Repeat-selling psychology

Jacquelyn Thomas et al. 'Recapturing Lost Customers' (2004). A bit wordy article about important things but might be interesting. Some researchers believe that's how a scientific article should look like. Although they forget about elegance and simplicity.

Findings:

'Customer winback is the process of firms’ revitalizing relationships with customers who have defected. ... Research has shown that a firm has a 60% to 70% chance of successfully repeat-selling to an “active” customer, a 20% to 40% chance of successfully repeat-selling to a lost customer, and only a 5% to 20% chance of successfully closing the sale on a brand new customer (Griffin and Lowenstein 2001). These statistics suggest that a key opportunity for firms to increase or maintain a customer base is the mining and evaluation of the firm’s database of defected customers. Stauss and Friege (1999) make this argument even more convincing in a case study in which they find that the net return on investment from a new customer obtained from an external list is 23% compared with a 214% return on investment from the reinstatement of a customer who has defected.' (p. 31)

'Some firms engage in extensive efforts to recapture defected customers or to reactivate lapsed customers. For example, during the long-distance telephone wars, one segment of customers frequently switched providers. Some customers switched to benefit from the introductory offer of a competing provider, whereas others simply wanted to solicit a better offer from the original provider (Marple and Zimmerman 1999). To recapture lost customers, telecommunications firms engaged in aggressive “come-back” campaigns. When the original provider approached customers to come back, they typically presented them with offers that were better than the original offer. Thus, the consumer usually benefited.' (p. 32)

'In practice, the favored approach is to offer restarts lower prices for the same product. To stimulate purchase activity, Amazon offers lapsed customers discounts on their next purchases. Similarly, HoneyBaked, the ham company, offers a $10 gift certificate to reactivate customers (Schmid 1998), and Self Care, a health care products marketer, offers discounts of up to 25% to customers who have not ordered from the company in 18 to 24 months (Kiley 1996).' (p. 32) 'Stauss and Friege present a conceptual framework for customer winback that entails regain analysis (i.e., determining which customers have defected and why), regain actions (i.e., engaging in dialogue with the customer to determine the appropriate regain offer), and regain controls (i.e., the profit/ loss analysis of the regain actions).' (p. 32)

'Griffin and Lowenstein (2001) introduce a general outline for winning back lost customers. Citing best practices from industry, they highlight the importance of highly trained winback teams and customer information systems. However, counter to the mantra of “zero defections,” they assert that not all customers should be won back.' (p. 33)

'Bolton, Kannan, and Bramlett (2000) find that a price gain (i.e., a decrease in price) has a significant impact on repatronage, but a price loss (i.e., a price increase) does not. This finding is consistent with that of Krishnamurthi, Mazumdar, and Raj (1992), who show that for customers who switch often among consumer packaged goods brands, price gains have a larger impact on brand choice than do price losses.' (p. 33)

'Previous researchers have asserted that loyal customers are willing to pay higher prices (Reichheld and Sasser 1990). Reinartz and Kumar (2000) test this assertion empirically. Using a median split, they segment customers into long- versus short-life customers and then examine the mean price paid by the two segments. They determine that long-life customers actually pay a lower mean price than do short-life customers.' (p. 33)

'A popular approach for making targeting decisions in direct marketing firms is recency, frequency, and monetary value analysis. Although weaknesses in this approach have been identified, a widely held belief among direct marketers is that customers who have bought most recently and more often and have the highest monetary value are more likely to respond favorably to subsequent offers (Hughes 1996). This belief is consistent with other research findings. For example, Schmittlein and Peterson (1994) find that in a brokerage context, customers who make fewer transactions (i.e., purchase less frequently) are most likely to terminate their relationship with the firm. Boulding, Kalra, and Staelin (1999) find that, more generally, consumers’ prior experience with a service affects their subsequent attitudes and assessments of that service.' (p. 33)

'Bolton, Kannan, and Bramlett (2000) find that experience with a product, measured by the number of prior transactions, is positively associated with a higher likelihood of repatronage. It is noteworthy that this result holds regardless of whether repatronage is measured either in terms of the decision to stay or to terminate the relationship or in terms of how much to use the service. They explain this finding by relating a customer’s prior experience to repatronage intentions and to the customer’s desire to maintain the status quo. Specifically, they assert that prior experience drives customer expectations and intentions. They argue that intentions are strongly related to the actual decision because customers strive to maintain the status quo; however, they also find that a customer’s level of satisfaction can moderate this result.' (p. 33)

'Prior research has asserted that with the passage of time, customers adapt to the new level of service provided by the switched-to firm (Ganesh, Arnold, and Reynolds 2000). In addition, customers who have switched to a new firm after having experienced another firm’s service exhibit higher levels of loyalty and repeat patronage to the switched-to firm than do patrons of the firm who had never experienced another provider (Ganesh, Arnold, and Reynolds 2000). Logically, the longer the time since the last purchase, the more likely a lapsed customer is to have engaged a new service or simply to have developed new behaviors. ... Note that this hypothesis is still well founded even if the customer has not switched to a new provider, because it is consistent with status quo bias, that is, an exaggerated preference for the current state or inaction (Samuelson and Zeckhauser 1988).' (pp. 33-34)

'For any lapsed customer, the decision to reinitiate a relationship with the firm creates dissonance relative to the customer’s prior state (i.e., inactivity) with the firm. Dissonance can vary in magnitude and is moderated by the importance or intensity with which attitudes are held (Eagly and Chaiken 1993; Festinger 1957). Applying this idea to our research, we argue that longer lapses may represent more extreme attitudes. Therefore, the decision to reinitiate a relationship after a long lapse results in a greater amount of dissonance relative to the decision to reinitiate a relationship after a shorter lapse. Cohen (1960) asserts that the greater the amount of dissonance, the stronger are the attempts to reduce it. This implies that customers who have had longer lapses make stronger attempts to reduce the dissonance between their prior behavior (i.e., the lapse) and their decision to reengage in a relationship with the firm.' (p. 34)

'To reduce or resolve the dissonance that occurs after a decision, a person attempts to engage in postdecision processing that reinforces the new decision that has been made (Festinger 1957, 1964). In the case of reacquired customers, the current decision is the choice to reengage in a relationship with the firm. ... Thus, because customers with longer lapses make stronger attempts to reinforce the reacquisition decision, they will have longer subsequent relationships than customers with shorter lapses.' (p. 34)

'The most basic question about the price offer decision is, How will restart consumers respond to price? General laws of supply and demand assert that higher prices lead to lower demand (e.g., Einhorn 1994). This general principle can be directly applied to the reacquisition price offer.' (p. 34)

'Because of the long-term perspective, responsiveness to price may be more complex. For example, Bolton and Lemon (1999) use the concept of payment equity (i.e., the customer’s perception of fairness with respect to the exchange of payment for service usage) to discuss consumers’ use of services. Their research shows that consumers seek to maintain payment equity in a service relationship and adjust usage levels in response to price changes. Specifically, Bolton and Lemon find that service usage levels may increase as price increases in order to maintain equity in the relationship.' (p. 34)

'Boulding, Kalra, and Staelin (1999) show that customers give different weights to prior experience and current experience. They find that as customers gain confidence or experience with a product, they weight their prior assessment of a given service more heavily than they do new information about the service. Thus, it might be expected that when restart customers assess their reinitiated relationship with the firm, they reflect on their prior relationship with the firm and give significant consideration to that assessment. This behavior is consistent with the existence of reference prices in consumer decision making.' (p. 34)

'The reference price literature enables us to generalize that consumers use prior prices in the formation of reference prices and that reference prices have a significant impact on demand (Kalyanaram and Winer 1995). ... Further drawing on reference price literature, we assert that differences between the new price and prior prices can influence how restart customers assess their experience. This assertion is supported by arguments that customers’ assessments of value, which directly affect relationship continuity, are based on differences relative to a reference point (e.g., Bolton 1998; Thaler 1985). More specifically, Varki and Colgate (2001) show that price perceptions significantly affect customer retention.' (pp. 34-35)

' ... the price paid in the prior relationship anchors customers’ perceptions and guides their subsequent behavior in the reinitiated relationship. This implies that firms should target customers for reacquisition and make the offer based on prices paid before the lapse.' (p. 35)

'The assertion that customers respond to differences in price raises the question of whether their response is the same for gains (e.g., price decreases) as it is for losses (e.g., price increases). Consistent with prospect theory (Einhorn and Hogarth 1981; Kahneman and Tversky 1979; Thaler 1985), another finding of the reference price literature is that customers respond more to losses than gains (Kalyanaram and Winer 1995). ... Bolton and Lemon (1999) find that gains in price (i.e., decreases) have a larger impact on usage amount than do losses in price (i.e., increases). Similarly, Bolton, Kannan, and Bramlett (2000) find that gains in price have a larger effect than do losses on both the decision to stay in a relationship and the usage level.' (p. 35)

'In terms of relative impact, the elasticities indicate that the offer price has the largest effect on reacquisition likelihood. ... Notably, price difference has a much smaller effect. Thus, the absolute effect of price is much more important than the effect of price relative to the last price paid in the prior relationship. This is an important insight for managers because it suggests that reacquisition strategies that emphasize decreasing price relative to the prior relationship are not likely to be effective. A more fruitful approach to winning back lapsed customers is simply to offer a low price, regardless of the price that the customer was accustomed to paying before the lapse. This also implies that customers who previously paid low prices should not be enticed with significantly lower prices.' (p. 38)

'Consistent with Bolton and Lemon (1999) and contrary to economic theory, we find that higher retention prices lead to longer relationship durations. ... we find that it is consistent with the assertion that loyal customers are willing to pay higher prices (Reichheld 1996) but contradicts Reinartz and Kumar’s (2000) finding that long-life customers pay lower average prices than do short-life customers (in a catalog retailing context). However, Reinartz and Kumar (2000, p. 28) state, “we expect these factors to have differential impacts in different industries.”' (pp. 38-39)

'Specifically, the results suggest that when price deviations (i.e., price increases or price decreases) are consistent with the customer’s decision to reestablish a relationship, they have a noticeable effect. However, the customer is unaffected by deviations that do not support the decision to reestablish the relationship. This behavior is consistent with Festinger’s (1957, 1964) assertion that people engage in postdecision processing that reinforces the decisions they have made.' (p. 39)

'Profits can be improved if the firm follows one of two pricing strategies. First, if the firm’s tendency is to offer restart customers prices that are lower than the last price paid before lapse, the most profitable approach is to offer a low reacquisition price and a low retention price. ... Second, to hedge against the risk and potential costs of a restart customer lapsing again, firms may opt to increase prices above their prior levels. ... To increase profits by using this strategy, the firm must increase both the reacquisition and the retention prices above the last price before lapse. ... The key to a firm’s successful implementation of a price increase strategy is managing the trade-off between a lower acquisition rate (due to higher reacquisition prices) and increased margins (due to higher retention prices).' (pp. 40, 43).

' From these results, it might be concluded that the key to managing customer winback most profitably is successful customer reacquisition. However, our targeting discussion has revealed that the firm may not want to price so as to reacquire all lapsed customers and instead may want to focus on customers with attractive profiles. ... When attractive customers have been recaptured, their behavior is such that the firm can recoup the losses from reacquisition by charging higher prices. This approach maximizes margins but not long-term market share. To maximize share, firms must be concerned with second tenure duration. A better strategy for maximizing share is to implement the heuristic of lowering prices relative to the last price before the lapse.' (pp. 43-44)

'Our analysis provides the additional insight that 100% retention (or other high retention rates) is not always desirable or profitable, particularly when it requires setting a low retention price. It is not worth it for firms to try to reestablish relationships with customers who are likely to lapse or to defect rapidly. Furthermore, our research suggests that lapsed customers who are more likely to be reacquired have a shorter second tenure with the firm after they have been reacquired.' (p. 44)

'Our analysis shows that reacquisition is the critical phase in the winback initiative. Firms’ significant lowering of reacquisition prices to increase the likelihood of reacquisition is an optimal strategy. To maximize profits, firms should increase prices when the relationship has been reestablished. If market share is the metric of interest, the firm should focus on maximizing duration of the second tenure. To do this, our analysis shows that both reacquisition and retention prices should be low.' (p. 44)

'In addition, this research shows that lapsed consumers’ response to price varies at different phases of the relationship. Throughout the relationship, the customer is sensitive to the absolute price. At the point of reacquisition, customers respond negatively to price. However, customers who are reacquired at higher prices have longer second tenures. Consistent with this outcome, our research shows that there is a negative correlation between a customer’s preference for reacquisition and their intrinsic “retainability.”' (p. 44)

'Customers also demonstrate a dynamic response to relative prices. At the time of reacquisition, customers respond to deviations in price relative to the last price paid before lapse. However, after the relationship is reestablished, customers respond in a way that reinforces their decision to reenter the relationship. In other words, price increases have no affect on second tenure duration, and price decreases relative to the prior price result in longer second tenures. This is an important insight for firms because it shows that the last price paid during the first tenure plays a role throughout the win back process.' (p. 44)

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