Customer Relationship Management

Classifying Relationships with Customers 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 Subscriber phone Pay phone Transactions Theater subscription Movie theater Warranty repair Public transport

Customer Loyalty Customer loyalty is the engine that drives the service profit chain.

Customer Loyalty Customer loyalty is what turns something as “soft” as service into something as “hard” as profits.

Superior Service Produces customers so satisfied that they return again and again. As they return they are building profits

Relationship Marketing is a philosophy of doing business that focuses on keeping and improving current customers does not necessarily emphasize acquiring new customers is usually less expensive (for the firm)--to keep a current customer costs less than to attract a new one goal is to build and maintain a base of committed customers who are profitable for the organization the focus is on the attraction, retention, and enhancement of customer relationships

Customer Goals of Relationship Marketing

What Makes Loyal Customers More Profitable? Tend to spend more as relationship develops business customers may grow larger may consolidate purchases from one supplier Cost less to serve their likes and dislikes, their needs, and their particular operations become known, which prevents costly errors. the total cost of acquiring customers declines less need for information and assistance Recommendations win new customers for firm (act as unpaid sales people) Long-established customers are less price sensitive. Trust leads to willingness to pay regular prices vs. shopping for discounts

How Much Profit a Loyal Customer Generates over Time Index (Year 1=100) 350 – 300 250 200 150 100 50 Year 1 Year 2 Year 3 Year 4 Year 5 Credit card Industrial laundry Industrial distribution Auto servicing Based on data from Reichheld and Sasser

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.

Lifetime Value of a Customer To develop a sense of the lifetime value of customers you must first start with assumptions: Income Expected Customer Lifetime Average Revenue (month/year) % of Other Customers convinced via WOM Employee Loyalty?? Expenses Costs of Serving Customer Increase??

A Loyal Customer is One Who... Shows Behavioral Commitment buys from only one supplier, even though other options exist increasingly buys more and more from a particular supplier provides constructive feedback/suggestions Exhibits Psychological Commitment wouldn’t consider terminating the relationship--psychological commitment has a positive attitude about the supplier says good things about the supplier

Benefits to the Organization of Customer Loyalty 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

Benefits to the Customer 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

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 Retention Strategies Stable Pricing Volume and Frequency Rewards Bundling and Cross Selling I. Financial Bonds Continuous Relationships Integrated Information Systems Excellent Quality and Value IV. Structural Bonds II. Social Bonds Joint Investments Personal Relationships Shared Processes and Equipment Social Bonds Among Customers III. Customization Bonds Anticipation/ Innovation Customer Intimacy Mass Customization

Rewarding Most Valued Customers: Benefits Offered by British Airways Travel insurance Lounge access Immunization (UK) Upgraded check in Dedicated/priority reservations Advance notification of delays (UK) Special services assistance Bonus air miles (US)

Underlying Logic of Customer Retention Benefits to the Organization Customer Satisfaction Customer Retention & Increased Profits QualityService Employee Loyalty

How Customers See Relational Benefits in Service Industries 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

Customer Loyalty Exercise Think of a service provider to who you are loyal. What do you do (your behaviors, actions, feelings) that indicates you are loyal? Why are you loyal to this provider? What factors have influenced the formation of your loyalty?

Most profitable customers Least profitable customers The Customer Pyramid Most profitable customers What segment spends more with us over time, costs less to maintain, spreads positive word-of-mouth? Platinum Gold Iron What segment costs us in time, effort and money yet does not provide the return we want? What segment is difficult to do business with? Lead Least profitable customers

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

Jaycustomers Thief: no intention of paying and sets out to steal goods and services Rule breaker: ignores or deliberately breaks company rules or policies Belligerent: red in the face and shouting angrily, or icy calm and mouthing insults, threats and obscenities Feuders: people who get into arguments with other customers (family feuders) Vandal: abuse physical facilities Deadbeat: fail to pay for services they have received

The Problem of Customer Misbehavior: Give examples of each of the following types of customer misbehavior Thief Rule breaker Belligerent Family Feuders Vandal Deadbeat Can you think of others? Make suggestions for handling customer misbehavior.