A Markov Analysis of Customer Retention and Recruitment

Abstract

This paper develops a Markov analysis of customer retention and recruitment for the service industry. It establishes the trade-off between retaining present customers and recruiting new customers and demonstrates that retention is essential in achieving high market share. Retention and recruitment cost functions are developed which allow managers to evaluate the effectiveness of service improvement programs and marketing campaigns and to predict returns for each type of investment. The model then determines the retention and recruitment investment levels that will maximize market share. The model is applied to data from a service organization to examine retention and recruitment in an actual service organization.