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Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 1 Chapter 12 Managing Relationships and Building Loyalty.

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Presentation on theme: "Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 1 Chapter 12 Managing Relationships and Building Loyalty."— Presentation transcript:

1 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Chapter 12 Managing Relationships and Building Loyalty

2 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 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 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Loyalty is Important to Profitability : Index of Customer Profits over Time (Fig. 12.1) Credit cardIndustrial laundryIndustrial distributionAuto servicing 0 (Year 1=100) – Year 1Year 2Year 3Year 4Year 5 Based on data from Reichheld and Sasser

4 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 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 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Analyzing Why Customers Are More Profitable over Time (Fig. 12.2) Year Profit from price premium Profit from references Profit from reduced op. costs Profit from increased usage Base Profit Source: Reichheld and Sasser

6 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 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 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Customer-Firm Relationship  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. Today’s marketers seek to develop long-term relationships with customers. Relationship marketing includes:

8 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 “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 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 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 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 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 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 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 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Portfolio of Professional Assignments (Fig. 12.4) Analytical Work on Project Data “Bread and Butter” Projects Significant Projects “Pacesetters” Major, State-of-the-art challenges for the firm’s principals that give the firm high visibility Major, State-of-the-art challenges for the firm’s principals that give the firm high visibility Demanding client assignments offering a learning experience for the firm’s most experienced associates Routine client projects shared among principals and associates Routine client projects shared among principals and associates Entry-level tasks for new associates or for research assistants & paraprofessionals Entry-level tasks for new associates or for research assistants & paraprofessionals

13 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E The Customer Pyramid (Fig. 12.5) Lead Iron Gold 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? Platinum Good Relationship Customers Poor Relationship Customers

14 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 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  better prices, discounts, special deals unavailable to others  extra services  higher priority with waits, faster service

15 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E The Customer Satisfaction-Loyalty Relationship (Fig. 12.6) Loyalty (Retention) Very dissatisfied Dissatisfied Neither satisfied nor dissatisfied Satisfied Very Satisfied Satisfaction Near Apostle Zone of Defection Zone of Indifference Zone of Affection Terrorist Apostle

16 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E The Wheel of Loyalty (Fig. 12.7) 1. Build a Foundation for Loyalty 2. Create Loyalty Bonds 3. Reduce Churn Drivers Customer Loyalty  Be selective in acquisition  Conduct churn diagnostic  Segment the market  Use effective tiering of service.  Deliver quality service.  Deepen the relationship  Give loyalty rewards  Build higher level bonds  Implement complaint handling & service recovery  Address key churn drivers  Increase switching costs Enabled through:  Frontline staff  Account managers  Membership programs  CRM Systems

17 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 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 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E Drivers of Service Switching (Fig. 12.9) Service Switching Service Encounter Failures Uncaring Impolite Unresponsive Unknowledgeable Response to Service Failure Negative Response No Response Reluctant Response Pricing High Price Price Increases Unfair Pricing Deceptive Pricing Inconvenience Location/Hours Wait for Appointment Wait for Service Competition Found Better Service Ethical Problems Cheat Hard Sell Involuntary Switching Customer Moved Provider Closed Value Proposition Others Service Failure / Recovery Core Service Failure Service Mistakes Billing Errors Service Catastrophe Unsafe Conflict of Interest

19 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 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

20 Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 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?


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