Understanding the Effect of Customer Relationship Management Efforts on Customer Retention and Customer Share Development

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Peter C. Verhoef

Understanding the Effect of Customer Relationship Management Efforts on Customer Retention and Customer Share Development Scholars have questioned the effectiveness of several customer relationship management strategies. The author investigates the differential effects of customer relationship perceptions and relationship marketing instruments on customer retention and customer share development over time. Customer relationship perceptions are considered evaluations of relationship strength and a supplier’s offerings, and customer share development is the change in customer share between two periods. The results show that affective commitment and loyalty programs that provide economic incentives positively affect both customer retention and customer share development, whereas direct mailings influence customer share development. However, the effect of these variables is rather small. The results also indicate that firms can use the same strategies to affect both customer retention and customer share development.

ustomer relationships have been increasingly studied in the academic marketing literature (Berry 1995; Dwyer, Schurr, and Oh 1987; Morgan and Hunt 1994; Sheth and Parvatiyar 1995). An intense interest in customer relationships is also apparent in marketing practice and is most evident in firms’ significant investments in customer relationship management (CRM) systems (Kerstetter 2001; Reinartz and Kumar 2002; Winer 2001). Customer retention rates and customer share are important metrics in CRM (Hoekstra, Leeflang, and Wittink 1999; Reichheld 1996). Customer share is defined as the ratio of a customer’s purchases of a particular category of products or services from supplier X to the customer’s total purchases of that category of products or services from all suppliers (Peppers and Rogers 1999). To maximize these metrics, firms use relationship marketing instruments (RMIs), such as loyalty programs and direct mailings (Hart et al. 1999; Roberts and Berger 1999). Firms also aim to build close relationships with customers to enhance customers’ relationship perceptions (CRPs). Although the impact of these tactics on customer retention has been reported (e.g., Bolton 1998; Bolton, Kannan, and Bramlett 2000), there is skepticism about whether such tac-

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Peter C. Verhoef is Assistant Professor of Marketing, Department of Marketing and Organization, Rotterdam School of Economics, Erasmus University, Rotterdam. The author gratefully acknowledges the financial and data support of a Dutch financial services company. The author thanks Bas Donkers, Fred Langerak, Peter Leeflang, Loren Lemon, Peeter Verlegh, Dick Wittink, and the four anonymous JM reviewers for their helpful suggestions. The author also acknowledges the comments of research seminar participants at the University of Groningen, Yale School of Management, Tilburg University, and the University of Maryland. Finally, he acknowledges his two dissertation advisers, Philip Hans Franses and Janny Hoekstra, for their enduring support.

tics can succeed in developing customer share in consumer markets (Dowling 2002; Dowling and Uncles 1997). Several studies have considered the impact of CRP on either customer retention or customer share, but not on both (e.g., Anderson and Sullivan 1993; Bolton 1998; Bowman and Narayandas 2001; De Wulf, Odekerken-Schröder, and Iacobucci 2001). A few studies have considered the effect of RMIs on customer retention (e.g., Bolton, Kannan, and Bramlett 2000). In contrast, the effect of RMIs on customer share has been overlooked. Furthermore, most studies focus on customer share in a particular product category (e.g., Bowman and Narayandas 2001). Higher sales of more of the same product or brand can increase this share; however, firms that sell multiple products or services achieve share increases by cross-selling other products. Moreover, no study has considered the effect of CRPs and RMIs on both customer...
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