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Managing Relationships
and Building Loyalty
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 1
The search for customer loyalty
Loyalty is described as a
customer’s willingness to continue patronizing a firm
purchasing & using its goods & services on a repeated &
preferably exclusive basis &
recommending the firm’s products to friends & associates.
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 2
What Makes Loyal Customers More Profitable?
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 3
Analyzing Why Customers Are More Profitable
over Time
1 2 3 4 5 6 7
Year Source: Reichheld and Sasser
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 4
Understanding the customer/firm relationship
1. Transactional marketing
Relational marketing
2. Database marketing
3. Interaction marketing
4. Network marketing
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 5
Understanding the customer/firm relationship
1.Transactional marketing:
A transaction is an event during which an exchange of value takes place
between two parties.
2. Data base marketing: The focus is on the market transaction but also
includes information exchange. Marketers rely on information technology,
usually in the form of a database, to form a relationship with targeted
customers & retain their patronage over time.
• However, the nature of these relationships is often not a close one, with
communication being driven & managed by the seller.
• Both the firm & the customer are prepared to invest resources to develop a
mutually beneficial relationship. This invest may include time spent sharing &
recording information.
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 9
Types of Relationships with Customers
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 10
Identifying and Selecting Target Segments
User characteristics
demographics
psychographics
geographic location
benefits sought
User behavior
when, where, how services used
quantity/value of purchases
frequency of use
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 11
Targeting the right customers
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 12
Cont…………….
• Many service firms still focus on the number of customers they serve without giving
sufficient attention to the value of each customer.
• Service customers who buy based strictly on lower price are not good target
customers for relationship marketing at the first place. These deal-prone customers
continually seek the lowest price offer.
• Acquiring the right customers can bring in long-term revenues, continued growth
from referrals, & enhanced satisfaction.
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 13
Cont…………….
• A wise firm may seek a mix of such segments in order to reduce the risks
that various types of customers might be affected.
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 14
Analyzing & managing the customer base
• Research has confirmed that most firms have several tiers of customers in
terms of profitability & that these tiers often different service expectations &
needs
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 15
The Customer Pyramid
Good Relationship
Customers
Which segment sees high value in
our offer, spends more with us over
Platinum time, costs less to maintain, and
spreads positive word-of-mouth?
Gold
Poor Relationship
Customers
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 16
Tiering the customer base
3. Iron: These customers provide the bulk of customer base. Because their
numbers give the firm economies of scale, they are often important so
that a firm can build & maintain a certain capacity level & infrastructure,
which is often needed for serving gold & platinum customers.
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 17
Retaining, upgrading & terminating customers
• Each segment receives a customized service level, based on its requirements &
value to the firm.
• The platinum tier will receive some exclusive benefits not available to other
segments. The benefit levels for platinum & gold customers are often designed with
retention in mind, because these customers are the ones that competitors would like
to entice to switch.
• For lead- customers, the options are to either migrate them to the iron segment or
terminate them.
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 18
The foundations of customer loyalty
Apostle
100
Zone of Affection
80
Loyalty (Retention)
Near Apostle
60 Zone of Indifference
40 Zone of Defection
20
Terrorist 0
1 2 3 4 5
Very Neither Very
dissatisfied Dissatisfied satisfied Satisfied Satisfied
nor dissatisfied
Satisfaction
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 20
The Wheel of Loyalty
3. Reduce 1. Build a
Churn Drivers Foundation
for Loyalty
Conduct churn diagnostic
Segment the market
Address key churn drivers
Be selective in acquisition
Enabled through:
Implement complaint
handling & service Use effective tiering of
Frontline staff service.
Account
recovery Customer
Increase switching Deliver quality
managers
Membership costs
Loyalty service.
programs
CRM
Systems 2. Create Loyalty
Bonds
Build higher level Deepen the
bonds relationship
Give loyalty
rewards
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 21
Customer Feedback and
Service Recovery
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 22
Key Questions for Managers to Ask about
Customer Complaining Behavior
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 23
Customer Response categories to service failures
Complain
Complaintotothe
the
service firm
service firm
Take
Takesome
someform Complain
form Complaintotoaathird
third
ofofpublic action
public action party
party
Take
Takelegal
legalaction
action
Service Take
Takesome
someform
formofof
ServiceEncounter
Encounterisis private
totoseek redress
seek redress
Dissatisfactory
Dissatisfactory privateaction
action
Defect
Defect(switch
(switch
provider)
provider)
Take
Takeno
noaction
action
Negative
Negativeword-of-
word-of-
mouth
mouth
Any
Anyone
oneororaacombination
combinationofof
these
theseresponses
responsesisispossible
possible
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 24
Understanding customer responses to service
failures
• To be able to deal effectively with dissatisfied & complaining customers,
managers need to understand key aspects of complaining behavior
b.Vent their anger: Some customers complain to rebuild self-esteem &/or to vent
their anger & frustration. When service processes are unreasonable or when
employees are rude or uncaring.
c. Help to improve the service: When customers are highly involved with a service,
they give feedback to try & contribute toward service improvements. These
customers are motivated by the prospect of getting better service in the future.
d. For altruistic reasons: These customers want to spare other customers from
experiencing the same problems.
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 25
Cont……………..
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 26
Cont…………..
• Some don’t wish to take the time to write a letter, fill out a form, or make a
phone call, especially if they don’t see the service sufficiently important to
merit the effort.
• Many customers see the payoff as uncertain & believe that no one would
be concerned about their problem or willing to resolve it.
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 27
Cont……………
• Better education, higher income, & greater social involvement give them
the confidence, knowledge & motivation to speak up when they encounter
problems.
• Studies show that majority of complaints are made at the place where the
service was received.
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 28
Customer expectations about their complaints
1. Procedural justice: It deals with the policies & rules that any customer will have to go
through in order to seek fairness. Customers expect the firm to assume responsibility, which
is the key to the start of a fair procedure
2. Interactional justice: It involves the firm’s employees who provide the service recovery &
their behavior towards the customer. Giving an explanation for the failure & making an effort
to resolve the problem are very important. The recovery effort must be perceived as
genuine, honest & polite.
3. Outcome justice: The compensation that a customer receives as a result of the losses &
inconvenience incurred because of the service failure. It includes compensation for time &
effort spent during service process recovery.
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 29
Dimensions of Perceived Fairness in Service
Recovery Process
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 30
Customer responses to effective service recovery
•
•Service recovery is an umbrella term for systematic efforts by a firm to
correct a problem following a service failure & retain a customer’s goodwill.
• The true test of a firm’s commitment to satisfaction & service quality is not
in the advertising promises but in the way it responds when things go wrong
for the customer.
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 31
Impact of Effective Service Recovery
on Retention
No
Problem
84%
Problem,
but effectively 92%
resolved
Problem
46%
Unresolved
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Customer Retention
Source: IBM-Rochester study
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 32
Principles of effective service recovery systems
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 33
Strategies to Reduce Customer Complaint
Barriers
Complaint Barriers for Dissatisfied Strategies to Reduce These Barriers
Customers
Inconvenience Make feedback easy and convenient by:
Difficult to find the right complaint Printing Customer Service Hotline numbers, e-
procedure. mail and postal addresses on all customer
Effort, e.g., writing a letter. communications materials.
Doubtful Pay Off Reassure customers that their feedback will be
taken seriously and will pay off by:
Uncertain whether any action, and what Having service recovery procedures in place,
action will be taken by the firm to and communicating this to customers.
address the issue the customer is Featuring service improvements that resulted
unhappy with. from customer feedback.
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 34
Cont…………..
c.Recovery skills must be taught: Effective training arms frontline staff with the
confidence & competence to turn distress into delight.
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 35
Cont……………
How much compensation should a firm offer when there has been a service
failure? Or would an apology be sufficient instead?
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 36
Cont……………….
Both managers & frontline employees must be prepared to deal with angry
customers who are confrontational & sometimes behave in insulting ways
toward service personnel.
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 37
Cont……………..
+
Do the Job Right the
Do the Job Right the
First Time
First Time
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 39
Service Guarantees
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 40
The power of service guarantees
• Guarantees are powerful tools for both promoting & achieving service quality
for the following reasons:
1.Guarantees force firms to focus on what their customers want & expect in
each element of the service.
2.Guarantees set clear standards, telling customers & employees alike what
the company stands for.
5.Guarantees help in reducing the risk of the purchase decision & building
long-term loyalty.
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 41
How to design service guarantees
•Some guarantees are simple & unconditional. Others appear to have been
written by lawyers & contain many restrictions.
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 42
Types of Service Guarantees
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 43
Is it always appropriate to introduce a service
guarantee?
• Managers should think carefully about their firm’s strength & weaknesses
before deciding to introduce a service guarantee.
• Companies that have a strong reputation for high-quality service may not
need a guarantee.
• In contrast, a firm whose service is currently poor must first work to improve
quality to level above that at which the guarantee might be invoked on a regular
basis by most of its customers.
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 44
Key objectives of effective customer feedback
systems
• Many strategists have concluded that in increasingly competitive markets, the
ultimate competitive advantage for a firm is to learn & change more rapidly than
competition.
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 45
Cont………………..
•Overall indices tell how satisfied customers are but not why they are happy
or unhappy.
•There is a limit to the number of questions that can be asked about each
individual process or product.
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 47
Cont……………
• All three types are representative & reliable when designed properly.
Representativeness & reliability are required for:
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 48
Cont……………
• Although these cards are good indicator of process quality & yield specific
feedback on what works well & what doesn’t, the respondents tend not to be
representative & are biased.
3. Mystery shopping
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 49
Strengths and Weakness of Key Customer Feedback
Collection Tools
Service Reviews
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 50
Entry Points for Unsolicited Feedback
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 51
Analysis, reporting & dissemination of customer
feedback
• Choosing the relevant feedback tools & collecting customer feedback is
meaningless if company is unable to disseminate the information to the
relevant parties to take action.
• The feedback loop to the frontline should be immediate for complaints &
complements as is practiced in a number of service businesses where
complaints, compliments & suggestions are discussed with the staff.
• The reports should be short & reader friendly, focusing on key indicators.
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 53