1. Chapter 12:
Managing Customer
Relationships and
Building Loyalty

2. Why Is Customer Loyalty Important to a Firm’s Profitability?
Customers become more profitable the longer they remain with a firm:
Increased purchases and/or account balances
Customers/families purchase in greater quantities as they grow
Reduced operating costs
Loyal customers become more efficient to serve
Contribute to greater profitability
Referrals to other customers
Positive word-of-mouth saves firm from investing money in sales and advertising
Price premiums
Long-term customers are more likely to pay regular prices
Highly satisfied customers are even willing to pay higher price during peak periods

3. How Much Profit a Customer Generates 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
Source: Based on reanalysis of data from Fredrick R. Reichheld and W. Earl Sassar, Jr., “Zero Defections: Quality Comes from Services,” Harvard Business Review 68 (Sep.-Oct. 1990), pp. 105–111.

4. 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/Loss
Loss 1 2 3 4 5 6 7
Year
Source: Why Are Customers More Profitable Over Time from Fredrick R. Reichheld and W. Earl Sassar, Jr., “Zero Defections: Quality Comes from Services,” Harvard Business Review 73 (Sep.–Oct. 1990): p. 108.

5. Assessing the Value of a Loyal Customer (1)
Must not assume that loyal customers are always more profitable than those making one-time transaction
Not all types of services incur heavy promotional expenditures to attract new customers
Walk-in traffic more important at times
Large customers may expect price discounts in return for loyalty (e.g. DHL)
Revenues don’t necessarily increase with time for all types of customers (e.g. Telecom)

6. Understanding the Customer-Firm Relationship

7. Relationship Marketing (1)
Transactional Marketing
An exchange of value takes place between two parties
One transaction or a series of transactions does not necessarily constitute a relationship
Requires mutual recognition and knowledge between the parties (e.g. passenger transport)
Database Marketing:
Includes market transaction and information exchange (utility services)
Technology is used to
(1) identify and build database of current and potential customers
(2) deliver differentiated messages based on customers’ characteristics
(3) track each relationship to monitor cost of acquiring that customer and lifetime value of resulting purchases

8. Relationship Marketing (2)
Interaction Marketing:
A closer relationship where exist face-to-face interaction between customers and supplier’s representatives
Value is added by people and social processes
Interactions may include negotiations, sharing of insights etc. (e.g. community banks)
Network Marketing:
Common in b2b context where companies commit resources to develop positions in network of relationships with stakeholders and relevant agencies
All types of marketing mentioned above are not necessarily mutually exclusive

9. The Wheel of Loyalty

10. The Wheel of Loyalty (Fig 12.4)
Enabled through:
Frontline staff
Account managers
Membership programs
CRM
Systems
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 and service recovery
Use effective tiering of service.
Customer
Loyalty
Deliver quality service.
Increase switching costs
2. Create Loyalty
Bonds
Build higher level bonds
Deepen the relationship
Give loyalty rewards

11. Building a Foundation for Loyalty

12. A Good Fit Between Customer Needs and Company Capabilities
Identify and target the right customers
Customers often differ widely in terms of needs.
Company should relate customer needs to capabilities.
Speed, quality, time, physical facilities, service personnel etc.

13. Searching for Value—Not Just Volume
Focus on number of customers served as well as value of each customer
Usually heavy users who buy more frequently and in larger volumes are more profitable than occasional users
Avoid targeting customers who buy based on lowest price
Firms that are highly focused and selective in their acquisition of customers grow faster
“Right customers” are not always high spenders
Can come from a large group of people that no other supplier is serving well
Different segments offer different value
E.g. Investment

14. Effective Tiering of Service 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?
Lead
Iron
Gold
Platinum
Which segment costs us time, effort, and money, yet does not provide return we want? Which segment is difficult to do business with?
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.

15. The Customer Satisfaction Loyalty Relationship (Fig 12.7)20 40 60 80
100 1 2 3 4 5
Loyalty (Retention)
Very
Dissatisfied
Neither
Satisfied
Satisfaction
Near Apostle
Zone of Defection
Zone of Indifference
Zone of Affection
Terrorist
Apostle
Source: Adapted from Thomas O. Jones and W. Earl Sasser, Jr., “Why Satisfied Customers Defect,” Harvard Business Review, November-December 1995, p. 91.

16. Creating Loyalty Bonds

17. Strategies for Developing Loyalty Bonds with Customers (1)
Deepening the relationship
Bundling/cross-selling services makes switching a major effort that customer is unwilling to undertake unless extremely dissatisfied with service provider
Customers benefit from consolidating their purchasing of various services from the same provider
See Research Insights 12.2: How do customers see relational benefits?
One-stop-shopping, potentially
higher service levels,
higher service tiers, etc.

18. Strategies for Developing Loyalty Bonds with Customers (2)
Reward-based Bonds
Incentives that offer rewards based on frequency of purchase, value of purchase, or combination of both
Financial bonds
Discounts on purchases, loyalty program rewards (e.g., frequent flier miles), cash-back programs
Non-financial rewards
Priority to loyalty program members for waitlists and queues in call centers: higher baggage allowances, priority upgrading, access to airport lounges for frequent flyers
Intangible rewards
Special recognition and appreciation, tiered loyalty programs
Reward-based loyalty programs are relatively easy to copy and rarely provide a sustained competitive advantage

19. Strategies for Developing Loyalty Bonds with Customers (3)
Social Bonds
Based on personal relationships between providers and customers
Harder to build and imitate and thus, better chance of retention in the long term
Customization Bonds
Customized service for loyal customers
e.g., Starbucks
Customers may find it hard to adjust to another service provider who cannot customize service
Source: PAL Library; Asset ID: AAFHKTO0

20. Strategies for Developing Loyalty Bonds with Customers (4)
Structural Bonds
Mostly seen in b2b settings
Stimulate loyalty through structural relationships between provider and customer
Joint investments in projects and sharing of information, processes and equipment
Can be seen in b2c environment too
Airlines—SMS check-in, SMS alerts for flight arrival and departure times
Difficult for competition to draw customers away when they have integrated their way of doing things with existing supplier

21. Creating Customer Bonds by Membership Relationships and Loyalty Programs (1)
Transform discrete transactions into relationships
Discrete transactions: Each usage involves payment to service supplier by an essentially "anonymous" consumer
Membership cards: Capture transactions, communicate customer preferences to frontline
Loyalty reward programs increasingly used by all businesses in response to competition
Frequent fliers program—rewards dominated in miles
Customers may get frustrated with reward programs
For example: Feel excluded from rewards program because of low balances, rewards seen as having little value, cumbersome redemption process
Don’t lose sight of broader goals of offering high service quality, nor allow service to other customers to deteriorate

22. Create Customer Bonds by Membership Relationships and Loyalty Programs (2)
How customers perceive reward programs
Brand loyalty versus deal loyalty
Buyers value rewards according to:
Cash value of redemption award
Range of choice among rewards
Aspirational value of rewards
Amount of usage required to obtain award
Psychological benefits of belonging to reward program
Timing
Send customers periodic updates on account status and progress towards particular milestones

23. Strategies for Reducing Customer Defections

24. Analyze Customer Defections and Monitor Declining Accounts
Understand reasons for customer switching
Churn diagnostics common in mobile phone industry
Analysis of data warehouse information on churned and declining customers
Exit interviews:
Ask a short set of questions when customer cancels account; in-depth interviews of former customers by third party agency
Churn Alert Systems:
Monitor activity in individual customer accounts to predict impending customer switching
Proactive detention efforts—send voucher, customer service representative calls customer

25. What Drives Customers to Switch? (Fig 12.9)
Core Service Failure
Service Mistakes
Billing Errors
Service Catastrophe
Service Encounter Failures
Uncaring
Impolite
Unresponsive
Unknowledgeable
Response to Service Failure
Negative Response
No Response
Reluctant Response
Pricing
High Price
Price Increases
Unfair Pricing
Deceptive Pricing
Inconvenience
Location/Hours
Wait for Appointment
Wait for Service
Competition
Found Better Service
Service Failure/Recovery
Value Proposition
Service
Switching
Involuntary Switching
Customer Moved
Provider Closed
Ethical Problems
Cheat
Hard Sell
Unsafe
Conflict of Interest
Others
Source: Adapted from Susan M. Keaveney, “Customer Switching Behavior in Service Industries: An Exploratory Study,” Journal of Marketing 59 (April 1995), pp. 71–82.