Customer Management - Research Paper Example

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EXECUTIVE SUMMARY This report was commissioned to provide insight into which marketing activity successfully helps in achieving customer retention in a retail banking organization as a part of the project “Customer Management”. The report consists of factual and relevant literature forming the basis of a hypothesis and analysis of the models hence produced to justify the hypothesis. The research done as a part of this report draws attention to the fact that customer retention can be achieved when customers exhibit loyalty to bank by being satisfied with the value of service they receive. 42% of satisfied customers end up being loyal to the firm they are associated with. Research also shows that loyal and retained customers have direct links to the profitability of an organization. As customer retention increases by 5%, net profits go up by 25-95%. Thus, the report recommends the bank to create value for its customers as this helps in going up the chain and drives customer satisfaction to build faith and retain customers, thereby increasing net profitability. TABLE OF CONTENTS  1. Introduction…………………………………………………………………………………1 2. Literature Review…………………………………………………………………………1 3. Analysis………………………………………………………………………………………..3 4. Conclusion and Recommendation………………………………………………..4 5. References……………………………………………………………………………………5 6. Appendix………………………………………………………………………………………6 INTRODUCTION Currently the unpredictable economic conditions dogged by effects of the credit crisis have forced banks to develop and implement customer retention strategies to drive revenue because of the birth of technologically advanced consumers who expect accessibility, personalized service, and competitive fees and rewards. (Galetto n.d.) The idea of keeping old customers and turning newly acquired customers into loyal buyers is highly important. Customer retention is the name of the game and the better one is at it, the more profitable it is.(Janelle Vreeland n.d.) “Customer retention refers to the ability of a company or product to retain its customers over some specified period. High customer retention means customers of the product or business tend to return to, continue to buy or in some other way not defect to another product or business, or to non-use entirely”.(Wikipedia,2017) With the cost of customer acquisition rising, retention is a priority for banking institutions. Majority of the products and services offered by a bank can be easily replicated by another bank, the only factors on which they can differentiate are price, customer management and quality. Thus, customer retention is potentially the solution that banks can use to gain an upper hand and survive in an extremely competent banking industry(Inkumsah 2013). “As per Harvard Business School report, on average, increasing customer retention rates by 5% increases profits by 25%-95%”(Anon 2017). Customer Retention helps in advances in revenue generation, product development, marketing, customer feedback, branding, differentiation, along with causing less stress to bank employees, getting more interaction and feedback from the customers. Analytics play an important part in banks' retention strategies. Banks, by using analytical techniques on appropriate enablers can see a significant increase in new customers and elongated relationships with existing ones. LITERATURE REVIEW Customer loyalty is of utmost importance to conduct business in present cutthroat marketplace, and banks are no exception(Ehigie 2006). Banks are increasingly concerned about harvesting and maintaining customer loyalty as they are aware that loyalty surely leads to increased income and is a key determining factor of market share and profitability.(Lewis & Soureli 2006) Contemporary researchers in bank marketing have suggested relationship marketing (RM) as a more viable alternative for gaining customer loyalty(Ehigie 2006). The concept is established on the realisation that building long-term bonds with customers leads to drop in defection rates and costs but increases gains(Ehigie 2006). Customer loyalty is a show of faith by the consumer towards a product, brand, marketer, or services despite other competitors in the market-place, which results in repeat purchase (Ehigie 2006). A loyal customer to a bank is, thus, one that will stay with it, is willing to invest in and introduce new products with the bank and is likely to endorse the bank’s services to others. Evidence showing links between customer loyalty and organization profitability have been found, implying that any organization with loyal customers has considerable competitive leverage. Hence, studies on customer loyalty are essential for bank management. Customers can be expected to stick with the bank if there is a customer-oriented climate. This is established when organizations try to identify genuine customers’ needs and adapt to meet those needs (Lewis & Soureli 2006; Ehigie 2006) These needs are fulfilled by satisfying a customer with the service, which in turn is fulfilled by establishing value for a customer in that entity. Thus, in a way customer value drives customer satisfaction which drives loyalty. This approach helps in retaining customers and when customers are loyal and have a long-standing relationship with the bank, then the bank makes profits. Thus, the theory on which this report is based underlines the hypothesis that customer value drives customer satisfaction, customer satisfaction drives customer loyalty which helps in increasing net profitability over a period.(Hallowell 1996) Today’s customers are more value oriented in their quest of seeking services because they have a wide variety of alternatives. “Customers buy based on value, in the form of preferred attributes, performance, consequences”. Thus, banks must be able to exclusively service the customers to meet their high expectations. Customers also like a lot of added value and benefits, a market orientation scheme that analyses needs, designs new and redoes current products must be implemented at the bank . (Ehigie 2006; Ennew & Binks 1996) Customer satisfaction is a response to customer value, a “post consumption evaluation that a chosen alternative at least meets or exceeds expectations”. It is an “evaluation of emotion”, mirroring the level to which a customer is happy with the service being offered by the banking organization. Therefore, satisfaction occurs with the intensification of a customers’ feelings when he/she compares his/her viewpoint of the service or product in comparison to his/her desires and expectations(Ehigie 2006). Hence when the perceived value of the product/service stands up to the expectation, the consumer is satisfied and when it exceeds a customer’s expectations, the customer feels “delighted”. But if the perceived performance falls short of a customer’s expectations, then the customer feels dissatisfied(Hallowell 1996). Thus, customer satisfaction is regarded as a crucial thread in business approach of every organization as it is a minimum to which an organization must set its goals to be successful(Benjamin et al. 2014). “If value is an evaluation or appraisal of attribute performance and satisfaction reflects the impact of performance on people’s feeling state, then value can be used to predict customer’s feelings and buying behaviour”(Olsen 2002).   Researchers acknowledge the importance of customer satisfaction and value as predictors of customer loyalty (Ehigie 2006). Studies show that customer satisfaction influences investment intentions as well as post-investment perspective (Hallowell 1996). Feelings (satisfaction/dissatisfaction) build up an individual’s comprehensive attitude to a product, service, or organization. These feelings define the individual’s emotional degree of loyalty and push the customer to continue to purchase services from the same organization, increasing the scale and scope of a relationship, or the act of recommendation(Hallowell 1996). We can thus say that loyalty is the base for customer retention. It’s a flow that starts from creating value for customers to satisfying the customers to propelling them to be loyal and thus achieving customer retention which leads to profitability. In general, retaining customers results in lower costs to service customers, reduced marketing expenditures, more business from the current customer base and greater profits(Hallowell 1996). The longer the relationship of a customer with the bank, the higher the probability that he/she will place a greater share of his/her business with the bank. Improved customer holding leads to better employee retention because employees feel proud and satisfied by serving their customers well. Loyal customers are easier to serve because they know the system and how to use it and developed good working relationships with the personnel. “Increased employee retention leads to improved customer retention because long serving personnel become increasingly experienced in creating value for their customers”. “A long-term relationship with a bank reduces a customer’s perceived risk and fosters customer confidence that the bank will not supply an inappropriate or non-performing service”(Bennett 2002). Retained customers also provide consistent word of mouth marketing for the bank which drastically reduces marketing costs that the bank would have otherwise had to deal with. (Jain, Pinson and Malhotra 1987). ANALYSIS Problem definition and Methodology As a marketing analyst of a large retail bank and in charge of the project “Customer Management”, the problem here is to find which marketing activity effectively retains customers and devise marketing strategies and models based on the same and to effectively implement it. My hypothesis is that customer value drives customer satisfaction which influences customer loyalty and this approach helps in retaining customers. Successful customer retention in turn leads to increased net profits. Hence, I have built three models and tested them using SPSS Statistics. H1- Value  Satisfaction H2-Satisfaction  Loyalty H3-Loyalty  Customer Profitability The data set has survey based data on 736 customers and comprises of demographic variables of the customers such as response number, bank branch number, gender, profession with a range of 1-3 and education with a range of 1-5. There are attitudinal variables of loyalty with a range of 1-7, value and satisfaction with a range of 1-10. There are also some other variables namely – income class, age, percentage of savings held at the bank, percentage of loans held at the bank, relationship length, customer lifetime value. The customers who had missing values in the gender variable have been removed. Customers whose profession was not specified have been treated as unemployed and the missing values have been filled with a value 4. The customers with no specified education levels have also been removed from the dataset. There were some values in decimals which has been rounded off to the nearest whole number for simplicity. After cleaning and correcting the errors in the data, I had a dataset consisting of 716 customers. Then I ran factor analysis on the six loyalty items to form an individual factor for loyalty which I use as a dependent variable in the latter stages. The same was done for the three value items and the three satisfaction items and individual factors value and satisfaction were formed. “Factor analysis is a statistical method used to describe variability among observed, correlated variables in terms of a potentially lower number of unobserved variables”(David et al. 2015). The KMO Bartlett sampling frequency was high in all the cases and in each case, there was strong positive correlation between the items of each variable. The next step was to run linear regression on the models. “Linear regression is an approach for modelling the relationship between a scalar dependent variable and one or more explanatory variables”(Ting et al. 2006). In the first model, value was regressed as an independent variable against satisfaction which was the dependent variable, in the second one satisfaction was regressed as an independent variable against loyalty and finally loyalty was regressed as an independent variable against customer lifetime value (CLV). Data Analysis In the first model, value (independent variable) was regressed against satisfaction with education and branch number as the control variables. The results of this model were highly significant i.e.: below the 5% significance level. The model explains 32% of the variability of the response data around its mean. The standard error of the estimated model is 0.827 which indicates the model is a good fit(Model 1). Value has a positive influence on satisfaction which implies that when the value for a customer increases, the level of satisfaction for a customer increases as based on my hypothesis. Branch number is also a factor considered here which is important as different branches of the bank will have different employees providing services therefore the quality of services will be a bit different in each branch which ultimately would affect a customer’s overall feeling towards it. Different branches are in different locations; hence location has an indirect influence on the model as well. As education increases, the satisfaction levels decrease. This may be because highly educated customers are well informed and thus have higher expectations of services.(Homburg & Giering n.d.) In the second model, satisfaction was regressed against loyalty (dependent variable) with gender, percentage of savings, income class and age as the control variables. The results of this model were found to be below the 5% significance level. The R- squared for this model is not too high but decent and explains 22% of the variability of the response data. The standard error of the estimated model is 0.889 which again indicates the model is a sufficiently good fit(Model 2). Satisfaction has a positive effect on loyalty which implies that when the customer satisfaction levels increase, he/she is more likely to be loyal to the bank (Customer retention). The gender and age of the customers have an influence on the regression as well. There have been theories which suggest women are influenced by the evaluation of their personal interactions with consultants and sales personnel compared to men but still customer retention rate among men is higher than women, that may be because generally more men associate themselves with banking rather than women. Customers who are older are more likely to be loyal to the bank. The younger bunch of people are rather less loyal and switch banks for greater convenience, lower prices, higher deposit interest rates to adapt to substantial changes to their lives such as moving away from home, tertiary study, different job. People with higher income and savings, tend to be more loyal to banks because they have a chunk of their wealth invested in the bank and thus it makes more sense for them to be stable in their choices. (Ehigie 2006; Homburg & Giering n.d.) Finally, loyalty is regressed over Customer lifetime value (CLV) as customer retention has direct links to profitability. Firstly, retaining customers is less costly than acquiring new customers, retained customers pay more because of price premiums, there are added profits from sales through referrals by these customers, retained customers lead to increase in sales as well. The model has a mediocre fit of 13% because this data has been gathered from surveys. But nevertheless, it is significant below the 5% significance level(Model 3). Percentage of loans, income class, and age have been used as control variables. It can be noted that as age increases, customer lifetime value and hence profitability increases. This is down to the fact that middle aged and older customers would have higher balances as compared to young customers. There is a similar relationship between income class and CLV as customers with higher income will logically be more profitable compared to ones with lower income. The percentage of loans taken by customers from the bank also has a positive effect on profitability as the more the loans, the higher the banks earn on interest.(Haenlein 2007; Jain & Singh 2002) CONCLUSION AND RECOMMENDATION In this report, I have tried my best to create a model that could help achieve customer retention and backed it up factually as well. It seems obvious that dissatisfied customers would be willing to break up a relationship than satisfied customers but satisfaction is not a sufficient guarantee for loyalty, it is just a mediator between value and loyalty and hence customer retention. Lack of proper operationalization and measurement of satisfaction is a shortcoming. Value for a customer holds high regard hence efforts should be made to create value for a customer like convenience, customization, electronic and internet banking, mobile applications for account operations.(Stauss & Neuhaus 2006) To retain young customers, products and services that hold value for them should be introduced. For customers who are highly educated and have high expectations, rigorous staff training and latest technology should be standardized to have high service levels. Yet this model is not fool proof as the number of customers targeted here are small and there is scope for more research and theories as the field of marketing is large and a lot of factors can affect the banking industry. REFERENCES Anon, 2017. http://www.gainsight.com/your-success/importance-of-customer-retention-strategy/. Anon, https://en.wikipedia.org/wiki/Customer_retention. Benjamin, M. et al., 2014. A Study on Customer Care Management Factors in Banking Sector of Haryana State India. , 4(1), pp.117–122. Bennett, R., 2002. Identifying the Key Issues for Measuring Loyalty. , 9, pp.27–44. David, S. et al., 2015. A Study on Employee Quality of Work life. , (4), pp.68–71. Ehigie, B.O., 2006. Correlates of customer loyalty to their bank : a case study in Nigeria. Ennew, C. & Binks, M., 1996. The Impact of Service Quality and Service Characteristics on Customer Retention : Small Businesses and Their ... The Impact of Service Quality and Service Characteristics on Customer. , (September). Galetto, M., https://www.ngdata.com/top-customer-retention-resources-for-banks/. Haenlein, M., 2007. A Model to Determine Customer Lifetime Value in a Retail Banking Context. , 25(3), pp.221–234. Hallowell, R. & Hallowell, R., 1996. The relationships of customer satisfaction , customer loyalty , and profitability : an empirical study. Homburg, C. & Giering, A., Personal Characteristics as Moderators of the Relationship Between Customer Satisfaction and Loyalty — An Empirical Analysis. , 18(January 2001), pp.43–66. Inkumsah, W.A., 2013. Factors That Impacted Customer Retention of Banks . A Study of Recently Acquired Banks in the UPSA Area of Madina , Accra ( Specifically Access Bank ). , 1, pp.88–103. Jain, D. & Singh, S.S., 2002. CUSTOMER LIFETIME VALUE RESEARCH IN MARKETING : A REVIEW AND FUTURE DIRECTIONS. , 16(2), pp.34–46. Available at: http://dx.doi.org/10.1002/dir.10032. Janelle Vreeland, https://lonelybrand.com/blog/the-importance-of-customer-retention-and-4-ways-to-improve-yours/. Lewis, B.R. & Soureli, M., 2006. The antecedents of consumer loyalty in retail banking y. , 31(February), pp.15–31. Olsen, S.O., 2002. Comparative Evaluation and the Relationship Between Quality , Satisfaction , and Repurchase Loyalty. Patterson, P.G., Spreng, R.A. & Patterson, P.G., 1997. Modelling the relationship between perceived value , satisfaction and repurchase intentions in a business-to- business , services context : an empirical examination. Stauss, B. & Neuhaus, P., 2006. The qualitative satisfaction. Ting, J., Souza, A.D. & Schaal, S., 2006. Bayesian Regression with Input Noise for High Dimensional Data. , pp.937–944. APPENDIX REGRESSION MODEL 1 INDEPENDENT VARIABLE: VALUE DEPENDENT VARIABLE: SATISFACTION CONTROL VARIABLES: BRANCH, EDUCATION REGRESSION MODEL 2 INDEPENDENT VARIABLE: SATISFACTION DEPENDENT VARIABLE: LOYALTY CONTROL VARIABLES: AGE, GENDER, INCOME, SAVINGS REGRESSION MODEL 3 INDEPENDENT VARIABLE: LOYALTY DEPENDENT VARIABLE: CLV CONTROL VARIABLES: LOANS, AGE, INCOME Read More