chapter 12 managing relationships and building loyalty

Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 12- 1

Chapter 12

Managing Relationships and Building Loyalty


Learning Objectives - Chapter 12

Discover the importance of customer loyalty to profitability

Consider strategies linking relationship marketing and The Wheel of Loyalty

Assess building a foundation for loyalty using tiering, membership programs and loyalty bonds

Examine the implications of CRM: Customer Relationship Management to customer loyalty


The Search for Customer Loyalty


How Much Profit a Customer Generates Over Time (Fig 12.1)

Credit card Industrial laundry Industrial distribution Auto servicing

0

(Year 1=100)

50

250

300

350 –

100

150

200

Year 1 Year 2 Year 3 Year 4 Year 5

Source: Based on reanalysis of data from Fredrick R. Reichheld and W. Earl Sassar, Jr., “Zero Defections: Quality Comes from Services,” Harvard Business Review 68 (Sep.-Oct. 1990), pp. 105–111.


Why Is Customer Loyalty Important to a Firm’s Profitability?

Customers become more profitable the longer they remain with a firm:

Increase purchases and/or account balancesReduced operating costsReferrals to other customersPrice premiums


Why Customers Are More Profitable Over Time (Fig 12.2)

1 2 3 4 5 6 7Year

Profit from pricepremium

Profit from references

Profit from reducedop. costs

Profit from increased usage

Base Profit/Loss

Source: Why Are Customers More Profitable Over Time from Fredrick R. Reichheld and W. Earl Sassar, Jr., “Zero Defections: Quality Comes from Services,” Harvard Business Review 73 (Sep.–Oct. 1990): p. 108.

Loss


Assessing the Value of a Loyal Customer

Must not assume that loyal customers are always more profitable than those making one-time transactions

Profit impact of a customer varies according to stage of service in product life cycle

Determine costs and revenues for customers from different market segments at different points in their customer lifecycles


Measuring Customer Equity:Lifetime Value of Each Customer

Acquisition revenues less costs Revenues (application fee + initial purchase) Costs (marketing + credit check + account set up)

Projected annual revenues and costs Revenues (annual fee + sales + service fees + value of

referrals) Costs (account management + cost of sales + write-offs)

Value of referrals Percentage of customers influenced by other customers Other marketing activities that drew the firm to an individual’s

attention

Net Present Value

Sum anticipated annual values (future profits) Suitably discounted each year into the future


Gap Between Actual and Potential Customer Value

What is current purchasing behaviour of customers in each target segment?

What would be impact on sales and profits if they exhibited ideal behaviour profile of:

(1) buying all services offered by the firm, (2) using these to the exclusion of any purchases from

competitors, (3) paying full price?

How long, on average, do customers remain with firm?

What impact would it have if they remained customers for life?


Understanding the Customer-Firm Relationship


Relationship Marketing

Marketing within the context of an active ongoing relationship rather than a one-off relationship

Transactional Marketing Database Marketing Interaction Marketing Network Marketing


Relationships with Customers (Table 12.1)

Nature of Service Delivery

Membership Relationship

No Formal Relationship

Continuous Cable TV

Insurance policy

College enrollment

Radio station

Police

Lighthouse

Discrete Transactions

Subscriber phone

Theatre subscription

Warranty repair

Pay phone

Movie theatre

Public transport

Type of Relationship between the ServiceOrganization and Its Customers


The Wheel of Loyalty


The Wheel of Loyalty (Fig 12.4)

1. Build aFoundationfor Loyalty

2. Create LoyaltyBonds

3. Reduce Churn Drivers

CustomerLoyalty

Be selective in acquisition

Conduct churn diagnosticSegment 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


Building a Foundation for Loyalty


Customer Needs and Company Capabilities

Identify and target the right customers

How do customer needs relate to operations elements?

How well can service personnel meet expectations of different types of customers?

Can company match or exceed competing services that are directed at same types of customers?

Should result in a superior service offering in the eyes of those customers who value what firm has to offer


Searching for Value—Not Just Volume

Focus on number of customers served as well as value of each customer Heavy users 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 (Fig 12.5)

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. By permission of the Regents.


The Customer Satisfaction Loyalty Relationship (Fig 12.6)

0

20

40

60

80

100

1 2 3 4 5

Lo

yalt

y (R

eten

tio

n)

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. Reprinted by permission of Harvard Business School.


Creating Loyalty Bonds


Strategies for Developing Loyalty Bonds with Customers

Deepening the relationship

Reward-based Bonds

Social Bonds

Customization Bonds

Structural Bonds

Transform discrete transactions into relationships


Create Customer Bonds by Membership Relationships and Loyalty Programs How customers perceive reward programs

Brand loyalty versus deal loyalty Buyers value rewards according to:

― Cash value of redemption award

― Range of choice among rewards

― Aspirational value of rewards

― Amount of usage required to obtain award

― Psychological benefits of belonging to reward program

Timing

― Send customers periodic updates on account status and progress towards particular milestones


Strategies for Reducing Customer Defections


Analyze Customer Defections and Monitor Declining Accounts

Understand reasons for customer switching

Churn diagnostics common in mobile phone industry

Analysis of data warehouse information on churned and declining customers

Exit interviews Churn Alert Systems


What Drives Customers to Switch?(Fig 12.9)

Source: Adapted from Susan M. Keaveney, “Customer Switching Behavior in Service Industries: An Exploratory Study,” Journal of Marketing 59 (April 1995), pp. 71–82.

Core Service Failure• Service Mistakes• Billing Errors• Service Catastrophe

Service Encounter Failures• Uncaring• Impolite• Unresponsive• Unknowledgeable

Response to Service Failure• Negative Response• No Response• Reluctant Response

Pricing• High Price• Price Increases• Unfair Pricing• Deceptive Pricing

Inconvenience• Location/Hours• Wait for Appointment• Wait for Service

Competition• Found Better Service

Service Failure/Recovery Value Proposition

ServiceSwitching

Involuntary Switching• Customer Moved• Provider Closed

Ethical Problems• Cheat• Hard Sell

• Unsafe• Conflict of Interest

Others


Addressing Key Churn Drivers

Delivery quality Minimize inconvenience and nonmonetary costs Fair and transparent pricing Industry specific drivers Reactive measures Implement effective complaint handling and

service recovery procedures Increase switching costs


CRM: Customer Relationship Management


Common Objectives of CRM Systems (1)(Service Perspectives 12.3)

Data collection

Data analysis

Sales force automation

Marketing automation

Call centre automation


An Integrated Framework for CRM Strategy(Fig 12.10)


Common Failures in CRM Implementation

Service firms equate installing CRM systems with having a customer relationship strategy

Challenge of getting it right with wide-ranging scope of CRM

Common reasons for failures

Viewing CRM as a technology initiative Lack of customer focus Insufficient appreciation of customer lifetime value (CLV) Inadequate support from top management Failure to reengineer business processes Underestimating the challenges in date integration


Key Issues in Defining a Customer Relationship Strategy

How should our value proposition change to increase customer loyalty?

How much customization or one-to-one marketing and service delivery is appropriate and profitable?

What is incremental profit potential of increasing share-of-wallet with current customers? How much does this vary by customer tier and/or segment?

How much time and resources can we allocate to CRM right now?

If we believe in customer relationship management, why haven’t we taken more steps in that direction in past?

What can we do today to develop customer relationships without spending on technology?


Summary of Chapter 12: Managing Customer Relationships and Building Loyalty (1)

Customer loyalty as an important driver of profitability for service firms so firms need to Assess value of loyal customer Narrow gap between actual and potential customer value

To understand the customer-firm relationship, firms should establish a relationship with customers by creating “membership” relationships

Four types of marketing Transactional marketing Database marketing Interaction marketing Network marketing



Wheel of Loyalty shows how firms can: Build a foundation of loyalty

Create loyalty bonds

reduce churn drivers

Building a foundation of loyalty involves: Good fit between customer needs and capabilities

Searching for value, not just volume

Tiering services effectively

Obtaining customer satisfaction through service quality



Customer loyalty bonds include: Reward-based bonds Social bonds Customization bonds Structural bonds

Bonds can also be created through membership relationships and loyalty programs

Strategies for reducing customer defections include: Analyzing customer defections and monitoring declining

accounts Addressing key churn drivers Implementing effective complaint-handling and service

recovery procedures Increasing switching costs


Summary of Chapter 12: Managing Customer Relationships And Building Loyalty (4)

Customer relationship management (CRM) is a whole process by which relations with customers are built and maintained.

An integrated CRM system includes Strategy development process Value creation process Multichannel integration process Performance assessment process

Cresting a successful CRM program requires understanding common failures in CRM implementation and knowing how to get it right

chapter 12 managing relationships and building loyalty

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