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The Customer Retention Chain of Cause and Effect

Simply Explained

Entrepreneurs often dream of customers expressing their enthusiasm throughout and recommending the purchased goods online and offline. And why all this? For more sales, of course! Profit is ultimately the ultimate goal of an economically profitable business. With a good strategy that is precisely geared to the target audience, you can gradually gain a solid base of regular customers who, like a real fan club, will always stand behind the company. This is all a question of customer loyalty.

Retention?! That’s right—it’s fundamental for a company to turn interested parties into buyers, buyers into repeat purchasers, and then ultimately regular customers. Therefore customer loyalty should be high up on every company’s priority list. However, it should not be seen as a small, isolated element. Customer loyalty is the goal of a series of measures that your business applies, known as the customer loyalty chain of cause and effect. To understand it, you should first look at what customer loyalty actually is.

What is Customer Retention?

The term “customer loyalty” suggests that the customer themselves becomes active. Customer loyalty first and foremost emanates from the business, and the definition includes all the necessary measures undertaken to drive it. If you look at Manfred Bruhn and Christian Homburg’s definition in their 2008 work “The Customer Loyalty Management Handbook” (Handbuch zum Thema Kundenbindungsmanagement), you can read the following: "Customer loyalty encompasses all company measures that aim to positively shape both previous and future behavioral intentions of a customer towards a provider or his services in order to stabilize or expand the customer relationship for the future."

In the case of a positive outcome, the customer responds to the chosen measures with customer loyalty. Customer loyalty is also closely related to customer satisfaction.

This explanation makes it easy to understand why customer loyalty relates to customer relationship management (CRM)—i.e., customer loyalty management. CRM is aimed at the existing customer base with the aim of maintaining these relationships and preventing a change of provider. Bruhn and Homburg also provide a meaningful explanation here: "Customer loyalty management is the systematic analysis, planning, implementation and control of all measures aimed at the current customer base with the aim of ensuring that these customers maintain or intensify their business relationship in the future.".

Many companies have to first let that statement sink in. Then one thing becomes very clear: customer loyalty is not something you can just produce out of thin air and on-demand. It is a goal preceded by a long series of measures, and all these measures must be based on the target audience or the desired buyer. Sounds like a lot of work for the Marketing and Management teams, doesn't it?

It becomes easier when you acquire background knowledge. A perfect foundation can be picked up by reading our following blog articles:

Knowledge about the different types of customer loyalty and measures can be found in this post about customer loyalty. After informing oneself with this knowledge, one can begin to approach the chain of cause and effect.

The Phases of Customer Retention

Customer loyalty does not simply fall from the sky but is rather the result of targeting cleverly tailored corporate strategies at the desired consumer. Therefore, obtaining customer loyalty must first be preceded by a number of phases. In addition, the primary goal of corporate management must never fall out of sight: financial success.

Experts speak of the so-called chain-effect of customer retention. This chain combines the various phases that occur in achieving customer loyalty and ultimately leads to more sales. In detail, these are the following phases:

This graphic shows which factors must be present on the customer side to complete the phase. It all starts with the first contact, which would normally be the purchase of a product, for example. The term “first contact” should not be confused at this point. In marketing, it is often used to describe how customers get their first contact with the company through advertising, websites, or other means. In the customer retention chain reaction, the first contact is to be understood as direct, close contact, i.e., the purchase or use of the service offered.

With the purchase in phase one, the customer has the opportunity in phase two to evaluate the purchase and make a personal judgment in terms of customer satisfaction. If their expectations are positively exceeded, the chain continues with the third phase. Good experiences promote the growth of customer loyalty, based on acceptance, trust, and a positive attitude towards the company. This is an important point because the customer is less willing to switch providers and is, therefore, more open to making a repeat purchase. From there, we land in phase four: our measures worked and the customer is buying again, recommending the company and its range as well as purchasing other products offered—so-called cross-buying behavior. The four phases thus culminate in increased sales. The last phase, phase five, concludes the chain of cause and effect.

These phases cannot be exchanged, skipped, or avoided—each is essential to initiate the next. In short: there are no shortcuts! But the journey is worth it as the effects of customer loyalty are complex and generate—above all—one thing: profit!

Process

The Effect of Customer Retention

By now, everyone should be clear about the value of having regular customers compared to the more complex (and costly) acquisition of new customers. Therefore, it need only be briefly said at this point: Regular customers generate higher sales. In order to clarify in detail customer loyalty’s effect on the fulfillment of internal economic goals, we split it into the following areas:

Sales effect
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• customer loyalty results in a higher purchase frequency and higher sales
• new customers are attracted via recommendations, generating additional sales
• by attracting customers from the competition, you increase your own market share

Cost effect
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• sink costs by reducing expenses based on existing customer information
• advertising and communication costs can be reduced
•regular customers can be inexpensively asked to assess optimization potential

Profit effect
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• off-setting customer procurement costs with the gain of new sales
• epeated cross-buying
• see the points under sales effect

Securing livelihoods and reducing risks
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• a contribution to rising sales figures ensures the company's livelihood
• a secure customer base enables long-term planning
• regular customers are less prone to switching
• regular customers are generally more relaxed about mistakes and problems and don't immediately change the provider

Negative effect
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• the measures necessary generate costs
•change demands resources in the entire company and in individual departments such as Marketing, Management, Sales, and Human Resources

Factors Influencing Customer Retention

Simply put, this means identifying the measures that promote customer loyalty. Anyone who has carefully read the above-mentioned article on the types of customer loyalty already knows more than the basics and can skip this section.

For everyone else, here is a brief summary of the most important influencing factors. First of all, we should distinguish between voluntary and forced customer loyalty. Forced customer loyalty results, for example, from fixed terms without the possibility of termination or from high exchange fees and the like. This is to discourage customers from switching to other providers. These describe legal, technical, and economic factors.

In contrast, one can consider the situational bond neutrally. The consumer might have no alternatives, for example, because the providing company has a monopoly. They are therefore forced to make use of their product or service. Here, however, you have to note that this situation can change quickly, and a competitor can pop up right in front of you. If you find that hard to imagine, try to find a fast-food restaurant without direct neighborhood competition!

However, you can retain customers more positively and in the longer term on a voluntary basis through an emotional bond. This is because the customer's emotions are addressed, the relationship of trust is strengthened, and the customer has positive experiences. Those who are involuntarily tied to a company will migrate at the first opportunity to see what the competition has to offer. True fans, however, remain loyal to a business. A company should therefore rely on long-term positive influencing factors such as emotional attachment. As you can see, there are different types of customer loyalty and every company can (and should) create their own catalog of measures to strengthen it.

Types of retention

The Marketing Mix for Successful Customer Loyalty

One thing has thus far become very clear: the extensive topic of “customer loyalty” belongs into experienced hands—it is a subject for those employees who have the expertise to achieve the goals. In most companies, this is going to be the Marketing department, which can use extensive strategies around advertising, communication, and more to generate a feeling of connection to the business.

Management level is, of course, always on the ball and gives the Marketing team the task of thinking about "how to retain customers". In principle a nice job, but which marketing strategies and customer loyalty instruments can the team use to implement customer loyalty? There are countless ways to put together an individual marketing mix that can strengthen customer loyalty. It is important to keep the chain of effects in mind in order to identify individual phases that make sense from a marketing perspective.

We already mentioned that customer loyalty is part of Customer Relationship Management (CRM). So far so good, but what should bright minds do with this information? A look at Bruhn and Homburg will help: “The task of CRM is to optimize and integrate customer-related processes across all company departments. For this, a database with appropriate software is needed."

In other words, CRM is dedicated to the task of increasing customer satisfaction and loyalty. To do this, it needs comprehensive data about regular customers in order to adapt measures directly to them. CRM, therefore, needs to be part of day-to-day operations in that all-important information about customers should be regularly updated in an editable database, open and accessible by all employees. These strategies are based on this great wealth of CRM knowledge.

That sums up CRM. But what other marketing concepts are there? For example, one should look at the so-called Customer Experience Management, also known as CEM. CEM is all about creating positive customer experiences, intended to strengthen customer loyalty.

Next is Retention Marketing—also known as Customer Retention Marketing—which is worth a look as it is all about customer loyalty. Here, customer groups are identified and measures are taken to address customers with targeted strategies.

If you have increasingly relied on enforced measures to secure customer loyalty, it is advisable to use an implementation of Churn Management. This tries to prevent customer churn by being active before customers leave. For example, churn management intervenes as soon as a contract term is nearing its end to show the customer the advantages of extending their contract and thus persuade them to stay.

With such possibilities, Marketing can design a colorful bouquet of strategies in order to devote themselves to customer loyalty in the best possible way.

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Customer Loyalty means Profit

If your head is spinning right now, you should let everything rest a while and sink into place. The following important takeaways should be observed:

  • What is the goal? Retention!
  • What does it do? It brings greater profit.
  • How? Through the chain of customer loyalty cause and effect.
  • How is this secured? Using marketing strategies.

Companies who internalize this have good prospects of being able to look after a large number of regular customers. These customers offer far more than mere profit. Those who trust their regular customers can use their criticism and feedback to optimize the company again and again. We mentioned that above, but it really is so fundamental that we’re going to repeat it: regular customers see the potential for improvement and are happy to answer questions. Grasp the potential and take advantage of the customer loyalty chain to improve your profits!