Statistical Methods in Customer Relationship Management

4.1 Introduction

After customers have been acquired, it is important to discuss the second step of CRM – retaining customers. Customer retention strategies are used in both contractual (where customers are bound by contracts such as mobile phone subscription or magazine subscription) and non-contractual settings (where customers are not bound by contracts, such as grocery purchases or apparel purchases). Reichheld and Sasser (1990) stated that a 5% improvement in customer retention can cause an increase in profitability between 25 and 85%, in terms of net present value, depending upon the industry. Since then, companies have constantly allocated resources on customer retention management and researchers have put much emphasis on studying customer retention.

Research on customer retention has two main streams. One stream is interested in investigating the effects various marketing variables on customer retention, which in turn influences a firm's performance. The other stream is interested in building econometric and statistical models to estimate or predict the customer retention decisions from both the customer and company prospective. Figure 4.1 shows an integrated framework which describes the various relationships examined in different studies across many industries. These industries have included telecommunications, financial services, hairdressing, restaurants, and retailing, among others. The common thread of these relationships is the mindset that (a) increased product ...