Chapter 12 Managing Relationships and Building Loyalty Copyright

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 - 2

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 Industrial laundry Year 3 Year 4 Industrial distribution Year 5 Auto servicing 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 - 4

Why Is Customer Loyalty Important to a Firm’s Profitability? § Customers become more profitable the longer they remain with a firm: Ø Increase purchases and/or account balances Ø Reduced operating costs Ø Referrals to other customers Ø Price premiums Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition 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 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. Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 12 - 6

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 - 7

Measuring Customer Equity: Lifetime Value of Each Customer § Acquisition revenues less costs Ø Revenues (application fee + initial purchase) Ø Costs (marketing + credit check + account set up) § Projected annual revenues and costs Ø Revenues (annual fee + sales + service fees + value of referrals) Ø Costs (account management + cost of sales + write-offs) § Value of referrals Ø Percentage of customers influenced by other customers Ø Other marketing activities that drew the firm to an individual’s attention § Net Present Value Ø Sum anticipated annual values (future profits) Ø Suitably discounted each year into the future Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 12 - 8

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: Ø (1) buying all services offered by the firm, Ø (2) using these to the exclusion of any purchases from competitors, Ø (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 - 9

Understanding the Customer-Firm Relationship Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition

Relationship Marketing § Marketing within the context of an active ongoing relationship rather than a one-off relationship Ø Transactional Marketing Ø Database Marketing Ø Interaction Marketing Ø Network Marketing Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 12 - 11

Relationships with Customers (Table 12. 1) Type of Relationship between the Service Organization and Its Customers Nature of Service Delivery Continuous Membership Relationship Cable TV No Formal Relationship Insurance policy Police College enrollment Lighthouse Discrete Transactions Subscriber phone Radio station Pay phone Theatre subscription Movie theatre Warranty repair Copyright © 2008 Pearson Education Canada Public transport Services Marketing, Canadian Edition Chapter 12 - 12

The Wheel of Loyalty (Fig 12. 4) 3. Reduce Churn Drivers Ø Conduct churn diagnostic Ø Address key churn drivers Enabled through: Ø Frontline staff Ø Account managers Ø Membership programs Ø CRM Systems Ø Implement complaint handling and service recovery Ø Increase switching costs Ø Build higher level bonds Copyright © 2008 Pearson Education Canada 1. Build a Foundation for Loyalty Ø Segment the market Ø Be selective in acquisition Ø Use effective tiering of service. Customer Loyalty Ø Deliver quality service. 2. Create Loyalty Bonds Ø Give loyalty rewards Services Marketing, Canadian Edition Ø Deepen the relationship Chapter 12 - 14

Customer Needs and Company Capabilities § Identify and target the right customers Ø How do customer needs relate to operations elements? Ø How well can service personnel meet expectations of different types of customers? Ø 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 - 16

Searching for Value—Not Just Volume § Focus on number of customers served as well as value of each customer Ø Heavy users are more profitable than occasional users Ø 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 Ø 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 - 17

Effective Tiering of Service The Customer Pyramid (Fig 12. 5) Good Relationship Customers Which segment sees high value in our offer, spends more with us over time, costs less to maintain, and spreads positive word-of-mouth? Platinum Gold Iron Lead Poor Relationship Customers Copyright © 2008 Pearson Education Canada Which segment costs us time, effort, and money, yet does not provide return we want? Which segment is difficult to do business with? 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. Services Marketing, Canadian Edition Chapter 12 - 18

The Customer Satisfaction Loyalty Relationship (Fig 12. 6) Apostle Loyalty (Retention) 100 Zone of Affection 80 Near Apostle Zone of Indifference 60 40 Zone of Defection 20 Terrorist 0 1 2 Very Dissatisfied 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 3 4 Neither Satisfied Satisfaction Services Marketing, Canadian Edition 5 Very Satisfied Chapter 12 - 19

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 - 21

Create Customer Bonds by Membership Relationships and Loyalty Programs § How customers perceive reward programs Ø Brand loyalty versus deal loyalty Ø 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 Ø Timing ― Send customers periodic updates on account status and progress towards particular milestones Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 12 - 22

Strategies for Reducing Customer Defections Copyright © 2008 Pearson Education Canada Services Marketing, Canadian

Analyze Customer Defections and Monitor Declining Accounts § Understand reasons for customer switching § Churn diagnostics common in mobile phone industry Ø Analysis of data warehouse information on churned and declining customers Ø Exit interviews Ø Churn Alert Systems Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 12 - 24

What Drives Customers to Switch? (Fig 12. 9) Service Failure/Recovery Value Proposition Core Service Failure • Service Mistakes • Billing Errors • Service Catastrophe Service Encounter Failures • Uncaring • Impolite • Unresponsive • Unknowledgeable Pricing Service Switching • High Price • Price Increases • Unfair Pricing • Deceptive Pricing 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 Ethical Problems • Customer Moved • Provider Closed • Unsafe • Cheat • Hard Sell • Conflict of Interest Source: Adapted from Susan M. Keaveney, “Customer Switching Behavior in Service Industries: An Exploratory Study, ” Journal of Marketing 59 (April 1995), pp. 71– 82. Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 12 - 25

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 - 26

CRM: Customer Relationship Management Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition

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 - 28

An Integrated Framework for CRM Strategy (Fig 12. 10) Copyright © 2008 Pearson Education

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 Ø Viewing CRM as a technology initiative Ø Lack of customer focus Ø Insufficient appreciation of customer lifetime value (CLV) Ø Inadequate support from top management Ø Failure to reengineer business processes Ø Underestimating the challenges in date integration Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 12 - 30

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 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 - 31

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 Ø Assess value of loyal customer Ø 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 Ø Transactional marketing Ø Database marketing Ø Interaction marketing Ø Network marketing Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 12 - 32

Summary of Chapter 12: Managing Customer Relationships and Building Loyalty (2) § Wheel of Loyalty shows how firms can: Ø Build a foundation of loyalty Ø Create loyalty bonds Ø reduce churn drivers § Building a foundation of loyalty involves: Ø Good fit between customer needs and capabilities Ø Searching for value, not just volume Ø Tiering services effectively Ø Obtaining customer satisfaction through service quality Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 12 - 33

Summary of Chapter 12: Managing Customer Relationships and Building Loyalty (3) § Customer loyalty bonds include: Ø Reward-based bonds Ø Social bonds Ø Customization bonds Ø Structural bonds § Bonds can also be created through membership relationships and loyalty programs § Strategies for reducing customer defections include: Ø Analyzing customer defections and monitoring declining accounts Ø Addressing key churn drivers Ø Implementing effective complaint-handling and service recovery procedures Ø Increasing switching costs Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 12 - 34

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 Ø Strategy development process Ø Value creation process Ø Multichannel integration process Ø Performance assessment process § Cresting a successful CRM program requires understanding common failures in CRM implementation and knowing how to get it right Copyright © 2008 Pearson Education Canada Services Marketing, Canadian Edition Chapter 12 - 35