Chapter 11 Building Customer Loyalty through Quality

Key Terms Customer centered Customer-delivered value Expected service Freedom from deficiencies Functional quality Product features Revenue management Societal (ethical) quality Technical quality

“To understand service quality and make quality management effective, we need profound knowledge about the details and activities connected with the emergence of a service. This presupposes interest in service design and service production.” -Evert Gummesson

Chapter Objectives Define customer value and customer satisfaction Understand the difference between customer satisfaction and customer loyalty Discuss attracting new users and retaining current customers by developing relationship marketing

Chapter Objectives Know tactics for resolving customer complaints and understand the importance of resolving complaints Define quality and discuss the importance of the benefits of quality Implement capacity and demand management tactics

Customer Delivered Value Customer-delivered value is the difference between total customer value and total customer cost of a marketing offer Customer satisfaction depends on the product’s performance relative to a buyer’s expectations Companies must be customer centered and deliver superior value to target customers

Customer Delivered Value

Customer Satisfaction Buying decisions based on judgments formed about the value of marketing offers Customer expectations based on past buying experiences Today’s most successful companies raising expectations and delivering performance to match

What is Loyalty and Why is It Important? Loyalty defined: When the customer feels so strongly that you can best meet his or her relevant needs, your competition is virtually excluded from the considered set, and the customer buys almost exclusively from you — referring to you as “their restaurant” or “their hotel.” Winning maximum share of heart, mind and wallet

What is Loyalty and Why is It Important? Relationship marketing The process of identifying and creating mutual value for customers that you share over the relationship’s lifetime Theodore Levitt’s definition compares the relationship to a marriage Benefits of loyalty Financial importance of maintaining and creating new customers Loyal customers use word-of-mouth to promote a product or brand Different from traditional marketing

Customer Satisfaction vs. Customer Loyalty Customer satisfaction measures how well a customer’s expectations are met Customer loyalty measures how likely customers are to return and their willingness to perform partner shipping activities for the organization Customer satisfaction is a requisite for loyalty

Relationship Marketing Creating, maintaining, and enhancing strong relationships with customers Basic Reactive Accountable Proactive Partnership

Benefits of Customer Loyalty Continued patronage Reduced marketing costs Decreased price sensitivity Partnership activities

Cost of Lost Customers Companies must define and measure retention rate Company must identify causes of customer defection and determine which can be reduced or eliminated Reducing customer defections by only 5 percent can result in improved profits of over 25 percent

Resolving Customer Complaints A critical part of customer retention 82 % of customers are likely to return if a complaint is handled quickly, as opposed to 9 % if it is not Most customers do not complain

Evolution of customer loyalty Building Loyalty Evolution of customer loyalty Sales Targeted promotions Frequency promotions Brand relationships Knowledge relationships

Exhibit: The Evolution of Building Loyalty

Frequent guest programs Building Loyalty Frequent guest programs Not the same as loyalty programs Any program with guest rewards that can be redeemed for free or discounted products or services Can be one part of a loyalty program

Building Loyalty What loyalty programs don’t do: Not a “quick fix” Not a promotion What makes loyalty programs work: Database, communication, meaningful rewards, simplicity, attainability, sustainability, measurability, management, manageability, profitability

Customer Complaints and Service Recovery Inevitable, healthy, opportunities, marketing tools, advertising TARP research study on complaint handling 50 % of consumers complain to front line staff 1-5 % of those go to management Complaint rates vary by type of problem Twice as many people are told about a bad experience over a good one Tip of the iceberg phenomenon

Exhibit; Tip of the Iceberg Phenomenon

Quality Quality has emerged as an important area in hospitality Product features enhance customer satisfaction and adds to the cost of a product Freedom from deficiencies increases customer satisfaction

Quality Technical quality refers to what the customer is left with after the customer – employee interactions have been completed Functional quality is the process of delivering the service or product Societal (ethical quality) means firms must consider ethical responsibilities when developing products

©2006 Pearson Education, Inc ©2006 Pearson Education, Inc. Marketing for Hospitality and Tourism, 4th edition Upper Saddle River, NJ 07458 Kotler, Bowen, and Makens

Benefits of Quality Service Customer Retention Avoidance of Price Competition Retention of Good Employees Reduction of Costs

Managing Capacity Involve the customer in the service delivery system Cross-train employees Use part-time employees Rent or share extra facilities and equipment

Managing Capacity Schedule downtime during periods of low capacity Extend service hours Use technology Change the Configuration of the Service

Revenue Management Revenue management is a methodological approach to allocating a perishable and fixed inventory to the most profitable customers Began in late 1980’s as yield management Prices change under fluctuating demand and advance bookings Creates an enormous competitive advantage

Revenue Management is… A systematic approach to matching demand for services with an appropriate supply in order to maximize revenues Appropriate in hotels Hotel room is a perishable product Capacity is fixed and cannot flex to meet demand Different market segments have different lead times to purchase Hotels have great flexibility in varying their prices at any given time

Revenue Management Practices Set most effective pricing structure Limit the number of reservations accepted on any given night or room type based on profit potential Negotiate volume discounts with groups Match market segments with room type and price needs Be consistent across channels and intermediaries

Yield The ratio between actual sales and potential sales forecasted over a given period of time Have to have realistic potential sales forecasting Hotels must be able to forecast demand for each room category from each of its market segments, for any date in the future Customer purchase behavior must be well understood

Managing Demand Use price to create or reduce demand Use reservations Overbook Use queuing Shift demand Change the salesperson’s assignment Create promotional events

The Five-Gap Model of Service Quality

Close Gap 1 1. Talking to customers 2. Talking to customer contact employees 3. Marketing information systems – customer surveys – analysis by segment – focus groups 4. Reducing levels of management

Close Gap 2 1. Management Commitment – resources, internal marketing, reward systems 2. Use of hard and soft technology 3. Shift demand 4. Is meeting customer expectations financially feasible?

Close Gap 3 1. Training 2. Internal marketing, pride 3. Teamwork 4. Reward systems 5. Service quality audits

2. Good communications within the firm Close Gap 4 1. Know the capabilities of the firm 2. Good communications within the firm 3. Internal marketing – teamwork

Customer Complaints and Service Recovery What to do about it? This is marketing’s task Make it easy for customers to complain Make it known where and how to complain Do something about the complaint if it is reasonable

Customer Complaints and Service Recovery Effective complaint handling, from A Complaint is a Gift: Say “thank you” Explain why you appreciate the complaint Apologize for the mistake Promise to do something about it immediately Ask for necessary information Correct the mistake Check customer satisfaction Prevent future mistakes

Employee Relationship Marketing or Internal Marketing Definition Apply marketing principles to those who serve the customer (directly or indirectly) and build a mutual bond of trust with them To create a customer, must create employee value Lower employee turnover relates to higher profits

Employee Relationship Marketing or Internal Marketing Noncontact employees All employees are part of the marketing effort Employees need to understand how their job and actions effect the customer Employees need to be kept up to date on important information Success ultimately lies with management

Class Discussion Name two products or services to which you consider yourself extremely loyal. What has produced that loyalty? How frequently do you buy this product or service? What do you tell your friends about this product or service? What do you tell your family?

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