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Chapter 12:
ManagingCustomerRelationships andBuilding Loyalty
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The Search forCustomer Loyalty
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Why Is Customer Loyalty Important to a
Firms Profitability?
Customers become more profitable the longer they remain with afirm:Increase purchases and/or account balances
Customers/families purchase in greater quantities as theygrow
Reduced operating costs Fewer demands from suppliers and operating mistakes as
customer becomes experiencedReferrals to other customers
Positive word-of-mouth saves firm from investing money in
sales and advertisingPrice premiums
Long-term customers willing to pay regular price
Willing to pay higher price during peak periods
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of a Loyal Customer
(1) Must not assume that loyal customers are always more profitable thanthose 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 dont necessarily increase with time for all types of
customers
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Profit impact of a customer varies according to stage of service in
product life cycle
For example referrals and negative word-of-mouth have a higher
impact in early stages
Tasks Determine costs and revenues for customers from different market
segments at different points in their customer lifecycles
Predict future profitability
of a Loyal Customer
(2)
M i C E i
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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 individuals attention
Net Present Value
Sum anticipated annual values (future profits) Suitably discounted each year into the future
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Potential Customer
Value What is current purchasing behavior of customers in each targetsegment? What would be impact on sales and profits if they exhibited ideal
behavior 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?
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Understanding the Customer-Firm Relationship
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Relationship Marketing (1)
Transactional Marketing One transaction or a series of transactions does not necessarily
constitute a relationship
Requires mutual recognition and knowledge a 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
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Relationship Marketing (2)
Interaction Marketing:
Face-to-face interaction between customers and suppliers
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
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Relationships with
Customers (Fig 12.1)
Nature of ServiceDelivery
Membership Relationship No Formal Relationship
Continuous Cable TV
Insurance policy
College enrollment
Radio station
Police
Lighthouse
Discrete Transactions Subscriber phone
Theater subscription
Warranty repair
Pay phone
Movie theatre
Public transport
Type of Relationship between the ServiceOrganization and Its Customers
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THANK YOU
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The Wheel of Loyalty
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The Wheel of Loyalty (Fig 12.4)
1. Build aFoundationfor Loyalty
2. Create LoyaltyBonds
3. ReduceChurn Drivers
Customer
Loyalty
Be selective in acquisition
Conduct churn diagnosticSegment the market
Use effective tieringof service.
Deliver qualityservice.
Deepen therelationship
Give loyaltyrewards
Build higherlevel bonds
Implement complainthandling and servicerecovery
Address key churn drivers
Increase switchingcosts
Enabled through:Frontline staff
Account
managers
Membership
programs
CRM
Systems
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Building a
Foundation for
Loyalty
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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
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Searching for ValueNot
Just Volume Focus on numberof 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
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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
CustomersSource: 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.
Th C S i f i
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The Customer Satisfaction
Loyalty Relationship (Fig 12.7)
0
20
40
60
80
100
1 2 3 4 5
Loyalty(
Reten
tion)
Very
DissatisfiedDissatisfied Neither Satisfied Very
Satisfied
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.
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Creating LoyaltyBonds
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Loyalty Bonds with
Customers (1) Deepening the relationship Bundling/cross-selling services makes switching a major effort
that customer is unwilling to undertake unless extremely
dissatisfied with service provider
Customers benefit from consolidating their purchasing of variousservices from the same provider
See Research Insights 12.2: How do customers see relational
benefits?
One-stop-shopping, potentially
higher service levels,
higher service tiers, etc.
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Loyalty Bonds with
Customers (2) Reward-based Bonds
Incentives that offer rewards based on frequency of purchase, valueof purchase, or combination of both
Financial bonds
Discounts on purchases, loyalty program rewards (e.g., frequentflier miles), cash-back programs
Non-financial rewards
Priority to loyalty program members for waitlists and queues incall centers: higher baggage allowances, priority upgrading,access to airport lounges for frequent flyers
Intangible rewards
Special recognition and appreciation, tiered loyalty programs Reward-based loyalty programs are relatively easy to copy and
rarely provide a sustained competitive advantage
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Loyalty Bonds with
Customers (3) Social Bonds Based on personal relationships between providers and
customers Harder to build and imitate and thus, better chance of
retention in the long term
Customization Bonds
Customized service for loyalcustomers
e.g., Starbucks
Customers may find it hard to adjustto another service provider whocannot customize service
Source: PAL Library; Asset ID: AAFHKTO0
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Loyalty Bonds with
Customers (4) Structural Bonds Mostly seen in b2b settings
Stimulate loyalty through structural relationships between provider
and customer
Joint investments in projects and sharing of information,processes and equipment
Can be seen in b2c environment too
AirlinesSMS check-in, SMS e-mail alerts for flight arrival and
departure times
Difficult for competition to draw customers away when they have
integrated their way of doing things with existing supplier
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Membership Relationships and
Loyalty Programs (1) Transform discrete transactions into relationships Discrete transactions: Each usage involves payment to service supplier
by an essentially "anonymous" consumer
Membership cards: Capture transactions, communicate customer
preferences to frontline
Loyalty reward programs increasingly used by all businesses in
response to competition
Frequent fliers programrewards dominated in miles
Customers may get frustrated with reward programs
For example: Feel excluded from rewards program because of lowbalances, rewards seen as having little value, cumbersomeredemption process
Dont lose sight of broader goals of offering high service quality, nor
allow service to other customers to deteriorate
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Membership Relationships and
Loyalty Programs (2) 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
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Strategies for
Reducing
Customer Defections
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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:
Ask a short set of questions when customer cancels account;
in-depth interviews of former customers by third party agency
Churn Alert Systems:
Monitor activity in individual customer accounts to predict
impending customer switching Proactive detention effortssend voucher, customer service
representative calls customer
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Switch?
(Fig 12.9)
Source: Adapted from Susan M. Keaveney, Customer Switching Behavior in Service Industries: An Exploratory Study, Journal of Marketing59 (April 1995), pp. 7182.
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
Service
Switching
Involuntary Switching Customer Moved Provider Closed
Ethical Problems Cheat Hard Sell
Unsafe Conflict of Interest
Others
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Addressing Key Churn Drivers
Delivery quality
Minimize inconvenience and nonmonetary costs
Fair and transparent pricing
Industry specific drivers
Cellular phone industry: Handset replacement a commonreason for subscribers discontinuing servicesofferproactive handset replacement programs
Reactive measures
Save teams: Specially trained call center staff to deal
with customers who want to cancel their accounts Be careful about how save teams are rewarded
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Other Ways to Reduce Churn
Implement effective complaint handling and service recoveryprocedures
Increase switching costs
Natural switching costs
For example, changing primary bank accountmanyrelated services tied to account
Can be created by instituting contractual penalties for
switching
Must be careful not to be perceived as holding
customers hostage
High switching barriers and poor service quality likely
to generate negative attitudes and word of mouth
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n egra e ramewor
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Strategy
Development
Process
Value Creation
Process
Multi-Channel
Integration
Process
Performance
Assessment
Process
Information Management Process
n egra e rameworfor CRM Strategy (Fig12.10)
Source: Adapted from: Adrian Payne and Pennie Frow, A Strategic Framework for Customer
Relationship Management, Journal of Marketing69 (October 2005): pp.167176.
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Value Creation Translates business and customer strategies into specific value
propositions for both customers and firm
Customers benefit from priority, tiered services, loyalty rewards, and
customization
Company benefits from reduced customer acquisition and retention
costs, and increased share-of-wallet
Dual creation of value: Customers need to participate in CRM to
reap value from firms CRM initiatives
for CRM Strategy:
Value Creation
CRM
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Multi-Channel Integration
Serve customers well across many
potential interfaces
Offer a unified interface that delivers
customization and personalization
CRM
Strategy: Multi-Channel
Integration
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Performance Assessment Is CRM system creating value for key
stakeholders?
Are marketing and service standard
objectives being achieved?
Is CRM system meeting performance
standards?
CRM Strategy:
Performance Assessment
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Information Management
Collect customer information from all channels
Integrate it with other relevant information
Make useful information available to the frontline
Create and manage data repository, IT systems, analytical
tools, specific application packages
CRM Strategy: Information
Management
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ommon ec ves
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ommon ec vesSystems (2)(Service Perspectives 12.3)
Marketing automation
Mining of customer data enables the firm to target its market
Goal to achieve one-to-one marketing and cost savings, often in the
context of loyalty and retention programs
Results in increasing the ROI on its marketing expenditure
CRM systems also enable the assessment of the effectiveness ofmarketing campaigns through the analysis of responses
Call center automation
Call center staff have customer information at their fingertips and can
improve their service levels to all customers
Caller ID and account numbers allow call centers to identify thecustomer tier the caller belongs to, and to tailor the service
accordingly
For example, platinum callers get priority in waiting loops
Common Failures in
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Common Failures in
CRM Implementation Service firms often 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
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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 havent we
taken more steps in that direction in past?
What can we do today to develop customer relationships without
spending on technology?
ummary o ap er : anag ng
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ummary o ap er : anag ngCustomer 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
ummary o ap er : anag ng
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ummary o ap er : anag ngCustomer Relationships and
Building Loyalty (2) 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
ummary o ap er : anag ng
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ummary o ap er : anag ngCustomer Relationships and
Building Loyalty (3) Customer loyalty bonds include:
Reward-based bonds Social bonds Customization bonds Structural bonds
Bonds can also be created through membership relationships andloyalty programs
Strategies for reducing customer defections include:
Analyzing customer defections and monitoring decliningaccounts
Addressing key churn drivers Implementing effective complaint-handling and service
recovery procedures Increasing switching costs
ummary o ap er : anag ng
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ummary o ap er : anag ngCustomer 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