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Chapter Building Customer Relationships 7      Relationship Marketing Relationship Value of Customers Customer Profitability Segments Relationship Development Strategies Relationship Challenges .

switching barriers. and relationship bonds.Objectives for Chapter 7: Building Customer Relationships  Explain relationship marketing. its goals. including the somewhat controversial idea that ―the customer is not always right.  Explain why and how to estimate customer relationship value.‖ McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies.  Identify challenges in relationship development.  Present relationship development strategies—including quality core service. Inc.  Introduce the concept of customer profitability segments as a strategy for focusing relationship marketing efforts. and the benefits of long-term relationships for firms and customers. All rights reserved. .

the focus is less on attraction. a strategic orientation.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. All rights reserved. Inc. . and more on retention and enhancement of customer relationships McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies.

1 Customer Goals of Relationship Marketing McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies. .Figure 7. All rights reserved. Inc.

All rights reserved. McGraw-Hill/Irwin .Benefits of Relationship Marketing  Benefits for Customers:  Receipt of greater value  Confidence benefits:  trust  confidence in provider  reduced anxiety  Benefits for Firms:  Economic benefits:  increased revenues  reduced marketing and administrative costs  regular revenue stream  Social benefits:  familiarity  social support  personal relationships  Customer behavior benefits:     strong word-of-mouth endorsements customer voluntary performance social benefits to other customers mentors to other customers  Special treatment benefits:  special deals  price breaks  Human resource management benefits:  easier jobs for employees  social benefits for employees  employee retention © 2006 The McGraw-Hill Companies. Inc.

―Zero Defection: Quality Comes to Services. F.’’ Harvard Business Review. . Reichheld and W. Inc.. All rights reserved. E. Sasser. Jr. McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies. September–October 1990.2 Profit Generated by a Customer Over Time Source: An exhibit from F.Figure 7.

Inc. no.3 Profit Impact of 5 Percent Increase in Retention Rate Source: F. . McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies. 4 (1994).Figure 7. 15. ―Loyalty and the Renaissance of Marketing. p. 2. Reichheld. F. vol. All rights reserved.‖ Marketing Management.

Table 7. Inc. .1 Lifetime Value of an Average Business Customer at Telecheck International McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies. All rights reserved.

feelings) that indicates you are loyal?  Why are you loyal to this provider?  What factors have influenced the formation of your loyalty? McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies. actions. Inc. All rights reserved.  What do you do (your behaviors. .Customer Loyalty Exercise  Think of a service provider to who you are loyal.

All rights reserved.Figure 7.4 The Customer Pyramid Most profitable customers Platinum What segment spends more with us over time. spreads positive word-of-mouth? Gold Iron What segment costs us in time. . Inc. costs less to maintain. 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 © 2006 The McGraw-Hill Companies.

Figure 7. All rights reserved. Inc. .5 Relationship Development Model Relationship Bonds Financial bonds Social bonds Customization bonds Structural bonds Customer Benefits Confidence benefits Social benefits Special treatment benefits Strong Customer Relationship (Loyalty) Core Service Provision Satisfaction Perceived service quality Perceived value Firm Benefits Switching Barriers Customer inertia Switching costs McGraw-Hill/Irwin Economic benefits Customer behavior benefits Human resource management benefits © 2006 The McGraw-Hill Companies.

perceived service quality. McGraw-Hill/Irwin . search costs. Inc. All rights reserved. learning costs.Strategies for Building Relationships  Core Service Provision:  service foundations built upon delivery of excellent service:  satisfaction. perceived value  Switching Barriers:  customer inertia  switching costs:  set up costs. contractual costs  Relationship Bonds:     financial bonds social bonds customization bonds structural bonds © 2006 The McGraw-Hill Companies.

Figure 7. Financial bonds 4. Excellent service and value 3. Inc.6 Levels of Relationship Strategies Volume and frequency rewards Integrated information systems Stable pricing Bundling and cross selling 1. All rights reserved. Social bonds Continuous relationships Joint Structural investments bonds Personal relationships Shared processes and equipment Social bonds among customers Customer intimacy Anticipation/ innovation Mass customization McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies. . Customization Bonds 2.

Inc.―The Customer Is NOT Always Right‖  Not all customers are good relationship customers:  wrong segment  not profitable in the long term  difficult customers McGraw-Hill/Irwin © 2006 The McGraw-Hill Companies. . All rights reserved.