1PROJECT TITLE“Customer retention Strategy for ICICI Security”Report Submitted in practical fulfillment of the requirement...
2DECLARATION BY CANDIDATEI declare that this dissertation work on “Customer retention Strategy for ICICISecurity”Is a bona...
3ACKNOWLEDGEMENTI express my deep sense of gratitude to our beloved Dean Sir, Mr. ManishDholakiya for giving me a wonderfu...
4Table of ContentSr. No. Topic Page No.1. Introduction1.1 About Customer retention1.2 Overview of the Financial Market1.3 ...
58. ConclusionBiblography
6AbstractSince the last decade, many companies perceive the retention of the customer as acentral topic in their managemen...
7Chapter 1 INTRODUCTION
81. INTRODUCTION1.1 About Customer RetentionBefore discussing anything, it is necessary to understand the Customer retenti...
9vital management tool for retailers to survive and grow in the very competitive sector asretailers encounter fierce compe...
10Options for Retail InvestorEquityDebtMutual FundsFixed Deposits with BanksPost office schemesGoldReal EstateInsurance1.3...
11Insurance SectorLife insurance industry, comprising over 20 companies, including public sectorLife Insurance Corporation...
12Indias foreign exchange (forex) reserves stood at US$ 292.64 billion for theweek ended March 29, 2013, according to data...
13Financial Services in India: Recent DevelopmentsCanadas largest insurer Manulife Financial is contemplating to enter Ind...
14The Bill seeks to raise foreign investment cap in the sector from 26 per cent to 49per cent, which is a much-awaited mov...
15Financial markets help to transfer funds from people who do not need it toPeople who do need it.For lenders, the markets...
161.4. About ICICI SecuritiesICICI Securities Ltd is an integrated securities firm offering a wide range ofservices includ...
17Derivatives, Currency Futures, Mutual Funds but also other services Fixed Deposits,Loans, Tax Services, New Pension Syst...
18relationship with our customers. ICICIdirect‘s services and offerings evolve accordingto the customers ever changing req...
19The attempt is to bring world class investment products to our customers throughover 15 centers of ICICIdirect.ICICI Sec...
20The Sales and Dealing team has demonstrated strong sales and executioncapabilities of actionable ideas to clients which ...
21A casual observer might infer from Indias flourishing stock markets, fast-growing mutual funds, and capable private bank...
221.6 Importance of the StudyThis study is beneficial for the ICICI Securities.It helps to understand them about their cus...
23Chapter 2THEORETICAL BACKGROUND&REVIEW LITERATURE
242.1 Customer Satisfaction and Links to CustomerProfitability:An Empirical Examination of the Association betweenAttitude...
251991). A customer may make such comparisons for each part of an offer (‗‗domain-specific satisfaction‘‘) or for the offe...
26analysis. The output is sometimes referred to as the ‗‗lifetime value‘‘ of a customer (cf.Heskett et al 1997, Peppers & ...
27remains unexplored is whether customer knowledge processes in the context ofcustomer relationship management are helping...
28through the variety of customer relationship management (CRM) software packagescurrently available on the market.Employe...
29But every year, the 35 percent of customers who reduced their balances significantlycost the bank 24 percent of its tota...
30problems. But satisfaction alone doesn‘t tell a company what makes customers loyal,the product or the difficulty of find...
31For industries that don‘t have many competitors capable of meeting the basicneeds of their customers, active dissatisfac...
32Profiling customersOur research also showed that the proportion of people in each loyalty segmentdiffers by industry (Ex...
33factors like convenience, account for more than 70 percent of reduced spending bypurchasers of casual apparel but only o...
34Relationship marketing (RM) is a process (Gronroos, 2000) that consists ofhaving long-term relationships with customers,...
35causes of customer defections are uncovered and addressed (Reichheld, 1996;Reichheld and Kenny, 1990). Information syste...
362000), and retailing services (Mehta, 2000), to restaurants (Lee and Hing 1995).However, since SERVQUAL was originally d...
37Accordingly,service quality is defined as how well a delivered service level matchescustomer‘s expectation. Parasuraman ...
38introduced a variety of instruments without testing the suitability of SERVQUAL as anonline service measure.2.6 CUSTOMER...
39Customer lifetime value (CLV) is defined as the sum of cumulated cash flows—discounted using the Weighted Average Cost o...
40manager‘s perspective, companies have to understand the reasons why consumerschoose a specific channel (retail store or ...
41Retetion Cross-Channel RetentionEX: searching onlinechannel of A-firm ,thenpurchasing A-firmonlinechannelEX: searching o...
42they gained to purchase in traditional stores (Burke, 2002). We could see in differentcircumstances cross-channel custom...
43C. Online-Channel AttractivenessAttractiveness—the positive characteristics of competing service providers—positively in...
44What is Customer Equity?When we aggregate the customer lifetime values of a firm‘s individualcustomers, the result is th...
45We cannot learn why the customer chooses to buy from the firm.Acquisition vs. Retention ModelsIn this approach, customer...
46involves factors that increase switching costs that are not subsumed by value equity andbrand equity, such as frequent b...
472.9 Customer retention in the financial industryGenerally speaking, a company could increase its profits by acquiring ne...
48Enhancing customer retention is beneficial for acquiring new customers. Loyalcustomers are more likely to generate word ...
49customer retention is very important (Veloutsou, Daskou, and Daskou 2004).Retention or attribution research has been inc...
50times more than that of retaining an existing customer (Hart, Heskett, and Sasser1990). Therefore, improving customer re...
51The adherents of customer retention argue that retaining customers improvesprofitability, mainly by reducing the costs i...
52This article reviews a number of implementable CLV models that are useful for marketsegmentation and the allocation of m...
532.12 Customer retention in the financial industry: Anapplication of survival analysisGenerally speaking, a company could...
54positive WOM, which enhances revenue and market share. Reichheld (1991-1992)found that between 20% and 40% of new custom...
552.13 Switching Barriers in the Four-Stage LoyaltyModelNumerous studies have linked customer satisfaction to financial ou...
56behavioral approach was (Jacoby (1973, 1978). Loyalty was defined as a biasednonrandom) repeat purchase of a specific br...
57b) Affective LoyaltyAffective loyalty relates to a favorable attitude towards a specific brand. Attitudeitself is a func...
58between provider employees and customers are repeated over time, the motivation forthe development of a social aspect to...
59Interest in service recovery has grown because bad service experiences often leadto customer switching (Keaveney, 1995),...
60Customer RecoveryThe vast majority of service recovery literature focuses on customer recovery.We do not attempt to summ...
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  1. 1. 1PROJECT TITLE“Customer retention Strategy for ICICI Security”Report Submitted in practical fulfillment of the requirementFor the Degree ofMBAInMarketing & FinanceUnder the supervision Submitted ByOf Nilesh K. SenProf. Pallavi Mittal MBA 4thSemester
  2. 2. 2DECLARATION BY CANDIDATEI declare that this dissertation work on “Customer retention Strategy for ICICISecurity”Is a bonafide work done and submitted by me and the research work was carriedout under the guidance of Prof. Pallavi Mittal.I further declare that this Project Report does not form of any other projectreports or dissertations on the basis of which a degree was awarded or conferredon an earlier occasion on me or any other candidate.Place: AhmedabadDate :
  3. 3. 3ACKNOWLEDGEMENTI express my deep sense of gratitude to our beloved Dean Sir, Mr. ManishDholakiya for giving me a wonderful opportunity for doing Master of BusinessAdministration in this esteemed institution.I consider it a great privilege to be under the guidance of “Mrs. PallaviMittal”,Professor of Marketing Amity Global Business School,Amity University. Thecontribution and significant role played by her help me in preparation andsubmission of project report in time.I gratefully acknowledge the team of staff members in M.B.A departmentfor helping me in all aspects and giving their valuable ideas for making my projectefficient and effective. Last but not the least I would like to thank my parents andfriends for their valuable support and encouragement through out the course of theproject.
  4. 4. 4Table of ContentSr. No. Topic Page No.1. Introduction1.1 About Customer retention1.2 Overview of the Financial Market1.3 Financial services in India1.3.1 Financial Market1.4 About ICICI Securities1.4.1 Complete description of ICICI Securities asa Distribution House1.5 Analysis of Indian Financial Sector1.6 Importance of the study2. Theoritical Background & ReviewLiterature3. Objectives of the study4. Theoretical Framework5. Research Design5.1 Data collection methods5.2 Sampling5.3 Primary Data5.4 Hypothesis Test6. Data Analysis & Interpretation7. Limitation & Scope of further Studies
  5. 5. 58. ConclusionBiblography
  6. 6. 6AbstractSince the last decade, many companies perceive the retention of the customer as acentral topic in their management and marketing decisions. A firm can increase profitsby 25-95 percent if it could improve its customer retention rates by 5 percent. A retainedcustomer will be loyal due to the attachment and commitment to the organization. Thiscustomer will, then, recommend others to purchase and repurchase the companies‘products and services. Review on past literatures indicates that studies on customerretention concentrated more on the manufacturing sector over the Finance & retailingdespite its growing importance as a major service subsector. This study exploresliteratures pertaining to the factors that influence customer retention and its measures atgreat length. Factors such as top management support, switching costs, perceived servicequality, customer satisfaction, interaction with customers, pricing, membership andemployees are found to significantly influence the customer retention rate whilecustomer retention rate can be measured by evaluating their characteristics in terms ofrepeat purchases, willingness in spreading positive word of mouth (WOM) about thecompany to others, insensitiveness towards the changes in pricing of products andattitude of praising (not complaining). Based on the thorough literatures done, atheoretical framework is proposed and some possible recommendations are put forwardfor future researches.
  7. 7. 7Chapter 1 INTRODUCTION
  8. 8. 81. INTRODUCTION1.1 About Customer RetentionBefore discussing anything, it is necessary to understand the Customer retention.So What is Customer Retention? Hence,“Customer Retention is the activity that a selling organization undertakes in order toreduce customer defections.”Successful customer retention starts with the first contact an organization haswith a customer and continues throughout the entire lifetime of a relationship. Acompany‘s ability to attract and retain new customers, is not only related to its productor services, but strongly related to the way it services its existing customers and thereputation it creates within and across the marketplace. Customer retention has a directimpact on profitability.Since the last decade, many companies perceive the retention of the customer asa central topic in their management and marketing decisions (Van den Poel &Larivie`re, 2005). Most of the studies about customer retention argue that retainingcustomers improves profitability, importantly by reducing the cost incurred in acquiringnew customers (Reichheld and Kenny, 1990; Schmittlein, 1995; Reichheld, 1996).Firms that constantly attract new customers will not be able to witness increases inprofits if they are unable to retain them but at the same juncture, it is not rewarding tomaintain every customer, since it is very costly (Anderson and Mittal 2000 IN Wooand Fock 2004). This is supported with findings of (Reichheld and Schefter, 2000)which discovered that a firm can increase profits by 25-95 percent if it could improve itscustomer retention rates by 5 percent. A small shift in customer retention rates can makea large difference for the firm‘s profit which will accelerate over time (Reichheld, 1993;Wright & Sparks, 1999; Zeithaml et al., 1996). Inherently, a retained customer will beloyal due to the attachment and commitment to the organization. This customer will,then, recommend others to purchase and repurchase the companies‘ product and services(Diller, 1996; Diller and Muellner, 1998; Gremler and Brown, 1998; Homburg etal. 1999; Oliver, 1999).Retailing is identified as one of the top contributors for servicesector worldwide (Currah and Wrigley, 2004; Kaliappan et al., 2008) whichconstantly evolves over time. It is believed that customer retention strategy will be a
  9. 9. 9vital management tool for retailers to survive and grow in the very competitive sector asretailers encounter fierce competition both from local and foreign retailers alike and aswell as from non-traditional retailers such as online retailers (Levy,2009). Review onpast literatures indicates that studies on customer retention concentrated more on themanufacturing sector over the service (retailing) sector (Anderson and Sullivan,1993)despite its growing importance to the development of nations (Hernandez, 2004;Ganz,2005).1.2 Overview of Financial MarketIn economics, a financial market is a mechanism that allows people to easily buy& sell (trade) financial securities (such as stocks & bonds), commodities (such asprecious metals or agricultural goods).Money we earn is partly spent and rest saved for meeting future expenses.Instead of keeping the savings idle we like to use savings in order to get return on it inthe future. This is called ―Investment”.Hence a question arises in our mind that Why people Invest & what are thedifferent avenues where people can invest? Following is an answer to the question.Why Invest?Earn Return on idle resourcesGenerate sum of money for specified goal in lifeMake provision for uncertain futureTo meet the cost of inflationTypes of Financial MarketCapital marketCommodity MarketMoney MarketDerivatives MarketInsurance MarketForeign Exchange Market
  10. 10. 10Options for Retail InvestorEquityDebtMutual FundsFixed Deposits with BanksPost office schemesGoldReal EstateInsurance1.3 Financial Services in IndiaReferences: Media Reports, Press Releases, RBI DocumentsComprising primary markets, foreign direct investments (FDI), alternateinvestment options, banking, insurance and asset management segment, the Indianfinancial services market happens to be one of the oldest and robust across the globe. Itis definitely fast growing and best among other emerging economies.India is highly preferred as an investment destination as the savings rate is high (25 percent plus) and financial products penetration is low. Hence, it is a vast market formutual funds, portfolio and wealth management services, insurance and a plethora ofother financial products. Moreover, with a major pie of savings going into physicalassets such as gold and real estate, the Indian Government is focusing on big policyinitiatives to attract savers towards financial markets through incentives and tax savings.For instance, the recent relaxation in expense ratios for mutual funds and the prospectsof higher foreign investment limits in insurance and pension sectors are certain steps thatcould unlock huge potential in these sectors and can emerge as a lucrative market forforeign investors.
  11. 11. 11Insurance SectorLife insurance industry, comprising over 20 companies, including public sectorLife Insurance Corporation (LIC) of India, collected total premium of Rs 84,501.75 crore (US$ 15.48 billion) during the April-February period of 2012-13fiscal. Private insurers together raked-in Rs 23, 796.29 crore (US$ 4.36 billion)in these 11 monthsOn the other hand, Indian general insurers premium collection rose 19.36 percent to Rs 561.1 billion (US$ 10.28 billion) in the April-January 2012-13,Insurance Regulatory and Development Authority (IRDA) said in a statement.Of the total, premium collection of the four state-run general insurers rose 16.78per cent to Rs 319.18 billion (US$ 5.85 billion) in the 10 months while that of 23private sector non-life insurers increased 22.93 per cent to Rs 241.81 billion(US$ 4.43 billion) to Jan 31, 2013.The four state-run general insurers are NewIndia Assurance Co, National Insurance Co Ltd, Oriental Insurance Co Ltd andUnited India Insurance Co LtdBanking ServicesAccording to the Reserve Bank of India (RBI)s Quarterly Statistics on Depositsand Credit of Scheduled Commercial Banks, March 2012, Nationalised Banksaccounted for 53.0 per cent of the aggregate deposits, while the State Bank of India(SBI) and its Associates accounted for 21.8 per cent. The share of New PrivateSector Banks, Old Private Sector Banks, Foreign Banks, and Regional Rural Banksin aggregate deposits was 13.0 per cent, 4.8 per cent, 4.4 per cent and 3.0%respectively.Nationalised Banks accounted for the highest share of 52.0 per cent in grossbank credit followed by State Bank of India and its Associates (22.5 per cent) andNew Private Sector Banks (13.5 per cent). Foreign Banks, Old Private Sector Banksand Regional Rural Banks had shares of around 4.8 per cent, 4.8 per cent and 2.4 percent, respectively
  12. 12. 12Indias foreign exchange (forex) reserves stood at US$ 292.64 billion for theweek ended March 29, 2013, according to data released by the central bank. Thevalue of foreign currency assets (FCA) - the biggest component of the forexreserves - stood at US$ 259.72 billion, according to the weekly statisticalsupplement released by the RBIMutual Funds Industry in IndiaIndias asset management companies (AMCs) have witnessed a growth of 19.5 per centin their average assets under management (AUM) in FY13, wherein they stood at Rs8.16 lakh crore (US$ 149.53 billion), as on March 31, 2013, according to the lateststatistics available from industry body Association of Mutual Funds in India (AMFI)Private Equity, Mergers & Acquisitions in IndiaFavorable demographics and growth opportunities keep India an attractivedestination for merger and acquisition (M&A) activities across diverse sectors includingconsumer goods and pharmaceuticals, according to global consultancy Ernst & Young.The value of M&A deals in India stood at US$ 4.5 billion in the March 2013quarter, according to Thomson Reuters India M&A First Quarter 2013 Review.Meanwhile, there were 90 private equity (PE) deals valuing US$ 1.04 billion duringJanuary-March 2013 quarter, reveal data from Four-S Services.Foreign Institutional Investors (FIIs) in IndiaFIIs have infused US$ 26 billion in the Indian stock market during the fiscalended March 31, 2013, according to latest data available with the marketregulator Securities and Exchange Board of India (SEBI). The amount is thehighest ever since overseas entities started investing in the countryThe number of registered FIIs in India stood at 1, 757 in FY 2012-13 while thenumber of FII sub-accounts rose to 6, 335, from 6, 322 at the end of 2011-12.
  13. 13. 13Financial Services in India: Recent DevelopmentsCanadas largest insurer Manulife Financial is contemplating to enter Indianinsurance sector. The company is actively doing a market research to find aviable Business model to set up shop here.Insurance sector is home to manyother foreign players like Allianz, Prudential, Standard Life, Aviva, Aegon andNippon Life, which are present in the market through joint ventures (JVs)withtheir respective Indian partners.The US$ 4 billion-media conglomerate - Essel Group has forayed into the Indianfinancial services sector. It has set up two businesses, private equity (PE) andinvestment banking, under the names of Essel Finance Managers andCAPSTAR, respectively, under the holding company, Essel Financial Services.CAPSTAR, to focus on deals in infrastructure, real estate and financial services,has set up an office each in Mumbai, Noida, Bangalore and Delhi and will openone each in Chennai and Pune. The firm will focus on mergers and acquisitions(M&A), pre-Initial Public Offering (IPO) deals, qualified institutionalplacements (QIPs) and portfolio management servicesFinancial Services: Government InitiativesIn its latest attempt to attract international investors, the Government hassimplified the process for FIIs investing in Government and corporate bonds. Inthe newly devised streamlined procedure, the Government, SEBI and the RBIhave decided to remove sub-limits for FIIs within the overall cap for bonds.From now on, there will only be two ceilings - a US$ 25 billion limit forinvestment in government securities (G-secs) that has been formed by mergingG-secs (old) and G-secs (long-term). In addition, there will be a US$ 51 billionsub-limit for corporate bonds that will include the existing one for FIIs (US$ 25billion), qualified foreign investors (QFIs) (US$ 1 billion) and US$ 25 billion forFIIs in long term infrastructure bondsMeanwhile, Mr P Chidambaram, the Finance Minister, has expressed confidencethat the Government would soon introduce amendments to the Insurance Bill.
  14. 14. 14The Bill seeks to raise foreign investment cap in the sector from 26 per cent to 49per cent, which is a much-awaited move in the capital-intensive industryRoad AheadMarket analysts believe that Indian stocks may touch new highs in 2013, as themarket sentiments in the US and Europe are still dismal. Higher-than-expected cuts inpolicy rates by the RBI and surprises in companies earnings could potentially drivemore FIIs in India.Mr. P Chidambaram has also indicated that there is a rising demand for openingbank branches in Indian towns and villages. More bank branches mean moremobilisations of savings and higher investments in the economy. On an average, about6, 000 branches were being opened every year in the last 2-3 years and theres a plan toopen more of them in 2013-14.1.3.1 Financial MarketBefore we understand the Full Term ―Financial Market‖. Let‘s understand first―What is Market‖?―Market is the means through which buyers and sellers are broughttogether to aid in the transfer of goods and/or services.‖Note:A market does not necessarily have a physical location.A market does not necessarily own the goods and service involved.A market can deal in any variety of goods and services.So, what is Financial Market?‖―A financial market is an environment where various types of financialinstruments are bought and sold, such as equities, currencies and debt securities,according to a set of rules.‖Various derivatives of these base entities, for example futures, swaps andoptions, and other financial innovations are also traded.
  15. 15. 15Financial markets help to transfer funds from people who do not need it toPeople who do need it.For lenders, the markets provide a conduit for their excess liquidity and aWay to store wealth.For borrowers, the markets furnish credit to finance their consumption andInvestment.
  16. 16. 161.4. About ICICI SecuritiesICICI Securities Ltd is an integrated securities firm offering a wide range ofservices including investment banking, institutional broking, retail broking, privatewealth management, and financial product distribution.ICICI Securities sees its role as Creating Informed Access to the Wealth ofthe Nation for its diversified set of client that include corporate, financial institutions,high net-worth individuals and retail investors.The platform not only offers convenient ways to invest in Equity, Derivatives,Currency Futures, Mutual Funds but also other services Fixed Deposits, Loans, TaxServices, New Pension Systems and Insurance are available.1.4.1 Complete description of ICICI Securities as a DistributionHouseRetail EquityICICI Securities empowers over 2 million Indians to seamlessly accessthe capital market with ICICIdirect.com, an award winning and pioneering onlinebroking platform. The platform not only offers convenient ways to invest in Equity,
  17. 17. 17Derivatives, Currency Futures, Mutual Funds but also other services Fixed Deposits,Loans, Tax Services, New Pension Systems and Insurance are available.ICICIdirect.com offers a convenient and easy to use platform to invest in equity andvarious other financial products using its unique 3-in-1 account which integratescustomers saving, trading and demat accounts.Apart from convenience, ICICIdirect.com also offers access to comprehensiveresearch information, stock picks and mutual fund recommendations among otherofferings. Tailored services and trading strategies are available to different types ofcustomers; long term investors, day traders, high-volume traders and derivatives tradersto name some.Distribution ChannelICICI Securities has set-up neighborhood financial stores which offer a varietyof financial products and services under one roof. It is a one-stop shop that facilitatesexisting and potential customers to speak to our team and understand their financialplans and goals. ICICI Securities has 250 stores across 66 cities in India.Another unique concept called the ICICIdirect Money Kitchen was launched inlate 2009. An extension of the superstore model, the money kitchen is an innovativefinancial store where visitors can create their profiles to not only analyze theirinvestment strategy by using various financial tools but also monitor it from time-to-time.To enable our customers to maximize their returns and plan for their future,ICICIdirect has also started financial planning services at these stores. Customizedfinancial plans can be created for our customers by dedicated Relationship Managerswho will understand the customers requirements and future goals.Based on this information, the Relationship Manager works on creating acomprehensive and easy-to-read financial plan. This enables ICICIdirect to move fromjust a transactional based relationship to a meaningful and value-added long-term
  18. 18. 18relationship with our customers. ICICIdirect‘s services and offerings evolve accordingto the customers ever changing requirements and goals.Customers can walk-in to the financial superstores for products like ICICIdirect3-in-1 online trading account, equities, mutual funds, IPO, Life and General insurance,Fixed Deposits and many other financial products. The stores also conduct periodictraining sessions on markets and demo sessions of the trading website.ResearchICICI Securities understands the need for insightful research to make the rightinvestment decision. An independent equity research team provides strong and timelyupdates to ensure that customer can avail of market opportunities.The research team focuses on both large cap as well as small and mid-cap. Largecap companies provide an overview of industry environments, while small and mid-capcompanies are chosen bottom-up, providing a unique perspective to a generally under-researched end of the market. The focus is on identifying companies, which we believeare likely to generate wealth for investors on a sustained basis through in-depthfundamental research.Wealth ManagementThe Wealth Management Group is a team of specialists who offer specificadvisory services to meet both personal and business wealth requirements of HNIs.The team creates customized strategies to meet Customers investment goals ofwealth accumulation, wealth preservation and liquidity. In addition to mutual funds,fixed deposits and other traditional products, we also offer alternate investment avenuesof Private Equity, Structured / Customized products for investors with specific views onthe markets and Portfolio Protection Strategies for large investors.
  19. 19. 19The attempt is to bring world class investment products to our customers throughover 15 centers of ICICIdirect.ICICI Securities as InstitutionalEquity Capital MarketICICI Securities has been at the forefront of capital markets advisory for severaldecades and has also been involved in most of the major public equity issuances inrecent times. The company was among the leading underwriters of Indian equity andequity linked offerings with unparalleled execution capabilitiesThe firms expertise include Initial Public Offerings (IPOs), Further PublicOfferings (FPOs), Rights Offerings, Convertible Offerings, Qualified InstitutionalPlacement (QIP), Non-convertible Debentures, Buyback, Delisting, Open Offers andinternational offerings, for both, unlisted and listed entities.ICICI Securities has successfully managed public issues of companies whichwere the first in their sector to tap the market - media both print and television, firstGovt. of India divestment IPO, first pure-play Internet Company in India etc.ICICI Securities was also involved in various pioneering issues in the Indiancapital markets - the first issue using the new alternate book-building (French Auction)method (NTPC), the first issue of shares with Differential Voting Rights (Tata Motors),the first public issue of Non-Convertible Debentures (Tata Capital), the first delistingusing the reverse book-building mechanism (Hewlett-Packard), etc.Institutional EquitiesICICI Securities assists global institutional investors to make the right decisionsthrough insightful research coverage and a client focused Sales and Dealing team.A dedicated and specialized research team ensures flow of well thought-out and well-researched stock ideas and portfolio strategies.
  20. 20. 20The Sales and Dealing team has demonstrated strong sales and executioncapabilities of actionable ideas to clients which have resulted in good relationshipsacross geographies.ICICI Securities enjoys the first mover and market leader advantage in thederivatives segment and offers the entire spectrum, from set-up to trading strategy.The equity group leverages research and distribution reach to domestic andforeign institutional investors in case of public offerings. The research team tracks over15 key sectors of the Indian economy and publishes in-depth research reports every year.The equity group acts as a bridge for institutional investors and corporate clients withthe markets.ICICI Securities is the first domestic Investment Bank to organize theme basedconferences in New York, Shanghai, Singapore & Hong Kong.1.5 Analysis of Indian Financial SectorAnalysis of Indian Financial Sector reveals that it is at present going through aphase of stable growth rate which is experiencing an upward swing. The rise can bemaintained over a long period by keeping the inflation down.The financial sector in India has experienced a growth rate of 8.5% per annum.The rise in the growth rate suggests the growth of the economy. The financial policiesand the monetary policies are able to sustain a stable growth rate. The reforms pertainingto the monetary policies and the macroeconomic policies over the last few years haveinfluenced the Indian economy to the core. The major step towards opening up of thefinancial market further was the nullification of the regulations restricting the growth inthe financial sector. To maintain such a growth for a long term the inflation has to comedown further. The analysis of Indian financial sector shows the growth of the sector wasthe result of the individual development of the divisions under the sector.
  21. 21. 21A casual observer might infer from Indias flourishing stock markets, fast-growing mutual funds, and capable private banks that the financial system is one of thecountrys strengths. But closer inspection reveals that while policy makers deserve creditfor liberating these high-performing parts of the system, tight government control overalmost every other part is undermining Indias overall economic performance. To sustainrapid GDP growth and spread its benefits more broadly, the country needs a financialsystem that is comprehensively market oriented and efficient.The financial systems shortcomings fall largely into three areas. First, formalfinancial institutions attract only half of Indias household savings and none of the $200billion its people keep tied up in gold. Second, these financial institutions allocate morethan half of the capital they do attract to the economys least productive areas: state-owned enterprises (SOEs), agriculture, and the unorganized sector (made up mostly oftiny businesses). The more productive corporations in Indias dynamic private sectorreceive only 43 percent of all commercial credit. Third, since the financial system isinefficient in both of its main tasksÁ»mobilizing savings and allocating capitalÁ»Indianborrowers pay more for capital and depositors receive less than they do in comparableeconomies.These failings place a heavy burden on Indias economy; fixing them would giveit an immense boost. Research by the McKinsey Global Institute (MGI) indicates that anintegrated program of reforms for the financial system could add $47 billion to IndiasGDP each year. This increase would in turn raise Indias real GDP growth rate to 9.4percent a year, from the current three-year average of roughly 7 percent. Indias growthwould be roughly on par with Chinas and just shy of the governments 10 percent target.Household incomes would be 30 percent above current projections by 2014, liftingmillions more people than expected out of poverty.
  22. 22. 221.6 Importance of the StudyThis study is beneficial for the ICICI Securities.It helps to understand them about their customer‘s current thinking about thecompany.It helps the ICICI Securities to understand their Customer Retention Strategy.It helps ICICI Securities to reduce their Customer defection.
  23. 23. 23Chapter 2THEORETICAL BACKGROUND&REVIEW LITERATURE
  24. 24. 242.1 Customer Satisfaction and Links to CustomerProfitability:An Empirical Examination of the Association betweenAttitudes and BehaviorAn increased focus on profitability at the customer level is a reflection of amovement within the marketing discipline towards a less aggregate view of markets. Inother words, the individual customer - rather than segments of customers – isincreasingly stressed as the unit of analysis. This movement has given birth to labelssuch as ‗‗one-to-one marketing‘‘ and ‗‗micro marketing‘‘. Seen from this perspective,customer profitability is emerging as an important dimension in which each (unique)customer can be described. A focus on customer-level profitability can also beconceived of as a reflection of marketing‘s changing role within the firm (cf. Webster1992). An important aspect of the new role is that ‗‗marketing is too important to be leftto the marketing department‘‘. Consequently, at least in marketing literature, otherDepartments are encouraged to deal with marketing issues. This can be seen particularlyin terms of cost control, in the sense that marketing performance measures are beingintroduced in cost accounting literature and practice. For example, activity-based costingand balanced scorecard techniques often include dimensions which are highly relevantto marketing (cf. Cooper & Kaplan 1991, Kaplan & Norton 1992). In this context, itis worth noting that marketing has traditionally lagged behind other functional areas ofbusiness with respect to the implementation of cost control systems (Dunne & Wolk1977, Morgan & Morgan 1980). Another factor behind the interest in customerprofitability (and its links to behavior and attitudes) is the development of informationtechnology, e.g. in terms of ‗‗data warehouses‘‘, which allows for a detailed analysis ofeach customer.Customer satisfactionCustomer satisfaction is a mental state which results from the customer‘scomparison of a) expectations prior to a purchase with b) performance perceptions aftera purchase (cf.Oliver 1993, Oliver 1996, Westbrook 1987, Westbrook & Oliver
  25. 25. 251991). A customer may make such comparisons for each part of an offer (‗‗domain-specific satisfaction‘‘) or for the offer in total (‗‗global satisfaction‘‘). In the satisfactionliterature, customer satisfaction usually refers to the latter type of outcome. Moreover,this mental state, which we view as a cognitive judgment, is conceived of as fallingsomewhere on a bipolar continuum bounded at the lower end by a low level ofsatisfaction expectations exceed performance perceptions) and at the higher end by ahigh level of satisfaction (performance perceptions exceed expectations).Customer profitabilityCustomer profitability is a customer-level variable which refers to the revenuesless the costs which one particular customer generates over a given period of time. Assuch, this variable refers to the supplier‘s value of having one particular customer, notthe customer‘s value of having a particular supplier. Customer profitability appears intwo temporal forms in marketing-related literature.First, it appears as a matter of historical record. In this sense, a customerprofitability analysis is similar to the firm‘s profit and loss statement. The maindifference is that a customer profitability analysis refers to one particular customer,whereas a profit and loss statement refers to all customers. A history-oriented customerprofitability analysis can be made at several levels. A Common point of departure is tocalculate the contribution margin (gross contribution margin), i.e. sales revenue less allproduct-related expenses for all products sold to an individual customer during oneparticular period of time (cf. Wang & Splegel 1994). Then, depending on theavailability of data, sales, general and administrative expenses traceable to the individualcustomer are subtracted (Cooper & Kaplan 1991, Howell & Soucy 1990). The result ofthis calculation is the operating profit generated by the customer. An extension of thisline of thinking is the computation of ‗‗customer return on assets‘‘, i.e. customerprofitability divided by e.g. the sum of accounts receivable and inventory (Rust et al1996).Second, customer profitability is also referred to in a future sense in theliterature. In this case, it often takes the form of the output from a net present value
  26. 26. 26analysis. The output is sometimes referred to as the ‗‗lifetime value‘‘ of a customer (cf.Heskett et al 1997, Peppers & Rogers 1993, Petrison et al 1993, Rust et al 1996).2.2 Achieving Customer Knowledge Competencies:Managing Customer Relationship Management ProgramsStrategicallyCustomer Relationship Management (CRM) has become the latest buzzword inthe academic and managerial press. While CRM has been defined in numerous ways(Morgan and Hunt 1994; Berry and Parasuraman 1993; Gronroos 1995), elementscommon to all definitions include leveraging technology to engage individual customersin a meaningful dialogue so that firms can customize their products and services toattract, develop and retain customers. CRM initiatives have grown rapidly over the pastfew years due to the great strides made in information technology. Modern CRMsoftware packages include front-office applications that access customer and productinformation as well as back-end systems including financials, inventory and ERP(Enterprise Resource Planning).Various researchers have extolled the benefits of CRM in enabling moreeffective marketing (Grant and Schlesinger 1995) by creating intelligent opportunitiesfor cross selling (Hill 1998) and faster new product introductions (Ruediger, Grant-Thompson, Harrington and Singer 1997). But implementing a new technology alone,to customize products and services, does not guaranteed such results.In the academic literature, a customer knowledge process has been demonstratedto enhance a firm‘s competitive advantage in new products (Cooper 1992; 1998) byenabling firms to explore profitable innovation opportunities created by emergingcustomer demand and reducing potential risks of misfitting customer needs. What
  27. 27. 27remains unexplored is whether customer knowledge processes in the context ofcustomer relationship management are helping firms achieve similar superior results.Customer Knowledge CompetenceFirm competences are generally thought of as ―complex bundles of skills andcollective learning, exercised through organizational processes‖ (Day 1994, p.38). Theimportance to firms of harnessing knowledge-based competences which yield acompetitive advantage is well established in both the marketing (Day 1994) and strategy(Pralahad and Hamel 1990) literature. While the importance to a firm‘s competitiveadvantage of the organizational processes that generate and integrate market knowledgehas been acknowledged conceptually (Glazer 1991; Day 1994; Hunt and Morgan1995) with the notable exception of Li and Calantone (1998).Li and Calantone (1998) distinguish between market knowledge and marketknowledge competence in the following way. Market knowledge is defined as―organized and structured information about the market as the result of systematicprocessing‖ whereas market knowledge competence is ―the processes that generate andintegrate market knowledge‖ (p.14). In this research, a similar distinction is adoptedbetween customer knowledge (or systematic information) and a customer knowledgecompetence. Unlike customer knowledge which is readily available through existingdatabase software packages, a customer knowledge competence is inimitable becauseprocesses of generating customer knowledge are embedded in organizational cognitiveactivities not observed readily from outside (Day 1994; Prahalad and Hamel 1990);and immobile because these processes are created within the firm and cannot bepurchased in the market (Day 1994).Managing CRM programs for Customer Knowledge CompetenceCustomer Knowledge Process : Consistent with organizational learning theory(Huber 1991; Sinkula 1994) a customer knowledge process is conceptualized to consistof three sequential aspects: customer information acquisition, interpretation andintegration. In practice, information about customer needs can be easily acquired
  28. 28. 28through the variety of customer relationship management (CRM) software packagescurrently available on the market.Employee Evaluation and Reward Systems: It is increasingly beingacknowledged that the challenge of realigning employee behavior closely parallels thechallenge of realigning customer behavior. (Grant and Schlesinger 1995). Engaging indialogue with a diverse and evolving customer base in multiple channels places a highpremium on organizational flexibility. But the creation of a flexible organizationimposes psychological and emotional trauma on the organization‘s employees(Prahalad and Ramaswamy 2000). The importance of incentive and reward systems tohelp employees meet these new challenges has recently been recognized. Gordon(1998 p.36) outlines four levels of customer learning for employees that need to beexplicitly considered in reward and recognition programs: individual learning; teamlearning within the enterprise; team learning between the company and other firms withwhich it does business such as suppliers and distribution channel intermediaries andteam learning with customers.2.3 Customer retention is not enoughCompanies spend millions trying to understand and influence customers—tohold on to them and to encourage them to spend more. But to increase the customers‘loyalty, companies must do more than track today‘s typical metrics: satisfaction anddefection.Our recent two-year study of the attitudes of 1,200 households about companiesin 16 industries as diverse as airlines, banking, and consumer products shows that thisopportunity is surprisingly large. Improving the management of migration as a whole byfocusing not only on defections but also on smaller changes in customer spending canhave as much as ten times more value than preventing defections alone. Companiestaking the approach we recommend have cut downward migration and defection by asmuch as 30 percent.For example, 5 percent of checking-account customers defected annually, takingwith them 10 percent of the bank‘s checking accounts and 3 percent of its total balances.
  29. 29. 29But every year, the 35 percent of customers who reduced their balances significantlycost the bank 24 percent of its total balances, while the 35 percent who increased theirbalances raised its total balances by 25 percent. This effect showed up in all 16industries we studied and was dominant in two-thirds of them.In industries like retailing and credit cards, whose customers generally deal withmore than one company, managing migration is vital. But doing so also matters inindustries like insurance and telecom services, where a customer might seem to have asingle primary provider. One local phone company, for example, found that more than90 percent of its loyalty opportunities came from reaching out to customers droppingfeatures such as second lines and call waiting.Understanding customersTo influence what customers spend, a company must generally dig deeper thanmerely finding out whether they like the product or service on offer. A broad measure ofsatisfaction can tell a company how likely customers are to defect; mobile-phonecustomers, for instance, continually switch providers because of customer service
  30. 30. 30problems. But satisfaction alone doesn‘t tell a company what makes customers loyal,the product or the difficulty of finding a replacement, for example. Nor does gaugingsatisfaction levels tell a company how susceptible its customers are to changing theirspending patterns—variations that more often come about as a result of changes in theirlives, in the company‘s offer, or in its competitors‘ offers. Understanding the otherdrivers of loyalty, our research showed, is crucial to having an influence on migration.By learning to understand why customers exhibit different degrees of loyalty,and combining that knowledge with data on current spending patterns, companies candevelop loyalty profiles that define and quantify six customer segments (Exhibit 2).
  31. 31. 31For industries that don‘t have many competitors capable of meeting the basicneeds of their customers, active dissatisfaction plays the strongest role in downwardmigration. As the number of competitors providing a minimum level of satisfactionincreases, other factors tend to assume a larger role; customers are more likely tocompare the merits of various voice mail options, for instance, once phones can becounted on to work reliably.Three basic customer attitudes—emotive, inertial, and deliberative—underlieloyalty profiles. Emotive customers are the most loyal. Feeling strongly that their currentpurchases are right for them and that their chosen product is the best, they rarely reassesspurchasing decisions.Our research shows that emotive customers generally spend more than those whodeliberate over purchases and migrate at a much lower rate. Emotive people are thus,rightly, the marketers‘ Holy Grail, and companies will find value in increasing theproportion of their customers in this group.Inertial customers, like emotive ones, rarely reassess their purchases, but theirinaction results from high switching costs or a lack of involvement with products.Utilities and life insurers are good examples of industries whose customers tend to beinertial. Although these customers aren‘t prone to spend more or less than they currentlydo, influencing them offers about as much opportunity as influencing emotivecustomers, largely by making them less likely to migrate downwardly in response toshocks such as price hikes, isolated cases of bad service, and lifestyle changes.Deliberators—both those who maintain their spending and those who spendless—are on average the largest group, representing 40 percent of all customers acrossindustries. The rewards from influencing deliberators can be twice as high as therewards from influencing emotive and inertial customers. Deliberators frequentlyreassess their purchases by criteria such as a product‘s price and performance and theease of doing business with a company.
  32. 32. 32Profiling customersOur research also showed that the proportion of people in each loyalty segmentdiffers by industry (Exhibit 3); we found, for example, that far fewer customers areemotionally attached to their grocery stores than to their long-distance providers. Forboth mobile-phone providers and Internet service providers, however, deliberatorspredominate, so even among different kinds of telecom companies, the proportions ineach segment can vary a lot.This fact implies that the reasons for migration differ greatly among industries.Deliberative customers, for example, who change their spending patterns because of
  33. 33. 33factors like convenience, account for more than 70 percent of reduced spending bypurchasers of casual apparel but only one-third of reduced spending by mobile-phonecustomers. These differences show why reward programs appealing to deliberators, forinstance, might be highly successful in one industry but not another.Using loyalty profilesArmed with its loyalty profile, a company gains new insights. First, the profilereinforces the point that building loyalty isn‘t just, as the traditional view would have it,about preventing defections and encouraging extra spending; it is about understandingand managing all six loyalty segments. Second, the profile highlights the different tacticsrequired to manage each of the segments and a company‘s need to carry out a range ofactions to reach all of them; a single act rarely increases the loyalty of all customers.Third, when combined with standard customer-value analysis, the profile helps acompany base its loyalty-building priorities on the size of each opportunity.2.4 Customer retention in retail financial servicesThe adherents of customer retention argue that retaining customers improvesprofitability, mainly by reducing the costs incurred in acquiring new customers(Reichheld and Kenny, 1990; Reichheld, 1996; Schmittlein, 1995). The primeobjective of customer retention (CR) is to achieve ―zero defections‖ of profitablecustomers (Reichheld, 1996), so that customer ―churn‖ is minimised.In addition, CRincorporates the notion of offering these retained customers goods or services that arethought likely to meet their needs (e.g. Reichheld and Kenny, 1990).a) Relational exchangeThe marketing literature has, over the last few years, been extensively concernedwith relationships, in which a core theme has been the shift in marketing practice andtheory from transactional to relational exchange (e.g. Buttle, 1996; Brodie et al., 1997;Gummesson, 1997; Gronroos, 2000).
  34. 34. 34Relationship marketing (RM) is a process (Gronroos, 2000) that consists ofhaving long-term relationships with customers, usually on a one-to-one basis and formsthe strategy that underpins relational exchanges.Interpretations of RM vary (Brodie et al., 1997), but common themes are thatrelationships are based on power being distributed equally between partners (Hogg etal., 1993; Rowe and Barnes, 1998) and that both the buyer and the seller are active in arich, multi-dimensional exchange (Easton and Araujo, 1994).b) Retailing financial servicesOne of the reasons behind mergers and conversions has been to gain the capacity tocross-sell financial products to selected customers (Gardener et al., 1999; Harrison,2000).Customers, in spite of receiving poor service, have been remarkably reluctant to switchproviders, particularly for their current account, but they are now increasingly preparedto switch providers if better value is available elsewhere.c) Retaining customersSupport for retaining customers in the marketing literature (e.g. Ahmad and Buttle,2002; Ennew and Binks, 1996; Jones and Sasser, 1995; Reichheld, 1996) isextensive. The benefits of retaining customers to the organisation are higher margins andfaster growth, derived from the notion that the longer a customer stays with anorganisation, generally the higher the profit (Reichheld and Kenny, 1990). Morerecently, qualitative investigation into CR has identified themes such as rewards andrecognition and cohesion in UK bank branches (Clark, 2002). Case study research byAhmad and Buttle (2001, 2002) has pointed to the contextual nature of customerretention and emphasised the need for research into typologies of retention.d) Developing a framework of CRManagers are responsible for establishing priorities and making strategic choices(Cravens et al., 1996),making it clear that the organisation‘s customer base is a keystrategic asset (Schmittlein, 1995). They should provide clear direction so that the
  35. 35. 35causes of customer defections are uncovered and addressed (Reichheld, 1996;Reichheld and Kenny, 1990). Information systems provide essential support forcustomer retention( Lewington et al., 1996), by keeping accurate details on purchaserecords, for assessing the value of customers to the organisation and in picking up likelydefectors (Schmittlein, 1995).If staff are given more power, greater access to information and adequateknowledge (Bowen and Lawler, 1995), they are in a better position to recoversituations or delight customers.2.5 Antecedents and Consequences of Service Quality inOnline Banking: An Application of the SERVQUALInstrumentDuring the past decade, the online service industry has witnessed tremendousgrowth, much of it spurred by the Internet revolution (Keaveney and Parthasarathy,2001). Especially, the potential of the Web as a commercial medium is widelyrecognized and the growth in online service industries such as online banking hasincreased rapidly. In addition to Internet companies, traditional organizations areinvesting a huge amount of money and effort in information systems to provide onlineservices through the Web. The underlying assumption of their investment is that,because online services provide their customers with convenience, interactivity,relatively low cost, and a high degree of customization/ personalization, they willenhance customer satisfaction and retention more effectively than offline-based services(Khalifa & Liu, 2001). To justify their investment in online services, manyorganizations are trying to measure the quality of their online services and investigatethe relationships between service quality and customer satisfaction. However, a formalmethodology for measuring online service quality is not well developed yet.Traditionally, many studies of service marketing have tried to define servicequality and develop instruments to measure it. Since Parasuraman et al.(1988)introduced a service quality instrument, called SERVQUAL, many studies have usedSERVQUAL to measure service quality in various domains, ranging from financialservices (Lin, 1999), health services (Dean, 1999), travel agent services (Kaynama,
  36. 36. 362000), and retailing services (Mehta, 2000), to restaurants (Lee and Hing 1995).However, since SERVQUAL was originally developed to measure service qualitydelivered through regular offline channels, its use in the Information System (IS)domain could be somewhat problematic (Van Dyke et al., 1999). Recently, a fewstudies have begun investigating the suitability of SERVQUAL in assessing the qualityof online services (Gefen & Devine, 2001).THEORETICAL BACKGROUNDSa) Online BankingInternet has emerged as a key competitive arena for the future of financial services(Cronin, 1998) in that online banking offers customers more features with lower costthan traditional banking activities. Since the Security First Network Bank (SFNB) firststarted its Internet bank on the web site (www.SFNB.com), more than 1,500 financialinstitutions have made plans to offer certain forms of Internet banking in 3 years.Advanced technologies enable banks to utilize new banking products, such as a smartcard and electronic money, through the Internet. Internet banking is easier, moreconvenient and offers more features with lower cost than home banking in the 80‘s.Customers‘ responses to the Internet banking system have been so much different fromthe home banking due to its easy accessibility. Customers can access their account fromanywhere in the world and at any time. To secure loyal customers, many banks try toprovide customers with unique online experiences that customers cannot access throughthe offline channels.Considering that enormous capital investment is needed fordeveloping these online banking services, it is very critical for them to measure theservice quality produced by online banking systems.b) Service QualityService quality is generally perceived to be a tool that can be used to create acompetitive advantage and therefore, substantial research into service and service qualityhas been undertaken in the last 20 years. Bitner et al. (1990) define service quality as―the consumers‘ overall impression of the relative inferiority/superiority of theorganization and its services.‖ The most common definition of service quality is thediscrepancy between consumer‘s expectations and perceptions of the service received.
  37. 37. 37Accordingly,service quality is defined as how well a delivered service level matchescustomer‘s expectation. Parasuraman et al. (1988, 1991) identified more detaileddimensions of service quality and developed a well-known instrument, calledSERVQUAL, to measure customer‘s perceptions and expectations from service. TheSERVQUAL instrument consists of five underlying dimensions, with two sets of 22item statements for the ‗expectation‘ and ‗perception‘ sections of the questionnaire.Perceived service quality is measured by subtracting customer perception scores fromcustomer expectation scores, both for each dimension and overall. The five dimensionsof SERVQUAL are (Parasuraman et al., 1988, 1991):(1) Tangibles, which pertain to the physical facilities, equipment, personnel andcommunication materials.(2) Reliability, which refers to the ability to perform the promised services dependablyand accurately.(3) Responsiveness, which refers to the willingness of service providers to helpcustomers and provide prompt service.(4) Assurance, which relates to the knowledge and courtesy of employees and theirability to convey trust and confidence.(5) Empathy, which refers to the provision of caring and individualized attention tocustomers.c) Online Service QualityDuring the past several years, some conceptual and empirical studies haveattempted to address the key attributes of service quality directly or indirectly related toonline service and, SERVQUAL has been widely accepted and used in measuringInformation System service quality (Van Dyke et al., 1999). Yang & Jun (2002)redefined the traditional service quality dimensions in the context of online services, andsuggested an instrument consisting of seven online service dimensions (reliability,access, ease of use, personalization, security, credibility, and responsiveness). Inaddition, Barnes & Vidgen (2002) introduced a method for assessing the service qualityof e-commerce web-sites, called WebQual.Many studies, including these two, have
  38. 38. 38introduced a variety of instruments without testing the suitability of SERVQUAL as anonline service measure.2.6 CUSTOMER LIFETIME VALUEIn the past two decades, the firms tended to focus on either cost management orrevenue growth. When a firm adopts one of these approaches it loses out on the other(Rust, Lemon, & Zeithaml, 2004). For instance, if a firm focuses only on revenuegrowth without emphasis on cost management, it fails to maximize the profitability.Similarly, cost management without revenue growth affects the market performance ofthe firm. What is needed is an approach which balances the two, creating market-basedgrowth while carefully evaluating the profitability and return on investment (ROI) ofmarketing investments. Optimal allocation of resources and efforts across profitablecustomers and cost effective and customer specific communication channels (marketingcontacts) is the key to the success of such an approach. This calls for assessing the valueof individual customers and employing customer level strategies based on customers‘worth to the firm.The assessment of the value of a firm‘s customers is the key to this customer-centric approach. But what is the value of a customer? Can customers be evaluatedbased only on their past contribution to the firm? Which metric is better in identifyingthe future worth of the customer? These are some of the questions for which a firmneeds answers before assessing the value of its customers. Many customer orientedfirms realize that the customers are valued more than the profit they bring in everytransaction. Customers‘ value has to be based on their contribution to the firm across theduration of their relationship with the firm. In simple terms, the value of a customer isthe value the customer brings to the firm over his/her lifetime. Some recent studies(Reinartz &Kumar, 2003) have shown that past contributions from a customer may notalways reflect his or her future worth to the firm. Hence, there is a need for a metricwhich will be an objective measure of future profitability of the customer to the firm(Berger & Nasr, 1998)
  39. 39. 39Customer lifetime value (CLV) is defined as the sum of cumulated cash flows—discounted using the Weighted Average Cost of Capital (WACC) — of a customer overhis or her entire lifetime with the company.CLV is a measure of the worth of a customer to the firm. Calculation of CLV forall the customers helps the firms to rank order the customers on the basis of theircontribution to the firm‘s profits. This can be the basis for formulating andimplementing customer specific strategies for maximizing their lifetime profits andincreasing their lifetime duration.Calculating CLV helps the firm to know how much it can invest in retaining thecustomer so as to achieve positive return on investment. A firm has limited resourcesand ideally wants to invest in those customers who bring maximum return to the firm.This is possible only by knowing the cumulated cash flow of a customer over his or herentire lifetime with the company or the lifetime value of the customers. Once the firmhas calculated CLV of their customers, it can optimally allocate its limited resources toachieve maximum return.2.7 A Study of Customer Retention across Retailers’ChannelsIn today‘s fast-paced world, technologies are increasing changing the waycustomers interact with companies to create service outcomes (Meuter et al. 2000).Customers have many different alternatives in which they can interact with a company(Wiertz et al., 2004). Consequently, in addition to the traditional network of channelintermediaries (e.g. retail stores and catalogs), customers could purchase anythingthrough virtual or remote technology (e.g. Internet mobile phone kiosk and voiceresponse system) (Shostack, 1985; Meuter et al., 2000; Stone and Hobbs, 2001;Burke, 2002; Montoya-Weiss, Voss, and Grewal, 2003; Wiertz et al., 2004).Consumers display complex shopping behaviors in this emerging multi-channelenvironment (Balasubramanian et al. 2005; Sridhar et al, 2005). Customers maysearch for product information online but purchase in a retail store. Therefore, from a
  40. 40. 40manager‘s perspective, companies have to understand the reasons why consumerschoose a specific channel (retail store or online) in their decision making process.Burke (2002) identified consumer preference for multi-channel shopping (in-store, online, catalog and television) through the purchase process (product searching,comparing and buying) and presented it by demography. Nunes and Cespedes (2003)analyzed different types of customers get what they need at each stage of the purchaseprocess – through one channel or another.According to the Baal and Dach’s (2005) study, we use ―Do customers use thesame channel from searching to purchasing?‖ and ―Do customers contact with the samefirm from searching to purchasing?‖ as two dimensions to construct a consumerbehavior matrix which includes switch, cross-channel free-riding, retention, and cross-channel retention (FIGURE 1). In the past, consumer attained all their needs from asingle integrated channel at different stage of their decision making. ―Switch‖ and―Retention‖ are signal-channel consumer behavior. But now, in the multi-channelenvironment, ―Cross-channel free-riding‖ and ―Cross-channel retention‖ are multi-channel consumer behavior. In this study, we focus on cross-channel retention of multi-channel consumer behavior.
  41. 41. 41Retetion Cross-Channel RetentionEX: searching onlinechannel of A-firm ,thenpurchasing A-firmonlinechannelEX: searching online channelof A-firm , then purchasingA-firm offline channelSwitch Cross channel Free – RidingEX: searching onlinechannelof A-firm , thenpurchasingB-firm onlinechannelEX: searching online channelof A-firm, then purchasingB-firm offline channelThere is still an issue we take into concern is customers‘ cross-channel behaviortakes place in different purchasing stages (Baal and Dach, 2005). Nowadays, it is verycommon that customers browse or inquire in an online retailer will use the informationDo customers use the same channelfrom searching to purchasing?NOYESYESDo customerscontact with thesame firm fromsearching topurchasing?NOFigure 1 Type of Multi-Channel Customers
  42. 42. 42they gained to purchase in traditional stores (Burke, 2002). We could see in differentcircumstances cross-channel customers going from online to offline or from offline toonline. However, on the basis of Baal and Dach’s (2005) investigation, 10.4% of therespondents consulted the Web sites of the retailers from whom they purchased, andonly 1.8% of customers completed their purchases in the online channels after gatheringinformation in the traditional stores. In other words, the rate of cross-channel customers‘retention going from online to offline is higher than going from offline to online. So thisstudy focuses on the retention of cross-channel customers going from online searchingto offline purchasing.The aim of this study is for multi-channel service providers to realize under whatcircumstances cross-channel customer retention likely, and determine what would be the―ideal shopping experience‖ from the customer‘s perspective.Theoretical BackgroundA. Online-Channel Perceived RiskPerceived risk has two componnts: uncertainty (the likelihood of unfavorableoutcomes) consequences (the importance of a loss) (Bauer 1960). Different types of riskexist, namely, financial, performance, time, physical, psychological, and social risks(Havlena and DeSarbo, 1991; Jacoby and Kaplan 1972; Murray and Schlacter,1990). Perceived risk also varies across methods of shopping. Nontraditional shoppingmay have higher risk than traditional shopping (Gillett, 1976).B. Online-Channel Switching BarrierSwitching barriers are defined as the degree to which customers experience asense of being locked in to a relationship based on the economic, social, orpsychological costs associated with leaving a particular service provider (Bendapudi &Berry, 1997; Allen & Meyer, 1990; Rusbult, Farrell, Rogers, & Mainous, 1988).Among these factors, economic and psychological are most common of the switchingbarriers.
  43. 43. 43C. Online-Channel AttractivenessAttractiveness—the positive characteristics of competing service providers—positively influences consumers‘ intentions to switch (e.g., Jones et al. 2000).enjoyment exchange behavior is reflected in the intrinsic emotion that comes fromengaging in activities that are absorbing, to the point of offering an escape from thedemands of the day-to-day world (Huizinga, 1955; Unger & Kernan, 1983). Oliver(1999) characterizes excellence of value as operating as an ideal, a standard againstwhich quality judgments are ultimately formed.2.8 MEASURING CUSTOMER EQUITY ANDCALCULATING MARKETING ROIMarketing managers and top executives frequently want to know whichmarketing expenditures to increase, to forecast the profitability among possiblemarketing investments, and to track them later to determine their financial returns. Forexample, they want to know how to compare the return from an advertising campaignwith that of a service quality improvement program, or an interior store redesign with anupgrade to a website.Customer Lifetime ValueA useful way to approach the marketing accountability problem is to considermarketing‘s effect on customer lifetime value. If we can measure the impact ofmarketing on individual customers‘ lifetime values (future profit streams), thenmarketing‘s effects are measurable and accountable. By focusing on marketing‘s effecton individual customers, rather than the impact of aggregate expenditures, a firm cancreate a customer-centered approach to brand management (Rust, Zeithaml, & Lemon,2004) that involves a customer-centered marketing strategy (Rust, Lemon, &Narayandas, 2005; Rust, Zeithaml, & Lemon, 2000) and ability to evaluate marketingROI (Rust, Lemon, & Zeithaml, 2004).
  44. 44. 44What is Customer Equity?When we aggregate the customer lifetime values of a firm‘s individualcustomers, the result is the ―customer equity‖ of the firm. Customer equity is thereforethe sum of the customer lifetime values of the firm‘s current and future customers.Customer Equity and the Value of the FirmCustomer equity is a proxy for the value of the firm (Gupta, Lehmann, &Stuart, 2004).Aside from accounting adjustments for expenditures such as plant andequipment and financial liabilities, the customer equity of the firm is equivalent to thevalue of the firm. Therefore, documenting the effect of marketing expenditures oncustomer equity provides a measure of financial return on those investments.Customer Equity as a Practical Approach to Marketing AccountabilityMany companies have adopted customer equity as an approach to marketingstrategy and marketing accountability, including at least three of the top 10 Fortune 500companies (IBM, General Motors, and ChevronTexaco).Alternative Approaches to Customer EquityDirect Marketing/CRM ModelsOne popular approach to modeling customer equity has been the direct marketing/CRMApproach (e.g., Rust & Verhoef, 2005; Venkatesan & Kumar, 2004). In thisapproach, the firm builds a customer database to record each customer‘s purchases alongwith marketing activities that have been targeted at the specific customers. Theadvantage of this approach is that actual customer behavior is being analyzed. Thedisadvantages of this approach are:Many firms do not have the appropriate databasesThe databases rarely include the customer‘s choices of competing brandsThe set of marketing expenditures that can be analyzed is typically limited todirect mailings and other direct contacts; and
  45. 45. 45We cannot learn why the customer chooses to buy from the firm.Acquisition vs. Retention ModelsIn this approach, customer equity is viewed as arising from customer acquisition andCustomer retention expenditures (Blattberg & Deighton, 1996). The typical assumptionis that the firm owns a database that contains customer behavior and customer-firmcontacts over time (e.g., Thomas, 2001). The advantages and disadvantages of thismethod are the same as for Direct Marketing/CRM models, with the added disadvantagethat knowing optimal acquisition versus retention expenditures does not provide preciseenough information to examine the impact of particular acquisition or retentionexpenditures (e.g., should the customer acquisition expenditures be for brand advertisingor direct selling?)Customer Retention-Based ModelsMost approaches to customer lifetime value and customer equity begin with the firm‘sexisting customer base, and then analyze customer retention (e.g., Bolton, 1998; Gupta,Lehmann, & Stuart, 2004; Rust, Zahorik, & Keiningham, 1995). The assumption isthat once customers leave, they are gone for good. Recent research has demonstratedthat this assumption can underestimate customer lifetime value by as much as 47%(Rust, Lemon, & Zeithaml, 2004). The problem is that customer retention-basedmodels fail to model the possibility of a customer switching back to the original brand, abehavior that happens routinely in many purchase categories particularly in consumerpackaged goods.Drivers of Customer EquityTo model the brand switching matrix at the individual customer level, we need tounderstand what drives customer switching and customer retention. All marketingexpenditures or drivers of customer equity can be grouped into three main categories—value equity, brand equity, and relationship equity (Rust, Zeithaml, & Lemon, 2000).Value equity includes drivers involving quality, price, convenience, and other objectiveperceptions of the offering. Brand equity, on the other hand, focuses on subjectiveperceptions such as brand image, brand awareness, and brand ethics. Relationship equity
  46. 46. 46involves factors that increase switching costs that are not subsumed by value equity andbrand equity, such as frequent buyer programs and ongoing relationship maintenanceactivities.The Chain of EffectsThe heart of the brand switching-based approach to customer equity is a chain ofeffects model that creates a statistical link from changes in perceptions of the drivers tochange in customer equity. The chain is seen at the individual level as:Driver perceptions => switching matrix => Customer Lifetime ValueThe Choice ModelThe choice model is conditional on the most recent brand chosen. That is, ifKevin chose Brand A last time, his choice probabilities will be different than if he choseBrand B last time, even if all of his brand perceptions are the same. This conditionreflects the effect of inertia on choice.The Switching MatrixThe utility of each brand conditional on the previous brand chosen may beobtained According to the equation:Utility = Inertia + Utility from drivers + Random errorThe inertia term enters the equation only for the choice alternative that wasselected most recently. This reproduces the pattern that we see in actual brand choice—that ―stickiness‖ to the choice of brand exists.Customer Lifetime ValueBased on the switching matrix, the probabilities of brand choice for all futurepurchases by each customer may be projected. This, in turn, may be converted tocustomer lifetime value, assessed using variables such as the average inter-purchasetime, average quantity per purchase, and the firm‘s discount rate and time horizon. Thefirm may then calculate its customer equity by taking the average customer lifetimevalue from the sample and multiplying it by the number of customers in the market.
  47. 47. 472.9 Customer retention in the financial industryGenerally speaking, a company could increase its profits by acquiring newcustomers, augmenting profitability from existing customers by enhancing their onetime purchase volume, and enhancing the duration of customer retention (Grant andSchlesinger 1995). In the past, most companies focused on the first two approaches.However, those strategies have been found not to be very effective and efficient inmarkets that are saturated. Recently, in both marketing theory (academia) and practice(industry), the emphasis in relationship marketing has shifted to long term customerrelationship management (Reinartz and Kumar 2003; Al-Hawari 2006). Managersand researchers have emphasized the importance of customer retention, the dynamics ofcustomer relationship, and customer lifetime value (Reinartz and Kumar 2003) forwhich customer retention is an important component (Gupta, Lehmann, and Stuart2004). Customer retention has been suggested as an important antecedent to financialoutcome (Evanschitzky and Wunderlich 2006). Compared to short-term customers,long-term oriented customers could offer substantial benefits to a company. Higherretention leads to higher profits across firms in various industries (Reichheld 1991-1992; Reichheld, Markey, and Hopton 2000). Increasing customer retention could beeffective in both raising revenue and lowering costs (Keaveney and Parthasarathy2001).Higher volumes at higher margins and increase service usage even when priceincreases (Reichheld 1996). On the cost side, researchers claim that the cost ofrecruiting a new customer is estimated to be five times more than that of retaining anexisting customer (Hart, Heskett, and Sasser 1990). Therefore, improving customerretention could benefit profits of companies. In the sector of interest to this study, it hasbeen estimated that ―reducing defections by just 5% generated 85% more profits in onebanks branch system, and 50% more in an insurance brokerage‖ (Reichheld and Sasser1990). An increase in customer retention is suggested to be helpful for companies togain a competitive advantage, expand their market share, and increase employeesatisfaction (Buttle and Ahmad 2002; Swailes and Dawes 1999).
  48. 48. 48Enhancing customer retention is beneficial for acquiring new customers. Loyalcustomers are more likely to generate word of mouth (WOM) advertising because oftheir positive attitude toward the current provider. New customers could be attracted bypositive WOM, which enhances revenue and market share. Reichheld (1991-1992)found that between 20% and 40% of new customers chose a bank based on areferal.Researchers claim that individuals are more likely to keep their first credit cardused in college a long time after they graduate from college and generate reasonableincome (Dugas 2001).Customer retention analysis is fundamental to evaluating customer lifetime valueand the intangible value of a company (Gupta et al. 2004). Customer lifetime value isreferred as a long-term view of a customer‘s profitability. It is defined as the presentvalue of the future profitability based on the customer relationship (Pfeifer, Haskins,and Conroy 2005). Customer lifetime value for a firm is the net profit or loss to the firmfrom a customer over the entire relationship life (Singh 2002). Customer lifetime value(CLV) is increasingly considered as a guide for a firm.Optimizing its marketing mix across the customer base and in decision-makingtoward marketing strategy (Libai, Narayandas, and Humby 2002). Besides tangibleassets listed in the annual report, intangible assets (such as brand, customers, andemployees) are critical to firm value, especially when considering future profitability(Gupta et al. 2004). Researchers have suggested that customer based value forms alarge part of a company‘s intangible value and could be treated as a proxy for firm value(Gupta et al. 2004). A firm’s customer-based value is the sum of the customerlifetime values (CLV) of its current and future customers. A customer retentionforecast is one component of the formula to calculate CLV. Increased customerretention was found to have the greatest effect on customer lifetime value, followed byimproved margin, reduced acquisition costs, and the discount rate (Gupta et al. 2004).Therefore, long-term customer retention projections could be very valuable forfully assessing the value of a company. Due to the saturation and fierce competition offinancial markets, as a prerequisite to profitability and intangible value of a company,
  49. 49. 49customer retention is very important (Veloutsou, Daskou, and Daskou 2004).Retention or attribution research has been increasingly emphasized in this context.Many studies of customer retention have been conducted in a service-wide context,such as retailing, insurance, and banking (Al-Hawari 2006; Boulding, Kalra,Staelin, and Zeithaml 1993; Ranaweera and Neely 2003; Zeithaml, Berry, andParasuraman 1996). Service quality, customer satisfaction, trust, switching costs,pricing, and brand image have been suggested as factors impacting whether acustomer will stay or switch (Bloemer, Ruyter, and Peeters 1998; Baumann,Burton, and Elliott 2005; Colgate and Lang 2001).Relationship Management strategies have been used to retain customers andbuild loyalty. Generally, those strategies involve creating loyalty programs, selling moreproducts or services to existing customers, improving customer service quality andcustomer satisfaction, developing consumer trust, and increasing customer switchingcost (Fitzgibbon and White 2005). Customer retention and loyalty were usuallyconsidered as synonymous by practitioners and academic researchers (Al-Hawari 2006;Boulding et al. 1993; Ranaweera and Neely 2003; Zeithaml et al. 1996), whilecustomer retention has been used to measure customer behavioral loyalty.2.10 Customer RetentionBefore taking any decision regarding Customer retention or Customer retentionStrategy, it is necessary to understand the Customer retention and then afterorganization is able to Build a customer retention strategy, then they are able toimplement a customer retention program.Managers and researchers have emphasized the importance of customerretention, the dynamics of customer relationship, and customer lifetime value (Reinartzand Kumar 2003) for which customer retention is an important component (Gupta,Lehmann, and Stuart 2004). Customer retention has been suggested as an importantantecedent to financial outcome (Evanschitzky and Wunderlich 2006). On the costside, researchers claim that the cost of recruiting a new customer is estimated to be five
  50. 50. 50times more than that of retaining an existing customer (Hart, Heskett, and Sasser1990). Therefore, improving customer retention could benefit profits of companies.Customer retention analysis is fundamental to evaluating customer lifetimevalue and the intangible value of a company (Gupta et al. 2004). Customer lifetimevalue is referred as a long-term view of a customer‘s profitability. Many studies ofcustomer retention have been conducted in a service-wide context, such asretailing, insurance, and banking (Al-Hawari 2006; Boulding, Kalra, Staelin, andZeithaml 1993; Ranaweera and Neely 2003; Zeithaml, Berry, and Parasuraman1996). Service quality, customer satisfaction, trust, switching costs, pricing, andbrand image have been suggested as factors impacting whether a customer will stayor switch (Bloemer, Ruyter, and Peeters 1998; Baumann, Burton, and Elliott 2005;Colgate and Lang 2001). Hence, Relationship Management strategies have been usedto retain customers and build loyalty. Generally, those strategies involve creating loyaltyprograms, selling more products or services to existing customers, improving customerservice quality and customer satisfaction, developing consumer trust, and increasingcustomer switching cost (Fitzgibbon and White 2005).Kano‘s model of customer satisfaction can be optimally combined with qualityfunction deployment. A prerequisite is identifying customer needs, their hierarchy andpriorities (Griffin/Hauser, 1993). Kano‘s model is used to establish the importance ofindividual product features for the customer‘s satisfaction and thus it creates the optimalprerequisite for process- oriented product development activities. Kano‘s methodprovides valuable help in trade-off situations in the product development stage. If twoproduct requirements cannot be met simultaneously due to technical or financial reasons,the criterion can be identified which has the greatest influence on customer satisfaction.
  51. 51. 51The adherents of customer retention argue that retaining customers improvesprofitability, mainly by reducing the costs incurred in acquiring new customers(Reichheld and Kenny, 1990; Reichheld, 1996; Schmittlein, 1995). The primeobjective of customer retention (CR) is to achieve ―zero defections‖ of profitablecustomers (Reichheld, 1996), so that customer ―churn‖ is minimised.In addition, CRincorporates the notion of offering these retained customers goods or services that arethought likely to meet their needs (e.g. Reichheld and Kenny, 1990).The last but not the least it is necessary to understand the customer otherwise thewhole process of Customer retention goes for a toss.2.11 Modeling Customer Lifetime ValueAs modern economies become predominantly service based, companies increasinglyderive revenue from the creation and sustenance of long-term relationships with their customers.In such an environment, marketing serves the purpose of maximizing customer lifetime value(CLV) and customer equity, which is the sum of the lifetime values of the company‘s customers.
  52. 52. 52This article reviews a number of implementable CLV models that are useful for marketsegmentation and the allocation of marketing resources for acquisition, retention, and cross-selling. The authors review several empirical insights that were obtained from these models andconclude with an agenda of areas that are in need of further research.Customer lifetime value (CLV) is gaining increasing importance as a marketing metricin both academia and practice. Companies such as Harrah‘s, IBM, Capital One, revealedpreferences rather than intentions. Furthermore, sampling is no longer necessary when you havethe entire customer base available. At the same time, sophistication in modeling has enabledmarketers to convert these dataInto insights. Current technology makes it possible to leverage these insights and customizemarketing programs for individual customers.The purpose of this article is to take stock of the advances in CLV modelingand identify areas for future research. This article is the outcome of intensive 2-daydiscussions during the ―Thought Leadership Conference‖ organized by the University ofConnecticut. The discussion groups consisted of a mix of academics and practitioners.Firm ValueCLV & CECustomer Acquisition Customer expansionCustomer Retention
  53. 53. 532.12 Customer retention in the financial industry: Anapplication of survival analysisGenerally speaking, a company could increase its profits by acquiring newcustomers, augmenting profitability from existing customers by enhancing their onetime purchase volume, and enhancing the duration of customer retention (Grant andSchlesinger 1995). In the past, most companies focused on the first two approaches.However, those strategies have been found not to be very effective and efficient inmarkets that are saturated. Recently, in both marketing theory (academia) and practice(industry), the emphasis in relationship marketing has shifted to long term customerrelationship management (Reinartz and Kumar 2003; Al-Hawari 2006). Managersand researchers have emphasized the importance of customer retention, the dynamics ofcustomer relationship, and customer lifetime value (Reinartz and Kumar 2003) forwhich customer retention is an important component (Gupta, Lehmann, and Stuart2004).Compared to short-term customers, long-term oriented customers could offersubstantial benefits to a company. Higher retention leads to higher profits across firmsin various industries (Reichheld 1991-1992; Reichheld, Markey, and Hopton 2000).Increasing customer retention could be effective in both raising revenue and loweringcosts (Keaveney and Parthasarathy 2001).It has been estimated that ―reducing defections by just 5% generated 85% moreprofits in one banks branch system, and 50% more in an insurance brokerage‖(Reichheld and Sasser 1990). An increase in customer retention is suggested to behelpful for companies to gain a competitive advantage, expand their market share, andincrease employee satisfaction (Buttle and Ahmad 2002; Swailes and Dawes 1999).Enhancing customer retention is beneficial for acquiring new customers. Loyalcustomers are more likely to generate word of mouth (WOM) advertising because oftheir positive attitude toward the current provider. New customers could be attracted by
  54. 54. 54positive WOM, which enhances revenue and market share. Reichheld (1991-1992)found that between 20% and 40% of new customers chose a bank based on a referral.A firm‘s customer-based value is the sum of the customer lifetime values (CLV)of its current and future customers. A customer retention forecast is one component ofthe formula to calculate CLV.Many studies of customer retention have been conducted in a service-widecontext, such as retailing, insurance, and banking (Al-Hawari 2006; Boulding, Kalra,Staelin, and Zeithaml 1993; Ranaweera and Neely 2003; Zeithaml, Berry, andParasuraman 1996). Service quality, customer satisfaction, trust, switching costs,pricing, and brand image have been suggested as factors impacting whether a customerwill stay or switch (Bloemer, Ruyter, and Peeters 1998; Baumann, Burton, andElliott 2005; Colgate and Lang 2001).Relationship Management strategies have been used to retain customers andbuild loyalty. Generally, those strategies involve creating loyalty programs, selling moreproducts or services to existing customers, improving customer service quality andcustomer satisfaction, developing consumer trust, and increasing customer switchingcost (Fitzgibbon and White 2005). Customer retention and loyalty were usuallyconsidered as synonymous by practitioners and academic researchers (Al-Hawari 2006;Boulding et al. 1993; Ranaweera and Neely 2003; Zeithaml et al. 1996), whilecustomer retention has been used to measure customer behavioral loyalty. In the currentresearch, those two terms are treated as transferable constructs. There are two analyticalor statistical approaches used by prior customer retention research. The first one is staticand short-term customer attrition or retention analysis. It is usually conducted with aforecast window of less than one year and used to identify customer segments, and setmarketing campaigns. The object is to reduce attrition or increase customer loyalty. Thesecond approach is dynamic. Long-term retention forecasting is conducted to calculatecustomer lifetime value and guide long- term business strategy, while aiding short-termmarketing campaigns.
  55. 55. 552.13 Switching Barriers in the Four-Stage LoyaltyModelNumerous studies have linked customer satisfaction to financial outcomes(Anderson, Fornell, and Lehmann 1994; Anderson, Fornell, and Rust 1997;Bernhardt, Donthu, and Kennett 2000;Ittner and Larcker 1998; Keiningham et al.1999). However, in moving from a transaction orientation to a relationship orientation(Berry 1995; Grönroos 1995; Morgan and Hunt 1994), contemporary marketingthought acknowledges that gaining and sustaining customer loyalty as the ultimate goalmay be more important than achieving customer satisfaction (Agustin and Singh 2005).Obviously, the link between customer satisfaction, customer loyalty, andfinancial outcome is not as straightforward as it may seem (Carroll 1991; Carroll andRose 1993; Reinartz and Kumar 2000). Yet researchers and managers acknowledgethat small changes in loyalty and retention can yield disproportionately large changes inprofitability (Reichheld 1993; Reichheld, Markey, and Hopton 2000; Reichheld andTeal 1996).Despite this obvious managerial relevance, earlier research primarily analyzedthe link between satisfaction ratings and repurchase intention. Few studies haveexamined the link between satisfaction ratings and repurchase behavior (Mittal andKamakura 2001; Zeithaml 2000). Adding to that stream of research, (Seiders et al.(2005) summarize and extend the literature by proposing that the relationship betweensatisfaction and repurchase behavior is moderated by customer, relational, andmarketplace characteristics. Only recently, has (Oliver’s (1997) four-stage loyaltymodel been subject to more extensive empirical testing (Evanschitzky and Wunderlich2006; Harris and Goode 2004; Olsen 2002).CONCEPTUAL FRAMEWORKUntil the 1970‘s, loyalty was understood as repeat purchase behavior, primarilyconsidering repeat purchase cycles (Bass 1974).Following that, a behavioral approachtoward explaining purchase patterns emerged. Among the first proponents of such a
  56. 56. 56behavioral approach was (Jacoby (1973, 1978). Loyalty was defined as a biasednonrandom) repeat purchase of a specific brand (from a set of alternatives) over time bya consumer, using a deliberate evaluation process (Jacoby and Kyner 1973). Later,(Jacoby and Chestnut 1978) note that the belief, affect, and intention structure of aconsumer must be examined in order to analyze loyalty.Despite these seminal works, there is still no universal agreement on thedefinition of loyalty (Dick and Basu 1994; Jacoby and Chestnut 1978; Oliver 1999;Uncles, Dowling, and Hammond 2003). According to (Uncles et al. (2003), threepopular conceptualizations of loyalty exist: loyalty as an attitude that leads to arelationship with the brand; loyalty expressed mainly in terms of revealed behavior; andbuying moderated by the individual‘s characteristics, circumstances, and/or the purchasesituation.We use (Oliver’s (1997) definition, because it includes both attitudinal andbehavioral aspects of loyalty. (Oliver (1997) defines loyalty as a deeply heldcommitment to rebuy or repatronize a preferred product or service consistently in thefuture, thereby causing repetitive same-brand or same brand-set purchasing, despitesituational influences and marketing efforts that have the potential to cause switchingbehavior. He introduces a four-stage loyalty model, implying that different aspects ofloyalty do not emerge simultaneously, but rather consecutively over time (Oliver 1999).More than a clarification, this model extends the loyalty sequence ―cognitive-affective-conative‖ by including an observable behavior, for example actual purchase behavior. Ateach loyalty stage, different factors influencing loyalty can be detected.a) Cognitive LoyaltyAt this stage, consumer loyalty is determined by information relating to theoffering, such as price, quality, and so forth. It is the weakest type of loyalty, since it isdirected at costs and benefits of an offering and not at the brand itself. Therefore,consumers are likely to switch once they perceive alternative offerings as being superiorwith respect to the cost-benefit ratio (Kalyanaram and Little 1994; Sivakumar andRaj 1997).
  57. 57. 57b) Affective LoyaltyAffective loyalty relates to a favorable attitude towards a specific brand. Attitudeitself is a function of cognition (e.g.,expectation). Satisfaction is a global affectevaluation or feeling state which can be predicted from perceived performance as thecognitive component of the evaluation (Oliver 1993; Phillips and Baumgartner 2002;Westbrook and Oliver 1991). Expectancy confirmation leads to satisfaction, which inturn effectuates affective loyalty (Bitner 1990). Oliver (1997) defines satisfaction as―the consumer‘s fulfillment response, the degree to which the level of Fulfillment ispleasant or unpleasant.‖c) Conative LoyaltyConative loyalty implies that attitudinal loyalty must be accompanied by a desireto intend an action, for example repurchase a particular brand. It is stronger thanaffective loyalty, but has vulnerabilities as well. Repeated delivery failures are aparticularly strong factor in diminishing conative loyalty. Consumers are more likely totry alternative offerings if they experience frequent service failures. Even though theconsumer is conatively loyal, he has not developed the resolve to avoid consideringalternative offerings (Oliver 1999).d) Action LoyaltyAction control studies imply that not all intentions are transformed into action(Kuhl and Beckmann 1985). The three previous loyalty states may result in a readinessto act (in this case, to buy).This readiness is accompanied by the consumer‘s willingnessto search for the favorite offering despite considerable effort necessary to do so.Competitive offerings are not considered as alternatives.SWITCHING BARRIERS AND CUSTOMER LOYALTYa) Social BenefitsCustomers build interpersonal relationships with service personnel.These bondsbetween the customers and the firm result in the former receiving social benefits (Berryand Parasuraman 1991). The same interactions can lead consumers to develop strongpersonal relationships with the company (Grönroos 1990; Parasuraman, Zeithaml,and Berry 1985) and bind customers (Bateson and Hoffman 1999). As interactions
  58. 58. 58between provider employees and customers are repeated over time, the motivation forthe development of a social aspect to the relationship necessarily increases (Czepiel,Solomon, and Suprenant 1985).b) Attractiveness of AlternativesDepending on the quality of competing alternatives, the customer perceives abenefit in changing the provider (Oliver 1997).The more attractive the alternatives are,the higher the perceived benefits when switching (Jones et al. 2000). Therefore,consumers are likely to switch once they perceive alternative offerings as being superiorwith respect to the cost-benefit ratio (Kalyanaram and Little 1994; Sivakumar andRaj 1997).c) Perceived Switching CostsIn many instances, customers are loyal to a provider, because of the difficulty ofchanging to a different firm. In accordance with (Jones et al. 2000), switching is likelyto involve various behavioral and psychological aspects, given that switching costsinclude the time, money and effort the customer perceives, when changing from oneprovider to another, more specifically, they entail search and learning costs (Jones,Mothersbaugh, and Beatty 2002). The consumers already know the routines of theircurrent provider, acting as a kind of specific investment, whereas these investments werelost when changing to another provider. Switching costs can affect loyalty, such as withincreasing perceived costs of an activity, the probability of a consumer acting that waydiminishes.2.14 Service Recovery Management: Closing The GapBetween Best Practices And Actual PracticesSERVICE RECOVERYWHAT IT IS, WHY IT MATTERS—AND ITS UNREALIZED POTENTIALService recovery refers to the actions a provider takes in response to a servicefailure (Grönroos, 1988). A failure occurs when customers‘ perceptions of the servicethey receive do not match their expectations.
  59. 59. 59Interest in service recovery has grown because bad service experiences often leadto customer switching (Keaveney, 1995), which in turn leads to lost customer lifetimevalue (Rust, Zeithaml,& Lemon, 2000). However, a favorable recovery positivelyinfluences customer satisfaction (Smith, Bolton, & Wagner, 1999; Zeithaml, Berry,& Parasuraman, 1996), word-of-mouth behavior (Maxham, 2001; Oliver & Swan,1989; Susskind, 2002; Swanson & Kelley, 2001), customer loyalty (Bejou & Palmer,1998; Keaveney, 1995; Maxham, 2001; Maxham & Netemeyer, 2002b), and,eventually, customer profitability (Hart, Heskett, & Sasser, 1990; Hogan, Lemon, &Libai, 2003; Johnston, 2001a; Rust, Lemon, & Zeithaml, 2004; Sandelands, 1994).Although some studies show that good initial service is better than an excellent recovery(Berry, Zeithaml, & Parasuraman, 1990), other empirical work suggests that anexcellent recovery can lead to even higher satisfaction and loyalty intentions amongconsumers than if nothing had gone wrong in the first place (Bitner, Booms, &Tetreault, 1990; McCollough, 1995; McCollough & Bharadwaj, 1992), in aphenomenon referred to as the ―service recovery paradox‖ (Zeithaml & Bitner, 2003).In summary, considerable evidence indicates the importance of service recovery and the―best practices‖ associated with effective service recovery management.BEST PRACTICES IN SERVICE RECOVERYInterdisciplinary services literature offers a rich source of research and insightsinto effective service recovery. For example, one pattern reflects a discipline-based biastoward the study of service recovery.Management literature focuses on employees andhow to prepare them to recover from service failures (Bowen & Johnston, 1999), whichwe term an employee recovery perspective. Operations literature centers more on theprocesses and how to learn from failures to prevent them in the future (Johnston &Clark, 2005; Stauss, 1993), which we refer to as process recovery . Finally, marketingliterature focuses on the customer experience and satisfying the customer after a servicefailure (Smith et al., 1999; Tax, Brown, & Chandrashekaran, 1998), which we callcustomer recovery.
  60. 60. 60Customer RecoveryThe vast majority of service recovery literature focuses on customer recovery.We do not attempt to summarize this entire rich body of research herein but insteadhighlight two key, far-reaching findings. First, perceived fairness is a strong antecedentof customer satisfaction with the recovery effort by the firm. Second, though companiesmay recover customers after one failure, it is very difficult to recover from multiplefailures.Fairness is keyRecent contributions show that perceived justice represents a significant factor inservice recovery evaluations (Seiders & Berry, 1998; Smith et al., 1999; Tax et al.,1998). Because a report of a service failure implies, at least to some extent, ―unfair‖treatment of the customer, service recovery must reestablish justice from the customer‘sperspective. Justice consists of three dimensions—distributive, procedural, andinteractional (e.g., Greenberg, 1990)—and all three types contribute significantly tocustomers‘ evaluations of recovery (Clemmer & Schneider, 1996; Tax & Brown,1998). For example, distributive justice focuses on the allocation of benefits and costs(Deutsch, 1985) and acknowledges that customers consider the benefits they receivefrom a service in terms of the costs associated with it (e.g., money, time). When they donot receive expected outcomes, they are dissatisfied, which demands service recovery.Fixing the customer means that during a service recovery encounter, thecustomer‘s negative emotions (e.g., anger, hate, distress, anxiety) must be addressedbefore he or she will be willing or able to accept a solution. In service recovery,procedural justice and interactional justice thus must be reestablished before distributivejustice can be addressed. In this context, procedural justice relates to the evaluation ofthe procedures and systems used to determine customer outcomes (Seiders & Berry,1998), such as the speed of recovery (Clemmer & Schneider, 1996; Tax et al., 1998)or the information communicated (or not communicated) about the recovery process(Michel, 2003). Firms must describe ―what the firm is doing to resolve the problem sothat customers understand mitigating circumstances and do not incorrectly attributeblame to the service firm when it is not responsible‖ (Dubé & Maute, 1996, p. 143).

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