Managing Relationships and Building Loyalty

1. Chapter 12
Managing Relationships
and Building Loyalty

2. Four Stages of Brand Loyalty in a
Consumer
• Cognitive loyalty – perception from brand
attribute information that one brand is preferable
to its alternatives
• Affective loyalty – developing a liking for the
brand based on cumulatively satisfying usage
occasions
• Conative loyalty – commitment to rebuying the
same brand
• Action loyalty – exhibiting consistent repurchase
behavior

3. Loyalty is Important to Profitability :
Index of Customer Profits over Time (Fig.
12.1)
(Year 1=100)
350 –
300
250
200
150
100
50
0
Year 1 Year 2 Year 3 Year 4 Year 5
Credit card Industrial laundry Industrial distribution Auto servicing
Based on data from Reichheld and Sasser

4. What Makes Loyal Customers More
Profitable?
• Tend to spend more as relationship develops
– customer’s 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

5. Analyzing Why Customers Are More
Profitable over Time (Fig. 12.2)
Profit from price
premium
Profit from references
Profit from reduced
op. costs
Profit from increased
usage
Base Profit
1 2 3 4 5 6 7
Year Source: Reichheld and Sasser

6. Measuring Customer Equity:
Calculating Life Time Value of 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 + service fees + value of referrals)
– Less costs (account management + cost of sales + write-offs)
• Net Present Value
– Determine anticipated customer relationship lifetime
– Select appropriate discount figure
– Sum anticipated annual values (future profits) at chosen discount
rate
• Customer Equity is total sum of NPVs of all current customers

7. Customer-Firm Relationship
Today’s marketers seek to develop long-term relationships
with customers. Relationship marketing includes:
• Database Marketing: Involves the use of technology by delivering
differentiated service levels to consumers and subsequently tracking
the relationship.
• Interaction Marketing: Usually in B2B context where people and the
social process also add mutually beneficial value.
• Network Marketing: Common in B2B context where companies
commit resources to develop positions in a network of relationships
with the stakeholders and relevant agencies.

8. Types of Relationships with Customers
(Table 12.1)
Type of Relationship--Firm and
Customer
Nature of
Service 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

9. Basic Segmentation Issues:
Building an Appropriate Customer
Portfolio
• Target customers whose needs match firm’s
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

10. 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

11. Identifying and Selecting Target
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 marketing variables

12. Portfolio of Professional
Assignments (Fig. 12.4)
Major, State-of-the-art challenges for the firm’s
principals that give the firm high visibility
Demanding client assignments offering a
“Pacesetters” learning experience for the firm’s most
experienced associates
Significant Projects Routine client projects shared
among principals and associates
“Bread and Butter” Projects
Entry-level tasks for new
associates or for research
assistants & paraprofessionals
Analytical Work on Project Data

13. The Customer Pyramid (Fig. 12.5)
Good Relationship
Customers
Which segment sees high value in
our offer, spends more with us over
Platinum time, costs less to maintain, and
spreads positive word-of-mouth?
Gold
Which segment costs us in time,
Iron
effort and money, yet does not
provide the return we want?
Which segment is difficult to do
Lead business with?
Poor Relationship
Customers

14. How Customers See 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 firm’s best service level
• Social benefits
– mutual recognition, known by name
– friendship, enjoyment of social aspects
• Special treatment benefits

15. The Customer Satisfaction-Loyalty
Relationship (Fig. 12.6)
Apostle
100
Zone of Affection
80
Loyalty (Retention)
Near Apostle
60 Zone of Indifference
40 Zone of Defection
20
Terrorist 0
1 2 3 4 5
Very Neither Very
dissatisfied Dissatisfied satisfied Satisfied Satisfied
nor dissatisfied
Satisfaction

16. The Wheel of Loyalty (Fig. 12.7)
3. Reduce 1. Build a
Churn Drivers Foundation
for Loyalty
Conduct churn diagnostic
Segment the market
Address key churn drivers
Be selective in acquisition
Enabled through: Implement complaint
handling & service Use effective tiering of
 Frontline staff
recovery Customer service.
 Account
managers Increase switching Loyalty Deliver quality
 Membership costs service.
programs
 CRM
Systems 2. Create Loyalty
Bonds
Build higher level Deepen the
bonds relationship
Give loyalty
rewards

17. Rewarding Value of Use, Not Just
Frequency at British Airways (Best Practice
in Action 12.2)
 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

18. Drivers of Service Switching (Fig. 12.9)
Service Failure / Recovery Value Proposition
Core Service Failure
• Service Mistakes
Pricing
• Billing Errors • High Price
• Service Catastrophe • Price Increases
• Unfair Pricing
Service Encounter Failures • Deceptive Pricing
• Uncaring Service Inconvenience
• Impolite
• Unresponsive Switching • Location/Hours
• Unknowledgeable • Wait for Appointment
• Wait for Service
Response to Service Failure
• Negative Response Competition
• No Response • Found Better Service
• Reluctant Response
Others
Involuntary Switching Ethical Problems
• Customer Moved • Cheat • Unsafe
• Provider Closed • Hard Sell • Conflict of Interest

19. Common CRM Applications (Mgt Memo
12.2)
• 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 collection
– Data analysis
– Sales force automation

20. 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?