Lovelock PPT Chapter 12

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Chapter 12:

Managing
Customer
Relationships and
Building Loyalty

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 12 - 1

Overview of Chapter 12
The Search for Customer Loyalty
Understanding the Customer-Firm Relationship
The Wheel of Loyalty
Building a Foundation for Loyalty
Creating Loyalty Bonds
Strategies for Reducing Customers Defections
CRM: Customer Relationship Management

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 12 - 2

The Search for Customer


Loyalty

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 12 - 3

Why Is Customer Loyalty Important to


a Firms Profitability?
Customers become more profitable the longer they
remain with a firm:
Increase purchases and/or account balances
Customers/families purchase in greater quantities as they grow

Reduced operating costs


Fewer demands from suppliers and operating mistakes as customer
becomes experienced

Referrals to other customers


Positive word-of-mouth saves firm from investing money in sales
and advertising

Price premiums
Long-term customers willing to pay regular price
Willing to pay higher price during peak periods
Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 12 - 4

How Much Profit a Customer


Generates Over Time (Fig 12.1)
(Year 1=100)
350
300
250
200
150
100
50
0

Year 1
Credit card

Year 2
Industrial laundry

Year 3

Year 4

Industrial distribution

Year 5
Auto servicing

Source: Based on reanalysis of data from Fredrick R. Reichheld and W. Earl Sassar, Jr., Zero Defections: Quality Comes from Services, Harvard
Business Review 68 (Sep.-Oct. 1990), pp. 105111.
Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 12 - 5

Why Customers Are More Profitable


Over Time (Fig 12.2)
Profit from price
premium
Profit from references
Profit from reduced
op. costs
Profit from increased
usage
Base Profit/Loss
Loss
1

4
Year

Source: Why Are Customers More Profitable Over Time from Fredrick R. Reichheld and W. Earl Sassar, Jr., Zero Defections: Quality Comes from
Services, Harvard Business Review 73 (Sep.Oct. 1990): p. 108.
Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 12 - 6

Assessing the Value of a


Loyal Customer (1)
Must not assume that loyal customers are always more
profitable than those making one-time transactions
Costs
Not all types of services incur heavy promotional
expenditures to attract a new customer
Walk-in traffic more important at times

Revenue
Large customers may expect price discounts in return for
loyalty
Revenues dont necessarily increase with time for all types
of customers

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 12 - 7

Assessing the Value of a


Loyal Customer (2)
Profit impact of a customer varies according to stage of
service in product life cycle
For example referrals and negative word-of-mouth have a
higher impact in early stages

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

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 12 - 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)

Value of referrals
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
Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 12 - 9

Gap Between Actual and


Potential Customer Value

What is current purchasing behavior of customers in


each target segment?

What would be impact on sales and profits if they


exhibited ideal behavior profile of:
(1) buying all services offered by the firm,
(2) using these to the exclusion of any purchases from competitors,
(3) paying full price?

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

What impact would it have if they remained customers


for life?

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 12 - 10

Understanding the
Customer-Firm Relationship

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 12 - 11

Relationship Marketing (1)


Transactional Marketing
One transaction or a series of transactions does not necessarily
constitute a relationship
Requires mutual recognition and knowledge between the parties

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

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 12 - 12

Relationship Marketing (2)


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 meaningful
relationships with customers a marketing challenge
For example, self-service technology, interactive websites, call
centers

Network Marketing:
Common in b2b context where companies commit resources to
develop positions in network of relationships with stakeholders and
relevant agencies
Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 12 - 13

Relationships with Customers


(Fig 12.1)
Type of Relationship between the Service
Organization and Its Customers
Nature of Service
Delivery

Membership
Relationship

No Formal
Relationship

Continuous

Cable TV

Radio station

Insurance policy

Police

College enrollment

Lighthouse

Subscriber phone

Pay phone

Theater subscription

Movie theatre

Warranty repair

Public transport

Discrete
Transactions

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 12 - 14

The Wheel of Loyalty

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 12 - 15

The Wheel of Loyalty

(Fig 12.4)

3. Reduce
Churn Drivers
Conduct churn diagnostic
Address key churn drivers
Enabled through:
Frontline staff
Account
managers
Membership
programs
CRM
Systems

Implement complaint
handling and service
recovery
Increase switching
costs

Build higher
level bonds

Slide 2007 by Christopher Lovelock and Jochen Wirtz

1. Build a
Foundation
for Loyalty
Segment the market
Be selective in acquisition
Use effective tiering of
service.
Deliver quality
service.

Customer
Loyalty

2. Create Loyalty
Bonds
Give loyalty
rewards

Services Marketing 6/E

Deepen the
relationship

Chapter 12 - 16

Building a Foundation for


Loyalty

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 12 - 17

Customer Needs and


Company Capabilities
Identify and target the right customers
How do customer needs relate to operations elements?
How well can service personnel meet expectations of different
types of customers?
Can company match or exceed competing services that are
directed at same types of customers?

Should result in a superior service offering in the eyes


of those customers who value what firm has to offer

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 12 - 18

Searching for ValueNot Just


Volume
Focus on number of customers served as well as value of
each customer
Heavy users who buy more frequently and in larger volumes are
more profitable than occasional users
Avoid targeting customers who buy based on lowest price

Firms that are highly focused and selective in their


acquisition of customers grow faster
Right customers are not always high spenders
Can come from a large group of people that no other supplier is
serving well

Different segments offer different value


Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 12 - 19

Effective Tiering of Service


The Customer Pyramid (Fig 12.5)
Good Relationship
Customers

Which segment sees high value in


our offer, spends more with us over
time, costs less to maintain, and
spreads positive word-of-mouth?

Platinum
Gold
Iron
Lead
Poor Relationship
Customers

Which segment costs us time,


effort, and money, yet does not
provide return we want? Which
segment is difficult to do
business with?

Source: Valarie A Zeithaml, Roland T Rust, and Katharine N. Lemon, The Customer Pyramid: Creating
and Serving Profitable Customers, California Management Review 43, no. 4, Summer 2001, pp.118
142.

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 12 - 20

The Customer Satisfaction


Loyalty Relationship (Fig 12.7)
Apostle
Loyalty (Retention)

100

Zone of Affection

80

Near Apostle

Zone of Indifference
60
40

Zone of Defection

20

Terrorist

0
1

Very
Dissatisfied
Dissatisfied
Source: Adapted from Thomas O. Jones and W. Earl
Sasser, Jr., Why Satisfied Customers Defect, Harvard
Business Review, November-December 1995, p. 91.
Slide 2007 by Christopher Lovelock and Jochen Wirtz

Neither

Satisfied

Satisfaction
Services Marketing 6/E

Very
Satisfied

Chapter 12 - 21

Creating Loyalty Bonds

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 12 - 22

Strategies for Developing Loyalty


Bonds with Customers (1)
Deepening the relationship
Bundling/cross-selling services makes switching a major effort
that customer is unwilling to undertake unless extremely
dissatisfied with service provider
Customers benefit from consolidating their purchasing of various
services from the same provider
See Research Insights 12.2: How do customers see relational
benefits?
One-stop-shopping, potentially
higher service levels,
higher service tiers, etc.

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 12 - 23

Strategies for Developing Loyalty


Bonds with Customers (2)
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
flier miles), cash-back programs

Non-financial rewards
Priority to loyalty program members for waitlists and queues in call
centers: higher baggage allowances, priority upgrading, access to
airport lounges for frequent flyers

Intangible rewards
Special recognition and appreciation, tiered loyalty programs

Reward-based loyalty programs are relatively easy to copy and


rarely provide a sustained competitive advantage
Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 12 - 24

Strategies for Developing Loyalty


Bonds with Customers (3)
Social Bonds
Based on personal relationships between providers and customers
Harder to build and imitate and thus, better chance of retention in
the long term
Customization Bonds
Customized service for loyal
customers
e.g., Starbucks

Customers may find it hard to adjust


to another service provider who
cannot customize service

Source: PAL Library; Asset ID: AAFHKTO0


Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 12 - 25

Strategies for Developing Loyalty


Bonds with Customers (4)
Structural Bonds
Mostly seen in b2b settings
Stimulate loyalty through structural relationships between provider
and customer
Joint investments in projects and sharing of information, processes
and equipment

Can be seen in b2c environment too


AirlinesSMS 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

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 12 - 26

Creating Customer Bonds by Membership


Relationships and Loyalty Programs (1)
Transform discrete transactions into relationships
Discrete transactions: Each usage involves payment to service
supplier by an essentially "anonymous" consumer
Membership cards: Capture transactions, communicate customer
preferences to frontline
Loyalty reward programs increasingly used by all businesses in
response to competition
Frequent fliers programrewards dominated in miles

Customers may get frustrated with reward programs


For example: Feel excluded from rewards program because of low
balances, rewards seen as having little value, cumbersome
redemption process

Dont lose sight of broader goals of offering high service quality, nor
allow service to other customers to deteriorate
Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 12 - 27

Create Customer Bonds by Membership


Relationships and Loyalty Programs (2)
How customers perceive reward programs
Brand loyalty versus deal loyalty
Buyers value rewards according to:
Cash value of redemption award
Range of choice among rewards
Aspirational value of rewards
Amount of usage required to obtain award
Psychological benefits of belonging to reward program

Timing
Send customers periodic updates on account status and
progress towards particular milestones

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 12 - 28

Strategies for Reducing


Customer Defections

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 12 - 29

Analyze Customer Defections and


Monitor Declining Accounts
Understand reasons for customer switching
Churn diagnostics common in mobile phone industry
Analysis of data warehouse information on churned and declining
customers
Exit interviews:
Ask a short set of questions when customer cancels account;
in-depth interviews of former customers by third party agency

Churn Alert Systems:


Monitor activity in individual customer accounts to predict
impending customer switching
Proactive detention effortssend voucher, customer service
representative calls customer

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 12 - 30

What Drives Customers to Switch?


(Fig 12.9)
Service Failure/Recovery

Value Proposition

Core Service Failure

Pricing

Service Mistakes
Billing Errors
Service Catastrophe

Service Encounter Failures


Uncaring
Impolite
Unresponsive
Unknowledgeable

Service
Switching

High Price
Price Increases
Unfair Pricing
Deceptive Pricing

Inconvenience
Location/Hours
Wait for Appointment
Wait for Service

Response to Service Failure


Negative Response
No Response
Reluctant Response

Competition
Found Better Service

Others
Involuntary Switching

Ethical Problems

Customer Moved
Provider Closed

Unsafe
Cheat
Hard Sell Conflict of Interest

Source: Adapted from Susan M. Keaveney, Customer Switching Behavior in Service Industries: An Exploratory Study, Journal of Marketing 59 (April 1995), pp. 7182.

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 12 - 31

Addressing Key Churn Drivers


Delivery quality
Minimize inconvenience and nonmonetary costs
Fair and transparent pricing
Industry specific drivers
Cellular phone industry: Handset replacement a common reason
for subscribers discontinuing servicesoffer proactive handset
replacement programs

Reactive measures
Save teams: Specially trained call center staff to deal
with customers who want to cancel their accounts
Be careful about how save teams are rewarded

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 12 - 32

Other Ways to Reduce Churn


Implement effective complaint handling and
service recovery procedures
Increase switching costs
Natural switching costs
For example, changing primary bank accountmany
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

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 12 - 33

CRM: Customer Relationship


Management

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 12 - 34

Integrated Framework for


CRM Strategy (Fig 12.10)

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): pp.167176.
Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 12 - 35

Integrated Framework for


CRM Strategy Development

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

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 12 - 36

Integrated Framework for CRM


Strategy: Value Creation

Value Creation
Translates business and customer strategies into specific
value propositions for both customers and firm
Customers benefit from priority, tiered services,
loyalty rewards, and customization
Company benefits from reduced customer acquisition
and retention costs, and increased share-of-wallet
Dual creation of value: Customers need to participate in
CRM to reap value from firms CRM initiatives

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 12 - 37

Integrated Framework for CRM


Strategy: Multi-Channel Integration

Multi-Channel Integration
Serve customers well across many
potential interfaces
Offer a unified interface that delivers
customization and personalization

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 12 - 38

Integrated Framework for CRM


Strategy: Performance Assessment

Performance Assessment
Is CRM system creating value for key
stakeholders?
Are marketing and service standard objectives
being achieved?
Is CRM system meeting performance
standards?

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 12 - 39

Integrated Framework for CRM


Strategy: Information Management

Information Management
Collect customer information from all
channels
Integrate it with other relevant information
Make useful information available to the
frontline
Create and manage data repository, IT
systems, analytical tools, specific application
packages

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 12 - 40

Common Objectives Of CRM Systems (1)


(Service Perspectives 12.3)

Data collection
Customer data such as contact details, demographics, purchasing
history, service preferences, and the like

Data analysis
Data captured is analyzed and categorized
Used to tier customer base and tailor service delivery accordingly.

Sales force automation


Sales leads, cross-sell, and up-sell opportunities can be effectively
identified and processed
Entire sales cycle from lead generation to close of sales and aftersales service can be tracked and facilitated through CRM system

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 12 - 41

Common Objectives Of CRM Systems (2)


(Service Perspectives 12.3)

Marketing automation
Mining of customer data enables the firm to target its market
Goal to achieve one-to-one marketing and cost savings, often in the
context of loyalty and retention programs
Results in increasing the ROI on its marketing expenditure
CRM systems also enable the assessment of the effectiveness of
marketing campaigns through the analysis of responses

Call center automation


Call center staff have customer information at their fingertips and
can improve their service levels to all customers
Caller ID and account numbers allow call centers to identify the
customer tier the caller belongs to, and to tailor the service
accordingly
For example, platinum callers get priority in waiting loops
Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 12 - 42

Common Failures in
CRM Implementation
Service firms often equate installing CRM systems with having
a customer relationship strategy
Challenge of getting it right with wide-ranging scope of CRM
Common reasons for failures
Viewing CRM as a technology initiative
Lack of customer focus
Insufficient appreciation of customer lifetime value (CLV)
Inadequate support from top management
Failure to reengineer business processes
Underestimating the challenges in date integration

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 12 - 43

Key Issues in Defining a


Customer Relationship Strategy

How should our value proposition change to increase


customer loyalty?

How much customization or one-to-one marketing and


service delivery is appropriate and profitable?

What is incremental profit potential of increasing share-ofwallet 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 past?

What can we do today to develop customer relationships


without spending on technology?

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 12 - 44

Summary of Chapter 12: Managing Customer


Relationships and Building Loyalty (1)
Customer loyalty as an important driver of profitability for
service firms so firms need to
Assess value of loyal customer
Narrow gap between actual and potential customer value

To understand the customer-firm relationship, firms should


establish a relationship with customers by creating
membership relationships
Four types of marketing

Transactional marketing
Database marketing
Interaction marketing
Network marketing

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 12 - 45

Summary of Chapter 12: Managing Customer


Relationships and Building Loyalty (2)
Wheel of Loyalty shows how firms can:
Build a foundation of loyalty
Create loyalty bonds
reduce churn drivers

Building a foundation of loyalty involves:


Good fit between customer needs and capabilities
Searching for value, not just volume
Tiering services effectively
Obtaining customer satisfaction through service quality

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 12 - 46

Summary of Chapter 12: Managing Customer


Relationships and Building Loyalty (3)
Customer loyalty bonds include:

Reward-based bonds
Social bonds
Customization bonds
Structural bonds

Bonds can also be created through membership relationships


and loyalty programs
Strategies for reducing customer defections include:
Analyzing customer defections and monitoring declining accounts
Addressing key churn drivers
Implementing effective complaint-handling and service recovery
procedures
Increasing switching costs

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 12 - 47

Summary of Chapter 12: Managing Customer


Relationships And Building Loyalty (4)
Customer relationship management (CRM) is a whole process
by which relations with customers are built and maintained.
An integrated CRM system includes

Strategy development process


Value creation process
Multichannel integration process
Performance assessment process

Cresting a successful CRM program requires understanding


common failures in CRM implementation and knowing how to
get it right

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Chapter 12 - 48

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