SM

Chapter 6

BUILDING
CUSTOMER
RELATIONSHIPS
 Objectives for Chapter 6:
Building Customer Relationships

• Explain relationship marketing, its goals, and the benefits

of long-term relationships for firms and customers
• Explain why and how to estimate customer lifetime value
• Specify the foundations for successful relationship
marketing--quality core services and careful market
segmentation
• Provide you with examples of successful customer
retention strategies
• Introduce the idea that “the customer isn’t always right”
 Relationship Marketing

• is a philosophy of doing business that focuses on keeping

and improving current customers
• does not necessarily emphasize acquiring new customers
• is usually cheaper (for the firm)--to keep a current
customer costs less than to attract a new one
• goal = to build and maintain a base of committed
customers who are profitable for the organization
• thus, the focus is on the attraction, retention, and
enhancement of customer relationships
 Lifetime Value of a Customer

• Assumptions
• Income
• Expected Customer Lifetime
• Average Revenue (month/year)
• Other Customers convinced via WOM
• Employee Loyalty??
• Expenses
• Costs of Serving Customer Increase??
 A Loyal Customer is One Who...
• Shows Behavioral Commitment
• buys from only one supplier, even though other options
exist
• increasingly buys more and more from a particular
supplier
• provides constructive feedback/suggestions
• Exhibits Psychological Commitment
• wouldn’t consider terminating the relationship--
psychological commitment
• has a positive attitude about the supplier
• says good things about the supplier
Benefits to the Organization of Customer Loyalty

• loyal customers tend to spend more with the

organization over time
• on average costs of relationship maintenance are
lower than new customer costs
• employee retention is more likely with a stable
customer base
• lifetime value of a customer can be very high
Benefits to the Customer

• inherent benefits in getting good value

• economic, social, and continuity benefits
• contribution to sense of well-being and quality of life
and other psychological benefits
• avoidance of change
• simplified decision making
• social support and friendships
• special deals
“The Customer Isn’t Always Right”

• Not all customers are good relationship customers:

• wrong segment
• not profitable in the long term
• difficult customers
Strategies for Building Relationships

• Foundations:
• Excellent Quality/Value
• Careful Segmentation
• Bonding Strategies:
• Financial Bonds
• Social & Psychological Bonds
• Structural Bonds
• Customization Bonds
• Relationship Strategies Wheel
Figure 6-1
Customer Goals of
Relationship Marketing

Enhancing

Retaining

Satisfying

Getting
 Figure 6-3
Underlying Logic of Customer Retention
Benefits to the Organization

Customer Satisfaction

Customer Retention & Quality

Increased Profits Service

Employee Loyalty
 Figure 6-5
Steps in Market Segmentation and
Targeting for Services

STEP 1: STEP 2: STEP 3: STEP4: STEP 5:

Identify Develop Develop Select the Ensure that
Bases for Profiles of Measures Target Segments
Segmenting Resulting of Segment Segments Are
the Market Segments Attractive- Compatible
ness
 Figure 6-6
Levels of Retention Strategies
Stable
Volume and Pricing
Frequency Bundling and
Rewards Cross Selling

Integrated I. Financial Continuous

Information Bonds Relationships
Systems

IV.
Excellent
Quality II.
Joint Structural Personal
Investments and Social Relationships
Bonds
Value Bonds

Shared Social Bonds

Processes III. Customization Among
and Bonds Customers
Equipment

Anticipation Customer
/ Innovation Intimacy
Mass
Customization
SM
Chapter 7

SERVICE RECOVERY
 Objectives for Chapter 7:
Service Recovery

• Illustrate the importance of recovery from service

failures in building loyalty
• Discuss the nature of consumer complaints and
why people do and do not complain
• Provide evidence of what customers expect and
the kind of responses they want when they
complain
• Provide strategies for effective service recovery
• Discuss service guarantees
SR
• Service recovery converting a previously dissatisfied
customer into a loyal customer.
• It is the action a service provider takes in response to
service failure.
• a good recovery has a positive impact on
• satisfaction,
• recommendation intention,
• word-of-mouth,
• loyalty,
• image, and trust
 Figure 7-1
Unhappy Customers’
Repurchase Intentions
Unhappy Customers Who Don’t Complain
9%
Unhappy Customers Who Do Complain 37%

19%
Complaints Not Resolved
46%

54%
Complaints Resolved
70%

Complaints Resolved Quickly

82%
95%

Percent of Customers Who Will Buy Again

Minor complaints ($1-$5 losses) Major complaints (over $100 losses)

Source: Adapted from data reported by the Technical Assistance Research Program.
 Figure 7-3
Customer Response Following Service
Failure

Service Failure

Take Action Do Nothing

Switch Providers Stay with Provider

Complain to Complain to Complain to

Provider Family & Friends Third Party

Switch Providers Stay with Provider

 Figure 7-5
Service Recovery Strategies

Service
Recovery
Strategies
Pricing
• High Price
• Price Increases Figure 7-6
•
•
Unfair Pricing
Deceptive Pricing Causes Behind Service
Inconvenience
• Location/Hours
Switching
• Wait for Appointment
• Wait for Service

Core Service Failure

• Service Mistakes
• Billing Errors
• Service Catastrophe

Service Encounter Failures

• Uncaring
• Impolite Service
• Unresponsive
• Unknowledgeable Switching
Response to Service Failure
• Negative Response
Behavior
• No Response
• Reluctant Response

Competition
• Found Better Service

Ethical Problems
• Cheat
• Hard Sell
• Unsafe
• Conflict of Interest

Involuntary Switching
• Customer Moved Source: Sue Keaveney
• Provider Closed
 Service Guarantees

• guarantee = an assurance of the fulfillment of a condition.A

service guarantee is a marketing tool service firms have increasingly
been using to reduce consumer risk perceptions, signal quality,
differentiate a service offering, and to institutionalize and
professionalize their internal management of customer complaint and
service recovery

• for products, guarantee often done in the form of a warranty

• services are often not guaranteed

• cannot return the service
• service experience is intangible
• (so what do you guarantee?)
 Table 7-7
Characteristics of an Effective Service Guarantee

Unconditional
 The guarantee should make its promise unconditionally -
no strings attached.
Meaningful
 It should guarantee elements of the service that are
important to the customer.
 The payout should cover fully the customer's
dissatisfaction.
Easy to Understand and Communicate
 For customers - they need to understand what to expect.
 For employees - they need to understand what to do.
Easy to Invoke and Collect
 There should not be a lot of hoops or red tape in the way
of accessing or collecting on the guarantee.
Source: Christopher W.L. Hart, “The Power of Unconditional Guarantees,” Harvard Business Review, July-August, 1988, pp. 54-62.
Con…………..
• Easy to invoke: The guarantee should be less dependent on the
customer and more on service provider.
• Easy to collect: Service providers should design an easy and problem-
free guarantees collection process for customers.
• Credible: Guarantees must be offered in a believable manner.
Why a Good Guarantee Works

• forces company to focus on customers

• sets clear standards
• generates feedback
• forces company to understand why it failed
• builds “marketing muscle”
Service Guarantees

• Does everyone need a guarantee?

• Reasons companies do NOT offer guarantees:

• guarantee would be at odds with company’s image
• too many uncontrollable external variables
• fears of cheating by customers
• costs of the guarantee are too high
 Service Guarantees

• service guarantees work for companies who are

already customer-focused
• effective guarantees can be BIG deals - they put the
company at risk in the eyes of the customer
• customers should be involved in the design of
service guarantees
• the guarantee should be so stunning that it comes
as a surprise -- a WOW!! factor
• “it’s the icing on the cake, not the cake”