Managing Relationships and Building Loyalty

In the current competitive environment, companies are striving hard to survive, realizing that the best strategy is to retain existing customers by developing a close and cooperative relationship with them……

Relationship Marketing Focuses on continuous multiple transactions rather than isolated individual transactions Focuses of this approach centers around developing hard core loyal customers with the idea of retaining them forever A high degree of customer contact, commitment and services are maintained

Why is RM important? It costs five times as much to attract a new customer as it does to keep a current one satisfied. It is claimed that a 5% improvement in customer retention can cause an increase in profitability of between 25 and 85 percent depending on the industry. Likewise, it is easier to deliver additional products and services to an existing customer than to a first-time “buyer.”

Select views on RM “Relationship Marketing is to identify and establish, maintain, and enhance relationships with customers and other stakeholders, at a profit, so that the objectives of all parties are met” (Grönroos, 1990). “RM attracts, maintains and enhances customer relationships ……..(Leonard Berry, 1983). “……a tool to turn current and new customers into regularly purchasing clients and then progressively move hem through being strong supporters of the company and its products to finally being acive and vocal advocates for the company” (Christopher et al., 1990) “ RM is marketing based on interaction within networks of relationships” (Gummesson, 2002).

Why Loyalty???-Bucket with Holes Increased purchase by some customers New customers Lost Customers Decreased purchase by some customers Lost Customers

Why Is Customer Loyalty Important to a Firm’s Profitability? Customers become more profitable the longer they remain with a firm: – Increase purchases and/or account balances – Reduced operating costs – Referrals to other customers – Price premiums

The Loyalty Effect The Loyalty Effect by Frederick Reichheld (Harvard Business School Press 1996). In this book, he opens up several new ways to look at customer lifetime value If you have loyal customers, several things happen:  Retention rates go up  Referrals go up  Spending rates go up  The customers are less price sensitive  The costs of servicing them go down  Initial processing costs go down  Returns and losses are lower  Profits go up

CLV It is defined as the difference between what it costs to acquire, service and retain a customer and the revenue generated from that customer over the customer lifecycle

Lifetime Value of Customers The lifetime value calculation looks at customers from the point of view of their lifetime revenue or profit contribution to a firm. The lifetime value of a customer depends on: – The length of an average ‘lifetime’ – The average revenues generated per relevant time period over the lifetime – Sales of additional products and services during that time, and – Referrals generated by the customer over the lifetime

Capturing Value from Customers Customer equity is the total combined customer lifetime values of all of the company’s customers

Effective Tiering of Service The Customer Pyramid 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 time, effort, and money, yet does not provide return we want? Which segment is difficult to do business with? Lead Iron Gold Platinum Good Relationship Customers Poor Relationship Customers Source: Valarie A Zeithaml, Roland T Rust, and Katharine N. Lemon, “The Customer Pyramid: Creating and Serving Profitable Customers,” California Management Review 43, no. 4, Summer 2001, pp.118–142. By permission of the Regents.