Love Lock 12

PRESENTATION ON
Managing Relationships and Building Loyalty
Slide 2004 by Christopher Lovelock and Jochen Wirtz
Services Marketing 5/E
12 - 1
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
12 - 2
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
Credit card
Year 2
Industrial laundry
Year 3
Year 4
Year 5
Auto servicing
Industrial distribution
Based on data from Reichheld and Sasser
12 - 3
Why is customer loyalty important to a firm profitability?

Profit derived from increased sale customers balances may grow may consolidate purchases to one supplier
Profit from reduced operating costs

less need for information and assistance make fewer mistakes
Profit from referrals to other person
Profit from price premium
12 - 4
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
7
Source: Reichheld and Sasser
Year
Slide 2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E
12 - 5
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

12 - 6
Customer-Firm Relationship
Todays 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.
12 - 7
Types of Relationships with Customers (Table 12.1)
Type of Relationship--Firm and Customer Nature of Service Delivery

Continuous Membership Cable TV Insurance College enrollment Subscriber phone Theater subscription Warranty repair No formal relationship Radio station Police Lighthouse Pay phone Movie theater Public transport
Discrete transactions
12 - 8
Identifying and Selecting Target Segments

(Mgt Memo 12.2)
User characteristics

demographics psychographics geographic location benefits sought

when, where, how services used quantity/value of purchases frequency of use profitability of relationship sensitivity to marketing variables
User behavior

12 - 9
The Customer Pyramid (Fig. 12.5)

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?
12 - 10
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 firms best service level
Social benefits
mutual recognition, known by name friendship, enjoyment of social aspects
Special treatment benefits

better prices, discounts, special deals unavailable to others extra services higher priority with waits, faster service
12 - 11
The Customer Satisfaction-Loyalty Relationship

(Fig. 12.6)
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
12 - 12
The Wheel of Loyalty (Fig. 12.7)

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
12 - 13
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
12 - 14
Drivers of Service Switching (Fig. 12.9)

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
Unsafe Cheat Hard Sell Conflict of Interest
12 - 15
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 Marketing automation Call center automation
12 - 16
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?
12 - 17

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PRESENTATION ON

Managing Relationships and Building Loyalty

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

Four Stages of Brand Loyalty in a Consumer

Cognitive loyalty perception from brand attribute

Affective loyalty developing a liking for the brand based

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

Based on data from Reichheld and Sasser

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

Why is customer loyalty important to a firm profitability?

Profit from reduced operating costs

Profit from referrals to other person

Profit from price premium

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

Profit from references

Measuring Customer Equity: Calculating Life Time Value of Each Customer

Annual Value (project for each year of relationship)

Net Present Value

Customer Equity is total sum of NPVs of all current customers

Database Marketing: Involves the use of technology by

Interaction Marketing: Usually in B2B context where people and

Network Marketing: Common in B2B context where companies

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

Types of Relationships with Customers (Table 12.1)

Type of Relationship--Firm and Customer Nature of Service Delivery

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

Identifying and Selecting Target Segments

demographics psychographics geographic location benefits sought

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

The Customer Pyramid (Fig. 12.5)

Platinum Gold Iron Lead

Services Marketing 5/E

Special treatment benefits

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

The Customer Satisfaction-Loyalty Relationship

Zone of Indifference Zone of Defection

Neither satisfied Dissatisfied Satisfied nor dissatisfied

The Wheel of Loyalty (Fig. 12.7)

1. Build a Foundation for Loyalty

Address key churn drivers

Implement complaint handling & service recovery Increase switching costs

Deliver quality service.

Build higher level bonds

2. Create Loyalty Bonds

Deepen the relationship

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

Bonus air miles

Slide 2004 by Christopher Lovelock and Jochen Wirtz

Services Marketing 5/E

Drivers of Service Switching (Fig. 12.9)

Service Encounter Failures

Response to Service Failure

Services Marketing 5/E

Common CRM Applications (Mgt Memo 12.2)