1. McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Building Customer Relationships
Chapter 6
Building Customer Relationships
Relationship Marketing
Relationship Value of Customers
Customer Profitability Segments
Relationship Development Strategies
Relationship Challenges
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3. United Services Automobile Association-USAA
In 1922, when 25 Army officers met in San Antonio, Texas, and decided to insure each other's vehicles, they could not have imagined that their tiny organization would one day serve millions of members and become one of the only fully integrated financial services organizations in America.
USAA has remained true to their founding values of service, loyalty, honesty and integrity.

4. United Services Automobile Association-USAA
Earned unprecedented growth of 9% in both new members and products, despite experiencing its worst catastrophe year ever and a shaky economy.
Became the Official Military Appreciation Sponsor of the National Football League.
Opened four new Financial Centers, bringing the total number to 11.
Launched a national TV campaign to promote our members sharing the legacy of USAA membership with their families.

5. United Services Automobile Association-USAA
Redesigned usaa.com to provide easier access for members to accounts, tools, products and services.
Introduced USAA® Money Manager, a personal budgeting tool for mobile devices.
FORTUNE includes USAA on its "100 Best Companies to Work For" list for the third year.
Forrester Research ranks USAA Bank highest among all brands from all industry categories in "The Customer Experience Index."

6. United Services Automobile Association-USAA
USAA focuses on retaining the best employees and rewarding them for member-oriented objectives such as percentage of member questions or request handled on the first call with no need to follow-up.
Member Retention
USAA provides a strong example of an organization that has focused on keeping its customers and building long-term relationship with them.

7. Building Customer Relationship
Customers are viewed as assets and they need to nurture and retain.
By concentrating new customers, firms can easily fall into traps of short-term promotions, price discounts, or catchy adds that bring customers in but are not enough to bring them back.
Service firms need to understand customers over time and in great depth and are better able to meet their changing needs and expectations.

8. Relationship Marketing
is a philosophy of doing business, a strategic orientation, that focuses on keeping current customers and improving relationships with them
Our opening examples shows how USAA has built its business around a relationship philosophy
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
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9. Relationship Marketing
The first act: Firms frequently focus on attracting customers
The second act: Pay little attention to what extent they should do to keep them.
“Bucket Theory of Marketing”: Marketing can be thought of big Bucket: It is what the sales, advertising, and promotion programs do that pours customers into the top of the bucket.
As long as these programs are effective, the bucket stays full.
When business running well the hole is small.
When the operation is weak and customers are not satisfied with what they get –and therefore the relationship is weak.
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10. The “Bucket Theory of Marketing”
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11. Relationship Marketing
So a relationship strategy focus on plugging the wholes in the bucket makes so much sense.
Marketers need to concern with acquisition of customers which now shift to a relationship strategy represents changes in mind-set, organizational culture, employee reward systems
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12. The evolution of customer relationship
Customers as strangers:
Strangers are those customers who have not yet had any transactions (interactions) with a firm and may not even be aware of the firm.
Initiate communication with them to attract them and acquire their business.
Customers as Acquaintances:
Once customers awareness and trial are achieved , familiarity is established and the customer and the firm become acquaintances, creating the basis for an exchange relationship.
The firms in this stage satisfy the customer.
Providing a value proposition to customers comparable with that of competitors.
Fair value
Repetitive interaction, the customer gains experience and become more familiar with the firm’s offerings.
Acquaintances relationships facilitates, reduction of the customer’s perceived risk and provider’s costs.
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13. The evolution of customer relationship
Customers as Friends:
As customer continues to make purchase from a firm.
Receive value in the exchange relationship.
The firm begins to acquire specific knowledge of the custom’s needs
Allowing it to create an offering that directly addresses the customer’s situation.
Unique offering
Differential value
Transform acquaintance to friendship.
So trust is very important
This stage the primary goal for firms is customer retention.
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14. The evolution of customer relationship
Customers as Partners:
Level of trust deepens.
The customer receive more customized product offerings and interactions.
The firm use customer’s knowledge and information systems to deliver highly personalized and customized offerings.
Exhibit 6.1 illustrate different issues at each successive level of the relationship
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15. Exhibit 6.1: A Typology of Exchange Relationships
Customers as…
Strangers
Acquaintances
Friends
Partners
Product offering
Attractive relative to competitors
On a par with industry standards
Differentiated with adaptation to segments
Customized, individualized offerings
Source of competitive advantage
Attractiveness
Satisfaction
Satisfaction + Trust
Satisfaction + Trust + Commitment
Buying activity
(what customer does)
Interest, exploration, trial
Reduced need for search
Buying without perfect information
Commitment in the form of information sharing, specific investments
Focus of selling activities (what firm does)
Encouraging trial facilitates initial selling
Familiarity and general knowledge
Specific segment knowledge
Specific knowledge, idiosyncratic investments
Relationship time horizon
None
Short
Medium: trust takes time to build
Long: detailed knowledge, interconnections
Sustainability of competitive advantage
Low: must continue to attract, induce trial
Low: must build unique value into standard product
Medium: must understand various customer needs
High: depends on uniqueness & effectiveness of interconnections
Primary relationship marketing goal
Acquire customer’s business
Satisfy customer needs
Retain customer’s business
Enhance relationship with customer
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16. The goal of Relationship Marketing
The primary goal of relationship marketing is to build and maintain a base of committed customers who are profitable for the organization.
Customer information systems help enhance the customer relationship.
Customer Information System (CIS) 8.1.0
It gives users the ability to look up customers by company name, contact name, zip code, phone number and city.
This information can also be filtered by state, user defined segment, status, prospect code, source code and a number of other fields.
Call back lists can be displayed and sorted in a variety of user-defined views. Everything about this software was designed to allow the user to determine how the software works.
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17. Customer Goals of Relationship Marketing
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18. The goal of Relationship Marketing
The goal is to move customers up the ladder from the point at which they are strangers that need to be attracted through to the point at which they are highly valued, long-term customers whose relationship with the firm has been enhanced.
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19. Customer Loyalty Exercise
Think of a service provider to whom 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?
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20. Relationship Value of Customers
It is a concept or calculation that looks at customers from the point view of their lifetime revenue and/ or profitability contributions to a company.
This type of calculation is needed when companies start thinking of building long-term relationships with their customers.
Lifetime value refers to lifetime revenue stream only; when costs are considered the more appropriate term to use is “lifetime Profitability”.
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21. Relationship Value of Customers
TeleCheck:
For 50 years, TeleCheck has delivered industry-leading check acceptance, check processing and risk analytics services to merchants and financial institutions. We protect thousands of businesses and financial institutions from check-related losses and fraud.
Core Product: Quick Response
New product: Fast Track
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22. Lifetime Value of a Customer
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23. Customer Profitability Segments
Customer differ in their relationship value.
It may be neither practical nor profitable to meet.
Fedex corporation, for example, categorized its customers internally as “ the good, the bad and the ugly”- based on their profitability.
Rather than treating all customers the same, the company paid particular attention to enhancing their relationships with good, moving the bad to be good and discouraging the ugly.
Other companies also try to identify segments.
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24. The Customer Pyramid
The Lead Tier consists of customers that are costing the company money. They demand more attention than they are due given their spending and profitability, and they are sometimes problem customers--complaining about the firm to others and tying up the firm’s resources.
The Iron Tier contains customers that provide the volume needed to utilize the firm's capacity but whose spending levels, loyalty, and profitability are not substantial enough for special treatment.
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25. The Customer Pyramid
The Gold Tier differs from the Platinum Tier in that profitability levels are not as high, perhaps because the customers want price discounts that limit margins.
They might not be as loyal to the firm even though they are heavy users in the product category--they might minimize risk by working with multiple vendors rather than just the focal company.
The Platinum Tier describes the company's most profitable customers, typically those who are heavy users of the product, not overly price sensitive, willing to invest in and try new offerings, and are committed to the firm.
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26. Figure 6.4: The Customer Pyramid
What segment spends more with
Most Profitable
us over time, costs less to maintain,
Customers
Platinum
spreads positive word of mouth?
Not as profitable: discounts or less loyal
Gold
Utilize capacity, but do not merit special treatment
Iron
Lead
What segment costs us in
time, effort and money yet
Least Profitable
does not provide the return
Customers
we want? What segment is
difficult to do business with?
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27. The Customer Pyramid (Example)
A real estate and relocation franchiser has identified the variables that account for profitability in the retail housing market. In addition to the cost of the home (for which the franchiser and the broker share a 6% commission), other variables include:
the amount of time it takes to buy/sell a home (which represents the opportunity cost of time and other commissions to the realtor);
marketing costs (brochures, open houses, advertisements);
customer motivation to purchase/sell (especially high with relocations);
price sensitivity of buyers, which may lead them to negotiate a lower rate with the realtor;
likelihood of repurchase; and
referral potential.
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28. The Customer Pyramid
Based on these factors, the company defined its Platinum customers as those who:
pay full commission on a home costing $500,000 or more;
are motivated to purchase within the next six months;
have purchased more than two homes in the past;
and are members of social or professional networks that make them candidates to refer other high-end buyers.
Gold customers purchase homes in the $250,000-$600,000 range but are more price sensitive than the top tier.
For example, some Gold customers want to negotiate on the commission or have the realtors pay points at closing. Gold customers are likely to refer others, but the types of customers to be referred will are not as valuable to the firm as those the Platinum customers refer.
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29. Relationship Development Model
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30. Relationship Development Model
Inertia: may even explain why some dissatisfied customers stay with providers.
Perceived Effort: If a customer believe that a great deal of effort is needed to change companies, the customer is more likely to stay put. For example, automobile repair facilities might keep a complete and detailed maintenance history of a customer’s vehicle.
Switching cost: include investments of time, money, or effort such as setup costs, learning costs and contractual costs.
Paying for a complete physical when changing doctors or new X-rays.
Learning of how to use a product or service
Customers are required to pay a penalty to switch providers.
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31. Levels of Relationship Strategies
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32. Levels of Relationship Strategies
Level 1-Financial Bonds:
The customer is tied to the firm primarily through financial incentives- Lower prices for greater volume purchases or lower prices for customers who have been with the firm a long time. Airlines, Hotel and Car Rental.
Level 2- Social Bonds:
Strategies bind customers to the firm through more than financial incentives.
Seek to build long term relationships through social and interpersonal as well as financial bonds.
Lawyers, accountant, teachers, hairdressers, counselors, health care providers
Caterpillar
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33. Levels of Relationship Strategies
Level 3- Customization Bonds
Strategies involve more than social ties and financial incentives, although there are common elements of level 1 and 2 strategies encompassed within a customization strategy and vice versa.
Customer loyalty achieved
Customer Intimacy
Harley Davidson riders develop customer-to-customer bonds through Harley Owners Group (HOG) activities.
Pandora – an internet –based music
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34. Levels of Relationship Strategies
Level 4- Structural Bonds
Strategies involve more difficult to imitate; they involve structural as well as financial, social, and customization bonds between the customer and the firm.
Cardinal health has established ways to improve hospital supply ordering, delivery, and billing that have greatly enhanced its value to supplier.
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35. “The Customer Is NOT Always Right”
Not all customers are good relationship customers:
wrong segment : A company can not target to all customers. Some are appropriate than others.
not profitable in the long term
difficult customers to serve
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36. Ending Business Relationships
Should firms fire their customers?
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