ladder is to an ‘advocate’. This provides powerful word-of-mouth
endorsement for a company. In a business to business context this
may ultimately develop into a ‘partner’, where they are closely
linked in a trusting and mutually sharing relationship with their
supplier.
An important implication of the loyalty ladder is that it is not nec-
essarily desirable to progress a relationship with every customer;
some customers or customer segments may not be suitable for the
investment needed in developing a relationship to ‘supporter’ or
‘advocate’, as it may prove to be too costly. Frequently there may be
a need to change an organization’s marketing activities and increase
the marketing expenditure on the relationship building elements of
the marketing mix. Managers therefore need to consider the poten-
tial life time value of a customer and determine whether it is appro-
priate to make this commitment.
There are a number of examples of organizations that have
invested too heavily in unselective customer acquisition and have
then found that they have attracted a customer base which may be
unprofitable and is inappropriate for further development. For
example, in the competitive mobile telephony market some suppli-
ers have gained many low usage customers through undiscriminat-
ing advertising and poor customer targeting. As a consequence,
there have been high levels of customer defection (up to nearly 50
per cent annual defection in some segments) and decreased prof-
itability.
The value of retaining customers
Relationship marketing has acted as a catalyst to understanding the
value of customer retention. Much of the early work written on rela-
tionship marketing11–13recognized the importance of retaining cus-
tomers, but it did not explore the measurement or profit impact of
keeping customers.
In Chapter 1, the work of Reichheld, a management consultant at
the firm Bain & Co, and Sasser, an academic at the Harvard Business
School, was briefly referred to. Their work^14 suggested that there is
a high correlation between customer retention and company prof-
itability. They researched a number of organizations and identified
that even a small improvement in retention rates could make a dra-
matic impact on profitability. They found that a five percentage
46 Relationship Marketing