Switching Barriers and Creating Value based Customer Relationships

The second strategy used for customer retention is to build switching barriers (or costs) into the service product.

There are two types of switching barriers (costs):
  1. Economic Barriers – representing financial disincentives to defecting such as termination penalties and service contracts and
  2. Psychological Barriers – where valued personal relationships are broken with a change of service provider.

Creating Value

A valued relationship is one in which both the customer and the firm can benefit from customer retention.

Customer Value – is defined as the sum of the benefits received from choosing and staying with one service supplier minus the sum of costs (financial and non-financial).

Value represents a trade-off between what we give and what we get. The concept of value also takes into consideration relationship benefits, not just the quality of the core service being offered.

Categories of customer relational benefits
  • Confidence Benefits
    – where customers develop feelings of trust and confidence in the service provider.

Benefits can come in the form of reduced anxiety or comfort in knowing what to expect.  Customers also know that they don’t have to re-educate the service provider each time they consume the service – the provider already knows their preferences and taste.

  • Social Benefits
    – where customers develop social relationships with their service providers.

Customers are instantly recognized, feel welcome and have developed a rapport.  These social bonds make it less likely that a customer will switch providers – even if a competitor offers a lower priced service.

  • Special Treatment Benefits
    – where customers believe they are getting a special deal or preferential treatment.

This relationship gets formalized in structures such as frequent flyer programs where regular flyers get a choice of where they would like to sit on a plane, and access to lounges that are not available for non-program members.

Benefits to the Firm

Normally come in the form of financial profitability over an extended time period.  Research has shown that the longer a customer stays with a firm, the more profitable they became to serve.  A graphical depiction of the profit a customer can generate in various industries.  There are four factors that work to a firm’s advantage to create incremental profits.  These are:

  • Opportunities to cross-sell other company services
  • Reduced operating costs
  • Increased purchases
  • Positive word-of-mouth advertising
Customer Value Approach to Segmentation

Not all customers are necessarily worth keeping.  This may at first appear to be a highly contentious proposition.  It is true, however, that over time, because of changes that occur within an organization and its competitive environment, one’s target market definition and positioning should be regarded as something dynamic.

This means that new kinds of customers, each with their own particular sets of needs, wants, desires, attitudes and values, must be continually identified and sought, while at the same time determining who among the extant customer base continue to ‘fit’ the organization’s current positioning and profile, and who do not.

Segmentation Analysis

Furthermore, it is important to learn and distinguish between customers and customer groups of variable value and profitability to an organization.

Segmentation analysis helps to make these distinctions, to ensure that an organization remains contemporaneous and competitive. It also enables an organization to serve its customers efficiently, effectively, profitably, and, thereby with mutual value. Marketing is not just about getting more business, but better, that is more valuable, business.

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