Chapter 12: Managing Customer Relationships and Building Loyalty

1. Chapter 12: Managing Customer Relationships and Building Loyalty

2. Overview of Chapter 12 • The Search for Customer Loyalty • Understanding the Customer-Firm Relationship • The Wheel of Loyalty • Building a Foundation for Loyalty • Creating Loyalty Bonds • Strategies for Reducing Customers Defections • CRM: Customer Relationship Management

3. The Search for Customer Loyalty

4. Why Is Customer Loyalty Important to a Firm’s Profitability? • Customers become more profitable the longer they remain with a firm: • Increase purchases and/or account balances • Customers/families purchase in greater quantities as they grow • Reduced operating costs • Fewer demands from suppliers and operating mistakes as customer becomes experienced • Referrals to other customers • Positive word-of-mouth saves firm from investing money in sales and advertising • Price premiums • Long-term customers willing to pay regular price • Willing to pay higher price during peak periods

5. (Year 1=100) 350 – 300 250 200 150 100 50 0 Year 1 Year 2 Year 3 Year 4 Year 5 Credit card Industrial laundry Industrial distribution Auto servicing How Much Profit a Customer Generates Over Time (Fig 12.1) 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.

6. 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.

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

8. Assessing the Value of a Loyal Customer (2) • Profit impact of a customer varies according to stage of service in product life cycle • For example referrals and negative word-of-mouth have a higher impact in early stages • Tasks • Determine costs and revenues for customers from different market segments at different points in their customer lifecycles • Predict future profitability

9. Measuring Customer Equity:Lifetime Value of Each Customer • Acquisition revenues less costs • Revenues (application fee + initial purchase) • Costs (marketing + credit check + account set up) • Projected annual revenues and costs • Revenues (annual fee + sales + service fees + value of referrals) • Costs (account management + cost of sales + write-offs) • Value of referrals • Percentage of customers influenced by other customers • Other marketing activities that drew the firm to an individual’s attention • Net Present Value • Sum anticipated annual values (future profits) • Suitably discounted each year into the future

10. Gap Between Actual and Potential Customer Value • What is current purchasing behavior of customers in each target segment? • What would be impact on sales and profits if they exhibited ideal behavior profile of: • (1) buying all services offered by the firm, • (2) using these to the exclusion of any purchases from competitors, • (3) paying full price? • How long, on average, do customers remain with firm? • What impact would it have if they remained customers for life?

11. Understanding the Customer-Firm Relationship

12. Relationship Marketing (1) • Transactional Marketing • One transaction or a series of transactions does not necessarily constitute a relationship • Requires mutual recognition and knowledge between the parties • Database Marketing: • Includes market transaction and information exchange • 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

13. Relationship Marketing (2) • Interaction Marketing: • Face-to-face interaction between customers and supplier’s representatives • Value is added by people and social processes • Increasing use of technologies make maintaining meaningful relationships with customers a marketing challenge • For example, self-service technology, interactive websites, call centers • Network Marketing: • Common in b2b context where companies commit resources to develop positions in network of relationships with stakeholders and relevant agencies

14. Relationships with Customers (Fig 12.1) Type of Relationship between the Service Organization and Its Customers

15. The Wheel of Loyalty

16. Enabled through: • Frontline staff • Account managers • Membership programs • CRM Systems The Wheel of Loyalty (Fig 12.4) 1. Build a Foundation for Loyalty 3. Reduce Churn Drivers • 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

17. Building a Foundation for Loyalty

18. Customer Needs and Company Capabilities • Identify and target the right customers • How do customer needs relate to operations elements? • How well can service personnel meet expectations of different types of customers? • Can company match or exceed competing services that are directed at same types of customers? • Should result in a superior service offering in the eyes of those customers who value what firm has to offer

19. Searching for Value—Not Just Volume • Focus on number of customers served as well as value of each customer • 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

20. Platinum Gold Iron Lead 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? 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.

21. Apostle 100 Zone of Affection 80 Near Apostle Zone of Indifference 60 Loyalty (Retention) 40 Zone of Defection 20 Terrorist 0 1 2 3 4 5 Very Satisfied Very Dissatisfied Neither Satisfied Dissatisfied Satisfaction The Customer Satisfaction Loyalty Relationship (Fig 12.7) Source: Adapted from Thomas O. Jones and W. Earl Sasser, Jr., “Why Satisfied Customers Defect,” Harvard Business Review, November-December 1995, p. 91.

22. Creating Loyalty Bonds

23. 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.

24. 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

25. 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

26. 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 e-mail 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

27. 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

28. 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

29. Strategies for Reducing Customer Defections

30. 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

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

32. Addressing Key Churn Drivers • Delivery quality • Minimize inconvenience and nonmonetary costs • Fair and transparent pricing • Industry specific drivers • Cellular phone industry: Handset replacement a common reason for subscribers discontinuing services—offer proactive handset replacement programs • Reactive measures • Save teams: Specially trained call center staff to deal with customers who want to cancel their accounts • Be careful about how save teams are rewarded

33. Other Ways to Reduce Churn • Implement effective complaint handling and service recovery procedures • Increase switching costs • Natural switching costs • For example, changing primary bank account—many related services tied to account • Can be created by instituting contractual penalties for switching • Must be careful not to be perceived as holding customers hostage • High switching barriers and poor service quality likely to generate negative attitudes and word of mouth

34. CRM: Customer Relationship Management

35. Strategy Development Process Multi-Channel Integration Process Performance Assessment Process Value Creation Process Information Management Process Integrated Framework for CRM Strategy (Fig 12.10) Source: Adapted from: Adrian Payne and Pennie Frow, “A Strategic Framework for Customer Relationship Management,” Journal of Marketing 69 (October 2005): pp.167–176.

36. Integrated Framework for CRM Strategy Development • Strategy Development • Assessment of business strategy • Business strategy guides development of customer strategy

37. Integrated Framework for CRM Strategy: Value Creation • Value Creation • Translates business and customer strategies into specific value propositions for both customers and firm • Customers benefit from priority, tiered services, loyalty rewards, and customization • Company benefits from reduced customer acquisition and retention costs, and increased share-of-wallet • Dual creation of value: Customers need to participate in CRM to reap value from firm’s CRM initiatives

38. Integrated Framework for CRMStrategy: Multi-Channel Integration • Multi-Channel Integration • Serve customers well across many potential interfaces • Offer a unified interface that delivers customization and personalization

39. Integrated Framework for CRM Strategy: Performance Assessment • Performance Assessment • Is CRM system creating value for key stakeholders? • Are marketing and service standard objectives being achieved? • Is CRM system meeting performance standards?

40. Integrated Framework for CRM Strategy: Information Management • Information Management • Collect customer information from all channels • Integrate it with other relevant information • Make useful information available to the frontline • Create and manage data repository, IT systems, analytical tools, specific application packages

41. Common Objectives Of CRM Systems (1)(Service Perspectives 12.3) • Data collection • Customer data such as contact details, demographics, purchasing history, service preferences, and the like • Data analysis • Data captured is analyzed and categorized • Used to tier customer base and tailor service delivery accordingly. • Sales force automation • Sales leads, cross-sell, and up-sell opportunities can be effectively identified and processed • Entire sales cycle from lead generation to close of sales and after- sales service can be tracked and facilitated through CRM system

42. Common Objectives Of CRM Systems (2)(Service Perspectives 12.3) • Marketing automation • Mining of customer data enables the firm to target its market • Goal to achieve one-to-one marketing and cost savings, often in the context of loyalty and retention programs • Results in increasing the ROI on its marketing expenditure • CRM systems also enable the assessment of the effectiveness of marketing campaigns through the analysis of responses • Call center automation • Call center staff have customer information at their fingertips and can improve their service levels to all customers • Caller ID and account numbers allow call centers to identify the customer tier the caller belongs to, and to tailor the service accordingly • For example, platinum callers get priority in waiting loops

43. Common Failures in CRM Implementation • Service firms often equate installing CRM systems with having a customer relationship strategy • Challenge of getting it right with wide-ranging scope of CRM • Common reasons for failures • Viewing CRM as a technology initiative • Lack of customer focus • Insufficient appreciation of customer lifetime value (CLV) • Inadequate support from top management • Failure to reengineer business processes • Underestimating the challenges in date integration

44. Key Issues in Defining a Customer Relationship Strategy • How should our value proposition change to increase customer loyalty? • How much customization or one-to-one marketing and service delivery is appropriate and profitable? • What is incremental profit potential of increasing share-of-wallet with current customers? How much does this vary by customer tier and/or segment? • How much time and resources can we allocate to CRM right now? • If we believe in customer relationship management, why haven’t we taken more steps in that direction in past? • What can we do today to develop customer relationships without spending on technology?

45. Summary of Chapter 12: Managing Customer Relationships and Building Loyalty (1) • Customer loyalty as an important driver of profitability for service firms so firms need to • Assess value of loyal customer • Narrow gap between actual and potential customer value • To understand the customer-firm relationship, firms should establish a relationship with customers by creating “membership” relationships • Four types of marketing • Transactional marketing • Database marketing • Interaction marketing • Network marketing

46. Summary of Chapter 12: Managing Customer Relationships and Building Loyalty (2) • Wheel of Loyalty shows how firms can: • Build a foundation of loyalty • Create loyalty bonds • reduce churn drivers • Building a foundation of loyalty involves: • Good fit between customer needs and capabilities • Searching for value, not just volume • Tiering services effectively • Obtaining customer satisfaction through service quality

47. Summary of Chapter 12: Managing Customer Relationships and Building Loyalty (3) • Customer loyalty bonds include: • Reward-based bonds • Social bonds • Customization bonds • Structural bonds • Bonds can also be created through membership relationships and loyalty programs • Strategies for reducing customer defections include: • Analyzing customer defections and monitoring declining accounts • Addressing key churn drivers • Implementing effective complaint-handling and service recovery procedures • Increasing switching costs

48. Summary of Chapter 12: Managing Customer Relationships And Building Loyalty (4) • Customer relationship management (CRM) is a whole process by which relations with customers are built and maintained. • An integrated CRM system includes • Strategy development process • Value creation process • Multichannel integration process • Performance assessment process • Cresting a successful CRM program requires understanding common failures in CRM implementation and knowing how to get it right