CHAPTER 12

MANAGING RELATIONSHIPS AND

BUILDING LOYALTY

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SUTACIO TAPANG ULANDAY VALIENTE VICENTE

 LO1: Recognize the important role customer loyalty
plays in driving a service firm's profitability.

WHY IS CUSTOMER LOYALTY SO IMPORTANT TO A FIRM'S PROFITABILITY?

"Few companies think of customers as annuities," says Frederick Reichheld, author of
The Loyalty Effect and a major researcher in this field.' However, that is what a loyal
customer can mean to a hrm—a consistent source of revenue over a period of many
years. How much is a loyal customer worth in terms of profits?

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1. Profit derived from increased purchases (or, in a credit card and banking environment,
higher account balances). Over time, business customers often grow larger and need to
purchase in greater quantities.
2. Profit from reduced customer service costs. As customers become more experienced,
they make fewer demands on the supplier (for instance, they have less need for information
and assistance and make more use of self-service options).
3. Profit from referrals to other customers. Positive word-of-mouth recommendations are like
free sales and advertising.
4. Profit from lower price sensitivity that allows a price premium. New customers often
benefit from introductory promotional discounts, whereas long-term customers are more
likely to pay regular prices.
5. Acquisition costs can be amortized over a longer period. Furthermore, the upfront costs of
attracting these buyers can be amortized over many years.

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 LO2: Calculate the life-time value (LTV) of a loyal
customer.

ASSESSING THE VALUE OF A LOYAL CUSTOMER

One of the challenges is to determine the costs and revenues associated with serving
customers in different market segments at different points in their customer life cycles and to
predict future profitability. For insights on how to calculate customer value, we have,
"Worksheet for Calculating Customer Lifetime Value."

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 Worksheet for Calculating Customer Lifetime Value

Calculating customer value is an approximate topic that depends on

many different presumptions. That you might wish to experiment
with other assumptions to see how they impact the final results. In
general, it is simpler to measure revenues per client individually than
it is to track the expenditures incurred in providing customer
service.

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 Acquisition Revenues Less Costs

If individual account records are kept, the initial application fee paid
and initial purchase should be found in these records. Costs, by
contrast, may have to be based on average data. For instance, the
marketing cost of acquiring a new client can be calculated by dividing
the total marketing costs (advertising, promotions, selling, etc.)
devoted toward acquiring new customers by the total number of new
customers acquired during the same period.

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 Annual Revenues and Costs

If annual sales, account fees, and service fees are documented on an

individual account basis, account revenue streams (except referrals) can
be easily identified. The priority is to segment your customer base by the
length of its relationship with your firm. Depending on the sophistication
and precision of your firm's records, annual costs in each category may be
directly assigned to an individual account holder or averaged for all
account holders in that age category.

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 Value of Referrals

Computing the value of referrals requires a variety of assumptions.

To get started, you may need to conduct surveys to determine
(1) what percentage of new customers claim that they were
influenced by a recommendation from another customer and
(2) what other marketing activities also drew the firm to that
individual's attention.

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 Net Present Value

Calculating net present value (NPV) from a future profit stream will
require choice of an appropriate annual discount figure. (This could
reflect estimates of future inflation rates.) It also requires
assessment of how long the average relationship lasts.

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 WHY ARE CUSTOMERS LOYAL?

Customers remain loyal to brands that consistently offer their

products/ service the best. Common benefits customers see in
being loyal are the following:

Confidence benefits
Social benefits
Social treatment benefits

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SUTACIO
THE WHEEL OF LOYALTY
 Target the Right Customers

Companies need to be selective about the segments they target

if they want to build successful customer relationships.
Managers must think carefully about how customer needs relate
to such operational elements as speed and quality and the
physical features and appearance of service facilities

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 Value of Referrals

Computing the value of referrals requires a variety of assumptions.

To get started, you may need to conduct surveys to determine
(1) what percentage of new customers claim that they were
influenced by a recommendation from another customer and
(2) what other marketing activities also drew the firm to that
individual's attention.

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SUTACIO
LEARNING OBJECTIVES 06
Use service tiering to manage the customer base and build loyalty.

MANAGE THE CUSTOMER BASE THROUGH

EFFECTIVE TIERING OF SERVICES
Marketers should adopt a strategic approach to retaining,
upgrading, and even ending relationships with customers. Customer
retention involves developing long-term, cost-effective links with
customers for the mutual benefit of both parties.

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 FOUR-LEVEL PYRAMID
Platinum - These customers 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. Gold - The gold tier includes a larger percentage of
customers than the platinum tier, but individual customers contribute
less profit.
Iron - These customers provide the bulk of the customer base. Their
numbers give the firm economies of scale.
Lead - Customers in this tier tend to generate low revenues for a firm
but often require the same level of service as iron customers.
FIGURE 12.8 THE CUSTOMER PYRAMID

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PRESENTED BY
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 TIERING THE CUSTOMERS OF A MARKET RESEARCH
AGENCY
Tiering its clients helped a leading U.S. marker research agency
understand its customers better.

Figure 12.10 The customer satisfaction–loyalty relationship.

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VALIENTE
PRESENTED BY
VALIENTE
LEARNING OBJECTIVES 07
Understand the relationship between customer satisfaction and loyalty.

CUSTOMER SATISFACTION AND SERVICE QUALITY

ARE PREREQUISITES FOR LOYALTY
The foundation for building true loyalty lies in customer satisfaction. Highly
satisfied or even delighted customers are more likely to consolidate their
buying with one supplier, spread positive word of mouth, and become loyal
apostles of a firm. Dissatisfaction, in contrast, drives customers away and is
a key factor in switching behavior.

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 STRATEGIES FOR DEVELOPING LOYALTY BONDS
WITH CUSTOMERS
Having the right portfolio of customer segments, attracting the right
customers, tiering the service, and delivering high levels of
satisfaction are a solid foundation for creating customer loyalty.

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LEARNING OBJECTIVES 08
Know how to deepen the relationship through cross-selling and bundling.

Know how to deepen the relationship through

cross-selling and bundling.
Firms can build closer ties with their customers by bundling and/or
cross-selling services.

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LEARNING OBJECTIVES 09
Understand the role of financial and non-financial loyalty rewards
in enhancing customer loyalty.

Encourage Loyalty through Financial and Non-

Financial Rewards
Incentives that offer rewards based on the frequency of purchase,
value of purchase, or a combination of both represent a basic level
of customer bonding. These rewards can be financial and non-
financial in nature.

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 Financial Rewards
are customer incentives that have a financial value (also called “hard benefits”).
Grahame Dowling and Mark Uncles argue that marketers need to examine three
psychological effects to assess the potential of a loyalty program to alter normal patterns
of behavior:
Brand loyalty versus deal loyalty.
How buyers value rewards.
Timing.
Non-Financial Rewards
It is also called “soft benefits” which provide benefits that cannot be translated
directly into monetary terms.
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LEARNING OBJECTIVES 10
Appreciate the power of social, customization, and structural
bonds in enhancing loyalty.
Build Higher-Levels Bonds
3 main types of higher-level bonds which are social, customization, and structural.
Social Bonds - The related personalization of services are usually based on
personal relationships between providers and customers.
Customization Bonds - These bonds are built when the service provider
succeeds in providing customized service to its loyal customers.
Structural Bonds - are frequently seen in B2B settings. They are created by
getting customers to align their way of doing things with the supplier’s own
processes, thus linking the customer to the firm.

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LEARNING OBJECTIVES 11
To understand what factors cause customers to switch to a
competitor and how to reduce such switching.

Analyze Customer Defections and Monitor Declining Accounts

Core service failures
Dissatisfactory service encounters
High, deceptive, or unfair pricing
Inconvenience in terms of time, location, or delays
Poor response to service failure

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Implement Effective
Complaint Handling
and Service Recovery
Procedures

Increase Switching
Costs
LEARNING OBJECTIVES 12
Know why loyalty programs and customer relationship management
(CRM) systems are important enablers of delivering loyalty strategies.

Customer Loyalty in a Transactional Marketing Context

A transaction involves an exchange of value between two parties, but it doesn't
necessarily establish a relationship, which requires mutual recognition and knowledge.
Relationship Marketing
Relationship marketing aims to establish long-term connections with customers,
fostering deeper engagement and higher value-added exchanges.

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 Creating ‘Membership-type’ Relationships as
Enablers for Loyalty Strategies
Discrete transactions, in which each use involves a payment to the service supplier by
an essentially “anonymous” consumer, are typical of services such as transport,
restaurants, cinemas, and shoe repairs. The problem for marketers of such services is
that they tend to be less informed about who their customers are and what use each
customer makes of the service than their counterparts in membership-type
organizations. Managers in businesses that sell discrete transactions have to work a
little harder to establish relationships.

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TAPANG
LEARNING OBJECTIVES 13
Understand the part played by CRM systems in delivering customized
services and building loyalty.

Customer Relationship Management

Many firms deal with large customer volumes and multiple touchpoints across
various locations, making it challenging to practice relationship marketing
traditionally.

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 What does a comprehensive CRM strategy include?

1. Strategy development
2. Value creation
3. Multi-Channel Integration
4. Information Management
5. Performance Assessment

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 Common failures in CRM implementation

Unfortunately, the majority of CRM implementations have failed in the past. A

key reason for this high failure rate is the misconception that the mere
installation of CRM systems amounts to having a customer relationship
strategy.

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CHAPTER 13
LEARNING OBJECTIVES 03
KNOW WHAT CUSTOMERS EXPECT FROM THE FIRM WHEN THEY COMPLAIN.

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SUTACIO TAPANG ULANDAY VALIENTE VICENTE

 Customer response options to service failure
When customers are dissatisfied of what’s the outcome of the
service firm, they have several alternatives. There are three
major courses of action a customer may take in response to a
service failure:
Take some form of Public Action
Take some form of Private Action
Take No Action
Take note: Any One or a Combination of These Responses Is Possible

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 Understanding Customer Complaining Behavior
To be able to deal effectively with dissatisfied and complaining
customers, managers need to understand key aspects of
complaining behavior, starting with the questions posed below.

Why Do Customers Complain?

There are four main purposes for complaining:
To obtain restitution or compensation.
To vent their anger.
To help to improve the service.
For altruistic reasons.

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 What Proportion of Unhappy Customers Complain?
Research shows that on average, only 5%–10% of customers who
have been unhappy with a service actually complain.

What Proportion of Unhappy Customers Complain?

A number of studies have identified some of the reasons why
customers don’t complain. Customers may not want to take the
time to write a letter, send an e-mail, fill in a form, or make a
phone call, particularly if they don’t see the service as being
important enough to be worth the effort.
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 Who Is Most Likely to Complain?
Research findings consistently show that people in higher socio-
economic levels are more likely to complain than those in lower
levels.

Where Do Customers Complain?

Studies show that the majority of complaints are made at the
place where the service was received.

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SUTACIO
LEARNING OBJECTIVES 03
Know what customers expect from the firm when they complain.

WHAT DO CUSTOMERS EXPECT ONCE THEY HAVE

MADE A COMPLAINT?
Whenever a service failure occurs, people expect to be treated
fairly. However, research has shown that many customers feel that
they have neither been treated fairly nor given adequate
compensation.

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VALIENTE
 FIGURE 13.7 THREE DIMENSIONS OF PERCEIVED FAIRNESS IN SERVICE RECOVERY PROCESSES. STEPHEN TAX
AND STEPHEN BROWN FOUND THAT AS MUCH AS 85% OF THE VARIATION IN SATISFACTION WITH A SERVICE
RECOVERY WAS DETERMINED BY THREE DIMENSIONS OF FAIRNESS (SEE FIGURE 13.7)

Procedural justice - refers to the policies and rules that any customer
has to go through to seek fairness. Customers expect the firm to take
responsibility, which is the key to the start of a fair procedure.
Interactional justice - involves the employees of the firm who provide
the service recovery and their behavior toward the customer.
Outcome justice concerns the restitution or compensation that a
customer receives as a result of the losses and inconveniences
caused by the service failure.

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LEARNING OBJECTIVES 04
Understand how customers respond to effective service recovery.

CUSTOMER RESPONSES TO EFFECTIVE SERVICE

RECOVERY
Customers who do complain give the firm a chance to correct
problems (including some the firm may not even know it has),
restore relationships with the complainer, and improve future
satisfaction for all customers.

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 IMPACT OF EFFECTIVE SERVICE RECOVERY ON
CUSTOMER LOYALTY
When complaints are resolved satisfactorily, there is a very high
chance that the customers involved will remain loyal.

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LEARNING OBJECTIVES 05
Explain the service recovery paradox

The Service Recovery Paradox

Describes the phenomenon where customers who experience an

excellent service recovery after a failure feel even more satisfied
than customers who had no problem in the first place.

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LEARNING OBJECTIVES 06
Know the principles of effective service recovery systems.

Principles of Effective Service Recovery

Systems

3 Guiding Principles

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 Principles of Effective Service Recovery Systems
Components of an effective service recovery system.
Make it Easy for Customers to Give Feedback
 Enable Effective Service Recovery
4 Effective Recovery
Proactive - Service recovery is ideally initiated on the spot, preferably
before customers have a chance to complain.
Planned - Contingency plans have to be developed for service failures,
especially for those that occur regularly and cannot be designed out of
the system.
Trained - Effective training on how to handle recovery solution sets for
routine service failures.
Empowered - employees should be empowered to use their judgment
and communication skills to develop solutions that will satisfy
complaining customers.

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 How Generous Should Compensation Be?
Different costs are associated with possible recovery strategies. The
following rules of thumb can help managers answer these questions:

What is the positioning of your firm?

How severe was the service failure?
Who is the affected customer?

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LEARNING OBJECTIVES 07
Be familiar with the guidelines for front-line employees on how to
handle complaining customers and recover from a service failure.

Dealing with complaining customers

Both managers and front-line employees must be prepared to deal with
distressed customers, including customers who can become
confrontational and behave in unacceptable ways toward service
personnel who often aren’t at fault.

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 Guidelines for the Front Line:
How to Handle complaining customers and recover from a
service Failure
1. Act Fast.
2. Acknowledge the customer’s feelings.
3. Show that you understand the problem
from each customer’s point of view.
4. Show that you understand the problem
from each customer’s point of view.
5. Clarify the facts and sort out the cause.
6. Give customers the benefit of the doubt.
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7. Propose the steps needed to solve
the problem
8. Keep customers informed of
progress
9. Consider compensation
10. Persevere to regain customer
goodwill
11. Self-check the service delivery
system and improve it
LEARNING OBJECTIVES 08
Recognize the power of service guarantees.

The Service Guarantees

One way for particularly customer-focused firms to institutionalize
professional complaint handling and effective service recovery is by
offering service guarantees.

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 LO9: Understand how to design effective service guarantees.
UNDERSTAND HOW TO DESIGN EFFECTIVE SERVICE GUARANTEES.
How to Design Service Guarantees
Some guarantees are simple and unconditional. Others appear to have
been written by lawyers and contain many restrictions. Ideally, service
guarantees should be designed to meet the following criteria:

1. Unconditional 4. Easy to invoke

2. Easy to understand and communicate 5. Easy to collect on
3. Meaningful to the customer 6. Credible

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 Is Full Satisfaction the Best You Can Guarantee?
Full-satisfaction guarantees have generally been considered the best
possible design. However, it has been suggested that the ambiguity
associated with such guarantees can lead to discounting of their
perceived value.

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 LO10: Know when firms should not offer service guarantees.
IS IT ALWAYS BENEFICIAL TO INTRODUCE A SERVICE GUARANTEE?

Here are some of the situations in which a guarantee may not be

appropriate:
Companies that already have a strong reputation for service excellence
may not need a guarantee.
In contrast, a firm whose service is currently poor must first work to
improve quality to a level above what is guaranteed.

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 Service firms whose quality is truly uncontrollable because of
external forces would be foolish to consider a guarantee.
In a market in which consumers see little financial, personal, or
physiological risk associated with purchasing and using a service, a
guarantee adds little value but still costs money to design,
implement, and manage.

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 Discouraging Abuse and Opportunistic
Customer Behavior

We advocate that firms should welcome and even encourage

complaints and invocations of service guarantees. However, we have
to acknowledge that not all complaints are honest. When firms have
generous service recovery policies or offer guarantees, there is
always the fear that some customers may take advantage of theM

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 LO11: Be familiar with the seven groups of jaycustomers and
understand how to manage them effectively.

Seven Types of Jaycustomers

The Cheat. There are many ways in which customers can cheat service
firms.
The Thief. The thief jaycustomer has no intention of paying and sets
out to steal goods and services (or to pay less than full price by
switching price tickets or contesting bills on baseless grounds).

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 The Vandal. Soft drinks are poured into bank cash machines;
graffiti is scrawled on both interior and exterior surfaces; burn
holes from cigarettes scar carpets, tablecloths, and bedcovers;
bus seats are slashed and hotel furniture is broken; customers'
cars are vandalized; glass is smashed and fabrics are torn.

The Deadbeat. They are the ones who delay payment.

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 Service firms whose quality is truly uncontrollable because of
external forces would be foolish to consider a guarantee.
In a market in which consumers see little financial, personal, or
physiological risk associated with purchasing and using a service, a
guarantee adds little value but still costs money to design,
implement, and manage.

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 Dealing with Customer Fraud
Dishonest customers may steal from the firm, refuse to pay for the
service, fake dissatisfaction, purposefully cause service failures to
occur, or overstate losses at the time of genuine service failures.

These findings suggest a number of important managerial implications:

1. Firms should ensure that their service recovery procedures are fair.
2. Large firms should recognize that consumers are more likely to
cheat them and have robust fraud-detection systems in place.

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 3. Firms can implement and thus reap the bigger marketing benefits of
100% money-back guarantees without worrying that the large payouts
would increase cheating considerably.
4. Guarantees can be offered to regular customers or as part of a
membership program because repeat customers are unlikely to cheat
on service guarantees.
5. Truly excellent service firms don't have to worry as much about
cheating as the average service provider.

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 THANK YOU FOR
LISTENING !!!
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SUTACIO TAPANG ULANDAY VALIENTE VICENTE