SERVICE MARKETING

CHAPTER 12: BUILDING LOYALTY, COMPLAINT HANDLING &

SERVICE RECOVERY
OVERVIEW

12.1 The Wheel of Loyalty

12.2 Building a Foundation for Loyalty
12.3 Strategies for Building Loyalty Bonds with Customers and
Reducing Customers' Defections
12.4 Service Guarantees

1
THE WHEEL OF LOYALTY

2
 THE WHEEL OF LOYALTY

The Wheel of Loyalty

comprises of 3
sequential strategies:
build a foundation
for loyalty, create
loyalty bonds, and
reduce churn drivers

3
Source:
(1) http://www.lacreme.ie/sites/lacreme.ie/files/styles/large/public/friendly%20receptionist.jpg?itok=9qd14NiL
BUILDING A FOUNDATION FOR
LOYALTY

4
 TARGETING THE RIGHT CUSTOMERS

“the result should be a win-win situation, where

profits are earned through the success
and satisfaction of customers, and not at
their expense.”
- Frederick Reichheld, Author

--
the result of carefully targeting customers by
matching the company capabilities and strengths
with customer needs should be a superior service
offering in the eyes of those customers who value
what the firm has to offer. 5
Source:
(1) http://www.theultimatequestion.com/theultimatequestion/images/fred_thumbnail.jpg
TARGETING THE RIGHT CUSTOMERS

Acquire customers who fit the core value proposition!

Target the right customer Focus on number of customers served
and value of each customer
How do customer needs relate to operations
elements? Some customers more profitable than others in
the short term
Can company match or exceed competing
services that are directed at same types of
customers? Others may have room for long-term growth

How can service personnel meet expectations

of different customers? “Right customers” are not always high spenders
Can be a large group of people that
no other supplier is serving well
6
 EFFECTIVE TIERING OF SERVICE
THE CUSTOMER PYRAMID

service tiers can be

developed around different
levels of profit contribution
of different groups of
customers and their needs
(including sensitivities to
variables such as price,
comfort, and speed) and
identifiable personal profiles
such as demographics.

7
THE CUSTOMER PYRAMID

1. Platinum. These customers constitute a very small percentage of a firm’s

customer base, but they are heavy users and contribute a large share of
the firm’s profits.

2. Gold. The gold-tier includes a larger percentage of customers than the

platinum, but individual customers contribute less profit than platinum
customers.

3. Iron. These customers provide the bulk of the customer base. Their
numbers give the firm economies of scale.

4. Lead. Customers in this tier tend to generate low revenues for a firm but often
require the same level of service as iron customers, turning them into a loss-
making segment from a firm’s perspective.
8
 THE CUSTOMER SATISFACTION
LOYALTY RELATIONSHIP

The satisfaction-loyalty
relationship can be divided
into three main zones:
defection, indifference, and
affection

9
THE CUSTOMER SATISFACTION
LOYALTY RELATIONSHIP

The zone of defection occurs at low satisfaction levels. Customers will

switch unless switching costs are high or there are no viable or convenient
alternatives.
The zone of indifference is found at intermediate satisfaction levels.
Here, customers are willing to switch if they find a better alternative.
The zone of affection is located at very high satisfaction levels, where
customers may have such high attitudinal loyalty that they do not look for
alternative service providers.
Customers who praise the firm in public and refer others to the firm are
described as “apostles.”
10
STRATEGIES FOR BUILDING LOYALTY
BONDS WITH CUSTOMERS
AND REDUCING
CUSTOMER DEFECTIONS

11
 DEVELOPING LOYALTY
BONDS WITH CUSTOMERS

Deepening the relationship

Bundling/Cross-selling Customers benefit from
services makes switching a consolidating their purchasing
major effort that customer is of various services from the
unwilling to undertake same provider

When having many services with the same

firm, the customer may achieve a higher
service tier and receive better service,
and sometimes service bundles do come with
price discounts.
12
CASE: ROYAL BANK OF CANADA

Royal Bank of Canada use data modeling to segment its base of 10

million customers.
The segmentation variables include credit risk
profile, current and projected
profitability, life stage, likelihood of
leaving the bank, channel preference (i.e.,
whether customers like to use a branch, self-
service machines, the call center, or online
banking), product activation (how quickly
customers actually use a product they have
bought), and propensity to purchase
another product (i.e., cross-selling potential).
13
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 flyer miles), cash-
back programs Reward-based loyalty
programs are relatively easy
Non-financial rewards —Priority to loyalty
program members for waitlists and queues in call
to copy and rarely provide
centers; higher baggage allowances, priority upgrading a sustained competitive
Intangible rewards –Special recognition and
advantage
appreciation, tiered loyalty programs 14
FINANCIAL REWARDS

Financial rewards are customer incentives that have a financial value

(also called “hard benefits”)

Marketers need to examine three psychological effects:

Brand loyalty versus deal Timing. How soon can benefits from
participating in the rewards program be
loyalty. To what extent are obtained by customers? Deferred
customers loyal to the core service
gratification tends to weaken the appeal of
(or brand) rather than to the loyalty
a loyalty program. One solution is to send
program itself?
customers periodic statements of their
account status.
15
 FINANCIAL REWARDS

How buyers value rewards. Several elements determine a loyalty

program’s value to customers:

Cash value of the Range of choice Aspirational value of

redemption awards among rewards rewards

Psychological benefits of
Amount of usage required Ease of using program belonging to the program
to obtain an award and making claims

16
 NON-FINANCIAL REWARDS

Nonfinancial rewards (also called “soft benefits”) provide benefits that

cannot be translated directly into monetary terms.

Example:

Unlike financial rewards, nonfinancial In the hotel context, getting priority for
reservations, early check- in, late check-out,
rewards directly relate to the firm’s
upgrades, and receiving special attention
core service and directly enhance the and appreciation make your stay more
customers’ experience and value pleasant, leave you with the fuzzy warm
perception. feeling that this firm appreciates your
business.
17
 DEVELOPING LOYALTY
BONDS WITH CUSTOMERS
There are three main types of higher level bonds

Social Bonds Customization Bonds

Customized service for loyal customers

Based on personal relationships between
e.g. Starbucks
providers and customers

Harder to build and imitate and thus, Customers may find it hard to adjust to
better chance of retention in the long term another service provider who cannot
customize service

18
Source:
(1) https://mymonline.com/mymblog/wp-content/uploads/2014/07/072-illustration-bad-employee-600.jpg
 DEVELOPING LOYALTY
BONDS WITH CUSTOMERS
Structural Bonds

Mostly seen in B2B settings and aim to stimulate Can be seen in B2C environment too
loyalty through structural relationships e.g., Airlines –SMS check-in, SMS e-
mail alerts for flight arrival and
between the provider and the customer. departure times

Align customers' way of doing things with Difficult for competition to draw
supplier’s own processes customers away when they have
e.g., Joint investments in projects and sharing
of information, processes and equipment)
integrated their way of doing things
with existing supplier

19
WHAT DRIVES CUSTOMERS TO
SWITCH?
The first step is to understand the reasons for customer switching

Susan Keveaney conducted a

large-scale study across a range
of services and found several
key reasons why customers
switch to another provider

20
ANALYZE CUSTOMER DEFECTIONS AND
MONITOR DECLINING ACCOUNTS

Churn Diagnostics Churn Alert Systems

Analysis of data warehouse information on

churned and declining customers • Monitor activity in individual
customer accounts to predict
Exit interviews: Ask a short set of impending customer switching
questions when customer cancels account;
in-depth interviews of former customers by • Proactive detention efforts –
third party agency send voucher, customer service
representative calls customer
In-depth interviews of former customers
by a third-party research agency
21
ADDRESSING KEY CHURN DRIVERS

Delivery quality
Minimize inconvenience and non-monetary costs
Offering fair and transparent pricing
Industry specific drivers
Reactive measures –Save teams who listen to customer
needs and issues and to try to address them with the key focus
of retaining the customer.
22
 OTHER WAYS TO REDUCE CHURN

Implement Effective Complaint Handling and Service Recovery Procedures

Do the job right the first Effective Complaint Increased Satisfaction
time + Handling =
and Loyalty

Conduct research

Identify Service Monitor complaints

Complaints Develop “Complaints as
The components of Opportunity” culture
an effective
service recovery Resolve Complaints
system are shown Effectively
Develop effective system and
training in complaint handling
in this diagram

Learn from the Recovery

Experience Conduct root cause analysis

23
Source: Adapted from Christopher H. Lovelock, Paul G. Patterson, and Rhett Walker, Services Marketing: An Asia-
Pacific and Australian Perspective, 4th edition (Sydney: Prentice Hall Australia, 2007), p. 388.
 OTHER WAYS TO REDUCE CHURN

Increase Switching Costs

Natural switching costs

e.g., Changing primary bank account – many related services tied to account

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
24
SERVICE GUARANTEES

25
 SERVICE GUARANTEES HELP PROMOTE
AND ACHIEVE SERVICE LOYALTY

One way for particularly customer-focused firms to institutionalize professional

complaint handling and effective service recovery is service guarantees.

• Force firms to focus on what customers want

• Set clear standards

• Highlight cost of service failures

• Help firm identify and overcome fail points

• Reduce the risk of purchase decision and build long-

term loyalty
26
 THE POWER OF SERVICE GUARANTEES
CASE: HAMPTON INN

It became imperative that every staffs and

managers listen carefully to guests,
anticipate their needs to the greatest
extent possible, and remedy problems
quickly so that guests were satisfied with the
solution.

Hampton’s strategy of offering to refund

the guarantee has become a vital tool to the cost of the room to a guest who
help managers identify new opportunities expresses dissatisfaction has attracted new
for quality improvement. customers and also served as a powerful
retention device. 27
Source:
(1) https://blog.kissmetrics.com/wp-content/uploads/2010/11/Hampton.jpg
HOW TO DESIGN SERVICE GUARANTEES

there should not be any element of surprise for the

Unconditional customer.

Easy to understand and clearly aware of the benefits that can be gained from
communicate to the customer the guarantee.

the guarantee is for something important to the customer,

Meaningful to the and the compensation should be more than adequate to cover
customer the service failure.

28
HOW TO DESIGN SERVICE GUARANTEES

It should be easy for the customer to invoke the

Easy to invoke guarantee.

If a service failure occurs, the customer should be able to easily

Easy to collect on collect on the guarantee without any problems.

Credible The guarantee should be believable

29
 TYPES OF SERVICE GUARANTEE

Single attribute- Multi-attribute- Full-satisfaction Combined

specific guarantee specific guarantee guarantee guarantee

• Explicit minimum • Explicit minimum • All service aspects • All service aspects
performance performance are guaranteed to are guaranteed (as
standard on one standard on a few be delivered to for full-satisfaction
important important the full guarantee)
attribute is attributes is satisfaction of the • Explicit minimum
guaranteed (e.g., guaranteed customer with no performance
standards on
delivery by noon exceptions or important attributes
the next day) conditions are guaranteed (as
attached for multi-attribute-
specific guarantee)

30
 IS IT ALWAYS SUITABLE TO
INTRODUCE A GUARANTEE?

It may not be appropriate to introduce guarantees when:

Companies have a strong reputation for
service excellence

Company does not have good quality level

Quality cannot be controlled because of

external forces
Consumers see little financial, personal, or
physiological risk associated with the
purchase
31