Marketing

Logistics

Chapter 4:
DEVELOPING CUSTOMER
RELATIONSHIP
Contents
1) Managing relationships and Building loyalty
• Customer loyalty
• The Wheel of Loyalty
• Customer relationship management (CRM)
2) Complaint handling and Service recovery
• Customer complaints
• Effective service recovery
• Service Guarantee
3) Digital marketing (for group presentation)
1. Managing relationships and
building loyalty

1.1 Customer Loyalty

1.2 The Wheel of Loyalty

1.3 Customer Relationship Management (CRM)

 Customer loyalty

Reduce costs:
Increase sales:
Importance of customer service
higher purchases,
customer loyalty to costs, amortization
share-of-wallet,
firm’s profitability of customer
cross-buying
acquisition costs

Positive word-of- Lower price-

mouth and referrals sensitivity
Customer loyalty

Individual customers purchase more as

Over time, customers often their families grow or as they become
consume more and need to more affluent.
purchase in greater quantities; Business customers often grow larger
in scale over time

Both types of customers may be willing to consolidate their purchases

with a single supplier who provides high-quality service, resulting in “a
high share of wallet” (cross-buying or new products/services).
 Customer loyalty
As customers become more
experiences, they make fewer Experienced customers tend to
demands on the supplier (e.g, less make fewer mistakes when
need for information and involved in operational processes
assistance and more use of self- → greater productivity and lower
service options) → reduce extra costs;
customer service costs;

Lower price sensitivity allows a

Positive word-of-mouth price premium (customers who
recommendations → free sales trust a supplier may be more
and advertising; willing to pay higher prices at peak
periods or for express work)
 Customer loyalty

• Being a Loyal Customer…

Benefits?
 • Loyalty drivers:
• Confidence benefits
Customer • Social benefits
loyalty • Special treatment benefits
Customer loyalty
• Marketing strategy: the potential profitability of a customer should be a key driver;

• Analysis “The Gap between the actual and potential value of customers”

• WHAT is the current purchasing behavior of customers?

• WHAT would be the impact on sales and profits if they exhibited the ideal behavior
profile of (1) buying all services offered by the firm, (2) using these to the exclusion of
any purchases from competitors, and (3) paying full prices;
• HOW LONG, on average, do customers remain with the firm?

• The active management of the customer base and customer loyalty is referred to as
“Customer Asset Management”
CASE STUDY: Customer Asset Management at DHL in Asia
The Wheel of Loyalty
The Wheel of Loyalty
1) Building a foundation for Loyalty

• Target the right customers: segment the market to match customer needs and firm
capabilities;

• Search for value, not just volume: be selective in customer acquisition (acquire customers
who fit the core value proposition);

• Manage the customer base via effective tiering of service: a strategic approach to retaining,
upgrading, and even ending relationships with customers

• Deliver quality service: customer satisfaction and service quality are prerequisites for
Loyalty.
The Customer Pyramid

• Platinum: form a very small percentage of a firm’s customer base but are heavy
users and tend to contribute a large share of the profits. They are less price-
sensitive, but expect higher service levels in return and are willing to invest in and
try new services;

• Gold: a lager percentage of customers than the platinum tier, but individual
customers contribute less profit. They tend to be slightly more price sensitive and
less committed to the firm;
The Customer Pyramid
• Iron: the bulk of the customer base which gives the firm economies of
scale. They are important for a firm to build and maintain a certain capacity
level and infrastructure, which are often needed for serving gold and
platinum customers well. However, iron customers may only be marginally
profitable, not enough to justify special treatment;
• Lead: these customers tend to generate low revenues but often require the
same level of service as iron customers, sometimes turn into a loss-making
segment from the firm’s perspective.
The Customer Pyramid
→ The precise characteristics of customer tiers vary from one type of business to
another and even from one firm to another.
→ Customer tiers are typically based on profitability and service needs. Each
segment received a service level that is customized on the basis of its requirements
and its value to the firm
→ Marketing efforts can be used to encourage an increased volume of purchases,
upgrade the type of service used, or cross-sell additional services to any of the four
tiers.
The Wheel of Loyalty

2) Strategies for developing loyalty bonds with customers

• Deepen the relationship via cross-selling and bundling;

• Encourage loyalty through financial and non-financial rewards based on the

frequency of purchase, the value of purchase, or both;

• Build higher-level bonds: social bonds; customization; structural bonds (B2B)

Financial Rewards vs Non-Financial Rewards
Financial rewards “Hard benefits”: discounts on purchases, loyalty program rewards (such
as frequent flier miles), cash-back programs.
Financial rewards can sometimes frustrate customers and breed dissatisfaction instead of
creating loyalty and goodwill if:
• Customers feel they are excluded from the program;

• The rewards are seen as having little or no value;

• Customers cannot redeem their loyalty points;

• Redemption process is too troublesome and time-consuming.

Financial Rewards vs Non-Financial Rewards
Non-financial rewards “Soft-benefits”: non-monetary terms such as exclusive rights or special
treatments;

• Important intangible rewards include special recognition and appreciation. Customers tend to
value the extra attention given to their needs and appreciate the efforts to meet their occasional
special requests.

• Non-financial rewards, especially if linked to higher-tier service levels, are typically more powerful
than financial ones as the former can create tremendous value for customers.

• Unlike financial rewards, non-financial rewards directly relate to the firm’s core service and
improve the customer’s experience and value perception.
The Wheel of Loyalty
3) Strategies for reducing customer defections/customer churns
- Analyzing customer defections and monitoring declining accounts to understand the
reasons for customer switching. Some commons:
• Core service failure (44%)
• Dissatisfactory service encounters (34%)
• High, deceptive, or unfair pricing (30%)
• Inconvenience in terms of time, location, or delays (21%)
• Poor response to service failure (17%)

- Address key churn drivers: delivering quality service; minimizing inconvenience and other
non-monetary costs; having fair and transparent pricing
The Wheel of Loyalty
3) Strategies for reducing customer defections/customer churns

- Implement effective complaint handling and service recovery procedures

- Increasing switching costs:

• Hard-lock-in: contractual penalties for switching (cell-phone service providers often

impose contractual penalties if a contract is canceled during a lock-in period)

• Soft-lock-in: focus on providing added value to customers through increased

convenience, customization and priority (positive switching costs)
Customer Relationship Management (CRM)

• CRM should be seen as enabling the successful implementation of the

Wheel of Loyalty

• Common objectives: CRM allows the firm to better understand, segment,

and tier its customer base; better target promotions and cross-selling, and
even implement churn alert systems.

• CRM Applications: data collection; data analysis; sales-force automation;

marketing automation; call-center automation
Customer Relationship Management (CRM)
A comprehensive CRM
CRM- Common failures in implementation
• Viewing CRM as a technology initiative: top management or marketing should take the lead in
devising the CRM strategy;

• Lack of customer focus: implement CRM without the ultimate goal of enhancing the service
value and enabling consistent service delivery;

• Insufficient appreciation of customer life-time value to fully assess the value of loyal customers;

• Inadequate support from top management: CRM strategy intent will not survive;

• Failing to re-engineer business processes as a customer-centric CRM;

• Underestimating the challenges in data integration: unlock the full potential of CRM to make
customer knowledge available in real time to all employees who need it.
How to get CRM implementation right?
Services firms should focus on clearly defined problems within their customer
relationship cycle to narrow down CRM strategy and implementation.

• How should the value proposition be changed 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 the share of wallet with
current customers? How much does this vary by customer tier/segment?

• How much time and resources can the firm allocate to CRM right now?
CRM Case study: MAILCHIMP
CRM Case study: MAILCHIMP
CRM Case study: GetResponse
 2.1 Customer complaints

2. Complaint
handling and 2.2 Effective service recovery

Service recovery
2.3 Service guarantees
Question ?

How do customers respond to service

failure?
Customer Complaints

Why do customers Who is most likely to

complain? complain?

Why don’t unhappy Where do customers

customers complain? complain?
Customer complaints

Obtain WHY ?
restitution or Vent anger
compensation

Help to
For altruistic
improve the
WHO ? service
reasons
Customer complaints

• It takes time and effort

• The payoff is uncertain Why not ?

• Complaining can be unpleasant

WHERE DO CUSTOMERS
COMPLAIN?
Customer expectation once a complaint is made
Effective Service Recovery

What is Service Recovery?

→ The systematic efforts made by the firm to correct a problem

following a service failure and retain a customer’s goodwill

→ The important role in achieving (or restoring) customer satisfaction

and loyalty

→ The true test of the firm’s commitment to service quality

Effective Service Recovery
Dissatisfied Customer Service Recovery Retention rate
Complain Not complain Un-solved Solved
v 9%
v v 19%
v v 54%

Service Recovery on Spot

→ Retention rate: 82%
Principle of Effective Service Recovery Systems

Make it easy for customers to provide feedback and reduce

customer complaint barriers

Enable effective service recovery: (1) proactive; (2) planned; (3)

trained; (4) empowered

Establish appropriate compensation levels

Dealing with Complaining Customers

• Act fast • Propose steps to solve the problem

• Acknowledge customer’s feelings • Consider compensation

• Don’t argue • Persevere to regain customer goodwill

• Show understanding • Improve the service system

• Clarify the facts • Keep the customer informed

• Give customer the benefits of the doubt

Tips
Service Guarantees

→ The promise that if service delivery fails to meet pre-defined standards, the
customer will be entitled to one or more forms of compensation (replacement,
refund, or credit)

→ Facilitation of effective service recovery

→ Institutionalization of the practice of learning from service failures

→ Ensuring subsequent system improvements

A promise
Service Guarantees → A power tool
• Guarantees force firms to focus on what their customers want and expect in each element
of the service
• Guarantees set clear standards, telling customers and employees alike what the company
stands for.
• Guarantees require the development of systems for generating meaningful customer
feedback and acting on it
• Guarantees force service organizations to understand why they fail and encourage them to
identify and overcome potential fail points
• Guarantees build “marketing muscle” by reducing the risk of the purchase decision and
building long-term loyalty
Service Guarantees → How to Design

1) Unconditional

2) Easy to understand and communicate

3) Meaningful to customer

4) Easy to invoke

5) Easy to collect on

6) Credible
Service Guarantees → Not always Beneficial

Confused

External Little
forces value

Costly
JAY Customers

The The
The Cheat The Thief
Rulebreaker Belligerent

The Family The

The Vandal
Feuders Deadbeat