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Michael Johnson
  Michael Johnson

Satisfaction, Churn and Calculative Commitment All Affect Retention Rates

2/28/2006 --

To increase customer retention, firms need both to improve overall satisfaction and identify consumers with a tendency to remain loyal.

ANN ARBOR, Mich.—A new study suggests that overall customer satisfaction with a companyís products and services indeed predicts customer retention, but so do other factors.

Michael Johnson of the University of Michiganís Stephen M. Ross School of Business and Anders Gustafsson and Inger Roos of Karlstad University in Sweden say other factors, especially customersí prior tendencies to churn—switching companies often—and the availability of attractive, easily obtainable alternatives, also can affect consumer loyalty and behavior.

"Effective customer relationship management strategies vary considerably, depending on which factors are driving retention," said Johnson, the D. Maynard Phelps Professor of Business Administration and professor of marketing at the Ross School. "If customer satisfaction is the primary driver of retention, a firm should improve product or service quality, or offer better prices. If customers' affective commitment (based on personal involvement) or calculative commitment (based on economic-based dependence) is more important, a firm should either build more direct relationships with customers or impose switching barriers in relation to competitors."

In addition, the researchers say, these customer retention management strategies may be dependent on so-called trigger conditions. Situational triggers alter customer evaluations of product or service offerings based on demographic, job or economic changes. Reactional triggers are critical incidents of deterioration in perceived performance of a company, which may put customers on a switching path to the competition.

In their research, which appeared in last fall's Journal of Marketing, Johnson and colleagues used customers of Telia, a large Swedish telecommunications company that provides fixed-phone, mobile phone, modem-based Internet and broadband Internet service. They initially conducted qualitative interviews with customers who had switched from the company and then used the interview results to develop questions for a periodic customer survey, which was administered to 2,715 respondents, ages 18 to 65. They continued to survey the test sample and collected nine months of retention data.

The study found that the average churn, i.e., the total number of months in which the customer was not retained during the survey period, is 3.52 months. Prior churn, defined as the number of months customers were not using the telecommunication service before the survey began, was 1.46 months.

In their analysis, Johnson, Gustafsson and Roos found that while overall satisfaction reduces churn, it has significantly less influence on customers who are inherently prone to switch and more influence on those who are inclined to stay. In addition, they say that calculative commitment, which measures the economic hardship of ending a relationship with a company and reflects the attractiveness of competitorsí products and services, also reduces churn and increases retention.

"Our study suggests that customer-relationship managers should include both overall evaluations of performance (e.g., customer satisfaction) and the viability of competitive offerings (e.g., calculative commitment) in periodic surveys used to predict retention," Johnson said. "In other words, calculative commitment forces managers to think beyond improving satisfaction to consider specifically how to improve their competitive advantage."

Furthermore, Johnson and colleagues say, by identifying which customers are prone to stay with a provider and likely to respond to satisfaction-improvement efforts, managers stand to boost their return on marketing investment. Although the impact of triggers was not evident in their study, the researchers recommend "if such triggers are shown to have an effect over a longer period, identifying them early gives a relationship manager some lead time to intervene and prevent switching."

Written by Claudia Capos

For more information, contact:
Bernie DeGroat
Phone: (734) 936-1015 or 647-1847