Quantcast
Latest Stories

MARKETING RX

‘What’s the truth about the profitability of customer retention?’

By ,

Q: Some three years ago, our son’s MBA professor told his class that research has shown that if a company is able to raise its customer retention by 5 percent, this will lead to a profitability increase of at least 35 percent and even to at most 95 percent. In a recent seminar conducted by a popular entrepreneur we heard this same proposition.

For three years now since our son told us about this idea of raising profitability by improving customer retention, we have persisted in implementing a customer retention program consisting of periodic customer reminders, discount coupons, surprise gifts, lottery and contests, and similar other promo events and activities.

We’ve done and are doing all these in our chain of four carinderias and another chain of laundry services outlets.

But not even once have we experienced a 35-percent profitability increase from a 5 percent and even a 10 percent to 15 percent improvement in customer retention in our two service chains.

When we mentioned our case at the recent seminar by an entrepreneur speaker, we did not get an explanation.  Instead, the speaker told us to check our retention and profitability “metrics.”  We explained to the speaker that it was our son who developed the needed “metrics” because he’s a CPA and an MBA graduate.  The speaker excused himself to turn to some other seminar attendees.

Will you help us by at least giving us your comments on what we may have done wrong?

A: Let the latest and better truth be told and known!  Our emphasis is on the words “latest” and “better.”

In many Friday columns, when we wrote about the issue of customer loyalty programs, we mentioned this relationship between customer retention and profitability. But we did not elaborate because our concern then was only about customer retention and its role as the stepping stone to customer loyalty.

So now, we tackle your question about what you may have done wrong in your quest for higher profitability via improving customer retention.  May we say outright that we do not believe you’ve done anything really wrong. This is because your basis for raising profitability via improved customer retention is not “the latest and better” truth about the customer retention and profitability relationship.

We start with what’s the “latest truth.”  But what’s the “old truth” in the first place?  What research was this highly seductive 5 percent-retention-improvement-leading-to-the-35 percent-profit-rise proposition based on?

The source is a generation old or to be exact, a 22-year-old Harvard Business Review article.  The title of the article is just as seductive as its proposition, namely,    “Zero Defection: Quality Comes to Service.”  The two authors were the highly respected Bain & Company “emeritus director,” Frederick Reichheld, and the reputable Harvard Business School professor, W. Earl Sasser.

Doubtless, it was because of the authors’ reputation and because it was the very influential Harvard Business Review who was the publisher that the article became an instant hit.  Its prescription found widespread and immediate adoption especially among service company businessmen.  In fact, the Senior MRx-er used the article as his framework in helping Meralco in the ’90s develop and manage its subscriber satisfaction program.

But the article’s research basis was not an original research by Reichheld and Sasser. They borrowed the research on “the Experience Curve” of Bruce Henderson’s Boston Consulting Group (BCG) of the 1960s.  The impressive volume of BCG research on the experience curve across a wide range of manufacturing industries consistently led to the same kind of proposition that Reichheld and Sasser applied in the service sector.  Irrespective of this research-borrowing admission from Reichheld and Sasser, nobody challenged the relevance of the retention-profitability proposition to the service industry.

This was true until 2000 or 10 years after.  In the October 2000 issue of the Journal of Marketing, two INSEAD professors, Werner Reinartz and V. Kumar, published the results of their research under the title, “On the Profitability of Long-Life Customers in a Noncontractual Selling: an Empirical Investigation and Implications for Marketing.”  The Reinartz and Kumar research gave “the better truth.”

Then the final challenge came in 2005 when two Columbia University marketing professors, Sunil Gupta and Donald Lehmann, published their definitive research in the book, Managing Customers as Investments: The Strategic Value of Customers in the Long-Run.  The Columbia University book came out with “the latest and better truth.”  Its reported original and impressive research series found this: “A 1 percent improvement in customer retention will lead to a profit increase of at least 3.5 percent to at most 5.1 percent.”

So there’s your “latest and better” truth about the customer retention and profitability relationship.  This latest and better truth is our basis for saying that we do not believe you’ve done anything really wrong.  Our MRx to you is simple.  Keep up with the latest research on any important marketing issue like this retention and profitability relationship. It may also be good to share this MRx with your son’s MBA professor and the entrepreneur speaker whose seminar you recently attended and who have obviously also not kept up with “the latest and better truth” in marketing.

Keep your questions coming.  Send them to us at MarketingRx@pldtDSL.net or drnedmarketingrx@gmail.com. God bless!


Follow Us


Follow us on Facebook Follow on Twitter Follow on Twitter


Recent Stories:

Complete stories on our Digital Edition newsstand for tablets, netbooks and mobile phones; 14-issue free trial. About to step out? Get breaking alerts on your mobile.phone. Text ON INQ BREAKING to 4467, for Globe, Smart and Sun subscribers in the Philippines.

Tags: business Friday , customer retention , profitability



Copyright © 2014, .
To subscribe to the Philippine Daily Inquirer newspaper in the Philippines, call +63 2 896-6000 for Metro Manila and Metro Cebu or email your subscription request here.
Factual errors? Contact the Philippine Daily Inquirer's day desk. Believe this article violates journalistic ethics? Contact the Inquirer's Reader's Advocate. Or write The Readers' Advocate:
c/o Philippine Daily Inquirer Chino Roces Avenue corner Yague and Mascardo Streets, Makati City, Metro Manila, Philippines Or fax nos. +63 2 8974793 to 94
Advertisement
Advertisement

News

  • What Went Before: Malacañang allies alleged involvement in pork scam
  • Timeline: Napoles tell-all
  • 12 senators on Napoles ‘pork’ list, says Lacson
  • Napoles surgery in Makati hospital successful
  • Save the queen? Aide takes fall for Enrile, Gigi Reyes
  • Sports

  • Mixers trim Aces; Painters repulse Bolts
  • Donaire junks Garcia as coach, taps father
  • ’Bye Ginebra: No heavy heart this time
  • UAAP board tackles new rules
  • Baguio climb to decide Le Tour de Filipinas
  • Lifestyle

  • The best flavors of summer in one bite, and more
  • Homemade yogurt, bread blended with pizza, even ramen
  • Visiting chefs from Denmark get creative with ‘ube,’ ‘ buko,’ ‘calamansi,’ mangoes
  • Salted baked potatoes
  • A first in a mall: Authentic Greek yogurt–made fresh in front of diners
  • Entertainment

  • Return of ‘Ibong Adarna’
  • Practical Phytos plans his future
  • In love … with acting
  • From prison to the peak of success
  • ‘Asedillo’ location thrives
  • Business

  • Philippine Airlines to stop shipment of shark fins
  • PH banks not ready for Asean integration
  • Stocks down on profit-taking
  • Banks allowed to use ‘cloud’
  • SMIC to issue P15-B bonds
  • Technology

  • ‘Unlimited’ Internet promos not really limitless; lawmakers call for probe
  • Viber releases new design for iPhone, comes to Blackberry 10 for the first time
  • Engineers create a world of difference
  • Bam Aquino becomes Master Splinter’s son after Wiki hack
  • Mark Caguioa lambasts Ginebra teammates on Twitter
  • Opinion

  • Editorial cartoon, April 24, 2014
  • Talking to Janet
  • Respite
  • Bucket list
  • JPII in 1981: walking a tightrope
  • Global Nation

  • PH seeks ‘clearer assurance’ from US
  • China and rivals sign naval pact to ease maritime tensions
  • What Went Before: Manila bus hostage crisis
  • Obama arrives in Tokyo, first stop of 4-nation tour
  • Believe it or not: Filipinos love US more than Yanks
  • Marketplace