IMPLEMENTING SERVICES MARKETING

Chapter 12 MANAGING RELATIONSHIP AND BUILDING LOYALTY

Loyal customers may not always be more valuable than those making a one-time transaction. The profit impact of a customer may also vary dramatically depending on the stage of the product life cycle the service is in. Managers must analyze the situation and look within the customer segments in their organization and determine the profitability levels for the different groups of customers. Management Memo 12 1 provides a worksheet for calculating a long-term customer s value to a firm. Managers should be concerned with the gap between actual and potential customer value to maximize profitability. Why Is Customer Loyalty Important to a Firm s Profitability? Underlying this profit growth, say Reichheld and Sasser, are four factors that work to the supplier s advantage to create incremental profits. In order of magnitude at the end of seven years, these factors are: 1. Profit derived from increased purchases (or, in a credit card and banking environment, higher account balances). Over time, business customers often grow larger and so need to purchase in greater quantities. Individuals may also purchase more as their families grow or as they become more affluent. Both types of customers may be willing to consolidate their purchases with a single supplier who provides high-quality service. 2. Profit from reduced operating costs. As customers become more experienced, they make fewer demands on the supplier (for instance, they have less need for information and assistance and make more use of self-service options). They may also make fewer mistakes when involved in operational processes, thus contributing to greater productivity. 3. Profit from referrals to other customers. Positive word-of-mouth recommendations are like free sales and advertising, saving the firm from having to invest as much money in these activities. 4. Profit from price premium. New customers often benefit from introductory promotional discounts; long-term customers are more likely to pay regular prices when they are highly satisfied and tend to be less price sensitive.7 Moreover, customers who trust a supplier may be more willing to pay higher prices at peak periods or for express work.

Understand the strategies associated with the concept of relationship marketing

Marketers are increasingly interested in developing long-term relationships with customers beyond the single transaction (also transactional marketing). Relationship marketing includes three categories with their own strategies (i.e. database, interaction, and network marketing). 1) Database marketing involves the use of technology in information exchange by maintaining a database and delivering differentiated service levels to consumers with differing characteristics and preferences and subsequently tracking each relationship. 2) Interaction marketing is more commonly found in business-to-business services. In this case, although the service remains important, people and the social process also add value that is often mutually beneficial. 3) Network marketing also occurs in the business-to-business context where companies commit resources to develop positions in a network of relationships with the stakeholders and relevant agencies. This form of marketing is also relevant in the consumer marketing environments. These four categories, including transactional marketing, are often not mutually exclusive and can be applied together in total relationship marketing. Relationships with customers can also be cultivated for both discrete and ongoing services. Targeting the Right Customers Important for service firms to segment their markets carefully and to choose a portfolio of target segments that is consistent with the firm s goals and capabilities. Matching customers to the firm s capabilities is critical. Managers must think carefully about how a customer s needs relate to such operational elements as speed and quality, the schedules when service is available, the firm s capacity to serve many customers simultaneously, and the physical features and appearance of service facilities. They also need to evaluate how well their service personnel can meet the expectations of specific types of customers in terms of both personal style and technical competence. Finally, they should consider whether the company could match or exceed competing services that are directed at the same customers. Service companies should consider the financial value to the firm of each customer, rather than just count how many customers can be served. Heavy users (who buy more frequently and in larger volumes) are generally more profitable than occasional users. And because customers interact with each other in many services, managers need to think about whether different target segments are compatible with one another. Attracting the right customers is important as they bring in long-term revenues, continued growth in referrals, etc. Emphasis must also be given to prevent attracting the wrong

customers that typically results in costly churn, a diminished company reputation and disillusioned employees. How tiering of service, loyalty bonds and membership programs relate to customer loyalty and how they can build customer loyalty Customer loyalty can be increased in the series of steps illustrated in the Wheel of Loyalty in Fig. 12 5. Service tiering, building loyalty bonds, and creating membership programs are three of the strategies.

First, the firm needs a solid foundation for creating customer loyalty that includes targeting the right portfolio of customer segments, attracting the right customers, tiering the service, and delivering high levels of satisfaction. Second, to truly build loyalty, a firm needs to develop close bonds with its customers that either deepen the relationship through cross-selling and bundling or add value to the customer through loyalty rewards and higher level bonds. Third, the firm needs to identify and eliminate the factors that result in churn the loss of existing customers and the need to replace them with new ones. Customer tiers can be developed around different levels of profit contribution, needs (including sensitivities to variables such as price, comfort, and speed), and identifiable personal profiles such as demographics. Each customer tier requires significantly different service levels based on customer requirements and customer value to the firm. Slicing the customer base per se allows the firm to see clearly where the profits and the loss making segments are and tailor their marketing accordingly in response.

In the latter instance, service tiers can be developed around different levels of profit contribution of different groups of customers and their needs (including sensitivities to variables such as price, comfort, and speed) and identifiable personal profiles such as demographics. Zeithaml, Rust, and Lemon illustrate this principle through a four-level pyramid

Platinum. These customers constitute a very small percentage of a firm s customer base, but they are heavy users and contribute a large share of the firm s profits. This segment typically is less price sensitive but expects highest service levels, and it is likely to be willing to invest in and try new services. Gold. The gold-tier includes a larger percentage of customers than the platinum, but individual customers contribute less profit than platinum customers. They tend to be slightly more price sensitive and less committed to the firm. Iron. These customers provide the bulk of the customer base. Their numbers give the firm economies of scale. Hence, they often are important so that a firm can build and maintain a certain capacity level and infrastructure, which often is needed for serving gold and platinum customers well. However, iron customers often are only marginally profitable. Their level of business is not sufficient to warrant special treatment. Lead. Customers in this tier tend to generate low revenues for a firm but often require the same level of service as iron customers, turning them into a loss-making segment from a firm s perspective. Loyalty bonds can help in building on the loyalty created. Some specific strategies include (1) deepening the relationship via bundling or cross selling (2) providing both tangible (i.e., both financial and non financial) and intangible rewards) (3) building social bonds based on personal relationships (4) building customization bonds where the service to an individual is heavily customized, (5) forming structural bonds through joint investment in projects etc.

The challenge for services that are transaction based is to move on to forming membership relationships with the customers. Membership programs and loyalty programs often are the enabler to allow the firm to tier its services and create loyalty bonds when the individual customer is not known to the firm. This is the case in many transaction-based services such as restaurants, movie theatres, and gas stations. Without motivating customers via a membership or loyalty rewards program to identify themselves during the service encounter, the firm would know little about these individual customers. Programs to reward frequent users (like the frequent flyer clubs created by the airlines) offer rewards, priority reservations and more. Many service businesses now have programs similar to the frequent flyer programs that reward members making frequent purchases. Some examples include hotels, video rental companies, landscapers, coffee shops, car rental firms, and grocery stores. Customer Relationship Management (CRM) Systems CRM signifies the whole process by which relations with the customers are built and maintained. CRM systems allow the company to better understand, segment, and tier its customer base, better target promotions and cross selling, and implement churn alert systems. CRM is an enabler, capturing customer information (such as history of transactions, customer preferences, etc.) and delivering it to the various touch points thus offering a united customer interface and a better service experience for the customer .

Chapter 13 CUSTOMER FEEDBACK AND SERVICE RECOVERY When customers experience a service failure (defined as a perception that one or more specific aspects of service delivery have not met customer expectations), they can take one or more of four major courses of action : 1) do nothing; 2) complain to the service firm; 3) take action through a third party (e.g., regulatory agencies or the courts); or 4) switch suppliers and spread negative word of mouth about the service provider. Why customers complain and what they expect from the firm? There are two main reasons why customers complain. They may want compensation for a monetary loss either in the form of a refund and/or by having a service performed again. A second reason for complaining is to rebuild self-esteem. When customers feel service employees have mistreated them, their self-esteem, self-worth, or sense of fairness may be

negatively affected. Before customers complain, however, they will consider the costs of taking action. These can include monetary costs (like postage or a long-distance phone call), costs in time and effort, or psychological costs associated with having to complain in person to a service employee. Customers are more likely to complain about service outcomes than service processes. Cultural and social norms may also affect complaining behavior. In some countries (e.g., Japan), customers feel awkward or embarrassed about making a complaint. Social norms also tend to discourage criticisms of professional service providers like doctors or lawyers, because they are viewed as experts in the services they offer. Understand customer responses to effective service recovery. Studies have shown that effective service recovery has deep impact on customer loyalty. When complaints are satisfactorily resolved, there is a much higher chance that the customers involved will remain loyal. Research by TARP found that intentions to repurchase for different types of products ranged from 9 percent to 37 percent when customers were dissatisfied but did not complain. For a major complaint, the retention rate increased from 9 percent to 19 percent if customers complained and the company. Offered a sympathetic ear, but was unable to resolve the complaint to the satisfaction of the customer. If the complaint could be resolved to the satisfaction of the customer, retention rate jumped to 54 percent. The highest retention rate of 82 percent was achieved when problems were fixed quickly, typically on the spot. Therefore, the handling of complaint should be seen as a profit center and not a cost center. However, as can be seen in Management Memo 13.1, there are managers who have not bought into the concept that it pays to invest in service recovery designed to protect those long-term profits.

Know how to design an effective service recovery system. Complaint handling should be viewed as a profit center, not a cost center, because the value in retaining profitable customers usually far outweighs the costs of maintaining an effective service recovery system. When a dissatisfied customer defects, the firm loses a long-term stream of profits from that customer and from anyone else who uses another supplier because of negative word-of-mouth. Thus, it pays to invest in effective service recovery strategies designed to protect long-term profits. Service recovery procedures must consider the firm s specific environment and the types of problems that customers are likely to encounter. Fig.13 4 illustrates the components of an effective service recovery system. Managers should also consider developing guidelines for employees on how to handle customer complaints effectively when designing a system to address service failures.

Service Guarantees Well-designed, unconditional service guarantees are an effective way of identifying and justifying needed improvements, plus creating a culture in which employees and management take proactive steps to satisfy guests. Why? They force firms to (1) focus on what their customers want an expect, (2) set clear performance standards for both customers and employees, (3) require the development of systems for generating and acting on customer feedback, (4) force service organizations to identify existing and potential failure points and take actions to correct them (5) build marketing muscle by reducing pre-purchase risk and building long-term loyalty. Although it is possible for dishonest customers to take advantage of service guarantee, research has shown that such behavior is limited and service guarantees can be successfully implemented in an Asian business environment. In fact, as service guarantees are still the exception, opportunities for achieving significant marketing impact and service differentiation may exist in a large number of service markets in Asia. Furthermore, none of the companies studied reported excessive opportunistic behavior, although all admitted that a minority of their customers does take undue advantage of their guarantees. Companies can make use of data management techniques to sieve out these dishonest customers and take action, while maintaining a unconditional service guarantee. In addition, not all firms are suited to introduce service guarantees; a service leader may not need to take such actions as this may undermine its reputation. Conversely, if all the offerings are similar in a very competitive market environment with no distinct market leader, the first firm to introduce unconditional guarantees could enjoy first mover advantage.

Key objectives of effective customer feedback systems in achieving customer-driven learning. It is critical for companies to learn from customers and change according to shifting customer needs and perceptions. An effective customer feedback system enables a firm to: (1) assess and benchmark its service quality and performance, (2) initiate customer driven learning and improvements, and (3) create a customer-orientated service culture. Together, these allow the company to understand where it stands against the best in the market, how it is perceived by its customers, and help improve its service offering to satisfy (if not delight) its customers.

Chapter 14 IMPROVING SERVICE QUALITY AND PRODUCTIVITY

Productivity and quality in a service context. Service managers need to focus on both productivity and quality from the customer s point of view to ensure long-term financial success. Service quality is the extent to which a service meets or exceeds customer expectations. Productivity measures how efficiently a service firm can turn inputs into outputs. Productivity and quality were historically seen as issues for operations managers, so companies focused on making internal process improvements that were not necessarily linked to customer service priorities. Continuing efforts to understand and improve quality reinforces the idea that quality is customer defined. Be aware of tools for measuring, diagnosing and correcting service quality problems. SERVQUAL is a survey research instrument based on the premise that customers can evaluate a firm s service quality by comparing their service perceptions with their prior expectations. In its basic form, the scale contains 21 perception items and 21 expectation items, reflecting five dimensions of service quality: tangibles (appearance of physical elements), reliability (dependable, accurate performance), responsiveness (promptness and helpfulness), assurance (competence, courtesy, credibility, and security), and empathy (easy access, good communications, and customer understanding). The GAP model is a diagnostic tool relates quality standards to customer expectations. The GAP model of service quality identifies gaps where a discrepancy may occur between the service provider s performance and the customer s expectations. The final goal in improving service quality is to reduce or eliminate all gaps, including lack of management understanding of what customers expect, failure to translate managers perceptions of customer expectations into service delivery quality standards, a perceived difference between specified delivery standards, and the service provider s actual performance, a difference between what a company promises through its advertising and the actual service quality that is perceived at delivery. The final gap is the difference between what the customer perceives and his/her original expectations.

Seven Service Quality Gaps (Fig. 14.1)

Various tools used in analyzing, measuring and improving service quality. Customer defined standards and measures of service quality can be grouped into soft and hard measures. Organizations known for excellent service make use of both soft and hard measures to improve service quality (see FedEx Service Quality Index as illustrated in Table 14 4). Soft measures include: transactional surveys, total market surveys, mystery shopping, analysis of feedback such as complaints and compliments, focus group interviews, and service reviews. Hard measures typically refer to operational processes or outcomes and include data such as uptime, delivery cost, failure rates, and service response times. Other tools used to analyze and address service quality problems include using the Fishbone Diagram (Cause and Effect Chart), Pareto Analysis, Blueprinting, and Poka Yokes. key methods of increasing service productivity. Classical methods in measuring productivity often focus on outputs rather than outcomes, stressing efficiency but neglecting effectiveness. The focus of productivity can be shifted from its traditional focus on volume of output to one emphasizing value of output. If the same volume can be sold at higher prices without a comparable increase in input costs, then the transformation of inputs into outputs will be more productive. Under these circumstances, the productivity goal shifts from efficiency to effectiveness. The former is operations and finance oriented. The latter is marketing and customer oriented. Because higher quality service creates more value for customers, the effectiveness approach to productivity is closely allied to service quality. Organizations that are more effective in consistently delivering customer desired outcomes would be able to command higher prices. Three customer driven strategies of improving productivity are:

1) Changing the timing of customer demand: Managers can make better use of their productive assets and provide better service by shifting demand away from the peak periods. To do this, they may need to target new market segments with different needs and schedules. 2) Involving customers more actively in the production process: Through technological innovations such as the Internet and self-servicing counters, customers can take over some of the labor task thus saving cost and improving productivity. Although much of these depend on customers willingness to change, research into socialization can help marketers redesign the service encounter to encourage more customer participation. 3) Asking the customers to use third parties: Specialist intermediaries, enjoying economies of scale and scope, can perform the task cheaper then the core service provider thus it makes sense to outsource delivery of supplementary service elements to intermediary organizations to improve service productivity. It should be noted that backstage changes filter through to the frontline, and frontline changes to improve productivity can impact customers. Marketing communications can play a big part in preparing customers for the change and explain the rationale and benefits and what the new behavior expected of the customer is. Managing customers reluctance to change is also very important

Chapter 15 ORGANIZING FOR SERVICE LEADERSHIP

Appreciate why the marketing, operations, and human resource management functions in service organizations need to be closely coordinated and integrated. The work of the traditional marketing department in services embraces only a small portion of the overall marketing function within a service business. Many marketingrelated tasks are, in fact, performed by individuals working in other departments that have responsibility for (or influence over) customer contact and service quality. Compartmentalizing management functions or subjecting one function to another are not appropriate ways to organize a service firm. The three functional imperatives are all linked. The marketing imperative specifies creation of relationships with desirable target segments that receive service packages of consistent quality that offer more value than competing alternatives. The operations imperative specifies creation and delivery of the specified package using the most appropriate operational procedures to consistently meet customer cost, schedule, and quality goals, while also seeking continuing productivity improvements. The human resources imperative requires the firm to recruit, train, and motivate staff members capable of working together to balance the twin goals of customer satisfaction and operational effectiveness. Causes of interfunctional tensions and how to avoid them. Tensions between different management functions often reflect different views of organizational priorities or the most appropriate ways of executing strategy (personality differences, internal politics, and departmental or personal bids for power may also be at the heart of such tensions). Marketing managers may see the operations perspective and its emphasis on efficiency as narrow and one-sided. Similarly, they may get frustrated on the HR side, by employee resistance to change or by union contracts that constrain innovation in services and delivery systems. Key areas for disagreements include: Revenue vs. costs: Marketers seek to increase sales and build customer loyalty; operations managers seek to improve efficiency and keep down costs. Different time horizons: Marketers often want to expedite development of new services to be responsive to customer needs and seize market opportunities; operations and HR managers may prefer a longer time horizon to perfect new technologies and procedures and to obtain commitment from employees and unions. Perceived fit of new products with existing operations: A service that offers good productmarket fit may not fit well with the existing operational system or with current employee job definitions and skills

Avoiding interfunctional tensions may require redefining the strategic imperatives for the marketing, operations, and HR functions (see second learning objective). Strategies for reducing such tensions include: Transfers and cross-training of managers and employees. Creating cross-functional taskforces to work on specific projects. Moving new people into new jobs rather than retraining existing people. Creating process-management teams, such as brand-management teams responsible for design and delivery of all front stage elements of a particular service. Instituting gain-sharing programs that allow employees to share in incremental profits (or in costs savings at a nonprofit organization). Information technology also provides opportunities to link different management functions together, to capture customer sales information, and to analyze it in ways that are useful to managers with differing responsibilities. Understand some of the actions needed to move a service firm from the reactive position of merely being available for service toward the status of world-class service delivery. In this chapter, we focus on what service leadership means for each of the three key functions in service management: marketing, operations, and human resources. Service leadership involves creating a climate in which curiosity, experimentation, and risk taking are supported. This includes a willingness to invest funds in needed improvements. Table 15 2 summarizes how the role assigned to marketing, operations, and human resources changes as an organization moves from loser to leader status. It also outlines how performance varies across organizations on nine characteristics relating to these three functions. The necessary actions to take will depend on where the organization is currently located on each of these characteristics and where it seeks to go. The role played by service leaders in fostering success within their organizations. Service leadership embraces three perspectives: (1) the role of the chief executive in leading the organization, (2) leadership of different departments and teams, at various levels within the organization, to ensure good service to customers, and (3) market leadership within a particular service industry, setting standards for service quality, service innovations, and defining the terms of competition. Leadership must come through individuals. Prescriptions for leader behavior emphasize establishing (or preserving) an appropriate corporate culture, instituting an effective planning process, instilling a sense of organizational cohesion, and providing continuing examples of desired behaviors. Some leaders build a company and create a culture that they shape as it grows. Others, seeking to

turn around a failing organization, work to transform or replace an inappropriate culture such as an operations-oriented mentality that places little value on service to customers. Berry highlights several service leadership characteristics: being driven by a set of core values, seeing quality of service as the foundation for competing, recognizing the key role of employees in delivering service, and giving priority to communicating with them, and enthusiasm for the business in which the firm is engaged. In summary, leadership should be viewed together with the culture and climate of the organization in determining the appropriate form of leadership to undertake.

References y Lovelock, Christopher, Jochen Wirtz, Hean Tat Keh, Xiongwen Lu. Services Marketing in Asia. Singapore, Prentice Hall 2005 y Peter, J.Paul, et Al. Consumer Behavior & Marketing strategy. Seventh edition, Prentice hall. 2001 y Kotler, Philip. Principles of Marketing. Prentice Hall. 2002 y Bitner Marry Jo., Service Blueprinting , 2007
http://docs.google.com/viewer?a=v&q=cache:0TYZ4ySqNcUJ:people.ischool.berkeley.edu/~gl ushko/IS243Readings/ServiceBlueprinting.pdf+blueprinting+service&hl=id&gl=id&pid=bl&srci d=ADGEEShdqKxdasQr9s3a85A4EgEVrFA0YwJludEwEu0lda2PUpIZB1xrunkK50l6LJX2y0QiIflgau EEGsmUZurkw5W00wy9zHj7sWPBfbHZ6LTSEHELiuQrOYqCn905pdiMWabjA&sig=AHIEtbS6oG RlKCzSaygcRW01NHf3oacSrA retrieve on 10 April 2010-04-16

SERVICES MANAGEMENT ASSIGMENT 3

Summary Chapter 12, 13, 14 and 15

Vera Zelvia Devi HRM 006200700006