Chapter 12 Managing Relationships and Building Loyalty

1. Chapter 12 Managing Relationships and Building Loyalty

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

3. The Search for Customer Loyalty

4. (Year 1=100) 350 – 300 250 200 150 100 50 0 Year 1 Year 2 Year 3 Year 4 Year 5 Credit card Industrial laundry Industrial distribution Auto servicing How Much Profit a Customer Generates Over Time (Fig 12.1) 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.

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 balances • Reduced operating costs • Referrals to other customers • Price premiums

6. 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 5 6 7 Year 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.

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

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

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?

10. Understanding the Customer-Firm Relationship

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

12. Relationships with Customers (Table 12.1) Type of Relationship between the Service Organization and Its Customers

13. The Wheel of Loyalty

14. Enabled through: • Frontline staff • Account managers • Membership programs • CRM Systems The Wheel of Loyalty (Fig 12.4) 1. Build a Foundation for Loyalty 3. Reduce Churn Drivers • Conduct churn diagnostic • Segment the market • Address key churn drivers • Be selective in acquisition • Implement complaint handling and service recovery • Use effective tiering of service. Customer Loyalty • Deliver quality service. • Increase switching costs 2. Create Loyalty Bonds • Build higher level bonds • Deepen the relationship • Give loyalty rewards

15. Building a Foundation for Loyalty

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

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

18. Platinum Gold Iron Lead 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? Which segment costs us time, effort, and money, yet does not provide return we want? Which segment is difficult to do business with? 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.

19. Apostle 100 Zone of Affection 80 Near Apostle Zone of Indifference 60 Loyalty (Retention) 40 Zone of Defection 20 Terrorist 0 1 2 3 4 5 Very Satisfied Very Dissatisfied Neither Satisfied Dissatisfied Satisfaction The Customer Satisfaction Loyalty Relationship (Fig 12.6) 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.

20. Creating Loyalty Bonds

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

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

23. Strategies for Reducing Customer Defections

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

25. Service Failure/Recovery Value Proposition • Core Service Failure • Service Mistakes • Billing Errors • Service Catastrophe • Pricing • High Price • Price Increases • Unfair Pricing • Deceptive Pricing Service Switching • Service Encounter Failures • Uncaring • Impolite • Unresponsive • Unknowledgeable • Inconvenience • Location/Hours • Wait for Appointment • Wait for Service • Response to Service Failure • Negative Response • No Response • Reluctant Response • Competition • Found Better Service • Ethical Problems • Cheat • Hard Sell Others • Involuntary Switching • Customer Moved • Provider Closed • Unsafe • Conflict of Interest 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.

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

27. CRM: Customer Relationship Management

28. Common Objectives of CRM Systems (1)(Service Perspectives 12.3) • Data collection • Data analysis • Sales force automation • Marketing automation • Call centre automation

29. An Integrated Framework for CRM Strategy(Fig 12.10)

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

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?

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

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

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

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