Love Lock 12

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

Chapter 12

Managing Relationships

and Building Loyalty


Four Stages of Brand Loyalty in a Consumer

Cognitive loyalty – perception from brand attribute information that one brand is preferable to its alternatives

Affective loyalty – developing a liking for the brand based on cumulatively satisfying usage occasions

Conative loyalty – commitment to rebuying the same brand

Action loyalty – exhibiting consistent repurchase behavior


Loyalty is Important to Profitability : Index of Customer Profits over Time (Fig. 12.1)

Credit card Industrial laundry Industrial distribution Auto servicing

0

(Year 1=100)

50

250

300

350 –

100

150

200

Year 1 Year 2 Year 3 Year 4 Year 5

Based on data from Reichheld and Sasser


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)

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


Analyzing Why Customers Are More Profitable over Time (Fig. 12.2)

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


Measuring Customer Equity:Calculating Life Time Value of Each Customer

Value at Acquisition revenues (application fee + initial purchase) Less costs (marketing +credit check + account set up)

Annual Value (project for each year of relationship) revenues (annual fee + sales + service fees + value of referrals) Less costs (account management + cost of sales + write-offs)

Net Present Value Determine anticipated customer relationship lifetime Select appropriate discount figure Sum anticipated annual values (future profits) at chosen discount

rate

Customer Equity is total sum of NPVs of all current customers


Customer-Firm Relationship

Database Marketing: Involves the use of technology by delivering differentiated service levels to consumers and subsequently tracking the relationship.

Interaction Marketing: Usually in B2B context where people and the social process also add mutually beneficial value.

Network Marketing: Common in B2B context where companies commit resources to develop positions in a network of relationships with the stakeholders and relevant agencies.

Today’s marketers seek to develop long-term relationships with customers. Relationship marketing includes:


Types of Relationships with Customers (Table 12.1)

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 Warranty repair Public transport


Basic Segmentation Issues: Building an Appropriate Customer Portfolio

Target customers whose needs match firm’s capabilities

Focus on value of prospective customers within each segment, not just numbers

Avoid targeting customers who might abuse:our employees, facilitiesother customers

Create a mix of segments to reduce risks of volatility during swings of economic cycles


Service-Relevant Segmentation Variables

Timing of service use (e.g., by hour, day, season)

Level of skill and experience as co-producer/self-server

Preferred language in face-to-face contact

Access to electronic delivery systems (e.g., Internet)

Attitudes toward use of new service technologies


Identifying and Selecting Target Segments (Mgt Memo 12.2)

User characteristics demographicspsychographicsgeographic locationbenefits sought

User behavior when, where, how services usedquantity/value of purchases frequency of useprofitability of relationshipsensitivity to marketing variables


Portfolio of Professional Assignments (Fig. 12.4)

Analytical Work on Project Data

“Bread and Butter” Projects

Significant Projects

“Pacesetters”

Major, State-of-the-art challenges for the firm’s principals that give the firm high visibility

Major, State-of-the-art challenges for the firm’s principals that give the firm high visibility

Demanding client assignments offering a learning experience for the firm’s most experienced associates

Demanding client assignments offering a learning experience for the firm’s most experienced associates

Routine client projects sharedamong principals and associates

Routine client projects sharedamong principals and associates

Entry-level tasks for new associates or for research assistants & paraprofessionals

Entry-level tasks for new associates or for research assistants & paraprofessionals


The Customer Pyramid (Fig. 12.5)

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


How Customers See Relational Benefits in Service Industries (Research Insights 12.1)

Confidence benefits less risk of something going wrong, less anxiety ability to trust provider know what to expect get firm’s best service level

Social benefits mutual recognition, known by name friendship, enjoyment of social aspects

Special treatment benefits better prices, discounts, special deals unavailable to others extra services higher priority with waits, faster service


The Customer Satisfaction-Loyalty Relationship (Fig. 12.6)

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 (Fig. 12.7)

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


Rewarding Value of Use, Not Just Frequency at British Airways (Best Practice in Action 12.2)

Dedicated reservations

Reservations assurance

Priority waitlist and standby

Advance notification of delays exceeding 4 hours

Upgraded check-in

Preferred boarding

Special services assistance

Bonus air miles

Upgrade for two


Drivers of Service Switching (Fig. 12.9)

Service Switching

Service Encounter Failures• Uncaring• Impolite• Unresponsive• Unknowledgeable

Response to Service Failure• Negative Response• No Response• Reluctant Response

Pricing• High Price• Price Increases• Unfair Pricing• Deceptive Pricing

Inconvenience• Location/Hours• Wait for Appointment• Wait for Service

Competition• Found Better Service

Ethical Problems• Cheat• Hard Sell

Involuntary Switching• Customer Moved• Provider Closed

Value PropositionValue Proposition

OthersOthers

Service Failure / RecoveryService Failure / Recovery

Core Service Failure• Service Mistakes• Billing Errors• Service Catastrophe

• Unsafe• Conflict of Interest


Common CRM Applications (Mgt Memo 12.2)

Signifies the whole process by which relationships with customers are built and maintained.

CRM as an enabler, offering a “unified customer interface” and allow firms to better understand and segment the customers etc. Applications include:

Data collection

Data analysis

Sales force automation

Marketing automation

Call center automation


Customer Relationship Strategies with CRM Systems: Key Questions

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 the incremental profit potential of increasing share of wallet with current customers? How much does this vary by customer tier and/or segment?

How much time and resource can we allocate to CRM right now?

If we believe in CRM, why have we not taken steps in that direction before? What can we do today to develop customer relationship without spending on technology?

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Love Lock 12