Managing Relationships & Building Loyalty

Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 1

Managing Relationships

and Building Loyalty


The search for customer loyalty

• It is described as a customer’s willingness to continue patronizing a firm over

the long term, purchasing & using its goods & services on a repeated &

preferably exclusive basis, & recommending the firm’s products to friends &

associates.


What Makes Loyal Customers More Profitable?

Tend to spend more as relationship developscustomer’s balances may growmay consolidate purchases to one supplier

Cost less to serve less need for information and assistancemake fewer mistakes

Recommend new customers to firm (act as unpaid sales people)

Trust leads to willingness to pay regular prices vs. shopping for discounts


Analyzing Why Customers Are More Profitable over Time

1 2 3 4 5 6 7

Year

Profit from pricepremium

Profit from references

Profit from reducedop. costs

Profit from increasedusage

Base Profit

Source: Reichheld and Sasser


Understanding the customer/firm relationship

• Research by Nichole Coviello, Roderick Brodie, & Hugh Munro suggests that there are, 4 distinct types of marketing:

1.Transactional marketing: A transaction is an event during which an exchange of value takes place between two parties. But even a series of transactions does not necessarily constitute a relationship, which requires mutual recognition & knowledge between the parties. When each transaction between a customer & a supplier is essentially discrete & anonymous, with no long-term record kept of a customer’s purchasing history & little or no mutual recognition between the customer & employees, no meaningful marketing relationship can be said to exist.


Cont……………..

2. Data base marketing: The focus is on the market transaction but also includes information exchange. Marketers rely on information technology, usually in the form of a database, to form a relationship with targeted customers & retain their patronage over time.

• However, the nature of these relationships is often not a close one, with communication being driven & managed by the seller.

• Technology is used to :

a.Identify & build a database of current & potential customers

b.Deliver differentiated messages based on consumer’s characteristics & preference

c.Track each relationship to monitor the cost of acquiring the customer & the life-time value of the resulting purchases.


Cont…………….

3. Interaction marketing: A closer relationship exists when there is face-to-face interaction between customers & representatives of the supplier.

• Although service remains important, value is added by people & social processes. Interactions may include negotiations & sharing of insights in both directions.

• Both the firm & the customer are prepared to invest resources to develop a mutually beneficial relationship. This invest may include time spent sharing & recording information.

4. Network marketing: This type of marketing occurs primarily in a business-to-business context, where firms commit resources to develop positions in a network of relationships with customers, distributors, suppliers, the media, consultants, trade associations, govt. agencies.

• The concept is also relevant in consumer marketing environment.


Creating “Membership” relationships

• It is a formalized relationship between the firm & an identifiable customer, may offer special benefits to both parties.

• Services involving discrete transactions can be transformed into membership relationships either by selling the service in bulk or by offering extra benefits to customers who choose to register with the firm.

• The advantage to the service organization of having membership relationships is that it knows who is its current customers & what use they make of the services offered.

• This information can be valuable for segmentation purposes if good records are kept & the data are readily accessible for analysis.

• Knowing the identities & addresses of current customers enables the organization to make effective use of direct mail, telephone selling- all highly targeted methods of marketing communication.


Types of Relationships with Customers

Type of Relationship--Firm and Customer

Nature of Service Delivery

“Membership” No formal relationship

Continuous Cable TV Radio station Insurance Police College enrollment Lighthouse

Discrete transactions Subscriber phone Pay phone Theater subscription Movie theater Warranty repair Public transport


Identifying and Selecting Target Segments

User characteristics demographics psychographics geographic location benefits sought

User behavior when, where, how services used quantity/value of purchases frequency of use profitability of relationship sensitivity to marketing variables


Targeting the right customers

1. Good relationships start with a good fit:

• If they want to build successful customer relationships, companies need to be selective about the segments they target.

• Matching customers to the firm’s capabilities is vital. Managers must think carefully about how customer needs relate to such operational elements as speed & quality, the time when service is available, the firm’s capacity to serve many customers simultaneously.

• Managers also need to consider how well their service personnel can meet the expectations of specific types of customers , in terms of both personal style & technical competence.

• Finally, managers need to ask themselves whether their company can match or exceed competing services that are directed at the same types of customers.



2. Searching for value, not just numbers:

• Too many service firms still focus on the number of customers they serve- an important issue for operations & human resource planning- without giving sufficient attention to the value of each customer.

• Service customers who buy based strictly on lower price are not good target customers for relationship marketing at the first place. These deal-prone customers continually seek the lowest price offer.

• Acquiring the right customers can bring in long-term revenues, continued growth from referrals, & enhanced satisfaction.

• Attracting the wrong customers typically results in costly churn.

• Marketers shouldn’t assume that the “right customers” are always high spenders.

• Marketers also need to recognize that some customers simply are not worth serving because they are too difficult to please or unable to decide what they want.



3. Selecting an appropriate customer portfolio:

• We can apply the concept of portfolio to service businesses with an established base of customers. Different segments offer different value for a service firm.

• Like investments, some types of customers may be more profitable than others in the short term, but others may have greater potential for long-term growth.

• Similarly, the spending patterns of some customers may be stable over time, whereas others may be more volatile.

• A wise firm may seek a mix of such segments in order to reduce the risks that various types of customers might be affected.


Analyzing & managing the customer base

• Marketers should adopt a strategic approach to retaining, upgrading & even terminating customers.

• Customer retention involves developing long-term, cost-effective links with customers for the mutual benefit of both parties.

• Recent research has confirmed that most firms have several tiers of customers in terms of profitability & that these tiers often different service expectations & needs


Tiering the customer base

1. Platinum: These customers constitute a very small percentage of a firm’s customer base, are heavy users & contribute a large share of the profits generated. Typically, this segment is less price sensitive but expects highest service levels in return & is likely to be willing to invest & try new services.

2. Gold: It forms a larger percentage of customers than the platinum, but individual customers contribute less profit than do platinum customers. It tend to be slightly more price-sensitive & less committed to the firms.

3. Iron: These customers provide the bulk of customer base. Because their numbers give the firm economies of scale, they are often important so that a firm can build & maintain a certain capacity level & infrastructure, which is often needed for serving gold & platinum customers. However, iron customers in themselves are often only marginal profitable.

4. Lead: They generate low revenue for the firm.


The Customer Pyramid

Lead

Iron

Gold

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

Platinum

Good Relationship Customers

Poor Relationship Customers


Retaining, upgrading & terminating customers

• Generally, customer tiers are based on not only profitability but also other identifiable characteristics common among these different segments.

• Instead of providing the same level of service to all customers, each segment receives a customized service level, based on its requirements & value to the firm. E.g. the platinum tier will receive some exclusive benefits not available to other segments. The benefit levels for platinum & gold customers are often designed with retention in mind, because these customers are the ones that competitors would like to entice to switch.

• Marketing efforts can be used to encourage an increased volume of purchase, upgrading the type of service used, or cross-selling additional services to any of the 4 tiers.

• For lead- customers, the options are to either migrate them to the iron segment or terminate them.

• Terminating customers comes as a logical consequence of the realization that not all existing customer relationships are worth keeping. Many relationships are no longer profitable for the firm as they may cost more to maintain the revenues.


How Customers See Relational Benefits in Service Industries

Confidence benefits less risk of something going wrong, less anxiety ability to trust provider know what to expect get firm’s best service level

Social benefits mutual recognition, known by name friendship, enjoyment of social aspects

Special treatment benefits better prices, discounts, special deals unavailable to others extra services higher priority with waits, faster service


The foundations of customer loyalty

• The foundation for true loyalty lies in customer satisfaction. Highly satisfied or even delighted customers are more likely to become loyal apostles or a firm, consolidate their buying with one supplier & spread positive word of mouth.

• In contrast, dissatisfaction drives customers away.

• The zone of defection is at low satisfaction levels. Customers will switch unless switching costs are high or there are no viable or convenient alternatives. Extremely dissatisfied customers can turn into “terrorists”

• The zone of indifference is at intermediate satisfaction levels. Here, customers are willing to switch if they find a better alternative.

• The zone of affection is at very high satisfaction levels, & customers here can have such high attitudinal loyalty that they do not look for alternative service providers. Customers who praise the firm in public & refer others to the firm are described as “apostles”.


The Customer Satisfaction-Loyalty Relationship

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40

60

80

100

1 2 3 4 5

Lo

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Verydissatisfied Dissatisfied

Neithersatisfied

nor dissatisfiedSatisfied

VerySatisfied

Satisfaction

Near Apostle

Zone of Defection

Zone of Indifference

Zone of Affection

Terrorist

Apostle


The Wheel of Loyalty

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 relationship

Give loyalty rewards

Build higher level bonds

Implement complaint handling & service recovery

Address key churn drivers

Increase switching costs

Enabled through: Frontline staff Account

managers Membership

programs CRM Systems


Creating bonds with customers

1. Creating bonds with customers:

• Having the right portfolio of customer segments, attracting the right customers, tiering the service, & delivering high levels of satisfaction are a solid foundation for creating customer loyalty.

a. Deepening the relationship: To tie customers more closely to firms, deepening the relationship via bundling &/or cross-selling services is an effective strategy. E.g. banks.

b. Reward- based bonds: Incentives that offer rewards based on the frequency or value of purchase combination of both represent a basic level of customer bonds. Reward-based bonds can be financial or nonfinancial. Financial bonds are built when loyal customers are rewarded with incentives that have a financial value, such as discounts on purchases & loyalty-program rewards. Non-financial rewards provide customers with benefits or value that cannot be translated directly into monetary items. E.g. giving priority to loyal customers for waitlist.


Cont………………

c. Social bonds: They are typically based on personal relationships between providers & customers. They may reflect pride or satisfaction in holding membership in an organization.

d. Customization bonds: These bonds are built when the service provider succeeds in providing customized service to its loyal customers. One-to-one marketing is a more specialized form of customization whereby each individual is treated as a segment.

e. Structural bonds: It is seen mostly in b2b settings & aim to stimulate loyalty through structural relationships between the provider & the customer. E.g. are joint investments in projects & sharing of information, processes & equipment. It can be created in a b2c environment too. For instance, some airlines have introduced SMS & e-mail alerts.


Cont………………

2. Creation of customer bonds through membership relationships & loyalty programs:

a.Transforming discrete transactions to membership relationships

b.Customer perceptions of loyalty-reward programs- Recent research in the credit card industry suggests that loyalty programs strengthen the customers’ perception of the value proposition & lead to increased revenues.

3. Managing & curtailing drivers of customer defections:

a.Common churn drivers: unsatisfactory service encounters, high, deceptive, or unfair pricing, inconvenience in terms of time, locations or delays

b.Strategies to reduce churn: Effective complaint handling & service recovery, minimizing inconvenience & other nonmonetary costs & fair & transparent pricing. Increasing switching cost.


Causes behind customer Service Switching

Service Switching

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

Ethical Problems• Cheat• Hard Sell

Involuntary Switching• Customer Moved• Provider Closed

Value PropositionValue Proposition

OthersOthers

Service Failure / RecoveryService Failure / Recovery

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

• Unsafe• Conflict of Interest


Objectives of CRM

• CRM systems act as an enabler, capturing customer information & delivering it to the various touch points.

• From a customer perspective, well implemented CRM system can offer a “unified customer interface”, which means that at each transaction, the relevant account details, knowledge of customer preferences & past transactions, or history of a service problem are at the fingertips of the person serving the customer. This can result in a vast service improvement.

• From a company perspective, CRM systems allow the company to better understand, segment, & tier its customer base; better target promotions & cross-selling.


Common CRM Applications

Data collection

Data analysis

Sales force automation

Marketing automation

Call center automation


Designing a CRM strategy

• Unfortunately, the majority of CRM implementation fail.

• A key reason for this high failure rate is that firms often equate installing CRM system with having a customer relationship strategy.

• They forget that the system is merely a tool to enhance the firm’s customer servicing capabilities & is not the strategy itself.


Customer Relationship Strategies with CRM Systems: Key Questions

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 the 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 resource can we allocate to CRM right now?

If we believe in CRM, why have we not taken steps in that direction before? What can we do today to develop customer relationship without spending on technology?

Managing Relationships & Building Loyalty

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