Chapter 11

Building Customer Loyalty through Quality

1

Key Terms• Customer centered• Customer-delivered value• Expected service• Freedom from deficiencies• Functional quality• Product features• Revenue management• Societal (ethical) quality• Technical quality

2

“To understand service quality and make quality management effective, we need profound knowledge

about the details and activities connected with the emergence of a service. This presupposes interest in

service design and service production.”

-Evert Gummesson

3

Chapter Objectives

• Define customer value and customer satisfaction

• Understand the difference between customer satisfaction and customer loyalty

• Discuss attracting new users and retaining current customers by developing relationship marketing

4

Chapter Objectives

• Know tactics for resolving customer complaints and understand the importance of resolving complaints

• Define quality and discuss the importance of the benefits of quality

• Implement capacity and demand management tactics

5

Customer Delivered Value• Customer-delivered value is the difference

between total customer value and total customer cost of a marketing offer

• Customer satisfaction depends on the product’s performance relative to a buyer’s expectations

• Companies must be customer centered and deliver superior value to target customers

6

Customer Delivered Value

7

Customer Satisfaction• Buying decisions based on judgments

formed about the value of marketing offers

• Customer expectations based on past buying experiences

• Today’s most successful companies raising expectations and delivering performance to match

8

What is Loyalty and Why is It Important?What is Loyalty and Why is It Important?

• Loyalty defined:Loyalty defined:– When the customer feels so strongly that you

can best meet his or her relevant needs, your competition is virtually excluded from the considered set, and the customer buys almost exclusively from you — referring to you as “their restaurant” or “their hotel.”

– Winning maximum share of heart, mind and wallet

9

What is Loyalty and Why is It ImportantWhat is Loyalty and Why is It Important?• Relationship marketingRelationship marketing– The process of identifying and creating mutual value for

customers that you share over the relationship’s lifetime– Theodore Levitt’s definition compares the relationship

to a marriage

• Benefits of loyaltyBenefits of loyalty– Financial importance of maintaining and creating new

customers– Loyal customers use word-of-mouth to promote a

product or brand

• Different from traditional marketingDifferent from traditional marketing

10

Customer Satisfaction vs. Customer LoyaltyCustomer Satisfaction vs. Customer Loyalty

• Customer satisfaction measures how well a customer’s expectationsexpectations are met

• Customer loyalty measures how likely customers are to returnreturn and their willingness to perform partner shipping activities for the organization

• Customer satisfaction is a requisiterequisite for loyalty

11

Relationship MarketingRelationship Marketing

• Creating, maintaining, and enhancing strong relationships with customers – BasicBasic

– ReactiveReactive

– AccountableAccountable

– ProactiveProactive

– PartnershipPartnership

12

Benefits of Customer LoyaltyBenefits of Customer Loyalty

• Continued patronagepatronage

• Reduced marketing costscosts

• Decreased price sensitivitysensitivity

• PartnershipPartnership activities

13

Cost of Lost CustomersCost of Lost Customers

• Companies must define and measure retentionretention rate

• Company must identify causes of customer defectiondefection and determine which can be reduced or eliminated

• Reducing customer defections by only 55 percent can result in improved profitsprofits of over 2525 percent

14

Resolving Customer ComplaintsResolving Customer Complaints

• A critical part of customer retention

• 82 % of customers are likely to return if a complaint is handled quickly, as opposed to 9 % if it is not

• Most customers do not complain

15

Building LoyaltyBuilding Loyalty

Evolution of customer loyaltyEvolution of customer loyalty– Sales– Targeted promotions– Frequency promotions– Brand relationships– Knowledge relationships

16

Exhibit: The Evolution of Building LoyaltyExhibit: The Evolution of Building Loyalty

17

Building LoyaltyBuilding Loyalty

Frequent guest programsFrequent guest programs– Not the same as loyalty programs– Any program with guest rewards

that can be redeemed for free or discounted products or services

– Can be one part of a loyalty program

18

Building LoyaltyBuilding Loyalty

• What loyalty What loyalty programs don’t do:programs don’t do:

– Not a “quick fix”– Not a promotion

• What makes loyalty What makes loyalty programs work:programs work:

– Database, communication, meaningful rewards, simplicity, attainability, sustainability, measurability, management, manageability, profitability

19

Customer Complaints and Service RecoveryCustomer Complaints and Service Recovery

• Customer complaintsCustomer complaints– Inevitable, healthy, opportunities, marketing

tools, advertising– TARP research study TARP research study on complaint handling• 50 % of consumers complain to front line staff• 1-5 % of those go to management• Complaint rates vary by type of problem• Twice as many people are told about a bad

experience over a good one• Tip of the iceberg phenomenon

20

Exhibit; Tip of the Iceberg PhenomenoExhibit; Tip of the Iceberg Phenomenon21

Quality

• Quality has emerged as an important area in hospitality

• Product features enhance customer satisfaction and adds to the cost of a product

• Freedom from deficiencies increases customer satisfaction

22

QualityQuality• Technical quality refers to what the

customer is left with after the customer – employee interactions have been completed

• Functional quality is the process of delivering the service or product

• Societal (ethical quality) means firms must consider ethical responsibilities when developing products

23

©2006 Pearson Education, Inc. Marketing for Hospitality and Tourism, 4th editionUpper Saddle River, NJ 07458 Kotler, Bowen, and Makens24

Benefits of Quality Service

• Customer RetentionCustomer Retention• Avoidance of Price CompetitionAvoidance of Price Competition• Retention of Good EmployeesRetention of Good Employees• Reduction of CostsReduction of Costs

25

Managing Capacity

1. Involve the customer in the service delivery system

2. Cross-train employees 3. Use part-time employees 4. Rent or share extra facilities and

equipment

26

Managing CapacityManaging Capacity

5. Schedule downtime during periods of low capacity

6. Extend service hours 7. Use technology 8. Change the Configuration of the

Service

27

Revenue ManagementRevenue Management

• Revenue management is a methodological approach to allocating a perishable and fixed inventory to the most profitable customers

• Began in late 1980’s as yield managementyield management• Prices change under fluctuating demand and

advance bookings• Creates an enormous competitive advantage

28

Revenue Management Revenue Management iis…s…• A systematic approach to matching demand matching demand

for services with an appropriate supply in order to maximize revenues

• Appropriate in hotels Appropriate in hotels – Hotel room is a perishable product– Capacity is fixed and cannot flex to meet

demand– Different market segments have different lead

times to purchase– Hotels have great flexibility in varying their

prices at any given time

29

Revenue Management PracticesRevenue Management Practices

• Set most effective pricing structure• Limit the number of reservations accepted

on any given night or room type based on profit potential

• Negotiate volume discounts with groups• Match market segments with room type

and price needs• Be consistent across channels and

intermediaries

30

YieldYield• The ratio between actual sales and

potential sales forecasted over a given period of time

• Have to have realistic potential sales forecasting

– Hotels must be able to forecast demand for each room category from each of its market segments, for any date in the future

– Customer purchase behavior must be well understood

31

Managing Demand

1. Use price to create or reduce demand 2. Use reservations 3. Overbook 4. Use queuing5. Shift demand 6. Change the salesperson’s assignment 7. Create promotional events

32

The Five-Gap Model of Service Quality

33

Close Gap 1Close Gap 1

1. Talking to customers2. Talking to customer contact employees3. Marketing information systems – customer

surveys – analysis by segment – focus groups4. Reducing levels of management

34

Close Gap 2Close Gap 2

1. Management Commitment – resources, internal marketing, reward systems

2. Use of hard and soft technology3. Shift demand4. Is meeting customer expectations financially

feasible?

35

Close Gap 3Close Gap 3

1. Training2. Internal marketing, pride3. Teamwork4. Reward systems5. Service quality audits

36

Close Gap 4Close Gap 4

1. Know the capabilities of the firm2. Good communications within the

firm3. Internal marketing – teamwork

37

Customer Complaints and Service RecoveryCustomer Complaints and Service Recovery

• What to do about it?What to do about it?– This is marketing’s task– Make it easy for customers to

complain– Make it known where and how to

complain– Do something about the complaint if

it is reasonable

38

Customer Complaints and Service RecoveryCustomer Complaints and Service Recovery

• Effective complaint handling, from A Complaint is a Gift:– Say “thank you”– Explain why you appreciate the complaint– Apologize for the mistake– Promise to do something about it immediately– Ask for necessary information– Correct the mistake– Check customer satisfaction– Prevent future mistakes

39

40

Employee Relationship Marketing or Internal Employee Relationship Marketing or Internal MarketingMarketing

DefinitionDefinition– Apply marketing principles to those who

serve the customer (directly or indirectly) (directly or indirectly) and build a mutual bond of trust with them

– To create a customer, must create employee value

– Lower employee turnover relates to higher profits

41

Employee Relationship Marketing or Internal MarketingEmployee Relationship Marketing or Internal Marketing

• Noncontact employees–All employees are part of the marketing

effort

• Employees need to understand how their job and actions effect the customer

• Employees need to be kept up to date on important information

• Success ultimately lies with management

42

Class DiscussionClass Discussion

• Name two products or services to which you consider yourself extremely loyal.

• What has produced that loyalty?• How frequently do you buy this product

or service?• What do you tell your friends about this

product or service?• What do you tell your family?

43

End of End of chapter slideschapter slides

44