Module 2:

(06 hours)

Building Customer Relationship: Relationship Marketing, Relationship Value of Customers, Customer Profitability Segments, Relationship Development Strategies, Relationship Challenges .

Learning objectives (LO): At the end of the module the student should be able to: illustrate relationship marketing, its goals and benefits of long term relationship for firms and customer

BUILDING CUSTOMER RELATIONSHIP

Relationship Marketing

Evolution of Customer Relationships

Customer As Strangers

Strangers are those customer who are not aware of or, perhaps those who have not had any transaction with firm. They may include the customers of competitors. Firms primary goal with those potential customer ( Strangers) is to initiate communication with them in order to attract them and acquire their business. Thus the primary marketing efforts directed towards such customer deal with familiarizing those potential customer with firms offerings and subsequently encouraging them to give the firm try.

Customer As Acquaintances
Once customer awareness and trial are achieved, familiarity is established , customer and the firm become acquaintances, creating the basis for an exchange relationship. Primary goal for the firm at this stage of relationship is satisfying the customer In acquaintances stage, firms are generally concerned about providing a value proposition to customers that are comparable with that of competitors. For a customer, an acquaintanceship is effective as long as the customer is relatively satisfied and what is being received in the exchange is perceived as fair value. Repetitive interactions improve the firms knowledge of the customer, helping to facilitate marketing, sales, and service efforts.

Customer as Friends

As a customer continues to make purchases from a firm and to receive value in the exchange relationship, the firm beings to acquire specific knowledge of the customers needs, allowing it to create an offering that directly addresses the customers situation. The provision of a unique offering and differential value, transforms the exchange relationship from acquaintance to friendship. Primary goal for firms at the friendship is customer retention by offering unique services.

Customer As Partners

As customer continues to interact with the firm, the level of trust often deepens and customer may receive more customized product /service offerings. The trust develop in friendship stage is necessary but not sufficient condition for customer firm partnership to develop. i.e. The creation of trust leads to creation of commitment and i.e. the condition necessary for customer to extend time perspective of relationship. The firm must use customer knowledge and information system to deliver highly personalized and customized offering.

The Goal of relationship Marketing

The Primary Goal of relationship marketing is to build and maintain a base of committed customer who are profitable for the organization.

Benefits for Customers and Firms

Benefits for Customer
Assuming they have the choice, customers will remain loyal to firm when they receive greater value relative to what they expect from competing firms. Value represent the trade off for the consumer between the give and get components. Consumers are more likely to stay in the relationship when the gets ( Quality, Satisfaction, Specific Benefits) exceeds the gives ( Monetary and non monetary costs ). Beyond the specific inherent benefits of receiving service value, customers also benefits in other ways from long term association with firm. Sometimes these benefits keep the customer loyal to firm more then the attributes of the core service.

Confidence Benefits
Confidence Benefits Comprise feeling of trust or confidence in the provider along with a sense of reduced anxiety and comfort in knowing what to expect.

Social Benefits
Over time, Customer develop a sense of familiarity and even a social relationship with their service providers. These ties make it less likely that they will switch, even if they learn about a competitors that might lower the price. Ex. Hair Stylist, or Trainer in Health Club. Flip side of this customer benefits is the risk to firm of losing customers when a valued employees leaves the firm and takes customer with him or her.

Special Treatment includes getting the benefits being given in form of Special Deal or Price or getting preferential treatment. Ex. I always pay my VISA bill on time, before a service charge is assessed. One time my payment didnt quite arrive on time. When I called them, by looking at my payment didnt quite arrive on time. When I called them, by looking at my past history, they realized that I always make an early payment. Therefore, they waived the service charge.

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

Figure 7.4

The Customer Pyramid

Most profitable customers
Platinum What segment spends more with us over time, costs less to maintain, spreads positive word-of-mouth?

Gold

Iron
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?

Lead

Least profitable customers

Customer Profitability Segments

The Platinum tier The companys most profitable customers, typically those who are heavy users of the product, are not overly price sensitive, are willing to invest in and try new offerings and committed customers of firm. The Gold Tier Differs from the platinum tier in profitability levels are not as high, perhaps because the customer want price discounts that limit margins, they may be heavy users who minimize risk by working with multiple vendors rather then focal company.

Iron tier Contains essential customers who provide the volume needed to utilize the firms capacity, but their spending levels, loyalty, and profitability are not substantial enough for special treatment.

The lead tier Consists of customer who are costing the company money . They demand more attention then they are due given their spending and profitability. Sometimes problem customercomplaining about the firm to others and tying up the firms resources.

Relationship Development Strategy

In this section we examine a variety of factors that influence the development of strong customers relationships including the customers overall evaluation of a firms offering, bonds created with customers by the firm, and barriers that the customer faces in leaving a relationship. The strategies that firm often use to keep their current customers.

 Core Service Provision Switching Barriers Relationship Bonds

Relationship Development Model

Relationship Drivers Switching Barriers Customer Inertia Switching Cost

Outcomes Customer Benefits Confidence benefits Social benefits Special Treatment Benefits

Core Service Provision Satisfaction Perceived service quality

Strong Customer Relationship (Loyalty)

Relationship Bonds Financial Bonds Social Bonds Customization Bonds Structural Bonds

Firm Benefits Economic Benefits Customer behavior Benefits Human resource management benefits

Core Service Provision

Retention strategies will have little long-term success unless the firm has solid base of service quality and customer satisfaction. The firm must be competitive. The firm needs to begin the relationship development process by providing a good core service delivery at minimum cost meets the customer expectations.

Switching Barriers
When considering a switch in service providers, a customer may face number of barriers that make it difficult to leave one service provider and begin a relationship with another. Ex. Cost of switching, perceived risk.

Customer Inertia
One reason that customers commit to developing relationships with firm is that a certain amount of effort may be required to change the firm. People do not like to change their behavior. To retain customers, firms might consider increasing the perceived effort required on the part of customer to switch service provider. If customer believes that a great deal of effort is required to change the companies, the customer likely to stay.

Switching Cost
These costs are both real and perceived, monetary and nonmonetary. These include investment of time, money and effort.

Level of Relationship

Relationship Bonds
Switching Barriers tend to serve as Constraints that keep customers in relationship with firm. Leonard Berry and A Parasuraman have developed the fame work for understanding the type of retention strategies that focus on developing bounds with the customer. The Framework suggest that relationship marketing can occur at different levels and that each successive level of Strategy results in ties that bind the customer a little closer to firm. There are 4 levels in the frame work. Level 1: Financial Bounds

Level 2 : Social Bounds

Level3: Customization Bounds

Level4: Structural Bounds

Levels of Relationship Strategies

Volume and frequency rewards Integrated information systems Stable pricing

Bundling and cross selling

1. Financial bonds

Continuous relationships

Joint investments

4. Structural bonds

Excellent service and value

3. Customization Bonds

2. Social bonds

Personal relationships

Shared processes and equipment

Social bonds among customers Customer intimacy

Anticipation/ innovation

Mass customization

Financial Bonds: At level 1 customer is tied to the firm primarily through financial incentives- lower the price greater volume purchase or lower prices for customer who have been with the firm a long time. Ex. Airline Industry, Frequent flyer program provide financial incentives and rewards for travelers who bring more of their business to particular airline. Other type of retention strategies that depend on primary on financial rewards are focused on building cross selling of services. Ex. Frequent flyers reward programs liked with Hotel chains. Other cases, firm aims to retain their customer by simply offering their most loyal customers the assurance of stable prices, or lower price increases then those paid by new customer. In this way they try to reward the loyal customer.

Social Bonds: Level2 strategies bind customer to the firm through more then financial incentives. Although price is still assumed to be important, Level2 retention marketers build on the long term relationships through social and interpersonal as well as financial bounds. Customers are viewed as Clients, not as nameless faces. Social interpersonal bonds are common among professional service providers and their clients as well as among personal care providers and their clients. Ex. Dentist

Interpersonal bonds are also common in business-business relationships in which customers develop relationships with sales people and /or relationship managers working with their firm.

Sometimes relationship are formed with the organization because of social bonds that develop among the customers rather then between the customers and provider of services. Such bounds are often formed in health clubs, country clubs. Over time the social relationships they have with other customers are important factors that keep them from switching to another organization. Ex. Harley Davidson

Customization Bonds:

Level 3 Strategies involve more then the social ties and financial incentives, although there are common elements of level 1 and level 2 strategies encompassed within a customization strategy.
Two commonly used terms fit within the customization bonds approach: Mass Customization and customer intimacy. Both these strategies suggest that customer loyalty can be encouraged through intimate knowledge of individual customers and through the development of one-one solutions that fit the individual customer needs.

Mass customization refers to the use of flexible process and organization structures to produce varied and often individually customized product and services at the price of standardization. Ex Levies gives option to customer to buy jeans made to their specification.

The ability to customize, in combination with customer intimacy (familiarity), can be used to anticipate customer needs and recommend innovative solution to meet these needs.
Customization bonds are difficult to break, as customer would need to start from scratch and teach new potential provider.

Structural Bond
Developed when two organization adapt to each other in some economic or technical way such as product or process adjustment. these bonds are strengthened through joint investment in product and process development In B-B context information and resource sharing, mutual knowledge, contractual arrangement between two organisation.

Structural Bonds are created by providing services to the client that are frequently designed right into service delivery system for that client. Structural bonds are created by providing customized services to the client that are technology based and make the customer more productive. Ex. The partner ship between Wal Mart and P&G. Blue Dart ties its customers with its PowerShips - free computers at client base to store address and shipping data, print mailing labels, track the packages .

Relationship Challenges

 The Wrong Segment: Company cant target its services to all customer. Not profitable in long term: in absence of ethical and legal mandates, organizations will prefer not to have long-term relationships with unprofitable customer. Some segments of customer will not be profitable for the company even if their needs can be meet by the service provider. Ex- ICICI Lombard not under taking TATA vehicles insurance because of higher claim ratio in pan India. Difficult Customer: Dysfunctional customer behavior refers to actions by customer who intentionally or perhaps unintentionally act in manner that in some way disrupts otherwise functional service encounters.

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