Harnessing value-added benefits as a customer retention strategy in a selected company within the financial services industry in KwaZulu-Natal
Thesis (M.A.) 2017 238 Pages
Table of contents
List of figures
List of tables
List of appendices
Clarification of abbreviations, terms and concepts
CHAPTER ONE: INTRODUCTION AND BACKGROUND TO THE STUDY
1.2 Problem statement
1.4 Key questions/hypotheses
1.5 Research design
1.6 Research method
1.7.1 Sampling population
1.7.2 Sample size
1.7.3 Sample method
1.8 Data collection tools
1.9 Data analysis methods
1.10 Reliability, validity and trustworthiness
1.11 Ethical considerations
1.13 Structure of the dissertation
CHAPTER TWO: LITERATURE REVIEW
2.2 Conceptual framework
2.3 Customer lifetime value
2.4 Customer churn and customer retention
2.5 Reasons for customer churn
2.6 Retaining the right customers
2.7 The importance of appealing to customer needs
2.8 Customer value perception
2.9 The effect of customer development on customer loyalty
2.10 The effect of customer engagement on customer satisfaction
2.11 The importance of relationship quality and customer trust
2.12 Organisational reputation, employee motivation and customer retention
2.13 The effect of multiple products on customer churn
2.14 The effect of the social environment on customer churn
2.15 The customer service channel and its effect on customer retention
2.16 Market competition and customer retention
2.17 Value-added benefits and customer retention
CHAPTER THREE: RESEARCH METHODOLOGY
3.2 Research questions/hypotheses
3.3 Research approach
3.4 Research design
3.5 Research method
3.6.1 Sample population
3.6.2 Sample size
3.6.3 Sample method
3.6.4 Data collection tools
3.6.5 Data analysis methods
3.7 Reliability, validity and trustworthiness
3.8 Ethical considerations
CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS
4.2 Data presentation and analysis
4.2.1 Quantitative data presentation and analysis - three case studies
4.2.2 Qualitative data presentation and analysis - Lock-in department employee semi-structured face-to-face interviews
4.2.3 Qualitative data presentation and analysis - Lock-in department employee open-ended questionnaire surveys
CHAPTER FIVE: CONCLUSION AND RECOMMENDATIONS
5.2 Summary of the research findings
5.4 Directions for future research
5.5 Limitations of the study
It is a pleasure and honour to thank those who made this dissertation possible.
I owe my deepest gratitude to my husband, Greg Worthington, whose support and belief in my abilities and dreams never wavered.
I am grateful for the love and support provided by my parents, Robert Olufsen and the late Judy Olufsen. They taught me to persevere and rise above my obstacles with bravery, kindness, and sometimes a little humour.
It is an honour for me to thank my children, Natascha and Dylan for their infinite wisdom and playfulness.
I am indebted to my supervisor, Devan Govender. He has made available his support and guidance, not only while doing my dissertation, but throughout my MBA qualification.
In memory of my mother
Judith Maxine Olufsen who taught me that I am Duffy Moon.
Customer retention has become a multifaceted and serious consideration for businesses. With the rapid advancement of technology, a growing competitive climate, and the ever-increasing platforms and channels available for customers to purchase services and products, the importance of servicing and engaging with current customers is becoming increasingly evident from a business profitability and sustainability perspective.
While after-sale value-added benefits offered to customers through upselling initiatives are believed to be necessary to increase customer retention, further understanding of the type of value-added benefit offered and the timing in which it is offered following the core product sale, is required to determine the extent of the impact it has on customer retention. It is therefore incumbent on companies to develop a robust customer retention strategy that integrates value-added benefits to upscale customer retention and prevent customer churn.
The researcher explored the effectiveness of value-added benefits offered via upselling as a strategy to reduce customer churn within a selected authorised financial services provider based in KwaZulu-Natal, South Africa. A descriptive research design was followed. The researcher conducted a thorough literature review aligned to value- added benefits as an innovative strategy to retain customers. Data was collected through a combination of tools, case studies, open-ended semi-structured employee interviews and open-ended employee questionnaire surveys, to explore a facet of customer churn where limited theory is available, and to describe the extent to which the offering of a value-added benefit to a current customer affects customer retention.
From the research conducted, the researcher concluded that customers who had taken up a value-added benefit were more likely to stay with their service provider, compared to customers who did not have a value-added benefit. Churn rate percentages for customers with core product-aligned value-added benefits were lower than the customers with core product non-aligned value-added benefits, and
customers who had taken up a value-added benefit, before their first debit order was collected by their service provider, were less likely to churn than customers who took up the same value-added benefit after their first debit order was collected by their service provider.
Based on the results of the research conducted, the researcher made eight recommendations to the selected authorised financial services provider. The researcher suggested that the company offer their customers value-added benefits before and after the customers’ first debit order is collected, ensure that the core product sales process is a positive experience for the customer, and introduce employee-centricity into their customer service departments. Furthermore, the researcher suggested that the company use customer segmentation to understand and appeal to customer needs more effectively, and introduce a technology-based self-service for their customers, complementing their personalised customer service channels. The selected company’s service fulfilment levels are low, and the researcher suggested that they increase their service fulfilment levels and collaborate with well- known brands to increase customer value perception. Finally, the researcher recommended that the selected company introduce a customer loyalty programme using gamification.
List of figures
Figure 2.1 Independent variable and variable attributes of the study (Milpark, 2015)
Figure 2.2 Forces driving industry competition (Porter, 1980)
Figure 2.3 Approach to customer lifetime value measurement (Kumar and Rajan, 2009)
Figure 2.4 Tree chart of changing consumer behaviour (Vaughan, 2008)
Figure 2.5 Model indicating the relationship between employee motivation and customer retention (Ganesh, 2016)
Figure 2.6 Customer retention rate comparisons: product category diversity versus product quantity (Park and Flan, 2014)
Figure 4.1 Results of case study one: comparison of churn percentages between VAB and no VAB
Figure 4.2 Results of case study two: comparison of churn percentages between non-aligned VAB and aligned VAB
Figure 4.3 Results of case study three: comparison of churn percentages between VAB after debit order and VAB before debit order
Figure 4.4 Results of question 1 : Agent questionnaire survey
Figure 4.5 Results of question 2: Agent questionnaire survey
Figure 4.6 Results of question 3: Agent questionnaire survey
Figure 4.7 Results of question 4: Agent questionnaire survey
Figure 4.8 Results of question 5: Agent questionnaire survey
List of tables
Table 4.1 Results of case study one: comparison of churn percentages between VAB and no VAB
Table 4.2 Results of case study two: comparison of churn percentages between non-aligned VAB and aligned VAB
Table 4.3 Results of case study three: comparison of churn percentages between VAB after debit order and VAB before debit order
Table 4.4 Results of question 1 : Agent questionnaire survey
Table 4.5 Results of question 2: Agent questionnaire survey
Table 4.6 Results of question 3: Agent questionnaire survey
Table 4.7 Results of question 4: Agent questionnaire survey
Table 4.8 Results of question 5: Agent questionnaire survey
List of appendices
Appendix one Sample - Letter of consent signed by the participants in the employee semi-structured face-to-face interviews
Appendix two Sample - Interview schedule used for the
employee semi-structured face-to-face interviews 215
Appendix three Sample - The employee open-ended questionnaire survey
Appendix four Example - A transcribed employee semi-structured face-to-face interview 220
Clarification of abbreviations, terms and concepts
Abbildung in dieser Leseprobe nicht enthalten
Chapter 1 Introduction and background to the study
Customer retention is a brand reputation enhancer, and ensures that customers are secured and maintained instead of being replaced. This is a beneficial strategy for most organisations. Throughout the researcher’s career within the financial services industry, it has been observed that customer retention is often overlooked in favour of customer acquisition, despite the latter incurring more costs to the business. As confirmed by Gunther, Tvete, Aas, Sandnes and Borgan (2014), it can cost an organisation up to twelve times more to acquire a new customer than it does to retain a current customer, and therefore the importance of servicing and engaging with current customers is becoming increasingly evident from a business profitability and sustainability perspective (Leather, 2013).
The business function that the researcher selected was market research, because it addresses the effect of value-added benefits on customer retention within an authorised financial services provider based in KwaZulu-Natal, South Africa. The research therefore pertains to after-sales services and demand analysis.
The researcher’s career has been focused on the customer side of the financial services industry, from both a customer acquisition and an after-sales customer retention perspective. At the time of initiating this study and conducting the research, the researcher was employed as Head of the Customer Lock-in Department for an authorised financial services company (hereafter referred to as ‘Company A’) based in KwaZulu-Natal, South Africa. The department is responsible for retaining customers through upselling the customer’s core product with a value-added benefit via telephonic interaction between a call centre agent (known as a Lock-in department agent) and the customer.
The researcher’s interest in this study is underpinned by the realisation that current customers are an important component of an organisation’s future preservation. While in the employment of Company A, the researcher’s environment was directly responsible for the retention of current customers through the upselling of value-added benefits.
Upon resigning from Company A in August 2016, the researcher has reinstated the marketing and customer-centricity consultancy, which the researcher initially founded in the year 2000. The researcher currently provides South African businesses with independent marketing and customer-centricity consulting. The results from this study may benefit Company A, as well as the researcher’s current consulting clients, which include businesses within the services sector. Such information may be used to adjust organisational perceptions and behaviour regarding the importance of customer retention. Clarity around the use of value-added benefits as an upselling tool may be provided at a time when behaviour, processes and perceptions may be altered for the better.
It has been noted that there is limited research on the practices of customer retention within the financial services industry, regardless of its importance (Farquhar, 2005). Furthermore, Fader, Flardie and Ka Lok (2005) identified additional research opportunities for customer lifetime value concepts to be applied to financial services environments. In addition, there is an opportunity for clarification with regard to contradicting findings in the literature review conducted to answer the research questions proposed.
In this chapter, the researcher explains the background to the study, the research problem, the research objectives, and the key research questions and hypotheses. A brief explanation of the research design and the research method is also provided, and a high level discussion will be presented regarding the sample population, sample size and sample method of this study.
A brief explanation regarding the study’s data collection tools and data analysis methods will be furnished. The researcher will supply an overview of the steps taken throughout the study to ensure ethical conduct, reliability, validity and trustworthiness. The limitations of the study will be provided and the structure of the dissertation explained.
1.2 Problem statement
Profitability and obtaining market share is the aim for the majority of organisations, and the retention of customers is one of the most effective manners to do so (Reinartz, Thomas & Kumar, 2005). However, during the researcher’s employment with Company A, it became evident that the company (chosen for investigation in this study) lacks systemic understanding of the importance of customer retention. Furthermore, the positive effects that customer retention may have on the profitability of Company A are overlooked. The customer retention strategy falls far short of integrating innovation and alternate strategies to strengthen customer retention.
According to Kajendra and Verma (2003), customer orientation (hereafter referred to as ‘CO’) puts the customer at the centre of an organisation’s decisionmaking. Shapiro (1988) states that CO is the distribution of information regarding an organisation’s customers throughout all levels of the business, and the formulation of strategies and organisational commitment to satisfy the needs of these customers. Company A does not practice CO and is historically a sales- orientated organisation that is product-centric.
According to Ceric, D’Alessandro, Soutar and Johnson (2016), a suitable strategy for successful business is the creation of higher value for the customer, while Andotra and Pooja (2008) state that price quality product strategies may enhance an organisation’s performance. Value-added benefits encompass both concepts as enhanced value for the customer at a reduced price, and organisations are able to provide such perceived value at decreased price points through core product value-added benefits.
Company A assumes that offering current customers value-added benefits, in addition to their core product, is an effective strategy to retain customers. However, significant areas for further investigation include the actual effect of value-added benefits on customer retention, the type of value-added benefit
offered in relation to customer retention, and the timing of offering the value- added benefits in relation to customer retention.
Therefore, the problem statement is as follows:
After-sale value-added benefits offered to customers through upselling initiatives within Company A are necessary to reduce customer churn, increase market share, and maintain a competitive advantage. While this may be the case, further understanding of the type of value-added benefit offered and the timing of it, is required to determine the extent of the impact it would have on the customer’s propensity to be loyal to, and remain with, Company A.
The objectives of this study are:
1.3.1 To explore the effectiveness of value-added benefits offered via upselling as a strategy to reduce customer churn within Company A.
1.3.2 To investigate to what extent a value-added benefit, which is in some way related to a customer’s core product, decreases customer churn, versus a поп-related value-added benefit, within Company A.
1.3.3 To identify the ideal time in which to upsell an existing customer with a value-added benefit offer after their initial core product sale within Company A.
1.4 Key questions/Hypotheses
Research question 1: How effective are value-added benefits offered via upselling as a strategy to reduce customer churn within Company A?
HN1: Value-added benefits offered via upselling reduces customer churn within Company A.
Research question 2: To what extent does a value-added benefit that is in some way related to a customer's core product, decrease customer churn versus a поп-related value-added benefit within Company A?
HN2: Increased customer value perception of their core product reduces customer churn within Company A.
Research question 3: What is the ideal contact time to upsell an existing customer with a value-added benefit offer after their initial core product sale within Company A?
HN3: Customers who are contacted with a value-added benefit via upselling, before their first monthly instalment (debit order) is collected by Company A, are less likely to cancel their core policy due to the perception of increased value for their core product.
1.5 Research design
A descriptive research design was followed for this study to describe phenomena as they exist. The researcher took the raw data provided by three case studies, and summated it into a useable form of information describing the cause and effect relationship between the two variables, namely value-added benefits and customer retention within Company A. In accordance with Polit and Hungler (2013), the researcher identified and specified the variables to be observed and measured in terms of this study.
An all-inclusive understanding, explanation, description and analysis of the variables used in this study and context, was provided by the researcher. The researcher explored a facet of customer churn on which limited theory is available in terms of describing to what extent value-added benefits influence customer retention.
1.6 Research method
The goal of this study is to verify and explore the correlation between the dependent variable (customer retention) and the independent variable (value- added benefits). Based on the complexity of this study, both quantitative and qualitative research methods were used. Therefore, this study used the sequential mixed method. The researcher conducted quantitative research first, and thereafter qualitative research as stated by Pearce, Christian, Smith and Vance (2014).
In addition to conducting a literature review, the researcher of this study gathered data in a numerical manner using three case studies, to ensure objective results (quantitative research) before embarking on qualitative research through employee questionnaire surveys and face-to-face interviews, which were conducted in the natural environment of Company A. The researcher interpreted and analysed the subjective qualitative data, identifying trends as they arose (Jirojwong, Johnson and Welch, 2014).
The purpose of this research was to establish and evaluate the cause and effect relationships between customer retention and the upselling of the customer’s core product with value-added benefits within the Company A. The study aimed to establish whether the upselling of a customer’s core product with a value- added benefit increases customer retention and therefore decreases customer churn.
To establish to what extent the upselling of a customer’s core product reduces customer churn, the researcher compared the percentage churn of the customer population sample who had taken up value-added benefits during case study one, and compared it to the percentage churn of Company A’s customers who had not taken up a value-added benefit (control group). Case study one was conducted over a period of four months, with the first month being the month of the value-added benefit offer (total of five months).
Thereafter, the researcher determined whether the value-added benefit offered via upselling needed to be related to the customer’s core product, thereby increasing their propensity to remain with the financial service provider due to the bolstering of their core product and the perception that they are receiving outstanding value for their monetary spend. To establish the extent of customer preference with regard to the type of value-added benefit, the researcher conducted case study two, whereby a customer population sample was offered a value-added benefit that was aligned with their core product, and a second customer population sample was offered a value-added benefit that was not aligned with their core product. The results of each customer population sample for case study two were compared to the customer’s propensity to stay over a period of two months, with the first month being the month of offer (total of three months).
The study thereafter intended to determine the most beneficial period in which to offer a customer a value-added benefit through upselling after their initial core product sale, in order to eliminate or decrease the potential of irritating the customer, yet providing him with outstanding offers at reasonable times. To establish the most effective customer engagement recency for the upselling of value-added benefits, the researcher conducted case study three. Here the researcher compared the churn percentage of the customer population sample that had taken up a value-added benefit within the first seven days after their initial core product sale, against the churn percentage of a customer population sample that had taken up the same value-added benefit after their first debit order payment, which is approximately 30 days after the initial core product sale.
Over a four month period, the researcher compared the customer churn percentage of the customer population sample of customers who had taken up a value-added benefit within the first seven days after the initial core product sale, to the customer churn percentage of a customer population sample of customers who had taken up the same value-added benefit after their first debit order payment. The first month of the case study is the month in which the customer population samples are offered their value-added benefits. Therefore, the total period for case study three was five months.
1.7.1 Sample population
For the case studies, the sampling frame for the quantitive research of this study is the current customer database of Company A. This database has approximately 550 000 active customers (elements) across South Africa. The elements range in gender, race, and age (18 to 65 years old).
Thereafter, the researcher intends to collect primary qualitative data from Company A’s Lock-in department employees. The sampling frame for the qualitative research of this study is the current call centre agent base of the Lock-in department, consisting of 37 employees.
Therefore, the sample population for the quantitative research of this study will be taken from Company A’s active customer database, and the sample population for the qualitative research of this study will be taken from Company A’s Lock-in department’s call centre agent base.
The quantitative research conducted for this study was conducted using three case studies concerning Company A’s customer database. Initially, the researcher identified the minimum sample size for each case study to be determined by the size of the customer population and the amount of error the researcher is willing to tolerate.
According to the sample size calculator available on the Survey Monkey webiste, at a 95% confidence level, a 5% margin for error and a normal distribution (50%), the minimum sample size is calculated as 384 particpiants out of the sample frame of the 550 000 customer database. However, the researcher conducted the case studies within a live environment, and a substantially higher number of participants (more than 384 participants) out of the sample frame of 550 000 were included in the study.
With regard to the customer database of Company A, the identification of each element by their South African identification number ensured that there was no duplication of the elements present within the sample frame and thereby eliminating selection bias.
The Lock-in department of Company A employs 37 call centre agents. The researcher collected qualitative data from the Lock-in agents by conducting 24 Lock-in department employee open-ended questionnaire surveys, and 10 Lock-in department employee semi-structured face-to- face interviews. Convenience sampling was used as a sampling method, based on its professional acceptance and lower cost. As a form of haphazard sampling, the researcher ensured the equal selection of probability across the call centre agent sample population (Hall, Higson, Jo Pierce, Price and Skousen, 2013).
1.7.3 Sample method
In order for the researcher to ensure that there was no bias in the sampling for this study, the researcher used stratified random sampling for quantitative data collection throughout the three case studies. The sample frame consisted of four categories of customers, namely Category A, Category B, Category c and Category D. Company A’s active customers are automatically allocated to a category based on income bracket, introductory sales office and core product. The customer population samples were selected as a true reflection of Company A’s active customer database in terms of category ratios.
With regard to qualitative data collection, the researcher used convenience sampling in order to gather informative data from Company A’s Lock-in department call centre agents. Convenience sampling is to be used as a sampling method, based on its professional acceptance and lower cost. As a form of haphazard sampling, the researcher ensured the equal selection of probability across the call centre agent sample population (Hall, Higson, Jo Pierce, Price and Skousen, 2013).
1.8 Data collection tools
For the purpose of this study the use of multiple data collection methods and sources ensured triangulation, whereby the verification of data was established in terms of validity, relevance and reliability (Hoque, Covaleski & Gooneratne, 2013).
The researcher collected primary quantitative data from conducting an analysis of results from three case studies carried out for the purpose of this study within the Lock-in department of Company A. According to Davey (1991), case study analysis will provide the researcher with the opportunity to understand intricate instances through widespread description and contextual investigation, based on evaluation questions regarding the relationship between value-added benefits and customer retention within Company A.
The researcher used a critical instance case study because this study was concerned with the analysis of one site (Company A) for the purpose of this paper. The researcher is interested in the cause and effect relationship between value-added benefits and customer retention within Company A (Davey, 1991).
The case studies were designed so that the area of interest is the value-added benefit offer within the Lock-in department of Company A. The stratified random sampling of active customers across all categories per case study was designed to make a generalised finding regarding the relationship between the offer of a value-added benefit, the increase of customer retention, and the decrease in customer churn.
The case studies were directed at the specific event of the telephone call and the offer. Case study one focused on the effect of value-added benefits on customer retention. Case study two focused on the type of value-added benefit offered. Case study three focused on the timing of the offer following the customer’s core product sale.
Customer churn rates across case study one were tracked over a period of four months, and customer churn rates across case study two were tracked over a period of two months per customer sample population. Customer churn rates across case study three were tracked over a period of four months. The principle the data analysis method of observe, think, test and revise was applied, and the observations made throughout the study were contemplated and used to direct consequent data collection.
Thereafter, the researcher collected primary qualitative data from Company A for the purpose of this study by conducting twenty-four Lock-in department employee open-ended questionnaire surveys and ten Lock-in department employee semi-structured face-to-face interviews. The qualitative data was
collected to improve the quality of the quantitative data collected from the three case studies by expanding, supporting or clarifying the findings from the results. According to Ingham-Broomfield (2008), questionnaires are time and cost efficient to administer. In addition, they provide anonymity. The researcher conducted a pilot survey of the employee questionnaire to test the questions and adjust where necessary. The pilot survey assessed the feasibility of the questionnaires and eliminated any mistakes that could be avoided (Polit and Hungler, 2013).
The ten Lock-in department employee semi-structured face-to-face interviews allowed the researcher to identify problems within the questionnaire surveys, while collecting additional verbal information about the survey responses. This additional information was beneficial in that it allowed the researcher to expand upon the questionnaire survey responses and generate the information required to prove or disprove the selected hypotheses for this study (Beatty and Willis, 2007).
The researcher collected secondary data for the purpose of this study by conducting an in-depth literature review of research publications regarding value- added benefits and their effect on customer retention, customer loyalty, and customer churn within the services sector. Published academic journals, articles and papers were included in the literature review for this study. The researcher linked concepts from the literature review in order to establish evidence to support the need for the research questions proposed.
1.9 Data analysis methods
The researcher prepared the collected data for analysis and interpretation according to the seven-step model for data preparation (Pink, 2010). The employee semi-structured face-to-face interviews and the employee open-ended employee questionnaire surveys were carefully checked, and unreadable and unclear answers were edited and corrected before they were coded for statistical techniques to be applied.
Interview recordings were transcribed for further analysis, and the researcher reviewed all data for accuracy. Statistical adjustments were applied to any data that required weighting, and the analysis strategy was reviewed before the data was presented.
In accordance with Loye (1995), the quantitative (numerical) data collected during the three case studies was tabulated, analysed and categorised before comparisons were drawn to indicate differences or similarities between Company A’s active customers (control group) and the results from the case study customer sample populations. Graphical analysis was provided for data to be reviewed and compared.
The researcher critically evaluated the qualitative data collected from employee interviews and surveys. Trends in the data were documented, categorised, analysed through logical and semiotic analysis, and interpretated (Loye, 1995).
1.10 Reliability, validity and trustworthiness
The researcher acknowledged that the researcher’s actions and decisions may influence the meaning and context of the phenomenon under investigation and therefore relevant steps were taken to ensure reliability, validity and trustworthiness in this research. By means of reflexivity, the researcher acknowledged that they were a primary part of the environment to be studied (Porter, 1993).
To ensure internal validity, the researcher examined a customer population sample of a minimum of 384 active customers of Company A per case study one and case study three over a time period of five months. Case study two included a customer population sample of at least 384 active customers of Company A over a period of three months per customer population sample.
The study’s research design was relative to the research questions, ensuring internal validity. The results of this study can be generalised outside of the immediate study sample and environment, indicating external validity (Carter and Porter, 2000).
As promoted by Hoque, Colvaleski and Gooneratne (2013) the researcher used triangulation as a strategy to ensure transparent and trustworthy data analysis and results presentation. To ensure consistency and quality control throughout this study the researcher ensured that documentation tools were well structured (Abowitz and Toole, 2010). Content validity and construct validity ensured the validity of data collection tools (Peat, 2002).
The researcher conducted a thorough literature review and, in response to Koch (1994), an audit of each process of this study was conducted. This ensured the credibility of the study, and enables the readers of the study to determine whether the comments and claims made by the researcher are reasonable.
1.11 Ethical considerations
In accordance with Langiais (2012), the researcher conducted this study in an honest and accurate manner in alignment with best research and professional practices. The research was conducted ethically and with moral sensitivity, while ensuring total confidentiality at all times.
The customers and employees of Company A were not harmed and did not experience any problems during the conduct of the research. As stated by Hegney and Wai Chan (2010), the principle of justice is of vital importance when conducting research and the participants of this study were treated as respected individuals, with due regard for their well-being.
Voluntary and informed consent was collected from all participants in this study (Patton, 2000 and Gray, 2004). In response to suggestions by Patton (2000) and Gray (2004), the researcher conducted a risk assessment of the activities of the study. Any legal liabilities and repercussions that may have arisen from such activities were considered by the researcher and mitigated, where possible.
This study is concerned with the effect of value-added benefits on customer churn within the financial services industry in South Africa. Despite an in-depth literature review on customer retention within the services industry, further research can be conducted with regard to the offering of value-added benefits to customers outside of the financial services industry, and the effect of such upsell offers on customer churn.
1.13 structure of the dissertation
Chapter two of this research paper includes a literature review where the researcher has reviewed the concepts and models that provide a foundation for the research, while examining customer lifetime value and the retention of profitable customers. The reasons for customer churn are identified and explored, and the importance of customer loyalty is examined. In addition to understanding the importance of appealing to customer needs, the researcher explores customer value perception and the effect of customer development on customer loyalty.
The link between customer engagement, customer satisfaction and customer retention is identified and analysed, and strategies for decreasing customer churn are scrutinised. The researcher debates the necessity of relationship quality and customer trust with regard to customer retention, and the effects of multiple products on customer retention are evaluated and investigated. While the customer’s social environment influences the customer’s propensity to stay with their service provider, the researcher reviews relevant literature in this regard.
Furthermore, the researcher examines the channels through which customer service is delivered, assesses how market competition influences customer retention, and explores the benefits of value-added benefits on customer retention.
In chapter three of this paper, the researcher included an introduction to the research methodology of this study. The research questions and hypotheses for the study are provided and the research approach, design and method are explained. The researcher provides insight into the sampling of the study in terms of population, the sample size, and the sample method. The study’s data collection tools and data analysis methods are provided.
The researcher has provided insight into how research reliability, validity and trustworthiness will be ensured, and the ethical considerations of the study have been clarified accordingly.
In chapter four of this paper, the researcher provided the quantitative research data presentation and analysis of three case studies conducted within Company A. Furthermore, the researcher has included the qualitative research data presentation and analysis of ten Lock-in department employee semi-structured face-to-face interviews and 24 Lock-in department employee open-ended questionnaire surveys.
In chapter five of this paper, the researcher provides a summary of the research findings and makes recommendations for Company A. Directions for future research and the limitations of this study have been provided.
Customers are a vital component of any organisation’s sustainability. This study aims to prove that value-added benefits offered via organisational-customer interaction decreases customer churn and increases customer retention. The results of this research may be used to adjust organisational perceptions and behaviour regarding the importance of customer retention. Clarity around the use of value-added benefits as an upselling tool may be provided at a time where behaviour, processes and perceptions may be altered for the better.
In this section, the researcher has summarised the introduction and background to the study, the research problem and objectives, and the key research questions and hypotheses. A brief explanation of the research design and the research method has been provided, and a high level discussion has been provided regarding the sample population, sample size and sample method of the study.
A brief explanation has been provided regarding the study’s data collection tools and data analysis methods. The researcher has supplied an overview of the steps taken throughout the study to ensure ethical conduct, reliability, validity and trustworthiness. The limitations of the study have been provided, as well as the structure of the dissertation.
Chapter 2 Literature review
The market is defined by what products and services are acquired, and by whom. Customers are perceived as submissive targets of the value created by organisations, however, it is vital for an organisation to perceive customer value as a consistent and ongoing relationship whereby the value is continuously COcreated, rather than transferred only during the point of purchase (Bettencourt, Lusch and Vargo, 2014).
Customer retention has become a multifaceted and serious consideration for businesses. With the rapid advancement of technology, growing competitive climate, and the ever-increasing platforms and channels available for customers to purchase services and products, there is robust evidence which states that corporations can lose up to 50% of their customers over a period of five years (Ganesh, Arnold and Reynolds, 2000).
To increase customer profitability, an organisation may focus on increasing customer retention and decreasing customer turnover, also referred to as customer churn (Murphy, 1996). Ensuring customer retention and decreasing churn are some of the most important strategic priorities of any financial services organisation, as each new customer brings with them the potential for a lifetime of profit to the service provider (Bernstel, 2002).
Carter (2008) states that the majority of organisations receive a high percentage of their annual sales from their current customers, indicating that customer retention is more profitable than customer acquisition. However, despite the importance of customer retention and the research which indicates that customer retention is enhanced through customer satisfaction (Ahmad and Buttle, 2002), Carter (2008) observed that although companies do measure customer retention, many organisations do not have a specific strategy for the development of customer satisfaction, nor do they measure customer loyalty.
The researcher has conducted a literature review on the concepts and models that provide a foundation for this research, while examining customer lifetime value and the retention of profitable customers. The reasons for customer churn are identified and explored, and the importance of customer loyalty is examined. In addition to understanding the importance of appealing to customer needs, the researcher explores customer value perception and the effect of customer development on customer loyalty.
The link between customer engagement, customer satisfaction and customer retention is identified and analysed, and strategies for decreasing customer churn are scrutinised. The researcher debates the necessity of relationship quality and customer trust with regard to customer retention, the effects of multiple products on customer retention are evaluated and investigated, and the relationship between value-added benefits and customer retention is explored. While the customer’s social environment influences the customer’s propensity to stay with their service provider, the researcher reviews relevant literature in this regard.
Furthermore, the researcher examines the channels through which customer service is delivered, and assesses how market competition influences customer retention.
2.2 Conceptual framework
Parahoo (2006) states that a theoretical framework is used when research is supported by one theory, while a conceptual framework appeals to concepts from a number of theories and discoveries in order to direct research.
Lacey (2010) suggests that a conceptual framework allows the researcher to expand upon their view of their research topic, and therefore more effectively addressing and exploring their own assumptions and preconceived opinions of their study. In support of expanding upon pre-conceived perceptions and assumptions, the researcher of this study has selected a conceptual framework based on their idea as to how the research problem is to be explored.
The researcher intends to explore the effect of value-added benefits (independent variable) on customer retention (dependent variable). Furthermore, the researcher intends to explore the effect of time (recency), and the type of value-added benefit (hereafter referred to as ‘VAB’) offered (variable attributes) on customer retention within the selected company in South Africa as depicted in figure 2.1 below.
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The researcher intends to collect data by conducting an in-depth literature review on customer lifetime value, the retention of profitable customers, the reasons for customer churn, and the importance of customer loyalty. In addition, literature with regard to the importance of appealing to customer needs, customer value perception and the effect of customer development on customer loyalty is to be reviewed.
The literature review included relevant research regarding the link between customer engagement, customer satisfaction and customer retention, as well as strategies for decreasing customer churn. Literature regarding the necessity of relationship quality and customer trust with regard to customer retention was reviewed, and the effects of multiple products on customer retention was evaluated. While the customer’s social environment influences the customer’s propensity to stay with their service provider, the researcher reviewed relevant literature in this regard.
Furthermore, the researcher reviewed literature with regard to the channels through which customer service is delivered, and how market competition influences customer retention. The researcher linked concepts from the literature review to establish evidence to support the need for the research questions proposed.
In addition to the researcher’s literature review, qualitative research data was collected from open-ended questionnaire surveys and semi-structured face-to- face interviews with Company A’s employees. Furthermore, three case studies were conducted within Company A, and the analysis of results from these was presented throughout this research.
Concepts from theories were used to support the study rather than full theories. In particular, theories that embody the findings of numerous investigations on how value-added benefits affect customer churn were included in this study. Such theories provide a general representation of the relationship between value-added benefits and customer churn. This research was based on the following concepts:
i. Porter’s Forces Driving Competition - According to Porter (1980), customer retention can be negatively affected by forces driving industry competition. The threat of new entrants, industry competitors, substitute products and services, and the bargaining power of suppliers, can influence customer churn, as depicted below.
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Figure 2.2 Forces driving industry competition
Source: Porter (2004:4)
According to Porter (2008) new entrants to an industry bring with them novel capacity and a yearning to obtain market share, particularly when a new entrant is diversifying from another market and they are able to capitalise their existing resources. The threat of entry can limit the profit potential of an industry, however, such a threat is dependent on industry entry barriers. If entry barriers are low, new entrants can expect minimal retribution from their established competitors. Customer retention can be enhanced through barriers of entry such as switching costs and product differentiation, including product bundling, the upselling of core products with value-added benefits, and cross selling.
The lack of product differentiation, such as product bundling and value- added benefits, may result in rivalry among existing competitors. Porter (2004) states that if a product or service is perceived to be a commodity, the customer’s choice to purchase it is based primarily on price and service delivery, however, product differentiation protects an organisation from competition because customers may develop a preference and loyalty towards the organisation’s differentiated product. Such product differentiation receives less pressure from substitute products, while providing customers with more value and appealing to the bargaining power of buyers. Customers are more acutely aware of their product and service options than ever before, and are therefore in a better position to ensure that they receive the most suitable price and the most favourable value from their service providers.
N. The Pareto Law - Conferring to the Pareto Law, 80% of business is likely to be a result of 20% of its customers (Krajewski, Ritzman and Malhotra, 2013). The theory highlights the importance of retaining an organisation’s high value customer segment as an imperative strategic initiative.
iii. The Standard Microeconomic Theory - According to Chellappa and Kumar (2005), the standard microeconomic theory states that a rational customer will select a bundle of services or products that will maximise the usefulness of their core product or service in relation to the customer’s spend.
As companies advertise the usefulness of their products and services, customers are progressively persuaded to purchase the product or service advertised. In addition, products and services with high customer loyalty have a wide price range, however, the boundaries of that price range are determined by both customer loyalty and the prices of substitute products. As the price for product A increases, the more customers will shift to the cheaper substitute, whereas the lower the price of product A, the more customers will shift from the substitute product to product A (Sexton, 1972).
¡V. The Theory of Reasoned Action - According to Stahl, Heitmann, Lehmann and Neslin (2012), brand equity is embedded in the mind of the customer. The theory of reasoned action (Engel, Blackwell and Miniard, 1995) states that consumer attitudes are a predecessor to their actions.
According to Michaelidou and Hassan (2014), the theory of planned behaviour (Ajzen, 1985) notes that human behaviour is a result of a person’s intention or motivation, which is further explained by the person’s attitude, perceived social or peer pressure in undertaking the behaviour, and the person’s perceived behavioural control. The theory of planned behaviour is an extension of the theory of reasoned action, however, the theory of reasoned action does not encompass an individual’s perceived behavioural control.
The majority of research in consumer behaviour examines customer intentions, but not customer behaviour at a later point in their customer journey with their service provider. Therefore, it is noted that organisational decisions based on the theory of planned behaviour and the theory of reasoned action, requires additional research between what a customer intends to do, and what they actually do throughout their customer journey with their service provider (Michaelidou and Hassan, 2014). There is a gap between customer intention and customer behaviour, which this research attempts to uncover and address through its three case studies regarding the effectiveness of value-added benefits as a customer retention strategy.
V. The Hierarchy-of-Effects Model of Consumer Behaviour - The hierarchy- of-effects model of consumer behaviour (Lavidge and Steiner, 1961) notes that consumer attitudes are a predecessor to their actions. According to the model, a consumer follows numerous steps before making a purchasing decision, including awareness, knowledge, liking, preference, conviction and the actual purchase. With regard to the use of value-added benefits as a strategy for customer retention, the customer’s purchasing process is a necessary element of the customer’s adoption of the value-added benefit.
vi. The Social Exchange Theory - As stated by Adebiyi, Oyatoye and Amole (2016), the social exchange theory is based on the idea that social interaction and human behaviour is an exchange of intangible and tangible activity, specifically that of rewards and costs (Homans, 1961). The theory notes that the underlying basis of human behaviour is the exchange of benefits, in particular, the giving of something that is more valuable to the receiver, than it is costly to the giver.
According to Blau (1964), the market is comprised of both economic and non-economic exchange, with self-interest and cost-benefit highlighted as important decision-making factors. Drucker (1973) states that customer satisfaction has been identified as the only economic and social explanation for the presence and survival of business, and with exchange being defined as a social interaction based on mutual incentives, neither customers nor organisations would continue their interactions if such reciprocity was no longer viable (Adebiyi et al., 2016).
2.3 Customer lifetime value
Borle, Singh and Jain (2008) state that organisations are concerned with how much value they can forecast from a customer. A customer’s net value forecast throughout their lifetime with their service provider can be used to make marketing initiatives more effective, making the identification of high value customers a focal point for businesses wishing to ensure a profitable future (Estrella-Ramon, Sanchez-Perez, Swinnen and VanHoof, 2013). Kumar and Rajan (2009) note that customer loyalty management differs from customer profitability management, and that customer lifetime value measurement and improvement can assist organisations to focus their resources on customers who are the most profitable.
Permana, Indratno and Pasaribu (2014) explain that customer lifetime value (hereafter referred to as ‘CLV’) relates to the financial value of the customer to the organisation during the period of time that the customer is acquiring services from the organisation. Park and Han (2014) confirm that CLV is a precise and long-term customer profitability metric that is able to accurately calculate a customer’s individual worth as a monetary value, which can be demarcated as the total of the net present value of a customer’s future cash flows (Kotler, 1974; Haenlein, Kaplan and Schoder, 2006).
Stahl et al. (2012) confirm CLV is the monetary value of the purchases made by the customer throughout a specific period, which is determined by rates of retention and the initial sale and profit margins, resulting in the net present value (hereafter referred to ‘NPV’) of the profit input of the customer (Farris, Bendle, Pfeifer and Reibstein, 2006). However, CLV can also be used for customer relationship management (Gupta, Hanssens, Hardie, Kahn, Kumar, Lin and Sriram, 2006), where a customer’s future and present behaviour is assessed and recorded. Although Fader et al. (2005) and Pfeifer, Haskins and Conroy (2005) confirm that CLV is the current value of the predicted cash flow anticipated with a customer, it is highlighted that CLV measures should forecast future measures rather than past behaviours, and that a group of customers with a low future lifetime value may offer a highly profitable collective sum (Fader et al., 2005).
According to Fader et al. (2005), CLV can be analysed by grouping individual customers with various buying histories and comparable future values. The trend towards a customer-centric approach to business has led to an interest in CLV, and the customer’s profitability can be calculated from the anticipated number of future transactions between the customer and the service provider as depicted in figure 2.3.
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Figure 2.3 Approach to customer lifetime value measurement
Source: Kumar and Rajan (2009:2)
Park and Han (2014) have noted that some marketing models specify that customer retention rates are linked with a customer's long-term profitability.
Repeat business creates enhanced profit, and therefore customer retention rates positively affect the long-term profitability of an organisation. If the concept of long-term customer profitability is based on the net present value of the customer’s present and future profits, as stated by Kotler (1974), then CLV and customer retention are vital elements of organisational profitability. However, CLV is only positively linked with retention rates if the additional business results in a positive profit for the organisation, and sales that result in losses are excluded (Kotler, 1974).
2.4 Customer chum and customer retention
Obtaining market share is the aim for the majority of organisations and retention of customers is one of the most effective manners in which to do so (Reinartz, Thomas and Kumar, 2005). Kumar and Rajan (2009) support Reinartz, Thomas and Kumar (2005) and state that a critical function for any organisation is the retention of their customers.
According to Liu and Wu (2007) customer retention is the measure of the continuation of a relationship between the customer and their service provider whereby the customer chooses to remain with their service provider based on an enhanced value perception. Farquhar (2005) and Reichheld (1996) further note that the main objective of customer retention is to achieve zero churn of an organisation’s most profitable customers, resulting in increased profits and enhanced market share. Consequently, it is the limitation of customer churn that provides financial services organisations with chief benefits, including heightened customer profitability and decreased acquisition expenditures, as stated by Farquhar (2005).
Customer churn is an important issue facing organisations within the services industry (Abbasimehr, Setak and Soroor, 2013). Dinan (2015) states that the investment required to acquire customers is substantially higher than the investment required to retain a customer, while Gunther, Tvete, Aas, Sandnes and Borgan (2014) confirm that it can cost an organisation up to twelve times more to acquire a new customer than it is to retain a current customer.
Concurring with this, Reichheld and Detrick (2003) note that loyal relationships between a service provider and their customers can greatly enhance cost reduction efforts within an organisation, and that a slight increase in customer retention may significantly increase premium profits.
In addition to the fundamental result of revenue loss due to customer churn, organisations lose the opportunity to recover their customer acquisition costs and the opportunity to upsell and cross sell to the customer (Kumar and Rajan, 2009). Pressure is placed on the organisation’s acquisition departments to replace the absent customer, and the business resources already affected are exhausted even further. The pressure placed on an organisation’s acquisition departments to replace lost customers is further intensified as their market becomes increasingly saturated with previous customers who are dissatisfied with the organisation’s services and products, resulting in an even smaller market for potential customers and the need for the organisation to search or relocate for new market potential.
2.5 Reasons for customer chum
Abbasimehr et al. (2013) state that customer churn is the likelihood of customers terminating their services with their service provider within a specific period of time. According to Evans (2002), organisations lose approximately 20% of their customers every year. It is noted that an increase in the customer churn rate will result in an increase in the level of the customer acquisition activity required to replace the customers lost.
Adebiyi et al. (2016) state that customer churn and customer retention are rational decisions made by an organisation’s customers, founded on comparative analysis of the available service providers. According to Gunther et al. (2014), it is no longer realistic for companies to depend on a consistent customer base, as it is easy for customers to change their service provider. Competitors within the market are constantly increasing, and customers are becoming more knowledgeable of their options and buying power within the marketplace.
Supporting Gunther et al. (2014) and Kon (2004), Vaughan (2008) states that a customer’s behaviour is influenced by their experience, values, lifestyles and demographics.
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Figure 2.4 Tree chart of changing consumer behaviour
Source: Vaughan (2008:17)
Evans (2002) states that customer retention management programmes to manage customer churn are limited, despite their importance. However, such programmes identify current and possible reasons for customer churn, allowing organisations to take action in reducing micro and macro environment precursors for customer loss.
In support of Porter (1980), Gunther er al. (2014) highlight the macro environment as a contributor to customer churn in terms of competitors within the market. It is noted that churn refers to the incidence whereby a customer cancels their service