Managing Relationships and Building Loyalty

Relationship Marketing

is a philosophy of doing business that focuses on relationship/retention does not necessarily emphasize acquiring new customers CRM means attracting, maintaining and enhancing customer relationship CRM is a business philosophy and set of strategies, programs, and systems that focus on identifying and building loyalty with a service providers most valuable customers.

Customer-Firm Relationship
Todays marketers seek to develop long-term relationships with customers. Relationship marketing includes:

Database Marketing Interaction Marketing Network Marketing

Evolution of Customer Relationships

Customers as Strangers Customers as Acquaintances Customers as Friends Customers as Partners

Customer Goals of Relationship Marketing

Enhancing

Retaining Satisfying
Acquiring

Benefits for Customers and Firms

Benefits for customers

Confidence Benefits Social benefits Special Treatment Benefits
for Firms Economic Benefits Customer Behavior Benefits Human Resource Management Benefits

Benefit

Benefits for Customers

Confidence benefits

less risk of something going wrong, less anxiety ability to trust provider know what to expect get firms best service level mutual recognition, known by name friendship, enjoyment of social aspects better prices, discounts, special deals unavailable to others extra services higher priority with waits, faster service

Social benefits

Special treatment benefits

Benefits for Firms

Economic Benefits

Increased revenues over time from customers Reduced marketing and administrative cost Ability to maintain margins without reducing prices Free advertising through word of mouth communication Customer voluntary performance Social benefits to other customers Contribute to co-production Employee receiving social benefits Employee retention

Customer Behavior Benefits

Human Resource Management Benefits

Customer Loyalty

What is Customer Loyalty?

A customers willingness to continue patronizing a firm over the long term and recommending the firms products to friends and associates. Customer loyalty is all about attracting the right customer, getting them to buy, buy often, buy in higher quantities and bring you even more customers.

Firms Build loyalty by

keeping touch with customers using email marketing, thank you cards and more. treating their team well so they treat their customers well. showing that they care and remembering what the customers like and dont like. by rewarding the customers for choosing them over their competitors. by truly caring for the customers and figuring out how to make them more happy and joyful.

The Wheel of Loyalty

3. Reduce Churn Drivers
Conduct churn diagnostic Address key churn drivers
Enabled through: Frontline staff Account managers Membership programs CRM Systems

1. Build a Foundation for Loyalty

Segment the market

Implement complaint handling & service recovery Increase switching costs

Customer Loyalty

Be selective in acquisition Use effective tiering of service.

Deliver quality service.

Build higher level bonds

2. Create Loyalty Bonds

Give loyalty rewards

Deepen the relationship

1. Building a Foundation for Loyalty

The Wheel of Loyalty

3. Reduce Churn Drivers
Conduct churn diagnostic

1. Build a Foundation for Loyalty

Segment the market Be selective in acquisition Use effective tiering of service.

Address key churn drivers

Enabled through: Frontline staff Account managers Membership programs CRM Systems

Implement complaint handling & service recovery Increase switching costs

Customer Loyalty

Deliver quality service.

Build higher level bonds

2. Create Loyalty Bonds

Give loyalty rewards

Deepen the relationship

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

Basic Segmentation Issues:

Building an Appropriate Customer Portfolio

Target customers whose needs match firms capabilities

Focus on value of prospective customers within each segment, not just numbers Avoid targeting customers who might abuse:
our employees, facilities other customers

Create a mix of segments to reduce risks of volatility during swings of economic cycles

Service-Relevant Segmentation Variables

Timing of service use (e.g., by hour, day, season) Level of skill and experience as co producer/self-server Preferred language in face-to-face contact Access to electronic delivery systems (e.g., Internet) Attitudes toward use of new service technologies

The Customer Pyramid

Good Relationship Customers

Platinum Gold Iron Lead

Poor 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 in time, effort and money, yet does not provide the return we want? Which segment is difficult to do business with?

The Customer Satisfaction-Loyalty Relationship

Apostle
100

Loyalty (Retention)

Zone of Affection
80

Near Apostle
60

Zone of Indifference Zone of Defection

40

20

Terrorist 0

1
Very dissatisfied

5
Very Satisfied

Neither satisfied Dissatisfied Satisfied nor dissatisfied

Satisfaction

Creating Loyalty Bonds

Strategies for Developing Loyalty Bonds with Customers

Deepening the relationship

Bundling/cross-selling

services makes switching a major effort that customer is unwilling to undertake unless extremely dissatisfied with service provider benefit from consolidating their purchasing of various services from the same provider

Customers

Strategies for Developing Loyalty Bonds with Customers

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
Priority

rewards

to loyalty program members for waitlists and queues in call centers, higher baggage allowances, priority upgrading, access to airport lounges for frequent flyers

Intangible
Special

rewards

Reward-based loyalty programs are relatively easy to copy and rarely provide a sustained competitive

recognition and appreciation, special request

Strategies for Developing Loyalty Bonds with Customers

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

Strategies for Developing Loyalty Bonds with Customers

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

AirlinesSMS

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

Creating Customer Bonds by Membership Relationships and Loyalty

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 programrewards dominated in miles For example: Feel excluded from rewards program because of low balances, rewards seen as having little value, cumbersome redemption process

Customers may get frustrated with reward programs

Dont lose sight of broader goals of offering high service quality, nor allow service to other customers to deteriorate

Create Customer Bonds by Membership Relationships and Loyalty Programs

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 Send customers periodic updates on account status and progress towards particular milestones

Timing

Strategies for Reducing Customer Defections

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 effortssend voucher, customer

What Drives Customers to Switch?

Service Failure/Recovery
Core Service Failure
Service Mistakes Billing Errors Service Catastrophe

Value Proposition
Pricing
High Price Price Increases Unfair Pricing Deceptive Pricing

Service Encounter Failures

Uncaring Impolite Unresponsive Unknowledgeable

Service Switching

Inconvenience

Location/Hours Wait for Appointment Wait for Service

Response to Service Failure

Negative Response No Response Reluctant Response

Competition

Found Better Service

Others
Involuntary Switching
Customer Moved Provider Closed

Ethical Problems

Cheat Unsafe Hard Sell Conflict of Interest

Source: Adapted from Susan M. Keaveney, Customer Switching Behavior in Service Industries: An Exploratory Study, Journal of Marketing 59 (April 1995), pp. 7182.

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 servicesoffer 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

Other Ways to Reduce Churn

Implement effective complaint handling and service recovery procedures Increase switching costs
Natural
For

switching costs

example, changing primary bank account many related services tied to account

Can

be created by instituting contractual penalties for switching

Must High

be careful not to be perceived as holding customers hostage

switching barriers and poor service quality likely to generate negative attitudes and word of mouth

Loyalty is Important to Profitability : Index of Customer Profits over Time (Year 1=100)
350 300 250 200 150 100 50 0

Year 1
Credit card

Year 2
Industrial laundry

Year 3

Year 4

Year 5
Auto servicing

Industrial distribution

Based on data from Reichheld and Sasser

What Makes Loyal Customers More Profitable?

Tend to spend more as relationship develops

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 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

7
Source: Reichheld and Sasser

Year

Rewarding Value of Use, Not Just Frequency at British Airways (Best

Practice in Action)
Dedicated reservations Reservations assurance

Priority waitlist and standby

Advance notification of delays

exceeding 4 hours
Upgraded check-in

Preferred boarding
Special services assistance Bonus air miles Upgrade for two

Common CRM Applications

Signifies the whole process by which relationships with customers are built and maintained. CRM as an enabler, offering a unified customer interface and allow firms to better understand and segment the customers etc. Applications include:
Data Data

collection analysis

Sales

force automation
automation

Marketing Call

center automation

How to get CRM implementation Right

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?