Chapter 14

2. Chapter 14 Relationship marketing

3. Lecture objectives • Understand the differences between a relationship marketing strategy and a transactional marketing strategy • Identify the components of a relationship marketing strategy • Evaluate the concept of attitudinal and behavioural loyalty in the context of hospitality • Analyse the role of a frequent guest program in branded hotel chains

4. Introduction • Traditional approach to marketing is acquisition of new customers, often described as transactional marketing • Once customer bought product/service, there is no strategic effort to develop relationship further; transaction complete from both the customer’s and the company’s perspective • Concept of relationship marketing (RM or CRM) looks at customers as a business asset that should be nurtured • Recognizes some customers have potential to generate significant value for companies over a period of time • Focus of RM is to create and maintain customer relationships over the long-term

5. What is relationship marketing? Relationship marketing is both a business philosophy, which stresses the importance of customer retention, and a marketing strategy with actions Grönroos (1994) defines relationship marketing as: to identify and establish, maintain and enhance, and where necessary, terminate relationships with customers and other stakeholders, at a profit so that the objectives of all parties involved are met; and this is done by mutual exchange and fulfilment of promises • Relationship marketing recognizes customers who make repeat purchases have high lifetime value (LTV) • LTV is the present-day value of all historic and future profit margins earned from sales to a particular customer or segment • Building close relationships with key customers is mutually rewarding for company and customer • RM strategy targeted at selected hospitality customers

6. Economics of customer retention Hospitality companies lose customers each year • Customers move through the family life cycle, changing employment, home, lifestyle and consumption habits • Corporate customers/intermediaries go through similar changes, with growth, mergers, takeovers, relocation, downsizing and demise • Competitors lure customers away with new-product initiatives, price incentives • Hospitality companies have relatively high customer defection rates (customer churn) Although companies needtoattract new customers to replace lost ones, customer retention is critical • Companies want to build relationships with customers for economic reasons • Companies generate better profits when they manage their customer base in order to identify, satisfy and retain profitable customers • Improving customer retention rates has the effect of increasing the size of the customer base • Research suggests increasing customer retention by 5% increases profits between 35% to 95% – e.g. marketing costs are reduced and repeat customers generate more revenue

7. Characteristics of relationship marketing Hospitality companies implementing relationship marketing strategies successfully need: • strong service culture • commitment to internal marketing • effective segmentation strategy • interactive relational database in all properties • trust from their customers • customer recognition and reward strategies

8. Figure 14.1 Marketing strategies for frequent LTV customers

9. Behavioural loyalty There is a distinction between a frequent customer and a loyal customer Frequency is not an indicator of loyalty: • a frequent business traveller might have to stay at hotel because of company expenses policy • some customers may regularly patronize the establishment because there are no competitors in the area This type of loyalty is described as behavioural loyalty, because it is based on frequent behaviour

10. Attitudinal loyalty • Loyal customers are true, faithful and constant • Loyal customers are completely satisfied with the marketing offer, emotionally committed and do not seriously consider competitor alternatives • This type of loyalty is described as attitudinal loyalty because of the strong preference the customer has built towards the brand or unit • Hospitality businesses want customers who have attitudinal loyalty and be frequent guests • Evidence suggests that totally satisfied customers are six times more likely to repurchase (Reichheld, 1993) • Loyal customers will often take ownership of the relationship and refer to the brand in first person terms (e.g., loyal pub customers often describe their bar as ‘my local’), and tune in brand’s marketing communication messages

11. Figure 14.2 The relationship marketing ladder of loyalty

12. Frequent and loyalty guest programs • Already explained crucial difference between frequency and loyalty • Distinction applies to frequent guest program (FGP) and loyalty guest program (LGP) • FGP adopts transactional approach to marketing and builds sales by offering rewards from a wide range of services (hotels, travel, retail, etc.) • LGP adopts relational approach and encourages regular customers to join a club, receive recognition as a privileged guest and get rewards via added benefits during the stay at the hotel • But FGP and LGP are virtually interchangeable and hospitality companies use the term FGP to apply to any loyalty program

13. Hospitality FGP/LGP • All major hospitality brands offer a guest program to reward regular customers • These customers are aware of their importance to hotels • The programs provide different levels of membership, determined according to the number of nights a customer stays in the hotels • Higher number of stays, the more generous the benefits • Hilton’s Honours program more transactional (FGP) • Shangri-La’s Golden Circle more relational (LGP)

14. Conclusion • Hospitality companies can develop meaningful relationships with customers to gain competitive advantage • Relationship marketing strategy not appropriate for all branded hospitality organizations • Companies developing a relationship marketing strategy must develop: • strong service culture that delivers high customer satisfaction • effective service recovery strategies • relevant recognition and reward policies to create customer trust, commitment and loyalty

15. References • Barsky, J. and Nash, L. (2002). ‘Evoking emotion: affective keys to hotel loyalty’. Cornell Hotel and Restaurant Administration Quarterly, 43, pp. 39–46. • Buttle, F. (1995). Relationship Marketing: Theory and Practice. Paul Chapman. • Dick, A. S. and Basu, K. (1994). ‘Customer loyalty towards an integrated framework’. Journal of Academic Marketing Science, 22, pp. 99–113. • Grönroos, C. (1994). ‘From marketing mix to relationship marketing: towards a paradigm shift in marketing’. Management Decision, 32, pp. 4–20. • Heskett, J. L., Jones, T. O., Loveman, G. W., Sasser, W. E., Jr. and Schlesinger, L. A. (1994). ‘Putting the service profit chain to work’. Harvard Business Review, 72, pp. 164–170. • Jang, D. andMattila, A. S. (2005). ‘An examination of restaurant loyalty programs: what kinds of rewards do customers prefer?’ International Journal of Contemporary Hospitality Management, 17, pp. 402–408. • Lewis, R. C. and Chambers, R. E. (2000). Marketing Leadership in Hospitality, Foundations and Practice. John Wiley. • Osman, H., Hemmington, N. and Bowie, D. (2009). ‘A transactional approach to customer loyalty in the hotel industry’. International Journal of Contemporary Hospitality Management, 21, pp. 239–250. • Peck, H., Payne, A., Christopher, M. and Clark, M. (1999). Relationship Marketing for Competitive Advantage: Winning and Keeping Customers. Butterworth-Heinemann. • Reichheld, F. (1993). ‘Loyalty based management’. Harvard Business Review, 71, pp. 64–73. • Shankar, V., Smith, A. K. and Rangaswamy, A. (2003). ‘Customer satisfaction and loyalty in online and offline environments’. International Journal of Research in Marketing, 20, pp. 153–175.