SM7 Ch12 Loyalty

Services Marketing
Chapter 12: Managing Customer Relationships & Building Loyalty
Slide 2011 by Lovelock & Wirtz
Services Marketing 7/e
Chapter 12 Page 1
Overview of Chapter 12
Services Marketing 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
Chapter 12 Page 2
Services Marketing
The Search for Customer Loyalty
Chapter 12 Page 3
How Much Profit a Customer Generates Over Time
Services Marketing
Chapter 12 Page 4
Why Customers Are More Profitable Over Time
Services Marketing
Chapter 12 Page 5
Why is Customer Loyalty Important to a Firms Profitability?
Services Marketing
Customers become more profitable the longer they remain with a firm:
Increased 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
Chapter 12 Page 6
Assessing the Value of a Loyal Customer
Services Marketing
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 dont necessarily increase with time for all types of customers
Chapter 12 Page 7
Assessing the Value of a Loyal Customer
Services Marketing
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
Chapter 12 Page 8
Measuring Customer Equity: Lifetime Value of Each Customer

Acquisition revenues less costs
Revenues (application fee + initial purchase)
Services Marketing
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)
Chapter 12 Page 9
Measuring Customer Equity: Lifetime Value of Each Customer

Value of referrals
Services Marketing
Percentage of customers influenced by other customers Other marketing activities that drew the firm to an individuals attention
Net Present Value

Sum anticipated annual values (future profits) Suitably discounted each year into the future
Chapter 12 Page 10
Gap Between Actual and Potential Customer Value
Services Marketing
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?
Chapter 12 Page 11
Why are Customers Loyal? (Service Insights 12.1)
Services Marketing
Customers stay loyal when we create value for them Value can be created for customers through:
Confidence benefits
-
Special treatment
- Better price - Discounts not available to most customers - Extra services - Higher priority when there is a wait
Confidence in correct performance Ability to trust the provider Lower anxiety when purchasing Knowing what to expect and receive Mutual recognition and friendship
Social benefits
-
Chapter 12 Page 12
Services Marketing
Understanding the Customer-Firm Relationship
Chapter 12 Page 13
Transactional Marketing
Services Marketing
Transactional Marketing
One transaction or a series of transactions does not necessarily constitute a relationship
Requires mutual recognition and knowledge between the parties
Chapter 12 Page 14
Relationship Marketing
Services Marketing
Marketing that creates extended relationships with customers Database Marketing:

Includes market transaction and information exchange Technology is used to
(1) Identify and build database of current and potential customers (2) Deliver differentiated messages based on customers characteristics (3) Track each relationship to monitor cost of acquiring that customer and lifetime value of resulting purchases
Chapter 12 Page 15
Relationship Marketing
Services Marketing
Interaction Marketing:
Face-to-face interaction between customers and suppliers 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
Chapter 12 Page 16
Relationships with Customers

Services Marketing Type of Relationship Between the Service Organization and its Customers Nature of Membership Service Delivery Relationship Continuous Cable TV
Insurance Policy College enrollment
No Formal Relationship
Radio Station Police Lighthouse Pay Phone Movie Theatre Public Transport
Discrete Transactions
Subscriber phone Theater subscription Warranty repair
Chapter 12 Page 17
Services Marketing
The Wheel of Loyalty
Chapter 12 Page 18
The Wheel of Loyalty

Services Marketing
Chapter 12 Page 19
Services Marketing
Building a Foundation for Loyalty
Chapter 12 Page 20
Targeting the Right Customers

Services Marketing 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
Chapter 12 Page 21
Effective Tiering of Service The Customer Pyramid
Services Marketing
Chapter 12 Page 22
The Customer Satisfaction Loyalty Relationship
Services Marketing
Chapter 12 Page 23
Services Marketing
Strategies for Building Loyalty Bonds with Customers
Chapter 12 Page 24
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
Chapter 12 Page 25
Services Marketing
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
Slide 2011 by Lovelock & Wirtz Services Marketing 7/e Chapter 12 Page 26

Social Bonds
Services Marketing
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
Chapter 12 Page 27

Structural Bonds
Mostly seen in B2B settings
Services Marketing
Align customers' way of doing things with suppliers 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
Chapter 12 Page 28
Services Marketing
Strategies for Reducing Customer Defections
Chapter 12 Page 29
Analyze Customer Defections and Monitor Declining Accounts
Services Marketing
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
What Drives Customers to Switch?

Services Marketing
Chapter 12 Page 31
Addressing Key Churn Drivers

Services Marketing 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
Chapter 12 Page 32
Other Ways to Reduce Churn

Services Marketing
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
Chapter 12 Page 33
Services Marketing
CRM: Customer Relationship Management
Chapter 12 Page 34
Objectives of CRM Systems

Services Marketing
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
Objectives of CRM Systems

Services Marketing 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.
Chapter 12 Page 36
Integrated Framework for CRM Strategy
Services Marketing
Strategy Development Process
Value Creation Process
Multi-channel Integration Process
Performance Assessment Process
Information Management Process
Source: Adapted from: Adrian Payne and Pennie Frow, A Strategic Framework for Customer Relationship Management, Journal of Marketing 69 (October 2005): 167176. Slide 2011 by Lovelock & Wirtz Services Marketing 7/e Chapter 12 Page 37
CRM: Strategy Development

Services Marketing
Strategy Development
Responsibility of top management

Used to guide the development for the customer strategy Assessment of business strategy
Chapter 12 Page 38
CRM: Value Creation

Services Marketing
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 firms CRM initiatives
Services Marketing 7/e Chapter 12 Page 39
CRM: Multi-Channel Integration

Services Marketing
Multi-Channel Integration
Serve customers well across many potential interfaces
Offer a unified interface that delivers customization and personalization
Chapter 12 Page 40
CRM: Performance Assessment

Services Marketing
Performance Assessment
Is CRM system creating value for key stakeholders?
Are marketing and service standard objectives being achieved? Is CRM system meeting performance standards?
Chapter 12 Page 41
CRM: Information Management

Services Marketing
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
Chapter 12 Page 42
Integrated Framework for CRM Strategy
Services Marketing
Chapter 12 Page 43
Common Failures in CRM Implementation
Services Marketing
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 date integration
Chapter 12 Page 44
Defining a CRM Strategy

Services Marketing
How should our value proposition change to increase customer loyalty? How much customization or one-to-one marketing and service delivery is appropriate and profitable? What is incremental profit potential of increasing share-of-wallet with current customers? How much does this vary by customer tier and/or segment? How much time and resources can we allocate to CRM right now? If we believe in customer relationship management, why havent we taken more steps in that direction in the past? What can we do today to develop customer relationships without spending on technology?
Summary
Services Marketing 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
Summary
Services Marketing 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

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Services Marketing

Chapter 12: Managing Customer Relationships & Building Loyalty

Slide 2011 by Lovelock & Wirtz

Services Marketing 7/e

Slide 2011 by Lovelock & Wirtz

Services Marketing 7/e

The Search for Customer Loyalty

Slide 2011 by Lovelock & Wirtz

Services Marketing 7/e

How Much Profit a Customer Generates Over Time

Slide 2011 by Lovelock & Wirtz

Services Marketing 7/e

Why Customers Are More Profitable Over Time

Slide 2011 by Lovelock & Wirtz

Services Marketing 7/e

Why is Customer Loyalty Important to a Firms Profitability?

Reduced operating costs

Referrals to other customers

Slide 2011 by Lovelock & Wirtz

Services Marketing 7/e

Assessing the Value of a Loyal Customer

Slide 2011 by Lovelock & Wirtz

Services Marketing 7/e

Assessing the Value of a Loyal Customer

Slide 2011 by Lovelock & Wirtz

Services Marketing 7/e

Measuring Customer Equity: Lifetime Value of Each Customer

Costs (marketing + credit check + account set up)

Projected annual revenues and costs

Slide 2011 by Lovelock & Wirtz

Services Marketing 7/e

Measuring Customer Equity: Lifetime Value of Each Customer

Net Present Value

Slide 2011 by Lovelock & Wirtz

Services Marketing 7/e

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:

How long, on average, do customers remain with firm?

What impact would it have if they remained customers for life?

Slide 2011 by Lovelock & Wirtz

Services Marketing 7/e

Why are Customers Loyal? (Service Insights 12.1)

Slide 2011 by Lovelock & Wirtz

Understanding the Customer-Firm Relationship

Slide 2011 by Lovelock & Wirtz

Services Marketing 7/e

Requires mutual recognition and knowledge between the parties

Slide 2011 by Lovelock & Wirtz

Services Marketing 7/e

Marketing that creates extended relationships with customers Database Marketing:

Slide 2011 by Lovelock & Wirtz

Services Marketing 7/e

Slide 2011 by Lovelock & Wirtz

Services Marketing 7/e

Relationships with Customers

Subscriber phone Theater subscription Warranty repair

Slide 2011 by Lovelock & Wirtz

Services Marketing 7/e

The Wheel of Loyalty