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Chapter

6
• • • • • •

Building Customer Relationships

Relationship Marketing Relationship Value of Customers Foundations for Relationship Strategies The Customer Isn’t Always Right Customer Profitability Segments Levels of Relationship Strategies

McGraw-Hill/Irwin

©2003. The McGraw-Hill Companies. All Rights Reserved

Objectives for Chapter 6: Building Customer Relationships
• Explain relationship marketing, its goals, and the benefits of long-term relationships for firms and customers. • Explain why and how to estimate customer lifetime value. • Specify the foundations for successful relationship marketing--quality core services and careful market segmentation. • Provide you with examples of successful customer retention strategies. • Introduce the idea that “the customer isn’t always right.”
McGraw-Hill/Irwin

©2003. The McGraw-Hill Companies. All Rights Reserved

All Rights Reserved .Relationship Marketing • is a philosophy of doing business that focuses on keeping current customers and improving relationships with them • does not necessarily emphasize acquiring new customers • is usually cheaper (for the firm) – keeping a current customer costs less than attracting a new one • thus. The McGraw-Hill Companies. and more on retention and enhancement of customer relationships McGraw-Hill/Irwin ©2003. the focus is less on attraction.

and other partners for mutual benefit. and superior service.• Transaction-based marketing Buyer and seller exchanges characterized by limited communications and little or no ongoing relationship between the parties. – Based on promises of low prices. growth. high quality. prompt delivery. cost-effective relationships with individual customers. and maintenance of long-term. employees. onetime exchanges. • Focuses on short-term. . • Relationship marketing Development. suppliers.

• Twenty to 40 percent chance of winning back an ex-customer. According to one study. marketers have • Sixty to 70 percent chance of selling again to the same customer. HOW MARKETERS KEEP CUSTOMERS • Retaining customers is far more profitable than losing them. • Five to 20 percent chance of converting a prospect into a customer. • Customers may switch loyalties if they perceive better benefits from a competitor. . • Perceived positive value in long-term buyer-seller relationships is a key benefit for customers.BUILDING BUYER-SELLER RELATIONSHIPS • Consumers form relationships to reduce choices and simplify the buying process.

3 Profit Impact of 5 Percent Increase in Retention Rate McGraw-Hill/Irwin ©2003. The McGraw-Hill Companies. All Rights Reserved .Figure 6.

. All Rights Reserved . even though other options exist – increasingly buys more and more from a particular supplier – provides constructive feedback/suggestions • Exhibits Psychological Commitment – wouldn’t consider terminating the relationship--psychological commitment – has a positive attitude about the provider – says good things about the provider McGraw-Hill/Irwin ©2003. • Shows Behavioral Commitment – buys from only one supplier. The McGraw-Hill Companies.A Loyal Customer is One Who..

The McGraw-Hill Companies.Customer Loyalty Exercise • Think of a service provider you are loyal to. actions. feelings) that indicates you are loyal? • Why are you loyal to this provider? McGraw-Hill/Irwin ©2003. All Rights Reserved . • What do you do (your behaviors.

Underlying Logic of Customer Retention Benefits to the Organization Customer Satisfaction Customer Retention & Increased Profits Quality Service Employee Loyalty McGraw-Hill/Irwin ©2003. All Rights Reserved . The McGraw-Hill Companies.

All Rights Reserved . The McGraw-Hill Companies.Benefits to the Organization of Customer Loyalty • loyal customers tend to spend more with the organization over time • on average costs of relationship maintenance are lower than new customer costs • employee retention is more likely with a stable customer base • lifetime value of a customer can be very high McGraw-Hill/Irwin ©2003.

Benefits to the Customer • inherent benefits in getting good value • economic. The McGraw-Hill Companies. All Rights Reserved . social. and continuity benefits – contribution to sense of well-being and quality of life and other psychological benefits – avoidance of change – simplified decision making – social support and friendships – special deals McGraw-Hill/Irwin ©2003.

Checking the driving records of customers. Credit card cos.“The Customer Isn’t Always Right” • Not all customers are good relationship customers: – wrong segment. The McGraw-Hill Companies. Insurance cos. Car rental cos. All Rights Reserved .a conference hotel may find that mixing executives in town for a serious educational programme with students in town for a regional athletic meet. – not profitable in the long term.Banks who have customers who are not profitable. If the executive group is a key long term customer it will pass up the students in order to retain the executives.ad agenciesMcGraw-Hill/Irwin ©2003. – difficult customers.

4 Steps in Market Segmentation and Targeting for Services STEP 1: Identify Bases for Segmenting the Market STEP 2: Develop Profiles of Resulting Segments STEP 3: Develop Measures of Segment Attractiveness STEP4: Select the Target Segments STEP 5: Ensure that Segments Are Compatible McGraw-Hill/Irwin ©2003. All Rights Reserved . The McGraw-Hill Companies.Figure 6.

costs less to maintain.5 The “80/20” Customer Pyramid Most Profitable Customers Best Customers What segment spends more with us over time. All Rights Reserved . effort and money yet does not provide the return we want? What segment is difficult to do business with? Least Profitable Customers McGraw-Hill/Irwin ©2003. spreads positive word of mouth? Other Customers What segment costs us in time.Figure 6. The McGraw-Hill Companies.

effort and money yet does not provide the return we want? What segment is difficult to do business with? Lead Least Profitable Customers McGraw-Hill/Irwin ©2003.6 The Expanded Customer Pyramid Most Profitable Customers Platinum What segment spends more with us over time. All Rights Reserved . The McGraw-Hill Companies.Figure 6. spreads positive word of mouth? Gold Iron What segment costs us in time. costs less to maintain.

All Rights Reserved .Strategies for Building Relationships • Foundations: – Excellent Quality/Value – Careful Segmentation • Bonding Strategies: – – – – Financial Bonds Social & Psychological Bonds Structural Bonds Customization Bonds • Relationship Strategies Wheel McGraw-Hill/Irwin ©2003. The McGraw-Hill Companies.

All Rights Reserved . Social Bonds Personal Relationships Shared Processes and Equipment III. Structural Bonds Continuous Relationships Joint Investments Excellent Quality and Value II. Financial Bonds IV.7 Levels of Retention Strategies Volume and Frequency Rewards Integrated Information Systems Stable Pricing Bundling and Cross Selling I. Customization Bonds Social Bonds Among Customers Anticipation/ Innovation Mass Customization McGraw-Hill/Irwin Customer Intimacy ©2003.Figure 6. The McGraw-Hill Companies.

Airlines link their reward prog. With hotel chains. Frequent flyer prog. The McGraw-Hill Companies.customers can enjoy greater financial benefits in exchange for their loyalty. Stable or lower price increase compared to others. McGraw-Hill/Irwin ©2003. auto rentals. Financial Bonds Volume and Frequency Rewards lower prices for greater vol. or lower prices for customers who have been with the firm a long time. All Rights Reserved . Bundling and cross selling of services. Stable prices-offer loyal cus.I.

family details. McGraw-Hill/Irwin ©2003. health care providers.lawyers. The McGraw-Hill Companies. A dentist can read the patient’s file a few minutes before he goes into the examination room to jog his memory on personal factsoccupation.customers develop close relationship with sales persons. Social Bonds Personal Relationships. hairdressers. accountants. teachers. All Rights Reserved . Caterpillar corp.II. interests.distributors.common among professional service providers.

II. educational settings. McGraw-Hill/Irwin ©2003. Another reason for not switching to a new service provider. Normally in health clubs. All Rights Reserved . The McGraw-Hill Companies.rather than with the provider.Harley Davidson. Social Bonds • Social bonds among customers.

Customization Bonds • To increase customer loyalty. The McGraw-Hill Companies.III. All Rights Reserved . provide customized service McGraw-Hill/Irwin ©2003.

McGraw-Hill/Irwin ©2003. The McGraw-Hill Companies. All Rights Reserved . Structural Bonds • Are created by providing customized service that are technology based and make the customer more productive.IV. track packages. In the mid 90s. Fed ex provided free computers to its clients to print addresses.