2.4 Customer Retention Customer retention involves the steps taken by a selling organisation in order to reduce customer defection.

Successful customer retention starts with the first contact an organization has with a customer and continues throughout the entire lifetime of a relationship. Customer retention is important to most companies because the cost of acquiring a new customer is far greater than the cost of maintaining a relationship with a current customer (Ro King, 2005). Several studies put emphasis on the significance of customer retention in the banking industry (Dawkins and Reichheld, 1990).

The argument for customer retention is relatively straightforward. It is more economical to keep customers than to acquire new ones. The costs of acquiring customers to replace those who have been lost are high. This is because the expense of acquiring customers is incurred only in the beginning stages of the commercial relationship (Reichheld and Kenny, 1990). In addition, longerterm customers buy more and if satisfied may generate positive word-of mouth promotion for the company. Additionally, long-term customers also take less of the companys time and are less sensitive to price changes (Healy, 1999). These findings highlight the opportunity for management to acquire referral business, as it is often of superior quality and inexpensive to obtain. Thus, it is believed that reducing customer defections by as little as five percent can double the profits (Healy, 1999). 2.4.1 Customer lifetime value: Thompson & Martin (2005) explain that every interaction with a customer should be done on the basis that their value to you is the total of all the purchases they will ever make, not that one sale. As an example, they state that most valuable customers are probably not those who make the biggest purchases; they are the ones who come back again and again. This way of thinking, according to him, enables firms to consider marketing approaches that dont require firms to make back the cost of acquiring a customer in a single sale. 2.4.2The cost of acquisition: According to Porter, it has been demonstrated that it is up to 20 times more expensive to acquire a new customer than it is to keep an existing one. De Wit & Meyer (2004) say that a traditional sales approach can be likened to pouring new customers into a bucket with a hole in the bottom the weaker your levels of customer retention the larger the hole.

2.5 Influential Factors of Customer Retention The increasing competitiveness in the financial service industry is forcing organisations to place greater emphasis on building and establishing valuable customer relationship (Oracle Corporation, 2005). According to Canel, Rosen and Anderson (2000), considering the situation from a wider perspective maintained that with the expanding global competition, the emergence of new technology and improved communication have increased customers expectation for fuller

satisfaction on their investment. A companys ability to attract and retain new customers is not only related to its product or service, but strongly related to the way it services existing customers and the reputation it creates within and across the market place.

2.5.1 Service Quality The key factors influencing customers selection of a bank include the range of services, rates, fees and prices charged (Abratt and Russell, 1999). It is apparent that superior service alone is not sufficient to satisfy customers. Prices are essential, if not more important than service and relationship quality. Furthermore, service excellence, meeting client needs, and providing innovative products are essential to succeed in the banking industry. Most private banks claim that creating and maintaining customer relationships are important to them and they are aware of the positive values that relationships provide (Colgate et al., 1996). Customers do not remain with an organisation just because of the discount offered or loyalty programme that is available. The service provided must also meet the expectations of the customer. An organisation building customer retention should enable customers to receive what they want, when they want it (just in time) and a perfect delivery each and every time with the desired level of service that appeal to the customer (Gronroos, 1997). Phelps and Graham (2001) also enumerated the two most effective methods of generating increased sales and customer retention as follows: (a) Give the customer a superior experience that they have no reason to or even look elsewhere. (b) Give them incentives to spend more, return, refer or buy more frequently. 2.5.2 Customer Loyalty Customer retention is more than giving the customer what they expect; its about exceeding their expectation so that they become loyal advocates for your brand. Creating customer loyalty puts customer value rather than maximizing profit and shareholder value at the centre of business strategy. The key differentiator in a competitive environment is more often than not the delivery of a consistently high standard of customer service (ibid). Customer loyalty is the heart of retention. If an organisation is not able to keep customer and build long-term relationship, it will continue to operate with discrete one off transaction. Discussion of customer retention seem to be dominated by loyalty programmes and customer discounts. But research shows that what really makes a customer to re-purchase is high quality customer service and well managed formal and informal communication (Mcllroy and Barnett, 2000). Customer loyalty is strongly associated with customers willingness to continue in the relationship; however, customer switching behaviour has a direct and strong effect on loyalty (Rowley, 2002). Loyalty can be understood in different ways depending upon the nature of the product or service which is being offered to a customer. For example, a bank customer is typically loyal as long as he holds an account with a bank and switches

when he changes his account. Furthermore, a customer can demonstrate his loyalty to a brand by showing his commitment and by providing a positive word-of-mouth to friends. In connection with loyalty, it is a general rule that service quality and customer satisfaction have strong effect on customer retention (ibid). Phelps and Graham (2001) are of the view that the more frequent a customer buys from an organisation the more their loyalty increases. A loyal customer will always pay more for services and be less sensitive to tactical discounting so that they will actually have more profitability than customers who are attracted by trade promotion and special offers. Such customers will be tempted to switch to other service providers. Mascareigne (2009) enumerated the following as the factors influencing customer eating customer trust, Customer involvement, Creating switching barriers, Service quality and price, and Communication effectiveness 2.5.3 Increasing Switching Cost Increasing the loyalty of the customer actually means the retentiveness of the customer is increased. Loyalty is internal to the customer, it can only be changed by a shift in the customers own value system. Retention however can be manipulated by the provider through the application of incentives. Again, although internal loyalty intensity is generally constant in the short term, it may change overtime due to life experiences for the customer and market experiences for businesses particularly catastrophic ones. For these reasons, it is essential to perform customer segmentation on a dynamic basis as frequently as it is economically justifiable. Given the inherent loyalty intensity of customers, their action however can be influenced through external stimuli or incentives, such as product attributes, price and pecuniary costs of switching, communication and relationship management including customer care. While the internal loyalty intensity of customer cannot be imparted, external stimuli are within the locus of control of the provider. These are the instruments which the provider can manipulate to achieve the desired action from the customer. According to Abdollahi (2008), retention is the outcome of the event that customers are retained or stayed with their current provider. Retention can be bought with the appropriate incentive or stimuli. Retention occurs due to the combined effect of two forces: the internal loyalty intensity of a customer and the external incentives or stimuli that they are subjected to in the form of product attributes, pecuniary switching costs, price, advertising, communication and customer care. Culture also moderates the effects of switching barriers on customer retention (Patterson and Smith, 2003). 2.6 Service Quality in the Banking Environment Service quality is about meeting customer needs satisfactorily by matching to his expectations. Service quality in banking implies consistently anticipating and satisfying the needs and expectations of customers (Howcrof 1991). The importance of service quality in Banks has been emphasized in many studies and perceived quality advantage leads them to higher profit (Raddon 1987; Buzzell& Gale 1987 in Ssebunnya Henry AbidNaeem). Parasuraman and Berry (1991) cited in Ssebunnya Henry AbidNaeem hold the view that high quality service gives credibility to field sales force. Heskett et al. (1990) observed that the longer a company keeps a customer, the more money it stands to make.

generally constant in the short term, it may change overtime due to life experiences for the customer and market experiences for businesses particularly catastrophic ones. For these reasons, it is essential to perform customer segmentation on a dynamic basis as frequently as it is economically justifiable. Given the inherent loyalty intensity of customers, their action however can be influenced through external stimuli or incentives, such as product attributes, price and pecuniary costs of switching, communication and relationship management including customer care. While the internal loyalty intensity of customer cannot be imparted, external stimuli are within the locus of control of the provider. These are the instruments which the provider can manipulate to achieve the desired action from the customer. According to Abdollahi (2008), retention is the outcome of the event that customers are retained or stayed with their current provider. Retention can be bought with the appropriate incentive or stimuli. Retention occurs due to the combined effect of two forces: the internal loyalty intensity of a customer and the external incentives or stimuli that they are subjected to in the form of product attributes, pecuniary switching costs, price, advertising, communication and customer care. Culture also moderates the effects of switching barriers on customer retention (Patterson and Smith, 2003). 2.6 Service Quality in the Banking Environment Service quality is about meeting customer needs satisfactorily by matching to his expectations. Service quality in banking implies consistently anticipating and satisfying the needs and expectations of customers (Howcrof 1991). The importance of service quality in Banks has been emphasized in many studies and perceived quality advantage leads them to higher profit (Raddon 1987; Buzzell& Gale 1987 in Ssebunnya Henry AbidNaeem). Parasuraman and Berry (1991) cited in Ssebunnya Henry AbidNaeem hold the view that high quality service gives credibility to field sales force. Heskett et al. (1990) observed that the longer a company keeps a customer, the more money it stands to make. Adrian (1995) contends that there is enough evidence that demonstrates the strategic benefits of quality in contributing to profit, market share and returns on investment; and lowering cost and improving productivity. This position is shared by Bateson (1995), Berry et al (1989), Garvin (1983); and Kotler (2003). Maximizing customer satisfaction through quality customer service has been described as the ultimate weapon (Davidow&Uttal (1989). According to Heskett et al, by composing and orchestrating the appropriate level of resources, skill, ingenuity, and experience for effecting specific benefits for service consumers, service providers participate in an economy without the restrictions of carrying stock (inventory) or the need to concern themselves with bulky raw materials. On the other hand, their investment in expertise does require consistent service marketing and upgrading in the face of competition which has equally few physical restrictions. 2.6.1 Service Dimensions Assurance:Assurance is defined as the employees knowledge and courtesy and the service providers ability to inspire trust and confidence (Zeithaml et al., 2006, p. 119). According to Andaleeb and Conway (2006), assurance may not be so important relative to other industries where the risk is higher and the outcome of using the service is uncertain. Thus, for the Customer

Satisfaction in the banking industry, assurance is an important dimension that customers look at in assessing a banks operation. The trust and confidence may be represented in the personnel who links the customer to the organization (Zeithaml et al., 2006). Empathy: Empathy is defined as the caring, individualized attention the firm provides its customer (Zeithaml et al., 2006, p. 120). The customer is treated as if he is unique and special. There are several ways that empathy can be provided: knowing the customers name, his preferences and his needs. Many small companies use this ability to provide customized services as a competitive advantage over the larger firms (Zeithaml et al., 2006). This dimension is also more suitable in industries where building relationships with customers ensures the firms survival as opposed to transaction marketing (Andaleeb& Conway, 2006). Thus, in the context of banking, empathy may be applicable where customers look for quick service and the queues at the counters are long. Reliability:Reliability is defined as the ability to perform the promised service dependably and accurately or delivering on its promises (Zeithaml et al., 2006, p. 117).This dimension is critical as all customers want to deal with firms that keep their promises and this is generally implicitly communicated to the firms customers. Responsiveness: Responsiveness is the willingness to help customers and provide prompt service (Zeithaml et al., 2006). This dimension is concerned with dealing with the customers requests, questions and complaints promptly and attentively. A firm is known to be responsive when it communicates to its customers how long it would take to get answers or have their problems dealt with. To be successful, companies need to look at responsiveness from the view point of the customer rather than the companys perspective (Zeithaml et al., 2006). Tangibles:This dimension, which is defined as the physical appearance of facilities, equipment, staff, and written materials. It translates to the banks interiors, the appearance and condition of facilities, and uniform of the staff (Zeithamal et al., 2006). Tangibles are used by firms to convey image and signal quality (Zeithaml et al., 2006). 2.7 Customer Satisfaction The definition of customer satisfaction (CS), as specified by ISO 10002 (Customer Satisfaction, Complaints), is the customers perception of the degree to which the customers requirements have been fulfilled (ISO, 2004). The marketing departments of firms have sought improvement of services using customer satisfaction as a benchmark for performance evaluation. The public sector also uses customer satisfaction as a service index. New Public Management (NPM) reforms employ CS as part of the evaluation of administrative services, and the Government Performance Results Act (GPRA) states that the government of the USA shall disclose CS data as a benchmark of its performance. Therefore, customer satisfaction can be regarded as a common evaluation scale for measuring customer satisfaction or dissatisfaction for quality of service. Satisfaction is defined as an emotional post-consumption response that may occur as the result of comparing expected and actual performance (disconfirmation),or it can be an outcome that occurs without comparing expectations (Oliver,1996).Contemporary literature on satisfaction in addition defines customer satisfaction as the primary and direct link to outcome measures (e.g., Anderson and Fornell, 1994; Andreassen, 1998; Athanassopoulos, 1999; Bolton and Lemon, 1999; Clow and Beisel, 1995; Ennew and Binks, 1999; Fornell et al., 1996; Hallowell, 1996; Mohr and Bitner, 1995; Spreng, Mackenzie,

and Olshavsky, 1996). Conversely, Poisz and Grumbkow (1988) on their part, view satisfaction as a discrepancy between the observed and the desired. This is consistent with value-percept disparity theory (Westbrook and Reilly,1983) which was developed in response to the problem that consumers could be satisfied by aspects for which expectation never existed(Yi,1990). The valuepercept theory views satisfaction as an emotion response triggered by a cognitive evaluative process (Parker and Mathews, 2001). In order words, it is a comparison of the object that one values rather than an expectation. 2.8 Customer Satisfaction and Service Quality Customer Satisfaction is a broad perception influenced by features and attributes of the product as well as by customers emotional responses, their attributions, and their perceptions of fairness. Service quality, the customers perception of the service component, is also a critical determinant of customer satisfaction. Sometimes, as in the case of a pure service, service quality may be the most critical determinant of satisfaction. (Zeitham, Bitner and Gremier (2009). The research findings reported by Caruana (2002) and Tsiotsou (2006) verify the preceding role of perceived quality and suggest a direct effect of perceived quality on consumer satisfaction. Thus, it is expected that the higher the perceived quality of a product, the higher the consumer satisfaction. There is no agreement however, on whether there is an interaction effect between perceived quality and satisfaction. For some researchers no interaction effect exists between the two concepts (Llusar, Zornoza&Tena 2001) whereas others have reported an interaction effect between satisfaction and perceived quality on purchase intentions (Taylor & Baker 1994). However, quality is problematical and distinct concept (Gronroos, 1988). What is deemed to be quality to one person may not be quality to another. Quality is in the eyes of the consumer. He also asserted that, service quality as perceived by the customer is influence by the experience that the customer goes through in receiving the service. He went further to explain perceived quality as the difference between the customers expectations of the service and his/her perceptions of the service he/she has received. Explanations between perception and expectation and their impact on service quality were not examined. Reichheld and Sasser, (1990) defined Quality as: the degree of excellence intended and the control of variability in achieving that excellence, in meeting the customers requirements. The International Standard of Organization (ISO) defines quality as the totality of features and characteristics of product or service that bears on its ability to satisfy or meet customers needs. To (Stevenson 2005), quality is the ability of a product or service to consistently meet or exceed customer expectations. Oliver and Swan (1989) defined quality as a judgment by customers or users of a product or service; it is the extent to which the customers or users believe the product or service surpasses their needs and expectations. Such quality is known as perceived quality, which in a way is referring to the price the customer is willing to pay. Quality is a way of giving the customers what they want, when they want it, at right price with no mistakes (ver and Swan (1989). (Deming 1986) however, defined quality as a predictable degree of uniformity and dependability at low cost and suited to the market. Consumers often assign quality to products and services on the basis of performance, pre-established standards, secondary characteristics that boost the products and services core functioning, price, brand image or reputation, market share, and the country of origin as well as reliability and fitness for purpose and warranty (Juran 1978). The term quality is used in different ways. Sometimes it refers to the grade of a product.

At other times, it refers to materials, workmanship, or special features. Sometimes it is related to price as in cheap or expensive. The implications in these various connotations of quality are that, customers value certain aspects of a product or service, and therefore associate those aspects with the quality that perceive a product or service. It may be obvious that from a customer perspective, quality does not pertain to a single aspect of a product or service, but to a number of different dimensions of the product or service. Service quality dimensions are the basis to which to assess quality. Parasuraman et al (1985).