Managing Relationships and

Building Loyalty

Loyalty
Loyalty is a customers willingness to continue
patronizing a firm over the long term, preferably on
an exclusive basis, and recommending the firms
products to friends and associates.
Service loyalty is the willingness of customer to
consistently
re-patronize
the
same
service
provider/service company, that maybe the first choice
among alternatives, thereby complying with actual
behavioral outcomes and attaching with favorable
attitude and cognition, regardless of any situational
influences and marketing efforts made to induce
switching behavior.
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Defector, Defection, and Zero

Defections
Defector is a nasty word during wartime.
It describes disloyal people who sell out
their own side and go over to the enemy.
Defection is used to describe customers
who drop off a companys radar screen
and transfer their brand loyalty to another
supplier
Zero defections is keeping every
customer who the company can serve
profitably.
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Loyalty vs. Profitability

Reichheld and Sasser (1990) found that customers
became more profitable the longer they remained with
a firm . They suggested four factors that influences
profitability of a firm through loyalty which are as
follows:
1.Profit derived from increased purchase
2.Profit from reduced operating costs
3.Profit from referrals of other customers
4.Profit from price premium
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Customer Lifetime Value

It is equivalent to life time profitability generated
by a loyal customer. It depends on the average
revenue generated over a period of time, referrals
generated by the customer over the period of time
and also the costs incurred to serve the customer.

Relationship Marketing
There are two types of marketing:
1.Transactional marketing:
marketing Traditional or Transactional marketing
is wholly concerned about the promotion and selling of the
product with little or no concentration over customer value and
satisfaction, and try to make new customer every time.
2.Relationship marketing:
marketing A marketing strategy in which a
company seeks to build long-term relationships with its
customers by providing consistent satisfaction. In relationship
marketing, customer profile, buying patterns, and history of
contacts are maintained in a sales database, and an executive
is assigned to one or more major customers to fulfill their
needs and maintain the relationship. There are three
categories of relationship marketing:
marketing
i. Database marketing
ii. Interaction marketing
iii. Network marketing
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Relationship Marketing
Database marketing:
marketing Database marketing is a form of direct
marketing using databases of customers or potential customers
to generate personalized communications in order to promote a
product or service for marketing purposes. Database marketing
emphasizes the use of statistical techniques by using
customers data to develop models of customer behavior, which
are then used to select customers for communications.
Interaction marketing:
Face-to-face interaction between
marketing
customers and representatives of the supplier. It is a cyclical
process of initiating and responding through two-way between
organization and customers. Interactive marketing is the ability
to address the customer, remember what the customer says
and address the customer again in a way that illustrates that
we remember what the customer has told us.
Network marketing:
marketing Network marketing also known as Multilevel marketing (MLM) is a business model that relies on a
network of customers, distributors, suppliers, the media,
consultants,
trade
associations,
government
agencies,
competitors etc.
7

Benefits of Relationship
Marketing
Benefits to Organization:
1. Customer
will continue our services without moving to
competitors.
2. Research found that people tend to increase the amount of
money they spend on services with each visit they make to a
service provider. Thus increase in revenue.
3. Attracting new customers is costly. Money spend on advertising,
promotional campaigns and discount offers.
4. Existing customers will become repeat customers and even
provide word-of- mouth publicity, which will bring in more
customers and additional revenues.
5. Service provider has to put in considerable time, effort and
resources to win the confidence of a new customer and build up
a relationship with him. However when we establish and
strengthen the relationship, it become easy to retain customers.
6. There is less pressure on employees to attract new customers.
Because of this, employee turnover is also lower and
organization saves a lot in terms of the costs of recruitment and
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training employees.

Benefits of Relationship
Marketing
Benefits to Customers:
1.Saving of time and effort.
2.As customer is already known
personalized services and sometimes
specials services can be enjoyed by the
customer (No waiting time in queue)

Membership Relationship
A membership relationship is a
formalized relationship between
the firm and an identifiable
customer, which may offer
special benefits to both parties.

10

The Wheel of Loyalty

A systematic and integrated approach to targeting, acquiring, developing and retaining a valuable customer base

11

Measures of Service Loyalty

1.
2.
3.
4.
5.

6.
7.
8.

Repeat purchase behavior:

behavior Consistent repeat purchase is one kind of loyaltyprone behavior by showing continuance commitment on an entity.
Positive word-of-mouth:
word-of-mouth It means recommending others to purchase through any
common means.
Period of usages:
usages It means the time interval in which the customer keeping
consumption from a particular service provider continuously.
Price tolerance:
tolerance The developed long term relationship of service loyalty makes
loyal customers more price tolerant.
Repeat purchase intention:
intention Customer loyalty is basically referred as the extent of
repeat purchase intention from the same service provider with affective
commitment.
Preference:
Preference Loyalty could be manifested by expressing preference over others.
Choice reduction behavior:
behavior For a loyal customer, the number of choices for
particular decision will usually not more than three.
First in mind:
mind High level of service loyalty will lead customers to consider the
service provider as the first in his/her mind.
12

Ladder of Customer Loyalty

13

Relationship between Customer Satisfaction and

Loyalty

Source: James L. Heskett, W. Earl Sasser, Jr., and Leonard A. Schlesinger, The Service Profit Chain, (New York, NY: The Free Press, 1997), p. 83.

14

Benefits of Customer Loyalty

To the Company:
Loyal customers tend to spend more with the organization
over time
Their relationship maintenance cost are lower than new
customers
A stable customer base induce employee retention.
Lifetime value of a customer can be very high
Loyal customers buys from only one supplier, even though
other options exist
Loyal customers provides constructive feedback/suggestions
They wouldnt consider terminating the relationship
Loyal customer has a positive attitude about the supplier
They says good things about the supplier
15

Benefits of Customer Loyalty

To the Customer:
Inherent benefits in getting good value
Economic, social, and continuity benefits
Contribution to sense of well-being and quality
of life and other psychological benefits
Avoidance of change
Simplified decision making
Social support and friendships
Special deals
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Four Rs of Service Marketing

Relationships is attempting to know the customers.
Retention describes the principle of retaining customers for the longterm and putting the focus on keeping customers as well as attracting
new ones. The longer a customer stays with a firm, the more profitable
they are likely to be. Not only that, they are easier to deal with, and
they spread their enthusiasm to others!
Referrals happen when people are happy, customers become a
valuable source of word-of-mouth, providing one of the most credible
forms of promotion.
Recovery refers to the inevitable mistakes that are likely to happen.
However, it is the response that matters as much as the problem itself.
17

Emerging Customer Retention Programs

Frequency marketing: marketing technique that strives
to make existing customers purchase more often from the
same provider.
Relationship marketing: marketing technique based on
developing long-term relationships with customers.
Aftermarketing: marketing technique that emphasizes
marketing after the initial sale has been made.
Service guarantees: A guarantee is a particular type of
recovery tool. It is an assurance of the quality of or length
of use to be expected from product offered for sale, often
with a promise of reimbursement
Defection
management:
Defection
management
involves tracking the reasons that customers defect and
using this information to continuously improve the service
delivery system, thereby reducing future defections.
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Difference Between Transactional and

Relationship Marketing
Transactional Marketing
1.
2.
3.
4.
5.
6.
7.
8.
9.

1.
Focus on single sale
Emphasizes on service features 2.
3.
Its short-term
Little or no importance given to 4.
customer services
Limited commitment toward the5.
customers
Focused on service quality while6.
production
7.
Communicate to persuade
8.
Functional, mechanistic,
Production-oriented based
business model
9.
Goal is customer satisfaction

Relationship Marketing
Focus on customer retention
Emphasizes on service benefits
Its a long-term relationship
Customer service taken as the
most important element
Higher commitment towards
customers
Quality at all aspects
Communicate to make sense &
meaning
More humanistic and
relationship based business
model
Goal is to delight the customer
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The Six Markets Model

Christopher, Payne and Ballantyne (1991) from Cranfield
University identify six markets which they claim are
central to relationship marketing.
1.Internal market: Every employee and every department
in an organization.
2.Supplier market: A party that supplies goods or services.
3.Recruitment market: Skilled people
4.Referral market consists of individuals who influence
other to purchase.
5.Influence market: Influence markets involve a wide
range of sub-markets including: government regulators,
standards bodies, lobbyists, stockholders, bankers,
venture capitalists, financial analysts, stockbrokers,
consumer associations, environmental associations, and
labor associations.
6.Customer market: "Customer market" is a term for the
portion of available customers who currently patronize a
business, usually for a product or service.
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The Six Markets Model

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CRM
Customer Relationship Management (CRM) is
to find, attract, and win new clients, service
and retain those the company already has,
attract former clients to return, and reduce
the costs of marketing and client service.
CRM is a comprehensive strategy and process
of acquiring, retaining and partnering with
selective customers to create superior value
for the company and the customer.
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Benefits of CRM
Benefits to the company

Have analytical consumer database

Identify the most profitable customers
Have greater understanding of the
customers
Increase market revenues
Reduce cost
Design an effective marketing mix
Design effective participation strategies
Provide right ambience at the service
outlet
Promote customers satisfaction, loyalty
and responsiveness
Get ideas from customers for innovation
or for improving products or services
Reduce introductory cost for new
offerings
Promote organizational image
Use as the hedge against minor
mistakes
Develop loyal customer base

Benefits to consumers
Reliable source of service
Time saving by not searching for
various other service providers
Minimize information search
cost,
energy
cost
and
psychological cost
Confidently get recovery in case
the service provided by the
seller is deficient
Effective role play in service
production due to familiarity
with service organization
Can get liberal credit terms
Enhanced social value
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Drivers of Successful CRM

The three drivers of successful relationships between
marketers and customers are customer value,
value high
levels of customer satisfaction and building a structure
for customer retention.
retention
Customer value: customer value is defined as the
ratio between the customers perceived benefits
(economic, functional and psychological) and the
resources (monetary, time, effort, psychological) used
to obtain those benefits.
Customer satisfaction: customer satisfaction is the
perception of individuals of the performance of the
product or service in relation to their expectations.
Customer retention: customer retention refers to
focusing the firms marketing efforts toward the existing
customer base.
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Levels of Relationship Strategies

Stable
pricing

Volume and
frequency
rewards
Integrated
information
systems
Joint
investments

Bundling and
cross-selling

Continuous
relationships

I. Financial
Bonds
Excellent
Quality
and
Value

IV.
Structural
Bonds

Shared
processes and
equipment

II.
Social
Bonds

Social bonds
among
customers

III. Customization
Bonds

Anticipation/
Innovation

Mass
customization

Personal
relationships

Customer
intimacy

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ERM
Employee relationship management is a process
that companies use to effectively manage all
interactions with employees, ultimately to achieve
the goals of the organization.
ERM is a strategic tool and a Human Resource
Management process which focuses on the
continuous perfection of the relationships between
organizations and employees through increased
communication and knowledge of individual and
shared interests.
ERM is a tool and a strategic process to manage
and increase motivation in the workforce by
increased focus on continuous perfection of the
individual relationships between the employer and
each employee.

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The 80/20 Customer Pyramid

Developed in the late 1800s by the Italian economist
Vilfredo Pareto,
The 8020 rule or Paretos Principle argues that 20% of
a population often account for 80% of an occurrence.
In a business context, this means that 80% of a
companys business stems from 20% of its customers.
Managements task is finding and keeping this lucrative
20%.
The lucrative 20% are sometimes termed barnacles,
because they tend to stay with a business over their
lifetime, while the 80% are sometimes termed
butterflies because they tend to give their business
to a variety of firms.
References:
Newell, F. (2000), Loyalty.com: Customer Relationship
Management in the New Era of Internet Marketing,
New York: McGraw-Hill Professional Books.
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The 80/20 Customer Pyramid

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The 80/20 Customer Pyramid

Most Profitable
Customers

Best
Customers

Other
Customers
Least Profitable
Customers

What segment spends more with

us over time, costs less to maintain,
spreads positive word of mouth?

What segment costs us in

time, effort and money yet
does not provide the return
we want? What segment is
difficult to do business with?
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The Expanded Customer Pyramid

Most Profitable
Customers

Platinum

What segment spends more with

us over time, costs less to maintain,
spreads positive word of mouth?

Gold
Iron
Lead
Least Profitable
Customers

What segment costs us in

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

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The Expanded Customer Pyramid

Platinum: Companys most profitable customers,
typically those who are heavy users of the product, are
not overly price sensitive, are willing to invest in and try
new offerings, and are committed customers of the firm.
Gold: Customers not that much profitable as comparing
to platinum. Because the customers want price discounts
that limit margin or are not as loyal, they may be heavy
users who minimize risk by working with multiple vendors
rather than just the focal company.
Iron: Essential customers who provide the volume
needed to utilize the firms capacity; but their spending
levels, loyalty and profitability are not substantial enough
for special treatment.
Lead: customers who are costing the company money.
They demand more attention than they are due given
their spending and profitability and are sometimes
problem customers.
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