Chapter 12

Managing Relationships
and Building Loyalty

Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 1
 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

Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 2
 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

Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 3
 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

Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 4
 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

Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 5
 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
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 6
 Customer-Firm Relationship

Today’s marketers seek to develop long-term relationships

with 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.

Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 7
 Types of Relationships with Customers (Table 12.1)

Type of Relationship--Firm and Customer

Nature of
Service Delivery
“Membership” No formal relationship
Continuous Cable TV Radio station
Insurance Police
College enrollment Lighthouse

Discrete transactions Subscriber phone Pay phone

Theater subscription Movie theater
Warranty repair Public transport

Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 8
 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

Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 9
 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

Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 10
 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

Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 11
 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 & paraprofessionals
Analytical Work on Project Data

Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 12
 The Customer Pyramid (Fig. 12.5)

Good Relationship
Customers
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 Relationship
Customers

Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 13
 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

 better prices, discounts, special deals unavailable to others
 extra services
 higher priority with waits, faster service

Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 14
 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

20

Terrorist 0
1 2 3 4 5
Very Neither Very
dissatisfied Dissatisfied satisfied Satisfied Satisfied
nor dissatisfied
Satisfaction
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 15
 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 acquisition
Enabled through:
 Implement complaint
handling & service  Use effective tiering
 Frontline staff of service.
 Account
recovery Customer
 Increase switching  Deliver quality
managers
 Membership costs
Loyalty service.
programs
 CRM
Systems 2. Create Loyalty
Bonds
 Build higher  Deepen the
level bonds relationship
 Give loyalty
rewards

Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 16
 Rewarding Value of Use, Not Just Frequency 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
Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 17
 Drivers of Service Switching (Fig. 12.9)

Service
ServiceFailure
Failure/ /Recovery
Recovery Value
ValueProposition
Proposition
Core Service Failure
• Service Mistakes Pricing
• Billing Errors • High Price
• Service Catastrophe • Price Increases
• Unfair Pricing
Service Encounter Failures • Deceptive Pricing
• Uncaring
• Impolite Service Inconvenience
• Location/Hours
• Unresponsive
• Unknowledgeable Switching • Wait for Appointment
• Wait for Service
Response to Service Failure
• Negative Response
Competition
• No Response • Found Better Service
• Reluctant Response
Others
Others
Involuntary Switching Ethical Problems
• Customer Moved • Cheat • Unsafe
• Provider Closed • Hard Sell • Conflict of Interest

Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 18
 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
 Marketing automation
 Call center automation

Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 19
 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?

Slide ©2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 20