Customer retention is a crucial factor for organizational success in business. Many companies have misconceptions about customer retention in regard to assessing customer satisfaction in order to enhance business. Following are the most prominent myths in business world today.
- An organization should endeavor a perfect 100 % customer retention: The philosophy that an organization should endeavor 100 % retention is unreasonable. There are many factors within the organization and outside it that substantially affect customer retention and making the presumption of 100 % retention rate wrong.
For example, in airline industry, airlines have good retention rate but not 100% for their lifetime valued customers who like to travel in business classes. But if the airlines expect the same retention rate from a college student it would be unreasonable.
However, the airlines inherit some pricing techniques to offer affordable tickets to these types of customers. But airlines know that college students cannot be loyal to them as they seek lowest fairs and not the overall services. But the airlines should not avoid these low valued customers because they could be sometimes profitable to them.
Hence, the airlines realize the importance of the fact that they can’t sell their tickets only to business class and high valued customer, so they accept retention rates less than 100% and inbuilt various types of classes and offers that suits different range of customers. By doing this they obviously have to compromise on 100% retention rates but they could apparently make high profit by diversifying business rules according to the type of customers.
In practice an organization should not consider all the customers to be retained as many of them could be only transactional customers who could yield profit. Concentrating on making 100 % retention rates could result in defection of many segments of customer which cause business losses.
- Enhancing customer retention and enhancing organizational profit is equivalent: It is also incorrect that enhancing customer retention will automatically enhance organizational profit.
From our above example of airline industry, it could be easily derived that it is impossible for airlines to retain 100% of its best high valued customers. If they want to try increasing this retention rates to much higher level they need distribute the tickets to these high values customers at much lower rates. This will result in serious business losses.
Hence it is important to realize that it turns out to be profitable by loosing some high valued customers by compromising on retention rates. This is because the profit earned by charging higher to the majority of retained customers always exceeds the profit washed out from defectors.
In normal situations the philosophy, that by increasing customer retention, business profits also increase, does not stand good. However, it is very essential for the organization to make subsequent strategies accordingly to manage customer retention and always aiming at business profit.
By understanding the above myths, following are the crucial aspects that all the organizations should focus on:
- The idea behind customer retention is not to focus on zero defection. Rather, the organizations should manage customer retention in such a way that it yields maximum profit and optimize customers’ equity.
- Without incurring cost customer retention cannot be maximized. Focus should be on indulging these expenses efficiently in increasing customer equity of individual customer and understanding that retention is not at all free.
