Managing Relationships & Building Loyalty

Managing Relationships
and Building Loyalty
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 1
The search for customer loyalty
• It is described as a customer’s willingness to continue patronizing a firm

over
the long term, purchasing & using its goods & services on a repeated &
preferably exclusive basis, & recommending the firm’s products to friends &
associates.
What Makes Loyal Customers More Profitable?
 Tend to spend more as relationship develops

 customer’s balances may grow
 may consolidate purchases to one supplier
 Cost less to serve

 less need for information and assistance
 make fewer mistakes
 Recommend new customers to firm (act as unpaid sales

people)
 Trust leads to willingness to pay regular prices vs. shopping

for discounts
Analyzing Why Customers Are More Profitable
over Time
Profit from price

premium
Profit from references
Profit from reduced

op. costs
Profit from increased
usage
Base Profit
1 2 3 4 5 6 7
Year Source: Reichheld and Sasser
Understanding the customer/firm relationship
• Research by Nichole Coviello, Roderick Brodie, & Hugh Munro suggests

that there are, 4 distinct types of marketing:
1.Transactional marketing: A transaction is an event during which an

exchange of value takes place between two parties. But even a series of
transactions does not necessarily constitute a relationship, which requires
mutual recognition & knowledge between the parties. When each transaction
between a customer & a supplier is essentially discrete & anonymous, with
no long-term record kept of a customer’s purchasing history & little or no
mutual recognition between the customer & employees, no meaningful
marketing relationship can be said to exist.
Cont……………..
2. Data base marketing: The focus is on the market transaction but also
includes information exchange. Marketers rely on information technology,
usually in the form of a database, to form a relationship with targeted
customers & retain their patronage over time.
• However, the nature of these relationships is often not a close one, with
communication being driven & managed by the seller.
• Technology is used to :
a.Identify & build a database of current & potential customers
b.Deliver differentiated messages based on consumer’s characteristics &
preference
c.Track each relationship to monitor the cost of acquiring the customer &
the life-time value of the resulting purchases.
Cont…………….
3. Interaction marketing: A closer relationship exists when there is face-to-

face interaction between customers & representatives of the supplier.
• Although service remains important, value is added by people & social

processes. Interactions may include negotiations & sharing of insights in
both directions.
• Both the firm & the customer are prepared to invest resources to develop a
mutually beneficial relationship. This invest may include time spent sharing &
recording information.
4. Network marketing: This type of marketing occurs primarily in a

business-to-business context, where firms commit resources to develop
positions in a network of relationships with customers, distributors, suppliers,
the media, consultants, trade associations, govt. agencies.
• The concept is also relevant in consumer marketing environment.

Creating “Membership” relationships
• It is a formalized relationship between the firm & an identifiable customer,

may offer special benefits to both parties.
• Services involving discrete transactions can be transformed into

membership relationships either by selling the service in bulk or by offering
extra benefits to customers who choose to register with the firm.
• The advantage to the service organization of having membership

relationships is that it knows who is its current customers & what use they
make of the services offered.
• This information can be valuable for segmentation purposes if good

records are kept & the data are readily accessible for analysis.
• Knowing the identities & addresses of current customers enables the

organization to make effective use of direct mail, telephone selling- all highly
targeted methods of marketing communication.
Types of 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 transactions Subscriber phone Pay phone

Theater subscription Movie theater
Warranty repair Public transport
Identifying and Selecting Target Segments
User characteristics
 demographics
 psychographics
 geographic location
 benefits sought
User behavior
 when, where, how services used
 quantity/value of purchases
 frequency of use
 profitability of relationship
 sensitivity to marketing variables
Targeting the right customers
1. Good relationships start with a good fit:
• If they want to build successful customer relationships, companies need to

be selective about the segments they target.
• Matching customers to the firm’s capabilities is vital. Managers must think

carefully about how customer needs relate to such operational elements as
speed & quality, the time when service is available, the firm’s capacity to
serve many customers simultaneously.
• Managers also need to consider how well their service personnel can meet
the expectations of specific types of customers , in terms of both personal
style & technical competence.
• Finally, managers need to ask themselves whether their company can

match or exceed competing services that are directed at the same types of
customers.
2. Searching for value, not just numbers:
• Too many service firms still focus on the number of customers they serve- an
important issue for operations & human resource planning- without giving sufficient
attention to the value of each customer.
• Service customers who buy based strictly on lower price are not good target
customers for relationship marketing at the first place. These deal-prone customers
continually seek the lowest price offer.
• Acquiring the right customers can bring in long-term revenues, continued growth
from referrals, & enhanced satisfaction.
• Attracting the wrong customers typically results in costly churn.

• Marketers shouldn’t assume that the “right customers” are always high spenders.
• Marketers also need to recognize that some customers simply are not worth serving
because they are too difficult to please or unable to decide what they want.
3. Selecting an appropriate customer portfolio:
• We can apply the concept of portfolio to service businesses with an

established base of customers. Different segments offer different value for a
service firm.
• Like investments, some types of customers may be more profitable than

others in the short term, but others may have greater potential for long-term
growth.
• Similarly, the spending patterns of some customers may be stable over

time, whereas others may be more volatile.
• A wise firm may seek a mix of such segments in order to reduce the risks
that various types of customers might be affected.
Analyzing & managing the customer base
• Marketers should adopt a strategic approach to retaining, upgrading &

even terminating customers.
• Customer retention involves developing long-term, cost-effective links with

customers for the mutual benefit of both parties.
• Recent research has confirmed that most firms have several tiers of
customers in terms of profitability & that these tiers often different service
expectations & needs
Tiering the customer base
1. Platinum: These customers constitute a very small percentage of a

firm’s customer base, are heavy users & contribute a large share of the
profits generated. Typically, this segment is less price sensitive but
expects highest service levels in return & is likely to be willing to invest &
try new services.
2. Gold: It forms a larger percentage of customers than the platinum, but

individual customers contribute less profit than do platinum customers. It
tend to be slightly more price-sensitive & less committed to the firms.
3. Iron: These customers provide the bulk of customer base. Because their
numbers give the firm economies of scale, they are often important so
that a firm can build & maintain a certain capacity level & infrastructure,
which is often needed for serving gold & platinum customers. However,
iron customers in themselves are often only marginal profitable.
4. Lead: They generate low revenue for the firm.
The Customer Pyramid
Good Relationship
Customers
Which segment sees high value in
our offer, spends more with us over
Platinum time, costs less to maintain, and
spreads positive word-of-mouth?
Gold
Which segment costs us in time,

Iron
effort and money, yet does not
provide the return we want?
Which segment is difficult to do
Lead business with?
Poor Relationship
Customers
Retaining, upgrading & terminating customers
• Generally, customer tiers are based on not only profitability but also other
identifiable characteristics common among these different segments.
• Instead of providing the same level of service to all customers, each segment
receives a customized service level, based on its requirements & value to the firm.
E.g. the platinum tier will receive some exclusive benefits not available to other
segments. The benefit levels for platinum & gold customers are often designed with
retention in mind, because these customers are the ones that competitors would like
to entice to switch.
• Marketing efforts can be used to encourage an increased volume of purchase,

upgrading the type of service used, or cross-selling additional services to any of the 4
tiers.
• For lead- customers, the options are to either migrate them to the iron segment or
terminate them.
• Terminating customers comes as a logical consequence of the realization that not

all existing customer relationships are worth keeping. Many relationships are no
longer profitable for the firm as they may cost more to maintain the revenues.
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
The foundations of customer loyalty
• The foundation for true loyalty lies in customer satisfaction. Highly

satisfied or even delighted customers are more likely to become loyal
apostles or a firm, consolidate their buying with one supplier & spread
positive word of mouth.
• In contrast, dissatisfaction drives customers away.

• The zone of defection is at low satisfaction levels. Customers will switch
unless switching costs are high or there are no viable or convenient
alternatives. Extremely dissatisfied customers can turn into “terrorists”
• The zone of indifference is at intermediate satisfaction levels. Here,

customers are willing to switch if they find a better alternative.
• The zone of affection is at very high satisfaction levels, & customers

here can have such high attitudinal loyalty that they do not look for
alternative service providers. Customers who praise the firm in public &
refer others to the firm are described as “apostles”.
The Customer Satisfaction-Loyalty Relationship
Apostle
100
Zone of Affection
80
Loyalty (Retention)
Near Apostle
60 Zone of Indifference
40 Zone of Defection
20
Terrorist 0
1 2 3 4 5
Very Neither Very
dissatisfied Dissatisfied satisfied Satisfied Satisfied
nor dissatisfied
Satisfaction
The Wheel of Loyalty
3. Reduce 1. Build a
Churn Drivers Foundation
for Loyalty
 Conduct churn diagnostic
 Segment the market
 Address key churn drivers
 Be selective in acquisition
Enabled through:
 Implement complaint
handling & service  Use effective tiering of
 Frontline staff service.
 Account
recovery Customer
 Increase switching  Deliver quality
managers
 Membership costs
Loyalty service.
programs
 CRM
Systems 2. Create Loyalty
Bonds
 Build higher level  Deepen the
bonds relationship
 Give loyalty
rewards
Creating bonds with customers
1. Creating bonds with customers:
• Having the right portfolio of customer segments, attracting the right

customers, tiering the service, & delivering high levels of satisfaction are
a solid foundation for creating customer loyalty.
a. Deepening the relationship: To tie customers more closely to firms,

deepening the relationship via bundling &/or cross-selling services is an
effective strategy. E.g. banks.
b. Reward- based bonds: Incentives that offer rewards based on the

frequency or value of purchase combination of both represent a basic
level of customer bonds. Reward-based bonds can be financial or
nonfinancial. Financial bonds are built when loyal customers are
rewarded with incentives that have a financial value, such as discounts
on purchases & loyalty-program rewards. Non-financial rewards provide
customers with benefits or value that cannot be translated directly into
monetary items. E.g. giving priority to loyal customers for waitlist.
Cont………………
c. Social bonds: They are typically based on personal relationships

between providers & customers. They may reflect pride or satisfaction in
holding membership in an organization.
d. Customization bonds: These bonds are built when the service provider
succeeds in providing customized service to its loyal customers. One-to-one
marketing is a more specialized form of customization whereby each
individual is treated as a segment.
e. Structural bonds: It is seen mostly in b2b settings & aim to stimulate

loyalty through structural relationships between the provider & the customer.
E.g. are joint investments in projects & sharing of information, processes &
equipment. It can be created in a b2c environment too. For instance, some
airlines have introduced SMS & e-mail alerts.
Cont………………
2. Creation of customer bonds through membership relationships & loyalty

programs:
a.Transforming discrete transactions to membership relationships

b.Customer perceptions of loyalty-reward programs- Recent research in the
credit card industry suggests that loyalty programs strengthen the customers’
perception of the value proposition & lead to increased revenues.
3. Managing & curtailing drivers of customer defections:
a.Common churn drivers: unsatisfactory service encounters, high, deceptive, or

unfair pricing, inconvenience in terms of time, locations or delays
b.Strategies to reduce churn: Effective complaint handling & service recovery,

minimizing inconvenience & other nonmonetary costs & fair & transparent pricing.
Increasing switching cost.
Causes behind customer Service Switching
Service
ServiceFailure
Failure/ /Recovery
Recovery Value
ValueProposition
Proposition
Core Service Failure
• Service Mistakes Pricing
• Billing Errors • High Price
• Service Catastrophe • Price Increases
• Unfair Pricing
Service Encounter Failures • Deceptive Pricing
• Uncaring
• Impolite Service Inconvenience
• Location/Hours
• Unresponsive
• Unknowledgeable Switching • Wait for Appointment
• Wait for Service
Response to Service Failure
• Negative Response
Competition
• No Response • Found Better Service
• Reluctant Response
Others
Others
Involuntary Switching Ethical Problems
• Customer Moved • Cheat • Unsafe
• Provider Closed • Hard Sell • Conflict of Interest
Objectives of CRM
• CRM systems act as an enabler, capturing customer information &

delivering it to the various touch points.
• From a customer perspective, well implemented CRM system can offer a

“unified customer interface”, which means that at each transaction, the
relevant account details, knowledge of customer preferences & past
transactions, or history of a service problem are at the fingertips of the
person serving the customer. This can result in a vast service improvement.
• From a company perspective, CRM systems allow the company to better

understand, segment, & tier its customer base; better target promotions &
cross-selling.
Common CRM Applications
 Data collection
 Data analysis
 Sales force automation
 Marketing automation
 Call center automation
Designing a CRM strategy
• Unfortunately, the majority of CRM implementation fail.

• A key reason for this high failure rate is that firms often equate installing
CRM system with having a customer relationship strategy.
• They forget that the system is merely a tool to enhance the firm’s customer
servicing capabilities & is not the strategy itself.
Customer Relationship Strategies with CRM
Systems: Key Questions
 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 the 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 resource can we allocate to CRM right now?
 If we believe in CRM, why have we not taken steps in that
direction before? What can we do today to develop customer
relationship without spending on technology?

Managing Relationships &amp; Building Loyalty

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Managing Relationships

and Building Loyalty

• It is described as a customer’s willingness to continue patronizing a firm

 Tend to spend more as relationship develops

 Cost less to serve

 Recommend new customers to firm (act as unpaid sales

 Trust leads to willingness to pay regular prices vs. shopping

Profit from price

Profit from reduced

• Research by Nichole Coviello, Roderick Brodie, & Hugh Munro suggests

1.Transactional marketing: A transaction is an event during which an

3. Interaction marketing: A closer relationship exists when there is face-to-

• Although service remains important, value is added by people & social

4. Network marketing: This type of marketing occurs primarily in a

• The concept is also relevant in consumer marketing environment.

• It is a formalized relationship between the firm & an identifiable customer,

• Services involving discrete transactions can be transformed into

• The advantage to the service organization of having membership

• This information can be valuable for segmentation purposes if good

• Knowing the identities & addresses of current customers enables the

Type of Relationship--Firm and Customer

Discrete transactions Subscriber phone Pay phone

1. Good relationships start with a good fit:

• If they want to build successful customer relationships, companies need to

• Matching customers to the firm’s capabilities is vital. Managers must think

• Finally, managers need to ask themselves whether their company can

2. Searching for value, not just numbers:

• Attracting the wrong customers typically results in costly churn.

3. Selecting an appropriate customer portfolio:

• We can apply the concept of portfolio to service businesses with an

• Like investments, some types of customers may be more profitable than

• Similarly, the spending patterns of some customers may be stable over

• Marketers should adopt a strategic approach to retaining, upgrading &

• Customer retention involves developing long-term, cost-effective links with

1. Platinum: These customers constitute a very small percentage of a

2. Gold: It forms a larger percentage of customers than the platinum, but

4. Lead: They generate low revenue for the firm.

Which segment costs us in time,

• Marketing efforts can be used to encourage an increased volume of purchase,

• Terminating customers comes as a logical consequence of the realization that not

 Special treatment benefits

• The foundation for true loyalty lies in customer satisfaction. Highly

• In contrast, dissatisfaction drives customers away.

• The zone of indifference is at intermediate satisfaction levels. Here,

• The zone of affection is at very high satisfaction levels, & customers

1. Creating bonds with customers:

• Having the right portfolio of customer segments, attracting the right

a. Deepening the relationship: To tie customers more closely to firms,

b. Reward- based bonds: Incentives that offer rewards based on the

c. Social bonds: They are typically based on personal relationships

e. Structural bonds: It is seen mostly in b2b settings & aim to stimulate

2. Creation of customer bonds through membership relationships & loyalty

a.Transforming discrete transactions to membership relationships

3. Managing & curtailing drivers of customer defections:

a.Common churn drivers: unsatisfactory service encounters, high, deceptive, or

b.Strategies to reduce churn: Effective complaint handling & service recovery,

• CRM systems act as an enabler, capturing customer information &

• From a customer perspective, well implemented CRM system can offer a

• From a company perspective, CRM systems allow the company to better

 Sales force automation

 Call center automation

• Unfortunately, the majority of CRM implementation fail.

 How should our value proposition change to increase customer

Managing Relationships & Building Loyalty

Managing Relationships & Building Loyalty