TOPIC 5 PART 2:

Managing Customer
Relationships and
Building Loyalty

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 - 1
 The Search for Customer Loyalty

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 - 2
 Why Is Customer Loyalty Important to
a Firm’s 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

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 - 3
 Assessing the Value of a
Loyal Customer (1)

 Must not assume that loyal customers are always more

profitable than those making one-time transactions
 Costs
― Not all types of services incur heavy promotional
expenditures to attract a new customer
― Walk-in traffic more important at times

 Revenue
― Large customers may expect price discounts in return for
loyalty
― Revenues don’t necessarily increase with time for all types
of customers

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 - 4
 Assessing the Value of a
Loyal Customer (2)

 Profit impact of a customer varies according to stage of

service in product life cycle
 For example referrals and negative word-of-mouth have a
higher impact in early stages

 Tasks
 Determine costs and revenues for customers from different market
segments at different points in their customer lifecycles
 Predict future profitability

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 - 5
 Gap Between Actual and
Potential Customer Value

 What is current purchasing behavior of customers in

each target segment?
 What would be impact on sales and profits if they
exhibited 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?
 How long, on average, do customers remain with firm?
 What impact would it have if they remained customers
for life?

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 - 6
 Understanding the Customer-Firm
Relationship

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 - 7
 Relationship Marketing (1)

 Transactional Marketing
 One transaction or a series of transactions does not necessarily
constitute a relationship
 Requires mutual recognition and knowledge between the parties

 Database Marketing:
 Includes market transaction and information exchange
 Technology is used to
― (1) identify and build database of current and potential customers
― (2) deliver differentiated messages based on customers’
characteristics
― (3) track each relationship to monitor cost of acquiring that
customer and lifetime value of resulting purchases

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 - 8
 Relationship Marketing (2)

 Interaction Marketing:
 Face-to-face interaction between customers and supplier’s
representatives
 Increasing use of technologies make maintaining meaningful
relationships with customers a marketing challenge
― For example, self-service technology, interactive websites, call
centers

 Network Marketing:
 Common in b2b context where companies commit resources to
develop positions in network of relationships with stakeholders and
relevant agencies

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 - 9
 Building a Foundation for Loyalty

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 - 10
 Customer Needs and
Company Capabilities

 Identify and target the right customers

 How well can service personnel meet expectations of different

types of customers?
 Can company match or exceed competing services that are
directed at same types of customers?

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 - 11
 Searching for Value—Not Just
Volume

 Focus on number of customers served as well as value of

each customer
 Heavy users who buy more frequently and in larger volumes are
more profitable than occasional users
 Avoid targeting customers who buy based on lowest price

• Firms that are highly focused and selective in their

acquisition of customers grow faster
• “Right customers” are not always high spenders
 Can come from a large group of people that no other supplier is
serving well

• Different segments offer different value

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 - 12
 Creating Loyalty Bonds

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 - 13
 Strategies for Developing Loyalty
Bonds with Customers (1)
 Deepening the relationship
 Bundling/cross-selling services makes switching a major effort
that customer is unwilling to undertake unless extremely
dissatisfied with service provider
 Customers benefit from consolidating their purchasing of various
services from the same provider.

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 - 14
 Strategies for Developing Loyalty
Bonds with Customers (2)
 Reward-based Bonds
 Incentives that offer rewards based on frequency of purchase, value
of purchase, or 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, tiered loyalty programs
 Reward-based loyalty programs are relatively easy to copy and
rarely provide a sustained competitive advantage

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 - 15
 Strategies for Developing Loyalty
Bonds with Customers (3)

 Social Bonds
 Based on personal relationships between providers and customers
 Harder to build and imitate and thus, better chance of retention in
the long term

 Customization Bonds
 Customized service for loyal
customers
 Customers may find it hard to
adjust to another service
provider who cannot customize
service

Source: PAL Library; Asset ID: AAFHKTO0

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 - 16
 Strategies for Developing Loyalty
Bonds with Customers (4)

 Structural Bonds
 Mostly seen in b2b settings
 Stimulate loyalty through structural relationships between provider
and customer
― Joint investments in projects and sharing of information, processes
and equipment
 Can be seen in b2c environment too
― Airlines—SMS check-in, SMS e-mail 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

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 - 17
 Strategies for Reducing
Customer Defections

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 - 18
 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
 Churn Alert Systems:
― Monitor activity in individual customer accounts to predict
impending customer switching
― Proactive detention efforts—send voucher, customer service
representative calls customer

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 - 19
 What Drives Customers to Switch?
(Fig 12.9)
Service Failure/Recovery Value Proposition
Core Service Failure Pricing
• Service Mistakes • High Price
• Billing Errors • Price Increases
• Service Catastrophe • Unfair Pricing
Service • Deceptive Pricing
Service Encounter Failures
• Uncaring Switching Inconvenience
• Impolite • Location/Hours
• Unresponsive • Wait for Appointment
• Unknowledgeable • 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
Source: Adapted from Susan M. Keaveney, “Customer Switching Behavior in Service Industries: An Exploratory Study,” Journal of Marketing 59 (April 1995), pp. 71–82.
Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 - 20
 Addressing Key Churn Drivers

 Delivery quality
 Minimize inconvenience and nonmonetary costs
 Fair and transparent pricing
 Industry specific drivers
 Cellular phone industry: Handset replacement a common reason
for subscribers discontinuing services—offer proactive handset
replacement programs

 Reactive measures
 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

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 - 21
 Other Ways to Reduce Churn

 Implement effective complaint handling and

service recovery procedures
 Increase switching costs
 Natural switching costs
― For example, 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 word of mouth

Slide © 2007 by Christopher Lovelock and Jochen Wirtz Services Marketing 6/E Chapter 12 - 22