1. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

2. 7 Chapter Building Customer Relationships  Relationship Marketing  Relationship Value of Customers  Customer Profitability Segments  Relationship Development Strategies  Relationship Challenges

3. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Objectives for Chapter 7: Building Customer Relationships  Explain relationship marketing, its goals, and the benefits of long-term relationships for firms and customers.  Explain why and how to estimate customer relationship value.  Introduce the concept of customer profitability segments as a strategy for focusing relationship marketing efforts.  Present relationship development strategies—including quality core service, switching barriers, and relationship bonds.  Identify challenges in relationship development, including the somewhat controversial idea that “the customer is not always right.”

4. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Relationship Marketing  is a philosophy of doing business, a strategic orientation, that focuses on keeping current customers and improving relationships with them  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

5. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Figure 7.1 Customer Goals of Relationship Marketing

6. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Benefits of Relationship Marketing  Benefits for Customers:  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  Benefits for Firms:  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

7. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Figure 7.2 Profit Generated by a Customer Over Time Source: An exhibit from F. F. Reichheld and W. E. Sasser, Jr., “Zero Defection: Quality Comes to Services,’’ Harvard Business Review, September–October 1990.

8. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Figure 7.3 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.

9. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Table 7.1 Lifetime Value of an Average Business Customer at Telecheck International

10. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin 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?

11. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Most profitable customers Least profitable customers What segment spends more with us over time, costs less to maintain, spreads positive word-of-mouth? 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? Gold Iron Lead Platinum Figure 7.4 The Customer Pyramid

12. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Figure 7.5 Relationship Development Model Customer Benefits Confidence benefits Social benefits Special treatment benefits Relationship Bonds Financial bonds Social bonds Customization bonds Structural bonds Switching Barriers Customer inertia Switching costs Core Service Provision Satisfaction Perceived service quality Perceived value Strong Customer Relationship (Loyalty) Firm Benefits Economic benefits Customer behavior benefits Human resource management benefits

13. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin 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

14. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Excellent service and value 1. Financial bonds 2. Social bonds 4. Structural bonds 3. Customization Bonds Volume and frequency rewards Bundling and cross selling Stable pricing Social bonds among customers Personal relationships Continuous relationships Customer intimacy Mass customization Anticipation/ innovation Shared processes and equipment Joint investments Integrated information systems Figure 7.6 Levels of Relationship Strategies

15. © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin “The Customer Is NOT Always Right”  Not all customers are good relationship customers:  wrong segment  not profitable in the long term  difficult customers