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Chapter 12

Managing Relationships and Building Loyalty Click to edit Master subtitle style


Four Stages of Brand Loyalty in a Consumer

Cognitive loyalty perception from brand attribute information that one brand is preferable to its alternatives Affective loyalty developing a liking for the brand based on cumulatively satisfying usage occasions Conative loyalty commitment to 3/18/12 rebuying the same brand

Loyalty is Important to Profitability : Index of Customer Profits (Year over Time (Fig. 12.1) 1=100)
350 3 0 2 0 5 2 0 0 1 0 5 1 0 0 05 0 0

Credit card

Year 1

Industrial laundry

Year 2

Year 3

Industrial distribution

Year 4

Based on data from Reichheld and Sasser servicing


Year 5


What Makes Loyal Customers More Profitable?

Tend to spend more as relationship develops

customers balances may grow may consolidate purchases to one supplier less need for information and assistance make fewer mistakes

Cost less to serve

Recommend new customers to firm (act as unpaid sales people) Trust leads to willingness to pay 3/18/12 regular prices vs. shopping for

Analyzing Why Customers Are More Profitable over Time (Fig. 12.2)

Profit from price premiu m Profit from references

Profit from op. reduced costs Profit from increased usa ge Base Profit

3 Ye ar

Source: Reichheld and Sasser


Measuring Customer Equity: Calculating Life Time Value of Each Customer

Value at Acquisition

revenues (application fee + initial purchase) Less costs (marketing +credit check + account set up)

Annual Value (project for each year of relationship)

revenues (annual fee + sales + service fees + value of referrals) Less costs (account management + cost of 3/18/12 sales + write-offs)

Customer-Firm Relationship
Todays marketers seek to develop long-term relationships with customers. Relationship marketing includes:

Database Marketing: Involves the use of technology by delivering differentiated service levels to consumers and subsequently tracking the relationship. Interaction Marketing: Usually in B2B context where people and the social process also add mutually beneficial value. Network Marketing: Common in B2B context where companies commit resources to develop positions in a network of relationships with the stakeholders and relevant agencies.

Types of Relationships with Customers (Table 12.1)

Type of Relationship--Firm and Customer Nature of Service Delivery
Membership relationship Continuous No formal Cable TV Radio station Insurance Police College enrollment Lighthouse

Discrete transactions Subscriber phone Pay phone Theater subscription Movie theater 3/18/12 Warranty repair Public transport

Basic Segmentation Issues: Building an Appropriate Customer Portfolio

Target customers whose needs match firms capabilities Focus on value of prospective customers within each segment, not just numbers Avoid targeting customers who might abuse:
our employees, facilities other customers 3/18/12

Service-Relevant Segmentation Variables

Timing of service use (e.g., by hour, day, season) Level of skill and experience as co-producer/self-server Preferred language in face-to-face contact Access to electronic delivery systems (e.g., Internet) Attitudes toward use of new 3/18/12 service technologies

Identifying and Selecting Target Segments

(Mgt Memo 12.2)

User characteristics
demographics psychographics geographic location benefits sought

User behavior
when, where, how services

used quantity/value of purchases frequency of use profitability of relationship sensitivity to marketing variables


Portfolio of Professional Assignments (Fig. 12.4)

Major, State-of-the-art challenges for the firms principals that give the firm high visibility Demanding client assignments offering a learning experience for the firms most experienced associates Routine client projects shared among principals and associates Entry-level tasks for new associates or for research assistants & paraprofessionals Pacesetters

Significant Projects

Bread and Butter Projects

Analytical Work on Project Data 3/18/12

The Customer Pyramid

Good Relationship Customers

(Fig. 12.5)

Platinum Gold Iron Lead

Poor Relationship Customers 3/18/12

Which segment sees high value in our offer, spends more with us over time, costs less to maintain, and spreads positive word-of-mouth?

Which segment costs us in time, effort and money, yet does not provide the return we want? Which segment is difficult to do business with?

How Customers See Relational Benefits in Service Industries (Research Insights

12.1) Confidence benefits

less risk of something going wrong, less anxiety ability to trust provider know what to expect get firms best service level mutual recognition, known by name friendship, enjoyment of social aspects

Social benefits


Special treatment benefits

The Customer SatisfactionLoyalty Relationship (Fig. 12.6)

1 0 0 8 0

Zone of Affection Near Apostle Zone of Indifference Zone of Defection

Loyalty (Retention) Terrorist

6 0 4 0 2 0 0 1
Very dissatisfied


Neither satisfied nor dissatisfied


Very Satisfied



The Wheel of Loyalty (Fig. 12.7)

3. Reduce Churn Drivers

Conduct churn diagnostic

1. Build a Foundation for Loyalty

Address key churn drivers

Segment the market

Enabled through: Frontline staff Account managers Membership programs CRM Systems

Implement complaint handling & service recovery

Be selective in acquisition

Increase switching costs

Customer Loyalty
2. Create Loyalty Bonds

Use effective tiering of service.

Deliver quality service.

Build higher level bonds

Give loyalty rewards

Deepen the relationship


Rewarding Value of Use, Not Just Frequency at British Airways (Best Practice in Action 12.2) Dedicated reservations
Reservations assurance Priority waitlist and standby Advance notification of

delays hours

exceeding 4

Upgraded check-in Preferred boarding Special services assistance Bonus air miles Upgrade for two


Drivers of Service Switching

(Fig. 12.9)
Service Failure / Recovery
Core Service Failure

Value Proposition

Service Mistakes Billing Errors Service Catastrophe Uncaring Impolite Unresponsive Unknowledgeable Negative Response No Response Reluctant Response

Service Encounter Failures

High Price Price Increases Unfair Pricing Deceptive Pricing


Response to Service Failure

Service Switching

Location/Hours Wait for Appointment Wait for Service


Found Better Service

Involuntary Switching

Ethical Problems

Customer Moved Provider Closed

Cheat Hard Sell

Unsafe Conflict of Interest


Common CRM Applications

(Mgt Memo 12.2)

Signifies the whole process by which relationships with customers are built and maintained. CRM as an enabler, offering a unified customer interface and allow firms to better understand and segment the customers etc. Applications include:


Data collection Data analysis Sales force automation

Customer Relationship Strategies with CRM Systems: Key Questions 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 the incremental profit potential of increasing share of wallet with current customers? How much does this vary by customer tier and/or segment? How much time and resource can we allocate to CRM right now? If we believe in CRM, why have we not taken steps in that direction before? What can we do today to develop customer relationship without spending on technology?