Winning Customers' Minds and Hearts: A Tailored Approach to Retention
Winning Customers' Minds and Hearts: A Tailored Approach to Retention
About the Research
Winning your customers’ minds and hearts: Disentangling the effects of lock‑in and affective customer experience on retention
Journal of the Academy of Marketing Science (JAMS), 2023; Volume 51, Issue 4
Authors:
Lily (Xuehui) Gao
Evert de Haan
Iguácel Melero‑Polo
F. Javier Sese
In the competitive business landscape, retaining customers is paramount. Companies often employ various strategies, but two main approaches stand out: lock-in mechanisms and enhancing the affective customer experience. These strategies represent different ways of keeping customers loyal, one through calculative means and the other by appealing to customer's feelings.
Lock-in strategies, like bundling offers and binding contracts, increase the cost for a customer to switch to a competitor, reflecting a transactional focus. Conversely, improving the affective customer experience is more relational, aiming to create positive emotions during interactions with the company.
The crucial question is: how do these two strategies interact, and how can companies make the best use of each? A recent study explored the interplay between lock-in and affective customer experience, revealing some key insights into how to manage these strategies effectively.
The Study's Approach
The researchers used experiential learning theory and social exchange theory to understand the impact of lock-in and affective customer experience on customer retention. They analyzed data from over 13,000 telecom customers, tracking their monthly retention and churn over four years, while also looking at lock-in mechanisms and perceived affective experiences.
The study revealed some important findings:
Lock-in is most effective when affective customer experience is poor. When customers rate their experience below 5 on a 0-10 scale, lock-in mechanisms reduce customer churn.
As the affective customer experience improves, the impact of lock-in decreases, becoming insignificant when the experience is rated above 7.
The depth of the customer relationship is crucial. The effects of lock-in and affective customer experience are stronger when the relationship is shallow, and weaker when it is deep.
With a deep relationship, lock-in may backfire. For example, binding contracts could increase churn from 0.43% to 1.12%.
Affective customer experience has both a direct and spillover effect on retention. A good experience in one service category can increase retention in other related categories.
Understanding Your Customers: Four Key Segments
The study also identified four distinct types of customers, based on their affective experience and relationship depth with the company. These customer types help to further refine how businesses should approach retention:
Indifferent Customers: These customers have a poor affective experience and a light relationship with the firm. They are likely to switch to competitors for better options. The study recommends lock-in strategies with economic rewards such as bundling offers and binding contracts.
Addictive Customers: These customers have a poor affective experience, but a deep relationship with the firm. They are more responsive to improvements in their experience, and companies should prioritize improving the affective customer experience for this group.
Devoted Customers: These customers have a good affective experience and a deep relationship with the firm. Lock-in is not strongly recommended for this group, particularly in the mobile service category, unless the firm can maintain both the good experience and the deep relationship. A binding contract is recommended for broadband.
Rational Customers: These customers have a good affective experience but a light relationship with the firm. They choose a product mainly for convenience. The study suggests using bundling to familiarize them with the range of products and also considers binding contracts a good option for retention.
Practical Implications for Businesses
The study offers tailored guidance for businesses based on the different customer segments:
For Indifferent Customers: Focus on lock-in strategies with economic incentives like bundling or contracts.
For Addictive Customers: Prioritize improving the affective customer experience, since they are more responsive to how they feel.
For Devoted Customers: Be cautious with lock-in strategies, especially for mobile services. Focus on maintaining good experiences and the deep relationship.
For Rational Customers: Use bundling to familiarize them with the company's range of services and consider binding contracts to enhance retention.
The study also suggests:
Don't rely solely on lock-in: While lock-in mechanisms can be useful for retaining customers with poor experiences, they should not be the primary focus. Improving the affective customer experience is key to long-term retention.
Use lock-in strategically as a stop-gap: Lock-in can be used to retain customers while companies improve customer experience.
Tailor strategies based on relationship depth: Adjust the approach depending on whether the relationship is new or long-standing.
Focus on a holistic customer experience: Improve the customer experience across all touchpoints, as experience in one area can have a spillover effect on other related categories.
The research underscores the need for a nuanced approach to customer retention. It shows that both "mind" (lock-in strategies) and "heart" (affective experience) are important, and companies should use a tailored approach based on the type of customer they are dealing with. Companies should aim to not only provide good deals but also make customers feel valued and respected, to foster long-term loyalty.
From the Authors
What companies/organizations/industries will benefit from your findings?
Telecommunication service providers
Subscription based services
What competitive, cooperative, customer, employee, or market conditions may success of the recommendations depend?
Cooperative Agreements: The success of a firm's strategies is intricately linked to the effectiveness of cooperative agreements within the telecommunications industry. Collaborative efforts with content providers, device manufacturers, and other industry players hold the potential to significantly enhance the value proposition of bundled services. The willingness of potential partners to engage in such agreements, the compatibility of their offerings with the firms, and the ability to negotiate mutually beneficial terms become critical factors. Vigilance in monitoring and adapting to competitors' responses to cooperative agreements is essential to ensure the sustainability and uniqueness of the firm's bundled offerings. This collaborative approach contributes to the overall competitiveness and differentiation of the firm within the industry.
Employee Engagement: Internal factors, specifically the engagement and alignment of employees with the firm's strategies, play a pivotal role in their success. Employees need to comprehend the company's goals and be committed to delivering positive customer experiences consistently. Ongoing training and development programs become imperative to enhance employees' ability to provide exceptional service, especially in the context of bundled services. Ensuring that employees are well-equipped and motivated contributes to the seamless implementation of bundling and retention strategies. Internal alignment is crucial for the effective execution of customer-centric initiatives, fostering a positive organizational culture that influences customer satisfaction and loyalty.
Customer Behavior and Preferences: The success of a firm's recommendations relies on a nuanced understanding of customer behavior and preferences. It involves segmenting and targeting diverse customer groups, tailoring bundling, and experience strategies accordingly. The firm must be adaptable to varying preferences within its customer base, recognizing that different segments may prioritize factors such as pricing, quality, or specific service features differently. The effectiveness of bundling discounts and the impact of affective customer experiences hinge upon aligning offerings with the distinct needs and expectations of various customer segments. This customer-centric approach is integral to attracting and retaining a diverse customer base.
How can the recommendations from your findings specifically be implemented?
One key recommendation from the research findings is to implement bundled services, particularly in the mobile and broadband categories, to capitalize on the spillover effect of affective customer experiences. Businesses can achieve this by designing seamless and integrated services that enhance overall customer satisfaction. Promotional campaigns should focus on communicating the benefits of bundling, emphasizing the positive affective experiences customers can expect. The implementation strategy should involve creating memory triggers to evoke information activation and retrieval, as suggested by Borah & Tellis (2016), ensuring that delightful experiences in one category positively influence the perception of the other.
Another important finding underscores the positive impacts of lock-in mechanisms on customer retention, with an added emphasis on the moderating role of relationship depth. To implement this recommendation, businesses should optimize contract terms and loyalty programs, offering exclusive benefits and clearly communicating the advantages of long-term commitments. Additionally, a focus on relationship depth involves personalized communication and the introduction of loyalty programs with tiered benefits. Ongoing employee training programs should be implemented to ensure staff members are equipped to deliver exceptional customer service, fostering a customer-centric culture within the organization.
The research suggests that customers who acquire bundled mobile and broadband services tend to remain with the firm, irrespective of the level of affective customer experience. To implement this recommendation, businesses should design marketing materials and communication strategies that emphasize the advantages of bundled services, particularly in reducing the importance of affective customer experiences due to binding contracts. Reinforcing the benefits of long-term commitments and creating a positive association with bundled services will be essential. By aligning these strategies, businesses can maximize customer retention and satisfaction, leveraging both lock-in mechanisms and the joint effects of bundling and affective customer experiences.
What outcomes would be expected?
The implementation of the recommendations based on the research findings is anticipated to yield several positive outcomes for the business. These outcomes are likely to be reflected in various aspects of the company's performance and customer relations:
Increased Customer Retention: The optimization of bundling strategies, strengthening of lock-in mechanisms, and the focus on relationship depth are likely to contribute to increased customer retention. Customers benefiting from bundled services and exclusive loyalty programs are more likely to stay committed to the company, resulting in a higher retention rate.
Enhanced Customer Experience: By prioritizing affective customer experiences and consistently delivering high-quality services, businesses can expect an improvement in overall customer satisfaction. The positive spillover effect, as identified in the research, suggests that delightful experiences in one service category positively influence satisfaction in another, contributing to an enhanced overall customer experience.
Improved Brand Loyalty: Strengthening lock-in mechanisms and building deeper relationships with customers through personalized communication and exclusive loyalty programs can lead to increased brand loyalty. Customers who perceive added value, benefits, and a positive relationship with the brand are more likely to remain loyal and resist switching to competitors.
Competitive Advantage: Implementing bundled services strategically and effectively communicating their benefits can create a unique selling proposition for the business. This differentiation, combined with increased customer satisfaction and loyalty, can contribute to a competitive advantage within the telecommunications industry.
