CHAPTER TWO

LITERATURE REVIEW

1.1 Introduction
This chapter explores the existing literature on the factors that influence customer retention
in banks. It is structured into the customer service theory, customer retention concept,
customer retention in recent studies and the factors affecting customer retention. The
theories which are relevant in the field of customer retention have been discussed in order
to facilitate analysis and understanding of the research questions.

1.2 Customer Service Theory

The theory of customer service and satisfaction is about retaining customers. Loyalty
remains the key element. It is by nature an intensely practical theory. Without a firm grasp
on the basic principles of customer service, a firm cannot survive. Few want to do business
with a firm that cares little about customers, their comfort and concerns. If a firm owner or
manager wants to be successful, that person needs to be very involved with meeting
customer needs, or the customer will go elsewhere. Therefore, profit seeking firms,
regardless of their true motivation, are forced by the nature of the marketplace to treat
customers with respect and seek their loyalty and return business (Anderson, 2000).

1.2.1 Steps leading to Customer Loyalty.

This is done through what customer relations expert Anderson E calls the "equation of
fantastic service." The first step is to greet the customer, making him feel welcome and at
home. Then the client's specific needs must be determined. Third, those needs must be met
efficiently. The purpose here is to create a friendly and personal relationship that provides
positive associations between the customer and the establishment. Those met needs need to
be checked and rechecked to make sure nothing was left out. Finally, fantastic service
"leaves the door open," making sure the client has an incentive to return. The benefit to the
customer is a pleasant and efficient experience, and the firm has just recruited a loyal
customer.
1.3 Theories on Customer Retention
Theoretical positions to customer retention management emerged from three main theories:
service approach, industrial marketing and general management approach.

1.3.1 Service Approach

From the service marketing approach, the way to retain customers is to improve customer
service and satisfaction (Zeithaml and Bitner, 1996). In a related study Ennew and Binks
(1996) examined the links between customer retention /defection and service quality in the
context of relationships between banks and their small business customers. Their findings
supported the hypothesis that retention is influenced by service quality, in terms of both
functional and technical, and customers’ relationships.

1.3.2 Industrial Marketing Approach

According to the industrial approach, customers are retained by creating multi-level bonds
comprising of financial, social and structural bonds. According to Turnbull and Wilson
(1989) social bonds are positive interpersonal relationships between the buyer and the seller.
Although they did not provide an explicit definition of structural bonds they implied, through
their illustrations that structural bonds refer to relationship that are built upon joint
investments which cannot be retrieved when the relationship ends. This may be due to the
complexity of the relationship and the cost of changing to another supplier. In general
structural bonds have created value to the customers by saving the costs of retraining or
making a new investment with a new supplier.

1.3.3 Management Approach

This theory centres on the management behaviour and how the behaviour can influence
customer retention. DeSouza (1992) advocates retention measures and implementation of
measures which prevent customers defecting by learning from former customer, analysing
complaints, service data and identifying and raising barriers to customers switching. Also
creation of a balance of the first time buyers, repeat buyers, switched away and return buyers,
last time buyers. Reorganizing the firm greatly influences customer retention (Rosenberg
and Czepeil (1984). Reichheld (1996) advocated the pursuit of a three-pronged approach of
keeping investors, employees, and customers and the adjustment of the firm’s mission,
which should be about creating value for its three above mentioned constituencies. His idea
rested on the notion that disloyal employees are not likely able to build an inventory of loyal
customers, and disloyal investors do not support long term relationship programmes.

1.4 Customer Service

This is one of the organizational processes which companies perform in considering the
growing competition for attracting entrepreneurial opportunities for increasing profitability
and better access to the market and increasing the customer satisfaction level. According to
Gummesson (2002), customer service has importance because it ends in increasing product
quality, gaining competitive advantage, gaining profitable opportunities, and as a result
increasing sales and income. The domain of the activities related to customer service is vast.

1.5 Service Recovery

Presenting informational services is in the line of informing customers about new products,
information regarding service centers. Presenting communicational services is directly
related to customer satisfaction. Customers after purchasing products from the company
may have doubts in their decision making; the only way to manage this uncertainty is to
establish a long term relationship with customers (Hollensen, 2003). One of the strategies
of presenting better customer services is to provide proper trainings to personnel and
customers. Presenting suitable training services create possibility for increasing the level of
customer service and hence the customer satisfaction. Using trained staff also, increases the
accountability of the company. Discovery services are also important in retaining customers.
Discovery services refer to the services that company do for detecting defects in the product
and rectifying them without causing any loss for the customers (Kruse et al, 2010.

1.6 Service Quality

This means the ability of the service provider to solve the problem such as the customer
dissatisfaction and the service failure (Gronoss, 1988). This research adopts the definition
of the service recovery as described. The active effort of the company to solve the problem
helps customer have credit on the service provider. And appropriate effort for the service
recovery can protect customers from switching the service provider (Colgate & Lang, 2001).
The service recovery at the service encounter is a foundation to develop the customer
relationship into a long-term friendship. Therefore the service recovery can be a component
for the switching barrier. Based on empirical findings in service quality and satisfaction
literature, service quality is one of the antecedents of satisfaction (Anderson and Sullivan,
1993; Cronin and Taylor, 1992, 1994; Reidenbach and Sandifer-Smallwood, 1990; Spreng
and Mackoy, 1996; Woodside, Frey, and Daly, 1989), and loyalty is one of the consequences
of satisfaction (Coner and Gungor, 2002; Cronin and Taylor, 1992, 1994; Dabholkar,
Shepherd, and Thorpe, 2000).

1.7 Customer relationship management

According to Storbacka, K., Strandvik, T. & Grönroos, C. (1994), relationship marketing
has to do with establishing, maintaining and enhancing relationship with customers and
other parties at a profit so that the objectives of the parties involved are met. This is done by
mutual exchange of fulfilment of promises.
In other words Glazer explains that, Customer Relationship Management (CRM) attempts
to provide a strategic bridge between information technology and marketing strategies aimed
at building long-term relationships and profitability. This requires "information-intensive
strategies" (Ravi Dhar and Rashi Glazer, 2003).
CRM is a management approach that seeks to create, develop and enhance relationships with
carefully targeted customers in order to maximize customer value, corporate profitability
and shareholder value. CRM is primarily concerned with utilizing information technology
to implement relationship marketing strategies (Payne, 1999, pp. 797 - 818). To get a better
idea of CRM, Payne separated the common expressions of CRM into Relationship
Marketing and Customer Management based on interviews with senior executives. As a
result, "Relationship Marketing" was associated by the respondents with high-level strategic
thinking about relationships with all key stakeholders. When describing "customer
relationship management", managers used phrases describing the development of marketing
strategies over the customer lifetime, such as understanding the customer base in total,
understanding needs, attitudes, life stage, profitability and lifetime value. By contrast,
"customer management" was seen by the majority of respondents as being more concerned
with the tactical implementation of CRM, in particular using specific tools such as campaign
management or call centre activities. According to Russ Lombardo – Peak Sales Consulting
(2002), CRM is a centralized database containing customer profiles for understanding
customer requirements and satisfying their needs. It is not simply technology nor is it
technology for technology sake. It is technology used to profile your customers so that you
can better understand their requirements in order to satisfy their needs. Technology is the
“enabler” of your business customer relationship management strategy. CRM is a strategic
approach concerned with creating improved shareholder value through the development of
appropriate relationships with key customers and customer segments. CRM unites the
potential of IT and relationship marketing strategies to deliver profitable, long-term
relationships. Importantly, CRM provides enhanced opportunities to use data and
information both to understand customers and implement relationship marketing strategies
better. This requires a cross-functional integration of people, operations, processes and
marketing capabilities that is enabled through information, technology and applications".
(Payne, A.F.T. and Frow, P., 1999) Relationship marketing seeks to go beyond transactional
to maintaining and enhancing on-going relationships or contacts with clients such as calling
to ask how their day had been, whether or not the services rendered to them were up to
standard etc. Research has shown that successful continuing relationship is characterized by
trust and commitment [Morgan and Hunt (1994); Shemwell et. al., (1994)]. Morgan and
Hunt identified five major precursors of bank relationship trust and commitment,
relationship termination costs; relationship benefits; shared values; communication and
opportunistic behaviors.

1.8 Customer retention strategies and practices

Customer retention is the act of implementing certain strategies which allows current
customers to keep using the brand and potential customers to turn into regular customers. In
order to sustain in the tough market competitions, businesses have to follow customer
retention strategies right from the time they get a new customer till throughout the period
the person uses the product. Customer retention is not just a matter of offering quality
products, but also how the company gives proper services and creates a dependable goodwill
in the market. If customer satisfaction is focused on mainly, it inevitably contributes to
customers being loyal to the product and brand. The following are some of the best practices
that Stephen R. (2011) proposed. He begins that good customer retention strategies most
importantly include techniques that exceed the expectations of customers, leading to utmost
customer satisfaction. First of all, the seller should make it a point to provide the best
customer service, be it to any type of customer. In order to generate loyalty in consumers
regarding the brand, marketers and salesmen should create good personal relations with
consumers. Moreover, effective business communication would lead to healthy corporate
relations. Customers tend to jump to other brands just because they do not receive the after
sales service that they expected they would. For making a customer loyal, providing
satisfactory after sales service is a must. If it is a technical appliance that is sold, the company
should pay attention to customers’ complaints regarding improper functioning of the product
and provide technical support as soon as possible. Another good customer retention tip is to
include contemporary business techniques such as offering memberships and frequent-buyer
programs to regular consumers. These programs should offer heavy discount shopping to
regular customers making them more loyal towards the product or service. In addition you
also have the option of using technology as a method of giving customers what they expect.
Companies can set up electronic order systems and email notifications regarding latest
product offerings and deals. This would allow consumers to contact the company and carry
out purchases conveniently. The main key for customer retention is improving customer
service and satisfaction Stephen Rampur, (2011). According to Bruce Temkin, a customer
experience ‘transformist’ and managing partner at Temkin Group, a Newton Mass.-based
research and consulting firm, customer experience in the financial services means loyalty.
Customers who have positive interactions with their financial providers are more likely to
purchase additional products, less likely to move business away, and more likely to
recommend the institution to their friends and families. To begin with, he suggested that
there is the need to invest in flexibility. Customer needs change, and so do market conditions.
Sometimes customer needs will require platforms that allow for easy changes to business
rules and process flows. There had to be a continued investment in moving inflexible
applications onto business process management platforms. Companies will put more
emphasis on business intelligence tools, especially to analyse customer-facing activities.
You also need to put a premium on the usability of the technologies that you pick. This will
drive the need for more formal usability testing in all IT projects. Companies will also want
to invest more in customer insight tools — making the collection, analysis and dissemination
of customer insight an on-going process. Obviously, IT issues can cause major customer
experience problems, but technology is not often the key driver. There are four key
competencies that companies need [in order] to be good at customer experience: purposeful
leadership, compelling brand values, employee engagement and customer connectedness. A
company with good customer experience competencies can overcome technology shortfalls,
while a company with poor competencies can mess up even the finest technology.
Banks can totally customize the customer experience for individual segments. But that does
not mean you need to design different experiences for every customer or customer group.
Customer experience should be customized to meet your brand and business strategy. This
means that companies need to have a good understanding of their brand values and their
target customer segments.

1.9 Chapter Summary

This chapter discussed the existing literature on the factors that influence customer retention
at NBS bank. The theories which are relevant in the field of customer retention have been
discussed in order to facilitate analysis and understanding of the research questions. The
next chapter covers the methodology adopted to undertake the study.