Marketing assignment J 6-10
mzlkha
390DPCh12.pptx
Chapter 12:
Managing Customer
Relationships &
Building Loyalty
Services Marketing
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 12 – Page ‹#›
1
Overview of Chapter 12
The Search for Customer Loyalty
Understanding the Customer-Firm Relationship
The Wheel of Loyalty
Building a Foundation for Loyalty
Strategies for Building Loyalty Bonds with Customers and Reducing Customers' Defections
CRM: Customer Relationship Management
Services Marketing
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 12 – Page ‹#›
2
The Search for
Customer Loyalty
Services Marketing
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 12 – Page ‹#›
3
How Much Profit a Customer Generates Over Time
Services Marketing
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 12 – Page ‹#›
4
Why Customers Are More Profitable Over Time
Services Marketing
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 12 – Page ‹#›
5
Why is Customer Loyalty Important to a Firm’s Profitability?
Customers become more profitable the longer they remain with a firm:
Increased purchases and/or account balances
- Customers/families purchase quantities grow over time
Reduced operating costs
- Fewer demands from suppliers and operating mistakes as customer becomes experienced
Referrals to other customers
- Positive word-of-mouth saves money in sales and advertising
Price premiums
- Long-term customers may pay regular price
- Willing to pay higher price during peak periods
Services Marketing
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 12 – Page ‹#›
Assessing the Value of a Loyal Customer
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
Services Marketing
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 12 – Page ‹#›
7
Assessing the Value of a Loyal Customer
Profit impact of a customer varies according to stage of service in product life cycle
e.g., 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
Services Marketing
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 12 – Page ‹#›
8
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)
Services Marketing
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 12 – Page ‹#›
9
Measuring Customer Equity: Lifetime Value of Each Customer
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
Services Marketing
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 12 – Page ‹#›
Why Customers Are More Profitable Over Time
Services Marketing
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 12 – Page ‹#›
11
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:
buy all services offered by the firm,
use these to the exclusion of any purchases from competitors,
pay full price?
How long, on average, do customers remain with firm?
What impact would it have if they remained customers for life?
Services Marketing
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 12 – Page ‹#›
12
Why are Customers Loyal? (Service Insights 12.1)
Confidence benefits
Confidence in correct performance
Ability to trust the provider
Lower anxiety when purchasing
Knowing what to expect and receive
Social benefits
Mutual recognition and friendship
Special treatment
- Better price
- Discounts not available to most customers
- Extra services
- Higher priority when there is a wait
Customers stay loyal when we create value for them
Value can be created for customers through:
Services Marketing
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 12 – Page ‹#›
Understanding the
Customer-Firm Relationship
Services Marketing
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 12 – Page ‹#›
14
Transactional Marketing
Transactional Marketing
One transaction or a series of transactions does not necessarily constitute a relationship
Requires mutual recognition and knowledge between the parties
Services Marketing
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 12 – Page ‹#›
15
Relationship Marketing
Marketing that creates extended relationships with customers
Database Marketing:
Includes market transaction and information exchange
Technology is used to
Identify and build database of current and potential customers
Deliver differentiated messages based on customers’ characteristics
Track each relationship to monitor cost of acquiring that customer and lifetime value of resulting purchases
Services Marketing
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 12 – Page ‹#›
Relationship Marketing
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 relationships with customers a challenge
e.g., self service technology, interactive website, call centers
Network Marketing:
Common in B2B context
Companies commit resources to develop positions in a network
Services Marketing
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 12 – Page ‹#›
17
Relationships with Customers
| Nature of Service Delivery | Membership Relationship | No Formal Relationship |
| Continuous | Cable TV Insurance Policy College enrollment | Radio Station Police Lighthouse |
| Discrete Transactions | Subscriber phone Theater subscription Warranty repair | Pay Phone Movie Theatre Public Transport |
Type of Relationship Between the Service
Organization and its Customers
Services Marketing
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 12 – Page ‹#›
18
The Wheel of Loyalty
Services Marketing
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 12 – Page ‹#›
19
The Wheel of Loyalty
Services Marketing
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 12 – Page ‹#›
20
Building a
Foundation for Loyalty
Services Marketing
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 12 – Page ‹#›
21
Targeting the Right Customers
Target the right customer
How do customer needs relate to operations elements?
How can service personnel meet expectations of different customers?
Can company match or exceed competing services that are directed at same types of customers?
Focus on number of customers served and 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 be a large group of people that no other supplier is serving well
Services Marketing
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 12 – Page ‹#›
Effective Tiering of Service The Customer Pyramid
Services Marketing
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 12 – Page ‹#›
23
The Customer Satisfaction Loyalty Relationship
Services Marketing
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 12 – Page ‹#›
24
Strategies for Building Loyalty Bonds with Customers
Services Marketing
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 12 – Page ‹#›
25
Strategies for Developing Loyalty Bonds with Customers
Deepening the relationship
Bundling/Cross-selling services makes switching a major effort that customer is unwilling to undertake
Customers benefit from consolidating their purchasing of various services from the same provider
One-stop-shopping, potentially higher service levels
Higher service tiers, etc.
Services Marketing
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 12 – Page ‹#›
26
Strategies for Developing Loyalty Bonds with Customers
Reward Based Bonds: 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 flyer miles), cash-back programs
Non-financial rewards
- Priority to loyalty program members for waitlists and queues in call centers; higher baggage allowances, priority upgrading
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
Services Marketing
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 12 – Page ‹#›
27
Strategies for Developing Loyalty Bonds with Customers
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
Services Marketing
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 12 – Page ‹#›
28
Strategies for Developing Loyalty Bonds with Customers
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 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
Services Marketing
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 12 – Page ‹#›
29
Strategies for Reducing Customer Defections
Services Marketing
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 12 – Page ‹#›
30
Analyze Customer Defections and Monitor Declining Accounts
Understand reasons for customer switching
Churn Diagnostics
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
Services Marketing
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 12 – Page ‹#›
31
What Drives Customers to Switch?
Services Marketing
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 12 – Page ‹#›
32
Addressing Key Churn Drivers
Delivery quality
Minimize inconvenience and non-monetary 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
Services Marketing
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 12 – Page ‹#›
33
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 word of mouth
Services Marketing
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 12 – Page ‹#›
34
CRM: Customer
Relationship Management
Services Marketing
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 12 – Page ‹#›
35
Objectives of CRM Systems
Data collection
Customer data such as contact details, demographics, purchasing history, service preferences
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 effectively identified and processed
Track and facilitate entire sales cycle
Services Marketing
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 12 – Page ‹#›
36
Objectives of CRM Systems
Marketing automation
Mining of customer data enables the firm to target its market
Goal to achieve one-to-one marketing and cost savings
Results in increasing the ROI on its marketing expenditure
Enables 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 resulting in improved service levels to customers.
Caller ID and account numbers allow call centers to identify the customer tier the caller belongs to, and to tailor the service accordingly.
Services Marketing
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 12 – Page ‹#›
Strategy Development Process
Value Creation
Process
Multi-channel Integration Process
Performance Assessment Process
Information Management Process
Integrated Framework for CRM Strategy
Source: Adapted from: Adrian Payne and Pennie Frow, “A Strategic Framework for Customer Relationship Management,” Journal of Marketing 69 (October 2005): 167-176.
Services Marketing
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 12 – Page ‹#›
38
CRM: Strategy Development
Strategy Development
Responsibility of top management
Used to guide the development for the customer strategy
Assessment of business strategy
Services Marketing
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 12 – Page ‹#›
39
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: Value Creation
Services Marketing
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 12 – Page ‹#›
40
Multi-Channel Integration
Serve customers well across many potential interfaces
Offer a unified interface that delivers customization and personalization
CRM: Multi-Channel Integration
Services Marketing
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 12 – Page ‹#›
41
Performance Assessment
Is CRM system creating value for key stakeholders?
Are marketing and service standard objectives being achieved?
Is CRM system meeting performance standards?
CRM: Performance Assessment
Services Marketing
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 12 – Page ‹#›
42
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
CRM: Information Management
Services Marketing
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 12 – Page ‹#›
43
Integrated Framework for
CRM Strategy
Services Marketing
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 12 – Page ‹#›
Common Failures in CRM Implementation
Service firms often equate installing CRM systems with having a customer relationship strategy
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 data integration
Services Marketing
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 12 – Page ‹#›
45
Defining a CRM Strategy
Should our value proposition change to increase customer loyalty?
How much customization, one-to-one marketing, and service delivery is appropriate and profitable?
What is the profit potential of increasing share-of-wallet with current customers? How does this vary by customer tier and/or segment?
How much time and resources can we allocate to CRM right now?
What can we do today to develop customer relationships without spending excessively on technology?
Services Marketing
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 12 – Page ‹#›
46
Summary
Customer loyalty is an important driver of profitability so firms need to assess lifetime customer value and narrow gap between actual and potential value
Building a foundation of loyalty involves
Good fit between customer needs and capabilities
Tiering services effectively
Obtaining customer satisfaction through service quality
Customer loyalty bonds include
Reward-based, social, customization, and structural bonds
Created through membership and loyalty programs
Services Marketing
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 12 – Page ‹#›
47
Summary
Strategies for reducing customer defections include
Analyzing customer defections and monitoring declining accounts
Addressing key churn drivers, increasing switching costs
Implementing effective complaint-handling and service recovery procedures
A successful CRM program requires understanding of common failures while including the following processes
Strategy development process
Value creation process
Multichannel integration process
Performance assessment process
Services Marketing
Slide © 2010 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 12 – Page ‹#›
48
