Service Quality Management: Developing Customer Relationships & Servicescape

Week 5A: Developing Customer Relationships

Lecture Learning Objectives

  • Define relationship marketing (RLM) and identify different types of customer loyalty.
  • Explain the role of trust, emotional connection, and personalization in service loyalty.
  • Apply retention strategies and loyalty models to hospitality and tourism contexts.
  • Evaluate customer segments using loyalty ladders and customer lifetime value (CLV) metrics.

Relationship Marketing (RLM)

  • Definition: A form of marketing that seeks to establish, maintain, and grow a business relationship between an organization and its customers.
  • Foundation: Customer satisfaction is a complex phenomenon that forms the basis for customer-service provider relationships.
  • Success Factor: The success of RLM strategy is predicated on promoting value by emphasizing factors associated with relationship quality.
  • Impact on Relationship Quality: For customers, relationship quality is most significantly impacted by consumer trust and relationship commitment.
  • Nurturing Relationships: Similar to personal relationships, business relationships require nurturing.
    • Enhancing customer satisfaction involves:
      • Nurturing individual relationships.
      • Making customers feel unique and singled out for attention.
      • This results in the probability of transforming non-loyal customers into loyal customers.
  • Alternative Definition (Loyalty Marketing): Creating positive brand awareness and growth for a business, not by extending its customer base, but by deepening the current customers’ relationships through understanding, fostering, and leveraging relationships with all stakeholders.
Why RLM is Important

RLM is the strategic process of acquiring, engaging, and retaining customers by managing interactions across the entire service journey from first contact to long-term loyalty.

  • Increased Competition: Personalized service experiences (differentiation) and exclusive offers help businesses stand out.
  • Emotional Brand Connections: Guests value brands that remember their preferences and create personalized experiences.
  • High Customer Acquisition Costs: It costs 55 times more to attract a new customer than to retain an existing one.
  • Repeat Business Drives Profitability: Loyal customers return more often, spend more, and provide positive word-of-mouth (WOM).
Examples of RLM Practices in Hospitality

These practices support different phases of the customer lifecycle: acquisition, onboarding, engagement, and retention.

  • Hilton Honors (Retention and Value Expansion):
    • Practice: Tiered rewards program offering points and perks.
    • Impact: Encourages repeat bookings and long-term engagement.
  • Ritz-Carlton Guest Preference Tracking (Deepening Relationships):
    • Practice: Guest preferences (e.g., pillow type, food allergies) are tracked for future visits.
    • Impact: Creates memorable, emotionally resonant service that builds loyalty through personalization.
  • Disney’s MagicBands (Seamless and Delightful Experience):
    • Practice: Wristbands streamline the guest experience (park entry, purchases, ride access, hotel room entry).
    • Impact: Reduces friction and builds emotional connection by making the entire visit feel magical.
RLM Retention Strategies

Basic Tenets of RLM (Customer Retention Marketing Strategy):

  • Providing “good” service is the minimum requirement.
  • Core Service Focus: The strategy is focused on making sure the core service is performed exceptionally well.
  • Relationship Customization: Providing value-added service and customer care.
  • Service Augmentation: Providing customers with non-price incentives through service differentiation.
  • Relationship Pricing: Providing price incentives for specific market targets.
  • Internal Marketing: Training and motivating a knowledgeable and supportive frontline staff capable of effectively marketing your business.

Marketing Mix Considerations:

  • Research shows a “danger point” where too much of the marketing mix is spent on price promotion instead of brand loyalty-building activities.
    • Example: A restaurant designated for “special occasions” should avoid promoting ten-cent wing Saturdays.
  • Sell on Quality, Not on Price: If the primary emphasis of the marketing message is on price, brand loyalty is exploited, not enhanced. The primary focus should be on how special the brand is, not how inexpensive.

Measuring and Managing Loyalty:

  • Measure What Matters: Measure customer loyalty, personalized experiences, and emotional engagement. Customer satisfaction is necessary for loyalty but is not the same as loyalty.
  • Avoid Punishing Loyalists: Attracting new business is never as important as keeping loyal customers happy. Brand loyalty is both valuable and fragile, requiring ongoing effort.

Understanding Customer Value:

  • Identify and Nurture the Right Customers: Establish a loyal customer base by identifying, attracting, nurturing, defending, and developing the right customers.
  • Profit Contribution: A tiny share of loyal heavy users accounts for an extraordinary share of a brand’s profits.
    • Example: Guests visiting five times a year, every year, are more important than those visiting once, twice, or five times total.
  • True Loyalty vs. Bought Behavior: Understand the value of your best prospects and customers. Repeat behavior can be bought through bribes (rewards), but “true” loyalty must be earned over time.

Customer Loyalty

  • Criticality for Service Providers: It is critical to develop strategies, tactics, and policies that result in customer loyalty.
  • Customer Value Focus: Loyalty puts creating customer value (not maximizing profits and shareholder value) at the center of business strategy, demanding significant changes in business practice.
  • Beyond the Goal: Developing a relationship to the point of loyalty is not the end goal; customers do not want to be taken for granted and want to be treated as special.
Benefits of Loyal Customers
  • Use/visit the same business more frequently and spend more per visit.
  • Less resistant to price increases (less likely to shop around).
  • Service recovery can be easier with familiar customers.
  • More likely to share positive word-of-mouth (WOM).
  • Less expensive for firms to attract repeat customers (reduced marketing, price incentives, promotional costs).
  • Profits can increase between 25 ext{%} and 85 ext{%} by retaining just 5 ext{%} of loyal customers.
  • Pareto’s Principle (80/20 Rule): Roughly 80 ext{%} of outcomes come from 20 ext{%} of causes.
Pareto’s Principle in Marketing and Service Quality
  • Marketing: 80 ext{%} of your profit stems from 20 ext{%} of your (loyal) customers.
  • Service Quality Applications:
    • 80 ext{%} of complaints often stem from 20 ext{%} of recurring issues.
    • 80 ext{%} of positive reviews may come from 20 ext{%} of service touchpoints (e.g., friendly staff, quick problem resolution).
    • Prioritize training on the 20 ext{%} of behaviors that create 80 ext{%} of customer delight.
  • Conclusion: We need to keep our loyal customers loyal, as they are our most profitable customers.
Characteristics of Most Profitable vs. Other Customers
  • Most Profitable Customers (20 ext{%}):
    • Segment spends more over time.
    • Costs less to maintain.
    • Spread positive word-of-mouth.
  • Other Customers (80 ext{%}):
    • Cost time, effort, and money.
    • Does not provide the return.
    • Difficult to do business with.
Defining Customer Loyalty

Loyalty exists when a customer can (based on knowledge) identify a superior brand among competitor brands (cognition), exhibit feelings of warmth toward one brand (affect), and intend to purchase one brand over other competitor brands (intention to return).

  • Attitudinal Loyalty: A lasting, general association between a product/brand and an evaluation; what a customer feels about a company, person, or thing.
  • Behavioral Loyalty: Past behavior (repeat purchase); what a customer does, possibly due to habit.
Distinction Between Frequency and Loyalty
  • Not all repeat customers are truly loyal.
  • Example: A consumer might frequently buy Pepsi from on-campus vending machines due to lack of alternative (high behavioral frequency), but be a loyal Coke consumer and advocate (high attitudinal loyalty) elsewhere.
Types of Loyalty (Relative Attitude vs. Repeat Patronage)
  • No Loyalty (Low Attitude, Low Behavior): Customers see little difference between brands and infrequently purchase the product.
  • Spurious Loyalty (Low Attitude, High Behavior): Customers frequently purchase a brand but do not perceive significant differentiation among the consideration set. Repeat purchase is often just a habit.
  • Latent Loyalty (High Attitude, Low Behavior): Customers have a strong preference for/attitude towards a brand but do not exhibit high repeat purchase behavior due to situational or environmental constraints.
  • Loyalty (High Attitude, High Behavior): Achieved when a customer displays a high relative attitude (determined by attitude differentiation and attitude strength) and high repeat purchase behavior. Loyal customers have high repeat patronage, are less motivated for alternatives, more resistant to other brands, and more likely to pass on positive word-of-mouth.
Why Customers Stay Without Being Truly Loyal: Switching Costs

It might be too expensive (time, money, hassle, etc.) for a customer to leave, even if they are no longer happy with the relationship. Reasons not to switch include:

  • Loss of money.
  • Investment of time and effort to find another provider/partner.
  • Inconvenience.
  • Loss of accumulated reward points.

Customer Loyalty Ladder

  • Purpose: Helps an organization plan engagement strategy wisely to tempt customers to move up the ladder.
  • Stages:
    • Suspects: Potential customers; aware of promotions but not currently doing business.
    • Prospects: Customers impressed by promotions and seriously considering buying.
    • Customers: First-time customers who have bought products or services. Organizations must provide all possible after-sales assistance.
    • Clients: Customers doing business repetitively and willing to foster future engagement.
    • Advocates: Customers doing repetitive business and recommending the organization to their acquaintances. These are the most valuable players and should be treated royally.
6-Steps to Converting Prospects to Customers and Advocates (Relationship Marketing System)
  1. Plan: Know who you are and where you're going.
    • Buyer Persona development.
    • Culture creation.
    • Branding.
    • Setting SMART Goals.
  2. Attract: Become a magnet, not a bullhorn.
    • Attract your ideal prospects.
    • SEO, Social Media, Blogging.
    • Define Relationship Marketing strategy.
  3. Convert: Shorten your sales cycle by working smarter, not harder.
    • Calls to Action.
    • Landing pages.
    • Email 2.02.0
  4. Engage: Relationships are more powerful than marketing.
    • Build a Know, Like, and Trust strategy.
    • Lead nurturing.
    • Video.
  5. Delight: Create a marketing army around your brand.
    • Under-promise, over-deliver.
    • Client retention strategies.
    • Solid branding.
  6. Measure: Track your marketing efforts, analyze, and improve.
    • Track Performance.
    • Google Analytics and Source Reports.

Customer Lifetime Value (CLV)

  • Definition: The total dollars flowing from a customer over the entire relationship with that customer. It's a key part of RLM.
  • Simplest Estimation Formula: (Average extrm{ Value extrm{ of extrm{ a extrm{ Sale}) extrm{ X extrm{ (Number extrm{ of extrm{ Repeat extrm{ Transactions}) extrm{ X extrm{ (Average extrm{ Retention extrm{ Time extrm{ in extrm{ Months extrm{ or extrm{ Years extrm{ for extrm{ a extrm{ Typical extrm{ Customer})}
  • Example: Delta Medallion status holders receive perks to increase brand loyalty and encourage repeat bookings, clearly demonstrating CLV principles.

RLM Tools

  • Consistency/Trust: (e.g., McDonald's)
  • Emotional Connection/Memorable Experience: (e.g., Disney)
  • Social Responsibility/Brand Alignment: (e.g., Banyan Tree Hotels and sustainability)
  • Personalization: (e.g., Marriott Bonvoy’s custom offers)
  • Perceived Value: (e.g., IHG Resorts and free upgrades to loyal guests)
Digital Tools for RLM

These tools facilitate the development and strengthening of relationships with online users.

  • Effectively managing customer profile information (via customer databases).
  • Managing customer contact options through mobile, email, and social networks.
  • Data mining to improve targeting.
  • Providing online customer service facilities.
  • Managing online service quality.
  • Managing the multichannel customer experience.
  • Using social media to improve customer loyalty and advocacy.
  • Social Media is Two-Way Engagement: Not just advertising.
    • Engages customers directly (e.g., Hyatt replies to guest tweets).
    • Creates shareable experiences (e.g., Instagrammable restaurants & hotels).
    • Enhances brand credibility via influencer partnerships (e.g., Ritz-Carlton x luxury travel bloggers).
    • Example: Marriott Bonvoy’s TikTok Campaign encouraged guests to share #MarriottMoments, increasing engagement by 30 ext{%}.
Loyalty Programs
  • Definition: Structured marketing strategies that reward customers (points, perks, etc.) for their repeat business, encouraging long-term engagement, brand preference, and increased revenue.
  • Purpose: More than just discounts; they are relationship-building tools that turn transactions into long-term customer value.
  • Examples:
    • Hilton Honors: Room upgrades, late check-out. Results in 83 ext{%} of Gold Members returning annually.
    • Delta SkyMiles: Lounge access, free checked bags. Achieves 70 ext{%} retention for Platinum Members.
    • Starbucks Rewards: Free drinks, bonus stars. Requires 9090-day active participation.

Week 5B: Servicescape

Lecture Learning Objectives

  • Define servicescape and its environmental dimensions (Bitner’s model).
  • Describe how servicescapes affect customer behavior, satisfaction, and brand perception.
  • Apply the concepts of ambient conditions, spatial layout, and service clues to hospitality and tourism environments.
  • Analyze how poor or misaligned servicescape design contributes to negative customer experiences.
  • Reflect on personal service encounters to assess the emotional and behavioral impact of physical and sensory environments.

Servicescape and Service Quality

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