Customer Retention through Prioritization: Integrating Time-Dependent
Context of Relationship Dynamics
Manisha Mathur* and S. Kumar
*Department of Marketing, School of Business Administration University of Mississippi, University, MS 38677
*E-mail: [email protected]
Abstract
Most marketing researchers and practitioners emphasize sustaining strong customer relationships for improving profitability. Profitably managing customer relationships is, therefore, an
important foundational cornerstone of marketing. In contrast, role of effectively prioritizing customers for increasing profitability has been challenged in marketing literature. While there are divergent views on the principle of customer prioritization, the role of differential use of marketing instruments in managing relationship marketing investments to effectively retain customers is yet to be substantiated. The current study proposes a conceptual framework explicating the key role of customer prioritization in accounting for the effectiveness of relationship investments and interaction frequency. The effect of customer prioritization on customer retention is contingent upon the length of the relationship. We test the proposed
framework with a multi-method approach to help ascertain the value of customer prioritization in enabling firms to effectively use relationship investments for customer retention. The findings also establish the moderating role of relationship phase on customer retention over the length of relationship.
Introduction
Relationship marketing (RM) efforts facilitate firms to engage in meaningful associations with their customers (Morgan and Hunt 1994; Srinivasan and Moorman 2005) and most
marketers attest to the benefits of developing long-term relational linkages with customers (Kumar 2000; Reinartz and Kumar 2000) . Many firms expend their resources to build strong relationships with their customers (Johnson and Selnes, 2004), which help the firms’ bottom line through greater customers’ repurchase and Word-of-Mouth (WOM) intentions (Maxham and Netemeyer, 2002).
The extant research is impressive (Berry 1995, Gummesson 2002; Palmatier et al. 2006; Palmatier, Jarvis, Bechkoff, Kardes 2009; Sheth and Parvartiyar 2000), which however, offers insufficient insights on range of strategic choices associated with leveraging relationship marketing efforts to increase customer profitability. This is remiss as diverse strategic
imperatives impact the extent and circuitousness of rewards on firm value. We address this gap by investigating how prioritizing customers account for relationship investments’ effectiveness and how length of the relationship with customers moderate the ability to retain customers.
The primary focus of this research, therefore, is to reconcile the divergent views on RM in the practitioner journals and the academic literature, and further advance the resource-based view and dynamic capabilities perspective by identifying the ability to set clear priorities among customers as necessary in explicating the mechanism by which RM investments lead to an improvement in customer retention. Developing such key firm capabilities improve firm
performance (Krasnikov and Jayachandran 2008). We propose that customer prioritization is an important construct for understanding a firm’s RM effectiveness. This study, therefore, fills a major gap in marketing research by assessing the favorable impact of customer prioritization as a
cornerstone of relationship marketing strategy aimed at retaining customers to improve firm revenues. Thus, this research addresses a key question: How can firms improve the effectiveness of relationship RM investments to enhance firm revenues under differing lengths of
relationships?
Overall, this research makes four key contributions. First, we develop a conceptual and empirical framework for a strategic choice associated with effective deployment of relationship investment. Second, significant theoretical and practical insights are provided into why setting clear priorities among customers and allocating resources for determining and aligning these priorities are important mechanisms to retain customers. Third, we identify and investigate whether customer prioritization is contingent upon time-dependent length of the relationship that impacts the effectiveness of customer prioritization in retaining customers and improving
revenues. Finally, we investigate whether interaction frequency influences customer prioritization.
Theoretical Background
Drawing from two theoretical perspectives in the strategy literature, the resource-based view (RBV), and the dynamic capabilities perspective, the study examines how firms can achieve an improvement in the firm performance by leveraging the investments in RM through prioritizing customers and deploying RM resources congruent with prioritization. The resource-based view of the firm is a well-established theoretical framework for anchoring the impact of firm specific resources on firm performance. Based on the notion that conceptually firms comprise of bundles of resources and that those resources exhibit heterogeneity across firms, which persists over time (Barney 1991, Wernerfelt 1984, Peteraf 1993), firms possess resources that are valuable, rare, inimitable, and nonsubstitutable. Firms can obtain competitive advantage
by executing novel value-creating strategies which are not readily matched by the other firms (Barney 1991, Peteraf 1993, Wernerfelt 1984, 1995).
When firms develop complementarities among the resources and their embedded processes, their potential to be successful in the marketplace is greatly enhanced (Collis and Montgomery 1995). Scholars extended RBV to the dynamic markets in an attempt to adequately explicate how and why some firms have a competitive edge in conditions of rapid and
unpredictable change (Teece et al. 1997). Dynamic capabilities theoretical perspective posits that sustainable source of competitive advantage is located in the ability of the firms to obtain,
integrate, and utilize resources such that they match each firm’s market environment (Eisenhardt and Martin 2000), and not constituted in firm’s idiosyncratic resources. Dynamic capabilities comprise of those entities that create value for firms by deploying resources into new value-creating strategies.
From the recent RBV-capabilities literature, it emerges that it is not just the possession of resources such as relationship investments (Palmatier et al. 2006) that result in differences in performances of firms within an industry. This emerging research stream emphasizes that the ability of a firm to deploy resources through capabilities plays a more important role than
absolute resources in explaining inter-firm performance differences over time (Slater, Olson, and Hult 2006). Consistent with these theoretical perspectives, this study demonstrates that the ability to prioritize customers enables firms to effectively deploy relationship investments and improves customer retention. Through customer prioritization, relationship investments are effectively deployed to retain customers and to create enduring value for the firm.
Conceptual Framework and Hypotheses
Though RM improves the allocation and targeting of marketing efforts, RM does not impact the firm’s profits directly (Palmatier et al. 2006; Palmatier et al. 2009). Thus, the current research posits that firms can achieve effectiveness in RM investments through the ability to develop and implement a differentiated deployment of marketing instruments for different sets of customers, leading to higher customer retention (Fig. 1). The direct impact of relationship
investments and interaction frequency on the ability to retain customers is inconsequential in contrast to the ability to prioritize customers.
The relationship between a firm and its customer undergoes changes over time and consequently impacts the firm’s as well as the customer’s decisions (Dwyer, Schurr, and Oh 1987; Jap and Ganesan 2000). Many researchers characterize relationship phases as distinct phases of exploration phase, maturity phase, and decline phase based on the time elapsed in the development of relationships (Jap and Ganesan 2000). It is increasingly being recognized by marketers that a particular phase in a relationship life cycle is critical for firms in managing customer relationships and ultimately, firm performance (Palmatier et al. 2006). In this study, we examine the extent to which customer prioritization influences customer retention under distinct phases of a relationship life cycle, which comprise of exploration, maturity, and decline phases.
Interaction Frequency Relationship Investment Customer Retention Customer Prioritization Relationship Phase • Exploration • Maturity • Decline
Fig1. Conceptual Model
Relationship phase enables the evaluation of the firm-customer relationship based on the phase of the relationship. We also examine the role of the amount of interaction with customers in influencing customer prioritization. Relationship phase encompasses the qualitative aspect of the firm-customer relationship, while the quantitative aspect of the relationship is taken into consideration through interaction frequency. Given the current economic scenario, it becomes strategically imperative for the firms not to neglect the role of firm’s market environment and its impact on the firms. Thus, the distinctive moderator such as relationship phase is representative of those factors that may influence the effectiveness of the firm’s RM investment in retaining customers.
Relationship Investment and Customer Prioritization
Relationship investment is the investment of financial resources, time, and effort directed at developing strong customer relations (Morgan and Hunt 1994), which leads to enhanced
reciprocal behavior critical for strengthening and maintaining a relationship (Palmatier et al. 2006). Such investments entail adaptation of policies, offering small favors or considerations, such as easier ordering and processing (Palmatier et al. 2009).
According to Day (1994), building and managing close customer relationships are distinctive capabilities of a firm. Customer prioritization is a distinctive capability that enables firms to manage dynamic customer relationships fruitfully. Based on the perspectives on RBV and dynamic capabilities, this study regards customer prioritization as the ability of a firm to effectively set clear priorities among their customers to retain customers and increase revenues.
Customer prioritization is the extent to which customers are treated differently with regard to marketing instruments based on their importance to the firm (Homburg et al. 2008). A greater level of customer prioritization is when the top-tier customers are provided distinct and preferential treatment as compared to the bottom-tier customers with regard to product, price, sales, communication, and processes (Lacey, Suh, and Morgan 2007, Homburg et al. 2008). When firms invest in relationships, they are able to assess the customer profitability accurately (Jayachandran et al. 2005). Equipped with customer profitability information (Shah et al. 2006), firms are better able to assess the profitability effect of specific marketing actions, as a result of which firms are better able to maintain relationships with their customers (Venkatesan and Kumar 2004) and realize the intended improvement in firm revenues from investments in relationships.
Efficient and effective customer prioritization is a firm capability as customer
prioritization enables the firms to competently utilize their resources through their appropriate allocation and targeted use of marketing instruments. With investments in relationships, firms are able to implement their prioritization efforts, successfully.
H1a: The relationship investment of the firm is positively associated with customer prioritization.
Interaction Frequency and Customer Prioritization
Interaction frequency represents the number of interactions per unit of time between exchange partners (Palmatier et al. 2006). Interaction frequency of the customers with the firm is a critical behavioral factor, capable of augmenting the motivation of the customers to build strong relationships, and enhancing the value of structural relationship marketing for a customer (Palmatier, Gopalakrishnan, and Houston 2006).
According to Palmatier et al. (2006) frequent interactions enable firms to obtain
behavioral information in different contexts enabling the firms to make better predictions about the potential of the customers’ importance to the firms. Firms are better able to transform the large database of customer information into a minefield of quality customer information which is meaningful, and capitalizable for prioritizing customers effectively, when there is frequent interaction between the firms and their customers. With the better quality of information about the customers’ importance, a firm is better able to prioritize the customers.
H1b: The customer-firm interaction frequency is positively associated with customer prioritization.
Customer Prioritization and Customer Retention
According to marketing literature customer prioritization refers to the extent to which a firm provides different and preferential treatment to selected customers regarding a firm’s products, price, sales, communication, and processes (Homburg et al. 2008, 2010). A firm may treat chosen customers preferentially by offering additional services, individualized goods or services, flexibility in payment targets or lowering prices. Firms find it profitable to address the
specific needs of selected customer segments. Thus, firms such as Federal Express Corporation and Bank of America provide preferential treatment to their most important or valuable
customers (Bhatnagar et al. 2007).
Many researchers have found that customer prioritization improves customer satisfaction, and customer loyalty, and consequently the performance outcomes such as average sales per customer, average customer profitability (Homburg et al. 2008). Furthermore, benefits of
prioritizing customers on the basis of a firm’s products, prices, communication or processes have been reported in marketing literature (Bhatnagar et al. 2007) yet customer prioritization is
implemented inadequately by the companies (Homburg et al. 2008). When firms prioritize their customers, average satisfaction of top tier or valuable customers is influenced in a positive manner, and average satisfaction of bottom-tier customers is not influenced negatively.
Additionally, as the satisfaction of top-tier customers increases, the tendency of those customers to stay in a relationship with a firm also increases.
Customer retention refers to the degree to which a firm maintains business and sales from the same set of customers or consistently maintains their relationships with customers (Carter 2010). According to Day and Van den Bulte (2002) customers vary in their future economic value and that superior returns are realized by allocating resources toward the retention and growth of the most valuable customers. Furthermore, retaining customers offers greater
sustainable competitive advantage than acquiring new customers (Parvartiyar and Sheth 2001), as it costs less to retain customers than to compete for new customers.
Ability to retain customers enables firms to keep their customers and continuously gain from them in terms of sales and revenues through continuous customer purchases. According to Jayachandran et al. (2005) greater customer retention is obtained when firms improve their
relational information processes. This is because when firms have better relational information processes, they are better able to prioritize their customers, and ultimately are better able to develop relations with their customers and retain them. As a result, firms are able to achieve greater levels of customer satisfaction and loyalty (Mithas, Krishnan and Fornell 2005). According to Gustafsson et al. (2005) customer satisfaction is a prominent driver of customer retention. Prior research shows that customer prioritization facilitates the development of relationships between a firm and its customers, which leads to the development of enduring relationships and ultimately, firms are effective in customer retention.
H2: Customer prioritization is positively correlated with customer’s intent to do business with
its service provider.
The Moderating Role of Relationship Phase
According to Dwyer, Schurr, and Oh (1987) relationships between buyer and seller develop through five phases demarcated as awareness, exploration, expansion, commitment, and dissolution. Each phase characterizes the major transition in how exchange partners regard each another (Dwyer, Schurr, and Oh 1987). Jap and Ganesan (2000) regard the life cycle of
relationship in a marketing channel in terms of exploration, buildup, maturity, and decline. However, the focus of the present research is on three distinct phases of a relationship because of their relevance with the study: exploration, maturity, and decline. In our article we are
investigating the phases which manifest the potential of relationship formation, or continuity of the relationship or the culmination of the relationship. These aspects of the relationships are distinctly evident in the three phases of relationship evolution: exploration, maturity, and decline, which led to the selection of exploration, maturity and decline phase for their further
investigation in our study. We have seen similar trend of selection in literature (Jap and Ganesan 2000).
During the exploration phase of relationship development, the potential partners evaluate the obligations, benefits, and encumbrances entailed in continuing an exchange relationship. The exploratory relationship may be very short-lived or may comprise a prolonged period of trial and appraisal; however relationship during this phase is very fragile and may terminate quite easily as it involves minimal investment and minimal interdependence in the bilateral exchange.
During exploration phase trial purchases may occur, both firm and its customers may test each other’s integrity, compatibility, and performance (Dwyer, Schurr, and Oh 1987).
Furthermore, in the exploration phase, there is a lot of ambiguity regarding the future value of the relationship, the relationship lacks trust, and focus is on individual outcomes (Jap and Ganesan 2000). The rationale may be explicated by the inability of the firm to effectively determine the potential profitability of their customers during the exploratory phase of their relationship development when customers are trying out the firm and the firm is probing the customers such that there is an inherent fragility in the firm-customer relationship.
Since relationship is fragile it would not be useful for the firm to engage their efforts in prioritizing their customers without the knowledge whether the customer is important to the firm or not. Generally, firms determine the importance of a customer by considering the customers’ actual or potential sales in the valuation criteria, which however, cannot be determined in the exploratory phase of the relationship due to lack of adequate information and interaction. Thus, higher levels of CRM investments would not be effective in enabling and developing a higher level of customer prioritization and customer retention during the exploratory phase of a relationship.
Customer satisfaction, a prominent driver of customer retention is achieved when customers evaluate the firm’s offerings over a period of time (Gustafsson et al. 2005), which is lacking in the exploration phase of relationship evolution. Fragility of the relationship makes it difficult for the firm to retain the customers because the relationship may terminate very easily. Hence, customer retainability of the firm would not be effectively achieved by firm’s focus on prioritizing its customers.
H3a: In the exploration phase of a relationship, customer prioritization will be negatively related to customer retention.
The maturity phase of a relationship characterizes that stage in the evolution of a relationship where both the seller and the buyer agree to maintain the relationship on a regular basis either tacitly or explicitly (Jap and Ganesan 2000). The maturity phase of relationship is marked by the deepening of satisfaction and interdependence supported by significant and consistent inputs, and both the buyer and the seller make an attempt to resolve any conflict and make adjustments in their relationship. During the maturity phase of relationship evolution, customers are able to evaluate the firm’s offerings over a period of time, and firms are able to discern their customer’s current and potential needs and preferences by discovering hidden patterns (Mithas et al. 2005). As a result, firms are better able to satisfy their customers and achieve customer loyalty (Dwyer, Schurr, and Oh 1987). Hence, investments in relationships are effective in enabling firms to retain their customers during the maturity phase of a relationship. H3b: In the maturity phase of a relationship, customer prioritization will be positively related
In the decline phase of the relationship evolution, at least one of the exchange partner experiences dissatisfaction, and contemplates on terminating the relationship. During the decline phase of the relationship development, dissolution of the relationship may be initiated
unilaterally by unsatisfied party by investigating alternative relationships and by informing the other partner about the intent to terminate the relationship (Dwyer, Shurr, and Oh 1987; Jap and Ganesan 2000). Furthermore, in the decline phase relationships lack trust and the focus is on individual outcomes (Jap and Ganesan 2000).
During the decline phase of the relationship, when there is a high level of customer dissatisfaction the efforts of the firm in prioritizing the customers and retaining the customers would not pay off. Thus, a higher level of CRM investment would not be effective in enabling the firms to prioritize their customers at a high level as the relationship in a potentially
dissolution stage would not be profitable and marketing resources would be wasted on those customers that would ultimately leave. The customer satisfaction-a prominent driver of customer retention (Gustafsson et al. 2005), is prominently missing during the decline phase of
relationship evolution. Furthermore, due to the significant levels of customer dissatisfaction, and trust, firms would not be able to maintain or gain customer loyalty, thus reducing the customer retainability of the firm. The higher level of CRM investment would not be effective in enabling the firms to retain the customers.
H3c: In the decline phase of a relationship, customer prioritization will be negatively related to customer retention.
Research Method Data collection
We employed a survey methodology for data collection at the customer level, in which we focused on service relationships between customers and their cellphone service providers within the telecommunications industry. The list of features and data applications available on cellphones is consistently growing, and cellphones are no longer considered a luxury but
necessity. At least 56% customers use their cellphones for multiple functions (Chan et al. 2006). The industry is competitive, and reportedly 47 % of all cellphone users switch their service carriers in order to obtain lower rates and better service, however, there are costs associated with switching to a new provider (Chan et al. 2006). The technology is constantly changing, and the consumers have different kinds of services to choose from. These aspects of the cellphone industry lead to varying levels of customer interactions with the providers.
With the variability in the needs and preference of customers, and continuous technology enhancements resulting in the availability of different options to the consumers, the industry manifests customer-firm relationships in different phases of relationship. In order to have a competitive edge, companies need to make appropriate investments in areas where they are deficient in developing appropriate relational linkages with customers, as the profitability is associated with the volume of consumers they can attract, and retain (Chan et al. 2006). Consistent with these insights, we conduct an empirical study to understand the perspective of individual customers and their perceptions about their cellphone service providers. We
administered a survey to people in a mall on weekends. Thus, nonresponse bias (Armstrong and Overton 1977) was not a problem in this study. The final sample comprised of 157 participants, including 86 males and 71 females. The age of the subjects ranged from 17 to 65 years.
Measures
Our measures are based on existing scales when available. The measures appear in the appendix. We measured relationship investment using a scale adapted from Palmatier et al. (2009) to determine what consumers perceive as important areas that need a firm’s investment pertaining to building stronger relationships. We measured customer prioritization by adapting Homburg, Droll, and Tetzek’s (2008) scale. Following Aurier and N’Goala (2010), customer retention was assessed through relationship duration and relationship exclusivity. We measured relationship phase using the scale developed by Jap and Ganesan (2000). To assess interaction frequency we asked how many times the participants interact with their cellphone service provider in a typical week (Palmatier et al. 2006). The descriptive statistics and correlations are summarized in Table 1.We included age and gender as our control variables in our model.
Table 1: Descriptive Statistics and Correlation Matrix
M SD 1 2 3 4 5 1. Relationship investment 5.099 1.418 1 2. Interaction frequency .169 .666 -.001 1 3. Customer prioritization 3.826 1.534 .310** .027 1 4. Relationship phase 1.950 .431 .047 .030 .101 1 5. Customer retention 2.509 .648 .073 -.004 .012 .227** 1 ** Correlation is significant at the 0.01 level (2-tailed).
Measure reliability and validity
The measurement properties of the scales were evaluated using confirmatory factor (CFA) and reliability analyses (Gerbing and Anderson 1988). Our measurement model fit well with the data (2=99.12, d.f. = 62;
p = .0019; CFI = 0.97; NNFI = .96; RMSEA = .063. The items loaded strongly (loadings range from .67 to .95) on the constructs they were proposed to
measure. To evaluate convergent validity and reliability, we computed composite reliability (CR) and average variance extracted (AVE) for the constructs.
The results indicate that the CR for the key constructs exceeds the 0.7 benchmark and that the AVE exceeds the 0.50 benchmark (Hair et al. 2010). The CR for relationship investment, customer prioritization, and customer retention were .85, .92, and .75 respectively, and the AVE were .60, .69, and .52 respectively. To assess discriminant validity, we compared the AVE to the squared inter-factor correrlations. In all instances, results indicate discriminant validity among the constructs (Fornell and Larcker 1981).
Model Estimation and Results of Hypotheses Testing
We used a multi-method approach to test our hypotheses. We used seemingly unrelated regression (SUR) as SUR estimation takes into consideration that separate samples are not taken to estimated endogeneous variables, thus allowing for the possibility that the errors across equations may be correlated (Pindyck and Rubinfeld, 1998). Furthermore, SUR produces more efficient estimates in contrast to ordinary least squares approach. We used general linear model (GLM) to assess hypotheses under differing contexts of lengths of relationships (exploration, maturity, and decline) as it allows us to compare the significance levels across groups (Hair et al. 2010). We controlled for age, and gender.
We did not find any multi-collinearity problems based on bivariate correlation and variance inflation factors. In our analysis, we used mean-centered variables to create our interactions, as it helps in the interpretation of our results. The first hypothesis predicts the positive effect of both relationship investment (H1a) and interaction frequency (H1b). As expected, we find evidence to suggest that relationship investment has a significance effect on customer prioritization (β = 0.275, SE = 0.083, p < .01). Hence, H1a is found to be strongly
supported. However, we do not find interaction frequency to be equally effective for customer prioritization (β = .042, SE = 0.077), and therefore, H1b is not supported.
Table 2: SUR Results
Customer Prioritization Customer Retention
t Value Standardized Estimate t value Standardized Estimate Independent variables -0.08 0.000 Relationship investment 3.29 0.275*** Interaction frequency 0.53 0.042 Customer prioritization 2.689*** .959 Age -0.69 -0.056 -0.48 -0.039 Gender -1.19 -0.096 -0.41 -0.033 Industry knowledge 0.65 0.052 1.88* 0.149 Note: *p<.10, **p<.05, ***p<.01
We found strong support for the second hypothesis linking customer prioritization directly with customer retention (β = 0.959, SE = 0.152, p < .01). We tested hypothesis 3 using GLM approach. Hypothesis 3 garnered mixed support as we found that effect of customer prioritization is strengthened significantly only during the maturity phase of the relationship (F = 1.599, df = 28, p < .05). We did not find the moderating impact of exploration and decline phase of relationship on the effectiveness of customer prioritization in retaining customers. The results are summarized in Tables 2 and 3.
Table 3: GLM results for relationship phase
Exploration Maturity Decline
F value F value F value
Independent variables Customer prioritization 2.356 1.599** 2.091 Age .636 .677 .612 Gender 3.326 .181 2.982 Industry knowledge 1.281 1.112 1.091 Note: *p<.10, **p<.05, ***p<.01
Discussion and Conclusion
The present research focuses on explaining the observed variability in the effectiveness of relationship investments as evident in prior inconsistent findings in marketing theory and
practice (Colgate and Danaher 2000; Crosby et al. 1990; De Wulf et al. 2001). In this paper, we demonstrate the critical role of customer prioritization in explicating the effectiveness of
investments in relationships in improving customer retention. This study also evaluates the moderating role of relationship phase in effectuating customer retention through customer prioritization. The results support and emphasize the important role of customer prioritization in improving customer retention. The findings also indicate that maturity phase of relationship significantly moderate the effectiveness of customer prioritization. The present study also makes significant theoretical and managerial contributions.
Theoretical and Managerial Implications: Our findings have important implications for further
theory development in marketing. From a theoretical standpoint, our findings corroborate the RBV and dynamic capabilities theoretical arguments that firms with customer prioritization capabilities should be better positioned to garner improvement in customer retention associated
with relationship marketing strategies. Our research provides insights by explicating how relationship investments influence customer retention.
Our results are consistent with the foundational tenets of RBV and its dynamic
capabilities extension that the source of competitive advantage does not merely rest on the firm’s resources and assets such as investments but is constituted by the firm’s ability to acquire, adapt, integrate, deploy and utilize them in ways that are congruent with the requirements or the
demands of the market environment. Our results suggest that both managers and researchers need to have a greater awareness about the trade-offs that may be implicit in managing customer relationships based on their business objectives of whether to attract new customers, build relationships with existing customers in newer ways or to successfully retain their customers.
Our research offers interesting implications for managers. Our study suggests that managers should strive for customer prioritization, and seek to have the ability to retain customers as a key goal of relationship investments in order to maximize their revenues. Our results indicate that the precise route by which they seek to achieve firm performance must be made explicit and should be well understood. Managers must be cognizant of the extent to which their investments must be directed toward maintaining relationships with customers depending upon the length of their relationships as our findings suggest that exploration and decline phase of relationships do not strengthen the favorable influence of customer prioritization on customer retention. Thus, during phases of relationships, managers must be able to effectuate different set of strategies to retain customers.
In addition to the knowledge of using different mechanisms to retain customers under varying situations of relationship phase, managers must assess firm performance using measures that explicitly link specific mechanisms deployed by firms to effectuate customer retention. For
example, an evaluation of firm’s sales is appropriate when customer relationships are starting to develop during the exploration phase of the relationship, and examine the increase in firm’s profits when customer relationships are reaching maturity. Thus, based on the relationship phase of the firm with its customers, managers must be able to trade marketing efforts focused on either retaining customers or attracting new customers.
Moreover, marketers must endeavor to effectively prioritize their customers or focus on investing in attracting new customers, based on their strategic goals of either increasing sales or profits or both. A firm must set its strategic goals based on their current phase of relationship with customers, as relationship phase influences the effectiveness of customer prioritization in retaining customers. The findings also suggest that the number of times the customer-firm interactions occur does not have any significant impact on the ability to effectively prioritize customers, indicating frequency of interactions is not a good driver of strong customer relationships.
There are some limitations in this study. The current study does not take into account the possibility of other explanations for the ineffectiveness of relationship investments. There could be other mechanism besides customer prioritization that may explain improved customer
retention due to investments in relationships. However, this research provides the most parsimonious and comprehensive conceptualization for demonstrating how customer
prioritization accounts for the effectiveness or relationship investments in improving customer retention. Additional empirical studies in different contexts would further validate the findings presented in this paper.
Conclusion
The current research explicates how customer retention can be achieved and maximized through customer prioritization within the context of varying lengths of relationships. It informs managers about the importance of investing in relationships and suggests a rationalized decision-making process involving customers. The current research will encourage managers to use customer prioritization to better focus the marketing strategy of a firm. Managers need to be aware that customer retention may be impacted differentially depending on the phase of a firm’s relationship with its customers. Consequently, the conceptual framework and empirical findings offer several important implications for managers. Finally, as customer retention is key to increase customer equity (Rust, Lemon, and Zeithaml 2004), the conceptual framework of effectiveness of relationship investments posited in the present article would enable managers to better enhance their customer equity and achieve financial accountability. The conceptualization provided in the article and the empirical validation of the role of customer prioritization offers strategic insights to marketing executives on optimal customer management and customer-firm relationship strategies useful for gaining better firm performance.
Appendix
Relationship Investments
Rate the level of investments your cellphone service provider makes in the following areas: (1 = “No investments,” and 7 = “High investments”)
Developing a large installed base of customers Enhancing the performance of our website Providing optimal product pricing
Improving the ease of ordering
Building a strong attachment to our brands Enhancing the quality of customer support
Customer Prioritization
Rate the extent does your cell phone service provider differentiates between customers/customer segments in relation to the following aspects?
(Seven-point rating scales anchored by 1 = “not at all—treat all customers equally” and 7 = “very much”)
Quality of the sales personnel
Frequency of contacts initiated by the sales force Rapidity of processes
Flexibility of processes
Timing of information transfer
Customer Retention
Relationship duration
How many years have you been using your current cellphone service provider? Exclusivity
How many different cell phone providers do you use for your needs?
Relationship Phase
Relationships typically evolve through a number of phases over time. Which of the following best describes your current relationship with your cellphone service provider? (Check only one)
Exploration: Both firms are discovering and testing the goal compatibility, integrity, and
performance of the other, as well as potential obligations, benefits, and burdens involved with working together on a long-term basis.
Maturity: Both firms have an ongoing, long-term relationship in which both are receiving
acceptable levels of satisfaction and benefits from the relationship.
Decline: One or both members have begun to experience dissatisfaction and are contemplating
relationship termination, considering alternative manufacturers or customers, and beginning to communicate an intent to end the relationship.
Interaction frequency
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