●satisfied customers tend to be less price sensitive and may be willing to
pay a price premium.
This early work on customer retention was of great interest to both
academics and managers. In particular, managers in individual
businesses are keen to know the value of retention for their
company in general, for individual products and in different cus-
tomer segments. Managers need to have information to allow them
to make choices in allocation of resources between customer acqui-
sition and customer retention.
Payne and Rickard^15 have pointed out that up to this time most of
the research and results on retention shared a number of character-
istics: they were based on company-specific examples from consult-
ing work; they were descriptive and based on confidential work
assignments; there was a limited specification of variables; and not
all the factors identified were supported by strong empirical evi-
dence.
Payne and Rickard have developed a mathematical model^16 of
customer retention with the objective of enabling a trade-off to be
made in the allocation of scarce marketing resources between strate-
gies concerned with retaining existing customers and attracting new
customers. Their retention model permits the calculation of the
impact on profitability of a number of factors related to customer
retention and acquisition. These factors include: the customer reten-
tion rate, the number of existing customers, the acquisition target
for new customers, the cost of acquiring each customer and the
profit per customer per period. This model has been used on a range
of industries to understand how changes in the above variables
impact on customer segment and company profitability. The basic
building blocks of this model are shown in Figure 2.8.
This model has been used by Payne and Frow^17 to examine the
impact of marketing programmes aimed at retaining existing cus-
tomers and acquiring new customers for a major UK electricity sup-
plier. This sector is one which is presented with special relationship
marketing challenges. From 1998 competition will enter the UK resi-
dential electricity supply market and suppliers will face, for the first
time, the challenge of keeping their existing customers, who are now
open to competitive attack from electricity suppliers beyond their
geographic boundaries, as well as the task of acquiring new cus-
tomers in the geographic territories of their new competitors. Based
on the results of a segmentation study of 2000 residential customers,
48 Relationship Marketing