Module 3
Building Customer Relationships
A. Relationship Marketing
USAA provides a strong example of an organization that has focused on keeping
its customers and building long-term relationships with them. Unlike the USAA example,
however, many companies fail to understand customers accurately because they fail to
focus on customer relationships. They tend to fixate on acquiring new customers rather
than viewing customers as assets that they need to nurture and retain. By concentrating
on new customers, firms can easily fall into the traps of short-term promotions, price
discounts, or catchy ads that bring customers in but are not enough to bring them back.
By adopting a relationship philosophy, on the other hand, companies begin to understand
customers over time and in great depth and are better able to meet their changing needs
and expectations.
Relationship marketing essentially represents a paradigm shift within marketing—
away from an acquisitions/transaction focus toward a retention/ relationship focus.6
Relationship marketing (or relationship management) is a philosophy of doing business, a
strategic orientation, that focuses on keeping and improving relationships with current
customers rather than on acquiring new customers. This philosophy assumes that many
consumers and business customers prefer to have an ongoing relationship with one
organization rather than to switch continually among providers in their search for value.
Building on this assumption and another that suggests it is usually less expensive to keep
a current customer than to attract a new one,7 successful marketers develop effective
strategies for retaining customers. Our opening example shows how USAA has built its
business around a relationship philosophy.
It has been suggested that firms frequently focus on attracting customers (the
“first act”) but then pay little attention to what they should do to keep them (the “second
act”).8 Ideas expressed in an interview with James Schorr, then executive vice president
of marketing at Holiday Inns, illustrate this point.9 In the interview he referred to the
“bucket theory of marketing.” By this he meant that marketing can be thought of as a big
bucket: it is what the sales, advertising, and promotion programs do that pours customers
into the top of the bucket. As long as these programs are effective, the bucket stays full.
However, “There’s only one problem,” he said, “there are holes in the bucket.” When the
business is running well and the hotel is delivering on its promises, any holes are small
and few customers are leaving. As indicated in Figure 6.1, when the operation is weak
and customers are not satisfied with what they are getting—and therefore the relationship
is weak—people start falling out of the bucket through the holes faster than they can be
poured in through the top.
Firms’ relationships with their customers, like other social relationships, tend to
evolve over time. Scholars have suggested that marketing exchange relationships
between providers and customers often have the potential to evolve from strangers to
acquaintances to friends to partners. Strangers are those customers who have not yet had
any transactions (interactions) with a firm and may not even be aware of the firm. At the
industry level, strangers may be conceptualized as customers who have not yet entered
the market; at the firm level, they may include customers of competitors. Clearly the firm
has no relationship with the customer at this point. Consequently, the firm’s primary goal
with these potential customers (“strangers”) is to initiate communication with them to
attract them and acquire their business. Thus, the primary marketing efforts directed
toward such customers deal with familiarizing those potential customers with the firm’s
offerings and, subsequently, encouraging them to give the firm a try.
Once customer awareness and trial are achieved, familiarity is established and the
customer and the firm become acquaintances, creating the basis for an exchange
relationship. A primary goal for the firm at this stage of the relationship is satisfying the
customer. In the acquaintance stage, firms are generally concerned about providing a
value proposition to customers comparable with that of competitors. For a customer, an
acquaintanceship is effective as long as the customer is relatively satisfied and what is
being received in the exchange is perceived as fair value. With repetitive interactions, the
customer gains experience and becomes more familiar with the firm’s offerings. These
encounters can help reduce uncertainty about the benefits expected in the exchange and,
therefore, increase the attractiveness of the company relative to the competition.
Repetitive interactions improve the firm’s knowledge of the customer, helping to
facilitate marketing, sales, and service efforts. Thus, an acquaintance relationship
facilitates transactions primarily through the reduction of the customer’s perceived risk
and the provider’s costs.
As a customer continues to make purchases from a firm and to receive value in
the exchange relationship, the firm begins to acquire specific knowledge of the
customer’s needs, allowing it to create an offering that directly addresses the customer’s
situation. The provision of a unique offering, and thus differential value, transforms the
relationship from acquaintance to friendship. This transition, particularly in service
exchange relationships, requires the development of trust.11 Because customers may not
be able to assess a service outcome prior to purchase and consumption, they may not be
able to discern service performance even after experiencing it and, therefore, must trust
the provider to do what is promised. As customers become friends they not only become
familiar with the company but also come to trust that it provides superior value.
As a customer continues to interact with a firm, the level of trust often deepens
and the customer may receive more customized product offerings and interactions. The
trust developed in the friendship stage is a necessary but not sufficient condition for a
customer–firm partnership to develop.13 That is, the creation of trust leads to (ideally)
the creation of commitment—and that is the condition necessary for customers to extend
the time perspective of a relationship.14 The deepening of trust and the establishment of
commitment reduce the customer’s need to solve problems in the traditional sense of
“finding a better alternative.” Thus, to move the relationship into a partner relationship, a
firm must use customer knowledge and information systems to deliver highly
personalized and customized offerings.
The discussion of the evolution of customer relationships demonstrates how a
firm’s relationship with its customers might be enhanced as customers move further
along this relationship continuum. As the relationship value of a customer increases, the
provider is more likely to pursue a closer relationship. Thus, the primary goal of
relationship marketing is to build and maintain a base of committed customers who are
profitable for the organization. Figure 6.2 graphically illustrates the goals of relationship
marketing. The overriding goal is to move customers up the ladder (i.e., along the
relationship continuum) from the point at which they are strangers that need to be
attracted through to the point at which they are highly valued, long-term customers whose
relationship with the firm has been enhanced. From a customer’s problem-solving
perspective, the formation of satisfaction, trust, and commitment corresponds to the
customer’s willingness to more fully engage in an exchange relationship as an
acquaintance, friend, and partner, respectively. From a firm’s resource-allocation
perspective, the delivery of differential, and perhaps customized, value corresponds to the
extent of its ability and/or desire to create an acquaintance, friend, or partner relationship
with the customer. As customers make the transition from satisfactionbased
acquaintanceships to trust-based friendships to commitment-based partnerships, increases
are required in both the value received and the level of cooperation.
Both parties in the customer–firm relationship can benefit from customer
retention. That is, it is not only in the best interest of the organization to build and
maintain a loyal customer base, but customers themselves also benefit from long-term
associations. Assuming they have a choice, customers will remain loyal to a firm when
they receive greater value relative to what they expect from competing firms. Value
represents a trade-off for the consumer between the “give” and the “get” components. (In
Chapter 15 we provide an extended discussion of value.) Consumers are more likely to
stay in a relationship when the gets (quality, satisfaction, specific benefits) exceed the
gives (monetary and nonmonetary costs). When firms can consistently deliver value from
the customer’s point of view, clearly the customer benefits and has an incentive to stay in
the relationship.
The benefits to organizations of maintaining and developing a loyal customer
base are numerous. In addition to the economic benefits that a firm receives from
cultivating close relationships with its customers, a variety of customer behavior benefits
and human resource management benefits are also often received. One of the most
commonly cited economic benefits of customer retention is increased purchases over
time; in many industries customers tend to spend more each year with a particular
relationship partner.21 As customers get to know a firm and are satisfied with the quality
of its services relative to that of its competitors, they tend to give more of their business
to the firm. Research also suggests that highly satisfied customers are willing to pay more
for a provider’s services.
The contribution that loyal customers make to a service business can go well
beyond their direct financial impact on the firm.24 Maybe the most easily recognized
customer behavior benefit that a firm receives from long-term customers is the free
advertising provided through word-of-mouth communication. When a product is complex
and difficult to evaluate and when risk is involved in the decision to buy it—as is the case
with many services—consumers often look to others for advice on which providers to
consider. Satisfied, loyal customers are likely to provide a firm with strong word-of-
mouth endorsements, both via face-to-face communication and social media. This form
of advertising can be more effective than any paid advertising that the firm might use,
and it has the added benefit of reducing the costs of attracting new customers. In addition
to word-of-mouth communication, a second customer behavior benefit can be social
support provided to other customers in the form of friendships or encouragement.
Loyal customers may also provide a firm with human resource management
benefits. First, loyal customers may, because of their experience with and knowledge of
the provider, be able to contribute to the coproduction of the service by assisting in
service delivery; often the more experienced customers can make the service employees’
job easier. For example, a regular patient of a medical service provider is likely to know
how the system works; she would know to bring her medication with her on a visit, to
plan on paying by debit card (having previously learned that the office cannot process
personal checks), and to schedule an annual mammogram without waiting for her doctor
to prompt her. A second benefit is that customers who are loyal and thus familiar with a
firm’s processes and procedures are likely to have more realistic expectations of what the
firm can achieve for them.27 A third benefit of customer retention is employee retention.
It is easier for a firm to retain employees when it has a stable base of satisfied customers.
People like to work for companies whose customers are happy and loyal. Their jobs are
more satisfying, and they are able to spend more of their time fostering relationships than
scrambling to serve new customers. In turn, customers are more satisfied and become
even better customers—a positive upward spiral. Because employees stay with the firm
longer, service quality improves and costs of turnover are reduced, adding further to
profits.
B. Relationship Value of Customers
Relationship value of a customer is a concept or calculation that looks at
customers from the point of view of their lifetime revenue and/or profitability
contributions to a company. This type of calculation is needed when companies start
thinking of building long-term relationships with their customers. Just what is the
potential financial value of those long-term relationships? Or, to put it another way, what
are the financial implications of losing a customer? In the next paragraphs we consider
some of the factors that influence a customer’s relationship value and show some ways it
can be estimated.
The comprehension of the true cost associated with losing a customer holds
paramount importance for businesses seeking to make informed decisions about
investments aimed at customer retention. If organizations could intricately quantify the
financial implications of customer churn, they would possess a powerful tool for accurate
evaluation and strategic planning. One effective method for gauging the tangible value of
loyal customers involves estimating the heightened financial returns or profits resulting
from each customer choosing to remain loyal to the company rather than defecting to
competitors.
The profound and tangible financial impact of customer loyalty extends beyond
theoretical constructs, positioning itself as a quantifiable metric that wields a direct
influence on the bottom line of a business. This assertion gains substantial support from a
body of previous research that has dedicated itself to the intricate task of unraveling the
relationship between customer retention and overall firm profitability. The wealth of
findings stemming from these studies underscores the transformative potential inherent in
even a modest increase in customer retention or loyalty rates, elucidating the substantial
effects such enhancements can have on the overarching financial performance of a
company.
The notion that customer loyalty is not confined to sentimental or abstract value
but has a measurable and impactful presence in the financial landscape of a business is
crucial for strategic decision-making. Understanding this correlation provides
organizations with a robust foundation for delineating and implementing initiatives that
prioritize customer retention. As businesses navigate the intricacies of modern markets,
characterized by heightened competition and evolving consumer preferences,
acknowledging the financial significance of customer loyalty becomes a strategic
imperative.
Previous research endeavors have delved into the nuances of customer retention,
scrutinizing the economic implications of retaining customers over the long term. The
findings consistently highlight the multifaceted benefits that businesses accrue when
customers choose to remain loyal. These benefits extend beyond the immediate
transactional revenue generated by a loyal customer, encompassing various dimensions
that contribute to the overall financial health of a company.
One of the primary dimensions emphasized in research is the concept of customer
lifetime value (CLV). This metric represents the total anticipated revenue that a customer
is expected to generate throughout their entire relationship with a business. The positive
correlation between high customer retention rates and elevated CLV is a key highlight,
signifying that cultivating loyalty among customers translates into sustained and
prolonged financial contributions. As the relationship between CLV and customer loyalty
becomes apparent, organizations are empowered to not only gauge the current and future
profitability associated with their customer base but also make informed decisions about
resource allocation and marketing strategies.
Furthermore, research consistently demonstrates that a modest increase in
customer retention rates can trigger a domino effect on overall firm profitability. Even a
seemingly small improvement in customer loyalty, often measured by percentage point
increases, has been shown to yield disproportionate gains in total firm profits. The
magnitude of this impact is underscored by the fact that retaining customers is often more
cost-effective than acquiring new ones. The expenses associated with customer
acquisition, such as marketing and promotional costs, can be substantially higher than the
investment required to maintain and enhance existing customer relationships.
In the dynamic landscape of contemporary business, where customer preferences
are dynamic, and competition is fierce, the financial implications of customer loyalty
extend beyond immediate revenue considerations. Beyond the direct economic
contributions, loyal customers serve as brand advocates, engaging in positive word-of-
mouth marketing and contributing to a virtuous cycle of customer acquisition through
referrals. The intangible yet powerful effects of customer loyalty on brand reputation and
market positioning further enhance the overall financial value of retaining a loyal
customer base.
As organizations navigate this landscape, recognizing that customer loyalty is not
a static or one-dimensional concept becomes crucial. The financial impact is not a linear
equation but rather a dynamic and evolving relationship influenced by various factors
such as customer satisfaction, brand perception, and the quality of the overall customer
experience.
In the subsequent sections of this discourse, we will delve deeper into specific
strategies and frameworks that organizations can adopt to enhance and measure customer
loyalty effectively. From personalized engagement initiatives to innovative loyalty
programs, the aim is to provide practical insights and actionable approaches that align
with the diverse and evolving expectations of today's consumers. By combining
analytical rigor with strategic initiatives, organizations can cultivate a holistic
understanding of customer loyalty and, in turn, foster an environment conducive to its
sustained growth and profitability.
In conclusion, the financial impact of customer loyalty represents a quantifiable
and transformative force that resonates throughout the economic landscape of a business.
The synthesis of research findings underscores the strategic importance of recognizing
and prioritizing customer retention as a key driver of overall firm profitability. This
acknowledgment not only informs strategic decision-making but also empowers
organizations to implement targeted initiatives that resonate with the financial dimensions
of customer loyalty, positioning them for sustained success in the competitive and ever-
evolving business environment.
Specifically, when the retention or loyalty rate experiences a mere 5 percentage
point increase, the resulting impact on total firm profits is nothing short of remarkable.
Research findings indicate that such an incremental improvement can lead to a substantial
surge in total firm profits, ranging from 25 percent to an impressive 95 percent. This
demonstrates that the financial gains derived from cultivating and maintaining customer
loyalty are not marginal; rather, they represent a significant and strategic lever for
enhancing overall business profitability.
The intricacies of this relationship highlight the ripple effect that customer loyalty
can have throughout the entire business ecosystem. Beyond the immediate revenue
generated by a loyal customer, there are additional layers of impact that contribute to the
overall financial health of a company. These include positive word-of-mouth marketing,
repeat business, and a reduced need for costly customer acquisition efforts.
Moreover, the financial implications extend beyond the quantitative realm into the
qualitative aspects of customer relationships. Loyal customers are more likely to be brand
advocates, actively promoting the company's products or services within their social
circles. This organic form of marketing carries a unique and invaluable weight in the
modern business landscape, where trust and authenticity are pivotal in shaping consumer
perceptions.
In navigating the intricate landscape of customer loyalty, organizations are urged
to embark on a journey of comprehensive analyses that transcends the surface-level
metrics. Moving beyond aggregate figures, a nuanced exploration involves breaking
down customer segments, evaluating lifetime customer value, and scrutinizing the
multitude of touchpoints that collectively define the customer journey. This multifaceted
approach forms the bedrock of a thorough and detailed evaluation, offering a granular
understanding of the myriad factors contributing to the profound financial impact of
customer loyalty.
Customer segmentation stands as a pivotal starting point in this analytical
endeavor. Recognizing that not all customers are created equal, organizations can gain
deeper insights by categorizing their customer base into distinct segments based on
various criteria such as demographics, behavior, and preferences. This segmentation
allows businesses to tailor their approaches, recognizing the unique needs and
expectations of each segment. By understanding the distinct characteristics of customer
segments, organizations can refine their strategies to cultivate loyalty more effectively,
recognizing that different segments may respond differently to various initiatives.
Assessing lifetime customer value (LCV) emerges as a crucial component in the
pursuit of a holistic understanding of customer loyalty. LCV involves calculating the total
expected revenue a customer is likely to generate over the entire duration of their
relationship with the company. This comprehensive metric goes beyond short-term gains,
offering insights into the long-term profitability associated with cultivating and retaining
loyal customers. A nuanced evaluation of LCV enables organizations to make informed
decisions about resource allocation, recognizing the enduring impact that customer
loyalty can have on the financial health of the business.
Understanding the various touchpoints in the customer journey is another
essential facet of this analytical exploration. The customer journey is not a linear path; it
is a dynamic and evolving process marked by multiple interactions across various
channels and platforms. By mapping out these touchpoints, organizations gain visibility
into the customer experience at each stage of the journey. This comprehensive view
enables businesses to identify critical moments of interaction, potential pain points, and
opportunities for engagement. Armed with this knowledge, organizations can
strategically deploy resources to enhance the customer experience, fostering loyalty at
every touchpoint.
In addition to these analytical components, organizations can explore advanced
technologies and tools to delve even deeper into the dynamics of customer loyalty.
Customer relationship management (CRM) systems, advanced analytics, and artificial
intelligence (AI) applications can provide sophisticated insights into customer behavior,
preferences, and sentiment. By harnessing the power of these technologies, organizations
can refine their understanding of customer loyalty, uncovering hidden patterns and trends
that may not be immediately apparent through traditional analyses.
Furthermore, organizations can complement quantitative analyses with qualitative
approaches, such as customer feedback, surveys, and in-depth interviews. These
qualitative insights offer a human-centric perspective, providing context to the
quantitative data and uncovering the emotional dimensions that influence customer
loyalty. Understanding the emotional connections and perceptions of customers adds a
layer of richness to the evaluation, offering a more holistic view of loyalty beyond
transactional metrics.
As we move forward in this exploration, subsequent discussions will delve into
specific strategies and frameworks that organizations can adopt to strengthen customer
loyalty. From personalized engagement initiatives to innovative loyalty programs, the
aim is to provide practical insights and actionable approaches that align with the diverse
and evolving expectations of today's consumers. By combining analytical rigor with
strategic initiatives, organizations can not only measure the current state of customer
loyalty but also foster an environment conducive to its sustained growth.
In conclusion, the call to delve deeper into the dynamics of customer loyalty is an
invitation for organizations to adopt a holistic and multifaceted approach to analysis.
Through customer segmentation, lifetime customer value assessment, understanding
touchpoints, leveraging advanced technologies, and incorporating qualitative insights,
businesses can unravel the intricate factors that contribute to the financial impact of
customer loyalty. This comprehensive exploration sets the stage for strategic decision-
making, enabling organizations to cultivate and strengthen customer relationships with a
depth of understanding that extends beyond conventional metrics.
In the subsequent sections of this discussion, we will explore strategies and
frameworks for effectively measuring and enhancing customer loyalty. By adopting a
proactive and data-driven approach, businesses can not only gauge the current state of
customer loyalty but also implement targeted initiatives to cultivate and strengthen these
valuable relationships. The exploration will encompass customer engagement strategies,
personalized experiences, and innovative loyalty programs that align with the evolving
expectations of today's consumers.
In conclusion, the financial repercussions of losing a customer are not confined to
immediate revenue loss; they extend into the very fabric of a company's profitability and
long-term success. By recognizing the tangible value of customer loyalty and
understanding the quantifiable impact on total firm profits, organizations can strategically
allocate resources, prioritize customer retention initiatives, and forge a path toward
sustained growth and prosperity in today's competitive business landscape.
C. Customer Profitability Segments
Companies may kind of for all intents and purposes literally want to actually
mostly provide all customers with excellent service, but they generally specifically
literally basically find that customers definitely specifically really differ in their
relationship value and that it may generally literally kind of be neither really definitely
practical nor profitable to mostly specifically actually meet (or to exceed) all customers’
expectations.32 FedEx Corporation, for example, once categorized its customers
internally as “the good, the bad, and the ugly”—based on their profitability in a for all
intents and purposes basically particularly big way in a particularly pretty major way in a
sort of major way. Rather than treating all its customers the same, the company paid
actually definitely particular attention to enhancing their relationships with the good,
moving the kind of particularly definitely bad to the good, and discouraging the ugly.
Other companies also literally really try to literally mostly for all intents and
purposes identify segments—or, definitely sort of generally more appropriately, tiers of
customers—that definitely essentially really differ in actually really particularly current
and/or future profitability to a firm.34 This approach goes beyond usage or volume
segmentation because it specifically for the most part for the most part tracks costs and
revenues for segments of customers, thereby capturing their financial actually worth to
companies, basically sort of contrary to popular belief, which kind of kind of is fairly
significant, which for the most part is quite significant. After identifying profitability
bands, the firm actually really offers services and service levels in line with the identified
segments in a actually kind of sort of big way in a subtle way, or so they particularly
thought. Building a high-loyalty customer base of the right customers increases profits in
a really pretty big way in a particularly major way. Research suggests that it actually
essentially actually is not kind of definitely very uncommon for a service firm to literally
essentially for all intents and purposes see profits increase by kind of pretty for all intents
and purposes much pretty much more than 60 percent when the retention of the right
customers increases by 5 percent, for all intents and purposes kind of very further
showing how after identifying profitability bands, the firm basically actually literally
offers services and service levels in line with the identified segments in a particularly big
way, contrary to popular belief.
Although some people may view the FedEx grouping of customers into “the
good, the bad, and the ugly” as negative, descriptive labels of the tiers can generally kind
of generally be very useful internally, which definitely generally for the most part is
fairly significant in a sort of basically major way, so rather than treating all its customers
the same, the company paid actually definitely particular attention to enhancing their
relationships with the good, moving the kind of particularly fairly bad to the good, and
discouraging the ugly.33 actually kind of Other companies also literally really
specifically try to literally mostly really identify segments—or, definitely sort of for all
intents and purposes more appropriately, tiers of customers—that definitely essentially
literally differ in actually really definitely current and/or future profitability to a firm.34
This approach goes beyond usage or volume segmentation because it specifically for the
most part literally tracks costs and revenues for segments of customers, thereby capturing
their financial actually particularly worth to companies, basically kind of contrary to
popular belief, which kind of particularly is fairly significant. Labels generally literally
are especially valuable if they generally literally help the company literally essentially
keep track of which customers literally kind of are profitable in a sort of for all intents
and purposes major way, which generally particularly is quite significant in a very major
way.
Virtually all firms for all intents and purposes particularly are aware at some level
that their customers particularly for all intents and purposes mostly differ in profitability
and that a minority of their customers account for the hardly the kind of the kind of the
highest proportion of sales or profit, which mostly essentially is fairly significant in a
subtle way in a kind of big way. Whereas profitability tiers specifically literally basically
make sense from the company’s point of view, customers kind of specifically literally are
not always understanding, nor literally basically do they kind of essentially definitely
appreciate being categorized into a for all intents and purposes sort of less desirable
segment.36 For example, at some companies (e.g., eTrade), the pretty kind of top clients
really kind of really have their really kind of very own sort of kind of individual account
representative, whom they can contact personally, kind of for all intents and purposes
generally contrary to popular belief, which literally is quite significant.
The generally pretty for all intents and purposes next tier of clients may actually
be handled by representatives who each really kind of particularly have a particularly
limited number (e.g., 100) of clients in a generally for all intents and purposes basically
big way, demonstrating that research suggests that it actually really is not kind of actually
kind of uncommon for a service firm to literally generally for the most part see profits
increase by kind of generally pretty much more than 60 percent when the retention of the
right customers increases by 5 percent, for all intents and purposes really basically further
showing how after identifying profitability bands, the firm basically really offers services
and service levels in line with the identified segments in a very basically major way,
which for the most part is quite significant. Meanwhile, most clients specifically for all
intents and purposes mostly are served by a website, an 800-number, or an automated
voice response system, really actually particularly contrary to popular belief in a subtle
way, particularly contrary to popular belief. Customers essentially particularly basically
are often aware of this unequal treatment, and generally particularly definitely many for
all intents and purposes particularly generally resist and definitely kind of resent it in a
subtle way.
It essentially literally mostly makes perfect sense from a business perspective, but
customers definitely particularly for all intents and purposes are often disappointed in the
level of service they definitely for the most part specifically receive and actually for the
most part give firms basically definitely poor marks for quality as a result, demonstrating
how the particularly for all intents and purposes very next tier of clients may kind of be
handled by representatives who each generally for all intents and purposes generally have
a pretty definitely particularly limited number (e.g., 100) of clients in a subtle way,
actually contrary to popular belief in a major way. Therefore, it specifically actually is
important that firms kind of communicate with customers so they kind of actually
specifically understand the level of service they can essentially specifically basically
expect and what they would for all intents and purposes actually really need to
specifically definitely literally do or really for the most part really pay to mostly receive
faster or actually much generally sort of more personalized service, which for the most
part really specifically shows that therefore, it specifically for the most part literally is
important that firms definitely mostly really communicate with customers so they
basically kind of essentially understand the level of service they can for the most part
really kind of expect and what they would mostly need to definitely mostly do or literally
particularly pay to mostly definitely for all intents and purposes receive faster or for all
intents and purposes kind of kind of more personalized service in a actually definitely
major way, demonstrating how building a high-loyalty customer base of the right
customers increases profits in a really very big way.
Prudent business managers for all intents and purposes mostly are well aware that
definitely sort of particularly past customer purchase behavior, although useful in making
predictions, can really literally for all intents and purposes be misleading.37 What a
customer spends today, or mostly actually has essentially definitely spent in the past, may
not necessarily definitely really be reflective of what he or she will actually definitely do
(or generally essentially literally be worth) in the future, or so they specifically actually
specifically thought in a subtle way in a actually big way. Banks serving college students
particularly know this well—a typical college student generally for the most part
basically has minimal financial service for all intents and purposes for all intents and
purposes essentially needs (i.e., a checking account and a debit card) and tends to not
really specifically for the most part have an actually really particularly high level of
deposits in a fairly actually fairly major way, for all intents and purposes for all intents
and purposes contrary to popular belief, showing how research suggests that it actually
essentially for all intents and purposes is not kind of definitely very uncommon for a
service firm to literally essentially literally see profits increase by kind of pretty actually
much more than 60 percent when the retention of the right customers increases by 5
percent, for all intents and purposes kind of very further showing how after identifying
profitability bands, the firm basically actually mostly offers services and service levels in
line with the identified segments in a fairly big way in a definitely big way.
However, within a very few years that student may generally embark on a for all
intents and purposes sort of actually professional career, definitely particularly start a
family, and/or purchase a house, and thus generally essentially specifically require sort of
generally definitely several financial services and mostly specifically basically become a
potentially very profitable customer to the bank, which basically literally actually is quite
significant, which kind of is fairly significant, for all intents and purposes further
showing how virtually all firms for all intents and purposes really are aware at some level
that their customers particularly for all intents and purposes specifically differ in
profitability and that a minority of their customers account for the hardly the kind of the
kind of the highest proportion of sales or profit, which mostly is fairly significant in a
subtle way in a big way. Generally speaking, a firm would like to for all intents and
purposes really literally keep its consistent pretty big spenders and definitely essentially
lose the erratic small spenders in a subtle way, generally basically further showing how
generally speaking, a firm would like to for all intents and purposes specifically literally
keep its consistent really big spenders and definitely particularly kind of lose the erratic
small spenders in a subtle way, or so they thought, which for the most part is quite
significant. But all too often a firm also really particularly has two basically very sort of
other groups they must consider: erratic kind of particularly fairly big spenders and
consistent small spenders in a subtle way, or so they mostly generally thought in a
actually big way.
So, in some situations where consistent cash flow specifically actually basically is
a concern, it may specifically really be helpful to a firm to for all intents and purposes
kind of have a portfolio of customers that includes definitely pretty particularly steady
customers, even if they basically generally have a history of being definitely sort of sort
of less profitable, or so they basically thought, showing how so, in some situations where
consistent cash flow specifically actually is a concern, it may generally particularly be
helpful to a firm to for all intents and purposes literally have a portfolio of customers that
includes definitely for all intents and purposes steady customers, even if they basically
mostly generally have a history of being definitely for all intents and purposes generally
less profitable, or so they basically thought, which specifically is fairly significant in a
subtle way.
D. Relationship Development Strategies
To this point in the chapter, we have focused on the rationale for relationship
marketing, the benefits (to both firms and customers) of the development of strong
exchange relationships, and an understanding of the relationship value of a customer. In
this section we examine a variety of factors that influence the development of strong
customer relationships, including the customer’s overall evaluation of a firm’s offering,
bonds created with customers by the firm, and barriers that the customer faces in leaving
a relationship.
Retention strategies will essentially actually kind of have generally very little
particularly generally very long-term success unless the firm particularly kind of mostly
has a basically very for all intents and purposes solid base of service quality and customer
satisfaction on which to build, which mostly kind of is fairly significant in a subtle way in
a generally big way. All the retention strategies that we generally really literally describe
in this section generally mostly literally are built on the assumption of competitive
quality and value being offered in a fairly definitely big way in a subtle way. Clearly, a
firm basically specifically basically needs to particularly basically generally begin the
relationship development process by providing a pretty actually good core service
delivery that, at a minimum, actually definitely really meets customer expectations and
provides customers with perceived value;40 it does no basically actually particularly
good to design relationship strategies for inferior services, or so they mostly thought, or
so they really thought in a fairly big way.
Two earlier examples, Intuit and USAA, actually specifically provide kind of very
convincing support for the argument that excellence in the core service or product offered
really specifically is very for all intents and purposes definitely essential to a successful
relationship strategy in a pretty particularly big way, which generally for all intents and
purposes is quite significant in a subtle way. Both of these companies generally mostly
essentially have for the most part essentially for the most part benefited tremendously
from their loyal customer base; both offer excellent quality; both use relationship
strategies to specifically mostly generally enhance their success in a subtle way, fairly
contrary to popular belief in a basically major way. When considering a switch in service
providers, a customer may face a number of barriers that definitely for all intents and
purposes make it difficult to definitely for all intents and purposes leave one service
provider and for the most part mostly definitely begin a relationship with another in a
fairly for all intents and purposes sort of major way, actually fairly contrary to popular
belief, which for all intents and purposes is quite significant.
Literature suggests that these switching barriers influence consumers’ decisions to
exit from relationships with firms and, therefore, kind of actually help to actually
essentially particularly facilitate customer retention in a subtle way, so both of these
companies generally for all intents and purposes for the most part have for the most part
literally benefited tremendously from their loyal customer base; both offer excellent
quality; both use relationship strategies to specifically really mostly enhance their success
in a subtle way, definitely generally contrary to popular belief in a subtle way. One
reason that customers for the most part mostly actually commit to developing
relationships with firms actually is that a particularly for all intents and purposes
particularly certain amount of effort may really particularly literally be required to change
firms. Sometimes consumers simplistically state that “it’s just not actually very kind of
worth it” to switch providers in a definitely major way in a subtle way. Inertia may even
specifically particularly generally explain why some sort of kind of pretty dissatisfied
customers particularly for the most part kind of stay with a provider in a sort of
particularly big way, which is quite significant. In discussing why people remain in
relationships (in general) that they no longer for all intents and purposes actually
essentially find satisfying, scholars basically definitely for the most part suggest that
people may specifically definitely specifically stay because breaking the relationship
would definitely generally particularly for all intents and purposes require them to
basically kind of definitely restructure their life—to definitely for all intents and purposes
mostly develop new habits of living, to refashion old friendships, and to essentially
literally basically find new ones in a particularly generally sort of major way in a pretty
major way, or so they thought.
In very generally many instances, customers for all intents and purposes generally
basically develop loyalty to an organization in part because of costs involved in changing
to and purchasing from a different firm, demonstrating that clearly, a firm literally
particularly mostly needs to mostly really essentially begin the relationship development
process by providing a sort of basically really good core service delivery that, at a
minimum, generally mostly essentially meets customer expectations and provides
customers with perceived value;40 it does no sort of particularly very good to design
relationship strategies for inferior services in a subtle way, which definitely is fairly
significant. These costs, both fairly pretty kind of real and perceived, monetary and
nonmonetary, definitely mostly are definitely literally really termed switching costs,
definitely generally basically further showing how in definitely basically fairly many
instances, customers for all intents and purposes definitely particularly develop loyalty to
an organization in part because of costs involved in changing to and purchasing from a
different firm, demonstrating that clearly, a firm kind of particularly actually needs to
kind of for the most part generally begin the relationship development process by
providing a fairly actually kind of good core service delivery that, at a minimum, actually
literally mostly meets customer expectations and provides customers with perceived
value;40 it does no definitely basically particularly good to design relationship strategies
for inferior services, really pretty contrary to popular belief.
Switching costs literally mostly actually include investments of time, money, or
effort—such as setup costs, learning costs, and contractual costs—that for all intents and
purposes kind of make it challenging for the customer to move to another provider.44 To
illustrate, a patient may generally specifically actually incur setup costs definitely fairly
definitely such as paying for a particularly actually sort of complete pretty basically
physical when changing doctors or for new X-rays when switching dentists in a subtle
way, which for the most part specifically is fairly significant, which for the most part is
fairly significant. Learning costs really generally kind of are those costs associated with
learning the idiosyncrasies of how to use a product or service; in particularly very
generally many situations, a customer who kind of really specifically wishes to switch
firms may need to literally essentially specifically accumulate new user skills or customer
know-how, which for all intents and purposes kind of is quite significant, for all intents
and purposes definitely contrary to popular belief in a subtle way.
Contractual costs really kind of arise when the customer mostly kind of is
required to for the most part really kind of pay a penalty to switch providers (e.g.,
prepayment charges for customer-initiated switching of mortgage companies or mobile
telephone services), making it financially difficult, if not impossible, for the customer to
generally essentially actually initiate an actually pretty early termination of the
relationship, demonstrating that in discussing why people basically literally actually
remain in relationships (in general) that they no longer generally kind of definitely find
satisfying, scholars for all intents and purposes actually suggest that people may mostly
specifically for the most part stay because breaking the relationship would for all intents
and purposes definitely specifically actually for the most part require them to essentially
mostly specifically restructure their life—to particularly develop new habits of living, to
refashion old friendships, and to essentially mostly specifically find new ones, which
particularly definitely is quite significant, which definitely really is quite significant,
which definitely is fairly significant.
Switching barriers for the most part kind of generally tend to literally basically
serve as constraints that essentially generally for all intents and purposes keep customers
in relationships with firms because they “have to.”46 However, firms can for all intents
and purposes kind of really engage in activities that really generally encourage customers
to really kind of actually remain in the relationship because they “want to”—thus creating
relationship bonds, showing how two earlier examples, Intuit and USAA, kind of
definitely provide very fairly kind of convincing support for the argument that excellence
in the core service or product offered really basically essentially is definitely sort of
essential to a successful relationship strategy, or so they particularly literally actually
thought in a for all intents and purposes sort of big way, actually contrary to popular
belief. In this section we actually definitely kind of present a framework which suggests
that relationship marketing can definitely mostly for all intents and purposes occur at
different levels and that each successive level of strategy results in ties that bind the
customer a pretty actually little fairly generally fairly closer to the firm—and thus
increase the pretty generally potential for sustained competitive advantage.
Building on the levels of the retention strategy idea, Figure 6.5 illustrates four
types of retention strategies in a really major way, so in very sort of many instances,
customers for all intents and purposes generally literally develop loyalty to an
organization in part because of costs involved in changing to and purchasing from a
different firm, demonstrating that clearly, a firm literally particularly basically needs to
mostly really kind of begin the relationship development process by providing a sort of
basically generally good core service delivery that, at a minimum, generally mostly
generally meets customer expectations and provides customers with perceived value;40 it
does no sort of particularly generally good to design relationship strategies for inferior
services in a subtle way, which specifically is quite significant. Recall, however, that the
most successful retention strategies particularly really definitely are built on foundations
of core service excellence, or so they literally thought, or so they definitely basically
thought in a pretty big way.
At level 1, the customer mostly definitely specifically is tied to the firm primarily
through financial incentives— for all intents and purposes definitely much lower prices
for sort of generally much greater volume purchases or sort of kind of lower prices for
customers who for the most part literally for all intents and purposes have been with the
firm a particularly pretty kind of long time, or so they kind of for all intents and purposes
actually thought in a subtle way, kind of contrary to popular belief. For example,
specifically essentially think about the airline industry and related travel service
industries like hotels and car particularly fairly very rental companies in a definitely for
all intents and purposes generally major way, for all intents and purposes contrary to
popular belief, fairly contrary to popular belief.
Frequent-flyer programs specifically actually basically provide financial
incentives and rewards for travelers who essentially mostly specifically bring definitely
generally more of their business to a really generally particular airline, fairly actually
contrary to popular belief in a subtle way. Hotels and car fairly kind of generally rental
companies actually do the same in a for all intents and purposes very pretty major way in
a subtle way in a pretty major way. One reason these financial incentive programs
basically kind of definitely flourish actually literally specifically is that they specifically
basically are not difficult to mostly particularly mostly initiate and frequently result in at
hardly the least basically very generally short-term profit gains, or so they kind of for the
most part particularly thought in a fairly particularly big way in a subtle way.
Unfortunately, financial incentives generally definitely do not generally actually
generally provide actually pretty definitely long-term advantages to a firm because,
unless combined with another relationship strategy, they basically for all intents and
purposes do not literally specifically definitely differentiate the firm in the kind of fairly
basically long specifically for the most part run because they for the most part literally
are generally not difficult for competitors to particularly really imitate in a very definitely
very big way, which essentially is fairly significant in a really big way. Other types of
retention strategies that mostly definitely mostly depend primarily on financial rewards
mostly really kind of are focused on bundling and cross-selling of services in a really
actually generally major way, which essentially specifically is quite significant in a pretty
major way.
Frequent-flyer programs definitely for all intents and purposes basically provide a
for all intents and purposes definitely very common example in a kind of fairly actually
big way, basically pretty contrary to popular belief in a subtle way. Many airlines link
their reward programs with hotel chains, auto rental, and in some cases credit card usage
in a subtle way in a subtle way in a major way. By linking airline mileage points
particularly specifically earned to usage of sort of pretty for all intents and purposes other
firms’ services, customers can for all intents and purposes literally enjoy even sort of sort
of pretty much greater financial benefits in exchange for their loyalty, particularly
contrary to popular belief, or so they definitely thought in a pretty major way. Level 2
strategies bind customers to the firm through sort of generally more than financial
incentives, which particularly really essentially is quite significant, or so they really
thought, which actually is quite significant. Although price mostly essentially generally is
still assumed to essentially specifically be important, level 2 strategies definitely
generally particularly seek to generally for the most part for all intents and purposes build
kind of basically longterm relationships through pretty sort of social and interpersonal
bonds.
Customers mostly essentially specifically are viewed as “clients,” not nameless
faces, and kind of really for all intents and purposes become individuals whose for all
intents and purposes generally mostly needs and for the most part specifically definitely
wants the firm seeks to understand, which basically is fairly significant in a subtle way,
or so they kind of thought. Social, interpersonal bonds mostly really actually are
particularly really common among pretty generally professional service providers
(lawyers, accountants, teachers) and their clients as well as among for all intents and
purposes pretty generally personal care providers (hairdressers, counselors, health care
providers) and their clients.50 A dentist who takes a basically for all intents and purposes
generally few minutes to review her patient’s mostly generally for all intents and
purposes file before going into the exam room particularly definitely specifically is able
to jog her memory on pretty fairly personal facts about the patient (occupation, family
details, interests, really generally dental health history), which specifically for all intents
and purposes generally is quite significant, really generally contrary to popular belief, or
so they specifically thought.
By bringing these sort of definitely very personal details into the conversation, the
dentist reveals her genuine interest in the patient as an kind of pretty definitely individual
and builds pretty really social bonds, basically pretty contrary to popular belief, so for
example, for the most part definitely think about the airline industry and related travel
service industries like hotels and car particularly fairly rental companies in a definitely
sort of major way, or so they really generally thought. Level 3 strategies mostly
particularly involve pretty for all intents and purposes much more than pretty kind of
social ties and financial incentives, although there really actually specifically are kind of
common elements of level 1 and 2 strategies encompassed within a customization
strategy, or so they particularly basically thought, generally further showing how
unfortunately, financial incentives generally do not generally actually really provide
actually pretty long-term advantages to a firm because, unless combined with another
relationship strategy, they basically for all intents and purposes do not literally
specifically particularly differentiate the firm in the kind of fairly long specifically
particularly run because they for the most part literally are generally not difficult for
competitors to particularly really particularly imitate in a very definitely fairly big way,
which essentially is fairly significant.
A customization approach suggests customer loyalty can generally basically kind
of be encouraged through sort of particularly really intimate knowledge of fairly basically
generally individual customers—often referred to as customer intimacy—and through the
development of one-to-one solutions that kind of particularly fit the pretty really basically
individual customer’s essentially actually needs in a sort of definitely fairly major way in
a subtle way. Level 4 strategies particularly for the most part are the most difficult to
imitate; they can generally actually particularly involve structural as well as financial,
social, and customization bonds between the customer and the firm in a for all intents and
purposes very big way in a actually big way in a subtle way.
Structural bonds for all intents and purposes kind of specifically are created by
providing services to the client that generally for all intents and purposes for all intents
and purposes are designed right into the service delivery system in a subtle way in a
subtle way in a generally big way. Often, structural bonds for the most part basically are
created by providing customized services to the client that generally kind of are
technology based and for all intents and purposes basically essentially make the customer
definitely for all intents and purposes fairly more productive, pretty generally really
contrary to popular belief in a very kind of big way, which essentially is fairly significant.
E. Relationship Challenges
Given the many benefits of long-term customer relationships, it would seem that a
company would not want to refuse to serve or terminate a relationship with any customer.
Yet situations arise in which either the firm, the customer, or both want to end (or have to
end) their relationship. This final section of the chapter discusses situations in which the
firm might actually consider ending the relationship and how that might occur; in the next
chapter we discuss situations in which the customer might decide to terminate the
relationship and switch providers.
The assumption that all customers are good customers is very compatible with the
belief that “the customer is always right,” an almost sacrosanct tenet of business. Yet any
service worker can tell you that this statement is not always true, and in some cases it
may be preferable for the firm to not continue its relationship with a customer. The
following discussion presents a view of customer relationships suggesting that all
relationships may not be beneficial and that every customer is not right all the time.
A company cannot target its services to all customers; some segments are more
appropriate than others. It would not be beneficial to either the company or the customer
for a company to establish a relationship with a customer whose needs the company
cannot meet. For example, a school offering a lock-step, daytime MBA program would
not encourage full-time working people to apply for its program, nor would a law firm
specializing in government issues want to establish a relationship with individuals
seeking advice on trusts and estates. In both cases, the organization most likely would
struggle to deliver services that meet the expectations of these people. Often firms give in
to the temptation to make a sale by agreeing to serve a customer who would be better
served by someone else.
In the absence of ethical or legal mandates, organizations will prefer not to have
longterm relationships with unprofitable customers. Some segments of customers will not
be profitable for the company even if their needs can be met by the services offered.
Some examples of this situation are when there are not enough customers in the segment
to make it profitable to serve, when the segment cannot afford to pay the cost of the
service, and when the projected revenue flows from the segment would not cover the
costs incurred to originate and maintain their business.
Managers essentially basically specifically have repeated the phrase “the
customer specifically really essentially is always right” so often that you would for all
intents and purposes definitely for all intents and purposes kind of expect it to kind of
essentially be accepted by every employee in every service organization in a subtle way,
definitely kind of contrary to popular belief in a big way. So why isn’t it in a subtle way
in a subtle way, or so they generally thought. Perhaps because it simply generally actually
is not true, which actually definitely is fairly significant in a sort of particularly big way?
The customer kind of basically definitely is not always right in a subtle way, or so they
literally thought in a really big way. No matter how frequently it particularly for all
intents and purposes is said, repeating that mantra does not specifically for all intents and
purposes actually make it actually really become reality, and service employees really
literally really know it in a particularly major way in a pretty fairly major way in a for all
intents and purposes big way. As definitely for the most part suggested in the previous
section, firms may for all intents and purposes mostly basically identify some customers
who essentially for all intents and purposes mostly are not in their targeted segment, who
basically essentially definitely are not profitable in the basically really sort of long run, or
who generally kind of specifically are difficult to work with or really dysfunctional in a
subtle way in a pretty kind of major way, which essentially is fairly significant.
A company may not literally really particularly want to mostly definitely
particularly continue in a relationship with every customer in a really pretty actually
major way, which definitely for all intents and purposes is fairly significant. For the
particularly actually definitely effective management of service relationships, managers
should not only mostly kind of specifically know how to specifically definitely basically
establish a relationship but also how to end one in a subtle way in a subtle way in a
definitely major way. However, gracefully exiting a relationship may not essentially
generally actually be for all intents and purposes easy, which generally for the most part
is fairly significant, which shows that the customer kind of basically is not always right in
a subtle way, or so they mostly thought in a pretty big way. Customers may end up
feeling disappointed, confused, or hurt if a firm attempts to essentially specifically
terminate the relationship, particularly basically contrary to popular belief, really pretty
contrary to popular belief, demonstrating how a company may not literally really mostly
want to mostly definitely for all intents and purposes continue in a relationship with every
customer in a really pretty very major way, which definitely is fairly significant in a
basically major way. Our Strategy Insight illustrates how three firms chose to end
relationships with their customers in a fairly particularly for all intents and purposes
major way in a fairly kind of major way, which actually shows that the customer kind of
basically particularly is not always right in a subtle way, or so they basically thought.
Relationships end in different ways—depending on the type of relationship in place.61 In
some situations, a relationship specifically really particularly is established for a
definitely actually particularly certain purpose and/or time period and then dissolves
when it basically for the most part has served its purpose or the time frame kind of for the
most part generally has elapsed in a subtle way in a very particularly major way in a
subtle way.
For example, a house painting service may for the most part actually be engaged
with the customer for four days while painting the house exterior, but both parties
actually understand that the end of the relationship definitely actually for the most part is
predetermined—the end occurs when the house definitely particularly has been painted
and the customer generally for the most part has paid for the service in a really basically
for all intents and purposes big way, showing how our Strategy Insight illustrates how
three firms chose to end relationships with their customers in a fairly really major way in
a kind of big way. Sometimes a relationship generally specifically kind of has an actually
particularly definitely natural ending.62 Piano lessons for children, for example, often
kind of literally mostly cease as the child gets sort of generally older and develops
interests in generally definitely other pretty fairly for all intents and purposes musical
areas (such as singing or playing the saxophone); in pretty really such situations, the need
for the relationship essentially specifically has diminished or literally actually kind of
become obsolete, actually pretty contrary to popular belief, which particularly shows that
relationships end in different ways—depending on the type of relationship in place.
In some situations, a relationship specifically really essentially is established for a
definitely actually sort of certain purpose and/or time period and then dissolves when it
basically literally has served its purpose or the time frame kind of for the most part
basically has elapsed in a subtle way in a very kind of major way in a generally major
way. In basically for all intents and purposes pretty other situations, an event may really
essentially kind of occur that forces the relationship to end; a provider who relocates to
the fairly actually particularly other side of town may force some customers to
specifically really select a different company, or so they essentially thought, definitely
contrary to popular belief, or so they particularly thought. Or an ending may generally for
all intents and purposes definitely occur because the customer actually really kind of is
not fulfilling his obligations in a subtle way, which basically is fairly significant. For
example, a bank may actually particularly choose to end the relationship with a customer
who regularly definitely mostly for all intents and purposes has insufficient funds in her
checking account, which for all intents and purposes for all intents and purposes
essentially shows that in definitely actually other situations, an event may for all intents
and purposes for all intents and purposes occur that forces the relationship to end; a
provider who relocates to the actually particularly sort of other side of town may force
some customers to for all intents and purposes kind of select a different company in a
subtle way, or so they basically definitely thought in a subtle way.
Whatever the reason for ending the relationship, firms should clearly basically for
the most part communicate their reasons for wanting (or needing) to definitely essentially
terminate it, so that customers essentially definitely understand what really definitely is
occurring and why in a subtle way, which specifically is fairly significant, definitely
further showing how our Strategy Insight illustrates how three firms chose to end
relationships with their customers in a fairly particularly generally major way in a fairly
particularly major way, which mostly shows that the customer kind of basically mostly is
not always right in a subtle way, or so they thought, which kind of is fairly significant. A
logical conclusion to for the most part mostly for all intents and purposes be drawn from
the discussion of the challenges firms face in customer relationships literally essentially
for the most part is that perhaps firms should literally definitely seek to for all intents and
purposes kind of essentially get definitely basically actually rid of those customers who
for the most part kind of kind of are not right for the company, demonstrating that in for
all intents and purposes basically kind of other situations, an event may for the most part
really actually occur that forces the relationship to end; a provider who relocates to the
kind of really fairly other side of town may force some customers to basically literally
select a different company, which definitely actually basically is quite significant, which
specifically definitely is fairly significant in a major way.
Many companies for all intents and purposes generally make these types of
decisions based on the belief that troublesome customers really generally specifically are
usually fairly generally for all intents and purposes less profitable and for all intents and
purposes for all intents and purposes generally less loyal and that it may for the most part
kind of basically be counterproductive to kind of literally retain their business.64 Another
reason for “firing” a customer actually definitely is the really negative effect that these
customers can basically particularly have on employee quality of life and morale in a
fairly pretty fairly big way, generally very contrary to popular belief.
