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Chapter12.ManagingRelationshipsandBuildingLoyaltyEssentialsofServicesMarketing,SecondEdition
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LO1Recognizetheimportantrolecustomerloyaltyplaysindrivingaservicefirms
profitability.
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LO2Calculatethelifetimevalue(LTV)ofaloyalcustomer.
LO3Understandwhycustomersareloyaltoaparticularservicefirm.
LO4KnowthecorestrategiesoftheWheelofLoyaltythatexplainhowtodevelop
aloyalcustomerbase.
LO5Appreciatewhyitissoimportantforservicefirmstotargettheright
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customers.
LO6Useservicetieringtomanagethecustomerbaseandbuildloyalty.
Sign Out
LO7Understandtherelationshipbetweencustomersatisfactionandloyalty.
LO8Knowhowtodeepentherelationshipthroughcrosssellingandbundling.
LO9Understandtheroleoffinancialandnonfinancialloyaltyrewardsinenhancing
customerloyalty.
LO10Appreciatethepowerofsocial,customization,andstructuralbondsin
enhancingloyalty.
LO11Understandwhatfactorscausecustomerstoswitchtoacompetitor,andhow
toreducesuchswitching.
LO12UnderstandthepartplayedbyCustomerRelationshipManagement(CRM)
systemsindeliveringcustomizedservicesandbuildingloyalty.
Figure12.1.Fromhighrollerstocasualgamblers,theglitteringlightsof
Harrahspromisecustomersatisfaction.
OpeningVignette:HarrahsEntertainmentsCustomerRelationship
Management
HarrahsEntertainmentistheworldslargestgamingcompanywithitsfourmainbrands
Harrahs,Caesars,Horseshoe,andtheLondonClubsfamilyofcasinos.Itisaleaderinthe
useofhighlysophisticatedloyaltyprograms.Harrahswasfirsttolaunchatieredcustomer
loyaltyprograminthegamingindustry.Today,ithasfourtiersinitsloyaltyprogram
Gold,Platinum,Diamond,andSevenStars(byinvitationonly).Theprogramisintegrated
acrossallitspropertiesandservices.Customersidentifythemselves(andearnpoints)at
everytouchpointthroughoutthecompany,rangingfromitsgamingtables,restaurants,and
hotels,tothegiftshopsandshows.Thepointscollectedcanbeusedtoobtaincash,
merchandise,lodging,showtickets,vacations,andevents.
WhatisspecialaboutHarrahsisnotitsloyaltyprogram,butwhatitdoeswiththe
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Chapter12.ManagingRelationshipsandBuildingLoyaltyEssentialsofServicesMarketing,SecondEdition
informationgleanedaboutitscustomerswhentheyusetheircardstoearnpoints.Atthe
backend,Harrahshaslinkedallitsdatabasesfromcasinomanagement,hotelreservations,
andeventstoallowittohaveaholisticviewofeachofitscustomers.Harrahsnowhas
detaileddataonover42millioncustomersandknowseachcustomerspreferencesand
behaviors.Theserangefromhowmuchtheyspendoneachtypeofgameandtheirlikesin
foodanddrinks,toentertainmentandlodgingpreferences.Allthisinformationaboutthe
customeriscapturedinrealtime.
Harrahsusesthisdatatodriveitsmarketingandonsitecustomerservice.Forexample,if
aDiamondcardholderonslotmachine278signalsforservice,aHarrahsassociateisable
toask,Theusual,Mr.Jones?andthentrackthetimeittakesforaservertofillthe
guestsrequest.Inanotherexample,whenacustomerwinsajackpot,Harrahscantailora
customerspecificrewardtocelebratethatwin.Harrahsalsoknowswhenacustomeris
approachinghismaximumgaminglimitonaparticulareveningandwhenthecustomeris
likelytostopplaying.Justbeforethelimitisreached,Harrahscanofferhimaheavily
discountedticketinrealtimeviatextmessageforashowwithavailableseats.Thiskeeps
thecustomeronthepremises(andspending)andmakeshimfeelvaluedashegetsavery
specialdealjustwhenhewantedtostopplaying.Atthesametime,itusesotherwise
wastedcapacityinHarrahsshowsandrestaurants.
Figure12.2.Harrahshitsthejackpotwithitstechnologicalinnovationin
developingcustomerrelationships.
Likewise,whenacustomermakesacalltoitscallcenter,thestaffwillhavedetailedreal
timeinformationaboutacustomerspreferencesandspendinghabits,andcanthentailor
promotionsthatcrosssellorupsellitsservices.Harrahsdoesnotdoblanketpromotions
thattargetallitscustomersatthesametime,whichis,accordingtoHarrahsChairman,
President,andCEOGaryLoveman,amarginerodingnightmare.Rather,ituseshighly
targetedpromotionsthatcreatetherightincentivesforeachofitsdifferentcustomers.It
alsousescontrolgroupstomeasurethesuccessofapromotionindollarsandcentsandto
furtherfinetuneitscampaigns.
Withitsdatadrivencustomerrelationshipmanagement(CRM),Harrahsisableto
transformcustomerinteractionsintopersonalanddifferentiatedones.Asaresult,Harrahs
increasedtheshareofwalletofitsHarrahsTotalRewardscardholderstoanimpressive
50%plus,upfrom34%beforeitsCRMprogramwasimplemented.
However,thatiswhataloyal
customercanmeantoafirmaregularsourceofrevenueoveraperiodofmanyyears.The
activemanagementofthecustomerbaseandcustomerloyaltyisalsoreferredtoas
customerassetmanagement.
Inamarketingcontext,thetermdefectionisusedtodescribecustomerswhostopbuying
andtransfertheirbrandloyaltytoanothersupplier.ReichheldandSassermadetheterm
zerodefectionspopular.Zerodefectionsmeanskeepingeverycustomerthecompanycan
serveprofitably.
Notonlydoesarisingdefectionrateshowthatsomethingiswrong
withquality(orthatcompetitorsofferbettervalue),itmayalsobeshowingafallinprofits.
Bigcustomersdonotdisappearovernight.Theyoftenmayshowtheirincreasing
dissatisfactionbysteadilyreducingtheirpurchasesandshiftingpartoftheirbusiness
elsewhere.
LO1
Recognizetheimportantrolecustomerloyaltyplaysindrivingaservicefirmsprofitability.
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Chapter12.ManagingRelationshipsandBuildingLoyaltyEssentialsofServicesMarketing,SecondEdition
thatacustomerhadbeenwiththefirm.
Theyfoundthatthelongercustomers
remainedwithafirmineachoftheseindustries,themoreprofitabletheybecame.Annual
profitincreasespercustomerasshowninFigure12.3forafewsampleindustries.The
industriesstudied(withaverageprofitsfromafirstyearcustomershowninparentheses)
werecreditcards($30),industriallaundry($144),industrialdistribution($45),and
automobileservicing($25).ThesameloyaltyeffectwasfoundintheInternetcontext.It
usuallytookmorethanayeartorecovercustomeracquisitioncosts,andprofitsthen
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increasedascustomersstayedlongerwiththefirm.
Source:ReprintedbypermissionofHarvardBusinessReviewfrom
FrederickJ.ReichheldandW.EarlSasserJr.,ZeroDefections:QualityComes
toServicesHarvardBusinessReview73(SeptOct1990),108.Copyright
1990bytheHarvardBusinessSchoolPublishingCorporation.Allrights
reserved.
Figure12.3.Howmuchprofitacustomergeneratesovertime.
ReichheldandSasserstatethattherearefourfactorsthatcausethisgrowth.Thesefactors
are:
1.Profitderivedfromincreasedpurchases(or,inacreditcardandbanking
environment,higheraccountbalances).Overtime,businesscustomersoftengrow
largerandsoneedtopurchaseingreaterquantities.Individualsmayalsopurchasemoreas
theirfamiliesgroworastheybecomemoreaffluent.Bothtypesofcustomersmaybe
willingtocombinetheirpurchaseswithasinglesupplierwhoprovideshighqualityservice.
2.Profitfromreducedoperatingcosts.Ascustomersbecomemoreexperienced,they
makefewerdemandsonthesupplier(forinstance,theyhavelessneedforinformationand
assistance,andmakemoreuseofselfserviceoptions).Theymayalsomakefewer
mistakeswheninvolvedinoperationalprocesses.Thiscontributestogreaterproductivity.
3.Profitfromreferralstoothercustomers.Positivewordofmouth
recommendationsarelikefreesalesandadvertising,savingthefirmfromhavingtoinvest
asmuchmoneyintheseactivities.
4.Profitfrompricepremium.Newcustomersoftenbenefitfromintroductory
promotionaldiscounts.Longtermcustomers,however,aremorelikelytopayregular
prices,andwhentheyarehighlysatisfiedtheytendtobelesspricesensitive.
Moreover,customerswhotrustasuppliermaybemorewillingtopayhigherpricesatpeak
periodsorforexpresswork.
Figure12.4showstherelativecontributionofeachofthesedifferentfactorsoveraseven
yearperiod,basedonananalysisof19differentproductcategories(bothgoodsand
services).Reichheldarguesthattheeconomicbenefitsofcustomerloyaltynotedabove
oftenexplainwhyonefirmismoreprofitablethanacompetitor.
Source:WhyCustomersAreMoreProfitableOverTimefromFrederickJ.
ReichheldandW.EarlSasserJr.ZeroDefections:QualityComestoServices,
HarvardBusinessReview73(SeptOct1990),108.Reprintedbypermissionof
HarvardBusinessSchool.
Figure12.4.Whycustomersaremoreprofitableovertime.
Loyalcustomersmaynotspendmorethanonetime
buyers,andinsomeinstances,theymayevenexpectpricediscounts.Also,profitsdonot
necessarilyincreasewithtimeforalltypesofcustomers.
Inmostmassmarket
businesstocustomer(B2C)servicessuchasbanking,mobilephoneservices,and
hospitalitycustomerscannotnegotiateprices.However,inmanyB2Bcontexts,large
customershavealotofbargainingpowerandthereforewillnearlyalwaystrytonegotiate
lowerpriceswhencontractscomeupforrenewal.Thisforcessupplierstosharethecost
savingsresultingfromdoingbusinesswithlarge,loyalcustomers.DHLhasfoundthat
althougheachofitsmajoraccountsgeneratessignificantbusiness,theyyieldbelowaverage
margins.Incontrast,DHLssmaller,lesspowerfulaccountsprovidesignificantlyhigher
10
profitability(Figure12.5).
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Chapter12.ManagingRelationshipsandBuildingLoyaltyEssentialsofServicesMarketing,SecondEdition
Figure12.5.DHLpricesdifferentlyfordifferentmarketsegments.
Recentstudieshavealsoshownthattheprofitimpactofacustomermayvaryalot
dependingonthestageoftheserviceproductlifecycle.Forinstance,referralsbysatisfied
customersandnegativewordofmouthfromdefectedcustomershaveamuchgreater
effectonprofitintheearlystagesoftheserviceproductslifecyclethaninlaterstages,
wherethefocusismuchmoreongeneratingcashflowfromtheexistingcustomerbase
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insteadofnewcustomers.
Someofthechallengesthatyouwillprobablyfaceinyourworkaretodeterminethecosts
andrevenuesassociatedwithservingcustomerstodifferentmarketsegmentsatdifferent
pointsintheircustomerlifecycles,andtopredictfutureprofitability.Forinsightsonhowto
calculatecustomervalue,seethebox,WorksheetforCalculatingCustomerLifetime
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Value.
LO2
Calculatethelifetimevalue(LTV)ofaloyalcustomer.
13
Calculatingcustomervalueisaninexactsciencethatissubjecttoavarietyof
assumptions.Youmaywanttotryvaryingtheseassumptionstoseehowitaffects
thefinalfigures.Generallyspeaking,revenuespercustomerareeasiertotrack
onanindividualizedbasisthanaretheassociatedcostsofservingacustomer,
unless(1)noindividualrecordsarekeptand/or(2)theaccountsservedarevery
largeandallaccountrelatedcostsareindividuallydocumentedandassigned.
AcquisitionRevenuesLessCosts
Ifindividualaccountrecordsarekept,theinitialapplicationfeepaidandinitial
purchase(ifrelevant)shouldbefoundintheserecords.Costs,bycontrast,may
havetobebasedonaveragedata.Forinstance,themarketingcostofacquiringa
newclientcanbecalculatedbydividingthetotalmarketingcosts(advertising,
promotions,selling,etc.)devotedtowardacquiringnewcustomersbythetotal
numberofnewcustomersacquiredduringthesameperiod.Ifeachacquisition
takesplaceoveranextendedperiodoftime,youmaywanttobuildinalagged
effectbetweenwhenmarketingexpendituresareincurredandwhennew
customerscomeonboard.Thecostofcreditcheckswhererelevantmustbe
dividedbythenumberofnewcustomers,notthetotalnumberofapplicants,
becausesomeapplicantswillprobablyfailthishurdle.Accountsetupcostswill
alsobeanaveragefigureinmostorganizations.
AnnualRevenuesandCosts
Ifannualsales,accountfees,andservicefeesaredocumentedonanindividual
accountbasis,accountrevenuestreams(exceptreferrals)canbeeasily
identified.Thefirstpriorityistosegmentyourcustomerbasebythelengthofits
relationshipwithyourfirm.Dependingonthesophisticationandprecisionofyour
firmsrecords,annualcostsineachcategorymaybedirectlyassignedtoan
individualaccountholderoraveragedforallaccountholdersinthatagecategory.
ValueofReferrals
Computingthevalueofreferralsrequiresavarietyofassumptions.Togetstarted,
youmayneedtoconductsurveystodetermine(1)whatpercentageofnew
customersclaimthattheywereinfluencedbyarecommendationfromanother
customerand(2)whatothermarketingactivitiesalsodrewthefirmtothat
individualsattention.Fromthesetwoitems,estimatescanbemadeofwhat
percentageofthecreditforallnewcustomersshouldbeassignedtoreferrals.
Additionalresearchmaybeneededtoclarifywhetheroldercustomersaremore
likelytobeeffectiverecommendersthanyoungerones.
NetPresentValue
Calculatingnetpresentvalue(NPV)fromafutureprofitstreamwillrequirechoice
ofanappropriateannualdiscountfigure.(Thiscouldreflectestimatesoffuture
inflationrates.)Italsorequiresassessmentofhowlongtheaveragerelationship
lasts.TheNPVofacustomer,then,isthesumoftheanticipatedannualprofiton
eachcustomerfortheprojectedrelationshiplifetime,suitablydiscountedeach
yearintothefuture.
LO3
Understandwhycustomersareloyaltoaparticularservicefirm.
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Chapter12.ManagingRelationshipsandBuildingLoyaltyEssentialsofServicesMarketing,SecondEdition
loyaltoanyonefirm.Rather,weneedtogiveourcustomersareasontocombinetheir
buyingwithonlyusandthenstayingwithus.Weneedtocreatevalueforthemtobecome
andremainloyal.Justaskyourself:Whatservicecompaniesareyouloyalto?Andwhyare
youloyaltothesefirms?Researchhasshownthatrelationshipscancreatevaluefor
individualconsumersthroughsuchfactorsasinspiringgreaterconfidence,offeringsocial
benefits,andprovidingspecialtreatment(seeServiceInsights12.1).Wewillnextdiscuss
howwecansystematicallythinkaboutcreatingvalueforourloyalcustomersusingthe
WheelofLoyalty.
ServiceInsights12.1:HowCustomersSeeRelational
BenefitsinServiceIndustries
Whatbenefitsdocustomersseethemselvesreceivingfromanextended
relationshipwithaservicefirm?Researchersseekinganswerstothisquestion
conductedtwostudies.Thefirstconsistedofindepthinterviewswith21
respondentsfromabroadcrosssectionofbackgrounds.Respondentswere
askedtoidentifyserviceprovidersthattheyusedonaregularbasisand
invitedtoidentifyanddiscussanybenefitstheyreceivedasaresultofbeing
aregularcustomer.Amongthecommentswere:
Ilikehim[hairstylist]...Hesreallyfunnyandalwayshaslotsofgoodjokes.
Heskindoflikeafriendnow.
IknowwhatImgettingIknowthatifIgotoarestaurantthatIregularly
goto,ratherthantakeachanceonallofthenewrestaurants,thefoodwill
begood.
Ioftengetpricebreaks.ThelittlebakerythatIgotointhemorning,every
onceinawhile,theyllgivemeafreemuffinandsay,Youreagood
customer,itsonustoday.
Youcangetbetterservicethandropincustomers...Wecontinuetogoto
thesameautomobilerepairshopbecausewehavegottentoknowtheowner
onakindofpersonalbasis,andhe...canalwaysworkusin.
Oncepeoplefeelcomfortable,theydontwanttoswitchtoanotherdentist.
Theydontwanttotrainorbreakanewdentistin.
Afterevaluatingandgroupingthecomments,theresearchersdesigneda
secondstudyinwhichtheycollected299surveyquestionnaires.Results
showedthatmostofthebenefitsthatcustomersderivedfromrelationships
couldbegroupedintothreecategories.Thefirst,andmostimportant,group
involvedwhattheresearcherslabeledconfidencebenefits,followedbysocial
benefits,andspecialtreatment.
Confidencebenefitsincludedfeelingsbycustomersthatinanestablished
relationship,therewaslessriskofsomethinggoingwrong,greater
confidenceincorrectperformance,andtheabilitytotrusttheprovider.
Customersexperiencedloweredanxietywhenpurchasingbecausetheyknew
whattoexpect,andtheytypicallyreceivedthefirmshighestlevelofservice.
Socialbenefitsincludedmutualrecognitionbetweencustomersand
employees,beingknownbyname,friendshipwiththeserviceprovider,and
enjoymentofcertainsocialaspectsoftherelationship.
Specialtreatmentbenefitsincludedbetterprices,discountsonspecialdeals
thatwereunavailabletomostcustomers,extraservices,higherprioritywhen
therewasawait,andfasterservicethanmostcustomers.
Source:KevinP.Gwinner,DwayneD.Gremler,andMaryJoBitner,
RelationalBenefitsinServicesIndustries:TheCustomers
Perspective,JournaloftheAcademyofMarketingScience26,no.2
(1998):101114.
LO4
KnowthecorestrategiesoftheWheelofLoyaltythatexplainhowtodevelopaloyal
customerbase.
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Chapter12.ManagingRelationshipsandBuildingLoyaltyEssentialsofServicesMarketing,SecondEdition
Figure12.6.TheWheelofLoyalty.
WediscusseachofthecomponentsoftheWheelofLoyaltyinthesectionsthatfollow.
ability. Finally,theyneedtoaskthemselveswhethertheircompanycanmatchorexceed
competingservicesthataredirectedatthesametypesofcustomers(Figure12.7).
Figure12.7Acompanythatisabletoexceedcustomerexpectationswill
wintheirloyalty.
Theresultofcarefullytargetingcustomersbymatchingthecompanycapabilitiesand
strengthswithcustomerneedsshouldbeasuperiorserviceofferingintheeyesofthose
customerswhovaluewhatthefirmhastooffer.AsFrederickReichheldsaid,...theresult
shouldbeawinwinsituation,whereprofitsareearnedthroughthesuccessandsatisfaction
15
ofcustomers,andnotattheirexpense.
givingsufficientattentiontothevalueofeachcustomer. Generallyspeaking,heavyusers
whobuymorefrequentlyandinlargervolumesaremoreprofitablethanoccasionalusers.
Servicecustomerswhobuystrictlybasedonlowestprice(aminorityinmostmarkets)are
notgoodtargetcustomersforrelationshipmarketing.Theyaredealprone,continuously
seekthelowestpriceonoffer,andswitchbrandseasily.
Loyaltyleadersarechoosyaboutacquiringonlytherightcustomers.Gettingtheright
customerscanbringinlongtermrevenuesandcontinuedgrowthfromreferrals.Itcanalso
enhancesatisfactionfromemployeeswhosedailyjobsareimprovedwhentheycandeal
withappreciativecustomers.Firmsthatarehighlyfocusedandselectiveintheircustomer
acquisitionratherthanthosethatfocusongettingnewcustomerswithoutbeingselective
17
tendtoshowrapidgrowthoverlongperiods. ServiceInsights12.2showshowthe
VanguardGroup,aleaderinthemutualfundsindustry,designeditsproductsandpricingto
attractandretaintherightcustomersforitsbusinessmodel.
Differentsegmentsofferdifferentvalueforaservicefirm.Likeinvestments,sometypesof
customersmaybemoreprofitablethanothersintheshortterm,butothersmayhave
greaterpotentialforlongtermgrowth.Similarly,thespendingpatternsofsomecustomers
maybestableovertime,whileothersmaybevaried,e.g.spendingheavilyinboomtimes
butcuttingbacksharplyinrecessions.Awisemarketerseeksamixofsegmentsinorderto
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reducetherisksassociatedwithvariationsindemand.
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Chapter12.ManagingRelationshipsandBuildingLoyaltyEssentialsofServicesMarketing,SecondEdition
ServiceInsights12.2:VanguardDiscouragesthe
AcquisitionofWrongCustomers
TheVanguardGroupisagrowthleaderinthemutualfundindustrythatbuilt
its$1.6trillioninmanagedassetsby2011throughcarefullytargetingthe
rightcustomersforitsbusinessmodel.Itsshareofnewsales,whichwas
around25%,reflecteditsshareofassetsormarketshare.However,ithada
farlowershareofredemptions(customerdefectionsinthefundcontext),
whichgaveitamarketshareofnetcashflowsof55%(newsalesminus
redemptions),andmadeitthefastestgrowingmutualfundinitsindustry.
HowdidVanguardachievesuchlowredemptionrates?Thesecretwasinits
carefulcustomeracquisition,anditsproductandpricingstrategies,which
encouragedtheacquisitionoftherightcustomers.
JohnBogle,Vanguardsfounder,believedthatthequalityofindexfundsand
theirlowermanagementfeeswouldleadtohigherreturnsoverthelongrun.
HeofferedVanguardsclientsthelowestmanagementfeesthroughapolicy
ofnottrading(itsindexfundsholdthemarkettheyaredesignedtotrack),not
havingasalesforce,andspendingonlyasmallportionofwhatits
competitorsdidonadvertising.Anotherimportantpartofkeepingitscosts
lowwasitsaimtodiscouragetheacquisitionofcustomerswhowerenot
longtermindexholders.
BogleattributesthehighcustomerloyaltyVanguardhasachievedtoagreat
dealoffocusoncustomerdefectionsorlowredemptionrates.Low
redemptionratesmeantthatthefirmwasattractingtherightkindofloyal,
longterminvestors.Thestabilityofitsloyalcustomerbasehasbeenkeyto
Vanguardscostadvantage.Whenaninstitutionalinvestorredeemed$25
millionfromanindexfundboughtonlyninemonthsearlier,heregardedthe
acquisitionofthiscustomerafailureofthesystem.Heexplained,Wedont
wantshortterminvestors.Theymuckupthegameattheexpenseofthelong
terminvestor.AttheendofhischairmanslettertotheVanguardIndex
Trust,Boglerepeated:Weurgethem[shortterminvestors]tolookelsewhere
fortheirinvestmentopportunities.
Thiscareandattentiontoacquiringtherightcustomersisfamous.For
example,Vanguardonceturnedawayaninstitutionalinvestorwhowantedto
invest$40millionbecausethefirmsuspectedthatthecustomerwouldchurn
theinvestmentwithinthenextfewweeks,creatingextracostsforexisting
customers.ThepotentialcustomercomplainedtoVanguardsCEO,whonot
onlysupportedthedecision,butalsouseditasanopportunitytoremindhis
teamswhytheyneededtobeselectiveaboutthecustomerstheyaccept.
Furthermore,Vanguardintroducedanumberofchangestoindustrypractices
thatdiscouragedactivetradersfrombuyingitsfunds.Forexample,Vanguard
didnotallowtelephonetransfersforindexfunds,redemptionfeeswere
addedtosomefunds,andthestandardpracticesubsidizingnewaccountsat
theexpenseofexistingcustomerswasrejectedbecausethepracticewas
consideredasdisloyaltoitscoreinvestorbase.Theseproductandpricing
policiesineffectturnedawayheavytraders,butmadethefundextremely
attractiveforlongterminvestors.
Finally,Vanguardspricingwassetuptorewardloyalcustomers.Formanyof
itsfunds,investorspayaonetimefeeupfront,whichgoesintothefunds
themselvestomakeupforallcurrentinvestorsfortheadministrativecostsof
sellingnewshares.Thisfeesubsidizeslongterminvestors,andpenalizes
shortterminvestors.
Source:AdaptedfromFrederickF.Reichheld,LoyaltyRules!How
TodaysLeadersBuildLastingRelationships.Boston:MA,Harvard
BusinessSchoolPress,2001,2429,8487,144145
www.vanguard.com(http://www.vanguard.com) ,accessedonMarch12,2012.
Finally,managersshouldntassumethattherightcustomersarealwaysbigspenders.
Dependingontheservicebusinessmodel,therightcustomersmaycomefromalarge
groupofpeoplethatnoothersupplierisdoingagoodjobofserving.Manyfirmshavebuilt
successfulstrategiesonservingcustomersegmentsthathadbeenneglectedbyestablished
players,whichdidntseethemasbeingvaluableenough.ExamplesincludeEnterprise
RentACar,whichtargetscustomerswhoneedatemporaryreplacementcar.Itavoided
themoretraditionalsegmentofbusinesstravelerstargetedbyitsprincipalcompetitors.
Similarly,CharlesSchwabfocusedonretailstockbuyers,andPaychexprovidessmall
19
businesseswithpayrollandhumanresourceservices.
LO6
Useservicetieringtomanagethecustomerbaseandbuildloyalty.
focusingafirmsresourcesontoptiercustomers. Furthermore,differentcustomertiers
oftenhavequitedifferentserviceexpectationsandneeds.AccordingtoValarieZeithaml,
RolandRust,andKatharineLemon,itisimportantforservicefirmstounderstandthe
needsofcustomerswithindifferentprofitabilitytiersandadjusttheirservicelevels
21
accordingly. Zeithaml,Rust,andLemonillustratethisprinciplethroughafourlevel
pyramid(Figure12.8).
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Chapter12.ManagingRelationshipsandBuildingLoyaltyEssentialsofServicesMarketing,SecondEdition
Source:ValerieA.Zeithaml,RolandT.Rust,andKatherineN.LemonThe
CustomerPyramid:CreatingandServingProfitableCustomers,California
ManagementReview43,no.4,Summer2001,Figure1,pp.118142Copyright
2001bytheRegentsoftheUniversityofCalifornia.Reprintedbypermission
ofTheRegentsforelectronicpostingaddAllrightsreserved.Thisarticleis
forpersonalviewingbyindividualsaccessingthissite.Itisnottobecopied,
reproduced,orotherwisedisseminatedwithoutwrittenpermissionfromthe
CaliforniaManagementReview.Byviewingthisdocument,youherebyagreeto
theseterms.Forpermissionorreprints,contact:cmr@haas.berkeley.edu.
Figure12.8.Thecustomerpyramid.
Platinum.Thesecustomersformaverysmallpercentageofafirmscustomerbase.They
areheavyusersandcontributealargeshareoftheprofits.Thissegmentisusuallylessprice
sensitive,butexpectshighestservicelevelsinreturn.Theyarelikelytobewillingtoinvest
inandtrynewservices.
Gold.Thegoldtierincludesalargerpercentageofcustomersthantheplatinum.However,
individualcustomerscontributelessprofitthanplatinumcustomersdo.Theytendtobe
slightlymorepricesensitiveandlesscommittedtothefirm.
Iron.Thesecustomersprovidethebulkofthecustomerbase.Theirnumbersgivethefirm
economiesofscale.Hence,theyareimportantsothatafirmcanbuildandmaintaina
certaincapacitylevelandinfrastructure,whichareoftenneededforservinggoldand
platinumcustomerswell.However,ironcustomersinthemselvesmayonlybemarginally
profitable.Theirlevelofbusinessisnotenoughtojustifyspecialtreatment.
Lead.Customersinthistiertendtogeneratelowrevenuesforafirm.However,they
oftenstillrequirethesamelevelofserviceasironcustomersdo.Therefore,fromthefirms
perspective,theyarefrequentlyalossmakingsegment.
Tieringtheservicemeansthatthefirmdeliversdifferentservicesandservicelevelsto
differentcustomergroups.Thebenefitfeaturesforplatinumandgoldcustomersshouldbe
designedtoencouragethemtoremainloyalbecausethesecustomersaretheveryones
competitorswouldlikemosttosteal.Amongloyalsegments,thefocusshouldbeon
22
developingandgrowingtherelationship,perhapsvialoyaltyprograms.
Bycontrast,amongleadtiercustomersatthebottomofthepyramid,theoptionsareto
eithertomovethemtotheironsegment(e.g.,throughincreasingsales,increasingprices,
and/orcuttingservicingcosts)ortoendtherelationshipwiththem.Imposingaminimum
balanceorfeethatiswaivedwhenacertainlevelofrevenueisgeneratedmayencourage
customerswhouseseveralsupplierstoconsolidatetheirbuyingwithasinglefirminstead.
Anotherwaytomovecustomersfromtheleadtiertoironistoencouragethemtouselow
costservicedeliverychannels.Forinstance,leadtiercustomersmaybechargedafeefor
facetofaceinteractionsbutthefeeiswaivedwhensuchcustomersuseelectronicchannels.
Inthecellulartelephoneindustry,forexample,lowusemobileuserscanbeencouragedto
useprepaidpackagesthatdonotrequirethefirmtosendoutbillsandcollectpayment.This
alsoreducestheriskofbaddebtsonsuchaccounts.
Divestingorterminatingcustomerscomeswhenthefirmrealizesthatnotallexisting
23
customerrelationshipsareworthkeeping. Somerelationshipsmaynolongerbeprofitable
forthefirmbecausetheycostmoretomaintainthanthecontributionstheygenerate.
Somecustomersnolongerfitthefirmsstrategyeitherbecausethatstrategyhaschanged
orbecausethecustomersbehaviorandneedshavechanged.
Occasionally,customersarefiredoutright.INGDirectisonesuchcompanythatdoesso.
Itsellsanofrillstypeofconsumerbankingitonlyhasahandfulofbasicproducts,andit
lureslowmaintenancecustomerswithnominimumbalancenorfeesandslightlyhigher
interestrates(itsOrangesavingsaccountpaid1.5%inAugust2010)(Figure12.9).Tooffset
thatgenerosity,itsbusinessmodelpushesitscustomerstowardonlinetransactions,andthe
bankroutinelyfirescustomerswhodontfititsbusinessmodel.Whenacustomercallstoo
often(theaveragecustomerphonecallcoststhebank$5.25tohandle)orwantstoomany
exceptionstotherule,thebankssalesassociatesbasicallysay:Look,thisdoesntfityou.
Youneedtogobacktoyourcommunitybankandgetthekindofcontactyoure
comfortablewith.Asaresult,INGDirectscostperaccountisonlyonethirdofthe
24
industryaverage.
Figure12.9.INGDirectoffershighinterestratesthatkeepcustomers
happy.
Eachservicefirmneedstoregularlyexamineitscustomerportfolioandconsiderending
unsuccessfulrelationships.Legalandethicalconsiderations,ofcourse,willdetermineand
howtotakesuchactions.Forexample,abankmayintroduceaminimummonthlyfeefor
accountswithalowbalance(e.g.,below$1,000),but,forsocialresponsibility
considerations,waivethisfeeforcustomersonsocialsecurity.
LO7
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Understandtherelationshipbetweencustomersatisfactionandloyalty.
mouth,andbecomeloyaladvocatesofafirm. Ontheotherhand,dissatisfactiondrives
customersawayandisakeyfactorinswitchingbehavior.Recentresearchevenshowed
thatincreasesincustomersatisfactionleadtoincreasesinstockprices.SeeServiceInsights
12.3.
Thesatisfactionloyaltyrelationshipcanbedividedintothreemainzones:defection,
indifference,andaffection(Figure12.10).Thezoneofdefectionoccursatlowsatisfaction
levels.Customerswillswitchunlessswitchingcostsarehighortherearenootherchoices.
Extremelydissatisfiedcustomerscanturnintoterroristsprovidingalotofnegativeword
26
ofmouthfortheserviceprovider. Thezoneofindifferenceisfoundatmoderate
satisfactionlevels.Here,customersarewillingtoswitchiftheyfindabetterchoice.Finally,
thezoneofaffectionislocatedatveryhighsatisfactionlevels,wherecustomersmayhave
suchhighattitudinalloyaltythattheydonotlookforalternativeserviceproviders.
Customerswhopraisethefirminpublicandreferotherstothefirmaredescribedas
27
apostles.Highsatisfactionlevelsleadtoimprovedfuturebusinessperformance.
Source:AdaptedfromThomasO.JonesandW.EarlSasser,Jr.,WhySatisfied
CustomersDefect,HarvardBusinessReview,NovemberDecember1995,p.
91.
Figure12.10.Thecustomersatisfactionloyaltyrelationship.
ServiceInsights12.3:CustomerSatisfactionandWall
StreetHighReturnsandLowRisk!
Doesafirmscustomersatisfactionlevelshaveanythingtodowithitsstock
price?ThiswastheinterestingresearchquestionClaesFornellandhis
colleagueswantedtoanswer.Morespecifically,theyexaminedwhether
investmentsincustomersatisfactionledtoexcessstockreturns.Ifso,were
thesereturnsassociatedwithhigherrisksaswouldbepredictedbyfinance
theory?
Theresearchersbuilttwostockportfolios,onehypotheticalbackdated
portfolioandarealworldportfolio.Bothportfoliosconsistedonlyoffirmsthat
didwellintermsoftheircustomersatisfactionratings,asmeasuredbythe
AmericanCustomerSatisfactionIndex(ACSI).Theirfindingsarestrikingfor
managersandinvestorsalike!Fornellandhiscolleaguesdiscoveredthat
ACSIwassignificantlyrelatedtostockpricesoftheindividualfirmsand
outperformedthemarket.However,simplypublishingthelatestdataonthe
ACSIindexdidnotimmediatelymoveshareprices.Instead,shareprices
seemedtoadjustslowlyovertime,asfirmspublishedotherresults(perhaps
earningsdataorotherhardfactsthatmaylagcustomersatisfaction).
Therefore,actingfasterthanthemarkettochangesintheACSIindex
generatedexcessstockreturns.Theresultsareinlinewithresearchin
marketing,whichholdsthatsatisfiedcustomersimprovethelevelandthe
stabilityofcashflow.
Formarketingmanagers,thisstudysfindingsconfirmthatinvestments(or
expensesifyoutalktoaccountants)inmanagingcustomerrelationshipsand
thecashflowstheyproduceincreaseafirmsvalue.Althoughtheresultsare
convincing,becarefulifyouwanttoinvestinfirmsthatshowhighincreases
incustomersatisfactioninfutureACSIreleases.Yourfinancefriendswilltell
youthatefficientmarketslearnfast!Youknowthishashappenedwhenyou
seestockpricesmoveasaresponsetofutureACSIreleases.Youcanlearn
moreabouttheACSIatwww.theacsi.org (http://www.theacsi.org) .
Cancustomersatisfactiondatahelptooutperformthemarket?
Sources:ClaesFornell,SunilMithas,ForrestV.MorgesonIII,andM.S.
Krishnan,CustomerSatisfactionandStockPrices:HighReturns,Low
Risk,JournalofMarketing70(January2006):314.LerzanAksoy,
BruceCooil,ChristopherGroening,TimothyL.Keiningham,andAtakan
Yalin,TheLongTermStockMarketValuationofCustomer
Satisfaction,JournalofMarketing72,no.4(2008):105122.
loyaltyprogramthatwillattractthemtospendmoney. Therefore,thereisaneedto
haveavarietyofstrategiestodeveloployaltybondswithcustomers.Specificstrategies
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include(1)deepeningtherelationshipthroughcrosssellingandbundling,(2)creating
loyaltyrewards,and(3)buildinghigherlevelbondssuchassocial,customization,and
29
structuralbonds. Wewilldiscusseachofthesethreestrategiesnext.
LO8
Knowhowtodeepentherelationshipthroughcrosssellingandbundling.
increasedshareofwalletrewardbasedbonds. Incentivesthatofferrewardsbasedonthe
frequencyofpurchase,valueofpurchase,oracombinationofboth,representabasiclevelof
customerbonding.Theserewardscanbefinancialornonfinancialinnature.
Financial Rewards
Financialrewardsarecustomerincentivesthathaveafinancialvalue(alsocalledhard
benefits).Theseincludediscountsonpurchases,loyaltyprogramrewardssuchasfrequent
fliermiles(Figure12.11),andthecashbackprogramsprovidedbysomecreditcardissuers.
Figure12.11.AmericanAirlinestriestomakeitsloyaltyprogramenticing.
Besidesairlinesandhotels,anincreasingnumberofservicefirmsrangingfromretailers
31
(suchasdepartmentstores,supermarkets, bookshops,andpetrolstations),
telecommunicationsproviders,andcafchainstocourierservicesandcinemachainshaveor
arelaunchingsimilarrewardprogramsinresponsetotheincreasingcompetitivenessof
theirmarkets.Manyfirmsdenominatetheirawardsinmilesthatcanbecreditedtoa
selectedfrequentflyerprogram.Inshort,airmileshavebecomeaformofpromotional
32
currencyintheservicesector.
Recentresearchinthecreditcardindustrysuggeststhatfinancialrewardsbasedloyalty
programsstrengthenthecustomersperceptionofthevaluepropositionandleadto
33
increasedrevenuesduetofewerdefectionsandhigherusagelevels.
Interestingly,ifafirmhasloyaltyprogrampartners,(e.g.,anairlinemaypartnercredit
cardcompanies,hotels,carrentalfirms,whereloyaltyprogrampointscanalsobeearned
withthesecompanies),satisfactionwiththecoreservicecanhaveapositiveimpacton
buyingfromprogrampartners.Inthesameway,satisfactionwiththeserviceofprogram
34
partnerscanhaveapositiveimpactonthebuyingofthecoreservice.
Evenwelldesignedrewardsprogramsbythemselvesarenotenoughtokeepafirmsmost
desirablecustomers.Ifyouaredissatisfiedwiththequalityofservice,orbelievethatyou
cangetbettervaluefromalessexpensiveservice,youmayquicklybecomedisloyal.No
servicebusinessthathasarewardsprogramforfrequentuserscaneveraffordtolosesight
ofitsbroadergoalsofofferinghighservicequalityandgoodvaluerelativetothepriceand
35
othercostsincurredbycustomers. Sometimes,whatthecustomerwantsisjustforthe
firmtodeliverthebasicservicewell,meettheirneeds,andsolvetheirproblemsquickly
36
andeasily,andtheywillbeloyal.
Finally,customerscanbefrustratedwithfinancialrewardsbasedprogramssothatinstead
ofcreatingloyaltyandgoodwill,theybreeddissatisfaction.Thiscanhappenwhencustomers
feeltheyareexcludedfromarewardprogrambecauseoflowbalancesorvolumeof
business,iftherewardsareseenashavinglittleornovalue,iftheycannotredeemtheir
loyaltypointsbecauseofblackoutdatesduringhighdemandperiods,andifredemption
37
processesaretootroublesomeandtimeconsuming.
Andsomecustomersalreadyhavesomanyloyaltycardsintheirwalletthattheysimply
arenotinterestedinaddingmorecardstothatpile.
Nonfinancial Rewards
Nonfinancialrewards(alsocalledsoftbenefits)providebenefitsthatcannotbetranslated
directlyintomonetaryterms.Examplesincludegivingprioritytoloyaltyprogram
membersonreservationwaitlistsandvirtualqueuesincallcenters.Someairlinesprovide
benefitssuchashigherbaggageallowances,priorityupgrading,accesstoairportloungesand
theliketoitsfrequentflyers,evenwhentheyareonlyflyingineconomyclass.
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Importantintangiblerewardsincludespecialrecognitionandappreciation.Customerstend
tovaluetheextraattentiongiventotheirneedsandappreciatetheimplicitservice
guaranteeofferedbyhightierloyaltyprogrammemberships.Thisincludeseffortstomeet
theiroccasionalspecialrequests.Manyloyaltyprogramsalsoprovideimportantstatus
benefitstocustomersinthetoptierswhofeelpartofanelitegroup(e.g.,theSevenStars
cardholderswithHarrahsEntertainmentinouropeningvignette)andenjoytheirspecial
38
treatment.
Nonfinancialrewards,especiallyiflinkedtohighertierservicelevels,aretypicallymore
powerfulthanfinancialones.Highertierservicecancreatealotofvalueforcustomers.
Unlikefinancialrewards,nonfinancialrewardsdirectlyrelatetothefirmscoreserviceand
improvethecustomersexperienceandvalueperception.Inthehotelcontext,forexample,
redeemingloyaltypointsforfreegiftsdoesnothingfortheguestexperience.However,
gettingpriorityforreservations,earlycheckin,latecheckout,upgrades,andreceiving
specialattentionandappreciationmakeyourstaymorepleasantandmakesyouwantto
comeback.
ServiceInsights12.4describeshowBritishAirwayshasdesigneditsExecutiveClub,
effectivelycombiningfinancialandnonfinancialloyaltyrewards.
ServiceInsights12.4:RewardingValueofUse,NotJust
Frequency,atBritishAirways
Unlikesomefrequentflyerprograms,inwhichcustomerusageismeasured
simplyinmiles,BritishAirways(BA)ExecutiveClubmembersreceiveboth
airmilestowardredemptionofairtravelawardsandpointstowardsilveror
goldtierstatusfortravelonBA.WiththecreationoftheOneWorldalliance
withAmericanAirlines,Qantas,CathayPacific,andotherairlines,Executive
Clubmembershavebeenabletoearnmiles(andsometimespoints)by
flyingthesepartnerairlines,too.
AsshowninTable12.1,silverandgoldcardholdersareentitledtospecial
benefits,suchaspriorityreservationsandasuperiorlevelofontheground
service.Forinstance,evenifagoldcardholderisonlytravelingineconomy
class,heorshewillbeentitledtofirstclassstandardsoftreatmentatcheckin
andintheairportlounges.Milescanbeaccumulatedforuptothreeyears
(afterwhichtheyexpire),buttierstatusisvalidforonly12monthsbeyondthe
membershipyearinwhichitwasearned.
Table12.1.BenefitsofferedbyBritishAirwaystoitsmost
valuedpassengers
Thismeansthattherighttospecialprivilegesmustbereearnedeachyear.
Theobjectiveofawardingtierstatusistoencouragepassengerswhohavea
choiceofairlinestoconcentratetheirtravelonBritishAirways.Few
passengerstravelsooftenthattheywillbeabletoobtainthebenefitsofgold
tierstatus(oritsequivalent)onmorethanoneairline.
Pointsgivenalsovaryaccordingtotheclassofservice.Longertripsearn
morepointsthanshorterones.However,ticketsatdeeplydiscountedprices
mayearnfewermilesandnopointsatall.Torewardpurchaseofhigher
pricedtickets,passengersearnpointsatdoubletheeconomyrateifthey
travelinclub(businessclass),andattripletherateinfirstclass.
Althoughtheairlinemakesnopromisesaboutcomplimentaryupgrades,
membersofBAsExecutiveClubaremorelikelytoreceivesuchinvitations
thanotherpassengers.Tierstatusisanimportantconsideration.Unlikemany
airlines,BAtendstolimitupgradestosituationsinwhichalowerclassof
cabinisoverbooked.Theydonotwantfrequenttravelerstobelievethatthey
canplanonbuyingalessexpensiveticketandthenautomaticallyreceivean
upgradedseat.
Source:BritishAirwaysExecutiveClub,
www.britishairways.com/travel/ecbenftgold/public/en_us
(http://www.britishairways.com/travel/ecbenftgold/public/en_us) ,accessedJuly2011.
LO10
Appreciatethepowerofsocial,customization,andstructuralbondsinenhancingloyalty.
Haveyouevernoticedhowyourfavoritehairdressercallsyoubyyournamewhenyougo
forahaircutorhowsheaskswhyshehasntseenyouforalongtime?Socialbondsare
usuallybasedonpersonalrelationshipsbetweenprovidersandcustomers.Thereisan
39
elementoftrust,whichisimportantforloyalty. Socialbondsaremoredifficulttobuild
thanfinancialbondsandmaytakelongertoachieve,buttheyarealsoharderforother
supplierstoimitate.Afirmthathascreatedsocialbondswithitscustomershasabetter
chanceofkeepingthemforthelongtermbecauseofthetrustthecustomersplaceinthe
40
staff. Whensocialbondsincludesharedrelationships(Figure12.12)orexperiences
betweencustomers,suchasincountryclubsoreducationalsettings,theycanbeamajor
41
loyaltydriverfortheorganization.
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Figure12.12.Aknowledgeableandcharismaticlecturerhelpsbuildsocial
bondswithstudents.
Customization Bonds
Thesebondsarebuiltwhentheserviceprovidersucceedsinprovidingcustomizedserviceto
itsloyalcustomers.Forexample,Starbucksemployeesareencouragedtolearntheir
regularcustomerspreferencesandcustomizetheirserviceaccordingly(Figure12.13).Many
largehotelchainscapturethepreferencesoftheircustomersthroughtheirloyaltyprogram
42
databases.Firmsofferingcustomizedservicearelikelytohavemoreloyaltycustomers.
Forexample,whencustomersarriveattheirhotel,theyfindthattheirindividualneeds
havealreadybeenmet.Theserangefrompreferreddrinksandsnacksintheminibar,to
thekindofpillowtheylike,andthenewspapertheywanttoreceiveinthemorning.When
acustomerbecomesusedtothisspecialservice,heorshemayfinditdifficulttoadjustto
anotherserviceproviderwhoisnotabletocustomizetheservice(atleastimmediatelyas
43
ittakestimeforthenewprovidertolearnaboutsomeonesneedsandpreferences).
Figure12.13.Starbucksemployeesareencouragedtolearntheir
customerspreferences.
Structural Bonds
StructuralbondsarecommonlyseeninB2Bsettings.Theyarecreatedbygetting
customerstoaligntheirwayofdoingthingswiththesuppliersownprocesses,thuslinking
thecustomertothefirm.Thissituationmakesitmoredifficultforcompetitorstodraw
themaway.Examplesincludejointinvestmentsinprojectsandsharingofinformation,
processes,andequipment.StructuralbondscanbecreatedinaB2Cenvironment,too.For
instance,somecarrentalcompaniesoffertravelerstheopportunitytocreatecustomized
pagesonthefirmswebsitewheretheycangetdetailsofpasttripsincludingthetypesof
cars,insurancecoverage,andsoforth.Thissimplifiesandspeedsupthetaskofmakingnew
bookings.
Haveyounoticedthat,whileallthesebondstieacustomerclosertothefirm,theyalso
delivertheconfidence,social,andspecialtreatmentbenefitsthatcustomersdesire(referto
ServiceInsights12.1)?Ingeneral,bondswillnotworkwellunlesstheyalsogeneratevalue
forthecustomer!
LO11
Understandwhatfactorscausecustomerstoswitchtoacompetitor,andhowtoreducesuch
switching.
customersswitchtoanotherprovider(Figure12.14). Thesewere:
Source:AdaptedfromSusanM.Keaveney,CustomerSwitchingBehaviorin
ServiceIndustries:AnExploratoryStudy,JournalofMarketing59(April
1995),7182.
Figure12.14.Whatdrivescustomerstoswitchawayfromaservicefirm?
Coreservicefailures(44%ofrespondents).
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Dissatisfactoryserviceencounters(34%).
High,deceptive,orunfairpricing(30%).
Inconvenienceintermsoftime,location,ordelays(21%).
Poorresponsetoservicefailure(17%).
Manyrespondentsdecidedtoswitchafteraseriesofrelatedincidents,suchasaservice
failurefollowedbyanunsatisfactoryservicerecovery.
Manyservicefirmsregularlyconductwhatiscalledchurndiagnostics.Thisincludesthe
analysisofdatafromchurnedanddecliningcustomers,exitinterviews(callcenterstaff
oftenhaveashortsetofquestionstheyaskwhenacustomercancelsanaccounttogaina
betterunderstandingofwhycustomersdefect),andindepthinterviewsofformer
customersbyathirdpartyresearchagency,whichtypicallyyieldamoredetailed
45
understandingofchurndrivers.
Somefirmseventrytopredictchurnofindividualaccounts.Forexample,cellphoneservice
providersusechurnalertsystems.Thesesystemskeeptrackoftheactivityinindividual
customeraccounts.Theobjectiveistopredictwhenacustomermightswitch.Important
accountsatriskareflaggedandeffortsaremadetokeepthecustomer,suchassendinga
voucherand/orhavingacustomerservicerepresentativecallthecustomertocheckonthe
healthofthecustomerrelationshipandstartcorrectiveactionifneeded.
ServiceInsights12.5:ChurnManagementGoneWrong
AmericaOnline(AOL)founditselfonthewrongendofchurnmanagement
whenabout300ofitssubscribersfiledcomplaintswiththeNewYorkstate
attorneygeneralsoffice,sayingthatAOLhadignoredtheirdemandsto
canceltheserviceandstopbillingthem.AfteraninvestigationbytheState
ofNewYork,AOLeventuallyagreedtopay$1.25millioninpenaltiesand
costsandtochangesomeofitscustomerservicepracticestosettlethecase.
Whatwentwrong?AOLhadbeenrewardingitscallcenteremployeesfor
savingcustomerswhocalledintocanceltheirservice.Employeescould
earnhighbonusesiftheywereabletopersuadehalformoreofsuch
customerstostaywiththefirm.Asclaimedbytheattorneygeneralsoffice,
thismayhaveledAOLsemployeestomakeitdifficulttocancelservice.Asa
response,AOLagreedinasettlementtohaveservicecancellationsrequests
recordedandverifiedbyathirdpartymonitor,andtoprovideuptofour
monthsworthofrefundstoallNewYorksubscriberswhoclaimthattheir
cancellationshadbeenignored(AOLdidnotadmittoanywrongdoingin
thatsettlement).EliotSpitzer,NewYorksAttorneyGeneralatthetime,said,
ThisagreementhelpstoensurethatAOLwillstrivetokeepitscustomers
throughqualityservice,notstealthretentionprograms.
Source:TheAssociatedPress,AOLtoPay$1,25MtoSettleSpitzer
Probe,USAToday,25.08.2005,p.5B.
46
Inthatway,customerswillremainsatisfied,andthiswillreducetheintentiontoswitch.
WewilldiscussindepthonhowtodothateffectivelyinChapter13.
47
Anotherwaytoreducechurnistoincreaseswitchingbarriers. Manyserviceshavenatural
switchingcosts.Forexample,itisalotofworkforcustomerstochangetheirprimary
bankingaccount,especiallywhenmanydirectdebits,credits,andotherrelatedbanking
servicesaretiedtothataccount.Also,manycustomersarereluctanttolearnaboutthe
48
productsandprocessesofanewprovider.
Switchingcostscanalsobecreatedbyhavingcontractualpenaltiesforswitching,suchasthe
transferfeespayabletosomebrokeragefirmsformovingsharesandbondstoanother
financialinstitution.However,firmsneedtobecarefulsothattheyarenotseenasholding
theircustomershostage.Afirmwithhighswitchingbarriersandpoorservicequalityis
likelytogeneratenegativeattitudesandbadwordofmouth.Atsomepoint,apreviously
49
inertcustomermayhaveenoughandswitchtheserviceprovider.
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LO12
UnderstandthepartplayedbyCustomerRelationshipManagement(CRM)systemsin
deliveringcustomizedservicesandbuildingloyalty.
thecustomersarebuiltandmaintained. Itshouldbeseenasenablingthesuccessful
implementationoftheWheelofLoyalty.LetsfirstlookatCRMsystemsbeforewemove
toamorestrategicperspective.
communicationwillresultinmoreloyalty.
Fromacompanysperspective,CRMsystemsallowthecompanytobetterunderstand,
segment,andtieritscustomerbase,bettertargetpromotionsandcrossselling,andeven
52
implementchurnalertsystemsthatsignalifacustomerisindangerofdefecting. Service
Insights12.6highlightssomecommonCRMapplications.
ServiceInsights12.6:CommonCRMApplications
Datacollection.Thesystemcapturescustomerdatasuchascontactdetails,
demographics,purchasinghistory,servicepreferences,andthelike.
Dataanalysis.Thedatacapturedisanalyzedandgroupedbythesystem
accordingtocriteriasetbythefirm.Thisisusedtotierthecustomerbaseand
tailorservicedeliveryaccordingly.
Salesforceautomation.Salesleads,crosssell,andupsellopportunities
canbeeffectivelyidentifiedandprocessed.Theentiresalescyclefromlead
generationtocloseofsalesandaftersalesservicecanbetrackedthroughthe
CRMsystem.
Marketingautomation.Miningofcustomerdataallowsthefirmtotargetits
market.AgoodCRMsystemallowsthefirmtoachieveonetoonemarketing
andcostsavings,oftenthroughloyaltyandretentionprograms.Thisresultsin
increasingthereturnoninvestment(ROI)onitsmarketingexpenditure.CRM
systemsalsoallowfirmstojudgetheeffectivenessofmarketingcampaigns
throughtheanalysisofresponses.
Callcenterautomation.Callcenterstaffhavecustomerinformationattheir
fingertipsandcanimprovetheirservicelevelstoallcustomers.Furthermore,
callerIDandaccountnumbersallowcallcenterstoidentifythecustomertier
thecallerbelongsto,andtotailortheserviceaccordingly.Forexample,
platinumcallersgetpriorityinwaitingloops.
53
RatherthanviewingCRMasatechnology,weshouldviewitasasystemthatfocuseson
theprofitabledevelopmentandmanagementofcustomerrelationships.Figure12.15
providesfivekeyprocessesinvolvedinaCRMstrategy:
1.Strategydevelopmentinvolveslookingatbusinessstrategy,includingthecompanys
vision,industrytrends,andcompetition.Itisusuallytheresponsibilityoftopmanagement.
Forcustomerrelationshipmanagementtohaveapositiveimpactonafirmsperformance,
54
thefirmsstrategyiskey. Therefore,businessstrategyshouldguidethedevelopmentof
customerstrategy,includingthechoiceoftargetsegments,customerbasetiering,the
designofloyaltybonds,andchurnmanagement(asdiscussedintheWheelofLoyalty,
Figure12.6).
2.Valuecreationtranslatesbusinessandcustomerstrategiesintovaluepropositionsfor
customersandthefirm.Thevaluecreatedforcustomersincludesallthebenefitsthatare
deliveredthroughprioritytieredservices,loyaltyrewards,andcustomizationand
personalization.Thevaluescreatedforthefirmincludereducedcustomeracquisitionand
retentioncosts,increasedshareofwallet,andreducedcustomerservingcosts.Customers
needtoparticipateinCRM(e.g.,throughvolunteeringinformation)sothattheybenefit
fromthefirmsCRMstrategy.CRMseemsmostsuccessfulwhenthereisawinwin
55
situationforthefirmanditscustomers.
Source:Adaptedfrom:AdrianPayneandPennieFrow,AStrategic
FrameworkforCustomerRelationshipManagement,JournalofMarketing
69(October2005):167176.
Figure12.15.AnintegratedframeworkforCRMstrategy.
3.Multichannelintegration.Mostservicefirmsinteractwiththeircustomersthrough
amultitudeofchannels,andithasbecomeachallengetoservecustomerswellacrossthese
manypotentialinterfaces,andofferaunifiedcustomerinterfacethatdeliverscustomization
andpersonalization.CRMschannelintegrationaddressesthischallenge.
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4.Informationmanagement.Servicedeliveryacrossmanychannelsdependsonthe
firmsabilitytocollectcustomerinformationfromallchannelsatthevarioustouchpoints
(Figure12.16).Theinformationmanagementprocessincludes:
Thedatarepositorythatcontainsallthecustomerdata.
ITsystemsincludingIThardwareandsoftware.
Analyticaltoolssuchasdataminingpackages.
Specificapplicationpackagessuchascampaignmanagementanalysis,creditassessment,
customerprofiling,andchurnalertsystems.
Frontofficeapplications,whichsupportactivitiesthatinvolvedirectcustomercontact,
includingsalesforceautomationandcallcentermanagementapplications.
Backofficeapplications,whichsupportinternalcustomerrelatedprocesses,including,
logistics,procurement,andfinancialprocessing.
Figure12.16.Airportselfcheckinkiosksrepresentanotherservice
touchpointthatneedstobeintegratedintoanairlinesCRMsystem.
5.Performanceassessmentmustaddressthreecriticalquestions:
IstheCRMstrategycreatingvalueforitskeystakeholders(i.e.,customers,employees,
andshareholders)?
Arethemarketingobjectives(rangingfromcustomeracquisition,shareofwallet,and
retentiontocustomersatisfaction)andservicedeliveryperformanceobjectives(e.g.,call
centerservicestandardssuchascallwaiting)beingachieved?
IstheCRMprocessitselfperforminguptoexpectations?(e.g.,Aretherelevantstrategies
beingset?Iscustomerandfirmvaluebeingcreated?Istheinformationmanagement
processworkingeffectively?Isintegrationacrosscustomerservicechannelsbeingachieved
effectively?)
include:
ViewingCRMasatechnologyinitiative.Itseasytoletthefocusshifttoward
technologyanditsfeatures,withtheresultthattheITdepartmentratherthantop
managementormarketingtakingtheleadincomingupwiththeCRMstrategy.Thisoften
resultsinalackofdirectionfrommanagementandalackofunderstandingofcustomersand
marketsduringimplementation.
Lackofcustomerfocus.ManyfirmsimplementCRMwithoutthegoalofallowingfor
improvingservicedeliveryforvaluedcustomersacrossalldeliverychannels.
Insufficientappreciationofcustomerlifetimevalue(LTV).Marketingdoesnot
takeintoaccountthedifferentprofitabilitiesofdifferentcustomers.Furthermore,the
servicingcostsfordifferentcustomersareoftennotwellcaptured(e.g.,byusingactivity
basedcostingasdiscussedinChapter6).
Inadequatesupportfromtopmanagement.Withoutownershipandactive
involvementfromtopmanagement,theCRMimplementationwillnotbesuccessful.
Failingtoreengineerbusinessprocesses.Itisnearlyimpossibletoimplement
CRMsuccessfullywithoutredesigningcustomerserviceandbackofficeprocesses.Many
implementationsfailbecauseCRMisbeingfittedintoexistingprocesses,ratherthan
redesigningtheprocessestofitacustomercentricCRMimplementation.Redesigningalso
requireschangemanagementandemployeeinvolvementandsupport,whichareoften
lacking.
Underestimatingthechallengesindataintegration.Firmsfrequentlyfailto
integratecustomerdatathatusuallyarescatteredacrosstheorganization.However,one
waytotakeadvantageofthefullpotentialofCRMistomakecustomerknowledge
availableinrealtimetoallemployeeswhoneedit.
Inthelongrun,firmscanputtheirCRMstrategiesatriskifcustomersbelievethatCRMis
57
beingusedinawaythatisharmfultothem. Examplesincludefeelingthattheyarenot
beingtreatedfairly(includingnotbeingofferedattractivepricingorpromotionsthatare
offered,forexample,tonewaccounts,butnottoexistingcustomers)andpotentialprivacy
concerns(seeServiceInsights12.7).Beingawareandactivelyavoidingtheseweaknessesis
afirststeptowardasuccessfulCRMimplementation.
buildingblockofcorporatesuccess,argueDarrellRigbyandDianneLedingham. Even
CRMsystemsthathavebeenimplementedbuthavenotyetshownresultscanbewell
positionedforfuturesuccess.ExperiencedMcKinseyconsultantsbelievethatevenCRM
systemsthathaveyettoshowresultscanstillbeturnedaround.Theyrecommendtakinga
stepbackandfocusingonhowtobuildcustomerloyalty,ratherthanfocusingonthe
59
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59
technologyitself. RatherthanusingCRMtotransformentirebusinessesthroughthe
implementationoftheCRMmodelshowninFigure12.15,servicefirmsshouldfocuson
clearlydefinedproblemswithintheircustomerrelationshipcycle.ThesenarrowCRM
strategiesoftenrevealadditionalopportunitiesforfurtherimprovements,which,taken
together,candevelopintobroadCRMimplementationextendingacrosstheentire
60
company.
Amongthekeyquestionsmanagersshouldaskwhendefiningtheircustomerrelationship
strategyare:
1.Howshouldourvaluepropositionchangetoincreasecustomerloyalty?
2.Howmuchcustomizationoronetoonemarketingandservicedeliveryisappropriate
andprofitable?
3.Whatistheincrementalprofitpotentialofincreasingtheshareofwalletwithour
currentcustomers?Howmuchdoesthisvarybycustomertierand/orsegment?
4.HowmuchtimeandresourcescanweallocatetoCRMrightnow?
5.Ifwebelieveincustomerrelationshipmanagement,whyhaventwetakenmoresteps
inthatdirectioninthepast?Whatcanwedotodaytodevelopcustomerrelationships
withoutspendingalotontechnology?
61
AnsweringthesequestionscanevenleadtotheconclusionthataCRMsystemmaynotbe
thebestinvestmentorhighestpriorityatthemoment.Inanycase,weemphasizethatthe
systemismerelyatooltodrivethestrategyandmustthusbecustomizedtodeliverthat
strategy(Figure12.17).
Figure12.17.CRMcanhelpcompaniescreatetwowaychannelswith
customers.
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ServiceInsights12.7:CRMExtremeAGlimpseinto
OrderingPizzain2018?
Operator:ThankyouforcallingPizzaDelight.Lindaspeaking,howmayI
helpyou?
Customer:Goodevening,canIorder...
Operator:Sir,beforetakingyourorder,couldIpleasehavethenumberof
yourmultipurposesmartcard?
Customer:Holdon....its....um...CA45559831.
Operator:Thankyou!CanIpleaseconfirmyoureMrThompsoncallingfrom
10940WilfordBoulevard?Youarecallingfromyourhomenumber432
3876,yourcellphonenumberis9924566,andyourofficenumberis432
9377.
Customer:Howintheworlddidyougetmyaddressandallmynumbers?
Operator:Sir,weareconnectedtotheIntegratedCustomerIntimacy
System.
Customer:Iwouldliketoorderalargeseafoodpizza...
Operator:Sir,thatsnotagoodidea.
Customer:Why?!?
Operator:Accordingtoyourmedicalrecords,youhaveveryhighblood
pressureandafartoohighcholesterollevel,Sir.
Customer:What?...Whatdoyourecommendthen?
Operator:TryourLowFatSoybeanYoghurtPizza.Youlllikeit.
Customer:Howdoyouknow?
Operator:YouborrowedthebookPopularSoybeanDishesfromtheCity
Librarylastweek,Sir.
Customer:OK,Igiveup...Getmethreelargeonesthen.Howmuchwill
thatbe?
Operator:Thatshouldbeenoughforyourfamilyofeight,Sir.Thetotalis
$54.90.
Customer:CanIpaybycreditcard?
Operator:Imafraidyoullhavetopayuscash,Sir.Yourcreditcardisover
thelimitandyourcheckingaccounthasanoverduebalanceof$2,435.88.
Thatsexcludingthelatepaymentchargesonyourhomeequityloan,Sir.
Customer:IguessIllhavetoruntotheATMandwithdrawsomecash
beforeyourguyarrives.
Operator:Youcantdothat,Sir.Basedontherecords,youvereachedyour
dailymachinewithdrawalslimitfortoday.
Customer:Nevermind.Justsendthepizzas,Illhavethecashready.How
longisitgonnatake?
Operator:About45minutesSir,butifyoudontwanttowaityoucanalways
comeandcollectitonyourHarley,registrationnumberL.A.6468...
Customer:#@$#@%^%%@
Operator:Sir,pleasewatchyourlanguage.Remember,on28thApril2017
youwereconvictedofusingabusivelanguageatatrafficwarden...
Customer:(Speechless)
Operator:Isthereanythingelse,Sir?
Source:Thisstorywasadaptedfromvarioussources,including
www.lawdebt.com/gazette/nov2004/nov2004.pdf
(http://www.lawdebt.com/gazette/nov2004/nov2004.pdf) (accessedinJanuary2006)and
avideocreatedbytheAmericanCivilLibertiesUnion(ACLU)availableat
www.aclu.org/pizza (http://www.aclu.org/pizza) .Thisvideoaimstocommunicate
theprivacythreatsthatCRMposestoconsumers.ACLUisanonprofit
organizationthatcampaignsagainstgovernmentsandcorporations
aggressivecollectionofinformationonpeoplespersonallifeandhabits.
Chapter Summary
LO1Customerloyaltyisanimportantdriverofaservicefirmsprofitability.The
profitsderivedfromloyalcustomerscomefrom(1)increasedpurchases,(2)reduced
operationcosts,(3)referralofnewcustomers,and(4)pricepremiums.Also,customer
acquisitioncostscanbeamortizedoveralongerperiodoftime.
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LO2However,itisnottruethatloyalcustomersarealwaysmoreprofitable.
Theymayexpectpricediscountsforstayingloyal.Totrulyunderstandtheprofitimpactof
thecustomers,firmsneedtolearnhowtocalculatetheLTVoftheircustomers.LTV
calculationsneedtoinclude(1)acquisitioncosts,(2)revenuestreams,(3)accountspecific
servicingcosts,(4)expectednumberofyearsthecustomerwillstaywiththefirm,and(5)
discountrateforfuturecashflows.
LO3Customersareonlyloyalifthereisabenefitforthemtobeso.Common
benefitscustomersseeinbeingloyalinclude:
Confidencebenefits,includingfeelingthatthereislessriskofsomethinggoingwrong,
abilitytotrusttheprovider,andreceiptofthefirmshighestlevelofservice.
Socialbenefits,includingbeingknownbyname,friendshipwiththeserviceprovider,and
enjoymentofcertainsocialaspectsoftherelationship.
Specialtreatmentbenefits,includingbetterprices,extraservices,andhigherpriority.
LO4Itisnoteasytobuildcustomerloyalty.TheWheelofLoyaltyoffersa
systematicframeworkthatguidesfirmsonhowtodoso.Theframeworkhasthree
componentsthatfollowasequence.
First,firmsneedtobuildafoundationforloyaltywithoutwhichloyaltycannotbe
achieved.Thefoundationdeliversconfidencebenefitstoitsloyalcustomers.
Oncethefoundationislaid,firmscanthencreateloyaltybondstostrengthenthe
relationship.Loyaltybenefitsdeliversocialandspecialtreatmentbenefits.
Finally,besidesfocusingonloyalty,firmsalsohavetoworkonreducingcustomerchurn.
Tobuildthefoundationforloyalty,firmsneedto:
LO5Segmentthemarketandtargettherightcustomers.Firmsneedto
choosetheirtargetsegmentscarefullyandmatchthemtowhatthefirmcandobest.Firms
needtofocusoncustomervalue,insteadofjustgoingforcustomervolume.
LO6Managethecustomerbaseviaservicetiering,whichdividesthecustomer
baseintodifferentvaluetiers(e.g.,platinum,gold,iron,andlead).Ithelpstotailor
strategiestothedifferentservicetiers.Thehighertiersofferhighervalueforthefirmbut
alsoexpecthigherservicelevels.Forthelowertiers,thefocusshouldbeonincreasing
profitabilitythroughbuildingvolume,increasingprices,cuttingservicingcosts,andasalast
resortevenendingunprofitablerelationships.
LO7Understandthatthefoundationforloyaltyliesincustomersatisfaction.The
satisfactionloyaltyrelationshipcanbedividedintothreemainzones:defection,indifference,
andaffection.Onlyhighlysatisfiedordelightedcustomerswhoareinthezoneofaffection
willbetrulyloyal.
Loyaltybondsareusedtobuildrelationshipswithcustomers.Therearethreedifferent
typesofcustomerbonds:
LO8Crosssellingandbundlingdeepenrelationshipsthatmakeswitchingmore
difficultandoftenincreaseconveniencethroughonestopshopping.
LO9Loyaltyprogramsaimatbuildingshareofwalletthroughfinancialrewards
(e.g.,loyaltypoints)andnonfinancialrewards(e.g.,highertierservicelevels,and
recognitionandappreciation).
LO10Higherlevelbondsincludesocial,customization,andstructuralbonds.
Thesebondstendtobemoredifficulttobecopiedbycompetitionthanrewardbasedbonds.
LO11ThefinalstepintheWheelofLoyaltyistounderstandwhatcauses
customerstoleaveandthensystematicallyreducethesechurndrivers.
Commoncausesforcustomerstoswitchincludecoreservicefailuresanddissatisfaction,
perceptionsthatpricingisdeceptiveandunfair,inconvenience,andpoorresponsetoservice
failures.
Topreventcustomersfromswitching,firmsshouldanalyzeandaddresskeyreasonswhy
theircustomersleavethem,havegoodcomplainthandlingandservicerecoveryprocesses
inplace,andpotentiallyincreasecustomersswitchingcosts.
LO12Finally,CRMsystemsshouldbeseenasenablingthesuccessful
implementationoftheWheelofLoyalty.CRMsystemsareparticularlyusefulwhenfirms
havetoservelargenumbersofcustomersacrossmanyservicedeliverychannels.An
effectiveCRMstrategyincludesfivekeyprocesses:
Strategydevelopment,includingchoiceoftargetsegments,tieringofservice,anddesign
ofloyaltyrewards.
Valuecreation,includingdeliveringbenefitstocustomersthroughtieredservicesand
loyaltyprograms(e.g.,prioritywaitlistingandupgrades).
Multichannelintegrationtoprovideaunifiedcustomerinterfaceacrossmanydifferent
servicedeliverychannels(e.g.,fromthewebsitetothebranchoffice)
Informationmanagement,whichincludesthedatarepository,analyticaltools(e.g.,
campaignmanagementanalysisandchurnalertsystems),andfrontandbackoffice
applications.
Performanceassessment,whichhastoaddressthethreequestionsof:
(1)IstheCRMcreatingvalueforcustomersandthefirm?
(2)Areitsmarketingobjectivesbeingachieved?
(3)IstheCRMsystemitselfperformingaccordingtoexpectations?
PerformanceassessmentshouldleadtocontinuousimprovementoftheCRMstrategyand
system.
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ThesekeywordsarefoundwithinthesectionsofeachLearningObjective(LO).Theyare
integraltounderstandingtheservicesmarketingconceptstaughtineachsection.Havinga
firmgraspofthesekeywordsandhowtheyareusedisessentialtohelpingyoudowellon
yourcourse,andintherealandverycompetitivemarketingsceneoutthere.
LO11Customerloyalty
2Loyaltyeffect
3Pricepremium
4Profitability
5Referrals
6Valueofloyalcustomers
LO27Acquisitioncosts
8Acquisitionrevenues
9Customerlifetimevalue
10Netpresentvalue
11Valueofreferrals
LO312Confidencebenefits
13Relationalbenefits
14Socialbenefits
15Specialtreatmentbenefits
LO416Buildfoundationforloyalty
17Createloyaltybonds
18Reducechurndrivers
19WheelofLoyalty
LO520Loyaltyleaders
21Searchingforvalue
22Targeting
LO623Customerbase
24Customerpyramid
25Customerretention
26Gold
27Iron
28Lead
29Loyaltyprograms
30Platinum
31Tieringofservice
LO732Customersatisfaction
33Satisfactionloyaltyrelationship
34Servicequality
35Zoneofaffection
36Zoneofdefection
37Zoneofindifference
LO838Deepeningtherelationship
LO939Financialrewards
40Polygamousloyalty
41Shareofwallet
42Nonfinancialrewards
LO1043Customizationbonds
44Higherlevelbonds
45Socialbonds
46Structuralbonds
LO1147Churndiagnostics
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48Churndrivers
49Churnmanagement
50Complainthandling
51Customerchurn
52Customerdefections
53Decliningaccounts
54Servicerecovery
55Switchingcosts
LO1256CRMapplications
57CRMimplementation
58CRMstrategy
59CRMsystems
60Customerlifetimevalue
61Customerrelationshipmanagement
62Dataintegration
63FailuresinCRM
64Informationmanagement
65Multichannelintegration
66Performanceassessment
67Strategydevelopment
68Valuecreation
Howwelldoyouknowthelanguageofservicesmarketing?Quizyourself!
Notfortheacademicallyfaintofheart
Foreachkeywordyouareabletorecallwithoutreferringtoearlierpages,give
yourselfapoint(andapatontheback).Tallyyourscoreattheendandseeifyou
earnedtherighttobecalledaservicesmarketeer.
Score
013ServicesMarketingisdoneagreatdisservice.
1425Themidnightoilneedstobelit,pronto.
2640Iknowwhatyoudidntdoallsemester.
4152ByGeorge!Youregettingthere.
5364Now,goforthandmarket.
6568Thereshouldbeamarketingconceptnamedafteryou.
KnowYourESM
ReviewQuestions
1.Whyiscustomerloyaltyanimportantdriverofprofitabilityforservicefirms?
2.Whyistargetingtherightcustomerssoimportantforsuccessfulcustomer
relationshipmanagement?
3.Howcanyouestimateacustomerslifetimevalue(LTV)?
4.HowdothevariousstrategiesdescribedintheWheelofLoyaltyrelateto
oneanother?
5.Howcanafirmbuildafoundationforloyalty?
6.Whatistieringofservices?Explainwhyitisusedandwhatareits
implicationsforfirmsandtheircustomers.
7.Identifysomekeymeasuresthatcanbeusedtocreatecustomerbondsand
encouragelongtermrelationshipswithcustomers.
8.Whataretheargumentsforspendingmoneytokeepexistingcustomers
loyal?
9.WhatistheroleofCRMindeliveringacustomerrelationshipstrategy?
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WorkYourESM
ApplicationExercises
1.Identifythreeservicebusinessesthatyoubuyfromonaregularbasis.Now,
foreachbusiness,completethefollowingsentence:Iamloyaltothis
businessbecause...
2.Whatconclusionsdoyoudrawabout(a)yourselfasaconsumer,and(b)
theperformanceofeachofthebusinessesinExercise1?Assesswhetherany
ofthesebusinessesmanagedtodevelopasustainablecompetitive
advantagethroughthewayitwonyourloyalty.
3.Identifytwoservicebusinessesthatyouusedseveraltimesbuthavenow
stoppedtobuyingfrom(orplantostopsoon)becauseyouweredissatisfied.
Completethesentence:Istoppedusing(orwillsoonstopusing)this
organizationasacustomerbecause...
4.Again,whatconclusionsdoyoudrawaboutyourselfandthefirmsin
Exercise3?Howwouldeachofthesefirmsavoidyourdefection?Whatcould
eachofthesefirmsdotoavoiddefectionsinthefutureofcustomerswitha
profilesimilartoyours?
5.Evaluatethestrengthsandweaknessesoftwofrequentuserprograms,
eachonefromadifferentserviceindustry.Assesshoweachprogramcouldbe
improvedfurther.
6.Designaquestionnaireandconductasurveyaskingabouttwoloyalty
programs.Thefirstisaboutmembership/loyaltyprogramsyourclassmatesor
theirfamilieslikebestandkeepthemloyaltothatfirm.Thesecondshould
beaboutaloyaltyprogramthatisnotwellperceivedanddoesnotseemto
addvaluetothecustomer.Useopenendedquestions,suchasWhat
motivatedyoutosignupinthefirstplace?,Whyareyouusingthis
program?,Hasparticipatingintheprogramchangedyourpurchasing/usage
behaviorinanyway?,Hasitmadeyoulesslikelytousecompeting
suppliers?,Whatdoyouthinkoftherewardsavailable?,Didmembership
intheprogramleadtoanyimmediatebenefitsintheuseoftheservice?,
Whatarethethreethingsyoulikebestaboutthisloyaltymembership
program?,Whatdidyoulikeleast?andWhataresomesuggested
improvements?Analyzewhatfeaturesmakeloyalty/membershipprograms
successful,andwhatfeaturesdonotachievethedesiredresults.Use
frameworkssuchastheWheelofLoyaltytoguideyouranalysisand
presentation.
7.ApproachserviceemployeesintwoorthreefirmswithimplementedCRM
systems.Asktheemployeesabouttheirexperienceinterfacingwiththese
systems,andwhetherornottheCRMsystems(a)helpthemunderstandtheir
customersbetterand/or(b)leadtoimprovedserviceexperiencesfortheir
customers.Askthemaboutpotentialconcernsandimprovementsuggestions
theymayhaveabouttheirorganizationsCRMsystems.
Endnotes
1 .Stanley,T.(2006),Highstakesanalytics.Optimize:BusinessStrategy&Execution
forCIOs,(February).www.cognos.com/company/success/harrahs.html
(http://www.cognos.com/company/success/harrahs.html),accessedMarch12,2012Voight,J.(2007),
TotalrewardspaysoffforHarrahs,Brandweek.com,17,(September).
www.brandweek.com/bw/news/recent_display.jsp?vnu_content_id=1003641351
(http://www.brandweek.com/bw/news/recent_display.jsp?vnu_content_id=1003641351),accessedMarch12,
2012J.N.Hoover,2007ChiefOfTheYear:TimStanley,InformationWeek,8.
(December2007)www.informationweek.com/story/showArticle.jhtml?
articleID=204702770 (http://www.informationweek.com/story/showArticle.jhtml?articleID=204702770),
accessedMarch12,2012JamesL.Heskett,W.EarlSasser,andJoeWheeler,The
OwnershipQuotient.Boston:HarvardBusinessPress,2008:913www.harrahs.com
(http://www.harrahs.com),accessedMarch12,2012.
2 .FrederickF.ReichheldandThomasTeal,TheLoyaltyEffect,Boston:Harvard
BusinessSchoolPress,1996.
3 .RuthBolton,KatherineN.Lemon,andPeterC.Verhoef,TheTheoretical
UnderpinningsofCustomerAssetManagement:AFrameworkandPropositionsforFuture
Research,JournaloftheAcademyofMarketingScience32,no.3(2004):271292.
4 .FrederickF.ReichheldandW.EarlSasser,Jr.,ZeroDefections:QualityComesto
Services,HarvardBusinessReview(October1990):105111.
5 .ReichheldandSasser,op.cit.
6 .FrederickF.ReichheldandPhilSchefter,ELoyaltyYourSecretWeapononthe
Web,HarvardBusinessReview(JulyAugust,2002):105113.
7 .ChristianHomburg,NicoleKoschate,andWayneD.Hoyer,DoSatisfiedCustomers
ReallyPayMore?AStudyoftheRelationshipBetweenCustomerSatisfactionand
WillingnesstoPay,JournalofMarketing69(April2005):8496.
8 .GrahameR.DowlingandMarkUncles,DoCustomerLoyaltyProgramsReally
Work?SloanManagementReview(Summer1997):7181WernerReinartzandV.Kumar,
TheMismanagementofCustomerLoyalty,HarvardBusinessReview(July2002):86
94.
9 .WernerJ.ReinartzandV.Kumar,OntheProfitabilityofLongLifeCustomersina
NoncontractualSetting:AnEmpiricalInvestigationandImplicationsforMarketing,
JournalofMarketing64(October2000):1735.
10.JochenWirtz,IndranilSen,andSanjaySingh,CustomerAssetManagementatDHLin
Asia,inServicesMarketinginAsiaACaseBook,byJochenWirtzandChristopher
Lovelockeds.,(Singapore:PrenticeHall,2005,379396).
11.JohnE.Hogan,KatherineN.Lemon,andBarakLibai,WhatistheTrueCostofaLost
Customer?JournalofServicesResearch5,no.3(2003):196208.
12.Foradiscussiononhowtoevaluatethecustomerbaseofafirm,seeSunilGupta,
DonaldR.Lehmann,andJenniferAmesStuart,ValuingCustomers,JournalofMarketing
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Research41,no.1(2004):718.
13.Touseacustomerlifetimevaluecalculatorandseeaworkedproblem,see
http://hbsp.harvard.edu/multimedia/flashtools/cltv/index.html
(http://hbsp.harvard.edu/multimedia/flashtools/cltv/index.html),accessedMarch12,2012.
14.Ithasevenbeensuggestedtoletchronicallydissatisfiedcustomergotoallowfront
linestafffocusonsatisfyingtherightcustomers,seeKashingWooandHenryK.Y.Fock,
RetainingandDivestingCustomers:AnExploratoryStudyofRightCustomers,AtRisk
RightCustomers,andWrongCustomers,JournalofServicesMarketing18,no.3(2004):
187197.
15.FrederickF.Reichheld,LoyaltyRulesHowTodaysLeadersBuildLasting
Relationships,Boston:MA,HarvardBusinessSchoolPress,2001,45.
16.YupingLiu,TheLongTermImpactofLoyaltyProgramsonConsumerPurchase
BehaviorandLoyalty,JournalofMarketing71,no.4(October2007):1935.
17.FrederickF.Reichheld,LoyaltyRulesHowTodaysLeadersBuildLasting
Relationships,Boston:MA,HarvardBusinessSchoolPress,2001,43,8485.
18.RaviDharandRashiGlazer,HedgingCustomers,HarvardBusinessReview81,(May
2003):8692
19.DavidRosenblum,DougTomlinson,andLarryScott,BottomFeedingforBlockbuster
Business,HarvardBusinessReview(March2003):5259.
20.ChristianHomburg,MathiasDroll,andDirkTotzek,CustomerPrioritization:DoesIt
PayOff,andHowShouldItBeImplemented?JournalofMarketing72,no.5(2008):
110130.
21.ValarieA.Zeithaml,RolandT.Rust,andKatharineN.Lemon,TheCustomer
Pyramid:CreatingandServingProfitableCustomers,CaliforniaManagementReview43,
no.4(Summer2001):118142
22.WernerJ.ReinartzandV.Kumar,TheImpactofCustomerRelationship
CharacteristicsonProfitableLifetimeDuration,JournalofMarketing67,no.1(2003):
7799.
23.VikrasMittal,MatthewSarkees,andFeisalMurshed,TheRightWaytoManage
UnprofitableCustomers,HarvardBusinessReview(April2008):95102.
24.ElizabethEsfahani,HowtoGetToughwithBadCustomers,INGDirect,October
2004,andhttps://home.ingdirect.com/index.html,accessedMarch12,2012.
25.Notonlyisthereapositiverelationshipbetweensatisfactionandshareofwallet,but
thegreatestpositiveimpactisseenattheupperextremelevelsofsatisfaction.Fordetails,
refertoTimothyL.Keiningham,TiffanyPerkinsMunn,andHeatherEvans,TheImpactof
CustomerSatisfactiononShareofWalletinaBusinesstoBusinessEnvironment,Journal
ofServiceResearch6,no.1(2003):3750Seealso:BethDavisSramek,CorneliaDroge,
JohnT.Mentzer,andMatthewB.Myers,CreatingCommitmentandLoyaltyBehavior
amongRetailersWhatAretheRolesofServiceQualityandSatisfaction?Journalofthe
AcademyofMarketingScience37,no.4(2009):440454InaGarnefeld,SabrinaHelm,
andAndreasEggert,WalkYourTalk:AnExperimentalInvestigationoftheRelationship
betweenWordofMouthandCommunicatorsLoyalty,JournalofServiceResearch14,no.
1(2011):93107.
26.FlorianV.Wangenheim,PostswitchingNegativeWordofMouth,JournalofService
Research8,no.1(2005):6778.
27.NeilA.MorganandLopoLeotteRego,TheValueofDifferentCustomerSatisfaction
andLoyaltyMetricsinPredictingBusinessPerformance,MarketingScience25,no.5
(SeptemberOctober2006):426439.
28.HeinerEvanschitzky,B.Ramaseshan,DavidM.Woisetschlager,VerenaRichelsen,
MarkusBlut,andChristofBackhaus,ConsequencesofCustomerLoyaltytotheLoyalty
ProgramandtotheCompany,JournaloftheAcademyofMarketingScience26(July
2011)(publishedonline).
29.LeonardL.BerryandA.Parasuraman,ThreeLevelsofRelationshipMarketing,in
MarketingServicesCompetingthroughQuality(NewYork,NY:TheFreePress,1991,
136142)andValarieA.Zeithaml,MaryJoBitner,andDwayneD.Gremler,Services
Marketing.5thed.,(NewYork,NY:McGrawHill,2008),Chapter7.
30.MichaelLewis,TheInfluenceofLoyaltyProgramsandShortTermPromotionson
CustomerRetention,JournalofMarketingResearch41(August2004):281292Jochen
Wirtz,AnnaS.Mattila,andMayOoLwin,HowEffectiveAreLoyaltyRewardProgramsin
DrivingShareofWallet?JournalofServiceResearch9,no.4(2007):327334.
31.RichardHo,LeoHuang,StanleyHuang,TinaLee,AlexanderRosten,andChristopher
S.Tang,AnApproachtoDevelopEffectiveCustomerLoyaltyPrograms:TheVIP
ProgramATT&TSupermarketsInc.,ManagingServiceQuality19,no.6(2009):702
720.
32.KatherineN.LemonandFlorianV.Wangenheim,TheReinforcingEffectsofLoyalty
ProgramPartnershipsandCoreServiceUsage,JournalofServiceResearch11,no.4
(2009):357370FrederickDeKay,RexS.TohandPeterRaven,LoyaltyPrograms:
AirlinesOutdoHotels,CornellHospitalityQuarterly50,no.3(2009):371382.
33.RuthN.Bolton,P.K.Kannan,andMatthewD.Bramlett,ImplicationsofLoyalty
ProgramMembershipandServiceExperienceforCustomerRetentionandValue,Journal
oftheAcademyofMarketingScience28,no.1(2000):95108MichaelLewis,The
InfluenceofLoyaltyProgramsandShortTermPromotionsonCustomerRetention,
JournalofMarketingResearch41,no.3(2004):281292.
34.KatherineN.LemonandFlorianV.Wangenheim,TheReinforcingEffectsofLoyalty
ProgramPartnershipsandCoreServiceUsage,JournalofServiceResearch11,no.4
(2009):357370.
35.See,forexample:IselinSkoglandandJudySiguaw,AreYourSatisfiedCustomers
Loyal?CornellHotelandRestaurantAdministrationQuarterly45,no.3(2004):221234.
36.MatthewDixon,KarenFreeman,andNicholasToman,StopTryingtoDelightYour
Customers,HarvardBusinessReviewJulyAugust(2010):116122.
37.BerndStauss,MaxieSchmidt,andAdreasSchoeler,CustomerFrustrationinLoyalty
Programs,InternationalJournalofServiceIndustryManagement16,no.3(2005):229
252.
38.Ontheperceptionofdesignofloyaltytiers,see:XavierDrzeandJosephC.Nunes,
FeelingSuperior:TheImpactofLoyaltyProgramStructureonConsumersPerceptionsof
Status,JournalofConsumerResearch35,no.6(2009):890905.
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Chapter12.ManagingRelationshipsandBuildingLoyaltyEssentialsofServicesMarketing,SecondEdition
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41.MarkS.Rosenbaum,AmyL.Ostrom,andRonaldKuntze,LoyaltyProgramsanda
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45.Foramoredetaileddiscussionofsituationspecificswitchingbehavior,refertoInger
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Erramilli,andBvsanMurthy,CustomerValue,Satisfaction,Loyalty,andSwitchingCosts:
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48.MoonkyuLeeandLawrenceF.Cunningham,ACost/BenefitApproachto
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49.LesleyWhiteandVenkatYanamandram,WhyCustomersStay:Reasonsand
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50.ForanoverviewonCRM,see:V.KumarandWernerJ.Reinartz,Customer
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B.Ramaseshan,DavidBejou,SubhashC.Jain,CharlotteMason,andJosephPancras,
IssuesandPerspectiveinGlobalCustomerRelationshipManagement,JournalofService
Research9,no.2(2006):195207V.Kumar,SarangSunder,andB.Ramaseshan,
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51.DwayneBall,PedroS.Coelho,andManuelJ.Vilares,ServicePersonalizationand
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52.KevinN.QuiringandNancyK.Mullen,MoreThanDataWarehousing:AnIntegrated
ViewoftheCustomer,inTheUltimateCRMHandbookStrategies&Conceptsfor
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53.Thissectionisadaptedfrom:AdrianPayneandPennieFrow,AStrategicFramework
forCustomerRelationshipManagement,JournalofMarketing69(October2005):167
176.
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JournalofMarketing69,no.4(2005):155166.
58.DarrellK.RigbyandDianneLedingham,CRMDoneRight,HarvardBusiness
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59.ManuelEbner,ArthurHu,DanielLevitt,andJimMcCrory,HowtoRescueCRM?
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CRM,HarvardBusinessReview(February2002):108.
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