Chapter 12:
Managing
Customer
Relationships and
Building Loyalty
The Search for
Customer Loyalty
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
Assessing the Value
of a Loyal Customer
(1)
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
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
Determine costs and revenues for customers from different market
segments at different points in their customer lifecycles
Predict future profitability
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
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,
(3) paying full price?
How long, on average, do customers remain with firm?
What impact would it have if they remained customers for life?
Understanding the Customer-
Firm Relationship
Relationship Marketing (1)
Transactional Marketing
One transaction or a series of transactions does not necessarily
constitute a relationship
Requires mutual recognition and knowledge a Marketing:
Includes market transaction and information exchange
Technology is used to
(1) identify and build database of current and potential
customers
(2) deliver differentiated messages based on customers’
characteristics
(3) track each relationship to monitor cost of acquiring that
customer and lifetime value of resulting purchases
Relationship Marketing (2)
Interaction Marketing:
Face-to-face interaction between customers and supplier’s
representatives
Value is added by people and social processes
Increasing use of technologies make maintaining meaningful
relationships with customers a marketing challenge
For example, self-service technology, interactive websites, call
centers
Network Marketing:
Common in b2b context where companies commit resources to
develop positions in network of relationships with stakeholders and
relevant agencies
Relationships with
Customers (Fig 12.1)
Type of Relationship between the Service
Organization and Its Customers
Nature of Service Membership Relationship No Formal Relationship
Delivery
Continuous Cable TV Radio station
Insurance policy Police
College enrollment Lighthouse
Discrete Transactions Subscriber phone Pay phone
Theater subscription Movie theatre
Warranty repair Public transport
THANK YOU
The Wheel of Loyalty
The Wheel of Loyalty (Fig 12.4)
3. Reduce 1. Build a
Churn Drivers Foundation
for Loyalty
Conduct churn diagnostic
Segment the market
Address key churn drivers
Be selective in acquisition
Enabled through: Implement complaint
Frontline staff handling and service Use effective tiering
Account recovery Customer of service.
managers Increase switching Deliver quality
Membership costs
Loyalty service.
programs
CRM
Systems 2. Create Loyalty
Bonds
Build higher Deepen the
level bonds relationship
Give loyalty
rewards
Building a
Foundation for
Loyalty
Customer Needs and
Company Capabilities
Identify and target 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
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
Effective Tiering of Service
The Customer Pyramid (Fig 12.5)
Good Relationship
Customers Which segment sees high value in
our offer, spends more with us over
time, costs less to maintain, and
Platinum
spreads positive word-of-mouth?
Gold
Which segment costs us time,
Iron effort, and money, yet does not
provide return we want? Which
segment is difficult to do
Lead business with?
Poor Relationship
Customers Source: Valarie A Zeithaml, Roland T Rust, and Katharine N. Lemon, “The Customer Pyramid: Creating
and Serving Profitable Customers,” California Management Review 43, no. 4, Summer 2001, pp.118–
142.
The Customer Satisfaction
Loyalty Relationship (Fig 12.7)
Apostle
100
Zone of Affection
Loyalty (Retention)
80
Zone of Indifference Near Apostle
60
40 Zone of Defection
20
Terrorist 0
1 2 3 4 5
Very Dissatisfied Neither Satisfied Very
Dissatisfied Satisfied
Source: Adapted from Thomas O. Jones and W. Earl
Satisfaction
Sasser, Jr., “Why Satisfied Customers Defect,” Harvard
Business Review, November-December 1995, p. 91.
Creating Loyalty
Bonds
Strategies for Developing
Loyalty Bonds with
Customers (1)
Deepening the relationship
Bundling/cross-selling services makes switching a major effort
that customer is unwilling to undertake unless extremely
dissatisfied with service provider
Customers benefit from consolidating their purchasing of various
services from the same provider
See Research Insights 12.2: How do customers see relational
benefits?
One-stop-shopping, potentially
higher service levels,
higher service tiers, etc.
Strategies for Developing
Loyalty Bonds with
Customers
Reward-based Bonds(2)
Incentives that offer rewards based on frequency of purchase, value
of purchase, or combination of both
Financial bonds
Discounts on purchases, loyalty program rewards (e.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, priority upgrading,
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
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, better chance of
retention in the long term
Customization Bonds
Customized service for loyal
customers
e.g., Starbucks
Customers may find it hard to adjust
to another service provider who
cannot customize service
Source: PAL Library; Asset ID: AAFHKTO0
Strategies for Developing
Loyalty Bonds with
Customers (4)
Structural Bonds
Mostly seen in b2b settings
Stimulate loyalty through structural relationships between provider
and customer
Joint investments in projects and sharing of information,
processes and equipment
Can be seen in b2c environment too
Airlines—SMS check-in, 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
Creating Customer Bonds by
Membership Relationships and
Loyalty Programs (1)
Transform discrete transactions into relationships
Discrete transactions: Each usage involves payment to service supplier
by an essentially "anonymous" consumer
Membership cards: Capture transactions, 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, rewards seen as having little value, cumbersome
redemption process
Don’t lose sight of broader goals of offering high service quality, nor
allow service to other customers to deteriorate
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
Strategies for
Reducing
Customer Defections
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;
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, customer service
representative calls customer
What Drives Customers to
Switch?
(Fig 12.9)
Service Failure/Recovery Value Proposition
Core Service Failure Pricing
• Service Mistakes • High Price
• Billing Errors • Price Increases
• Service Catastrophe • Unfair Pricing
Service • Deceptive Pricing
Service Encounter Failures
• Uncaring Switching Inconvenience
• Impolite • Location/Hours
• Unresponsive • Wait for Appointment
• Unknowledgeable • Wait for Service
Response to Service Failure
• Negative Response Competition
• No Response • Found Better Service
• Reluctant Response
Others
Involuntary Switching Ethical Problems
• Customer Moved • Cheat • Unsafe
• Provider Closed • Hard Sell • Conflict of Interest
Source: Adapted from Susan M. Keaveney, “Customer Switching Behavior in Service Industries: An Exploratory Study,” Journal of Marketing 59 (April 1995), pp. 71–82.
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
Be careful about how save teams are rewarded
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
CRM: Customer
Relationship
Management
Integrated Framework
for CRM Strategy (Fig
12.10)
Strategy Value Creation Multi-Channel Performance
Development Integration Assessment
Process Process Process Process
Information Management Process
Source: Adapted from: Adrian Payne and Pennie Frow, “A Strategic Framework for Customer
Relationship Management,” Journal of Marketing 69 (October 2005): pp.167–176.
Framework for CRM
Strategy
Development
Strategy Development
Assessment of business strategy
Business strategy guides development of customer
strategy
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, tiered services, loyalty rewards, and
customization
Company benefits from reduced customer acquisition and retention
costs, and increased share-of-wallet
Dual creation of value: Customers need to participate in CRM to
reap value from firm’s CRM initiatives
CRM
Strategy: Multi-Channel
Integration
Multi-Channel Integration
Serve customers well across many
potential interfaces
Offer a unified interface that delivers
customization and personalization
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?
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, IT systems, analytical
tools, specific application packages
Common Objectives Of CRM
Systems (1)
(Service Perspectives 12.3)
Data collection
Customer data such as contact details, demographics,
purchasing history, service preferences, and the like
Data analysis
Data captured is analyzed and categorized
Used to tier customer base and tailor service delivery
accordingly.
Sales force automation
Sales leads, cross-sell, and up-sell opportunities can be
effectively identified and processed
Entire sales cycle from lead generation to close of sales and
after- sales service can be tracked and facilitated through CRM
system
Common Objectives Of CRM
Systems (2)
(Service Perspectives 12.3)
Marketing automation
Mining of customer data enables the firm to target its market
Goal to achieve one-to-one marketing and cost savings, 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, and to tailor the service
accordingly
For example, platinum callers get priority in waiting loops
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
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 does this vary by customer tier and/or
segment?
How much time and resources can we allocate to CRM right now?
If we believe in customer relationship management, why haven’t we
taken more steps in that direction in past?
What can we do today to develop customer relationships without
spending on technology?
Summary of Chapter 12: Managing
Customer Relationships and
Building Loyalty (1)
Customer loyalty as an important driver of profitability for service
firms so firms need to
Assess value of loyal customer
Narrow gap between actual and potential customer value
To understand the customer-firm relationship, firms should
establish a relationship with customers by creating “membership”
relationships
Four types of marketing
Transactional marketing
Database marketing
Interaction marketing
Network marketing
Summary of Chapter 12: Managing
Customer Relationships and
Building Loyalty (2)
Wheel of Loyalty shows how firms can:
Build a foundation of loyalty
Create loyalty bonds
reduce churn drivers
Building a foundation of loyalty involves:
Good fit between customer needs and capabilities
Searching for value, not just volume
Tiering services effectively
Obtaining customer satisfaction through service quality
Summary of Chapter 12: Managing
Customer Relationships and
Building Loyalty (3)
Customer loyalty bonds include:
Reward-based bonds
Social bonds
Customization bonds
Structural bonds
Bonds can also be created through membership relationships and
loyalty programs
Strategies for reducing customer defections include:
Analyzing customer defections and monitoring declining
accounts
Addressing key churn drivers
Implementing effective complaint-handling and service
recovery procedures
Increasing switching costs
Summary of Chapter 12: Managing
Customer Relationships And
Building Loyalty (4)
Customer relationship management (CRM) is a whole process by
which relations with customers are built and maintained.
An integrated CRM system includes
Strategy development process
Value creation process
Multichannel integration process
Performance assessment process
Cresting a successful CRM program requires understanding
common failures in CRM implementation and knowing how to get
it right
