Essentials of Services Marketing
Chapter 12: Managing Relationships and Building Loyalty
Objectives Outline (12.1 - 12.13)
12.1 Recognize the important role customer loyalty plays in driving a service firm’s profitability.
12.2 Calculate the lifetime value (LTV) of a loyal customer.
12.3 Understand why customers are loyal to a particular service firm.
12.4 Know the core strategies of the Wheel of Loyalty that explain how to develop a loyal customer base.
12.5 Appreciate why it is so important for service firms to target the “right” customers.
12.6 Use service tiering to manage the customer base and build loyalty.
12.7 Understand the relationship between customer satisfaction and loyalty.
12.8 Know how to deepen the relationship through cross-selling and bundling.
12.9 Understand the role of financial and non-financial loyalty rewards in enhancing customer loyalty.
12.10 Appreciate the power of social, customization, and structural bonds in enhancing loyalty.
12.11 Understand what factors cause customers to switch to a competitor and how to reduce such switching.
12.12 Know why loyalty programs and customer relationship management (CRM) systems are important enablers of delivering loyalty strategies.
12.13 Understand the part played by CRM systems in delivering customized services and building loyalty.
12.1: The Importance of Customer Loyalty
Customer Loyalty: A key driver of profitability for service firms.
Value Analysis and Loyalty Drivers
Importance of Customer Loyalty: Loyalty increases firm profitability through various means.
Profit Factors
Customers Become More Profitable Over Time:
Increased purchases: More significant purchases and/or account balances are common over time.
Reduced operating costs: Experienced customers have fewer demands, lowering operational mistakes.
Referrals: Loyal customers often refer new customers, reducing marketing costs.
Price premiums: Long-term customers are willing to pay regular prices and even higher prices during peak periods.
12.2: Understanding Lifetime Value (LTV)
Calculating the LTV of a Loyal Customer: This involves assessing both revenues and costs associated with loyal versus one-time transaction customers.
Assessing the Value of a Loyal Customer
Key Deliverables:
Acquisition Revenues: Calculated as total revenues from initial transactions minus acquisition costs (application fee, initial purchase, marketing costs).
Projected Annual Revenues: Revenue from ongoing fees, service fees, and referrals must also be accounted for.
Net Present Value (NPV): The sum of all anticipated future profits from a customer.
12.3: Understanding Customer Loyalty
Core Principle: Customers remain loyal when value is created for them.
Value Creation Methods
Technology: Improves service quality, instills confidence in customers, reduces anxiety, and manages expectations.
Social Benefits: Includes mutual recognition and providing personalized treatment such as special discounts or services.
12.4: Core Strategies of the Wheel of Loyalty
Wheel of Loyalty: Core framework detailing strategies that foster customer loyalty.
Key Components
Foundation for Loyalty:
Market segmentation to match customer needs with firm capabilities.
Maintaining quality service.
Create Loyalty Bonds:
Provide loyalty rewards (financial and non-financial).
Deepen relationships through cross-selling and bundling services.
Reduce Churn Drivers:
Engage in proactive and reactive retention measures, like monitoring customer satisfaction and complaint handling.
12.5: Targeting the Right Customers
Definition of Right Customers: Customers that align well with the service firm, not merely those who spend the most.
Key Focus Areas
Understand customer needs in relation to operations.
Recognize that some high-potential customers might not currently be high spenders but can grow.
12.6: Service Tiering
Customer Pyramid: Segmentation of customers into four categories:
Platinum: High-value customers.
Gold: Mid-value customers.
Iron: Lower value.
Lead: High maintenance, low-profit customers.
12.7: Satisfaction and Loyalty Relationship
Satisfaction Zones: Three regions in customer satisfaction that relate to loyalty: Indifference, Affection, and Defection zones.
12.8: Cross-selling and Bundling
Definition: Combining several services leads to reduced switching likelihood unless there is significant dissatisfaction.
Benefits of Bundling
Services are more convenient for customers with a potential for enhanced service levels.
12.9: Loyalty Rewards
Financial and Non-financial Rewards: Incentives include both monetary benefits like discounts and intangible benefits like special recognition.
12.10: Bonds in Loyalty Enhancement
Types of Bonds:
Social Bonds: Personal connections that create long-lasting loyalty.
Customization Bonds: Tailored services that are hard to switch from.
Structural Bonds: Aligning customer processes with those of the supplier for synergistic benefits.
12.11: Customer Switching Factors
Reasons Customers Switch Providers: Include service failures, pricing issues, negative personal encounters, or better competitive offers.
Strategies to Reduce Defections
Delivering quality service, reducing inconvenience, and creating transparent pricing dynamics.
12.12: Role of Loyalty Programs and CRM Systems
Importance: These systems enable a more profound engagement with customers, enhancing loyalty strategies.
12.13: CRM Systems in Service Delivery
Key Objectives: CRM systems focus on unified customer interfaces and enhancing service delivery through segmented targeting.
Applications in CRM
Data collection and analysis, sales force automation, marketing automation, and call center automation enhance customer service and operational efficiency.
Key Processes in Effective CRM Strategy
Strategy development
Value creation for both customers and the firm
Multi-channel integration for consistent engagement
Information management for customer follow-ups
Performance assessment for ROI on marketing and service delivery effectiveness.