Lovelock PPT Chapter 12

Chapter 12:
Managing
Customer
Relationships and
Building Loyalty
Slide 2007 by Christopher Lovelock and Jochen Wirtz
Services Marketing 6/E
Chapter 12 - 1
Overview of Chapter 12
The Search for Customer Loyalty
Understanding the Customer-Firm Relationship
The Wheel of Loyalty
Building a Foundation for Loyalty
Creating Loyalty Bonds
Strategies for Reducing Customers Defections
CRM: Customer Relationship Management
Chapter 12 - 2
The Search for Customer

Loyalty
Chapter 12 - 3
Why Is Customer Loyalty Important to

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

Fewer demands from suppliers and operating mistakes as customer
becomes experienced
Referrals to other customers

Positive word-of-mouth saves firm from investing money in sales
and advertising
Price premiums
Long-term customers willing to pay regular price
Willing to pay higher price during peak periods
Chapter 12 - 4
How Much Profit a Customer

Generates Over Time (Fig 12.1)
(Year 1=100)
350
300
250
200
150
100
50
0
Year 1
Credit card
Year 2
Industrial laundry
Year 3
Year 4
Industrial distribution
Year 5
Auto servicing
Source: Based on reanalysis of data from Fredrick R. Reichheld and W. Earl Sassar, Jr., Zero Defections: Quality Comes from Services, Harvard
Business Review 68 (Sep.-Oct. 1990), pp. 105111.
Chapter 12 - 5
Why Customers Are More Profitable

Over Time (Fig 12.2)
Profit from price
premium
Profit from references
Profit from reduced
op. costs
Profit from increased
usage
Base Profit/Loss
Loss
1
4
Year
Source: Why Are Customers More Profitable Over Time from Fredrick R. Reichheld and W. Earl Sassar, Jr., Zero Defections: Quality Comes from
Services, Harvard Business Review 73 (Sep.Oct. 1990): p. 108.
Chapter 12 - 6
Assessing the Value of a

Loyal Customer (1)
Must not assume that loyal customers are always more
profitable than those making one-time transactions
Costs
Not all types of services incur heavy promotional
expenditures to attract a new customer
Walk-in traffic more important at times
Revenue
Large customers may expect price discounts in return for
loyalty
Revenues dont necessarily increase with time for all types
of customers
Chapter 12 - 7
Assessing the Value of a

Loyal Customer (2)
Profit impact of a customer varies according to stage of
service in product life cycle
For example referrals and negative word-of-mouth have a
higher impact in early stages
Tasks
Determine costs and revenues for customers from different market
segments at different points in their customer lifecycles
Predict future profitability
Chapter 12 - 8
Measuring Customer Equity:

Lifetime Value of Each Customer
Acquisition revenues less costs
Revenues (application fee + initial purchase)
Costs (marketing + credit check + account set up)
Projected annual revenues and costs

Revenues (annual fee + sales + service fees + value of referrals)
Costs (account management + cost of sales + write-offs)
Value of referrals
Percentage of customers influenced by other customers
Other marketing activities that drew the firm to an individuals
attention
Net Present Value

Sum anticipated annual values (future profits)
Suitably discounted each year into the future
Chapter 12 - 9
Gap Between Actual and

Potential Customer Value
What is current purchasing behavior of customers in

each target segment?
What would be impact on sales and profits if they

exhibited ideal behavior profile of:
(1) buying all services offered by the firm,
(2) using these to the exclusion of any purchases from competitors,
(3) paying full price?
How long, on average, do customers remain with firm?
What impact would it have if they remained customers

for life?
Chapter 12 - 10
Understanding the
Customer-Firm Relationship
Chapter 12 - 11
Relationship Marketing (1)

Transactional Marketing
One transaction or a series of transactions does not necessarily
constitute a relationship
Requires mutual recognition and knowledge between the parties
Database Marketing:
Includes market transaction and information exchange
Technology is used to
(1) identify and build database of current and potential customers
(2) deliver differentiated messages based on customers
characteristics
(3) track each relationship to monitor cost of acquiring that
customer and lifetime value of resulting purchases
Chapter 12 - 12
Relationship Marketing (2)

Interaction Marketing:
Face-to-face interaction between customers and suppliers
representatives
Value is added by people and social processes
Increasing use of technologies make maintaining meaningful
relationships with customers a marketing challenge
For example, self-service technology, interactive websites, call
centers
Network Marketing:
Common in b2b context where companies commit resources to
develop positions in network of relationships with stakeholders and
relevant agencies
Chapter 12 - 13
Relationships with Customers

(Fig 12.1)
Type of Relationship between the Service
Organization and Its Customers
Nature of Service
Delivery
Membership
Relationship
No Formal
Relationship
Continuous
Cable TV
Radio station
Insurance policy
Police
College enrollment
Lighthouse
Subscriber phone
Pay phone
Theater subscription
Movie theatre
Warranty repair
Public transport
Discrete
Transactions
Chapter 12 - 14
Chapter 12 - 15
(Fig 12.4)
3. Reduce
Churn Drivers
Conduct churn diagnostic
Address key churn drivers
Enabled through:
Frontline staff
Account
managers
Membership
programs
CRM
Systems
Implement complaint
handling and service
recovery
Increase switching
costs
Build higher
level bonds
1. Build a
Foundation
for Loyalty
Segment the market
Be selective in acquisition
Use effective tiering of
service.
Deliver quality
service.
Customer
Loyalty
2. Create Loyalty
Bonds
Give loyalty
rewards
Deepen the
relationship
Chapter 12 - 16
Building a Foundation for

Loyalty
Chapter 12 - 17
Customer Needs and

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

of those customers who value what firm has to offer
Chapter 12 - 18
Searching for ValueNot Just

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

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

Chapter 12 - 19
Effective Tiering of Service

The Customer Pyramid (Fig 12.5)
Good Relationship
Customers
Which segment sees high value in

our offer, spends more with us over
time, costs less to maintain, and
spreads positive word-of-mouth?
Platinum
Gold
Iron
Lead
Poor Relationship
Customers
Which segment costs us time,

effort, and money, yet does not
provide return we want? Which
segment is difficult to do
business with?
Source: Valarie A Zeithaml, Roland T Rust, and Katharine N. Lemon, The Customer Pyramid: Creating
and Serving Profitable Customers, California Management Review 43, no. 4, Summer 2001, pp.118
142.
Chapter 12 - 20
The Customer Satisfaction

Loyalty Relationship (Fig 12.7)
Apostle
Loyalty (Retention)
100
Zone of Affection
80
Near Apostle
Zone of Indifference
60
40
Zone of Defection
20
Terrorist
0
1
Very
Dissatisfied
Dissatisfied
Source: Adapted from Thomas O. Jones and W. Earl
Sasser, Jr., Why Satisfied Customers Defect, Harvard
Business Review, November-December 1995, p. 91.
Neither
Satisfied
Satisfaction
Very
Satisfied
Chapter 12 - 21
Creating Loyalty Bonds
Chapter 12 - 22
Strategies for Developing Loyalty

Bonds with Customers (1)
Deepening the relationship
Bundling/cross-selling services makes switching a major effort
that customer is unwilling to undertake unless extremely
dissatisfied with service provider
Customers benefit from consolidating their purchasing of various
services from the same provider
See Research Insights 12.2: How do customers see relational
benefits?
One-stop-shopping, potentially
higher service levels,
higher service tiers, etc.
Chapter 12 - 23

Reward-based Bonds
Incentives that offer rewards based on frequency of purchase, value
of purchase, or combination of both
Financial bonds
Discounts on purchases, loyalty program rewards (e.g., frequent
flier miles), cash-back programs
Non-financial rewards
Priority to loyalty program members for waitlists and queues in call
centers: higher baggage allowances, priority upgrading, access to
airport lounges for frequent flyers
Intangible rewards
Special recognition and appreciation, tiered loyalty programs
Reward-based loyalty programs are relatively easy to copy and

rarely provide a sustained competitive advantage
Chapter 12 - 24

Social Bonds
Based on personal relationships between providers and customers
Harder to build and imitate and thus, better chance of retention in
the long term
Customization Bonds
Customized service for loyal
customers
e.g., Starbucks
Customers may find it hard to adjust

to another service provider who
cannot customize service
Source: PAL Library; Asset ID: AAFHKTO0

Chapter 12 - 25

Structural Bonds
Mostly seen in b2b settings
Stimulate loyalty through structural relationships between provider
and customer
Joint investments in projects and sharing of information, processes
and equipment
Can be seen in b2c environment too

AirlinesSMS check-in, SMS e-mail alerts for flight arrival and
departure times
Difficult for competition to draw customers away when they have

integrated their way of doing things with existing supplier
Chapter 12 - 26
Creating Customer Bonds by Membership

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

For example: Feel excluded from rewards program because of low
balances, rewards seen as having little value, cumbersome
redemption process
Dont lose sight of broader goals of offering high service quality, nor
allow service to other customers to deteriorate
Chapter 12 - 27
Create Customer Bonds by Membership

Relationships and Loyalty Programs (2)
How customers perceive reward programs
Brand loyalty versus deal loyalty
Buyers value rewards according to:
Cash value of redemption award
Range of choice among rewards
Aspirational value of rewards
Amount of usage required to obtain award
Psychological benefits of belonging to reward program
Timing
Send customers periodic updates on account status and
progress towards particular milestones
Chapter 12 - 28
Strategies for Reducing

Customer Defections
Chapter 12 - 29
Analyze Customer Defections and

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

Monitor activity in individual customer accounts to predict
impending customer switching
Proactive detention effortssend voucher, customer service
representative calls customer
Chapter 12 - 30
What Drives Customers to Switch?

(Fig 12.9)
Service Failure/Recovery
Value Proposition
Core Service Failure
Pricing
Service Mistakes
Billing Errors
Service Catastrophe
Service Encounter Failures

Uncaring
Impolite
Unresponsive
Unknowledgeable
Service
Switching
High Price
Price Increases
Unfair Pricing
Deceptive Pricing
Inconvenience
Location/Hours
Wait for Appointment
Wait for Service
Response to Service Failure

Negative Response
No Response
Reluctant Response
Competition
Found Better Service
Others
Involuntary Switching
Ethical Problems
Customer Moved
Provider Closed
Unsafe
Cheat
Hard Sell Conflict of Interest
Source: Adapted from Susan M. Keaveney, Customer Switching Behavior in Service Industries: An Exploratory Study, Journal of Marketing 59 (April 1995), pp. 7182.
Chapter 12 - 31
Addressing Key Churn Drivers

Delivery quality
Minimize inconvenience and nonmonetary costs
Fair and transparent pricing
Industry specific drivers
Cellular phone industry: Handset replacement a common reason
for subscribers discontinuing servicesoffer proactive handset
replacement programs
Reactive measures
Save teams: Specially trained call center staff to deal
with customers who want to cancel their accounts
Be careful about how save teams are rewarded
Chapter 12 - 32
Other Ways to Reduce Churn

Implement effective complaint handling and
service recovery procedures
Increase switching costs
Natural switching costs
For example, changing primary bank accountmany
related services tied to account
Can be created by instituting contractual penalties for

switching
Must be careful not to be perceived as holding customers
hostage
High switching barriers and poor service quality likely to
generate negative attitudes and word of mouth
Chapter 12 - 33
CRM: Customer Relationship

Management
Chapter 12 - 34
Integrated Framework for

CRM Strategy (Fig 12.10)
Strategy
Development
Process
Value Creation
Process
Multi-Channel
Integration
Process
Performance
Assessment
Process
Information Management Process
Source: Adapted from: Adrian Payne and Pennie Frow, A Strategic Framework for Customer
Relationship Management, Journal of Marketing 69 (October 2005): pp.167176.
Chapter 12 - 35
Integrated Framework for

CRM Strategy Development
Strategy Development
Assessment of business strategy
Business strategy guides development of
customer strategy
Chapter 12 - 36
Integrated Framework for CRM

Strategy: Value Creation
Value Creation
Translates business and customer strategies into specific
value propositions for both customers and firm
Customers benefit from priority, tiered services,
loyalty rewards, and customization
Company benefits from reduced customer acquisition
and retention costs, and increased share-of-wallet
Dual creation of value: Customers need to participate in
CRM to reap value from firms CRM initiatives
Chapter 12 - 37

Strategy: Multi-Channel Integration
Multi-Channel Integration
Serve customers well across many
potential interfaces
Offer a unified interface that delivers
customization and personalization
Chapter 12 - 38

Strategy: Performance Assessment
Performance Assessment
Is CRM system creating value for key
stakeholders?
Are marketing and service standard objectives
being achieved?
Is CRM system meeting performance
standards?
Chapter 12 - 39

Strategy: Information Management
Information Management
Collect customer information from all
channels
Integrate it with other relevant information
Make useful information available to the
frontline
Create and manage data repository, IT
systems, analytical tools, specific application
packages
Chapter 12 - 40
Common Objectives Of CRM Systems (1)

(Service Perspectives 12.3)
Data collection
Customer data such as contact details, demographics, purchasing
history, service preferences, and the like
Data analysis
Data captured is analyzed and categorized
Used to tier customer base and tailor service delivery accordingly.
Sales force automation

Sales leads, cross-sell, and up-sell opportunities can be effectively
identified and processed
Entire sales cycle from lead generation to close of sales and aftersales service can be tracked and facilitated through CRM system
Chapter 12 - 41
Common Objectives Of CRM Systems (2)

(Service Perspectives 12.3)
Marketing automation
Mining of customer data enables the firm to target its market
Goal to achieve one-to-one marketing and cost savings, often in the
context of loyalty and retention programs
Results in increasing the ROI on its marketing expenditure
CRM systems also enable the assessment of the effectiveness of
marketing campaigns through the analysis of responses
Call center automation

Call center staff have customer information at their fingertips and
can improve their service levels to all customers
Caller ID and account numbers allow call centers to identify the
customer tier the caller belongs to, and to tailor the service
accordingly
For example, platinum callers get priority in waiting loops
Chapter 12 - 42
Common Failures in
CRM Implementation
Service firms often equate installing CRM systems with having
a customer relationship strategy
Challenge of getting it right with wide-ranging scope of CRM
Common reasons for failures
Viewing CRM as a technology initiative
Lack of customer focus
Insufficient appreciation of customer lifetime value (CLV)
Inadequate support from top management
Failure to reengineer business processes
Underestimating the challenges in date integration
Chapter 12 - 43
Key Issues in Defining a

Customer Relationship Strategy
How should our value proposition change to increase

customer loyalty?
How much customization or one-to-one marketing and

service delivery is appropriate and profitable?
What is incremental profit potential of increasing share-ofwallet with current customers? How much does this vary by
customer tier and/or segment?
How much time and resources can we allocate to CRM right

now?
If we believe in customer relationship management, why

havent we taken more steps in that direction in past?
What can we do today to develop customer relationships

without spending on technology?
Chapter 12 - 44
Summary of Chapter 12: Managing Customer

Relationships and Building Loyalty (1)
Customer loyalty as an important driver of profitability for
service firms so firms need to
Assess value of loyal customer
Narrow gap between actual and potential customer value
To understand the customer-firm relationship, firms should

establish a relationship with customers by creating
membership relationships
Four types of marketing
Transactional marketing
Database marketing
Interaction marketing
Network marketing
Chapter 12 - 45

Wheel of Loyalty shows how firms can:
Build a foundation of loyalty
Create loyalty bonds
reduce churn drivers
Building a foundation of loyalty involves:

Good fit between customer needs and capabilities
Searching for value, not just volume
Tiering services effectively
Obtaining customer satisfaction through service quality
Chapter 12 - 46

Customer loyalty bonds include:
Reward-based bonds
Social bonds
Customization bonds
Structural bonds
Bonds can also be created through membership relationships

and loyalty programs
Strategies for reducing customer defections include:
Analyzing customer defections and monitoring declining accounts
Addressing key churn drivers
Implementing effective complaint-handling and service recovery
procedures
Increasing switching costs
Chapter 12 - 47

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

Value creation process
Multichannel integration process
Performance assessment process
Cresting a successful CRM program requires understanding

common failures in CRM implementation and knowing how to
get it right
Chapter 12 - 48

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Chapter 12:

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

The Search for Customer

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Why Is Customer Loyalty Important to

Reduced operating costs

Referrals to other customers

Services Marketing 6/E

How Much Profit a Customer

Services Marketing 6/E

Why Customers Are More Profitable

Services Marketing 6/E

Assessing the Value of a

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Assessing the Value of a

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Measuring Customer Equity:

Projected annual revenues and costs

Net Present Value

Services Marketing 6/E

Gap Between Actual and

What is current purchasing behavior of customers in

What would be impact on sales and profits if they

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

What impact would it have if they remained customers

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Relationship Marketing (1)

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Relationship Marketing (2)

Services Marketing 6/E

Relationships with Customers

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

The Wheel of Loyalty

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

The Wheel of Loyalty

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Building a Foundation for

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Customer Needs and

Should result in a superior service offering in the eyes

Slide 2007 by Christopher Lovelock and Jochen Wirtz

Services Marketing 6/E

Searching for ValueNot Just

Firms that are highly focused and selective in their

Different segments offer different value

Services Marketing 6/E

Effective Tiering of Service

Which segment sees high value in

Which segment costs us time,

Slide 2007 by Christopher Lovelock and Jochen Wirtz