Chapter 12

:

Managing Customer Relationships and Building Loyalty

Slide © 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 12 - 1

Overview of Chapter 12 1. The Search for Customer Loyalty 2. The Wheel of Loyalty* 1. Building a Foundation for Loyalty

2. Creating Loyalty Bonds
3. Strategies for Reducing Customers Defections 3. CRM: Customer Relationship Management

Slide © 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 12 - 2

1. The Search for Customer Loyalty

Slide © 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 12 - 3

Why Is Customer Loyalty Important to a Firm’s Profitability?  Customers become more profitable the longer they remain with a firm:
Increase purchases and/or account balances
― Customers/families purchase in greater quantities as they grow

Reduced operating costs
― Fewer demands from suppliers and operating mistakes as customer becomes experienced

Referrals to other customers
― Positive word-of-mouth saves firm from investing money in sales and advertising

Price premiums
― Long-term customers willing to pay regular price ― Willing to pay higher price during peak periods
Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 - 4

1990). 105–111.5 .. Earl Sassar.1) (Year 1=100) 350 – 300 250 200 150 100 50 0 Year 1 Credit card Year 2 Industrial laundry Year 3 Year 4 Year 5 Auto servicing Industrial distribution Source: Based on reanalysis of data from Fredrick R. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 . Jr.” Harvard Business Review 68 (Sep.How Much Profit a Customer Generates Over Time (Fig 12. Reichheld and W.-Oct. “Zero Defections: Quality Comes from Services. pp.

Reichheld and W.6 .–Oct.” Harvard Business Review 73 (Sep. 1990): p. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 . 108. Earl Sassar. costs Profit from increased usage Base Profit/Loss Loss 1 2 3 4 Year 5 6 7 Source: Why Are Customers More Profitable Over Time from Fredrick R. Jr.. “Zero Defections: Quality Comes from Services.Why Customers Are More Profitable Over Time (Fig 12.2) Profit from price premium Profit from references Profit from reduced op.

7 .Assessing the Value of a Loyal Customer (1)  Caveat: Must not assume that loyal customers are always more profitable than those 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 don’t necessarily increase with time for all types of customers Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 .

8 .Assessing the Value of a Loyal Customer (2)  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 for You  Determine costs and revenues for customers from different market segments at different points in their customer lifecycles  Predict future profitability Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 .

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 individual’s attention  Net Present Value  Sum anticipated annual values (future profits)  Suitably discounted each year into the future Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 .9 .

do customers remain with firm? What impact would it have if they remained customers for life? Services Marketing 6/E Chapter 12 .  (3) paying full price?   How long.Gap Between Actual and Potential Customer Value   What is current purchasing behavior of customers in each target segment? 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.10 Slide © 2007 by Christopher Lovelock and Jochen Wirtz . on average.

2. The Wheel of Loyalty* Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 .11 .

The Wheel of Loyalty (Fig 12. Build a Foundation for Loyalty Segment the market Be selective in acquisition Use effective tiering of service. Reduce Churn Drivers Conduct churn diagnostic 1.4) 3. Create Loyalty Bonds Give loyalty rewards Deepen the relationship Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 .12 . Deliver quality service. Address key churn drivers Enabled through:  Frontline staff  Account managers  Membership programs  CRM Systems Implement complaint handling and service recovery Increase switching costs Customer Loyalty Build higher level bonds 2.

2-1: Building a Foundation for Loyalty Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 .13 .

and choose 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 Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 . target.Customer Needs and Company Capabilities  Identify.14 .

15 .Searching for Value—Not Just Volume  Focus on number of 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 Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 .

Effective Tiering of Service: The Customer Pyramid (Fig 12. Lemon. 4. “The Customer Pyramid: Creating and Serving Profitable Customers.118–142. yet does not provide return we want? Which segment is difficult to do business with? Source: Valarie A Zeithaml.5) Good Relationship Customers Which segment sees high value in our offer. Roland T Rust.16 Slide © 2007 by Christopher Lovelock and Jochen Wirtz .” California Management Review 43. and money. pp. Summer 2001. Services Marketing 6/E Chapter 12 . effort. spends more with us over time. and Katharine N. no. costs less to maintain. and spreads positive word-of-mouth? Platinum Gold Iron Lead Poor Relationship Customers Which segment costs us time.

Earl Sasser.” Harvard Business Review. Jones and W. “Why Satisfied Customers Defect.The Customer Satisfaction Loyalty Relationship (Fig 12. November-December 1995. 91. Slide © 2007 by Christopher Lovelock and Jochen Wirtz Neither Satisfied Very Satisfied Satisfaction Services Marketing 6/E Chapter 12 .7) Apostle 100 Zone of Affection Loyalty (Retention) 80 Zone of Indifference 60 Near Apostle 40 Zone of Defection 20 Terrorist 0 1 2 3 4 5 Very Dissatisfied Dissatisfied Source: Adapted from Thomas O.. Jr. p.17 .

18 .2-2: Creating Loyalty Bonds Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 .

19 .Strategies for Developing Loyalty Bonds with Customers (1)  Deepening the relationship Bundling/cross-selling services makes switching a major effort Customers benefit from consolidating their purchasing of various services Ex) 2 X 2 matrix Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 .

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 Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 .20 .Strategies for Developing Loyalty Bonds with Customers (2)  Reward-based Bonds  Incentives that offer rewards based on frequency of purchase.. value of purchase.g. frequent flier miles). cash-back programs  Non-financial rewards ― Priority to loyalty program members for waitlists and queues in call centers: higher baggage allowances. loyalty program rewards (e. priority upgrading. or combination of both  Financial bonds ― Discounts on purchases.

Starbucks  Customers may find it hard to adjust to another service provider who cannot customize service Source: PAL Library..g. Asset ID: AAFHKTO0 Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 . better chance of retention in the long term  Customization Bonds  Customized service for loyal customers ― e.Strategies for Developing Loyalty Bonds with Customers (3)  Social Bonds  Based on personal relationships between providers and customers  Harder to build and imitate and thus.21 .

processes and equipment  Can be seen in b2c environment too ― Airlines—SMS check-in.Strategies for Developing Loyalty Bonds with Customers (4)  Structural Bonds  Mostly seen in b2b settings  loyalty through structural relationships between provider and customer ― Joint investments in projects and sharing of information.22 . 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 Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 .

rewards seen as having little value. communicate customer preferences to frontline  Loyalty reward programs increasingly used by all businesses in response to competition ― Frequent fliers program—rewards dominated in miles*  Customers may get frustrated with reward programs ― For example: Feel excluded from rewards program because of low balances.Creating Customer Bonds by Membership Relationships and Loyalty Programs (1)  Transform discrete transactions into relationships  Membership cards: Capture transactions. cumbersome redemption process  Don’t lose sight of broader goals of offering high service quality.23 . nor allow service to other customers to deteriorate Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 .

Create Customer Bonds by 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 Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 .24 .

25 .2-3: Strategies for Reducing Customer Defections Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 .

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 efforts—send voucher.Analyze Customer 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.26 . customer service representative calls customer Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 .

” Journal of Marketing 59 (April 1995). .27 Source: Adapted from Susan M.What Drives Customers to Switch? (Fig 12.9) Service Failure/Recovery Core Service Failure • Service Mistakes • Billing Errors • Service Catastrophe 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 Involuntary Switching • Customer Moved • Provider Closed Slide © 2007 by Christopher Lovelock and Jochen Wirtz Ethical Problems • Unsafe • Cheat • Hard Sell • Conflict of Interest Services Marketing 6/E Chapter 12 . 71–82. Keaveney. “Customer Switching Behavior in Service Industries: An Exploratory Study. pp.

Addressing Key Churn Drivers  Delivery quality  Minimize inconvenience and nonmonetary costs  Fair and transparent pricing  Industry specific drivers  Cellular phone industry: Handset replacement a common reason for subscribers discontinuing services—offer proactive handset replacement programs  Reactive measures  Save teams: Specially trained call center staff to deal with customers who want to cancel their accounts Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 .28 .

29 .Other Ways to Reduce Churn  Implement effective complaint handling and service recovery procedures  Increase switching costs*  Natural switching costs ― For example. changing primary bank account—many related 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 Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 .

30 . CRM: Customer Relationship Management Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 .3.

and the like  Data analysis  Data captured is analyzed and categorized  Used to tier customer base and tailor service delivery accordingly. demographics. purchasing history.3)  Data collection  Customer data such as contact details. and up-sell opportunities can be effectively identified and processed  Entire sales cycle from lead generation to close of sales and after.  Sales force automation  Sales leads. cross-sell.sales service can be tracked and facilitated through CRM system Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 .Common Objectives Of CRM Systems (1) (Service Perspectives 12. service preferences.31 .

platinum callers get priority in waiting loops Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 .32 .3)  Marketing automation  Mining of customer data enables the firm to target its market  Goal to achieve one-to-one marketing and cost savings. and to tailor the service accordingly ― For example.Common Objectives Of CRM Systems (2) (Service Perspectives 12. 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 of marketing 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 the customer tier the caller belongs to.

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 .33 .Integrated Framework for CRM Strategy (Fig 12.167–176.” Journal of Marketing 69 (October 2005): pp. “A Strategic Framework for Customer Relationship Management.10) Strategy Development Process Value Creation Process Multi-Channel Integration Process Performance Assessment Process Information Management Process Source: Adapted from: Adrian Payne and Pennie Frow.

Integrated Framework for CRM Strategy Development  Strategy Development  Assessment of business strategy  Business strategy guides development of customer strategy Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 .34 .

and customization ― Company benefits from reduced customer acquisition and retention costs.Integrated Framework for CRM Strategy: Value Creation  Value Creation  Translates business and customer strategies into specific value propositions for both customers and firm ― Customers benefit from priority.35 . and increased share-of-wallet  Dual creation of value: Customers need to participate in CRM to reap value from firm’s CRM initiatives* Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 . tiered services. loyalty rewards.

36 .Integrated Framework for CRM Strategy: Multi-Channel Integration  Multi-Channel Integration  Value Delivery*  Serve customers well across many potential interfaces  Offer a unified interface that delivers customization and personalization Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 .

Integrated Framework for CRM Strategy: Performance Assessment  Performance Assessment  Is CRM system creating value for key stakeholders?  Are marketing and service standard objectives being achieved?  Is CRM system meeting performance standards? Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 .37 .

Integrated Framework for CRM Strategy: Information Management  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.38 . IT systems. analytical tools. specific application packages Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 .

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 time and resources can we allocate to CRM right now?  What can we do today to develop customer relationships without spending on technology? Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 .39 .

40 .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 Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 .

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