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Chapter 12
Managing Relationshipsand Building Loyalty
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Four Stages of BrandLoyalty in a Consumer
Cognitive loyalty perception from
brand attribute information that onebrand is preferable to its alternatives
Affective loyalty developing a
liking for the brand based oncumulatively satisfying usageoccasions
Conative loyalty commitment torebu in the same brand
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Profitability :Index of Customer Profits
over Time (Fig. 12.1)
Creditcard
Industriallaundry
Industrial distribution Autoservicing
0
(Year1=100)
50
2
50
300
350
10
0
150
200
Year1
Year2
Year3
Year4
Year5
Based on data from Reichheld and Sasser
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What Makes LoyalCustomers More Profitable?
Tend to spend more as relationshipdevelops customers 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
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na yz ng y us omersAre More Profitable over
Time (Fig. 12.2)
1 2 3 4 5 6 7
Ye
ar
Profit frompricepremiu
mProfit from references
Profit fromreducedop.
costsProfit from increased
usageBase
Profit
Source: Reichheld and Sasser
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Calculating Life Time Valueof Each Customer
Value at Acquisition revenues (application fee + initial
purchase)
Less costs (marketing +credit check +account set up)
Annual Value (project for each
year of relationship) revenues (annual fee + sales + servicefees + value of referrals)
Less costs (account management + cost
of sales + write-offs)
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Customer-Firm Relationship
Database Marketing: Involves the use of technology by
delivering differentiated service levels to consumersand subsequently tracking the relationship.
Interaction Marketing: Usually in B2B context wherepeople and the social process also add mutuallybeneficial value.
Network Marketing: Common in B2B context wherecompanies commit resources to develop positions in anetwork of relationships with the stakeholders andrelevant agencies.
Todays marketers seek to develop long-term relationships withcustomers. Relationship marketing includes:
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Types of Relationships withCustomers (Table 12.1)
Type of Relationship--Firmand Customer
Nature ofService 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
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as c egmen a on ssues:Building an Appropriate
Customer Portfolio Target customers whose needs match
firms capabilities Focus on value of prospective
customers within each segment, notjust numbers
Avoid targeting customers who mightabuse: our employees, facilities
other customers
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Service-RelevantSegmentation Variables
Timing of service use (e.g., byhour, day, season)
Level of skill and experience asco-producer/self-server
Preferred language in face-to-facecontact
Access to electronic deliverysystems (e.g., Internet)
Attitudes toward use of new
service technologies
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Identifying and SelectingTarget Segments
(Mgt Memo 12.2)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 marketingvariables
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Portfolio of ProfessionalAssignments (Fig. 12.4)
Analytical Work on Project Data
Bread and Butter Projects
Significant Projects
Pacesetters
Major, State-of-the-art challenges for the firmsprincipals that give the firm high visibility
Demanding client assignments offering alearning experience for the firms most
experienced associates
Routine client projects sharedamong principals and associates
Entry-level tasks for newassociates or for researchassistants & paraprofessionals
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The Customer Pyramid (Fig. 12.5)
Lead
Iron
Gold
Which segment sees high value inour offer, spends more with us overtime, costs less to maintain, andspreads positive word-of-mouth?
Which segment costs us in time,effort and money, yet does notprovide the return we want?Which segment is difficult to dobusiness with?
Platinum
Good RelationshipCustomers
Poor RelationshipCustomers
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Relational Benefits in
Service Industries(Research Insights
12.1) Confidence benefits less risk of something going wrong, less
anxiety
ability to trust provider know what to expect get firms best service level
Social benefits mutual recognition, known by name friendship, enjoyment of social aspects
Special treatment benefits tt r ri i unt i l l
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The Customer Satisfaction-Loyalty Relationship (Fig. 12.6)
0
20
40
60
80
100
1 2 3 4 5
Loyalty
(Retention
)
Verydissatisfied Dissatisfied
Neithersatisfied
nor dissatisfiedSatisfied
VerySatisfied
Satisfaction
Near Apostle
Zone of Defection
Zone of Indifference
Zone of Affection
Terrorist
Apostle
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The Wheel of Loyalty (Fig. 12.7)
1. Build aFoundationfor Loyalty
2. Create LoyaltyBonds
3. ReduceChurn Drivers
CustomerLoyalty
Be selective in acquisition
Conduct churn diagnostic Segment the market
Use effective tiering ofservice.
Deliver qualityservice.
Deepen therelationship
Give loyaltyrewards
Build higher levelbonds
Implement complainthandling & servicerecovery
Address key churn drivers
Increase switchingcosts
Enabled through: Frontline staff Account managers Membership
programs CRM
Systems
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ewar ng a ue o se, oJust Frequency at British
Airways (Best Practice in Action 12.2) Dedicated reservations Reservations assurance
Priority waitlist and standby
Advance notification of
delays exceeding 4hours
Upgraded check-in
Preferred boarding
Special services assistance
Bonus air miles
Upgrade for two
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Drivers of Service Switching(Fig. 12.9)
Service
Switching
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
Ethical Problems Cheat Hard Sell
Involuntary Switching Customer Moved Provider Closed
Value Proposition
Others
Service Failure / Recovery
Core Service Failure Service Mistakes Billing Errors Service Catastrophe
Unsafe Conflict of Interest
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Common CRM Applications(Mgt Memo 12.2)
Signifies the whole process by whichrelationships with customers are builtand maintained.
CRM as an enabler, offering a unifiedcustomer interface and allow firms tobetter understand and segment the
customers etc. Applications include: Data collection Data analysis
Sales force automation
s omer e a ons p
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us omer e a ons pStrategies with CRM
Systems: Key Questions How should our value proposition change to increase
customer loyalty?
How much customization or one-to-one marketing andservice delivery is appropriate and profitable?
What is the incremental profit potential of increasingshare of wallet with current customers? How much doesthis vary by customer tier and/or segment?
How much time and resource can we allocate to CRMright now?
If we believe in CRM, why have we not taken steps inthat direction before? What can we do today to developcustomer relationship without spending on technology?