Conceptual Framework for Longitudinal Study on Relationship

Conceptual Framework for Longitudinal Study on Relationship Marketing in Building Customer Retention & Customer Acquisition: The UK Deregulated Electric Utility Experience ESRC RELATIONSHIP MARKETING SEMINAR UNIVERSITY OF EAST ANGLIA, NORWICH 12 DECEMBER 2003 LEONG YOW PENG WARWICK BUSINESS SCHOOL UNIVERSITY OF WARWICK 1 1.0 Key Research Focus Areas  Relationship Marketing  Customer Switching Behaviour  Customer Retention  Customer Acquisition 2 2.0 Research Objectives  To gain insight on how service companies build customer retention and customer acquisition through relationship marketing tactics.  To understand and determine the mediating role of customer behaviour between relationship marketing and customer retention & acquisition 3 3.0 Research Questions  What are the relationship marketing tactics practised by the service companies in building customer retention and customer acquisition ?  What motivates customers to remain loyal (stay on) or switch their service provider ?  What are the mediating effects of customer behaviour between relationship marketing and customer retention/acquisition? 4 4.0 Literature Review RELATIONSHIP MARKETING CUSTOMER BEHAVIOUR CUSTOMER LOYALTY PURCHASING BEHAVIOUR PSYCHOLOGICAL VARIABLES CUSTOMER SWITCHING BEHAVIOUR CUSTOMER RETENTION CUSTOMER ACQUISITION 5 4.1 Relationship Marketing Definitions Berry (1983) : “attracting, maintaining and enhancing customer relationships”. Gronroos (1990) : “ establishing, maintaining, and enhancing relationships with customers and other partners, at a profit, so that the objectives of the parties involved are met”. Morgan and Hunt (1994) : “ all marketing activities directed toward establishing, developing and maintaining successful relational exchanges” .The essence of Relationship Marketing is the supplier’s creation of commitment and trust between itself and the customer. 6 Relationship Vs Transactional Marketing Relationship Marketing  Transactional Marketing        Orientation to customer retention Continual customer contact Focus on customer value Long term horizon High customer service emphasis High commitment to meeting customer expectations Quality concerns all staff members   Orientation to single sales Episodic customer contact Focus on product features Short term horizon Little emphasis on customer service Little commitment to meeting customer expectations Quality concerns only production staff     7 4.2 Customer Retention Zeithaml, Berry and Parasuranam (1996) “The behavioural consequences of service quality ” showed strong evidences linking service quality and behavioural intentions that signal whether customers remain with or defect from a firm. Ravald and Gronroos (1996) :firms providing superior value through enhanced offers and customer service can improve customer satisfaction so that customer retention is improved. Fornell and Wernerfelt (1987) :in an empirical study on impact of complaint handling programmes on customer retention and concluded that marketing resources are better spent keeping existing customers than attracting new ones. The following hypothesis is proposed: Hartline and Ferrell (1996) maintained that the employee-customer interface is the most important determinant of the customers’ perceptions of service quality. As a result, managers must find ways to increase the self efficacy and job satisfaction of contact employees. Rucci, Kim and Quinn (1998) found that a 5 point increase in employee attitude, produces a 1.3 point increase in customer impression (a customer satisfaction measure) which leads to a 0.5 % increase in revenue growth and an identifiable increase in profitability. 8 Customer Retention Constructs Service Quality Customer Service Differentiated Service Customer Retention Complaint Handling Employee Satisfaction 9 4.3 Customer Acquisition Blattberg and Jacquelyn (2001): The following marketing mix element affects acquisition: advertising, word of mouth, pricing, segmentation, promotions, product quality, channel distribution and sales force. Branding plays a special role in service companies because strong brands increase customers’ trust, enable customers to better visualize and understand intangible products. (Berry, 2000). Advertising helps to create awareness, create evolving needs and develops customer’s positive attitude towards a brand. 10 Customer Acquisition Constructs Better Pricing Advertising Reputation/ Branding Promotion/ Value Offers Customer Acquisition Sales Force/Personal Selling Positive Word of Mouth 11 PRICING INCONVENIENCE CORE SERVICE FAILURE SERVICE ENCOUNTER FAILURE SERVICE SWITCHING BEHAVIOUR RESPONSE TO SERVICE FAILURE COMPETITION ETHICAL PROBLEMS Source: Keaveney (1995) JM, Vol. 59, pp. 71-82. 12 INVOLUNTARY SWITCHING 5.0 Contribution Existing Literature:  Currently, there are studies linking various relationship marketing tactics and customer choice ( remain or switch their service provider). Proposed Research:  To develop a framework linking Relationship Marketing Tactics and Customer Retention.  To develop a framework linking Relationship Marketing Tactics and Customer Acquisition.  To determine the mediating role of customer behaviour between relationship marketing tactics and customer retention and acquisition 13 6.0 Theoretical Framework RELATIONSHIP MARKETING TACTICS CUSTOMER SWITCHING/ LOYALTY BEHAVIOUR CUSTOMER ACQUISITION / RETENTION 14 6.1 Marketing Methods ( New South Wales, Utility, Australia ) •Competitive Pricing •Product/Service Quality •Customer Service •Value Add Services •Direct Marketing (Personal Selling) •Increase Corporate Image ( Retailers Reputation) •Advertising •Broad Range of Products •Serving Specific Market CUSTOMER RETENTION/ ACQUISITION Source: Stanton, Molesworth & Sewell ( 2001 ) 15 6.2 Marketing Methods ( England & Wales, Utility , UK ) • Service Delivery • Customer Service • Experience • Reputation Building • Door Step Selling • Internet • Payment Method - Direct Debit - Standard Credit - Prepayment • Advertising • Pricing Packages - Zero Standing Charge Tariff - >2 tier tariff - Economy 7 tariff - Low, Medium , High User - Price Cap for 1-2 years • Range of Services - Dual Fuel - Energy Saving Services • Geographical Focus Source: Waterson & Brigham ( 2003 ) CUSTOMER RETENTION / ACQUISITION 16 6.3 Theoretical Framework ( 1 ) CUSTOMER LOYALTY BEHAVIOUR • Perceived Value/Benefits • Perceived Switching Costs • Convenience • Perceived Quality • Positive Experience • Responsiveness • Perceived Image • Circumstantial RELATIONSHIP MARKETING TACTICS •Service Quality •Customer Service •Differentiated Service - Dual Fuel - Energy Saving • Payment Methods •Efficient Complaint Handling •Employee Satisfaction • Reputation Building CUSTOMER RETENTION 17 6.4 Theoretical Framework (2) CUSTOMER SWITCHING BEHAVIOUR • Pricing • Inconvenience • Core Service Failure • Service Encounter Failure • Response to Service Failure • Competition • Ethical Problems • Circumstantial RELATIONSHIP MARKETING TACTICS • • • • • Pricing Packages Advertising Reputation/ Brand Building Promotion/Value Offers Direct Marketing (Door Selling/ Telesales ) • Payment Methods • Bundling Product/Services CUSTOMER ACQUISITION 18 7.0 Research Method Test Model in the UK deregulated electricity market for the retail services sector. Berry ( 1983 ): “The practice of relationship marketing is most applicable to a service firm when each of the following conditions exists”..  Ongoing desire for the service.  Customer has choice in choosing their suppliers.  Competition exists in the market where there are multiple suppliers and customer switching is common. 19 7.1 Key Issues For Electric Utility  Minimize the Impact of Price War  Keep Existing Customers Loyal  Differentiate Services  Attract New Customers Source: Payne and Frow (1997) 20 7.2 Electricity Supply Chain Generation Transmission Distribution Retail ( Supply) Services 21 Impact : Price Reduction Average Real Standard Domestic Electricity Prices from Incumbent Standard Credit Annual Consumption of 3300 kWh 400 375 350 325 300 275 250 225 1989/90 1990/91 1991/02 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 Oct-02 Time 22 Impact : Market Share Market Share of Ex-Public Electricity Suppliers After Deregulation Market Share of New Electricity Suppliers 35.8% Market Share of ExPES 64.2% 23 Impact on Ex-Public Elec. Suppliers Percentage of Retail Customers Switching Away From Ex-PES Suppliers Scottish Hydro Electric SWEB London Electric SWALEC Southern Electric Scottish Power SEEBOARD Eastern Electricity Great Britain Yorkshire Electricity Midlands Electricity Manweb East Midlands Electricity NORWEB Northern Electric 19% 31% 32% 33% 33% 34% 35% 35% 35.8% 38% 39% 39% 39% 41% 41% 24 15% 20% 25% 30% 35% 40% 45% 8.0 Survey Design  Sampling Frame  Sampling Unit  Unit of Analysis Respondents  Marketing Executive  Customer Sample list of registered customers domestic sectors household members paying the bills 25 Survey Design Sampling • Amerada • AEP • Basic Power • Unite • TXU • Virgin Energy • nPower • British Gas • PowerGen Higher CA New ESP Lower CA •Norweb, •Northern Electric •East Midlands Electricity •Midlands Electricity •Manweb •Yorkshire Previous ESP Lower CR ESP - Electricity Service Providers CR - Customer Retention CA - Customer Acquisition •Scottish Hydro Electric •SWEB •London Electric •SWALEC •Southern Electric •Scottish Power •Seeboard •Eastern Electricity Higher CR 26 9.0 Data Collection DOCUMENTARY DATA INDEPTH INTERVIEWS PRE-TEST QUESTIONNAIRE FOCUS GROUP PILOT MAIL SURVEY 27 10.0 Data Analysis  Factor Analysis - EFA - CFA  Reliability & Validity of Constructs  Interrelationship of Observed Variables  Causal Model between RMT/ CB/ CR/CA 28 11.0 Conclusion  Critical Success Factors - Cooperation from electricity service providers and their customers to conduct the longitudinal study  Contributions - Empirical insight on the application of Relationship Marketing in building Customer Retention and Customer Acquisition. - Theoretical contribution in filling the gap on studying Customer Switching/Loyalty Behaviour as the mediating variable between Relationship Marketing Tactics and CA/CR 29 Conclusion  Contributions - Managerial input to regulators /ESP to plan their policies /marketing programmes. - Useful resource to other countries who are in the process of deregulating their electricity industry. 30 THANK YOU 31