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Services Marketing - Customer Relationship Marketing

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The development of deep, enduring relationships with all the people or firms involved directly or indirectly in the firm’s marketing activities is appearing as a key goal of marketing. This is the …

The development of deep, enduring relationships with all the people or firms involved directly or indirectly in the firm’s marketing activities is appearing as a key goal of marketing. This is the concept of Relationship marketing – it aims at building mutually satisfying long-term relationships with the key partners like customers, financiers, suppliers, distributors and of course the stakeholders, in order to earn and retain their business. It also builds strong economic, technical and social binding amongst the partners. There are four key constituents of marketing as given below :
1. The Customers,
2. The Employees,
3. The Marketing Partners : Channels, Suppliers, Distributors, Dealers, Retailers, Agencies, etc.
4. The Financial Community : Shareholders, Stakeholders, Financiers, Investors, Analysts, etc.
5. Another key constituent is the Society : Well-wishers, Research Scholars, Scientists, Professors, Environmentalists.
The ultimate goal of relationship marketing is the building of a unique company asset called a “marketing network”, which consists of the company and its supporting stakeholders as listed above with whom it has built manual profit relationships. Interestingly, today, the competition is not between companies as such, but between the carefully built marketing relationship networks – whoever has a better network, wins. So the principle is simple – build an effective network, and the profits will follow automatically.

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  • 1. Chapter – 8 CUSTOMER RETENTION AND CUSTOMER RELATIONSHIP MARKETING By Himansu S M / 02-Aug-2012
  • 2. The relationship value of a customer is generally referred to as the lifetime revenue and / or the profits / profitability contribution by a customer to a company. This calculation is critically essential for the firm to plan to build a long-term relationship with their customers. 28/2/2013 © Himansu S M
  • 3. Relationship Value of Customers  This has three basic parts :  To estimate the potential financial value of those long-term relationships,  Also, what are the financial implications of loosing a customer,  And what are the cost involved to keep the customer loyal to the company. 38/2/2013 © Himansu S M
  • 4. FACTORS THAT INFLUENCE RELATIONSHIP VALUE  The lifetime or the relationship value of a customer is influenced by :  The length of an average lifetime,  The average revenue generated per relevant time period over the lifetime,  Sales of additional products and services over tome,  The referrals generated by the customer over time,  And finally the costs associated with serving the 48/2/2013 © Himansu S M
  • 5. FACTORS THAT INFLUENCE RELATIONSHIP VALUE  Lifetime value sometime refers to only the revenue generated for the life of the customer.  But more appropriately, when the costs are taken into account, then the "Lifetime Value" means "Lifetime Profitability". 58/2/2013 © Himansu S M
  • 6. IMPORTANCE OF CUSTOMER LOYALTY TO A FIRM'S PROFITABILITY  Researchers Reichheld and Sasser, found out in their classic study about the profit per customer in various service business that, the longer customers remained with the firm, the more profitable they become to serve.  The researchers say that underlying this profit of growth, there are FOUR factors working to the suppliers' profit. They are : 68/2/2013 © Himansu S M
  • 7. 1. Profit derived from increased purchases  (Ex. : Credit Card Balance). Customers normally decide to consolidate their purchases from a single source who provide high-quality service.  Business customers grow over time, and hence their need also increases for the greater purchase.  Individual customers also purchase more as their family grows or they become more affluent. 78/2/2013 © Himansu S M
  • 8. 2. Profit From Reduced Operating Costs  As the customers become more experienced, they make less demand on the supplier. (Ex. : Less need for information and assistance).  They are likely to make lesser mistakes in operational process thus contributing to higher productivity. 88/2/2013 © Himansu S M
  • 9. 3. Profit From Referrals To Other Customers  Satisfied and loyal customers mostly have positive word-of-mouth recommendations, which are free of any sales and advertising or any capital cost for the companies. 98/2/2013 © Himansu S M
  • 10. 4. Profit From Price Premium  Often new customer benefit from promotional discounts. These are not for the regular customers. Also regular customers who trust a supplier may be more willing to pay higher prices at peak periods or express work.  However, assuming that loyal customers are always more profitable than those making one-time transaction, is a risky mistake, as given below : 108/2/2013 © Himansu S M
  • 11. 4. Profit From Price Premium  Regarding Cost : Not all type of services incur heavy promotional expenditure to attract a new customer. Sometimes it's more important to invest in a good retail location that will attract walk-in traffic.  Regarding Revenue : Loyal customers may not necessarily spend more than the one- time buyers, and they may also expect price discounts. So ultimately, the revenue doesn't go up for all type of customers. 118/2/2013 © Himansu S M
  • 12. 4. Profit From Price Premium  Related to Product Life-cycle : Researches show that the profit impact of a customer vary dramatically, depending on the stage of product life cycle. (Introduction, Growth, Maturity & Decline)  Ex. : The referrals of satisfied customers and negative word-of-mouth of defected customers have a much higher profit impact on early rather than later stages of product life cycle. 128/2/2013 © Himansu S M
  • 13. ESTIMATING CUSTOMER LIFETIME VALUE & CUSTOMER EQUITY  It's very important to know the real cost of loosing a customer and also to retain a customer, so that the company can accurately evaluate investments designed for customer retention and loyalty. Viewed from this financial prospective, marketing programs designed to : 138/2/2013 © Himansu S M
  • 14. ESTIMATING CUSTOMER LIFETIME VALUE & CUSTOMER EQUITY Marketing Programs are designed to :  Attract new customers,  Build relationships,  Increase sales from existing customers, and  Maintain relationships into the future, These should be rightly seen as investments and not operating expenses. 148/2/2013 © Himansu S M
  • 15. Customer Equity  In the opinion of Alan Grant and Leonard Schlesinger, "Achieving the full profit potential of each customer relationship should be the fundamental goal of every business.  Even using the conservative estimates, the gap between most companies' current and full potential performance is enormous".  They suggest that the company managers must ask the following questions for each segment and act accordingly : 158/2/2013 © Himansu S M
  • 16. Customer Equity  What would be the impact on sales and profits if each customer exhibited the ideal behaviour profile of :  Buying all the services offered by the firm,  Using this to the exclusion of any purchases from competitors, and  Paying full price,  How long on average do customers remain with the firm,  What impact would it have if they remain customers for life. 168/2/2013 © Himansu S M
  • 17. How can a Firm calculate the Customer Lifetime Value and Customer Equity  One way of calculating the Rupee value of loyal customers is to estimate the increased value of profits that accrue for each additional customer who remains loyal to the company rather than defecting to the competition.  With the modern accounting system to track the actual costs incur and revenue generated over a period of time, a company can accurately the Rupee value ( both cost and revenue) of retaining customers. 178/2/2013 © Himansu S M
  • 18. How can a Firm calculate the Customer Lifetime Value and Customer Equity  This involves a procedure for calculating the discounted value of each individual customer throughout its expected lifetime as a customer of the firm to know the "Customer Lifetime Value" (CLV).  The sum of these CLVs for all customers equates to the firm's "Customer Equity".  These calculations can be simplified by developing a segment-by-segment assessment, instead of studying each customer individually. 188/2/2013 © Himansu S M
  • 19. LINKING CUSTOMER RELATIONSHIP VALUE TO FIRM VALUE  The critical importance of the relationship value of the customers has increased many fold over the last decade. This is because of the financial and other benefits that a firm can have with the loyal customers.  Interestingly, a recent research has shown that customer retention has a large impact on the firm value. The CLV calculation can provide a base for assessing the value of a firm. In other words the market value of a firm can more or less be the customers' lifetime value. 198/2/2013 © Himansu S M
  • 20. LINKING CUSTOMER RELATION- SHIP VALUE TO FIRM VALUE  This approach is simple :  Estimate the relationship value of a customer,  Forecast the future growth of the number of customers,  Use these figures to determine the value of a company's current and future base.  This score is accurate to the extent that the customer base forms a large part of the company's overall value.  Such a calculation is particularly suitable for new and high-growth firms for which the traditional methods like discounted cash flow don't work well. 208/2/2013 © Himansu S M
  • 21. Lifetime Value of a Customer 21 Items Year-0 Year-1 Year-2 Year-3 Year-4 Year-5 Remark Revenue (Rs. K) Main 33.000 39.600 47.520 57.024 68.429 Inc. by 20% pa Accessory 5.500 6.600 7.920 9.504 Inc. by 20% pa Cost Main 6.000 24.090 28.908 34.690 41.628 49.953 Inc. by 20% pa Accessory 4.152 4.982 5.979 7.175 Inc. by 20% pa LCV Main Profit (6.000) 8.910 10.692 12.830 15.396 18.476 Inc. by 20% pa Acc Profit - - 1.348 1.618 1.941 2.329 Inc. by 20% pa Reduced OHA 1.155 1.386 1.663 1.996 Referral Profit 1.100 1.650 3.300 6.600 Total Profit (6.000) 8.910 14.295 17.484 22.301 29.401 8/2/2013 © Himansu S M
  • 22. There are a variety of factors which influence the development of strong customer relationships. 228/2/2013 © Himansu S M
  • 23. 8/2/2013 © Himansu S M 23  This includes the customer’s overall evaluation of  (1) firm’s core service offering,  (2) bonds created with customers by the firm,  (3) barriers that the customers face in leaving a relationship.  These are the factors which provide the rationale for specific strategies the firms often use to keep their existing customers.
  • 24. CORE SERVICE PROVISION  For all these strategies, the starting point is the strong base of service quality, and customer satisfaction, on which strategies can be built.  The company need not be the very best, but it must be competitive always and sometimes even better.  Thus the company should start the relationship development process with a very good core service delivery which at least meets the customers’ expectations. 248/2/2013 © Himansu S M
  • 25. SWITCHING BARRIERS  Customers change service firms sometimes, but most of the times they face some constraints, which are known as switching barriers.  In fact this helps the firms to facilitate customer retention, and the firms must try to use it positively, as given below : 258/2/2013 © Himansu S M
  • 26. 1. Customer Inertia :  This is just the laziness in breaking relationship, because it needs some amount of effort to switch. This is one of the reasons why some dissatisfied customer stay with the firm. Several salient features are given below  Breaking a relationship requires the customers to restructure or reorganise their life styles. That is to develop new habits, new environment, new fashion, and so on. In other words people don’t want to change their behaviour. 268/2/2013 © Himansu S M
  • 27. 1. Customer Inertia :  To retain their customers, firms may consider increasing the perceived effort needed on the part of customers to switch firms. If a customer believes that a great deal of effort is required to change companies, the customers is more likely to stay as such.  On the other hand, if a company tries to attract a competitor’s customer, it might make the process of switching easier for the customer to switch as far as practicable. Ex., credit card companies offer lower interest rate on the existing loans of a switching customer. 278/2/2013 © Himansu S M
  • 28. 2. Switching Costs :  This is the financial or the cost aspect of switching, or the costs involved in switching, which may be monetary or nonmonetary. This includes, time cost, effort cost, searching cost, setup cost, learning cost, contract cost, etc. These act as a barrier to the customer.  Setup costs are those required for the initial expenses for a new service and its provider. (Dish TV)  Search costs may be required to obtain suitable information about alternate services.  Learning costs are the costs associated with acquiring skills to use the particular service. (LINUX) 288/2/2013 © Himansu S M
  • 29. 2. Switching Costs :  Contractual cost is the penalty charged by the old provider when leaving. (Mobile Phones)  In order to retain the customers, the firms need to increase the perception of switching costs to the extent that customer is in a monetary loss to leave.  And conversely, the firms must try to lower these costs for the competitor’s customer so as to attract him to come to the firm, and give it a try. (Credit Card Loan Transfer) 298/2/2013 © Himansu S M
  • 30. RELATIONSHIP BONDS  Switching barriers tend to serve as constraints that keep customers from switching because they “have to” (being forced).  There can be strategies for the firms which encourage the customers to remain in the relationship because they “want to” (acting willingly).  Such a strategy was developed by Berry, and Parasuraman, which suggests that relationship marketing can occur at different levels. 308/2/2013 © Himansu S M
  • 31. RELATIONSHIP BONDS  Each of these levels of strategy results in tying the customer a little closer to the firm.  Also, the potential for sustained competitive advantage increases in each step.  They are divided into four levels one each for Financial, Social, and Customisation and Structural Bonds, as given below : 318/2/2013 © Himansu S M
  • 32. LEVELS OF RELATIONSHIP BONDS L-4 : Structural Bonds L-3 : Customisation Bonds L-2 : Social Bonds L-1 : Financial Bonds 328/2/2013 © Himansu S M
  • 33. Level – 1 = Financial Bonds  At the very first or the lowest level, the customers are mainly tied to the firm thro’ financial benefits and incentives, like :  Volume and Frequency Rewards : Lower prices for bigger volume or a more frequent purchase of company’s services.  But unfortunately, financial incentives don’t generally provide long term advantages, unless combined with some other relationship strategy, because they don’t differentiate between them and their competitors who can often match the offering. 338/2/2013 © Himansu S M
  • 34. Level – 1 = Financial Bonds  Bundling and cross Selling : Another type of retention strategy that depends on financial rewards are directed towards bundling (attaching services of the same firm) and cross selling (attaching services of another firm) of products and services.  Ex., Frequent fliers of a particular airliner may be offered with taxi rental, hotel rooms, and even free tour tickets. 348/2/2013 © Himansu S M
  • 35. Level – 1 = Financial Bonds  Stable Pricing : In some other cases, firms try to retain their customers simply by offering stable prices to them. Or may be a very negligible increase if it can’t be avoided as compared to the new customers. By this the firms share some cost savings with the loyal customers, which they get out of the long term association. 358/2/2013 © Himansu S M
  • 36. Level – 2 = Social Bonds  This is a stronger binding than the level – 1, which is the social bond. Price here is assumed to be already taken care of. The next level builds a long term relationship thro’ social and interpersonal (and of course financial) bonds.  Social bond is critical, but alone it can’t bind the customers permanently to the firm. On the other hand this type of bond is much more difficult to imitate than financial strategy.  So, in the absence of any other strong reasons, this bond encourages the customers to stay in a relationship. Coupled with financial bond, social bonding 368/2/2013 © Himansu S M
  • 37. Level – 2 = Social Bonds  Personal Relationships : Social interpersonal bonds are common amongst professional service providers (lawyers, CAs, Financial Advisors, etc.) and their clients, and also personal care providers (hair dressers, healthcare providers, fashion designers, etc.) and their clients.  Continuous Relationships : Interpersonal bonds for continuous relationship are common in B2B relationships, where customers develop relationships with the relationship managers working with their firms. 378/2/2013 © Himansu S M
  • 38. Level – 2 = Social Bonds  Social Bonds among Customers : Sometimes, relationships are formed with the firm because of the social bonds that develop amongst the customers, rather than between the customers and service providers.  Ex., health clubs, educational settings, and other social groups and service environments. Here the customers interact with each other and develop a relationship over a period of time. And this becomes an important reason for not switching to another service provider. (Ex., close friends generally attend the same educational institutes). 388/2/2013 © Himansu S M
  • 39. Level – 3 = Customisation Bonds  This level is higher than the level – 1 and 2, although there are some common elements of them. This is known as customisation bond or strategy. This customisation bond has two usual approaches : mass customisation and customer intimacy.  Customer Intimacy : This strategy suggests that the customer loyalty can be encouraged thro’ intimate knowledge of an individual customer, and also thro’ one-to-one solutions that fit individual customer’s needs.  Anticipation / Innovation : For both of these strategies, technology and innovation play an important role in providing customised services to a large no. of customers. 398/2/2013 © Himansu S M
  • 40. Level – 3 = Customisation Bonds  Mass Customisation : This concept is defined as “the use of flexible processes and organisational structures to produce varied and individually customised products and services at the price of standardised, mass produced alternatives”.  This doesn’t mean that the service provider will work harder to offer unlimited variations of choices to suit each and every customer. But it means that the service providers will offer customisation with very little effort on their part with tailored services to the customers’ individual needs. 408/2/2013 © Himansu S M
  • 41. Level – 4 = Structural Bonds  This is the highest level, and also the most difficult to imitate. This involves the structural as well as customisation, social and financial bonds between the customers and the firm.  Structural bonds are created by providing value added services to the customers that are frequently designed right into the service design system for that customer.  Frequently, structural bonds are created by providing customised services to the customers that are technology based in a suitable infrastructure and make the customer more productive. 418/2/2013 © Himansu S M
  • 42. Level – 4 = Structural Bonds  (Ex., [1] many Banks and MF AMCs have a technology based system of “process alert” thro’ mobile SMS or e-mail etc., [2] direct credit transaction into the bank account).  These kinds of innovative services help the service provider to increase customer retention, and also new customer attraction.  But one disadvantage from the customers’ point of view is that they fear that tying themselves too closely to one provider may not allow them to take advantage of potential price savings from other provider in future. 428/2/2013 © Himansu S M
  • 43. END of Chapter – 8  © Himansu S M / 02-08-2013 438/2/2013 © Himansu S M