Managing Customer Relationships and Building Loyalty

Chapter 12:
Managing Customer Relationships and Building Loyalty
Slide 2007 by Christopher Lovelock and Jochen Wirtz
Services Marketing 6/E
Chapter 12 - 1
Overview of Chapter 12
The Search for Customer Loyalty Understanding the Customer-Firm Relationship The Wheel of Loyalty Building a Foundation for Loyalty Creating Loyalty Bonds Strategies for Reducing Customers Defections CRM: Customer Relationship Management
Chapter 12 - 2
The Search for Customer Loyalty
Chapter 12 - 3
Why Is Customer Loyalty Important to a Firms Profitability?

Customers become more profitable the longer they 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 customer becomes experienced
Referrals to other customers

Positive word-of-mouth saves firm from investing money in sales and advertising
Price premiums
Long-term customers willing to pay regular price Willing to pay higher price during peak periods
Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 - 4
How Much Profit a Customer Generates Over Time (Fig 12.1)

(Year 1=100)
350 300 250 200 150 100 50 0
Year 1
Credit card
Year 2
Year 3
Year 4
Year 5
Auto servicing
Industrial laundry
Industrial distribution
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. 105111. Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 - 5
Why Customers Are More Profitable Over Time (Fig 12.2)

Profit from price premium Profit from references Profit from reduced op. costs Profit from increased usage Base Profit/Loss Loss 1 2 3 4 Year 5 6 7
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. Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 - 6
Assessing the Value of a Loyal Customer (1)

Must not assume that loyal customers are always more profitable than those 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
Chapter 12 - 7
Assessing the Value of a Loyal Customer (2)

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
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 individuals 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 behavior of customers in each target segment? 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?
Chapter 12 - 10
Understanding the Customer-Firm Relationship
Chapter 12 - 11
Relationship Marketing (1)

Transactional Marketing
One transaction or a series of transactions does not necessarily constitute a relationship Requires mutual recognition and knowledge between the parties
Database 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
Chapter 12 - 12
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
Relationships with Customers (Fig 12.1)

Type of Relationship between the Service Organization and Its Customers Nature of Service Delivery Continuous Membership Relationship Cable TV Insurance policy College enrollment Discrete Transactions Subscriber phone Theater subscription Warranty repair
No Formal Relationship Radio station Police Lighthouse Pay phone Movie theatre Public transport
Chapter 12 - 14
The Wheel of Loyalty
Chapter 12 - 15
The Wheel of Loyalty
(Fig 12.4)
3. Reduce Churn Drivers

Conduct churn diagnostic Address key churn drivers
Enabled through: Frontline staff Account managers Membership programs CRM Systems
1. Build a Foundation for Loyalty

Segment the market
Implement complaint handling and service recovery Increase switching costs
Be selective in acquisition Use effective tiering Customer of service. Deliver quality Loyalty service.
Build higher level bonds
2. Create Loyalty Bonds

Give loyalty rewards
Deepen the relationship
Chapter 12 - 16
Building a Foundation for Loyalty
Chapter 12 - 17
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
Chapter 12 - 18
Searching for ValueNot Just Volume

Focus on number of 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

Effective Tiering of Service The Customer Pyramid (Fig 12.5)

Good Relationship Customers Platinum Gold Iron Lead Poor Relationship Customers
Which segment costs us time, effort, and money, yet does not provide return we want? Which segment is difficult to do business with? Which segment sees high value in our offer, spends more with us over time, costs less to maintain, and spreads positive word-of-mouth?
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. Services Marketing 6/E Chapter 12 - 20
The Customer Satisfaction Loyalty Relationship (Fig 12.7)

Apostle
100
Zone of Affection
Loyalty (Retention)
80
Zone of Indifference
60 40 20
Near Apostle
Zone of Defection
Terrorist 0
1 2 3 4 5
Very Dissatisfied Dissatisfied

Source: Adapted from Thomas O. Jones and W. Earl Sasser, Jr., Why Satisfied Customers Defect, Harvard Business Review, November-December 1995, p. 91. Slide 2007 by Christopher Lovelock and Jochen Wirtz
Neither
Satisfied
Satisfaction
Very Satisfied
Chapter 12 - 21
Creating Loyalty Bonds
Chapter 12 - 22
Strategies for Developing 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 various services 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.
Chapter 12 - 23

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 call 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
Chapter 12 - 24

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 loyal customers
e.g., Starbucks
Customers may find it hard to adjust to another service provider who cannot customize service
Source: PAL Library; Asset ID: AAFHKTO0 Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 - 25

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
Chapter 12 - 26
Creating Customer Bonds by 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 low balances, rewards seen as having little value, cumbersome redemption process
Dont lose sight of broader goals of offering high service quality, nor allow service to other customers to deteriorate
Create Customer Bonds by 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
Chapter 12 - 28
Strategies for Reducing Customer Defections
Chapter 12 - 29
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:
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
Chapter 12 - 30
What Drives Customers to Switch? (Fig 12.9)

Service Failure/Recovery
Core Service Failure
Service Mistakes Billing Errors Service Catastrophe
Value Proposition
Pricing
High Price Price Increases Unfair Pricing Deceptive Pricing
Service Encounter Failures

Uncaring Impolite Unresponsive Unknowledgeable
Service Switching
Inconvenience
Location/Hours Wait for Appointment Wait for Service
Response to Service Failure

Negative Response No Response Reluctant Response
Competition
Found Better Service
Others
Involuntary Switching
Customer Moved Provider Closed
Ethical Problems
Unsafe Cheat Hard Sell Conflict of Interest
Services Marketing 6/E Chapter 12 - 31
Source: Adapted from Susan M. Keaveney, Customer Switching Behavior in Service Industries: An Exploratory Study, Journal of Marketing 59 (April 1995), pp. 7182.
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 reason for subscribers discontinuing servicesoffer proactive 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
Chapter 12 - 32
Other Ways to Reduce Churn

Implement effective complaint handling and service recovery procedures Increase switching costs
Natural switching costs
For example, changing primary bank accountmany related 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
Chapter 12 - 33
CRM: Customer Relationship Management
Chapter 12 - 34
Integrated Framework for CRM Strategy (Fig 12.10)
Strategy Development Process
Value Creation Process
Multi-Channel Integration Process
Performance Assessment Process
Information Management Process
Source: Adapted from: Adrian Payne and Pennie Frow, A Strategic Framework for Customer Relationship Management, Journal of Marketing 69 (October 2005): pp.167176. Slide 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 - 35
Integrated Framework for CRM Strategy Development
Strategy Development
Assessment of business strategy Business strategy guides development of customer strategy
Chapter 12 - 36
Integrated Framework for CRM Strategy: Value Creation
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
Chapter 12 - 37
Integrated Framework for CRM Strategy: Multi-Channel Integration
Multi-Channel Integration
Serve customers well across many potential interfaces Offer a unified interface that delivers customization and personalization
Chapter 12 - 38
Integrated Framework for CRM Strategy: Performance Assessment
Performance Assessment
Is CRM system creating value for key stakeholders? Are marketing and service standard objectives being achieved? Is CRM system meeting performance standards?
Chapter 12 - 39
Integrated Framework for CRM Strategy: Information Management
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
Chapter 12 - 40
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 be effectively identified and processed Entire sales cycle from lead generation to close of sales and aftersales service can be tracked and facilitated through CRM system
Chapter 12 - 41
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 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 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 service accordingly
For example, platinum callers get priority in waiting loops
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
Chapter 12 - 43
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-ofwallet 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?
Chapter 12 - 44
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
Chapter 12 - 45
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
Chapter 12 - 46
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
Chapter 12 - 47
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 - 48

Managing Customer Relationships and Building Loyalty

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Chapter 12:

Managing Customer Relationships and Building Loyalty

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

The Search for Customer Loyalty

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Why Is Customer Loyalty Important to a Firms Profitability?

Reduced operating costs

Referrals to other customers

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

Why Customers Are More Profitable Over Time (Fig 12.2)

Assessing the Value of a Loyal Customer (1)

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Assessing the Value of a Loyal Customer (2)

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Measuring Customer Equity: Lifetime Value of Each Customer

Projected annual revenues and costs

Net Present Value

Gap Between Actual and Potential Customer Value

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Understanding the Customer-Firm Relationship

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Relationship Marketing (1)

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Relationship Marketing (2)

Relationships with Customers (Fig 12.1)

Services Marketing 6/E

The Wheel of Loyalty

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

The Wheel of Loyalty

3. Reduce Churn Drivers

1. Build a Foundation for Loyalty

Implement complaint handling and service recovery Increase switching costs

Build higher level bonds

2. Create Loyalty Bonds

Deepen the relationship

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Building a Foundation for Loyalty

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Customer Needs and Company Capabilities

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Searching for ValueNot Just Volume

Different segments offer different value

Effective Tiering of Service The Customer Pyramid (Fig 12.5)

Slide 2007 by Christopher Lovelock and Jochen Wirtz

The Customer Satisfaction Loyalty Relationship (Fig 12.7)

Very Dissatisfied Dissatisfied

Creating Loyalty Bonds

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E