McGraw-Hill/Irwin ©2003. The McGraw-Hill Companies. All Rights Reserved Chapter 6 Building Customer Relationships Relationship Marketing Relationship Value of Customers Foundations for Relationship Strategies The Customer Isn’t Always Right Customer Profitability Segments Levels of Relationship Strategies

McGraw-Hill/Irwin ©2003. The McGraw-Hill Companies. All Rights Reserved Objectives for Chapter 6: Building Customer Relationships Explain relationship marketing, its goals, and the benefits of long-term relationships for firms and customers. Explain why and how to estimate customer lifetime value. Specify the foundations for successful relationship marketing--quality core services and careful market segmentation. Provide you with examples of successful customer retention strategies. Introduce the idea that “the customer isn’t always right.”

McGraw-Hill/Irwin ©2003. The McGraw-Hill Companies. All Rights Reserved Relationship Marketing is a philosophy of doing business that focuses on keeping current customers and improving relationships with them does not necessarily emphasize acquiring new customers is usually cheaper (for the firm) –keeping a current customer costs less than attracting a new one thus, the focus is less on attraction, and more on retention and enhancement of customer relationships

McGraw-Hill/Irwin ©2003. The McGraw-Hill Companies. All Rights Reserved Figure 6.1 Customer Goals of Relationship Marketing

McGraw-Hill/Irwin ©2003. The McGraw-Hill Companies. All Rights Reserved Figure 6.2 Profit Generated by a Customer Over Time

McGraw-Hill/Irwin ©2003. The McGraw-Hill Companies. All Rights Reserved Figure 6.3 Profit Impact of 5 Percent Increase in Retention Rate

McGraw-Hill/Irwin ©2003. The McGraw-Hill Companies. All Rights Reserved Table 6.1 Lifetime Value of an Average Business Customer at Telecheck International, Inc.

McGraw-Hill/Irwin ©2003. The McGraw-Hill Companies. All Rights Reserved A Loyal Customer is One Who... Shows Behavioral Commitment –buys from only one supplier, even though other options exist –increasingly buys more and more from a particular supplier –provides constructive feedback/suggestions Exhibits Psychological Commitment –wouldn’t consider terminating the relationship--psychological commitment –has a positive attitude about the provider –says good things about the provider

McGraw-Hill/Irwin ©2003. The McGraw-Hill Companies. All Rights Reserved Customer Loyalty Exercise Think of a service provider you are loyal to. What do you do (your behaviors, actions, feelings) that indicates you are loyal? Why are you loyal to this provider?

McGraw-Hill/Irwin ©2003. The McGraw-Hill Companies. All Rights Reserved Underlying Logic of Customer Retention Benefits to the Organization Customer Retention & Increased Profits Employee Loyalty Quality Service Customer Satisfaction

McGraw-Hill/Irwin ©2003. The McGraw-Hill Companies. All Rights Reserved Benefits to the Organization of Customer Loyalty loyal customers tend to spend more with the organization over time on average costs of relationship maintenance are lower than new customer costs employee retention is more likely with a stable customer base lifetime value of a customer can be very high

McGraw-Hill/Irwin ©2003. The McGraw-Hill Companies. All Rights Reserved Benefits to the Customer inherent benefits in getting good value economic, social, and continuity benefits –contribution to sense of well-being and quality of life and other psychological benefits –avoidance of change –simplified decision making –social support and friendships –special deals

McGraw-Hill/Irwin ©2003. The McGraw-Hill Companies. All Rights Reserved “The Customer Isn’t Always Right” Not all customers are good relationship customers: –wrong segment –not profitable in the long term –difficult customers

McGraw-Hill/Irwin ©2003. The McGraw-Hill Companies. All Rights Reserved Figure 6.4 Steps in Market Segmentation and Targeting for Services Identify Bases for Segmenting the Market STEP 1: Develop Profiles of Resulting Segments STEP 2: Develop Measures of Segment Attractive- ness STEP 3: Select the Target Segments STEP4: Ensure that Segments Are Compatible STEP 5:

McGraw-Hill/Irwin ©2003. The McGraw-Hill Companies. All Rights Reserved Strategies for Building Relationships Foundations: –Excellent Quality/Value –Careful Segmentation Bonding Strategies: –Financial Bonds –Social & Psychological Bonds –Structural Bonds –Customization Bonds Relationship Strategies Wheel

McGraw-Hill/Irwin ©2003. The McGraw-Hill Companies. All Rights Reserved Most Profitable Customers Least Profitable Customers What segment spends more with us over time, costs less to maintain, spreads positive word of mouth? What segment costs us in time, effort and money yet does not provide the return we want? What segment is difficult to do business with? Other Customers Best Customers Figure 6.5 The “80/20” Customer Pyramid

McGraw-Hill/Irwin ©2003. The McGraw-Hill Companies. All Rights Reserved Most Profitable Customers Least Profitable Customers What segment spends more with us over time, costs less to maintain, spreads positive word of mouth? What segment costs us in time, effort and money yet does not provide the return we want? What segment is difficult to do business with? Gold Iron Lead Platinum Figure 6.6 The Expanded Customer Pyramid

McGraw-Hill/Irwin ©2003. The McGraw-Hill Companies. All Rights Reserved Excellent Quality and Value I. Financial Bonds II. Social Bonds IV. Structural Bonds III. Customization Bonds Volume and Frequency Rewards Bundling and Cross Selling Stable Pricing Social Bonds Among Customers Personal Relationships Continuous Relationships Customer Intimacy Mass Customization Anticipation/ Innovation Shared Processes and Equipment Joint Investments Integrated Information Systems Figure 6.7 Levels of Retention Strategies