There are four stages of customer retention strategies, which are: 1. Financial Bonds 2. Social Bonds 3. Customisation Bonds 4. Structural Bonds.
Stages of Customer Retention Strategies
Stage # 1. Financial Bonds:
In this stage, the customer is tied to the firm primarily through financial incentives — lower prices for greater volume purchases or lower prices for customers who have been with the firm long time. Examples of level 1 relationship marketing are not hard to find. Think about the airline industry and related travel service industries like hotels and car rental companies. Frequent flyer programs provide financial incentives and car rental companies do the same.
Long-distance telephone companies in the United States have engaged in a similar battle, trying to provide volume discounts and other price incentives to retain market share and build a loyal customer base. One reason these financial incentive programs proliferate is that they are not difficult to initiate and frequently result in at least short-term profits/gains.
Unfortunately, financial incentiveness does not generally provide long-term advantages to a firm because, unless combined with another relationship strategy, they don’t differentiate the firm from its competitors in the long run. Many travellers belongs to several frequent flyer programs and don’t hesitate to trade off among them.
And there has been considerable customer switching every month among the major telecommunication suppliers. While price and other financial incentives are important to customers, they are generally not difficult for competitors to imitate because the primary customised element of the marketing mix is price.
Other type of retention strategies that depend primarily on financial rewards are focused on bundling and cross-selling of services. Frequent flyer programs again provide a common example. Many airlines link their reward programs with hotel chains, auto rental, and in some cases credit card usage. By linking airline mileage points earned to usage of other firm’s services, customers can enjoy even greater financial benefits in exchange for their loyalty.
In other cases, firms aim to retain their customers by simply offerings their most loyal customers the assurance of stable prices, or at least lower prices increases than those paid by new customers. In this way, they reward their loyal customers by sharing with them some of the cost savings and increased revenue the firm receives through serving them over time. While widely and increasingly used as retention tactics, loyalty programs based on financial rewards merit caution.
These programs are often easily imitated. Thus any increased usage or loyalty from customers may be short-lived. Second, these strategies are not likely to be successful unless they are structured so that they truly lead to repeat or increased usage rather than serving as means to attract new customers and potentially causing endless switching among competitors.
Stage # 2. Social Bonds:
In this stage, strategies bind customers to the firm through more than financial incentives. Although price is still assumed to be important, level 2 retention marketers build long-term relationship through social and interpersonal as well financial bonds. Customers are viewed as “clients,” not nameless faces, and becomes individuals whose needs and wants the firm seeks to understand.
Social, interpersonal bonds are common among professional service providers (lawyers, accountants, and teachers) and their clients as well as among personal care providers (hair-dressers, counsellors, healthcare providers) and their clients. A dentist, who takes a few minutes to review her patient’s file before coming into the exam room, is able to jog her memory on personal facts about the patient (occupation, family details, interests, dental health history).
By bringing these personal details into the conversation, the dentist reveals her genuine interest in the patient as an individual and builds social bonds. Interpersonal bonds are also common in business-to-business relationships where customers develop relationships with salespeople and/or relationship managers working with their firms.
Recognising the value of continuous relationships in building loyalty, Caterpillar Corporation credits much of its noted success to its extensive, stable distribution organisation worldwide. Caterpillar is the world’s largest manufacture of mining, construction, and agriculture heavy equipment. Although its engineering and product quality is superior, the company attributes much of its success to its strong dealer network and product support services offered throughout the world.
CEO David Fites contends that knowledge of the local market and close relationships with customers that Caterpillar’s dealers provide is invaluable – “Our dealers tend to be prominent business leaders in their service territories who are deeply involved in community activities and who are committed to living in the area. Their reputations and long-term relationships are important because selling our products is a personal business.”
Sometimes relationships are formed with the organisation due to the social bonds that develop among customers rather than between customers and the provider of the service. This is frequently the case in health clubs, country clubs, educational settings, and other service environments where customers interact with each other.
Over time the social relationships they have with other customers are important factors that keep them from switching to another organisation. One company that has built a significant strategy around customer-to-customer bonds is Harley Davidson with its local Harley Owners Groups, HOGs. HOGs are involved in local rallies, tours, and parties, as well as participating in national HOG events organised by the company.
Social bonds alone may not tie the customer permanently to the firm, but they are much more difficult for competitors to imitate than are price incentives. In the absence of strong reasons to shift to another provider, interpersonal bonds can encourage customers to stay in a relationship. In combination with financial incentives, social bonding strategies may be very effective.
Stage # 3. Customisation Bonds:
In this stage, strategies involve more than social ties and financial incentives, although there are commonly elements of level 1, level 2 strategies encompassed within a customisation strategy, and vice versa. For example – in the Caterpillar dealership strategy just described, dealers are relied on not just to form strong personal commitments to customers. They are also relied on to feed information back into the system to help Caterpillar customise services to fit developing customer needs.
Two commonly used terms fit within the customisation bonds approach – mass communication and customer intimacy. Both of these strategies suggest that customer loyalty can be encouraged through intimate knowledge of individual customers and through the development of “one-to-one” solutions that fit the individual customers’ needs.
Mass communication has been defined as ‘the use of flexible processes and organisational structures to produce varied and often individually customised products and services at the price of standardised, mass-produced alternatives’. Mass customisation does not work harder for what they want; rather, it means providing then through little effort on their part tailored services to fit their individual needs.
In this stage, strategies are the most difficult to imitate and involve structural as well as financial, social, and customisation bonds between the customer and the firm. Structural bonds are created by providing services to the client that are frequently designed right into the service delivery system for that client. Often structural bonds are created by providing customised services to the client that are technology based and make the customer more productive. An example of structural bonds can be seen in a business-to-business context with Allegiance Healthcare Corporation.
By working closely with its hospital supply ordering, delivery, and billing that have greatly enhanced its value as a supplier. For example of level 4, strategy can be seen in the competitive battle between UPS and Federal Express. In the mid-1900s, both firms attempted to tie their clients closer to them with free computers—Federal Express’s Powerships and UPS’s MaxiShips—that stored addresses and shipping data, printed mailing labels, and helped track packages.
By tying into one of the systems, a company saved time overall and could better track daily shipping records. As technology has continued to advance, the two companies have tied their customers to them through the Web and now through wireless technology. But there is also a potential downside to this arrangement from the customer’s perspective. Customers may fear that tying themselves too closely to one provider may not allow then to take advantage of potential price savings from other providers in the future.