Chapter_12 (Summer 10)

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Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 - 1

Chapter 12:

Managing CustomerRelationships andBuilding Loyalty




Overview of Chapter 12

1. The Search for Customer Loyalty

2. The Wheel of Loyalty*

1. Building a Foundation for Loyalty2. Creating Loyalty Bonds

3. Strategies for Reducing Customers Defections

3. CRM: Customer Relationship Management




1. The Search for Customer Loyalty




Why Is Customer Loyalty Important toa Firm’s Profitability?

Customers become more profitable the longerthey 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 customerbecomes experienced

Referrals to other customers

― Positive word-of-mouth saves firm from investing money in salesand advertising

Price premiums

― Long-term customers willing to pay regular price

― Willing to pay higher price during peak periods




How Much Profit a CustomerGenerates 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 Ser vices,” Harvard Business Review 68 (Sep.-Oct. 1990), pp. 105 –111.




Why Customers Are More ProfitableOver Time (Fig 12.2)

1 2 3 4 5 6 7

Year

Profit from price

premium

Profit from references

Profit from reduced op. costs

Profit from increasedusage

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


http://slidepdf.com/reader/full/chapter12-summer-10 7/40Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 - 7

Assessing the Value of aLoyal Customer (1)

Caveat: Must not assume that loyal customers arealways more profitable than those making one-timetransactions

Costs

― Not all types of services incur heavy promotionalexpenditures to attract a new customer

― Walk-in traffic more important at times

Revenue

― Large customers may expect price discounts in return forloyalty*

― Revenues don’t necessarily increase with time for all typesof customers



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

For example referrals and negative word-of-mouth have ahigher impact in early stages

Tasks for You

Determine costs and revenues for customers fromdifferent market segments at different points in their

customer lifecyclesPredict future profitability

Assessing the Value of aLoyal Customer (2)



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’sattention

Net Present Value

Sum anticipated annual values (future profits)

Suitably discounted each year into the future



Gap Between Actual andPotential Customer Value

What is current purchasing behavior of customers ineach target segment?

What would be impact on sales and profits if theyexhibited ideal behavior profile of:

(1) buying all services offered by the firm,

(2) using these to the exclusion of any purchases fromcompetitors,

(3) paying full price? How long, on average, do customers remain with firm?

What impact would it have if they remained customersfor life?



2. The Wheel of Loyalty*



The Wheel of Loyalty (Fig 12.4)

1. Build aFoundationfor Loyalty

2. Create LoyaltyBonds

3. ReduceChurn Drivers

CustomerLoyalty

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

Accountmanagers

Membershipprograms

CRM

Systems



2-1: Building a Foundation for Loyalty





Searching for Value—Not JustVolume

Focus on number of customers served as well as value of each customer

Heavy users who buy more frequently and in largervolumes are more profitable than occasional users

Avoid targeting customers who buy based on lowestprice

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

• “Right customers” are not always high spenders

Can come from a large group of people that no othersupplier 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 RelationshipCustomers

Poor RelationshipCustomers

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 SatisfactionLoyalty Relationship (Fig 12.7)

0

20

40

60

80

100

1 2 3 4 5

L o y a l t y (

R e t e n t i o 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.



2-2: Creating Loyalty Bonds



Strategies for Developing LoyaltyBonds with Customers (1)

Deepening the relationship

Bundling/cross-selling services makes

switching a major effort

Customers benefit from consolidating

their purchasing of various services

Ex) 2 X 2 matrix




Reward-based Bonds Incentives that offer rewards based on frequency of purchase, value

of purchase, or combination of both

Financial bonds

― Discounts on purchases, loyalty program rewards (e.g., frequent

flier miles), cash-back programs Non-financial rewards

― Priority to loyalty program members for waitlists and queues in callcenters: higher baggage allowances, priority upgrading, access toairport lounges for frequent flyers

Intangible rewards― Special recognition and appreciation, tiered loyalty programs

Reward-based loyalty programs are relatively easy to copy andrarely provide a sustained competitive advantage




Social Bonds Based on personal relationships between providers and customers

Harder to build and imitate and thus, better chance of retention inthe long term

Customization Bonds

Customized service forloyal customers

― e.g., Starbucks

Customers may find ithard to adjust to anotherservice provider whocannot customize service

Source: PAL Library; Asset ID: AAFHKTO0





Structural Bonds

Mostly seen in b2b settings

loyalty through structural relationships between provider andcustomer

― Joint investments in projects and sharing of information, processesand equipment

Can be seen in b2c environment too

― Airlines—SMS check-in, SMS e-mail alerts for flight arrival anddeparture times

Difficult for competition to draw customers away when they haveintegrated their way of doing things with existing supplier




Creating Customer Bonds by MembershipRelationships and Loyalty Programs (1)

Transform discrete transactions into relationships

Membership cards: Capture transactions, communicate customerpreferences to frontline

Loyalty reward programs increasingly used by all businesses inresponse to competition

― Frequent fliers program—rewards 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

Don’t lose sight of broader goals of offering high service quality, norallow service to other customers to deteriorate




Create Customer Bonds by MembershipRelationships 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 andprogress towards particular milestones




2-3: Strategies for ReducingCustomer Defections




Analyze Customer Defections andMonitor Declining Accounts

Understand reasons for customer switching

Churn diagnostics common in mobile phone industry

Analysis of data warehouse information on churned and decliningcustomers

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 efforts—send voucher, customer service

representative calls customer




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

Service

Switching

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

Cellular phone industry: Handset replacement a common reasonfor subscribers discontinuing services—offer proactive handsetreplacement programs

Reactive measures

Save teams: Specially trained call center staff to dealwith customers who want to cancel their accounts




Other Ways to Reduce Churn

Implement effective complaint handling andservice recovery procedures

Increase switching costs*

Natural switching costs

― For example, changing primary bank account—manyrelated services tied to account

Can be created by instituting contractual penalties forswitching

― Must be careful not to be perceived as holding customershostage

― High switching barriers and poor service quality likely togenerate negative attitudes and word of mouth




3. CRM: Customer RelationshipManagement




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

Data collection

Customer data such as contact details, demographics,purchasing history, service preferences, and the like

Data analysis

Data captured is analyzed and categorized Used to tier customer base and tailor service delivery

accordingly.

Sales force automation

Sales leads, cross-sell, and up-sell opportunities can beeffectively identified and processed

Entire sales cycle from lead generation to close of sales andafter- sales service can be tracked and facilitated through CRMsystem




Common Objectives Of CRM Systems (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 thecontext of loyalty and retention programs

Results in increasing the ROI on its marketing expenditure

CRM systems also enable the assessment of the effectiveness of marketing 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 the

customer tier the caller belongs to, and to tailor the serviceaccordingly

― For example, platinum callers get priority in waiting loops




StrategyDevelopment

Process

Value Creation

Process

Multi-ChannelIntegration

Process

PerformanceAssessment

Process

Information Management Process

Integrated Framework forCRM Strategy (Fig 12.10)

Source: Adapted from: Adrian Payne and Pennie Frow, “A Strategic Framework for Customer

Relationship Management,” Journal of Marketing 69 (October 2005): pp.167 –176.




Integrated Framework forCRM Strategy Development

Strategy Development

Assessment of business strategy

Business strategy guides development of customer strategy



d k f




Multi-Channel Integration

Value Delivery*

Serve customers well across manypotential interfaces

Offer a unified interface that deliverscustomization and personalization

Integrated Framework for CRMStrategy: Multi-Channel Integration



I d F k f CRM




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 applicationpackages

Integrated Framework for CRMStrategy: Information Management

K I i D fi i




Key Issues in Defining aCustomer Relationship Strategy

How should our value proposition change toincrease customer loyalty?*

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

What is incremental profit potential of increasingshare-of-wallet with current customers?*

How much time and resources can we allocate toCRM right now?

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

C F il i



Common Failures inCRM Implementation

Service firms often equate installing CRM systems withhaving 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

Chapter_12 (Summer 10)

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