CHAPTER 12

Managing
Relationships and
Building Loyalty

BAUTISTA|DURAN|MAMBA|OCAMPO|OSTONAL

Search for
Customer
Loyalty

2
Wheel of
Loyalty

Building a
Foundation
for Loyalty

CRM System

OVERVIEW
Strategies for
Reducing
Customer
Defections

Strategies for
Developing Loyalty
Bonds with Customer

SEARCH FOR
CUSTOMER
LOYALTY

HOW MUCH PROFIT A

CUSTOMER
GENERATES OVER
TIME (Fig. 12.3)

WHY IS CUSTOMER LOYALTY IMPORTANT TO A

FIRMS PROFITABILITY
Customers become more profitable the longer they remain with a firm:
Increase purchases and/or account balances
Customers / families purchase in greater quantities as they grow
Reduced operating costs
Fewer demands from suppliers and operating mistakes as customer becomes
experienced
Referrals to other customers
Positive word-of-mouth saves firm from investing money in sales and advertising
Price premiums
Long-term customers willing to pay regular price
Willing to pay higher price during peak periods

WHY CUSTOMER ARE MORE

PROFITABLE OVER TIME

ASSESING THE VALUE OF A LOYAL

CUSTOMER
Must not assume that loyal customers are always more profitable than those
making one-time transactions
Large customers may expect price discounts in return for loyalty
Revenues dont necessarily increase with time for all types of customers
Tasks:
Determine costs and revenues for customers from different market
segments at different points in their customer lifecycles
Predict future profitability

MEASURING CUSTOMER EQUITY: LIFETIME VALUE OF

EACH CUSTOMER

Acquisition revenues less costs

Revenues (application fee + initial purchase)
Costs (marketing +credit check + account set up)

Projected annual revenues and costs

Revenues (annual fee + sales + service fees + value of referrals)
Costs (account management + cost of sales + write-offs)

Value of referrals
Percentage of customers influenced by other customers
Other marketing activities that drew the firm to an individuals attention

Net Present Value

Sum anticipated annual values (future profits)
Suitably discounted each year into the future

WHY ARE CUSTOMER LOYAL

Customers stay loyal when we create value for them. Value can be created for
customers through:
Confidence benefits
1. Confidence in correct performance
2. Ability to trust the provider
3. Lower anxiety when purchasing
4. Knowing what to expect and receive

WHY ARE CUSTOMER LOYAL

Social benefits
1. Mutual recognition and friendship between service provider
and customer
Special treatment
1. Better price
2. Discounts not available to most customer
3. Extra services
4. Higher priority when there is a wait

THE
WHEEL OF
LOYALTY

THE WHEEL OF
LOYALTY (Fig.
12.5)

BUILDING A
FOUNDATION
FOR LOYALTY

TARGETING THE RIGHT CUSTOMER AND

SEARCHING FOR VALUE, NOT VOLUME
Target the right customer and match them to what firm can deliver
1. How do customer needs relate to operations elements?
2. How well can service personnel meet expectations of different types of
customers?
3. Can company match or exceed competing services that are directed at
same types of customers?
Focus on number of customers served as well as value of each customer
1. Some customers more profitable than others in the short term
2. Others may have room for long-term growth
Right customers are not always high spenders
1. Can come from a large group of people that no other supplier is serving
well

EFFECTIVE TIERING OF SERVICE: THE

CUSTOMER PYRAMID

THE CUSTOMER SATISFACTION: LOYALTY

RELATIONSHIP

STRATEGIES FOR
DEVELOPING
LOYALTY BONDS
WITH CUSTOMER

STRATEGIES FOR DEVELOPING LOYALTY

BONDS WITH CUSTOMER
1. Deepening the relationship
Bundling/Cross-selling services makes switching a major effort that customer is
unwilling to go through unless extremely dissatisfied with service provider
Customers benefit from buying all their various services from the same provider. Onestop-shopping, potentially higher service levels, higher service tiers etc.
2. Reward Based Bonds
Can be financial or non-financial bonds or a combination of both
Financial bonds - Discounts on purchases, loyalty program rewards (e.g. frequent flier
miles), cash-back programs
Non-financial rewards - Priority to loyalty program members for waitlists and queues in
call centers; higher baggage allowances, priority upgrading, access to airport lounges
for frequent flyers
Intangible rewards - Special recognition and appreciation
Reward-based loyalty programs are relatively easy to copy and rarely provide a sustained
competitive advantage

STRATEGIES FOR DEVELOPING LOYALTY

BONDS WITH CUSTOMER
3. Social Bonds
Based on personal relationships between providers and customers
Harder to and takes a longer time to build, but also harder to imitate and thus, better
chance of retention in the long term
4. Customization Bonds
Customized service for loyal customers (e.g. Starbucks)
Customers may find it hard to adjust to another service provider who cannot customize
service

5. Structural Bonds
Mostly seen in B2B settings
Align customers way of doing things with suppliers own processes. Joint investments in
projects and sharing of information, processes and equipment.
Can be seen in B2C environment too. Airlines - SMS check-in, SMS email alerts for flight
arrival
and departure times
Difficult for competition to draw customers away when they have integrated their way of
doing things with existing supplier

STRATEGIES
FOR REDUCING
CUSTOMER
DEFECTIONS

ANALYZE CUSTOMER DEFECTIONS AND

MONITOR DECLINING ACCOUNTS

Understand reasons for customer switching

Churn Diagnostics common in mobile phone industry
Analysis of data warehouse information on churned and declining customers
Exit interviews:
Ask a short set of questions when customer cancels account; in-depth
interviews of former customers by third party agency

WHAT DRIVES CUSTOMER TO SWITCH

ADDRESS KEY CHURN DRIVERS

1.
2.
3.
4.

Deliver quality service

Reduce inconvenience and non-monetary costs
Have fair and transparent pricing
Industry specific drivers
Cellular phone industry: handset replacement a common reason for
subscribers discontinuing services offer handset replacement programs

5. Take active steps to retain customers

Save teams: specially trained call center staff to deal with customers who
want to cancel their accounts
Be careful about how save teams are rewarded

OTHER WAYS TO REDUCE CHURN

1. Implement Effective Complaint Handling and Service Recovery
Procedures
2. Increase Switching Costs
Natural switching costs (e.g. Changing primary bank account
many related services tied to account)
Can be created by 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 bad word of mouth

CRM:
CUSTOMER
RELATIONSHIP
MANAGEMENT
SYSTEM

COMMON OBJECTIVE OF CRM SYSTEM

1. Customer perspective
Unified customer interface that delivers customization and personalization
Vast service improvement and increase customer value
2. Company perspective
Better segment, tier customer base and target promotion
Implement churn alert systems if customers are in danger of defecting
3. Marketing automation
Mining of customer data enables the firm to target its market
Goal to achieve one-to-one marketing and cost savings, often in the context of loyalty
and retention programs
Results in increasing the ROI on its marketing expenditure
CRM systems also allows firms to judge effectiveness of marketing campaigns through
the analysis of responses
4. Call center automation
Call center staff have customer information at their finger tips and can improve their
service levels to all customers
Caller ID and account numbers allow call centers to identify the customer tier the caller
belongs to, and to tailor the service accordingly. For example, platinum callers get
priority in waiting loops.

COMMON APPLICATIONS OF CRM SYSTEM

1. Data collection
Customer data such as contact details, demographics,
purchasing history, service preferences, and the like
2. Data analysis
Data captured is analyzed and categorized
Used to tier customer base and tailor service delivery
accordingly
3. Sales force automation
Sales leads, cross-sell and up-sell opportunities can be
effectively identified and processed
Entire sales cycle from lead generation to close of sales and
after- sales service can be tracked and facilitated through CRM
system

COMPREHENSIVE CRM STRATEGY

Strategy
Developme
nt Process

Value
Creation
Process

Multichannel
Integration
Process

Information Management Process

Performanc
e
Assessmen
t Process

INTEGRATED FRAMEWORK FOR CRM STRATEGY

DEVELOPMENT

Strategy Development
Assessment of business strategy
Business strategy guides development
of customer strategy

INTEGRATED FRAMEWORK FOR CRM

STRATEGY:
VALUE CREATION

Value Creation
Translates business and customer strategies into
specific value propositions for both customers
and firm
Customers benefit from priority, tiered
services, loyalty rewards and customization
Company benefits from reduced customer
acquisition and retention costs, and increased
share-of-wallet
Dual creation of value: customers need to

INTEGRATED FRAMEWORK FOR CRM

STRATEGY:
MULTI-CHANNEL INTEGRATION

Multi-channel Integration

Serve customers well across

many potential interfaces
Offer a unified interface that
delivers customization and
personalization

INTEGRATED FRAMEWORK FOR CRM

STRATEGY:
PERFORMANCE ASSESSMENT

Performance Assessment

Is CRM system creating value for

key stakeholders?
Are marketing and service
standard objectives being
achieved?
Is CRM system meeting
performance standards?

INTEGRATED FRAMEWORK FOR CRM

STRATEGY:
INFORMATION MANAGEMENT

Information Management

Collect customer information from all

channels
Integrate it with other relevant
information
Make useful information available to
the frontline
Create and manage data repository, IT
systems, analytical tools, specific
application packages

COMMON FAILURES IN CRM IMPLEMENTATION

Unfortunately, there is a high failure rate for CRM implementations.
Common reasons for failures:
1. Viewing CRM as a technology Initiative
2. Lack of customer focus
3. Not enough understanding of customer lifetime value (CLV)
4. Inadequate support from top management
5. Lack of coordination
6. Failure to reengineer business processes
7. Underestimating the challenges in data integration

KEY ISSUES IN DEFINING A CUSTOMER

RELATIONSHIP STRATEGY
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 increase in profit from increasing share-of-wallet with
current customers? How much does this vary by customer tier and/or
segment?
How much time and resources can we provide to CRM right now?
If we believe in customer relationship management, why havent we
taken more steps in that direction in past?
What can we do today to develop customer relationships without
spending on technology?