Services Marketing:
People, Technology, Strategy
CHAPTER 12
Managing Relationships And Building
Loyalty
Professor: Dr. Vu Hoang Linh, Ph.D.
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Learning Objectives
• Recognize the important role customer loyalty plays in
driving a service firm’s profitability.
• Calculate the lifetime value (LTV) of a loyal customer.
• Understand why customers are loyal to a service firm.
• Know core strategies of the Wheel of Loyalty that explains
how to develop a loyal customer base.
• Appreciate importance to target “right” customers.
• Use service tiering to manage customer base and build
loyalty.
• Understand relationship between customer satisfaction and
loyalty.
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Learning Objectives
• Know how to deepen relationship through cross-selling and
bundling.
• Understand role of financial and non-financial loyalty
rewards in enhancing customer loyalty.
• Appreciate power of social, customized, and structural
bonds in enhancing loyalty. Understand what factors cause
customers to switch and how to reduce such switching.
• Know why loyalty programs and CRM systems are important
enablers of delivering loyalty strategies.
• Understand part played by CRM systems in delivering
customized services and building loyalty.
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The Search For Customer Loyalty
• Targeting, acquiring and retaining “right”
customers is at core of many successful service
firms.
• Customer loyalty extends beyond purchasing
behavior, and includes preferences, liking and
future intentions.
• Objective is to build relationships and to develop
loyal customers who will contribute to the
growing volume of firm’s business in future.
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Managing
Relationships
And Building
Loyalty
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Why Customer Loyalty Is Important
For A Firm’s Profitability
Figure 12.2 How much profit a customer generates over time 6
Factors That Work To Create
Incremental Profits
• Profit derived from increased purchases
• Profit from reduced customer service costs
• Profit from referrals to other customers
• Profit from lower price sensitivity that allow
a price premium
• Acquisition costs can be amortized over a
longer period
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Customers Are Profitable Over Time
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Assessing The Value Of A Loyal
Customer
• Challenging task of determining costs and revenues
associated with serving customers in different market
segments at different points of customer lifecycles
• Profit impact of a customer may vary dramatically
depending on the stage of service product lifecycle.
• Cannot assume loyal customers are always more
profitable than those who make one-time transactions.
• Profits do not necessarily increase with time for all
types of customers.
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The Gap Between Actual And
Potential Customer Value
An analysis of the gaps between the actual and potential
value of customers is needed (Grant and Schlesinger):
• What is the current purchasing behavior of customers in each target
segment?
• 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
(3) paying full price
• On an average, how long do customers remain with the firm?
• What impact would it have if they remained customers for life?
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Why are customers loyal?
• Service firms need to create value for
customers to become and remain loyal.
• Relationships can create value for
individual consumers through factors
such as inspiring greater confidence,
offering social benefits and providing
special treatment.
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The Wheel Of Loyalty
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Building A Foundation For Loyalty
• Target the right customers
– To be selective about the segments they target if
they want to build successful customer
relationships.
• Search for value, not just volume
– Marketing is about getting better business, not
just more business.
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Building A Foundation For Loyalty
• Manage the customer base through
effective tiering of service
– Zeithaml, Rust, and Lemon illustrate this principle
through a four-level pyramid
• Customer satisfaction and service quality
are prerequisites for loyalty
– The satisfaction-loyalty relationship can be divided
into three main zones: defection, indifference and
affection.
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The Customer Pyramid
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Customer Satisfaction And Service Quality
As Prerequisites For Loyalty
Figure 12.8 The customer satisfaction-loyalty relationship 16
Strategies For Developing Loyalty
Bonds With Customers
Strategies for developing loyalty bonds with
customers:
1. Deepen the relationship through cross-
selling and bundling
2. Create loyalty rewards
3. Build higher level bonds such as social,
customized and structural bonds.
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1. Deepen The Relationship
• Firms can deepen relationship through
bundling and/or cross-selling services
• Switching becomes a major exercise and is
unlikely, unless customers are extremely
dissatisfied
• When enjoying many services of the same
firm, the customer may achieve a higher
service tier and receive better services
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2. Create Loyalty Rewards
Encourage customer loyalty through Financial and
Non-financial rewards
1. Financial rewards
- customer incentives with financial value; “hard
benefits”
- e.g., discounts on purchases, loyalty program
rewards such as frequent flier miles, and cash-back
programs provided by credit card companies
2. Non-financial rewards
- provide benefits that cannot be translated directly
into monetary terms; “soft benefits”
- e.g., giving priority to loyalty program members on
reservation waitlists and virtual queues in call centers
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3. Build Higher-level Bonds
Three main types:
• Social Bonds
Social bonds and related personalization of
service are based on personal relationships
between providers and customers; are more
difficult to build than financial bonds
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3. Build Higher-level Bonds
• Customization Bonds
Built when service provider succeeds in
providing customized service to its loyal
customers
Firms offering customized service are likely
to have more loyal customers
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3. Build Higher-level Bonds
• Structural Bonds
Frequently seen in B2B settings
Created by getting customers to align their
way of doing things with the supplier’s
processes and linking customer to firm
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Strategies For Reducing Customer
Defections
Analyze customer defections and monitor
declining accounts
• Reasons for customer defection (Susan
Keveaney)
• E.g. core service failures; dissatisfactory
service encounters; high, deceptive or unfair
pricing; inconvenience in terms of time,
location, or delays and poor response to
service failure
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Strategies For Reducing Customer
Defections
• Address key churn drivers
• By delivering quality service, minimizing
inconvenience and other non-monetary costs,
and having fair and transparent pricing.
• Implement effective complaint handling and
service recovery procedures
• Increase switching costs
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What Drives Customers to Switch
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Enablers Of Customer Loyalty
Strategies
Customer Loyalty in a Transactional Marketing
Context
– Focus mostly on the foundation strategies of
the Wheel of Loyalty, such as segmenting the
market and matching customer needs with
firm capabilities, and delivering high service
quality
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Enablers Of Customer
Loyalty Strategies
• Relationship Marketing Context
– Both the firm and the customer have an
interest in a deeper engagement, and higher
value-added exchange.
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Enablers Of Customer
Loyalty Strategies
Creating “Membership-type”
Relationships as Enablers for Loyalty
Strategies
– A membership relationship is a formalized
relationship between the firm and an
identifiable customer, which often provides
special benefits to both parties.
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Relationships with Customers
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Customer Relationship Management
Figure 12.13 An integrated framework for CRM strategy 30
Five Key Processes Involved In A
CRM Strategy
1. Strategy development
– Involves assessment of business strategy, including
articulation of company’s vision, industry trends and
competition
2. Value creation
– Translates business and customer strategies into
specific value propositions for customers and firm
3. Multi-channel integration
– Serving customers well across multitude of channels,
while offering unified customer interface that delivers
customization and personalization.
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Five Key Processes Involved In A
CRM Strategy
4. Information management
– Collecting customer information from all channels,
integrating with other relevant information, and
making relevant information available to frontline
at various touch points.
5. Performance assessment
– Assessing performance of CRM to check if pre-
determined goals are achieved.
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Common Failures In CRM
Implementation
• Viewing CRM as a technology initiative
• Lack of customer focus
• Insufficient appreciation of customer lifetime
value (LTV)
• Inadequate support from top management
• Failing to reengineer business processes
• Underestimating the challenges in data
integration
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Getting CRM Implementation Right
• CRM is becoming a basic building block in
corporate success.
• Service firms should focus on clearly
defined problems within their customer
relationship cycle.
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Enhancing Supplementary Services
The key issues with implementing CRM:
– 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 the share-of-wallet with current
customers? How much does this vary with regard
to customer tier and/or segment?
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Enhancing Supplementary Services
– How much time and resources can we allocate
to CRM at present?
– If we believe in customer relationship
management, why have we not taken more
steps in that direction in the past? What can
we do today to develop customer relationships
without spending a lot on technology?
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