chapter_12 (summer 10)
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7/30/2019 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
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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
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1. The Search for Customer Loyalty
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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
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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.
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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
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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
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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)
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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
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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?
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2. The Wheel of Loyalty*
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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
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2-1: Building a Foundation for Loyalty
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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
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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.
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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.
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2-2: Creating Loyalty Bonds
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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
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Strategies for Developing LoyaltyBonds with Customers (2)
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
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Strategies for Developing LoyaltyBonds with Customers (3)
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
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Strategies for Developing LoyaltyBonds with Customers (4)
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
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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
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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
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2-3: Strategies for ReducingCustomer Defections
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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
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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
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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
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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
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3. CRM: Customer RelationshipManagement
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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
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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
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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.
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Integrated Framework forCRM Strategy Development
Strategy Development
Assessment of business strategy
Business strategy guides development of customer strategy
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d k f
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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
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I d F k f CRM
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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
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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
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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
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