Build Customer Relationships Chapter 7 Build Customer Relationships Relationship Marketing Relationship Value of Customers Customer Profitability Segments Relationship Development Strategies Relationship Challenges McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Relationship Marketing is a philosophy of doing business, a strategic orientation, that focuses on keeping current customers and improving relationships with them does not necessarily emphasize acquiring new customers is usually cheaper (for the firm) keeping a current customer costs less than attracting a new one thus, the focus is less on attraction, and more on retention and enhancement of customer relationships

The “Bucket Theory of Marketing”

Customer Goals of Relationship Marketing

A Typology of Exchange Relationships CUSTOMERS as STRANGERS Those customers who are not aware of or, perhaps, those who have not yet had any transactions with a firm. The primary goal is to attract and acquire The primary marketing efforts directed toward such customer’s deal with familiarizing those potential customers with the firm’s offerings and, subsequently, encouraging them to give the firm a try. 2. CUSTOMERS as ACQUAINTANCES Once customer awareness and trial are achieved, familiarity is established. The primary goal for the firm for this stage of the relationship is satisfying Offering value proposition to customers that is comparable with competitors.

A Typology of Exchange Relationships 3. CUSTOMERS as FRIENDS Continues to make purchases from the company and receive value from the relationships. The primary goal for firms at the friendship stage of the is customer retention. 4. CUSTOMERS as PARTNERS A customer continues to interact with a firm, the level of trust often deepens and the customer may receive more customized service. The key success in the partnership stage is the firm’s ability to organize and use information about individual customers more effectively that competitors. The firm is concerned with enhancing the relationship

Benefits of Relationship Marketing Benefits for Customers: Receipt of greater value Confidence benefits: trust confidence in provider reduced anxiety Social benefits: familiarity social support personal relationships Special treatment benefits: special deals price breaks Benefits for Firms: Economic benefits: increased revenues reduced marketing and administrative costs regular revenue stream Customer behavior benefits: strong word-of-mouth endorsements customer voluntary performance social benefits to other customers mentors to other customers Human resource management benefits: easier jobs for employees social benefits for employees employee retention

Profit Generated by a Customer Over Time

Profit Impact of 5 Percent Increase in Retention Rate Source: F. F. Reichheld, “Loyalty and the Renaissance of Marketing,” Marketing Management, vol. 2, no. 4 (1994), p. 15.

The Customer Pyramid

The Customer Pyramid Platinum Tier Gold Tier Iron Tier Lead Tier Company’s most profitable customers, typically heavy users of the product, not overly price sensitive, willing to invest in and try new offerings, and committed customers of the firm   Gold Tier Profitability levels are not as high, perhaps because customers want price discounts that limit margins or are simply not as loyal. May be heavy users who minimize risk by working with multiple vendors. Iron Tier Essential customers that provide the volume needed to utilize the firm'’ capacity but their spending levels, loyalty, and profitability are not substantial enough for special treatment Lead Tier Customers who are costing the firm money. They demand more attention than they are due given their spending and profitability and are sometimes problem customers—complaining about the firm to others and tying up firm resources.

Segmenting Customers Based on Commitment and Profitability BUTTERFLIES Good fit of company offering and customer needs High profit potential Action: Aim to achieve transactional satisfaction, not attitudinal loyalty Milk the accounts as long as they are active Key challenge: cease investment once inflection point is reached TRUE FRIENDS Good fit of company offering and customer needs Highest profit potential Actions: Consistent intermittently spaced communication Achieve attitudinal and behavioural loyalty Invest to nurture/defend/retain High (Behavioral Loyalty) CLV STRANGERS Little fit of company offering and customer needs Lowest profit potential Action: No relationship investment Profitize every transaction BARNACLES Limited fit of company offering and customer needs Low profit potential Action: Measure size and share-of-wallet If share-of-wallet is low, specific up and cross-selling If size of wallet is small, strict cost control Low Relationship Commitment (Attitudinal Loyalty) Low High W. Reinhartz & V. Kumar, "The Mismanagement of Customer Loyalty," Harvard Business Review 80 (July 2002), pp. 86-94.

Relationship Development Model

Strategies for Building Relationships Core Service Provision: service foundations built upon delivery of excellent service: satisfaction, perceived service quality, perceived value Switching Barriers: customer inertia switching costs: set up costs, search costs, learning costs, contractual costs Relationship Bonds: financial bonds social bonds customization bonds structural bonds

Levels of Relationship Strategies

“The Customer Is NOT Always Right” Not all customers are good relationship customers: wrong segment not profitable in the long term difficult customers