Key Factors Affecting Customer Retention Marketing Essay

The objectives of this thesis are to examine the influence of the interaction between overall satisfaction with service quality, product quality, pricing, and switching barriers on customer retention at Apollo Education and Training Organization. The study started with an assumption which all above elements have direct impacts on customer retention and crucial to retain students in foreign – owned education firms. It can be seen from the results that there is a positive relationship between product quality, service quality, price, customer satisfaction and switching barriers with customer retention. The sample size of this quantitative research included 104 current adult students at Apollo Hanoi. Building on the quantitative aspects questionnaire was designed to examine the customer retention, service quality, product quality, price, customer satisfaction and switching barriers and to generalize the finding to the large population. There are also limitations as well as future research implications at the end of this research study. Furthermore, the descriptive analysis is used to analyze the extent to which the factors affect customer retention.

Customer retention is an important element of a foreign – owned education firm in today’s increasingly competitive environment. Management must identify and improve upon factors that can limit customer defection. These include switching barriers and customer satisfaction with service quality, product quality, pricing.

Clearly, there are compelling arguments for management to carefully consider the factors that might increase customer retention rates. A lot of studies have emphasized the significance of customer retention in the industry like banking or hospitalism such as Dawkins and Reichheld, 1990; Marple and Zimmerman, 1999; Page et al., 1996; Fisher, 2001. However, there has been little effort to investigate factors that might lead to customer retention in education firm. Most of the studies have focused on the impact of individual constructs, without attempting to link them in a model to further explore or explain retention. If retention criteria are not well managed, customers might still leave their suppliers, no matter how hard bankers try to retain them.

Keywords: Customer retention, Service Quality, Product Quality, Customer Satisfaction, Switching Barrier.

Chapter 1: Overview of the research

Background of Research

Despite of the existing difficulties of the economy, in 2011 and 2012, education remains one of the few positive growth areas. According to experts; it is due to the stable development of education. People’s learning needs are increasing; their level of investment in learning is increasing too. This investment is not interrupted by fear, worried about funding; on the contrary, students can save many other expenses to spend on their studies or their children.

In the field of education, it can be said that in 2012 a lot of new English language centers are opened. The main reason is that English is more and more important, becoming obligatory recruitment requirements of many enterprises.

According to the survey, using English proficiently helps graduate students quickly get a job and receive two times higher wages compared to non-English speaking candidate. Therefore, parents will not hesitate to invest in their children English learning at the prestigious center from an early age. More blue and white – collared workers will enroll with the purpose of increasing salary, income.

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Apollo Vietnam, which was founded in 1994, is the “first fully foreign owned English language training company in Vietnam” and an “affiliate of International House – a well established and trusted name in English teaching”. With the slogan “Where the best become better”, Apollo continues to strive to maintain the high standard English teaching organization in Vietnam.

Apollo has made and continues to make a lot of contributions to Vietnamese society such as scholarships for students, fun & learn English and teachers’ training for local schools and several well-known and well-loved television shows, for example, The Golden Bell, The Road to Olympia and Connect Youths.

Apollo has seven moder centers based in Ho Chi Minh, Ha Noi, Da Nang, Hai Phong and offers a variety of educational programs and services, such as Public courses ( including English for Young Learners, Teens, Adults, IELTS & TOEFL iBT), Corporate English, School Partnership Program and Overseas Study Services.

Apollo’s has a lot of achievements in education and training, recognized by the Vietnamese Government and the United Kingdom:

First foreign organization that has received two campaign medals for the Cause of Education” from the Vietnamese Ministry of Education and Training

In 2008, Apollo’s Chairman of the Board of Directors, Mr. Khalid Muhmood, was also awarded the MBE (Member of the British Empire) by Queen Elizabeth II for providing international-standard English training in Vietnam.

Apollo is collaborating with leading endorsers, such as Cambridge University, DOET,Nokia, Fahasa, Nestle, Prudential and many more.

Apollo is also the English content provider for popular game shows in Vietnam like Peak to Olympia, Golden Bell, Hot VTeen, and Doremi.

Apollo has different courses designed for public students at Apollo at different ages, especially for adult. Please have look at Appendix 6 for more details.

Problem Statement and Research Questions

In recent years, a lot of English language centers with huge capital and investment are opened putting Apollo in the fiercer competition with strong existing competitors like British Council, Language Link, ILA, ACET, RMIT,Clever Learn, Oxford English UK,… as well as new entrants such as Alphabest, AMA,etc. As a result, fewer new customers are being pursued by an increasing number of service providers. Under those circumstances, a large share of a firm’s resources must be devoted to the present customer base in order to make them satisfied and retain them.

One significance of customer retention is its close relationship to the company’s continued survival, and to strong future growth. Hence, for a company, to maintain a stable profit level when competition is fierce, a defensive strategy which strives to retain existing customers is more important than an aggressive one, which expands the size of the overall market by inducing potential customers (Fornell, 1992).

Apollo currently has a good student retention rate of young learner segment, about 80%, whereas for adult segment in recent years, it’s only around 50% (Figure 2). As it can be seen from Figure 1, Apollo had from 640 to 700 adult student turns from 2009 until present and one forth of company’s public revenue comes from those adult students which means that each month a lot of revenue shouldn’t have lost if more careful measurements and priorities are drawn to adult segment. As a service company, no one likes the fact that 50% of adult students leave after enrolling one course at Apollo. Therefore, Apollo should try to find out the reasons why they leave and solutions to retain more current adult students.

Figure 1: Apollo’s Average Number of Adult Students from 2009 to 2012 (source: internal document)

Figure 2: Apollo Adult Students’s Retention Rate from 2009 to 2012 (source: internal document)

There is a large number of literature about customer loyalty, customer satisfaction but not many studies are concentrated on the specific topic of customer retention. Moreover, there are many different characters in the context of English training service by foreign company compared to the regular service. Part of my job relates to retaining existing adult students at Apollo. Gaining better understanding of how to retain adult students at Apollo will not only help me to work more efficiently but also make small contribution to company’s development.

The research questions that are discussed in this thesis are as below:

What are the main determinants and influencers of customer retention at Apollo Hanoi?

How can these factors and determinants be developed and evaluated at Apollo Hanoi?

Hence, the primary purpose of this study is to investigate the strategies at Apollo Hanoi to increase customer retention. After reading the related literature, as discussed above, it was found out that it would be more appropriate to answer these questions by designing a model to determine customer retention.

Thesis Objectives

This study explores the impacts that improvements in switching barriers and overall customer satisfaction by improving product or English course quality, service quality, price could have on customer retention at Apollo Hanoi, as it is a key indicator of customer retention, which in turn affects profit.

On one hand, this thesis would be an opening to the further researches according to the related area, and on the other hand, this study may have some limitations. There are other factors influencing customer retention, apart from factors suggested in this thesis such as, the demographic characteristics of customers, their life cycles, and their usage pattern of English courses, that would be studied in future researches.

The general objective of the research was to examine the extent to which key indicators affecting customer retention are having an impact on Apollo Hanoi and identify steps that Apollo Hanoi should take, if proven necessary.

The research is more specifically aimed to:

Find out the reasons why left students ended the relationship with Apollo

Discover what factors are most important to encourage students study the next level at Apollo according to customer’s perspectives

Indicate the level of satisfaction of adult students with such factors at Apollo Hanoi

Find out whether switching barriers has strong effect on students’ decision to stay

Present recommendations to Apollo Hanoi on how to enhance its customer retention

Thesis scope and limitations

Scope

This research was limited to Apollo Hanoi due to the limited reach of the researcher who will be conducting his research and equaled desire for control over the research process apart from these limitations.

Limitations

Time

The researcher faced time constraints in the process of collecting data. As a result, many aspects of the research had to be accommodative of other activities going on at Apollo Hanoi, which included a survey the company had issued forcing the issuing of the questionnaire for this research to be delayed to avoid over questioning of adult students.

Finance

The researcher was constrained financially. This primarily attributed to the fact that the research was primarily self-sponsored. As a result, certain value adding aspects of the research could not be administered effectively.

Data Collection

Apollo management was not in a position to disclose all the information requested due to lack of availability of the information as requested and the inability of the company to disclose all documents as they are.

The researcher also experienced problems with adult students, as many were reluctant to fill in the survey and answer the questions in interviews.

Thesis Structure

My thesis will be divided into six chapters

Introduction

Literature Review

Methodology

Empirical Findings

Recommendations and conclusions

In the introduction chapter, the background information such as brief information of foreign education in general and English training in particular in Vietnam, objectives of my research, hypotheses will be presented.

In literature review chapter, the related theories will be introduced.

Methodology chapter will explain the research techniques and methods.

Empirical Findings, data analysis, recommendations and conclusions will show the actual and gathered data and results of this research.

Conceptual framework

Product Quality

Overall Customer Satisfaction

Price

Customer retention

Service Quality

Switching barriers

CHAPTER 2: Literature Review

Customer retention

Customer retention plays a very important role in organization’s economic portfolio. It is “the act of keeping customers resulting from service quality and customer satisfaction” (Ross 1995). Companies should be interested in retaining customers, though, for the following reasons (Reichheld 1996):

Getting new customers can cost five times more than the cost involved in satisfying and retaining current customers. It needs a lot of effort to induce satisfied customers to switch from their current suppliers to others.

The average company loses ten percent of its customers per year.

A five percent decrease in the customer defection rate can increase profits by 25 percent to 85 percent, depending on the industry.

The customer profit rate tends to increase over the life of the retained customer.

According to Werner and Kunar 2000, retention may lead to increased profit over time if there is a forced ongoing relationship or an inertia driven relationship; if costs of maintenance decrease over time at a faster rate than revenues. It is further argued that focus on customer loyalty can provide general commercial advantages due to the following reasons:

Customers cost less to retain than to acquire.

A loyal customer will commit more to its chosen supplier.

About half the new customers come from referrals from existing customers/ clients

The concept of customer retention comes from the concept of customer orientation or customer focused marketing, which calls for organizing the company towards the satisfaction of the customer needs. Ideally this requires that the offering should focus on the customer and his needs and/or expectations.

Weinstein & Johnson (1999) recommended that “at least 75% of an organization’s marketing budget should be spent on customer retention strategies and strengthening these relationships”. Besides this realization, there is a general lack of focus on customers; profitability is still king (Ross 1995). Most firms focus a significant amount of resources to attract and acquire new customers, instead of keeping the existing ones. It is generally thought that “once a customer is acquired, keeping the customer is simple through superior products and services” (Payne 2006, 2). Ross (1995) continued to claim that a focus on cash flow and short-term profits is not something wrong, but long-term profit and market share both require a base of satisfied customers which are retained by a focus on satisfaction with product quality, service quality, pricing and creating high switching barriers.

We notice that customer retention is a concept that requires management to focus on customers by analyzing the indicators that reflect their satisfaction with services.

Key factors affecting customer retention

Retention depends on how it is measured and presented, but even more on the expectations and targets set for the activity. Therefore, the need for having a model which determines the customer retention influencers so as to evaluate them is essential for such a firm to be successful in the competitive markets

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As mentioned before, a model will be developed based on the previous researches for evaluating different factors which influence customer retention and this model will be applied for Apollo Hanoi. Earlier studies of factors affecting customer retention usually concentrate on customer satisfaction and the switching barriers (e.g., Dick & Basu, 1994; Gerpott, Rams, & Schindler, 2001; Lee & Cunningham, 2001). It is studied that customers experiencing a high level of satisfaction are likely to remain with their existing providers and maintain their relationship with the firm. However, according to some research, customer satisfaction, while positively influencing customer retention, is not always a sufficient condition, and, in some cases, fails to produce the expected effects. Hence, these researchers suggest that it is necessary to analyze other potentially influential factors. It is in this context that the concept of the switching barrier was proposed (Jones, Mothersbaugh, & Betty, 2002).

Furthermore, it has been demonstrated that the switching barrier plays the role of an adjustment variable in the interrelationship between customer satisfaction and customer retention. In other words, when the level of customer satisfaction is identical, the level of customer retention can change depending on the magnitude of the switching barrier.

Hence, many studies have been done on the subject of customer retention and loyalty. They developed models so as to determine different factors influencing customer loyalty and retention. The main model that was developed in these studies is a result of an empirical causal model is as below. It will also be used in this research:

Customer Retention

Overall Customer Satisfaction

Switching Barriers

Figure 1: Determinants of customer retention, model by Kim, et. al., 2003

Each factor contains some variables like switching barriers which include switching cost, interpersonal relationship, attractiveness of alternatives, service recovery

The education firms must maximize customer satisfaction and the switching barrier in order to enhance customer retention. In particular, they must focus on service quality, product quality, pricing policy and offer customer-oriented services to improve customer satisfaction. At the same time, efforts to raise the switching barrier must be built for a long-term relationship.

Customer satisfaction

“Customer satisfaction roots from a comparison between customer’s expectations and experiences. It means positive reaction to a service experience. If the customers’ perceived experience matches the expectations, customers are assumed to be satisfied. If the preceding expectations were higher than the gain of the service, the customers are considered to be disappointed and or dissatisfied”. (Ylikoski 2000, 109).

Stock (2005, 59) argued that “customer satisfaction is an important driver of organizational performance and a key component of competitive strategies and sustainable advantage” .Therefore, in market – driven economy, measuring customer satisfaction is very important and customer satisfaction is essensial to the firm’s survival, growth and success (Guo et al., 2004, 141). According to the marketing concept, “customer needs are essentially satisfied by integrated marketing, with the intention to satisfy customers while earning profit; the basic idea is that satisfied customers will be more likely to repurchase, leading to increased sales and market share for the company” (Innis and La Londe, 1994, 2). Hence, “to achieve long-term business success, it is vital to keep customers happy” (Stank et al., 1997, 2).

Customer satisfaction has been considered as the main element for customer retention in a lot of researches, and has consequently “moved to the forefront of relational marketing approaches” (Rust and Zahorik 1993). According to Anderson and Sullivan (1993), the more satisfied customers are, the higer is their retention. On the other hand, there are studies and publications where “the relationship between satisfaction and retention has been noted not to be so straightforward” (Hennig-Thurau and Klee 1997). “In some industries, customer satisfaction scores tend to correlate with retention whereas in other industries, there is little or no correlation” (Lowenstein 1995, 11-12).

Kotler (2003, 73) stated that firms should measure satisfaction frequently, because customer satisfaction is the key to customer retetion. “The highly satisfied customer stays loyal longer, buys more from the firm, talks favorably, pays less attention to competing brands, is less sensitive to price, offers ideas to the company, and costs less to serve than new customers, because transactions are routine”. “Customers will defect if they are very dissatisfied, dissatisfied, or even indifferent”. Hence, firms have to frequently survey their customers’ level of satisfaction and target to create very satisfied customers, because they are most likely to stay loyal to the firm. According to Bolton (1998), “the level of satisfaction explains a significant portion of explained difference in the duration of service provider -customer relationship, comparable to the effect of price”. Besides, Bolton stated that “it was a common misconception that organizations which focus on satisfaction are failing to manage customer retention. Furthermore, managers and researchers might have underestimated the importance between customer satisfaction and retention due to the complexity of the relationship between these factors”.

In a research by Ranaweera and Prabhu (2003), it was argued that “while satisfaction may be an important driver for retention, it only does not ensure service loyalty; trust, switching barriers, and emotional response such as inertia and indifference might also affect retention”. In their research, Ranaweera and Prabhu adopted a holistic approach to examine the combined effects of satisfaction, trust, and switching barriers in a continuous purchasing setting”. The findings denoted that “customer satisfaction and trust have strong and positive effects on customer retention, although the effects of trust on retention are weaker than that of satisfaction”. The results also proved that “switching barriers have a significant effect on customer retention”. According to the research, it is proved that satisfaction is the main driver of customer retention buy if trust is absent, satisfaction will have less impact on retention.

The correlation between satisfaction and customer retention is not usually as simple and straightforward as stated before. Reichheld et al. (2000) argued that “a concept called the satisfaction trap is represented: while it may seem nonrational that increasing customer satisfaction will push retention and therefore profits, the facts are opposite as 60 percent and 80 percent of customers who defect say they were satisfied or very satisfied with their former supplier”. According to Storbacka et al. (1994), “customer satisfaction is only one dimension in increasing relationship strength; strong relationships can be dependent or perceived of contextual bonds that function as exit barriers”. It is vital to understand that contextual barriers can generate latent dissatisfaction which emerges as the importance of the contextual bonds reduces. The article ends arguing that the relationships are remarkably different between different individual consumers. Some may be very committed to the relationship and for them the perceived satisfaction with the relationship is very important. Others may find the relationship unimportant, and for those customers, the satisfaction component is so much significant.

Extensive evidence suggests the positive influence of customer satisfaction on loyalty (Bolton, 1998; Fornell et al., 1996; Musa, 2004). In fact, many researchers pointed out that in order to improve business performance; firms should measure and manage customer satisfaction and its importance has led marketing scholars to recommend firms to improve their customers’ satisfaction judgments as “satisfaction is a key to customer loyalty and retention” (Fornell et al.). Customer satisfaction with a company’s products or services is often viewed as the key to a company’s success and long-term competitiveness.

Product quality

A prominent reason why customers do not retain with company is that their products are not fulfilling its functions properly. “When products fail to perform their functions completely and properly, then products are useless for customers, when customers are not satisfied with products and do not use it, they will reduce its retention and relationship with company” (Buzzell and Gale 1987). Product quality plays a vital role in customer retention and has positive relationship with customer retention. Customers compare the perceived performance of a product or service with some performance standard. Customers are satisfied when the perceived performance is greater than the standard, while dissatisfaction occurs when there is lack of standard for performance falls. “Product quality is the strategic benefits of quality in contributing to market share and return on investment” (Anderson and Zeithaml 1984). Searching for quality is credibly the most important consumer trend of the 1980s (Rabin 1983) as “customers are now demanding higher quality in products than ever before” (Leonard and Sasser 1982).

A company could use a number of strategies to retain its customers. Of great importance, product quality for customer retention to such strategies is the wider concepts of customer service, customer retention, and relationship marketing. Companies can build loyalty and retention through using of number of techniques, including “database marketing, customized products in limited editions, redeemable against a variety of goods or service, issuing loyalty cards, preferential discounts, free gifts, special promotions, newsletters, of magazines, member’s clubs, or it has been argued that customer retention is linked to employee loyalty, since employees are the ones that build up long-term relationship with customers”.

Service quality

“Service quality is a critical issue in the service industry” (Stafford, Stafford and Wells, 1998) and of particular importance for English training providers who characteristically offer English courses which are homogeneous in nature. Moreover, service quality is both directly and indirectly related to loyalty through satisfaction (Bloemer, De Ruyter and Peters, 1998). Therefore, those companies which deliver quality of services better than their competitors would surely have greater possibilities of success. In order to understand the level of service quality of an education firm, a measurement should be established. However, quantifying service quality is not simple and too subjective.

Nowadays, education firms provide the same types of English courses, but they do not provide the same quality of services. Besides, customers today are more aware of alternatives and their expectations of service have increased. Service quality can, hence, be used as a strategic tool to build a distinctive advantage over competitors. Although quality cannot be improved unless it is measured, it can be defined from several perspectives duh as “the ability to satisfy the needs and expectations of customers” (Bergman and Klefsjo (1990), or “the overall features and characteristics of a product or service that bears on its ability to satisfy given needs”.

A reason for customers to switch is that companies fail to provide the better and effective customer service to them. These services include “pre-sale service and post- sale service” (Lewis & Mitchell, 1990). If customers are not satisfied with customer service of the company, it will force them to change the supplier. Service quality is very important for the retention of the customers and have positive relationship as if firms provide service according to the customer requirement than it will also retain the customer as well as lowering manufacturing costs and improving productivity. “Service quality is consumers’ judgment about the overall excellence or superiority of products” (Zeithaml 1988). The design and implementation of service delivery processes plays a very important role in the overall competitiveness of modern organizations. Roth and Jackson (1995) provided clear evidence that process capability and execution are major drivers of performance due to their impacts on customer satisfaction and service quality in education firm.

Bearden and Teel (1983) found a positive relationship existing between service quality and customer satisfaction. The positive relationship between service quality and customer satisfaction creates true customers, increase efficiency, market shares, and profits, heavy sales volume, higher revenue, and reduces cost by economies of scales, and retain customer”.(Anderson and Sullivan 1993) Satisfied customer do not often switch their service providers and therefore, the cost of retaining existing customers is significantly lower than attracting new ones. These customers my also spread their satisfaction by positive word of mouth which influences non-existent customers’ desire to engage with the organization and work as free promotional agents (Gronroos 2007, Zeithmal and Bitner, 2000)

The positive effects by practising service quality models are a competitive differentiation that favors the enterprise, chances of potential growth, better employee morale, customer loyalty and retention, customer satisfaction, economic growth and profits, employee motivation and vision, favorable advertising, greater productivity and minimization of loss for the customers.

The evidence that customer loyalty makes an organization more profitable makes it imperative that complaints and other unfavorable behavioral intentions should be handled effectively and timely to ensure the stability of these relationships. It is important for organizations to also acknowledge that customers may also switch because of the attraction of competitors that are providing better service, more personable service or higher quality. In this case, customers are not switching because of unsatisfactory service. Managers of service firms should know that some customers would still switch services even when they are satisfied with a former provider (Keaveney, 1995).

Price

Price is another factor for customers to be retained or not to retain with companies. Due to competition, companies are playing with prices of products and services. Clients always required products on most cheap price.

Previous researches show that there is positive relationship between price and customer retention and the stability would increase the potential for customer retention. Company should lower customers’ price sensitivity, reduce the costs of failed marketing and of new customer creation, reduce operating costs due to customer number increases, improve the effectiveness of advertising, and enhance business reputation (Fornell, 1992). Customers often switch mainly due to some pricing issues, for example high price perceived, unfair or deceptive pricing practices (Peng and Wang, 2006). Therefore, so as to increase customer satisfaction, it is essential for service firms to actively manage their customers’ price perceptions, for example carrying out attractive pricing, offering reasonable prices mix, lower prices without decreasing quality, etc.

Price might be one of the most important determinants of customer decisions (Srivastava and Lurie, 2001). Managers could make use of price matching to stimulate repeat purchase behavior (reducing price defection), because price matching may indicate a commitment to protect customers , the objective of it is to keep customers happy so that they would come back and buy again. (Reichheld and Sasser, 1990) suggest that repeated existing customers focus less on price savings than new customers do. Understanding long-term price matching effects on customers is important so as to determine whether price matching has a lasting impact on customer behavior that is evaluating the effectiveness of these policies in stimulating customer retention, in addition to customer acquisition (Kukar-Kinney, 2006).

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