Marketing Logistics

Chapter 4:
DEVELOPING CUSTOMER RELATIONSHIP
Contents
1) Managing relationships and Building loyalty
• Customer loyalty
• The Wheel of Loyalty
• Customer relationship management (CRM)
2) Complaint handling and Service recovery
• Customer complaints
• Effective service recovery
• Service Guarantee
3) Digital marketing (for group presentation)
1. Managing relationships and building loyalty
1.1 Customer Loyalty
1.2 The Wheel of Loyalty
1.3 Customer Relationship Management (CRM)
Customer loyalty
Importance of customer loyalty to firm’s profitability
• Increase sales: higher purchases, share-of-wallet, cross-buying
• Reduce costs: customer service costs, amortization of customer
acquisition costs
• Positive word-of-mouth and referrals
• Lower price-sensitivity
Customer loyalty
• Over time, customers often consume more and need to purchase in
greater quantities;
• Individual customers purchase more as their families grow or as they become
more affluent.
• Business customers often grow larger in scale over time
• Both types of customers may be willing to consolidate their purchases
with a single supplier who provides high-quality service, resulting in
“a high share of wallet” (cross-buying or new products/services).
Customer loyalty
• As customers become more experiences, they make fewer demands
on the supplier (e.g, less need for information and assistance and
more use of self-service options) → reduce customer service costs;
• Experienced customers tend to make fewer mistakes when involved
in operational processes → greater productivity and lower extra costs;
• Positive word-of-mouth recommendations → free sales and
advertising;
• Lower price sensitivity allows a price premium (customers who trust
a supplier may be more willing to pay higher prices at peak periods or
for express work)
Customer loyalty
Being a Loyal Customer… Benefits?
Loyalty drivers:
• Confidence benefits
• Social benefits
• Special treatment benefits
Customer loyalty
• Marketing strategy: the potential profitability of a customer should be
a key driver;
• Analysis “The Gap between the actual and potential value of
customers”
• WHAT is the current purchasing behavior of customers?
• WHAT would be the impact on sales and profits if they exhibited the ideal
behavior profile of (1) buying all services offered by the firm, (2) using these
to the exclusion of any purchases from competitors, and (3) paying full prices;
• HOW LONG, on average, do customers remain with the firm?
• The active management of the customer base and customer loyalty is
referred to as “Customer Asset Management”
CASE STUDY: Customer Asset Management at DHL in Asia
The Wheel of Loyalty
The Wheel of Loyalty
1) Building a foundation for Loyalty
• Target the right customers: segment the market to match customer
needs and firm capabilities;
• Search for value, not just volume: be selective in customer acquisition
(acquire customers who fit the core value proposition);
• Manage the customer base via effective tiering of service: a strategic
approach to retaining, upgrading, and even ending relationships with
customers
• Deliver quality service: customer satisfaction and service quality are
prerequisites for Loyalty.
The Customer Pyramid
• Platinum: form a very small percentage of a firm’s customer base but
are heavy users and tend to contribute a large share of the profits.
They are less price-sensitive, but expect higher service levels in
return and are willing to invest in and try new services;
• Gold: a larger percentage of customers than the platinum tier, but
individual customers contribute less profit. They tend to be slightly
more price sensitive and less committed to the firm;
The Customer Pyramid
• Iron: the bulk of the customer base which gives the firm economies
of scale. They are important for a firm to build and maintain a
certain capacity level and infrastructure, which are often needed for
serving gold and platinum customers well. However, iron customers
may only be marginally profitable, not enough to justify special
treatment;
• Lead: these customers tend to generate low revenues but often
require the same level of service as iron customers, sometimes turn
into a loss-making segment from the firm’s perspective.
The Customer Pyramid
→ The precise characteristics of customer tiers vary from one type of
business to another and even from one firm to another.
→ Customer tiers are typically based on profitability and service needs.
Each segment received a service level that is customized on the basis of
its requirements and its value to the firm
→ Marketing efforts can be used to encourage an increased volume of
purchases, upgrade the type of service used, or cross-sell additional
services to any of the four tiers.
The Wheel of Loyalty
2) Strategies for developing loyalty bonds with customers
• Deepen the relationship via cross-selling and bundling;
• Encourage loyalty through financial and non-financial rewards based
on the frequency of purchase, the value of purchase, or both;
• Build higher-level bonds: social bonds; customization; structural
bonds
Financial Rewards vs Non-Financial Rewards
Financial rewards “Hard benefits”: discounts on purchases, loyalty
program rewards (such as frequent flier miles), cash-back programs.
Financial rewards can sometimes frustrate customers and breed
dissatisfaction instead of creating loyalty and goodwill if:
• Customers feel they are excluded from the program;
• The rewards are seen as having little or no value;
• Customers cannot redeem their loyalty points;
• Redemption process is too troublesome and time-consuming.
Financial Rewards vs Non-Financial Rewards
Non-financial rewards “Soft-benefits”: non-monetary terms such as
exclusive rights or special treatments;
• Important intangible rewards include special recognition and appreciation.
Customers tend to value the extra attention given to their needs and
appreciate the efforts to meet their occasional special requests.
• Non-financial rewards, especially if linked to higher-tier service levels, are
typically more powerful than financial ones as the former can create
tremendous value for customers.
• Unlike financial rewards, non-financial rewards directly relate to the firm’s
core service and improve the customer’s experience and value perception.
The Wheel of Loyalty
3) Strategies for reducing customer defections/customer churns
- Analyzing customer defections and monitoring declining accounts to
understand the reasons for customer switching. Some commons:
• Core service failure (44%)
• Dissatisfactory service encounters (34%)
• High, deceptive, or unfair pricing (30%)
• Inconvenience in terms of time, location, or delays (21%)
• Poor response to service failure (17%)
- Address key churn drivers: delivering quality service; minimizing
inconvenience and other non-monetary costs; having fair and
transparent pricing
The Wheel of Loyalty
3) Strategies for reducing customer defections/customer churns
- Implement effective complaint handling and service recovery
procedures
- Increasing switching costs:
• Hard-lock-in: contractual penalties for switching (cell-phone service providers
often impose contractual penalties if a contract is canceled during a lock-in
period)
• Soft-lock-in: focus on providing added value to customers through increased
convenience, customization and priority (positive switching costs)
Customer Relationship Management (CRM)
• CRM should be seen as enabling the successful implementation of the
Wheel of Loyalty
• Common objectives: CRM allows the firm to better understand,
segment, and tier its customer base; better target promotions and
cross-selling, and even implement churn alert systems.
• CRM Applications: data collection; data analysis; sales-force
automation; marketing automation; call-center automation
Customer Relationship Management (CRM)
A comprehensive CRM
CRM- Common failures in implementation
• Viewing CRM as a technology initiative: top management or marketing
should take the lead in devising the CRM strategy;
• Lack of customer focus: implement CRM without the ultimate goal of
enhancing the service value and enabling consistent service delivery;
• Insufficient appreciation of customer life-time value to fully assess the
value of loyal customers;
• Inadequate support from top management: CRM strategy intent will not
survive;
• Failing to re-engineer business processes as a customer-centric CRM;
• Underestimating the challenges in data integration: unlock the full
potential of CRM to make customer knowledge available in real time to all
employees who need it.
How to get CRM implementation right?
Services firms should focus on clearly defined problems within their
customer relationship cycle to narrow down CRM strategy and
implementation.
• How should the value proposition be changed 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 the share of wallet
with current customers? How much does this vary by customer
tier/segment?
• How much time and resources can the firm allocate to CRM right now?
2) Complaint handling and Service recovery
2.1 Customer complaints
2.2 Effective service recovery
2.3 Service guarantees
Question ?
How do customers respond to service failure?
Customer Complaints
• Why do customers complain?
• Who is most likely to complain?
• Why don’t unhappy customers complain?
• Where do customers complain?
Customer complaints
• Obtain restitution or compensation
• Vent anger WHY ?
• Help to improve the service
• For altruistic reasons

WHO ?
Customer complaints
• It takes time and effort
• The payoff is uncertain
• Complaining can be unpleasant Why not ?

WHERE DO CUSTOMERS
COMPLAIN?
Customer expectation once a complaint is made
Effective Service Recovery
What is Service Recovery?
→ The systematic efforts made by the firm to correct a problem
following a service failure and retain a customer’s goodwill
→ The important role in achieving (or restoring) customer satisfaction
and loyalty
→ The true test of the firm’s commitment to service quality
Effective Service Recovery
Dissatisfied Customer Service Recovery Retention rate
Complain Not complain Un-solved Solved
v 9%
v v 19%
v v 54%

Service Recovery on Spot

→ Retention rate: 82%
Principle of Effective Service Recovery
Systems
• Make it easy for customers to provide feedback and reduce customer
complaint barriers
• Enable effective service recovery: (1) proactive; (2) planned; (3)
trained; (4) empowered
• Establish appropriate compensation levels
Dealing with Complaining Customers
• Act fast
• Acknowledge customer’s feelings
• Don’t argue Tips
• Show understanding
• Clarify the facts
• Give customer the benefits of the doubt
• Propose steps to solve the problem
• Consider compensation
• Persevere to regain customer goodwill
• Improve the service system
• Keep the customer informed
Service Guarantees
→ The promise that if service delivery fails to meet pre-defined
standards, the customer will be entitled to one or more forms of
compensation (replacement, refund, or credit)
→ Facilitation of effective service recovery
→ Institutionalization of the practice of learning from service failures
→ Ensuring subsequent system improvements
A promise
Service Guarantees → A power tool
• Guarantees force firms to focus on what their customers want and
expect in each element of the service
• Guarantees set clear standards, telling customers and employees alike
what the company stands for.
• Guarantees require the development of systems for generating
meaningful customer feedback and acting on it
• Guarantees force service organizations to understand why they fail
and encourage them to identify and overcome potential fail points
• Guarantees build “marketing muscle” by reducing the risk of the
purchase decision and building long-term loyalty
Service Guarantees → How to Design
1) Unconditional
2) Easy to understand and communicate
3) Meaningful to customer
4) Easy to invoke
5) Easy to collect on
6) Credible (Reliable)
Service Guarantees → Not always Beneficial
• Confused
• Little value
• Costly
• External forces
JAY Customers
• The Cheat
• The Thief
• The Rulebreaker
• The Belligerent
• The Family Feuders
• The Vandal
• The Deadbeat