36146425 Lovelock PPT Chapter 12

8/8/2019 36146425 Lovelock PPT Chapter 12

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Chapter 12:

ManagingCustomerRelationships andBuilding Loyalty


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The Search forCustomer Loyalty


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Why Is Customer Loyalty Important to a

Firms Profitability?

Customers become more profitable the longer they remain with afirm:Increase purchases and/or account balances

Customers/families purchase in greater quantities as theygrow

Reduced operating costs Fewer demands from suppliers and operating mistakes as

customer becomes experiencedReferrals to other customers

Positive word-of-mouth saves firm from investing money in

sales and advertisingPrice premiums

Long-term customers willing to pay regular price

Willing to pay higher price during peak periods


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of a Loyal Customer

(1) Must not assume that loyal customers are always more profitable thanthose making one-time transactions Costs

Not all types of services incur heavy promotional expenditures

to attract a new customer

Walk-in traffic more important at times

Revenue

Large customers may expect price discounts in return for

loyalty Revenues dont necessarily increase with time for all types of

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 a higher

impact in early stages

Tasks Determine costs and revenues for customers from different market

segments at different points in their customer lifecycles

Predict future profitability

of a Loyal Customer

(2)

M i C E i


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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 individuals attention

Net Present Value

Sum anticipated annual values (future profits) Suitably discounted each year into the future


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Potential Customer

Value What is current purchasing behavior of customers in each targetsegment? What would be impact on sales and profits if they exhibited ideal

behavior 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?


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Understanding the Customer-Firm Relationship


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Relationship Marketing (1)

Transactional Marketing One transaction or a series of transactions does not necessarily

constitute a relationship

Requires mutual recognition and knowledge a Marketing:

Includes market transaction and information exchange Technology is used to

(1) identify and build database of current and potential

customers

(2) deliver differentiated messages based on customers

characteristics

(3) track each relationship to monitor cost of acquiring that

customer and lifetime value of resulting purchases


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Relationship Marketing (2)

Interaction Marketing:

Face-to-face interaction between customers and suppliers

representatives

Value is added by people and social processes

Increasing use of technologies make maintaining meaningful

relationships with customers a marketing challenge

For example, self-service technology, interactive websites, call

centers

Network Marketing:

Common in b2b context where companies commit resources to

develop positions in network of relationships with stakeholders and

relevant agencies


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Relationships with

Customers (Fig 12.1)

Nature of ServiceDelivery

Membership Relationship No Formal Relationship

Continuous Cable TV

Insurance policy

College enrollment

Radio station

Police

Lighthouse

Discrete Transactions Subscriber phone

Theater subscription

Warranty repair

Pay phone

Movie theatre

Public transport

Type of Relationship between the ServiceOrganization and Its Customers


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THANK YOU


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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

Customer

Loyalty

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

Account

managers

Membership

programs

CRM

Systems


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Building a

Foundation for

Loyalty


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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


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Searching for ValueNot

Just Volume Focus on numberof customers served as well as value of each

customer Heavy users who buy more frequently and in larger volumes 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


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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 Relationship

Customers

Poor Relationship

CustomersSource: 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.

Th C S i f i


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The Customer Satisfaction

Loyalty Relationship (Fig 12.7)

0

20

40

60

80

100

1 2 3 4 5

Loyalty(

Reten

tion)

Very

DissatisfiedDissatisfied Neither Satisfied Very

Satisfied

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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Creating LoyaltyBonds


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Loyalty Bonds with

Customers (1) Deepening the relationship Bundling/cross-selling services makes switching a major effort

that customer is unwilling to undertake unless extremely

dissatisfied with service provider

Customers benefit from consolidating their purchasing of variousservices from the same provider

See Research Insights 12.2: How do customers see relational

benefits?

One-stop-shopping, potentially

higher service levels,

higher service tiers, etc.


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Loyalty Bonds with

Customers (2) Reward-based Bonds

Incentives that offer rewards based on frequency of purchase, valueof purchase, or combination of both

Financial bonds

Discounts on purchases, loyalty program rewards (e.g., frequentflier miles), cash-back programs

Non-financial rewards

Priority to loyalty program members for waitlists and queues incall centers: higher baggage allowances, priority upgrading,access to airport lounges for frequent flyers

Intangible rewards

Special recognition and appreciation, tiered loyalty programs Reward-based loyalty programs are relatively easy to copy and

rarely provide a sustained competitive advantage


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Loyalty Bonds with

Customers (3) Social Bonds Based on personal relationships between providers and

customers Harder to build and imitate and thus, better chance of

retention in the long term

Customization Bonds

Customized service for loyalcustomers

e.g., Starbucks

Customers may find it hard to adjustto another service provider whocannot customize service

Source: PAL Library; Asset ID: AAFHKTO0


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Loyalty Bonds with

Customers (4) Structural Bonds Mostly seen in b2b settings

Stimulate loyalty through structural relationships between provider

and customer

Joint investments in projects and sharing of information,processes and equipment

Can be seen in b2c environment too

AirlinesSMS check-in, SMS e-mail alerts for flight arrival and

departure times

Difficult for competition to draw customers away when they have

integrated their way of doing things with existing supplier


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Membership Relationships and

Loyalty Programs (1) Transform discrete transactions into relationships Discrete transactions: Each usage involves payment to service supplier

by an essentially "anonymous" consumer

Membership cards: Capture transactions, communicate customer

preferences to frontline

Loyalty reward programs increasingly used by all businesses in

response to competition

Frequent fliers programrewards 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

Dont lose sight of broader goals of offering high service quality, nor

allow service to other customers to deteriorate


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Membership Relationships 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 and

progress towards particular milestones


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Strategies for

Reducing

Customer Defections


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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:

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 effortssend voucher, customer service

representative calls customer


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Switch?

(Fig 12.9)

Source: Adapted from Susan M. Keaveney, Customer Switching Behavior in Service Industries: An Exploratory Study, Journal of Marketing59 (April 1995), pp. 7182.

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 commonreason for subscribers discontinuing servicesofferproactive handset replacement programs

Reactive measures

Save teams: Specially trained call center staff to deal

with customers who want to cancel their accounts Be careful about how save teams are rewarded


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Other Ways to Reduce Churn

Implement effective complaint handling and service recoveryprocedures

Increase switching costs

Natural switching costs

For example, changing primary bank accountmanyrelated services tied to account

Can be created by instituting contractual penalties for

switching

Must be careful not to be perceived as holding

customers hostage

High switching barriers and poor service quality likely

to generate negative attitudes and word of mouth


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n egra e ramewor


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Strategy

Development

Process

Value Creation

Process

Multi-Channel

Integration

Process

Performance

Assessment

Process

Information Management Process

n egra e rameworfor CRM Strategy (Fig12.10)

Source: Adapted from: Adrian Payne and Pennie Frow, A Strategic Framework for Customer

Relationship Management, Journal of Marketing69 (October 2005): pp.167176.


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Value Creation Translates business and customer strategies into specific value

propositions for both customers and firm

Customers benefit from priority, tiered services, loyalty rewards, and

customization

Company benefits from reduced customer acquisition and retention

costs, and increased share-of-wallet

Dual creation of value: Customers need to participate in CRM to

reap value from firms CRM initiatives

for CRM Strategy:

Value Creation

CRM


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Multi-Channel Integration

Serve customers well across many

potential interfaces

Offer a unified interface that delivers

customization and personalization

CRM

Strategy: Multi-Channel

Integration


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Performance Assessment Is CRM system creating value for key

stakeholders?

Are marketing and service standard

objectives being achieved?

Is CRM system meeting performance

standards?

CRM Strategy:

Performance Assessment


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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 application packages

CRM Strategy: Information

Management


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ommon ec ves


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ommon ec vesSystems (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 the

context of loyalty and retention programs

Results in increasing the ROI on its marketing expenditure

CRM systems also enable the assessment of the effectiveness ofmarketing 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 thecustomer tier the caller belongs to, and to tailor the service

accordingly

For example, platinum callers get priority in waiting loops

Common Failures in


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Common Failures in

CRM Implementation Service firms often 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

Key Issues in Defining a


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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 havent we

taken more steps in that direction in past?

What can we do today to develop customer relationships without

spending on technology?

ummary o ap er : anag ng


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ummary o ap er : anag ngCustomer 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



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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



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Building Loyalty (3) Customer loyalty bonds include:

Reward-based bonds Social bonds Customization bonds Structural bonds

Bonds can also be created through membership relationships andloyalty programs

Strategies for reducing customer defections include:

Analyzing customer defections and monitoring decliningaccounts

Addressing key churn drivers Implementing effective complaint-handling and service

recovery procedures Increasing switching costs



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ummary o ap er : anag ngCustomer 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

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36146425 Lovelock PPT Chapter 12