banking Survey, 2007).
The quality of products and services together with new innovations offered by financial services firms are what best describe them in terms of who they are and what they do. They give a brand to the firm and the strength due to reliability and efficiency over time boosts the confidence of the customers. According to Retail Banking Survey (2007), customers deal with financial services firms that save on time and money with easy-to-use and understand products and services. The quality of products and services has to include the varying needs of the customers and hence provide efficiency in addressing all the financial needs of the customer. However, diversification has to assure quality.
The Loyalty Ladder Model
This is a relationship marketing approach that considers stages that have to be done right from the time a customer has a need that the firm can solve to the stage of partnership thus improving customer retention (Ahmad & Buttle, 2001). The stages that a customer attains before reaching full partnership are; suspect, prospect, customer, client, supporter, advocate and finally a partner (Evans 2002). According to Blackwell, Miniard and Engel (2001), an individual in choosing a brand, goes through several stages up to final decision making stage. Evans (2002) emphasizes that different relationship stages require different needs and requirements that sellers and marketers are supposed to provide appropriate stimuli and information to influence the right actions. In the long run, Blackwell et al. (2001) argue that these processes can stimulate customer retention. Ahmad and Buttle (2001) provide suggestions for retention at various stages. Needs recognition calls for triggering of the need by marketers mainly through advertising, friends and advocates; the search for information stage requires offering reliable information such as brochures, the internet; the evaluation of alternatives stage calls for emphasis on the products or services attributes and benefits; the purchase stage requires tracking of records and building of trust while finally the post purchase stage calls for follow-up.
Payne (2006) classifies the stages of a customer relation with financial organizations into acquisition, consolidation and enhancement. He emphasizes that at the acquisition stage marketers need to conduct adequate research and provide pre-sale support and advice. He suggests ways of marketing through advertising, seminars and exhibitions, using branches as points of sale and telesales. Payne (2006) further asserts that at the consolidation stage, necessary information should be provided, follow-up done, and guidance of customers on the way forward with a focus on the process of application, relevant documentation and payment methods, processes and systems. The enhancement stage involves account management. There is increased advertising, interviews and meetings, and reliance on the call centres and letters for correspondence. Customers offer suggestions and feedback with increased advocacy and partnerships. Customers benefit from strategic information and loyalty programs (Payne, 2006).
Jap (2001) explores the role of the sales staff in the four stages of the relationship lifecycle. In the exploration and build-up phases he suggests that the marketer’s influence over satisfaction outcome is minimal. At the maturity phase, he claims that the influence of marketers is usually positive while at the decline phase the marketer helps the customers to repair their perceptions. He asserts that the points of the relationship life cycle that are productive have the characteristics of enthusiasm and maximum collaboration, regular information exchange and good communication. He claims that the life cycle is based on promotion of quality goods and services while focusing on the customer.
Customer Lifetime Value
The customer lifetime value refers to the value of an organization’s customers to the organization (Ahmad & Buttle, 2001). Establishing connections that are meaningful with customers consequently increases the firm’s profits and retention rates. This is because valuing of customers allows firms to be valued in terms of profitability and retention rates with research showing that valuation of customers increases retention rates (Gupta et al. 2004). Ahmad and Buttle (2001) assert that customer lifetime value is a crucial component in the process of general understanding of the customer, their behaviours and satisfaction. They provide that at the macro level the customer lifetime value is calculated as follows:
Revenue less costs/proportion of incurred losses
However when customer lifetime value is established on the basis of an individual level, it is calculated as follows:
Value of transactions (use or purchase of product) X Transactions number per year (on average or extrapolation) X Duration of relationship cycle expected
This amount is discounted down to the net present value. The value obtained is usually large just portraying the importance of the customer value. According to Reichheld and Sasser (1990), the significance of the life time value increases with considerations for good customer managements’ real benefits. They further assert that a slight increase in retention greatly affects a client’s life time value disproportionately. Following the great effects of increasing the lifetime value, it is important to aim at prudent management of the financial services of an organization mainly through increased loyalty and hence increasing the business value (Ahmad & Buttle, 2001). Reichheld and Sasser (1990) recommend that to benefit from the customer lifetime value, financial organizations need to focus on maximizing retention, reducing the category of customers likely to deliver low value and maximizing their value. In assessing the customer lifetime value, Gupta et al. (2004) emphasize that firms need to understand their customers for effective targeting of efforts and products. They recommend that firms have to aim at maximizing returns through cost-effective measures, that is, attaining the highest benefits at the lowest costs. They further suggest that in understanding their customers, marketers have to take into consideration the lifestyles, residence, family status, future expectations, income, type and place of work. They also have to understand the potential values of the customers so that the design of services can be customized.
The importance of customer retention to financial services organizations
Customer retention plays very crucial roles in financial services organization. The sector is normally faced with competition and offers products and services that are related. Payne (2006) asserts that the financial services organizations rely on customer retention to a great deal since the levels of competition and costs involved in product development are usually high. He asserts that customer retention allows organizations to save on costs of advertising and building and developing the brands for strength. According to Reached and Sasser (1990), financial services sector prefer customer retention because of the nature of the industry. The new customers are not usually sure and specific of their financial needs. In fact they are expected to make decisions in conditions of risk. This aspect makes the application of customer- centric approaches difficult. Strategizing to get to predict the needs of new customers becomes difficult and hence the achievement of customer satisfaction is not measurable in a reliable manner. Development of strategies for customer retention is easier since the relationship formed between the organization and those customers is usually based on trust with communication barriers broken. Developing of customer- centric approaches is easier and measurable. In addition, Reichheld and Sasser (1990) assert that retention of customers is preferred because of the ease of solving problems, referrals and instability of the market.
Payne (2006) argues that income streams for customer retention are usually more predictable with cross selling being more effective than new attractions. The predictability and effectiveness of cross selling is usually due to the relationships between customers and the organization. New customers are usually seeking for alternative products and services. Payne (2006) further asserts that the new customers are faced with risks in terms of performance, physically, psychologically, status socially, time and financial risks. These risks cause new customers not to be confident in entrusting reasonable amounts of their incomes to the financial organizations. According to Evans (2002), the amortization of development costs is usually done across longer periods; this increases the margins for the organizations. Financial organizations aim at maximizing returns at low costs. Evans further asserts that the amortization over longer periods allows the organizations to maximize their returns since margins are usually increased while reliance on the same creates allowance for operations at lower costs enabling them fulfil their goals.
Reichheld and Sasser (1990) have revealed through their research that an organization’s level of profitability increases with the increase in customer retention because of the correlation between them. They insist that in the long run customers in retention pay more by buying more and hence the costs of serving them are decreased. Gupta et al. (2004) further emphasize that valuing customers has effects of increasing the retention rates. The correlation factors effects are thus experienced in higher profits. Ahmad and Buttel (2001) show that financial organizations reap much benefit from customer loyalty. They assert that financial organizations thus prefer retention because of the ability of such customers to develop loyalty as compared to new customers. They further explain that the customer lifetime value that encourages maximization of returns has greater impact in retention values. The customer value they suggest has positive impacts on the value of business and loyalty. These benefits can be enjoyed more from retention as compared to new attractions.
The recommendations given by Reichheld and Sasser (1990) reference to the customer lifetime value of maximizing retention, reducing categories of customers of low value to achieve value to the businesses all are favourable with retention of customers. They further suggest reduction in the number of customers with low value. According to the recommendation, such customers mainly fall in the category of new attractions. Based on their recommendation, financial service organizations focus on retention to reduce potential risks from new attractions.
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