Utsav Mahendra : Managing Relationships and Building Loyalty


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Managing Relationships
and Building Loyalty

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Utsav Mahendra : Managing Relationships and Building Loyalty

  1. 1. Chapter 12Managing Relationships and Building Loyalty
  2. 2. 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. 3. Loyalty is Important to Profitability : Index of Customer Profits over Time (Fig. 12.1)(Year 1=100) 350 – 300 250 200 150 100 50 0 Year 1 Year 2 Year 3 Year 4 Year 5 Credit card Industrial laundry Industrial distribution Auto servicing Based on data from Reichheld and Sasser
  4. 4. 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. 5. Analyzing Why Customers Are More Profitable over Time (Fig. 12.2) Profit from price premium Profit from references Profit from reduced op. costs Profit from increased usage Base Profit 1 2 3 4 5 6 7 Year Source: Reichheld and Sasser
  6. 6. 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. 7. Customer-Firm RelationshipToday’s marketers seek to develop long-term relationshipswith customers. Relationship marketing includes:• 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.
  8. 8. Types of Relationships with Customers (Table 12.1) Type of Relationship--Firm and CustomerNature ofService Delivery “Membership” No formal relationshipContinuous Cable TV Radio station Insurance Police College enrollment LighthouseDiscrete transactions Subscriber phone Pay phone Theater subscription Movie theater Warranty repair Public transport
  9. 9. 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. 10. 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. 11. 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. 12. Portfolio of Professional Assignments (Fig. 12.4) Major, State-of-the-art challenges for the firm’s principals that give the firm high visibility Demanding client assignments offering a “Pacesetters” learning experience for the firm’s most experienced associates Significant Projects Routine client projects shared among principals and associates “Bread and Butter” Projects Entry-level tasks for new associates or for research assistants & paraprofessionalsAnalytical Work on Project Data
  13. 13. The Customer Pyramid (Fig. 12.5)Good RelationshipCustomers Which segment sees high value in our offer, spends more with us over Platinum time, costs less to maintain, and spreads positive word-of-mouth? Gold Which segment costs us in time, Iron effort and money, yet does not provide the return we want? Which segment is difficult to do Lead business with?Poor RelationshipCustomers
  14. 14. 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
  15. 15. The Customer Satisfaction-Loyalty Relationship (Fig. 12.6) Apostle 100 Zone of Affection 80 Loyalty (Retention) Near Apostle 60 Zone of Indifference 40 Zone of Defection 20Terrorist 0 1 2 3 4 5 Very Neither Very dissatisfied Dissatisfied satisfied Satisfied Satisfied nor dissatisfied Satisfaction
  16. 16. The Wheel of Loyalty (Fig. 12.7) 3. Reduce 1. Build a Churn Drivers Foundation for Loyalty Conduct churn diagnostic Segment the market Address key churn drivers Be selective in acquisitionEnabled through: Implement complaint handling & service Use effective tiering of Frontline staff recovery Customer service. Account managers Increase switching Loyalty Deliver quality Membership costs service. programs CRM Systems 2. Create Loyalty Bonds Build higher level Deepen the bonds relationship Give loyalty rewards
  17. 17. Rewarding Value of Use, Not JustFrequency 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. 18. Drivers of Service Switching (Fig. 12.9) Service Failure / Recovery Value PropositionCore Service Failure• Service Mistakes Pricing• Billing Errors • High Price• Service Catastrophe • Price Increases • Unfair PricingService Encounter Failures • Deceptive Pricing• Uncaring Service Inconvenience• Impolite• Unresponsive Switching • Location/Hours• Unknowledgeable • Wait for Appointment • Wait for ServiceResponse 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
  19. 19. 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
  20. 20. 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?