8. Module 11 Session 9 - Managing Customer Relationship

Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 1

Managing Relationships

and Building Loyalty


The search for customer loyalty

• Targeting, acquiring & retaining the right customers is at the core of many

successful service firms.

• All businesses aspire to have a database of loyal customers.

• Loyalty is described as a customer’s willingness to continue patronizing a

firm over the long term, purchasing & using its goods & services on a

repeated & preferably exclusive basis & recommending the firm’s products to

friends & associates.


What Makes Loyal Customers More Profitable?

Tend to spend more as relationship developscustomer’s balances may growmay consolidate purchases to one supplier

Cost less to serve less need for information and assistancemake fewer mistakes

Recommend new customers to firm (act as unpaid sales people or Customer Advocates)

Trust leads to willingness to pay regular prices vs. shopping for discounts


Analyzing Why Customers Are More Profitable over Time

1 2 3 4 5 6 7

Year

Profit from pricepremium

Profit from references

Profit from reducedop. costs

Profit from increasedusage

Base Profit

Source: Reichheld and Sasser


Understanding the customer/firm relationship

• Relationship strategies could be focused towards creating single transaction or extended relationships with the customers.

• Research by Nichole Coviello, Roderick Brodie, & Hugh Munro suggests that there are, 4 distinct types of marketing:

1.Transactional marketing: A transaction is an event during which an exchange of value takes place between two parties. But even a series of transactions does not necessarily constitute a relationship, which requires mutual recognition & knowledge between the parties. When each transaction between a customer & a supplier is essentially discrete & anonymous, with no long-term record kept of a customer’s purchasing history & little or no mutual recognition between the customer & employees, no meaningful marketing relationship can be said to exist.


Cont……………..

2. Data base marketing: The focus is on the market transaction but also includes information exchange. Marketers rely on information technology, usually in the form of a database, to form a relationship with targeted customers & retain their patronage over time.

• However, the nature of these relationships is often not a close one, with communication being driven & managed by the seller.

• Technology is used to :

a. Identify & build a database of current & potential customersb. Deliver differentiated messages based on consumer’s characteristics &

preferencec. Track each relationship to monitor the cost of acquiring the customer & the

life-time value of the resulting purchases.


Cont…………….

3. Interaction marketing: A closer relationship exists when there is face-to-face interaction between customers & representatives of the supplier.

• Although service remains important, value is added by people & social processes. Interactions may include negotiations & sharing of insights in both directions.

• Both the firm & the customer are prepared to invest resources to develop a mutually beneficial relationship. This invest may include time spent sharing & recording information.

4. Network marketing: This type of marketing occurs primarily in a business-to-business context, where firms commit resources to develop positions in a network of relationships with customers, distributors, suppliers, the media, consultants, trade associations, govt. agencies.

• The concept is also relevant in consumer marketing environment.


Creating “Membership” relationships

• It is a formalized relationship between the firm & an identifiable customer, may offer special benefits to both parties.

• Services involving discrete transactions can be transformed into membership relationships either by selling the service in bulk or by offering extra benefits to customers who choose to register with the firm.

• The advantage to the service organization of having membership relationships is that it knows who is its current customers & what use they make of the services offered.

• This information can be valuable for segmentation purposes if good records are kept & the data are readily accessible for analysis.

• Knowing the identities & addresses of current customers enables the organization to make effective use of direct mail, telephone selling- all highly targeted methods of marketing communication.


Types of Relationships with Customers

Type of Relationship--Firm and Customer

Nature of Service Delivery

“Membership” No formal relationship

Continuous Cable TV Radio station Insurance Police College enrollment Lighthouse

Discrete transactions Subscriber phone Pay phone Theater subscription Movie theater Health Treatment for Public transport corporate member employee


Identifying and Selecting Target Segments

User characteristics demographics psychographics geographic location benefits sought

User behavior when, where, how services used quantity/value of purchases frequency of use


Targeting the right customers

1. Good relationships start with a good fit:

• If they want to build successful customer relationships, companies need to be selective about the segments they target.

• Matching customers to the firm’s capabilities is vital.

•Managers also need to consider how well their service personnel can meet the expectations of specific types of customers , in terms of both personal style & technical competence.

• Finally, managers need to ask themselves whether their company can match or exceed competing services that are directed at the same types of customers.



2. Searching for value, not just numbers:

• Many service firms still focus on the number of customers they serve without giving sufficient attention to the value of each customer.

• Service customers who buy based strictly on lower price are not good target customers for relationship marketing at the first place. These deal-prone customers continually seek the lowest price offer.

• Acquiring the right customers can bring in long-term revenues, continued growth from referrals, & enhanced satisfaction.

• Attracting the wrong customers typically results in costly churn.

• Marketers shouldn’t assume that the “right customers” are always high spenders.

• Marketers also need to recognize that some customers simply are not worth serving because they are too difficult to please or unable to decide what they want.



3. Selecting an appropriate customer portfolio:

• We can apply the concept of portfolio management to service businesses with an established base of customers. Different segments offer different value for a service firm.

• Like investments, some types of customers may be more profitable than others in the short term, but others may have greater potential for long-term growth.

• Similarly, the spending patterns of some customers may be stable over time, whereas others may be more volatile.

• A wise firm may seek a mix of such segments in order to reduce the risks that various types of customers might be affected.


Analyzing & managing the customer base

• Marketers should adopt a strategic approach to retaining, upgrading & even terminating customers.

• Research has confirmed that most firms have several tiers of customers in terms of profitability & that these tiers often different service expectations & needs


The Customer Pyramid

Lead

Iron

Gold

Which segment sees high value in our offer, spends more with us over time, costs less to maintain, and spreads positive word-of-mouth?

Which segment costs us in time, effort and money, yet does not provide the return we want? Which segment is difficult to do business with?

Platinum

Good Relationship Customers

Poor Relationship Customers


Tiering the customer base

1. Platinum: These customers constitute a very small percentage of a firm’s customer base, are heavy users & contribute a large share of the profits generated. Typically, this segment is less price sensitive but expects highest service levels in return & is likely to be willing to invest & try new services.

2. Gold: It forms a larger percentage of customers than the platinum, but individual customers contribute less profit than do platinum customers. It tend to be slightly more price-sensitive & less committed to the firms.

3. Iron: These customers provide the bulk of customer base. Because their numbers give the firm economies of scale, they are often important so that a firm can build & maintain a certain capacity level & infrastructure, which is often needed for serving gold & platinum customers.

4. Lead: They generate low revenue for the firm.


Retaining, upgrading & terminating customers

• Each segment receives a customized service level, based on its requirements & value to the firm.

• The platinum tier will receive some exclusive benefits not available to other segments. The benefit levels for platinum & gold customers are often designed with retention in mind, because these customers are the ones that competitors would like to entice to switch.

• Marketing efforts can be used to encourage an increased volume of purchase, upgrading the type of service used, or cross-selling additional services to any of the 4 tiers.

• For lead- customers, the options are to either migrate them to the iron segment or terminate them.

• Terminating customers comes as a logical consequence of the realization that not all existing customer relationships are worth keeping. Many relationships are no longer profitable for the firm as they may cost more to maintain the revenues.


The foundations of customer loyalty

• The foundation for true loyalty lies in customer satisfaction. Highly satisfied or even delighted customers are more likely to become loyal apostles or a firm, consolidate their buying with one supplier & spread positive word of mouth.

• In contrast, dissatisfaction drives customers away.

• The zone of defection is at low satisfaction levels. Customers will switch unless switching costs are high or there are no viable or convenient alternatives. Extremely dissatisfied customers can turn into “terrorists”

• The zone of indifference is at intermediate satisfaction levels. Here, customers are willing to switch if they find a better alternative.

• The zone of affection is at very high satisfaction levels, & customers here can have such high attitudinal loyalty that they do not look for alternative service providers. Customers who praise the firm in public & refer others to the firm are described as “apostles”.


The Customer Satisfaction-Loyalty Relationship

0

20

40

60

80

100

1 2 3 4 5

Lo

yalt

y (R

eten

tio

n)

Verydissatisfied Dissatisfied

Neithersatisfied

nor dissatisfiedSatisfied

VerySatisfied

Satisfaction

Near Apostle

Zone of Defection

Zone of Indifference

Zone of Affection

Terrorist

Apostle


The Wheel of Loyalty

1. Build aFoundationfor Loyalty

2. Create LoyaltyBonds

3. Reduce Churn Drivers

CustomerLoyalty

Be selective in acquisition

Conduct churn diagnosticSegment the market

Use effective tiering of service.

Deliver quality service.

Deepen the relationship

Give loyalty rewards

Build higher level bonds

Implement complaint handling & service recovery

Address key churn drivers

Increase switching costs

Enabled through: Frontline staff Account

managers Membership

programs CRM Systems


Customer Feedback and Service Recovery


Key Questions for Managers to Ask about Customer Complaining Behavior

Why do customers complain?

What proportion of unhappy customers complain?

Why don’t unhappy customers complain?

Who is most likely to complain?

Where do customers complain?


Customer Response categories to service failures

Service Encounter is Dissatisfactory

Service Encounter is Dissatisfactory

Take some form of public action

Take some form of public action

Take some form of private action

Take some form of private action

Take no actionTake no action

Complain to the service firm

Complain to the service firm

Complain to a third party

Complain to a third party

Take legal action to seek redress

Take legal action to seek redress

Defect (switch provider)

Defect (switch provider)

Negative word-of-mouth

Negative word-of-mouth

Any one or a combination of these responses is possible

Any one or a combination of these responses is possible


Understanding customer responses to service failures• To be able to deal effectively with dissatisfied & complaining customers, managers need to understand key aspects of complaining behavior

•Why do customers complain?

a.Obtain restitution or compensation: Often consumers complain to recover some economic loss by seeking a refund, compensation, &/or have the service performed again.

b.Vent their anger: Some customers complain to rebuild self-esteem &/or to vent their anger & frustration. When service processes are unreasonable or when employees are rude or uncaring.

c. Help to improve the service: When customers are highly involved with a service, they give feedback to try & contribute toward service improvements. These customers are motivated by the prospect of getting better service in the future.

d. For altruistic reasons: These customers want to spare other customers from experiencing the same problems.


Cont……………..

2. What proportion of unhappy customers complain?

• Research shows that an average, only 5-10% of customers who have been unhappy with a service actually complain.

• Although generally only a minority of dissatisfied customers complain, there is evidence that consumers across the world are becoming better informed, more self- confident, & more assertive about seeking satisfactory outcomes for their complaints.


Cont…………..

3. Why don’t unhappy customers complain?

• Some don’t wish to take the time to write a letter, fill out a form, or make a phone call, especially if they don’t see the service sufficiently important to merit the effort.

• Many customers see the payoff as uncertain & believe that no one would be concerned about their problem or willing to resolve it.

• In some situations, people simply do not know where to go or what to do

• Additionally, many people may feel that complaining is unpleasant.


Cont……………

4. Who is most likely to complain?

• Research findings consistently show that people in higher socioeconomic levels are more likely to complain than those in lower levels.

• Better education, higher income, & greater social involvement give them the confidence, knowledge & motivation to speak up when they encounter problems.

5. Where do customers complain?

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


Customer expectations about their complaints

• When a service failure occurs, people expect to be adequately compensated in a fair manner. It was found in a research, that satisfaction with a service recovery was determined by the 3 dimensions of fairness:

1. Procedural justice: It deals with the policies & rules that any customer will have to go through in order to seek fairness. Customers expect the firm to assume responsibility, which is the key to the start of a fair procedure

2. Interactional justice: It involves the firm’s employees who provide the service recovery & their behavior towards the customer. Giving an explanation for the failure & making an effort to resolve the problem are very important. The recovery effort must be perceived as genuine, honest & polite.

3. Outcome justice: The compensation that a customer receives as a result of the losses & inconvenience incurred because of the service failure. It includes compensation for time & effort spent during service process recovery.


Dimensions of Perceived Fairness in Service Recovery Process

Procedural Justice

Procedural Justice

InteractiveJustice

InteractiveJustice

OutcomeJustice

OutcomeJustice

Complaint Handling & Service Recovery Process

Complaint Handling & Service Recovery Process

Justice Dimensions of the Service Recovery Process

Customer Satisfaction with the

Service Recovery

Customer Satisfaction with the

Service RecoverySource: Tax and Brown


Customer responses to effective service recovery

•

•Service recovery is an umbrella term for systematic efforts by a firm to correct a problem following a service failure & retain a customer’s goodwill.

• Service recovery efforts play a crucial role in achieving customer satisfaction.

• The true test of a firm’s commitment to satisfaction & service quality is not in the advertising promises but in the way it responds when things go wrong for the customer.

• Effective service recovery requires thoughtful procedures for resolving problems & handling dissatisfied customers.


Impact of Effective Service Recovery on Retention

NoProblem

ProblemUnresolved

Customer Retention

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

84%

92%

46%

Source: IBM-Rochester study

Problem, but effectively resolved


Principles of effective service recovery systems

Make it easy for customers to give feedback:

• Many companies have improved their complaint- collection procedures by adding special toll-free phone lines, links on the Web sites, prominently displayed customer comment cards in their branches.

• In the customer newsletter, some companies feature service improvements that were the direct result of customer feedback under the motto “ you told us, & we responded”


Strategies to Reduce Customer Complaint Barriers

Complaint Barriers for Dissatisfied Customers

Strategies to Reduce These Barriers

Inconvenience Difficult to find the right complaint

procedure. Effort, e.g., writing a letter.

Make feedback easy and convenient by: Printing Customer Service Hotline numbers,

e-mail and postal addresses on all customer communications materials.

Doubtful Pay Off

Uncertain whether any action, and what action will be taken by the firm to address the issue the customer is unhappy with.

Reassure customers that their feedback will be taken seriously and will pay off by:

Having service recovery procedures in place, and communicating this to customers.

Featuring service improvements that resulted from customer feedback.

Unpleasantness Complaining customers fear that

they may be treated rudely, may have to hassle, or may feel embarrassed to complain.

Make providing feedback a positive experience:

Thank customers for their feedback. Train the frontline not to hassle and make

customers feel comfortable. Allow for anonymous feedback.


Cont…………..

2. Enable effective service recovery:

•Effective service recovery procedure should be:

a.Proactive: Service recovery needs to be initiated on the spot, ideally before customers have a chance to complain. Service personnel should be sensitized to signs of dissatisfaction & ask whether customers might be experiencing a problem.

b.Planned: Contingency plans have to be developed for service failures, especially for those that can occur regularly.

c.Recovery skills must be taught: Effective training arms frontline staff with the confidence & competence to turn distress into delight.

d. Recovery requires empowered employees: Employees should be empowered to use their judgment & communication skills to develop solutions that will satisfy complaining customers. Employees need to have the authority to make decisions & spend money in order to resolve service problems promptly & recover customer goodwill.


Cont……………

3. How generous should compensation be?

How much compensation should a firm offer when there has been a service failure? Or would an apology be sufficient instead?

The following rules of thumb can help to answer these questions:

a.What is the firm’s market positioning?

b.How severe was the service failure? Let the punishment fit the crime

c.Who is the affected customer? Long term Loyal or discrete


Cont……………….

4. Dealing with complaining customers :

Both managers & frontline employees must be prepared to deal with angry customers who are confrontational & sometimes behave in insulting ways toward service personnel.


Cont……………..

The following guidelines provide specific guidelines for effective problem resolution, designed to calm upset customers & deliver a resolution.

Act quickly, Admit mistakes, but don’t be defensive

Show that you understand the problem from each customer’s point of view

Don’t argue with customers

Acknowledge the customer’s feelings

Give customers the benefit of the doubt

Clarify the steps needed to solve the problem

Keep customers informed of progress

Consider compensation

Persevere to regain customer goodwill


Components of an Effective Service Recovery System

Learn from the Recovery Experience

Learn from the Recovery Experience

Resolve Complaints Effectively

Resolve Complaints Effectively

Identify Service Complaints

Identify Service Complaints

Effective Complaint Handling

Effective Complaint Handling

Conduct Root CauseAnalysis

Conduct Root CauseAnalysis

Develop Effective System and Training in Complaints Handling

Develop Effective System and Training in Complaints Handling

Conduct Research

Monitor Complaints

Develop “Complaints as Opportunity” Culture

Conduct Research

Monitor Complaints

Develop “Complaints as Opportunity” Culture

=+

Close the Loop via Feedback

Increased Satisfaction and Loyalty

Increased Satisfaction and Loyalty

Do the Job Right the First Time

Do the Job Right the First Time


Service Guarantees

A growing number of companies offer customers a satisfaction guarantee, promising that if service delivery fails to meet predefined standards, the customer is entitled to one or more forms of compensation, such as easy-to-claim replacement, refund or credit.

From the customer’s perspective, the primary function of service guarantees is to lower the perceived risks associated with purchase.


The power of service guarantees

• Guarantees are powerful tools for both promoting & achieving service quality for the following reasons:

1.Guarantees force firms to focus on what their customers want & expect in each element of the service.

2.Guarantees set clear standards, telling customers & employees alike what the company stands for.

3.Guarantees require the development of systems for generating meaningful customer feedback & acting on it.

4.Guarantees force service organization to understand why they fail & encourage them to identify & overcome potential fail points.

5.Guarantees help in reducing the risk of the purchase decision & building long-term loyalty.


How to design service guarantees

•Some guarantees are simple & unconditional. Others appear to have been written by lawyers & contain many restrictions.

• Service guarantees should be designed to meet the following criteria:

1.Unconditional

2.Easy to understand & communicate

3.Meaningful to customers

4.Easy to invoke

5.Easy to collect

6.Credible


Types of Service Guarantees

Single attribute-specific guarantee – one key service attribute is covered

Multiattribute-specific guarantee – a few important service attributes are covered

Full-satisfaction guarantee – all service aspects covered with no exceptions

Combined guarantee – like the full-satisfaction, adding explicit minimum performance standards on important attributes


Is it always appropriate to introduce a service guarantee?

• Managers should think carefully about their firm’s strength & weaknesses before deciding to introduce a service guarantee.

• Companies that have a strong reputation for high-quality service may not need a guarantee.

• In contrast, a firm whose service is currently poor must first work to improve quality to level above that at which the guarantee might be invoked on a regular basis by most of its customers.

• In a market where consumers se little financial, personal or physiological risk associated with purchasing & using a service, a guarantee adds little value but still costs money to design, implement & manage.

• Where little perceived difference in service quality among competing firms exists, the first company to institute a guarantee may be able to obtain a first-mover advantage & create a valued differentiation for its services.


Key objectives of effective customer feedback systems

• Many strategists have concluded that in increasingly competitive markets, the ultimate competitive advantage for a firm is to learn & change more rapidly than competition.

• Specific objectives of effective customer feedback systems typically fall into three main categories:

1.Assessment & benchmarking of service quality & performance:

•The objective is to answer the question, How satisfied are the customers?

•This objective includes learning about how well a firm performed in comparison to its main competitors?

•How it performed in comparison to the previous year?


Cont………………..

• Whether investments in certain service aspects have paid off in terms of customer satisfaction?

• Often, a key objective of comparison against other units (branches, teams, competitors) is to motivate managers & service staff to improve performance, especially when the results are linked to compensation.

2. Customer-driven learning & improvements: The objective is to answer:

• Why our customers are unhappy?

• Where & how can we improve?

• This objective is about gaining an understanding of the things that other suppliers do well & those that make customers happy.

3. Creating a customer-oriented service culture


Customer feedback collection tools

• Recognizing that different tools have different strengths & weaknesses, service marketers should select a mix of customer feedback collection tools that jointly deliver the needed information.

1.Total market surveys, annual surveys & transactional surveys:

•Total market surveys & annual surveys measure satisfaction with all major customer service processes & products.

•The level of measurement is usually at high level, with the objective of obtaining a global index or indicator of overall service satisfaction for the entire firm.

•Overall indices tell how satisfied customers are but not why they are happy or unhappy.

•There is a limit to the number of questions that can be asked about each individual process or product.


Cont……………

• In contrast, transactional surveys are typically conducted after customers have completed a specific transaction & query them about this process in some depth.

• All three types are representative & reliable when designed properly. Representativeness & reliability are required for:

1.Accurate assessment of where the company, a process, branch or individual stands relative to quality goals.

2.Evaluation of individuals, staff, teams, branches &/or processes especially when incentive schemes are linked to such measures.


Cont……………

2. Service feedback cards:

• This powerful & inexpensive tool involves giving customers a feedback card following completion of each major service process & inviting them to return it by mail or other means to central customer feedback unit.

• Although these cards are good indicator of process quality & yield specific feedback on what works well & what doesn’t, the respondents tend not to be representative & are biased.

3. Mystery shopping

4. Focus group discussions & service reviews

5.Unsolicited customer feedback: E.g. Singapore Airlines prints complaints & compliment letters in its monthly employee magazine, Outlook.


Strengths and Weakness of Key Customer Feedback Collection Tools

Potential for Service Recovery

Collection ToolsMulti-level Measurement

Action-able

Represen-tative,

Reliable

First Hand

Learning

Cost Effective

Cost EffectiveService

SatisfactionProcess

SatisfactionSpecific

Feedback

Total Market Survey (inclu. competitors)

Annual Survey on overall satisfaction

Transactional Survey (process specific)

Service Feedback Cards (process specific)

Mystery Shopping (service testers)

Unsolicited Feedback Recd(Online feedback system)

Focus Group Discussions

Service ReviewsService Reviews

Meets Requirements: Fully Moderate Little/Not at all


Entry Points for Unsolicited Feedback

Employees serving customers face-to-face or by phone

Intermediaries acting for original supplier

Managers contacted by customers at head/regional office

Complaint cards mailed or placed in special box

Complaints passed to company by third-party recipientsconsumer advocatestrade organizations legislative agenciesother customers


Analysis, reporting & dissemination of customer feedback

• Choosing the relevant feedback tools & collecting customer feedback is meaningless if company is unable to disseminate the information to the relevant parties to take action.

• Hence, to drive continuous improvement & learning, a reporting system needs to deliver feedback & analysis to frontline staff, process owners, branch or department managers & top management.

• The feedback loop to the frontline should be immediate for complaints & complements as is practiced in a number of service businesses where complaints, compliments & suggestions are discussed with the staff.

• There are 3 types of service performance reports to provide information necessary for service management :

1. A monthly Service Performance update provides process owners with timely feedback on customer comments. Here the feedback is provided to the process manager who can discuss it with service staff.



2. A quarterly service performance review provides process owners & branch or department managers with trends in process performance & service quality.

3. An annual service performance report gives top management a representative assessment of the status & long-term trends relating to customer satisfaction with the firm’s services.

• The reports should be short & reader friendly, focusing on key indicators.

Documents

8. Module 11 Session 9 - Managing Customer Relationship