Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 12- 1 Chapter 12 Managing Relationships and Building Loyalty
Jan 01, 2016
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 12- 1
Chapter 12
Managing Relationships and Building Loyalty
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 12- 2
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
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 12- 3
The Search for Customer Loyalty
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 12- 4
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.
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 12- 5
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
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 12- 6
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
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 12- 7
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
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 12- 8
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
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 12- 9
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?
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 12- 10
Understanding the Customer-Firm Relationship
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 12- 11
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
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 12- 12
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
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 12- 13
The Wheel of Loyalty
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 12- 14
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
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 12- 15
Building a Foundation for Loyalty
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 12- 16
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
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 12- 17
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
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 12- 18
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.
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 12- 19
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.
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 12- 20
Creating Loyalty Bonds
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 12- 21
Strategies for Developing Loyalty Bonds with Customers
Deepening the relationship
Reward-based Bonds
Social Bonds
Customization Bonds
Structural Bonds
Transform discrete transactions into relationships
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 12- 22
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
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 12- 23
Strategies for Reducing Customer Defections
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 12- 24
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
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 12- 25
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
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 12- 26
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
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 12- 27
CRM: Customer Relationship Management
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 12- 28
Common Objectives of CRM Systems (1)(Service Perspectives 12.3)
Data collection
Data analysis
Sales force automation
Marketing automation
Call centre automation
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 12- 29
An Integrated Framework for CRM Strategy(Fig 12.10)
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 12- 30
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
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 12- 31
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?
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 12- 32
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
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 12- 33
Summary of Chapter 12: Managing Customer 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
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 12- 34
Summary of Chapter 12: Managing Customer 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 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
Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 12- 35
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