The Fallacy of Customer Retention The Truth of Customer Retention . . . And Peter Carroll Rejoins

According to the customer retention argument, bank retail profitability can be considerably improved by increasing the customer retention rate by only a few percentage points. In fact, however, revenues would not rise, and costs would decline only marginally. The key criticism of the retention argum...

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Bibliographic Details
Published in:Journal of retail banking services : JRBS 1991-01, Vol.13 (4), p.15
Main Authors: Carroll, Peter, Reichheld, Frederick F
Format: Article
Language:English
Subjects:
Bank marketing
Banking industry
Criticism
Customer relations
Customer retention
Customer satisfaction
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Summary:According to the customer retention argument, bank retail profitability can be considerably improved by increasing the customer retention rate by only a few percentage points. In fact, however, revenues would not rise, and costs would decline only marginally. The key criticism of the retention argument is that customer longevity does not result in significant profitability improvement. It only appears to because of faulty cross-sectional analysis of data. In an analysis without the cross-sectional confusion, balances were found to grow only 2%. Reichheld agrees with this criticism to some extent. However, he adds that there are 2 institutions that do track individual customers over time and that their data corroborate the findings that balances grow over time. The customer retention argument has been blown so far out of proportion because it contains a number of errors that exaggerate its significance. In trying to refute the criticisms of the argument, Reichheld commits another error by assuming that costs are mostly fixed.
ISSN:0195-2064