Managing Relationships and Building Loyalty Chapter 12 Managing Relationships and Building Loyalty

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

Based on data from Reichheld and Sasser Loyalty is Important to Profitability : Index of Customer Profits over Time (Fig. 12.1) Credit card Industrial laundry Industrial distribution Auto servicing (Year 1=100) 50 250 300 350 – 100 150 200 Year 1 Year 2 Year 3 Year 4 Year 5 Based on data from Reichheld and Sasser

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

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 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 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

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.

Types of Relationships with Customers (Table 12.1) Type of Relationship--Firm and Customer Nature of Service Delivery “Membership” No formal relationship Continuous Cable TV Radio station Insurance Police College enrollment Lighthouse Discrete transactions Subscriber phone Pay phone Theater subscription Movie theater Warranty repair Public transport

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

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 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 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 Entry-level tasks for new associates or for research assistants & paraprofessionals Analytical Work on Project Data

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

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

The Customer Satisfaction-Loyalty Relationship (Fig. 12.6) Apostle 100 Zone of Affection 80 Near Apostle 60 Zone of Indifference Loyalty (Retention) 40 Zone of Defection 20 Terrorist 1 2 3 4 5 Neither satisfied nor dissatisfied Very dissatisfied Very Satisfied Dissatisfied Satisfied Satisfaction

The Wheel of Loyalty (Fig. 12.7) 3. Reduce Churn Drivers 1. Build a Foundation for Loyalty Conduct churn diagnostic Segment the market Address key churn drivers Be selective in acquisition Implement complaint handling & service recovery Enabled through: Frontline staff Account managers Membership programs CRM Systems Use effective tiering of service. Customer Loyalty Increase switching costs Deliver quality service. 2. Create Loyalty Bonds Build higher level bonds Deepen the relationship Give loyalty rewards

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

Drivers of Service Switching (Fig. 12.9) Service Failure / Recovery Value Proposition Core Service Failure Service Mistakes Billing Errors Service Catastrophe Pricing High Price Price Increases Unfair Pricing Deceptive Pricing Service Encounter Failures Uncaring Impolite Unresponsive Unknowledgeable Service Switching Inconvenience Location/Hours Wait for Appointment Wait for Service Response to Service Failure Negative Response No Response Reluctant Response Competition Found Better Service Others Involuntary Switching Customer Moved Provider Closed Ethical Problems 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 Marketing automation Call center 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?