The impact of loyalty and promotion effects on retention rate

Researching customer retention rates is made difficult because of the lack of suitable systems with which to measure it. From a first-order Markov brand-switching model, serial equations are derived to estimate the retention rate using market share and loyalty. To explore the impact of loyalty and promotion programme on retention rate, data from five leading brands for three product categories were obtained to fit the developed model. Findings suggest that: (1) when the loyalty effect remains unchanged over a period of time, the greater the effect of a promotion programme, the greater the retention rate; (2) when the promotion effects among brands are similar, the retention rate varies depending on level of loyalty; and (3) when the proportion of loyal customers is high, the proportion of potential switchers affected by promotion programmes is low. In this case, the impact of a promotion programme on the retention rate is not significant. This model successfully demonstrates how the Markov brand-switching model can be employed to estimate a measure of retention rate from consumer panel data as well as to better understand how promotion affects loyalty, switching behaviour, and retention rate.