This document summarizes key points from Chapter 5 of a marketing textbook on targeting customers, managing relationships, and building loyalty. It discusses segmentation strategies like technographic segmentation based on customer attitudes and use of technology. It emphasizes that firms should target customers that provide the most value, not just numbers. For services with shared facilities, the document notes that managing the customer mix is important to ensure different segments do not conflict and negatively impact the service experience. While firms would like to restrict service to targeted customers, outright refusal may be illegal, so indirect methods are recommended to discourage non-targeted customers.

1. MKTG 29 : Service Marketing Management
Chapter 5 : Targeting Customers, Managing Relationships and
Building Loyalty
Professor : Mr. Abelito T. Quiwa. MBA
School Year : 2012 - 2013

2. Chapter Outline
Targeting the Right Customers
Searching for Value, Not Just Numbers
Technographic Segmentation
Segmentation Strategies for Effective Capacity Utilization
Selecting the Appropriate Customer Portfolio
Creating and Maintaining Valued Relationship
Search for Customer Loyalty

3. Introduction
 “The first step in managing a loyalty-based business
system is finding and acquiring the right customer.” –
Frederick F. Reichheld
 The term “mass marketing” is used less and less these
days. Instead, today’s marketers are concerned with
“focus” or “targeting” or “mass customization “. Underlying
such terms is the notion of market segmentation.
 More and more firms are trying to decide which types of
customers they can serve well rather than trying to be all
things to all people.
 Managers in innovative firms constantly debate what
improvements in product elements, or what new services
they need to offer, to attract and retain customers from
specific segments that are believed to present good
opportunities for growth and profits.

4. Introduction
 In this chapter, we emphasise the importance of choosing
to serve a mix of several carefully chosen target segments
and taking pains to build and maintain their loyalty, through
well-conceived relationship marketing strategies. We
explore the following questions:
1. What segmentation variables are particularly relevant to
service organization?
2. Why do capacity-constrained firms need to target multiple
market segments?
3. What do we mean by “loyalty”?
4. How can a firm calculate the financial value of a customer
who remains loyal over many years?
5. What are the strategies associated with relationship
marketing?

5. Targeting the Right Customers
 “Who should we be serving ?” is a question that every
service business needs to raise periodically. Customers
often differ widely in terms of needs. They also differ in
terms of the value that they can contribute to a company.
 Not all customers offer a good fit, with the organization’s
capabilities, delivery technologies and strategic direction.
In short, companies should be selective about the market
segments they target.
 Market segmentation is one of the central concepts in
marketing and there are many different traditional ways to
segment a market. Effective market segmentation should
group buyers in ways that result in similarity within each
segment and dissimilarity between segments on relevant
characteristics.

6. Targeting the Right Customers
 The nature of services may offer advantageous approaches to
segmentation not commonly used in manufacturing and include:
 Timing of service use (helpful for planning demand-management
strategies designed to fill available capacity at specific times)
 Level of skill and experience (especially relevant for situations in
which customers will be working with a service provider as co-
producers or when customers perform self-service).
 Preferred language (important in planning marketing
communications of any sort, especially face-to-face contact)
 Access to electronic delivery systems (e,g, the Internet) and
attitudes toward use of new service technologies.

7. Searching for value, Not just Numbers
 Too many service firms still focus on the number of customers
they serve, without giving sufficient attention to the value of each
customer.
 Generally speaking, heavy users, who buy more frequently and
in large volumes, are more profitable than occassional users.
 Matching customers to the firm’s capabilities is vital. Managers
must think carefully about how customer needs relate to such
operational elements as speed and quality, the times when
service is available, the firm’s capacity to serve many customers
simultaneously and the physical features and appearance of
service facilities.
 They also need to consider how well their service personnel can
meet the expectations of specific types of customers in terms of
both personal style and technical competence.
 Finally, they need to ask themselves: Can my company match or
exceed competing services that are directed at the same types
of customers?

8. Technographic Segmentatio
Because of the dramatic increase in technology-related goods
and services, some marketers are now suggesting a new
technolographic segmentation variables, reflecting
customer’s willingness and ability to use the latest
technology.
Consulting firm, Forester Research, has created a ten-
category segmentation scheme called “ Technograhics” which
is based on the interaction between three variables: attitude
toward technology,(optimistic versus pessimistic), financial
situation ( more affluent or less affluent) and application of
technology (career, family or entertainment).

9. Technographic Segmentation
Career Family Entertainment
Fast Forwards New Age Nurturers Mouse Potatoes
These consumers are the Also big spenders but They like the online
biggest spenders and focused on technology for world for entertainment
they are early adopters of home usee, such as a and are willing to spend
new technology for home family PC. for the latest in
office and personal use. technology.
Techno-Strivers Digital Hopefuls Gadget Grabbers
Use technology from cell Families with a limited They also favour online
phones and pagers to budget but still interested in entertainment but have
online services primarily new technology; good less cash to spend on it
to gain a career edge. candidates for the under
$1,000 PC.
Hand-Shakers Traditionalists Media Junkies
Older consumers – Willing to use technology, Seeks entertainment and
Typically managers-who but slow to upgrade; not cannot find much of it
Do not touch their convinced upgrades and online; prefer TV and
Computers at work; they other add-ons are worth other, older media
Leaves that to younger paying for.
Assistants.
Figure 5.1 Segmentation Customers Relative to Technology Use

10. Segmentation Strategies for Effective
Capacity Utilization
 Capacity-constrained service businesses need to make the
best use of their productive capacity. The problem for such
businesses is to find enough customers to use their
service at any given time and place.
 Managers should recognize the risks involved in trying to
fill capacity with just any warm body. Instead, they should
be asking themselves whether they have attracted the right
sort of customers at the right places, times and prices.
 In people-processing services, where customers
themselves become part of the product, conflicts may arise
when people from distinctively dfferent segments come
together simultneously in the same facility.

11. Segmentation Strategies for Effective
Capacity Utilization
 Customer as Part of the Service Experience
 When service users share a common facility, such
as a hotel, restaurant or retail store, other customers
become part of the product. As a result, the size and
composition of the customer base have important
implication for both the image of the service
organization and the nature of the service experience.
 Since customers contribute strongly to the atmoshere
of many high-contact services, a firm should seek to
attract and retain customers form the most
appropriate market segments. Managers also need to
ensure that prospective customers are aware of what
constitutes appropriate dress and behaviour.

12. Segmentation Strategies for Effective
Capacity Utilization
 Can Firm Restrict Service to Target Customers Only?
 Many marketers would probably like to be able to
decline request for service from prospective
customers who do not fit the market position sought
by their firm. There are always way to discourage
unwanted persons from requesting services, for
instance, by insisting on certain standard of dress.
 However, outright refusal to admit someone toa
service facility may be viewed as illegal or unethical if
the person has the ability to pay and is not behaving
in a disorderly manner.

13. Customer As Part of the Service
Exprience
 If you are a customer of a high-contact, shared service, you can
quickly determine whether it is well or poorly patronized. You can
also see what sort of people are using the service –their
appearance, age range, apparent income bracket, dress (formal
or casual) and whether they appear to have come alone, in
couples or in group.
 Since customers contribute strongly to the atmosphere of many
high-contact servicesm a firm should seek to attract and retain
customers from the most appropriate market segments.
Managers also need to ensure that prospective customers are
aware of what constitutes appropriate dress and behaviour.
 A uniform customer base is not always possible or even
desirable for many service businesses. Two or more distinct
market segments may each contribute importantly to the
organization’s success, yet they may not mix well. Ideally,
potentially conflicting segments should be separated in place
and time.

14. Can Firms Restrict Service to Target
Customers Only?
 Many marketers would probably like to be decline
requests for service from prospective customers who
do not fit the market position sought by their firm.
 There are ways to discourage unwanted persons from
requesting services, for instance, by insisting on
certain standard of dress. However, outright refusal to
admit someone to a service facility may be viewed as
illegal or unethical if that person has the ability to pay
and is not behaving in a disorderly manner.
 Prospective customers should be informed in
advance about the specific nature of a service, so that
they know what to expect. This increases the chances
of a satisfactory “fit” between customers and the
organization.

15. Selecting the Appropriate Customer Portfolio
 Creating a Portfolio of Market Segments.
 Different segments offer different value for a service
firm. Some types of customers may be more
profitable than others in the short term, but others
may have greater potential for long-term growth.
 Similarly, the spending patterns of some customers
may be stable over time, while others my be more
cyclical, spending heavily in boom times, but cutting
back sharply in recessions. A wise firm may seek a
mix of such customers in order to reduce the risks
associated with such cyclical behaviour.
Historical data can be adapted to reflect pricing and cost changes,
Promotional efforts and market-related risks-including the
Anticipated impact of competitive actions or changes in market
Dynamics.

16. Selecting the Appropriate Customer Portfolio
 Attracting, Retaining, Upgrading and Terminating Customers
 All too often, rewards and recognition for sales people go to
those who bring in new business. However, this is not
necessarily the most profitable strategy. A widely circulated
statement is that on average it costs a firm to six times as much
to attract a new customer as it does to implement retention
strategies to hold on to an existing one.
 Well-managed firms understand the importance of working hard
to retain and increase their existing customers and develop
compensation packaged designed to encourage such behaviour.
 Customer retention involves marketing and account-
management activities aimed at developing long-term, cost-
effective links with the organizations to benefit both paries.
 Service firms can use a variety of strategies to maintain and
enhance relationships, including such basics as treating
customer fairly, offering service augmentations and treating each
customer as though he or she were a segment of one-the
essence of mass customization.

17. Selecting the Appropriate Customer Portfolio
Major, state-of-the-art challenges
for the firm’s principles that give
the firm high visibility
“Pacesseters”
Demanding client assignment offering
a learning experienc for the firm’s most
Significant Projects experienced associates.
Routing client project shared
“ Bread and Butter “ Projects Among principals and associates
Entry-level tasks for new
Associates or for research
Analytical Work on Project Data Assistant and
paraprofessionals
Figure 5.2 Product Mix for a Professional Service Firm

18. Selecting the Appropriate Customer Portfolio
 In the Asian context it has been shown that in many
service setting where customers jointly participate in
the service production and consumption process,
relationship building rest not only with the contact
personnel, but also with all the other customers-firm
interface.
 Research findingg indicate that different aspects of
the customer interface, namely, contact personnel,
and physical and customer environment are important
in enhancing the quality of the relationship for high-
end and low-end service providers.
This implies the need for a service firm to leverage strategically,
on the key customer-firm antecedents in its pursuit of customer
retention and loyalty.

19. Creating and Maintaining Valued
Relationship
What is valued relationship? It is one in which the customer
finds value because the benefit received from service delivery
significantly exceed the associated costs of obtaining them.
Kumar emphasises that relationships in a business-to-business
service are largely dependent on the quality of interactions
between individuals at each of the partnering firms.
Kumar observes:” As relationships strengthen over a period
of time the service provider’s personnel often asssume the
role of outsourced departments and make cretical decisions
on behalf of thei clients.

20. Creating and Maintaining Valued
Relationship
 For the firm, a valued relationship is one that is financially
profitable over time and in which the benefits of serving a
customer may extend beyond revenues, to include such
intangibles as the knowledge and pleasure obtained from
working with that customer.
 A good working relationship betwee two parties implies
that they relate positively to one another, as opposed to
just conducting a series of almost anonymous transaction.
 In a healthy and mutually profitable relationship, both
parties have an incentive to ensure that it extends for many
years. The seller, in particular, recognises that it pays to
take an investments perspective, justifying the initial costs
of acquiring new customers and learning about their
needs, by an expectation of future profits.

21. Relationship Versus Transaction
 A fundamental distinction in marketing exists between strategies
intended to bring about a single transaction and those designed to
create extended relationship with customers. The term “
relationship marketing” has been widely used to describe the latter
type of activity, but until recently it was only loosely defined.
 There are four distinct types of marketing:
1. Transactional marketing
2. Three categories of what they call relational marketing:
- database marketing
- interaction marketing
- network marketing

22. Relationship Versus Transaction
Transactional marketing
 A transaction is an event during which an exchange of value
takes place between two parties. One transaction, or even
aseries of transactions, does not necessarily constitute a
relationship, since these require mutual recognition and
knowledge among the parties.
 When each transaction between a customer and a supplier is
essentially discrete and anonymous, with no long-term
record kept of a customer’s purchasing history and little or
no mutual recognition between a customer and the firm’s
employees, no meaningful marketing relationship can be said
to exist.

23. Relationship Versus Transaction
 Database marketing
 In this type of marketing, the focus is still on the market
transaction, but now includes information exchange. Marketers
relay on information technology, possibly in teh form of a data
base or the internet, to form a relationship with targeted
customers and retain their patronage over time.
 However, the nature of aged by the seller. Technology is used
to ;
1) Identify and build a database of current and potential customers
2) Deliver differentiated messages based on consumers’
characteristics and preferences;
3) Track each relatioship to monitor the cost acquiring the
consumer and the lifetime value of the resulting purchases.
 Although technology can be used to personalise the raltionship (
as in word-processed letters that insert the customer’s name),
relations remain somewhat distant. Utility services such as
power supply, gas and cable television are good exsamples.

24. Relationship Versus Transaction
 Interaction marketing
 A closer relationship exists in situations where there is
face-to-face interaction between customers and
representatives of the supplier (or “ear-to-ear
interaction over telephone). Although the service itself
remains important, value is added by people and
social processes.
 Interaction may include negotiations and sharing of
insights in both directions. This type of relationship
has long existed in many local environment where
buyers and sellers know and trust, each other,as in
community banks or a dental clinic.It is also
commonly found in many business-to-business
services.
 Both the firm and the customer are prepared to invest
resources, including time, to develop a mutually
beneficial relationship. This investment may include
time spent sharing and recording information.

25. Relationship Versus Transaction
Network marketing
 This type of marketing occurs primarily in a business-to-
business context, where firmrs commit resources to develop
positions in a network of relationships with customers,
distributions, suppliers, the media, consultants, government
agencies, competitors and even their customers’ customers.
 There is often a team of individual within a supplier, who
must collaborate to provide effective service to a parallel
team within the customer organization. However, the
concept of networking is also relevant in consumer-
marketing environments, where customers are encouraged
to refer friends and acquantances to the service provider.

26. Relationship Versus Transaction
 Creating “Members” Relationships
 Although some services involve discrete transactions, in other
instances purchasers receive service on a continuing basis. Even
where the transactions are themselves discrete, there may still be
an opportunity to create an ongoing relationship.
 The difference in thses situations offer an opportunity for
categorising services. First, we can ask: Does the supplier entet
into a formal “membership” relationship with customers as with
telephone subsriptions, banking and the family doctor? Or is there
no defined relationship?
 Second: Is the service delivered on a continuous basis, as in
insurance, broadcasting and police protection? Or is each
transaction recorded and charged separately?

27. Relationship Versus Transaction
 Creating “Members” Relationships
Table 5.1 shows the matrix resulting from this
categorisation, with examples in each category.
Typer of Relationship betwee the
Service Organization and Its Customers
Nature of Membership No Formal
Service Delivery Relationship Relationship
Continuous delivery Insurance Radio
of service Cable TV subscription Police protection
College enrolment Lighthouse
Banking Public highway
Discrete transactions Long-distance calls from Car rental
Subscriber phone Mail service
Theather series subscription Toll highway
Travel on commuter ticket Pay phone
Repair under warranty Movie theatre
Health treatment for Public transporation
HBO member Restaurant

28. Relationship Versus Transaction
Creating “Members” Relationships
 A membership relationship is a formalized relationship
between the firm and an identifiable customer, which may
offer special benefits to both parties. Service involving
discrete transactions can be transformed into membership
relationship either by selling the service in bulk(for instance,
a theater series subscriptions or a commuter ticket on public
transport) of by offering extra benefits to customers who
choose to register with the firm (loyalty programmes for
hotels, airlines and car rental firms fall into this category).

29. The Search for Customer Loyalty
 Loyalty is an old-fashioned work that has traditionally been used
to describe fidelity and enthusiastic devoiton to a country, cause
or individual.
 More recently, in a business context, it has been used to
describe a customer’s willingness to continue a partronising a
firm over the long term, purchasing and using its goods and
service s on a repeated and preferably exclusive basis and
voluntarily recommending the firm’s product to friends and
associates.
 Richard Oliver has argued that consumers first become loyal in a
cognitive sense, perceiving from brand attribute information that
one brand is preferable to its alternatives.
 The second stage is effective loyalty, where a consumer
develops a liking towards the brand based on cumulatively
satisfying usage occasions. Such attitudes are not easily
dislodged by counter arguments by competitors.
 The third stage is contive loyalty, where the consumer is
committed to buy the same brand again,which should lead to the
fourth stage, called action loyalty, where the repurchase is
made.

30. The Search for Customer Loyalty
 “Few companies think of customers as annuities,”
says Frederick Reichheld, author of The Loyalty
Effectand a major researcher in this field. And yet that
is precisely what a loyal customer can mean to afirm:
a consistent source of revenues over a period of
many years.
 However, this loyalty cannot be taken for granted. It
will only continue as long as the customer feels that
he or she is receiving better value (including superior
quality relative to price) than can be obtained by
switching to another supplier.
 If the firm does something to disappoint the customer,
or if a competitor starts to offer significantly better
value, then there is a risk that the customer will
defect.

31. Realising the Full Profit Potential of a
Customer Relationship
 How much is a loyal customer worth in terms fo profits? In
1990, Reichheld and Sasser analyzed the profit per customer
in different service businesses, entegorished by the number of
years that a customer had been with the firm.
 They found out that the longer number of years that a
customers had been with the firm in each of these industries,
the more profitable they became to serve.
 In order of magnitude at the end of seven years, these factors
are:
1. Profit derived from increased purchase
2. Profits from reduced operating costs.
3. Profits from referrals to other customers
4. Profit from price premium

32. Reinforcing Loyalty by Rewarding
Repeat Users
 Customer loyalty programmes seek to bond customers to
a company (or to specific products) by offering additional
incentives. Informal loyalty prorammes, sometimes found
in small businesses, may take the form of periodically
giving regular customers a small treas as a way of
thanking them.
 Within any competitive product category, managers
recognize that few customers consistently buy one brand,
especially in situations where service delivery involves a
discrete transaction, such as a car rental.
 In many instance, consumers are loyal to several brands
while spurning others, sometimes described as “
polygamous loyalty”(not to be confused with variety
seeking, which results in consumers changing brands
without any fixed allegiance at all).

33. Reinforcing Loyalty by Rewarding
Repeat Users
To assess the potential of a loyalty programmes
to alte normal patterns of behaviour . Dowling and
Uncles argue that marketers need to examine
theree psychological effects.
1. Brand loyalty versus deal loyalty. Marketers
should focus on loyalty programmes that directly
suppor the value and positioning of the product in
question,rather than just creating a point of
differentiation.
2. How buyers value rewards. Several elements combine to
determine a loyalty programme’s value to customers:

34. Reinforcing Loyalty by Rewarding
Repeat Users
 To assess the potential of a loyalty programmes to alte normal
patterns of behaviour . Dowling and Uncles argue that marketers
need to examine theree psychological effects.
2. How buyers value rewards. Several elements combine to
determine a loyalty programme’s value to customers:
2.1. the cash value of the redemption rewards;
2.2. the range of choice among rewards
2.3. the aspirational value of the rewards
2.4. whether the amount of usage required to obtain in award
places it within the realm of possibility for any give
n consumer;
2.5. the ease of using the programme and making claims for
redemption;
2.6. the psychological benefits of belonging to the programme
and accumulating points.

35. Reinforcing Loyalty by Rewarding
Repeat Users
 To assess the potential of a loyalty programmes to
alte normal patterns of behaviour . Dowling and
Uncles argue that marketers need to examine theree
psychological effects.
3. Timing. How soon are the benefits from participating
in the rewards programme obtained by customers?
Deferred gratification tends to weaken the appeal of
a loyalty programme. One solution is to send
customers a periodic statement of their account
status, indicating progress towards reaching a
particular milestone and promoting the rewards that
might be fortcoming when that point is reached.

36. Conclusion
 When customers have a high level of contact with the
service organization and with one another, the
customer portfolio helps to define the character of the
organization, because customers themselves become
a part of the product.
 Too diverse a portfolio may result in an ill-defined
image, especially if all segments are present at the
same time “ Unsuitable” customers may spoil the
experience for others and hurt profitability in other
ways, too.
 Thus, marketers must be selective in targeting the
desired customer segments, and guidelines must be
established for customers’ behaviour while theyare
using the service.

37. Conclusion
 For services that are capacity constrained, the marketer’s task in
not only to balance supply and demand, but also to obtain the
must desirable types of customers at a particular point in time.
This may require targeting different segments at different times.
 Marketers need to pay special attention to those customers who
offer the firm the greatest value, since they purchase its
products with the frequency and spend the most on premium
services.
 Programmes to reward frequent users, of which the most highly
developed are the frequent flyer clubs created by the airlines, not
only serve to identify and provide rewards for high-value
customers, they also enables marketers to track the former’s
behaviour in terms of where and when they uses the service,
what service calsses or types of product they buy and how much
they spend.
 The greatest success is likely to go to organizations, which can
give their best customers incentives to remain loyal, rather than
playing the field and spreading their patronage among many
suppliers.