Transcript Chapter 12

Chapter 12
Managing Relationships
and Building Loyalty
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
12 - 1
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 rebuying the same brand
 Action loyalty – exhibiting consistent repurchase behavior
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
12 - 2
Loyalty is Important to Profitability :
Index of Customer Profits 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
Based on data from Reichheld and Sasser
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
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What Makes Loyal Customers More Profitable?
 Tend to spend more as relationship develops
 customer’s balances may grow
 may consolidate purchases to one supplier
 Cost less to serve
 less need for information and assistance
 make fewer mistakes
 Recommend new customers to firm (act as unpaid sales
people)
 Trust leads to willingness to pay regular prices vs. shopping
for discounts
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
12 - 4
Analyzing 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
1
2
3
4
5
6
7
Year
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Source: Reichheld and Sasser
Services Marketing 5/E
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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 sales + write-offs)
 Net Present Value
 Determine anticipated customer relationship lifetime
 Select appropriate discount figure
 Sum anticipated annual values (future profits) at chosen discount
rate
 Customer Equity is total sum of NPVs of all current customers
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
12 - 6
Customer-Firm Relationship
Today’s 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.
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
12 - 7
Types of Relationships with Customers (Table 12.1)
Type of Relationship--Firm and Customer
Nature of
Service Delivery
Continuous
Discrete transactions
“Membership”
Cable TV
Insurance
College enrollment
Subscriber phone
Theater subscription
Warranty repair
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
No formal relationship
Radio station
Police
Lighthouse
Pay phone
Movie theater
Public transport
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Basic Segmentation Issues:
Building an Appropriate Customer Portfolio
 Target customers whose needs match firm’s capabilities
 Focus on value of prospective customers within each
segment, not just numbers
 Avoid targeting customers who might abuse:
 our employees, facilities
 other customers
 Create a mix of segments to reduce risks of volatility during
swings of economic cycles
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
12 - 9
Service-Relevant Segmentation Variables
 Timing of service use (e.g., by hour, day, season)
 Level of skill and experience as co-producer/selfserver
 Preferred language in face-to-face contact
 Access to electronic delivery systems (e.g., Internet)
 Attitudes toward use of new service technologies
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
12 - 10
Identifying and Selecting Target Segments
(Mgt Memo 12.2)
User characteristics




demographics
psychographics
geographic location
benefits sought
User behavior





Slide ©2004 by Christopher Lovelock and Jochen Wirtz
when, where, how services used
quantity/value of purchases
frequency of use
profitability of relationship
sensitivity to marketing variables
Services Marketing 5/E
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Portfolio of Professional Assignments
(Fig. 12.4)
Major, State-of-the-art challenges for the firm’s
principals that give the firm high visibility
Demanding client assignments offering a
learning experience for the firm’s most
experienced associates
“Pacesetters”
Significant Projects
Routine client projects shared
among principals and associates
“Bread and Butter” Projects
Analytical Work on Project Data
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
Entry-level tasks for new
associates or for research
assistants & paraprofessionals
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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
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?
Iron
Lead
Poor Relationship
Customers
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
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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 firm’s best service level
 Social benefits
 mutual recognition, known by name
 friendship, enjoyment of social aspects
 Special treatment benefits
 better prices, discounts, special deals unavailable to others
 extra services
 higher priority with waits, faster service
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
12 - 14
The Customer Satisfaction-Loyalty Relationship
(Fig. 12.6)
Apostle
100
Loyalty (Retention)
Zone of Affection
80
Near Apostle
60
40
Zone of Indifference
Zone of Defection
20
Terrorist 0
1
Very
dissatisfied
2
3
4
Neither
satisfied
Dissatisfied
Satisfied
nor dissatisfied
5
Very
Satisfied
Satisfaction
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
12 - 15
The Wheel of Loyalty (Fig. 12.7)
3. Reduce
Churn Drivers
Conduct churn diagnostic
Address key churn drivers
Enabled through:
 Frontline staff
 Account
managers
 Membership
programs
 CRM
Systems
Implement complaint
handling & 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.
Customer
Loyalty
2. Create Loyalty
Bonds
Deliver quality
service.
Deepen the
relationship
Give loyalty
rewards
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
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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
exceeding 4 hours
 Upgraded check-in
 Preferred boarding
 Special services assistance
 Bonus air miles
 Upgrade for two
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
12 - 17
Drivers of Service Switching (Fig. 12.9)
Service Failure / Recovery
Value Proposition
Core Service Failure
Pricing
• Service Mistakes
• Billing Errors
• Service Catastrophe
• High Price
• Price Increases
• Unfair Pricing
• Deceptive Pricing
Service Encounter Failures
Service
Switching
• Uncaring
• Impolite
• Unresponsive
• Unknowledgeable
Response to Service Failure
• Negative Response
• No Response
• Reluctant Response
Inconvenience
• Location/Hours
• Wait for Appointment
• Wait for Service
Competition
• Found Better Service
Others
Involuntary Switching
Ethical Problems
• Customer Moved
• Provider Closed
• Unsafe
• Cheat
• Hard Sell • Conflict of Interest
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
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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
 Marketing automation
 Call center automation
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
12 - 19
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?
Slide ©2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
12 - 20