Tuesday, January 26, 2010

Customer Retention

Customer Retention

Customer retention is a measure of the continuance of the customer’s relationship with the firm. Retention can increase the profitability of the company in terms of cost effectiveness (lowering costs to service customers) and feedback value (customers’ increased volume of purchases). However, managing customer retention is more challenging issue than managing customer acquisition (pg 14).

My brother-in-law, Hiro, used to own an Italian restaurant in Tokyo, Japan. His restaurant is small, maximum capacity of about thirty people, but it is a well-known local restaurant where people often visit for luncheons or cups of coffee. Hiro had a great communication skill, and he customized the preferred menu for the frequent visiting customers. As a result, more and more customers came even from the other side of Tokyo to have his special menu, and the restaurant’s profit soared.

However, Hiro decided to transfer his ownership of the restaurant to his friend Hide because Hiro had an opportunity to study abroad about Italian cuisine. Hiro trusted his friend Hide, and taught him a lot about managing customer relationships. After Hiro left, however, Hide started to change the environment of the restaurant. He abandoned the special menu for local customers and created standardized menu, offered at lower price, to target more general customers. His sudden changed marketing confused the customers. Customers who were willing to spend more money for special menu faced the totally different option. They started to leave the restaurant, and this led a huge drop for the restaurant’s profit.

Hide focused on customer acquisition than the retention, but it is more important to analyze customer’s perceived value that drives customer’s satisfaction. “A 1% improvement in retention leads to a 5% improvement in profitability; A 1% improvement in acquisition cost leads to a 0.1% improvement in profitability” (Ruthrich, 2007).

Jungmin Park (Mina), Section E

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