Chapter 12-LovelockChapter 7-Zeithaml

LoyaltyDefectorZero Defection

Rate

Increased purchase by some

customers

New customers

Lost Customers

Decreased purchase by some customers

Lost Customers

• Customers become more profitable the longer they remain with a firm:–Increase purchases and/or account balances• Customers/families purchase in greater

quantities as they grow–Reduced operating costs

• Fewer demands from suppliers and operating mistakes as customer becomes experienced

–Referrals to other customers• Positive word-of-mouth saves firm from

investing money in sales and advertising–Price premiums

• Long-term customers willing to pay regular price• Willing to pay higher price during peak periods

Must not assume that loyal customers are always more profitable than those making one-time transactions Costs ▪ Not all types of services incur heavy promotional

expenditures to attract a new customer

▪ Walk-in traffic more important at times

Revenue▪ Large customers may expect price discounts in return for

loyalty

▪ Revenues don’t necessarily increase with time for all types of customers (depends on product life cycle)

Transactional Marketing One transaction or a series of transactions does not

necessarily constitute a relationship Requires mutual recognition and knowledge between the

parties

Database Marketing: Includes market transaction and information exchange Technology is used to▪ (1) identify and build database of current and

potential customers▪ (2) deliver differentiated messages based on

customers’ characteristics ▪ (3) track each relationship to monitor cost of

acquiring that customer and lifetime value of resulting purchases

Interaction Marketing: Face-to-face interaction between customers and

supplier’s representatives Value is added by people and social processes Increasing use of technologies make maintaining

meaningful relationships with customers a marketing challenge▪ For example, self-service technology, interactive websites,

call centers

Network Marketing: Common in b2b context where companies commit

resources to develop positions in network of relationships with stakeholders and relevant agencies

Relationship of partner

Actively recommends you

Supports you passively

Repeat business, but passive or negative attitude

Carried out one transaction

Potential customer

The Wheel of Loyalty

1. Build aFoundationfor Loyalty

2. Create LoyaltyBonds

3. Reduce Churn

Drivers

CustomerLoyalty

Be selective in acquisition

Conduct churn diagnostic Segment the market

Use effective tiering of service.

Deliver quality service.

Deepen the relationshipGive loyalty

rewards

Build higher level bonds

Implement complaint handling and service recovery

Address key churn drivers

Increase switching costs

Enabled through:

Frontline staff Account

managers Membership

programs CRM Systems

Searching for Value—Not Just Volume • Focus on number of customers served as

well as value of each customer – Heavy users who buy more frequently and in

larger volumes are more profitable than occasional users

– Avoid targeting customers who buy based on lowest price

• Firms that are highly focused and selective in their acquisition of customers grow faster

• “Right customers” are not always high spenders– Can come from a large group of people that

no other supplier is serving well

• Different segments offer different value

Effective Tiering of Service The Customer Pyramid

Which segment sees high value in our offer, spends more with us over time, costs less to maintain, and spreads positive word-of-mouth?

Which segment costs us time, effort, and money, yet does not provide return we want? Which segment is difficult to do business with?

Lead

Iron

Gold

Platinum

Good Relationship Customers

Poor Relationship Customers

Source: Valarie A Zeithaml, Roland T Rust, and Katharine N. Lemon, “The Customer Pyramid: Creating and Serving Profitable Customers,” California Management Review 43, no. 4, Summer 2001, pp.118–142.

The Customer Satisfaction

Loyalty Relationship

0

20

40

60

80

100

1 2 3 4 5

Loyalt

y (

Rete

nti

on

)

VeryDissatisfied

Dissatisfied Neither Satisfied VerySatisfied

Satisfaction

Near Apostle

Zone of Defection

Zone of Indifference

Zone of Affection

Terrorist

Apostle

Source: Adapted from Thomas O. Jones and W. Earl Sasser, Jr., “Why Satisfied Customers Defect,” Harvard Business Review, November-December 1995, p. 91.

Excellent Service and Value

1. Financial Bond

2. S

ocia

l Bon

d

3. Customization Bond4.

Str

uctu

ral B

on

d

Volum

e &

Fre

quenc

y

Stable Pricing

Bundling & Cross SellingContinuous

Relationships

Pers

on

al

Rela

tion

sh

ips

Social Bonds

Am

ong

customers

Inte

gra

ted

Info

rmati

on

Sys

tem

s

Join

tIn

vestm

en

ts

Shared process

es and

equipments

Anticipation/Innovation

Mass customization

Customer Intimacy

Customer is not always rightThe Wrong Segment Not Profitable in the Long TermDifficult Customers

Personal Organizational