Customer Retention

Negative Retention Strategies

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An important distinction can be made between strategies that lock the customer in by penalizing their exit from a relationship, and strategies that reward a customer for remaining in a relationship. The former are generally considered negative, and the latter positive customer retention strategies.

Negative customer retention strategies impose high switching costs on customers, discouraging their defection. In a B2C context, mortgage companies have commonly recruited new customers with attractive discounted interest rates.

When the honeymoon period is over, these customers may want to switch to another provider, only to discover that they will be hit with early redemption and exit penalties.

Customers wishing to switch retail banks find that is less simple than anticipated: direct debits and standing orders have to be reorganized.

In a B2B context, a customer may have agreed to purchase a given volume of raw material at a quoted price. Some way through the contract a lower cost supplier makes a better offer. The customer wants to switch but finds that there are penalty clauses in the contract. The new supplier is unwilling to buy the customer out of the contract by paying the penalties.

Some customers find these switching costs are so high that they remain customers, though unwillingly.

• They are likely to agitate to be freed from their obligations, taking up much management time.

• Also, they are likely to utter negative word-of-mouthOpens in new window; in today’s social media environment it is easier than ever and highly effective.
• They are unlikely to do further business with that supplier.

When presented with dissatisfied customers complaining about high relationship exit (switching) costs, companies have a choice. They can either enforce the terms and conditions, or not. The latter path is more attractive when the customer is strategically significant, particularly if the company can make an offer that matches that of the prospective new supplier.