Customer churn is an ever-growing issue in the relational services sector (e.g., retail banking, telecommunications), where business models ultimately depend upon long-term relationships with customers as the basis for profitability. Businesses in this sector have tended to view satisfaction and service quality as the key tools for increasing customer retention. The present study investigates the important additional role of the brand in managing the churn of current customers of relational services. Based on information economics, we propose specifically that the credibility of the brand underlies the role that the brand can play in this process. This research leads to the enhanced understanding that the brand has a significant role to play in managing long-term customer relationships, and details how the usual tools of customer relationship management, satisfaction and service quality, relate to brand credibility. Results from samples of retail bank and long distance telephone company customers indicate that brand credibility serves in a defensive role: it significantly enhances word-of-mouth and reduces switching behaviors among customers; these relationships are mediated by customer satisfaction and commitment. Implications of the study for theory and practice are discussed.
The management of customer churn, or turnover, is a top priority of executives in service industries such as retail banking and telecommunications. It is accepted wisdom in marketing that new customer acquisition is a far more costly undertaking than establishing a broader and deeper relationship with existing customers (see, e.g., Heskett et al., 1994; Reicheld and Sasser, 1990; Rust et al., 1995). Hence, in general the loss of a customer should be viewed with concern by banks and telecommunications firms, both being examples of longer-term relational services requiring the establishment of a formal relationship between customer and firm.
Evidence for the rising recognition of the importance of customer churn to firm profitability is easily found in these industries. For example, recent research by Teradata (2004) demonstrates that US bankers are quite aware of this problem: 79% of survey respondents (out of a total of 101 bank executives from financial institutions with assets of $25 billion or more) indicated that “preventing customer churn is the key competitive issue for American bankers in 2004.” Similarly, the telecommunications industry, and wireless carriers in particular, have had to concentrate significant efforts on customer retention: Carroll (2002) quotes a Yankee Group report stating that from about 20–80% of annualized wireless subscribers churned in 2001, depending upon the carrier; more recent numbers for the US telecommunications industry show that only about a quarter of customers want to continue their current telecom relationship (Myron, 2004). Indeed, the difficulty in predicting customer churn is well known (Carroll, 2002; Teradata, 2004; Dropping, 2005).
Examination of the academic literature also supports the significance of examining churn or retention in these industries (e.g., Bell et al., 2005; Evans, 2002; Gustafsson et al., 2005; Lee and Cunningham, 2001). While extant studies recognize a degree of inertia in the telecommunications and retail finance sectors, due to switching costs (e.g., Bell et al., 2005), there is also significant interest in examining factors that enhance customer retention or reduce customer churn in these industries (e.g., Gustafsson et al., 2005).
In this paper we take a broader, more strategic look at customer franchise management in a retail service context. Specifically, we wish to examine the role that the brand can play in customer retention, as well as in promoting certain behaviors by customers that lead to long-term benefits for the firm. The reason we believe that such a view is inherently strategic lies in the observation that brands embody the long-term experience that a customer has with a service provider; in effect, the brand is a “summary statistic” characterizing the cumulative temporal relationship between two parties, the customer and the service provider (Erdem and Swait, 1998). In this perspective, the brand comes to embody the credibility of the firm (Erdem and Swait, 1998 and Erdem and Swait, 2004), which can only be built and solidified over time through repeated customer/firm interactions, but can quickly be lost if trust is violated by the firm; this makes brand credibility a firm-wide responsibility that must concern all functions at all times. Building the credibility of a brand is recognized by consumers to be a long-term and continuing investment by the firm; hence, they behave towards the firm as if it were posting a bond that is forfeited when its promises are not kept (Erdem and Swait, 1998; Wernerfelt, 1988).
No studies to our knowledge have examined the role of brand credibility (rather than brand reputation or brand image) on retention of current customers.1 Earlier studies (e.g., Selnes, 1993) have related brand reputation (defined as a perception of quality associated with the brand) to satisfaction and loyalty. This very specific definition of reputation (contrasted, e.g., with Ganesan, 1994) is quite different from the brand credibility construct at the heart of this research. Furthermore, none have studied the effect of brand credibility on commitment and satisfaction, which play an important role in customer retention (Gustafsson et al., 2005).
Credibility has been noted as playing a key role in customer perceptions of the retailing environment, particularly in the context of pricing tactics, advertising, salesperson interactions and online catalogs (e.g., Bobinski et al., 1996; O’Shaughnessy, 1971–1972; The Wall Street Journal, 2000; Yang et al., 2003). In the present study we examine the role of brand credibility among current customers of the retail service brand.
