Essentials of Services Marketing,

2nd Edition

Instructor Supplements
 Managing Relationships and Building Loyalty

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 Chapter 12 Outline

12.1 The Search for Customer Loyalty

12.2 The Wheel of Loyalty
12.3 Building a Foundation for Loyalty
12.4 Strategies for Developing Loyalty Bonds with Customers
12.5 Strategies for Reducing Customers Defections
12.6 CRM: Customer Relationship Management Systems
12.7 What a Comprehensive CRM Strategy Includes

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 12.1
The Search for Customer Loyalty

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 12.1 The Search for Customer Loyalty
How Much Profit a Customer Generates Over Time
(Fig 12.3)

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 12.1 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
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 12.1 The Search for Customer Loyalty
Why Customers Are More Profitable Over Time
(Fig. 12.4)

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12.1 The Search for Customer Loyalty
Assessing the Value of a Loyal Customer

• Must not assume that loyal customers are always more profitable
than those making one-time transactions
– Large customers may expect price discounts in return for loyalty
– Revenues don’t necessarily increase with time for all types of
customers

• Tasks:
– Determine costs and revenues for customers from different
market segments at different points in their customer lifecycles
– Predict future profitability

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12.1 The Search for Customer Loyalty
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

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12.1 The Search for Customer Loyalty
Why are Customers Loyal? (1)
(Service Insights 12.1)
• Customers stay loyal when we create value for them

• Value can be created for customers through

– Confidence benefits
– Confidence in correct performance
– Ability to trust the provider
– Lower anxiety when purchasing
– Knowing what to expect and receive

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12.1 The Search for Customer Loyalty
Why are Customers Loyal? (2)
(Service Insights 12.1)
• Social benefits
– Mutual recognition and friendship between service provider and
customer

• Special treatment
– Better price
– Discounts not available to most customer
– Extra services
– Higher priority when there is a wait

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 12.2
The Wheel of Loyalty

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 12.2 The Wheel of Loyalty
Fig 12.6

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 12.3
Building a Foundation for Loyalty

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 12.3 Building a Foundation for Loyalty
Targeting the Right Customers and Searching for
Value, Not Volume
• Target the right customer and match them to what firm can deliver
– 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?

• Focus on number of customers served as well as value of each

customer
– Some customers more profitable than others in the short term

– Others may have room for long-term growth

• “Right customers” are not always high spenders

– Can come from a large group of people that no other supplier is
serving well
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 12.3 Building a Foundation for Loyalty
Effective Tiering of Service The Customer Pyramid
(Fig 12.8)

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 12.3 Building a Foundation for Loyalty
The Customer Satisfaction Loyalty Relationship
(Fig. 12.10)

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 12.4
Strategies for Developing Loyalty Bonds with
Customers

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 12.4 Strategies for Developing Loyalty Bonds with
Customers
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 go through unless extremely
dissatisfied with service provider

– Customers benefit from buying all their various services from the
same provider
○ One-stop-shopping, potentially higher service levels, higher
service tiers etc

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 12.4 Strategies for Developing Loyalty Bonds with
Customers
Strategies for Developing Loyalty Bonds with
Customers (2)
• Reward Based Bonds
– Can be financial or non-financial bonds or a 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
– Reward-based loyalty programs are relatively easy to copy and
rarely provide a sustained competitive advantage

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 12.4 Strategies for Developing Loyalty Bonds with
Customers
Strategies for Developing Loyalty Bonds with
Customers (3)
• Social Bonds
– Based on personal relationships between providers and
customers
– Harder to and takes a longer time to build, but also harder to
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

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 12.4 Strategies for Developing Loyalty Bonds with
Customers
Strategies for Developing Loyalty Bonds with
Customers (4)
• Structural Bonds
– Mostly seen in B2B settings

– Align customers way of doing things with supplier’s own

processes
○ Joint investments in projects and sharing of information,
processes and equipment.

– Can be seen in B2C environment too

○ Airlines - SMS check-in, SMS email 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
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 12.5
Strategies for Reducing Customers Defections

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 12.5 Strategies for Reducing Customers Defections
What Drives Customers to Switch? (Fig 12.14)

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 12.5 Strategies for Reducing Customers Defections
Address Key Churn Drivers

• Deliver quality service

• Reduce inconvenience and non-monetary costs
• Have fair and transparent pricing
• Industry specific drivers
– Cellular phone industry: handset replacement a common reason
for subscribers discontinuing services – offer handset
replacement programs
• Take active steps to retain customers
– 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 (see Service
Insights 12.5)
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 12.5 Strategies for Reducing Customers Defections
Other Ways to Reduce Churn

• Implement Effective Complaint Handling and Service Recovery

Procedures

• Increase Switching Costs

– Natural switching costs

○ e.g. 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 bad word of mouth

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 12.6
CRM: Customer Relationship Management Systems

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 12.6 CRM: Customer Relationship Management
Systems
Common Objectives Of CRM Systems
• Customer perspective
– Unified customer interface that delivers customization and
personalization
– Vast service improvement and increase customer value

• Company perspective
– Better segment, tier customer base and target promotion
– Implement churn alert systems if customers are in danger of
defecting

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 12.6 CRM: Customer Relationship Management
Systems
Common Applications Of CRM Systems (1)
(Service Insights 12.6)
• 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

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 12.6 CRM: Customer Relationship Management
Systems
Common Applications Of CRM Systems (2)
(Service Insights 12.6)
• 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 allows firms to judge effectiveness of
marketing campaigns through the analysis of responses
• Call center automation
– Call center staff have customer information at their finger tips
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.

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 12.7
What a Comprehensive CRM Strategy Includes

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 12.7 What a Comprehensive CRM Strategy Includes
Comprehensive CRM Strategy (Fig 12.14)

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 12.7 What a Comprehensive CRM Strategy Includes
Integrated Framework for CRM Strategy
Development

Strategy Development
• Assessment of business strategy
• Business strategy guides
development of customer strategy

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 12.7 What a Comprehensive CRM Strategy Includes
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

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12.7 What a Comprehensive CRM Strategy Includes
Integrated Framework for CRM Strategy – Multi-Channel
Integration

Multi-channel Integration
• Serve customers well across many
potential interfaces
• Offer a unified interface that delivers
customization and personalization
12.7 What a Comprehensive CRM Strategy Includes
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?
12.7 What a Comprehensive CRM Strategy Includes
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
 12.7 What a Comprehensive CRM Strategy Includes
Common Failures in CRM Implementation

• Unfortunately, there is a high failure rate for CRM implementations

• Common reasons for failures

– Viewing CRM as a technology Initiative
– Lack of customer focus
– Not enough understanding of customer lifetime value (CLV)
– Inadequate support from top management
– Failure to reengineer business processes
– Underestimating the challenges in data integration

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 12.7 What a Comprehensive CRM Strategy Includes
How to Get CRM Implementation Right?

• 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 increase in profit from 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 provide 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?

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 Summary of Chapter 12: Managing 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

• 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

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 Summary of Chapter 12: Managing Relationships
and Building Loyalty (2)

• Customer loyalty bonds include

– Reward-based bonds
– Social bonds
– Customization bonds
– Structural bonds

• 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

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 Summary of Chapter 12: Managing Relationships
and Building Loyalty (3)

• 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

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