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Managing Relationships and Building Loyalty

Slide ©2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

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The search for customer loyalty

It is described as a customer’s willingness to continue patronizing a firm over the long term, purchasing & using its goods & services on a repeated & preferably exclusive basis, & recommending the firm’s products to friends & associates.

Slide ©2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

12 - 2

shopping for discounts Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 .What Makes Loyal Customers More Profitable?  Tend to spend more as relationship develops  customer’s balances may grow  may consolidate purchases to one supplier  Cost less to serve  less need for information and assistance  make fewer mistakes  Recommend new customers to firm (act as unpaid sales people)  Trust leads to willingness to pay regular prices vs.3 .

4 .Analyzing Why Customers Are More Profitable over Time Profit from price premium Profit from references Profit from reduced op. costs Profit from increased usage Base Profit 1 2 3 4 5 6 7 Source: Reichheld and Sasser Year Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 .

Roderick Brodie.5 . 4 distinct types of marketing: 1. which requires mutual recognition & knowledge between the parties. Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 . no meaningful marketing relationship can be said to exist.Transactional marketing: A transaction is an event during which an exchange of value takes place between two parties. & Hugh Munro suggests that there are. with no long-term record kept of a customer’s purchasing history & little or no mutual recognition between the customer & employees. But even a series of transactions does not necessarily constitute a relationship.Understanding the customer/firm relationship • Research by Nichole Coviello. When each transaction between a customer & a supplier is essentially discrete & anonymous.

to form a relationship with targeted customers & retain their patronage over time.Cont…………….Deliver preference differentiated messages based on consumer’s characteristics & c. • However. Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 .. • Technology is used to : a.Identify & build a database of current & potential customers b. with communication being driven & managed by the seller. the nature of these relationships is often not a close one.Track each relationship to monitor the cost of acquiring the customer & the life-time value of the resulting purchases. 2.6 . Marketers rely on information technology. usually in the form of a database. Data base marketing: The focus is on the market transaction but also includes information exchange.

trade associations. • The concept is also relevant in consumer marketing environment.Cont……………. agencies. 3. value is added by people & social processes. consultants. Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 . • Although service remains important. Interactions may include negotiations & sharing of insights in both directions. suppliers.7 . Interaction marketing: A closer relationship exists when there is face-toface interaction between customers & representatives of the supplier. distributors. • Both the firm & the customer are prepared to invest resources to develop a mutually beneficial relationship. the media. where firms commit resources to develop positions in a network of relationships with customers. This invest may include time spent sharing & recording information. 4. govt. Network marketing: This type of marketing occurs primarily in a business-to-business context.

Knowing the identities & addresses of current customers enables the organization to make effective use of direct mail. telephone selling. Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 . The advantage to the service organization of having membership relationships is that it knows who is its current customers & what use they make of the services offered.all highly targeted methods of marketing communication. This information can be valuable for segmentation purposes if good records are kept & the data are readily accessible for analysis.8 .Creating “Membership” relationships • It is a formalized relationship between the firm & an identifiable customer. • • • • Services involving discrete transactions can be transformed into membership relationships either by selling the service in bulk or by offering extra benefits to customers who choose to register with the firm. may offer special benefits to both parties.

9 .Types of Relationships with Customers Type of Relationship--Firm and Customer Nature of Service Delivery Continuous “Membership” Cable TV Insurance College enrollment Subscriber phone Theater subscription Warranty repair No formal relationship Radio station Police Lighthouse Pay phone Movie theater Public transport Discrete transactions Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 .

how services used quantity/value of purchases frequency of use profitability of relationship sensitivity to marketing variables User behavior      Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 . where.Identifying and Selecting Target Segments User characteristics     demographics psychographics geographic location benefits sought when.10 .

the time when service is available. companies need to be selective about the segments they target.Targeting the right customers 1. 12 . Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E the expectations of specific types of customers . the firm’s capacity to serve many customers simultaneously. Good relationships start with a good fit: • If they want to build successful customer relationships. managers need to ask themselves whether their company can match or exceed competing services that are directed at the same types of customers. Managers must think carefully about how customer needs relate to such operational elements as speed & quality. • Matching customers to the firm’s capabilities is vital. in terms of both personal style & technical competence. • Managers also need to consider how well their service personnel can meet • Finally.11 .

Service customers who buy based strictly on lower price are not good target customers for relationship marketing at the first place. • Marketers also need to recognize that some customers simply are not worth serving because they are too difficult to please or unable to decide what they want. Searching for value.Cont……………. These deal-prone customers continually seek the lowest price offer. 2. • Acquiring the right customers can bring in long-term revenues. • Attracting the wrong customers typically results in costly churn. • Marketers shouldn’t assume that the “right customers” are always high spenders.without giving sufficient attention to the value of each customer. Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 .12 .an important issue for operations & human resource planning. not just numbers: • • Too many service firms still focus on the number of customers they serve. continued growth from referrals. & enhanced satisfaction.

but others may have greater potential for long-term growth. Different segments offer different value for a service firm.Cont……………. some types of customers may be more profitable than others in the short term. whereas others may be more volatile. the spending patterns of some customers may be stable over time. • Like investments. 3.13 . Selecting an appropriate customer portfolio: • We can apply the concept of portfolio to service businesses with an established base of customers. Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 . • A wise firm may seek a mix of such segments in order to reduce the risks that various types of customers might be affected. • Similarly.

upgrading & even terminating customers. • Customer retention involves developing long-term.14 . • Recent research has confirmed that most firms have several tiers of customers in terms of profitability & that these tiers often different service expectations & needs Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 .Analyzing & managing the customer base • Marketers should adopt a strategic approach to retaining. cost-effective links with customers for the mutual benefit of both parties.

Iron: These customers provide the bulk of customer base. are heavy users & contribute a large share of the profits generated. Services Marketing 5/E 2. iron customers in themselves are often only marginal profitable. It tend to be slightly more price-sensitive & less committed to the firms. this segment is less price sensitive but expects highest service levels in return & is likely to be willing to invest & try new services. 3. Because their numbers give the firm economies of scale. Platinum: These customers constitute a very small percentage of a firm’s customer base. which is often needed for serving gold & platinum customers. Slide ©2004 by Christopher Lovelock and Jochen Wirtz 12 . they are often important so that a firm can build & maintain a certain capacity level & infrastructure. However. but individual customers contribute less profit than do platinum customers. Typically.Tiering the customer base 1. Lead: They generate low revenue for the firm. 4. Gold: It forms a larger percentage of customers than the platinum.15 .

The Customer Pyramid Good Relationship Customers Platinum Gold Iron Lead Poor Relationship Customers Slide ©2004 by Christopher Lovelock and Jochen Wirtz Which segment sees high value in our offer. spends more with us over time. costs less to maintain. effort and money. and spreads positive word-of-mouth? Which segment costs us in time.16 . yet does not provide the return we want? Which segment is difficult to do business with? Services Marketing 5/E 12 .

upgrading the type of service used. E.g. • Marketing efforts can be used to encourage an increased volume of purchase. or cross-selling additional services to any of the 4 tiers. the platinum tier will receive some exclusive benefits not available to other segments. 12 . the options are to either migrate them to the iron segment or terminate them.customers. The benefit levels for platinum & gold customers are often designed with retention in mind. • For lead.Retaining. Many relationships are no longer profitable for the firm as they may cost more to maintain the revenues. Instead of providing the same level of service to all customers. based on its requirements & value to the firm. each segment receives a customized service level. upgrading & terminating customers • • Generally. • Terminating customers comes as a logical consequence of the realization that not Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E all existing customer relationships are worth keeping. customer tiers are based on not only profitability but also other identifiable characteristics common among these different segments. because these customers are the ones that competitors would like to entice to switch.17 .

18 . enjoyment of social aspects  Special treatment benefits  better prices. less anxiety  ability to trust provider  know what to expect  get firm’s best service level  Social benefits  mutual recognition. faster service Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 . known by name  friendship.How Customers See Relational Benefits in Service Industries  Confidence benefits  less risk of something going wrong. discounts. special deals unavailable to others  extra services  higher priority with waits.

customers are willing to switch if they find a better alternative. • In contrast. Highly satisfied or even delighted customers are more likely to become loyal apostles or a firm. consolidate their buying with one supplier & spread positive word of mouth.19 .The foundations of customer loyalty • The foundation for true loyalty lies in customer satisfaction. Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 . Customers who praise the firm in public & refer others to the firm are described as “apostles”. Here. & customers here can have such high attitudinal loyalty that they do not look for alternative service providers. Extremely dissatisfied customers can turn into “terrorists” The zone of indifference is at intermediate satisfaction levels. dissatisfaction drives customers away. The zone of affection is at very high satisfaction levels. Customers will switch • • unless switching costs are high or there are no viable or convenient alternatives. • The zone of defection is at low satisfaction levels.

20 .The Customer Satisfaction-Loyalty Relationship Apostle 100 80 60 40 20 Zone of Affection Near Apostle Zone of Indifference Zone of Defection Terrorist 0 Loyalty (Retention) 1 Very dissatisfied 2 Dissatisfied Neither satisfied nor dissatisfied 3 4 Satisfied 5 Very Satisfied Satisfaction Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 .

21 . Build a Foundation for Loyalty  Segment the market  Be selective in acquisition  Use effective tiering of service.The Wheel of Loyalty 3. Reduce Churn Drivers  Conduct churn diagnostic  Address key churn drivers Enabled through:  Frontline staff  Account managers  Membership programs  CRM Systems 1. Create Loyalty Bonds  Give loyalty rewards  Deepen the relationship Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 .  Implement complaint handling & service recovery  Increase switching costs Customer Loyalty  Build higher level bonds 2.  Deliver quality service.

Reward-based bonds can be financial or nonfinancial.g. E. banks. Non-financial rewards provide customers with benefits or value that cannot be translated directly into monetary items.Creating bonds with customers 1. Reward.22 . • a. Financial bonds are built when loyal customers are rewarded with incentives that have a financial value. Deepening the relationship: To tie customers more closely to firms. Creating bonds with customers: Having the right portfolio of customer segments. deepening the relationship via bundling &/or cross-selling services is an effective strategy.based bonds: Incentives that offer rewards based on the frequency or value of purchase combination of both represent a basic level of customer bonds. attracting the right customers. b. & delivering high levels of satisfaction are a solid foundation for creating customer loyalty. giving priority to loyal customers for waitlist. such as discounts on purchases & loyalty-program rewards. E.g. tiering the service. Services Marketing 5/E Slide ©2004 by Christopher Lovelock and Jochen Wirtz 12 .

It can be created in a b2c environment too. Customization bonds: These bonds are built when the service provider succeeds in providing customized service to its loyal customers. One-to-one marketing is a more specialized form of customization whereby each individual is treated as a segment. some airlines have introduced SMS & e-mail alerts. Social bonds: They are typically based on personal relationships between providers & customers. Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 . d. processes & equipment. E.23 . are joint investments in projects & sharing of information. For instance. They may reflect pride or satisfaction in holding membership in an organization.Cont……………… c.g. Structural bonds: It is seen mostly in b2b settings & aim to stimulate loyalty through structural relationships between the provider & the customer. e.

minimizing inconvenience & other nonmonetary costs & fair & transparent pricing.24 . deceptive. Increasing switching cost.Strategies to reduce churn: Effective complaint handling & service recovery. Managing & curtailing drivers of customer defections: a.Transforming discrete transactions to membership relationships b. 3. locations or delays b.Common churn drivers: unsatisfactory service encounters. high. or unfair pricing.Recent research in the credit card industry suggests that loyalty programs strengthen the customers’ perception of the value proposition & lead to increased revenues.Customer perceptions of loyalty-reward programs. Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 . inconvenience in terms of time.Cont……………… 2. Creation of customer bonds through membership relationships & loyalty programs: a.

Causes behind customer Service Switching Service Failure / /Recovery Service Failure Recovery Core Service Failure • Service Mistakes • Billing Errors • Service Catastrophe Value Proposition Value Proposition Pricing • High Price • Price Increases • Unfair Pricing • Deceptive Pricing Service Encounter Failures • Uncaring • Impolite • Unresponsive • Unknowledgeable Service Switching Inconvenience • Location/Hours • Wait for Appointment • Wait for Service Response to Service Failure • Negative Response • No Response • Reluctant Response Competition • Found Better Service Others Others Involuntary Switching • Customer Moved • Provider Closed Slide ©2004 by Christopher Lovelock and Jochen Wirtz Ethical Problems • Unsafe • Cheat • Hard Sell • Conflict of Interest 12 .25 Services Marketing 5/E .

Objectives of CRM • CRM systems act as an enabler.26 . or history of a service problem are at the fingertips of the person serving the customer. well implemented CRM system can offer a “unified customer interface”. the relevant account details. knowledge of customer preferences & past transactions. This can result in a vast service improvement. • From a customer perspective. which means that at each transaction. • From a company perspective. & tier its customer base. Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 . CRM systems allow the company to better understand. segment. capturing customer information & delivering it to the various touch points. better target promotions & cross-selling.

27 .Common CRM Applications  Data collection  Data analysis  Sales force automation  Marketing automation  Call center automation Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 .

the majority of CRM implementation fail. • A key reason for this high failure rate is that firms often equate installing CRM system with having a customer relationship strategy. servicing capabilities & is not the strategy itself. • They forget that the system is merely a tool to enhance the firm’s customer Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 .28 .Designing a CRM strategy • Unfortunately.

29 .Customer Relationship Strategies with CRM Systems: Key Questions  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 the 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 resource can we allocate to CRM right now?  If we believe in CRM. why have we not taken steps in that direction before? What can we do today to develop customer relationship without spending on technology? Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 .