Chapter 12 PDF

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Chapter12.ManagingRelationshipsandBuildingLoyaltyEssentialsofServicesMarketing,SecondEdition
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Chapter 12. Managing Relationships and Building Loyalty

LearningObjectives
Bytheendofthischapter,thereadershouldbeableto:
Highlights
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LO1Recognizetheimportantrolecustomerloyaltyplaysindrivingaservicefirms
profitability.
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LO2Calculatethelifetimevalue(LTV)ofaloyalcustomer.
LO3Understandwhycustomersareloyaltoaparticularservicefirm.
LO4KnowthecorestrategiesoftheWheelofLoyaltythatexplainhowtodevelop
aloyalcustomerbase.
LO5Appreciatewhyitissoimportantforservicefirmstotargettheright
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customers.
LO6Useservicetieringtomanagethecustomerbaseandbuildloyalty.
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LO7Understandtherelationshipbetweencustomersatisfactionandloyalty.
LO8Knowhowtodeepentherelationshipthroughcrosssellingandbundling.
LO9Understandtheroleoffinancialandnonfinancialloyaltyrewardsinenhancing
customerloyalty.
LO10Appreciatethepowerofsocial,customization,andstructuralbondsin
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enhancingloyalty.
LO11Understandwhatfactorscausecustomerstoswitchtoacompetitor,andhow
toreducesuchswitching.
LO12UnderstandthepartplayedbyCustomerRelationshipManagement(CRM)
systemsindeliveringcustomizedservicesandbuildingloyalty.
Figure12.1.Fromhighrollerstocasualgamblers,theglitteringlightsof
Harrahspromisecustomersatisfaction.
OpeningVignette:HarrahsEntertainmentsCustomerRelationship
Management
HarrahsEntertainmentistheworldslargestgamingcompanywithitsfourmainbrands
Harrahs,Caesars,Horseshoe,andtheLondonClubsfamilyofcasinos.Itisaleaderinthe
useofhighlysophisticatedloyaltyprograms.Harrahswasfirsttolaunchatieredcustomer
loyaltyprograminthegamingindustry.Today,ithasfourtiersinitsloyaltyprogram
Gold,Platinum,Diamond,andSevenStars(byinvitationonly).Theprogramisintegrated
acrossallitspropertiesandservices.Customersidentifythemselves(andearnpoints)at
everytouchpointthroughoutthecompany,rangingfromitsgamingtables,restaurants,and
hotels,tothegiftshopsandshows.Thepointscollectedcanbeusedtoobtaincash,
merchandise,lodging,showtickets,vacations,andevents.
WhatisspecialaboutHarrahsisnotitsloyaltyprogram,butwhatitdoeswiththe
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informationgleanedaboutitscustomerswhentheyusetheircardstoearnpoints.Atthe
backend,Harrahshaslinkedallitsdatabasesfromcasinomanagement,hotelreservations,
andeventstoallowittohaveaholisticviewofeachofitscustomers.Harrahsnowhas
detaileddataonover42millioncustomersandknowseachcustomerspreferencesand
behaviors.Theserangefromhowmuchtheyspendoneachtypeofgameandtheirlikesin
foodanddrinks,toentertainmentandlodgingpreferences.Allthisinformationaboutthe
customeriscapturedinrealtime.
Harrahsusesthisdatatodriveitsmarketingandonsitecustomerservice.Forexample,if
aDiamondcardholderonslotmachine278signalsforservice,aHarrahsassociateisable
toask,Theusual,Mr.Jones?andthentrackthetimeittakesforaservertofillthe
guestsrequest.Inanotherexample,whenacustomerwinsajackpot,Harrahscantailora
customerspecificrewardtocelebratethatwin.Harrahsalsoknowswhenacustomeris
approachinghismaximumgaminglimitonaparticulareveningandwhenthecustomeris
likelytostopplaying.Justbeforethelimitisreached,Harrahscanofferhimaheavily
discountedticketinrealtimeviatextmessageforashowwithavailableseats.Thiskeeps
thecustomeronthepremises(andspending)andmakeshimfeelvaluedashegetsavery
specialdealjustwhenhewantedtostopplaying.Atthesametime,itusesotherwise
wastedcapacityinHarrahsshowsandrestaurants.
Figure12.2.Harrahshitsthejackpotwithitstechnologicalinnovationin
developingcustomerrelationships.
Likewise,whenacustomermakesacalltoitscallcenter,thestaffwillhavedetailedreal
timeinformationaboutacustomerspreferencesandspendinghabits,andcanthentailor
promotionsthatcrosssellorupsellitsservices.Harrahsdoesnotdoblanketpromotions
thattargetallitscustomersatthesametime,whichis,accordingtoHarrahsChairman,
President,andCEOGaryLoveman,amarginerodingnightmare.Rather,ituseshighly
targetedpromotionsthatcreatetherightincentivesforeachofitsdifferentcustomers.It
alsousescontrolgroupstomeasurethesuccessofapromotionindollarsandcentsandto
furtherfinetuneitscampaigns.
Withitsdatadrivencustomerrelationshipmanagement(CRM),Harrahsisableto
transformcustomerinteractionsintopersonalanddifferentiatedones.Asaresult,Harrahs
increasedtheshareofwalletofitsHarrahsTotalRewardscardholderstoanimpressive
50%plus,upfrom34%beforeitsCRMprogramwasimplemented.
The Search for Customer Loyalty

Targeting,acquiring,andretainingtherightcustomersisatthecoreofmanysuccessful
servicefirms.InChapter3,wediscussedsegmentationandpositioning.Inthischapter,we
emphasizetheimportanceoffocusingondesirable,loyalcustomerswithinthechosen
segmentsandthenbuildingandmaintainingtheirloyaltythroughcarefullyplanned
relationshipmarketingstrategies.Theobjectivesaretobuildrelationshipsandtodevelop
loyalcustomerswhowilldoagrowingvolumeofbusinesswiththefirminthefuture.
Loyaltyinabusinesscontextdescribesacustomerswillingnesstocontinuebuyingfroma
firmoverthelongtermandrecommendingthefirmsproductstofriendsandassociates.
Customerloyaltydoesnotjustrefertocustomerbehavior.Italsoincludespreference,
liking,andfutureintentions.
Fewcompaniesthinkofcustomersasannuities,saysFrederickReichheld,authorofThe
LoyaltyEffect,andamajorresearcherinthisfield.
However,thatiswhataloyal
customercanmeantoafirmaregularsourceofrevenueoveraperiodofmanyyears.The
activemanagementofthecustomerbaseandcustomerloyaltyisalsoreferredtoas
customerassetmanagement.
Inamarketingcontext,thetermdefectionisusedtodescribecustomerswhostopbuying
andtransfertheirbrandloyaltytoanothersupplier.ReichheldandSassermadetheterm
zerodefectionspopular.Zerodefectionsmeanskeepingeverycustomerthecompanycan
serveprofitably.
Notonlydoesarisingdefectionrateshowthatsomethingiswrong
withquality(orthatcompetitorsofferbettervalue),itmayalsobeshowingafallinprofits.
Bigcustomersdonotdisappearovernight.Theyoftenmayshowtheirincreasing
dissatisfactionbysteadilyreducingtheirpurchasesandshiftingpartoftheirbusiness
elsewhere.
LO1
Recognizetheimportantrolecustomerloyaltyplaysindrivingaservicefirmsprofitability.
Why Is Customer Loyalty so Important to a Firms Profitability?

Howmuchisaloyalcustomerworthintermsofprofits?ReichheldandSasseranalyzedthe
profitpercustomerindifferentservicebusinesses.Itwasgroupedbythenumberofyears
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thatacustomerhadbeenwiththefirm.
Theyfoundthatthelongercustomers
remainedwithafirmineachoftheseindustries,themoreprofitabletheybecame.Annual
profitincreasespercustomerasshowninFigure12.3forafewsampleindustries.The
industriesstudied(withaverageprofitsfromafirstyearcustomershowninparentheses)
werecreditcards($30),industriallaundry($144),industrialdistribution($45),and
automobileservicing($25).ThesameloyaltyeffectwasfoundintheInternetcontext.It
usuallytookmorethanayeartorecovercustomeracquisitioncosts,andprofitsthen
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increasedascustomersstayedlongerwiththefirm.
Source:ReprintedbypermissionofHarvardBusinessReviewfrom
FrederickJ.ReichheldandW.EarlSasserJr.,ZeroDefections:QualityComes
toServicesHarvardBusinessReview73(SeptOct1990),108.Copyright
1990bytheHarvardBusinessSchoolPublishingCorporation.Allrights
reserved.
Figure12.3.Howmuchprofitacustomergeneratesovertime.
ReichheldandSasserstatethattherearefourfactorsthatcausethisgrowth.Thesefactors
are:
1.Profitderivedfromincreasedpurchases(or,inacreditcardandbanking
environment,higheraccountbalances).Overtime,businesscustomersoftengrow
largerandsoneedtopurchaseingreaterquantities.Individualsmayalsopurchasemoreas
theirfamiliesgroworastheybecomemoreaffluent.Bothtypesofcustomersmaybe
willingtocombinetheirpurchaseswithasinglesupplierwhoprovideshighqualityservice.
2.Profitfromreducedoperatingcosts.Ascustomersbecomemoreexperienced,they
makefewerdemandsonthesupplier(forinstance,theyhavelessneedforinformationand
assistance,andmakemoreuseofselfserviceoptions).Theymayalsomakefewer
mistakeswheninvolvedinoperationalprocesses.Thiscontributestogreaterproductivity.
3.Profitfromreferralstoothercustomers.Positivewordofmouth
recommendationsarelikefreesalesandadvertising,savingthefirmfromhavingtoinvest
asmuchmoneyintheseactivities.
4.Profitfrompricepremium.Newcustomersoftenbenefitfromintroductory
promotionaldiscounts.Longtermcustomers,however,aremorelikelytopayregular
prices,andwhentheyarehighlysatisfiedtheytendtobelesspricesensitive.
Moreover,customerswhotrustasuppliermaybemorewillingtopayhigherpricesatpeak
periodsorforexpresswork.
Figure12.4showstherelativecontributionofeachofthesedifferentfactorsoveraseven
yearperiod,basedonananalysisof19differentproductcategories(bothgoodsand
services).Reichheldarguesthattheeconomicbenefitsofcustomerloyaltynotedabove
oftenexplainwhyonefirmismoreprofitablethanacompetitor.
Source:WhyCustomersAreMoreProfitableOverTimefromFrederickJ.
ReichheldandW.EarlSasserJr.ZeroDefections:QualityComestoServices,
HarvardBusinessReview73(SeptOct1990),108.Reprintedbypermissionof
HarvardBusinessSchool.
Figure12.4.Whycustomersaremoreprofitableovertime.
Assessing the Value of a Loyal Customer

Itsamistaketoassumethatloyalcustomersarealwaysmoreprofitablethanthosewho
makeonetimetransactions.
Loyalcustomersmaynotspendmorethanonetime
buyers,andinsomeinstances,theymayevenexpectpricediscounts.Also,profitsdonot
necessarilyincreasewithtimeforalltypesofcustomers.
Inmostmassmarket
businesstocustomer(B2C)servicessuchasbanking,mobilephoneservices,and
hospitalitycustomerscannotnegotiateprices.However,inmanyB2Bcontexts,large
customershavealotofbargainingpowerandthereforewillnearlyalwaystrytonegotiate
lowerpriceswhencontractscomeupforrenewal.Thisforcessupplierstosharethecost
savingsresultingfromdoingbusinesswithlarge,loyalcustomers.DHLhasfoundthat
althougheachofitsmajoraccountsgeneratessignificantbusiness,theyyieldbelowaverage
margins.Incontrast,DHLssmaller,lesspowerfulaccountsprovidesignificantlyhigher
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profitability(Figure12.5).
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Figure12.5.DHLpricesdifferentlyfordifferentmarketsegments.
Recentstudieshavealsoshownthattheprofitimpactofacustomermayvaryalot
dependingonthestageoftheserviceproductlifecycle.Forinstance,referralsbysatisfied
customersandnegativewordofmouthfromdefectedcustomershaveamuchgreater
effectonprofitintheearlystagesoftheserviceproductslifecyclethaninlaterstages,
wherethefocusismuchmoreongeneratingcashflowfromtheexistingcustomerbase
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insteadofnewcustomers.
Someofthechallengesthatyouwillprobablyfaceinyourworkaretodeterminethecosts
andrevenuesassociatedwithservingcustomerstodifferentmarketsegmentsatdifferent
pointsintheircustomerlifecycles,andtopredictfutureprofitability.Forinsightsonhowto
calculatecustomervalue,seethebox,WorksheetforCalculatingCustomerLifetime
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Value.
LO2
Calculatethelifetimevalue(LTV)ofaloyalcustomer.
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Worksheet for Calculating Customer Lifetime Value
Calculatingcustomervalueisaninexactsciencethatissubjecttoavarietyof
assumptions.Youmaywanttotryvaryingtheseassumptionstoseehowitaffects
thefinalfigures.Generallyspeaking,revenuespercustomerareeasiertotrack
onanindividualizedbasisthanaretheassociatedcostsofservingacustomer,
unless(1)noindividualrecordsarekeptand/or(2)theaccountsservedarevery
largeandallaccountrelatedcostsareindividuallydocumentedandassigned.
AcquisitionRevenuesLessCosts
Ifindividualaccountrecordsarekept,theinitialapplicationfeepaidandinitial
purchase(ifrelevant)shouldbefoundintheserecords.Costs,bycontrast,may
havetobebasedonaveragedata.Forinstance,themarketingcostofacquiringa
newclientcanbecalculatedbydividingthetotalmarketingcosts(advertising,
promotions,selling,etc.)devotedtowardacquiringnewcustomersbythetotal
numberofnewcustomersacquiredduringthesameperiod.Ifeachacquisition
takesplaceoveranextendedperiodoftime,youmaywanttobuildinalagged
effectbetweenwhenmarketingexpendituresareincurredandwhennew
customerscomeonboard.Thecostofcreditcheckswhererelevantmustbe
dividedbythenumberofnewcustomers,notthetotalnumberofapplicants,
becausesomeapplicantswillprobablyfailthishurdle.Accountsetupcostswill
alsobeanaveragefigureinmostorganizations.
AnnualRevenuesandCosts
Ifannualsales,accountfees,andservicefeesaredocumentedonanindividual
accountbasis,accountrevenuestreams(exceptreferrals)canbeeasily
identified.Thefirstpriorityistosegmentyourcustomerbasebythelengthofits
relationshipwithyourfirm.Dependingonthesophisticationandprecisionofyour
firmsrecords,annualcostsineachcategorymaybedirectlyassignedtoan
individualaccountholderoraveragedforallaccountholdersinthatagecategory.
ValueofReferrals
Computingthevalueofreferralsrequiresavarietyofassumptions.Togetstarted,
youmayneedtoconductsurveystodetermine(1)whatpercentageofnew
customersclaimthattheywereinfluencedbyarecommendationfromanother
customerand(2)whatothermarketingactivitiesalsodrewthefirmtothat
individualsattention.Fromthesetwoitems,estimatescanbemadeofwhat
percentageofthecreditforallnewcustomersshouldbeassignedtoreferrals.
Additionalresearchmaybeneededtoclarifywhetheroldercustomersaremore
likelytobeeffectiverecommendersthanyoungerones.
NetPresentValue
Calculatingnetpresentvalue(NPV)fromafutureprofitstreamwillrequirechoice
ofanappropriateannualdiscountfigure.(Thiscouldreflectestimatesoffuture
inflationrates.)Italsorequiresassessmentofhowlongtheaveragerelationship
lasts.TheNPVofacustomer,then,isthesumoftheanticipatedannualprofiton
eachcustomerfortheprojectedrelationshiplifetime,suitablydiscountedeach
yearintothefuture.
LO3
Understandwhycustomersareloyaltoaparticularservicefirm.
Why Are Customers Loyal?

Afterunderstandinghowimportantloyalcustomerscanbeforthebottomlineofaservice
firm,letsexplorewhatitisthatmakesacustomerloyal.Customersarenotautomatically
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loyaltoanyonefirm.Rather,weneedtogiveourcustomersareasontocombinetheir
buyingwithonlyusandthenstayingwithus.Weneedtocreatevalueforthemtobecome
andremainloyal.Justaskyourself:Whatservicecompaniesareyouloyalto?Andwhyare
youloyaltothesefirms?Researchhasshownthatrelationshipscancreatevaluefor
individualconsumersthroughsuchfactorsasinspiringgreaterconfidence,offeringsocial
benefits,andprovidingspecialtreatment(seeServiceInsights12.1).Wewillnextdiscuss
howwecansystematicallythinkaboutcreatingvalueforourloyalcustomersusingthe
WheelofLoyalty.
ServiceInsights12.1:HowCustomersSeeRelational
BenefitsinServiceIndustries
Whatbenefitsdocustomersseethemselvesreceivingfromanextended
relationshipwithaservicefirm?Researchersseekinganswerstothisquestion
conductedtwostudies.Thefirstconsistedofindepthinterviewswith21
respondentsfromabroadcrosssectionofbackgrounds.Respondentswere
askedtoidentifyserviceprovidersthattheyusedonaregularbasisand
invitedtoidentifyanddiscussanybenefitstheyreceivedasaresultofbeing
aregularcustomer.Amongthecommentswere:
Ilikehim[hairstylist]...Hesreallyfunnyandalwayshaslotsofgoodjokes.
Heskindoflikeafriendnow.
IknowwhatImgettingIknowthatifIgotoarestaurantthatIregularly
goto,ratherthantakeachanceonallofthenewrestaurants,thefoodwill
begood.
Ioftengetpricebreaks.ThelittlebakerythatIgotointhemorning,every
onceinawhile,theyllgivemeafreemuffinandsay,Youreagood
customer,itsonustoday.
Youcangetbetterservicethandropincustomers...Wecontinuetogoto
thesameautomobilerepairshopbecausewehavegottentoknowtheowner
onakindofpersonalbasis,andhe...canalwaysworkusin.
Oncepeoplefeelcomfortable,theydontwanttoswitchtoanotherdentist.
Theydontwanttotrainorbreakanewdentistin.
Afterevaluatingandgroupingthecomments,theresearchersdesigneda
secondstudyinwhichtheycollected299surveyquestionnaires.Results
showedthatmostofthebenefitsthatcustomersderivedfromrelationships
couldbegroupedintothreecategories.Thefirst,andmostimportant,group
involvedwhattheresearcherslabeledconfidencebenefits,followedbysocial
benefits,andspecialtreatment.
Confidencebenefitsincludedfeelingsbycustomersthatinanestablished
relationship,therewaslessriskofsomethinggoingwrong,greater
confidenceincorrectperformance,andtheabilitytotrusttheprovider.
Customersexperiencedloweredanxietywhenpurchasingbecausetheyknew
whattoexpect,andtheytypicallyreceivedthefirmshighestlevelofservice.
Socialbenefitsincludedmutualrecognitionbetweencustomersand
employees,beingknownbyname,friendshipwiththeserviceprovider,and
enjoymentofcertainsocialaspectsoftherelationship.
Specialtreatmentbenefitsincludedbetterprices,discountsonspecialdeals
thatwereunavailabletomostcustomers,extraservices,higherprioritywhen
therewasawait,andfasterservicethanmostcustomers.
Source:KevinP.Gwinner,DwayneD.Gremler,andMaryJoBitner,
RelationalBenefitsinServicesIndustries:TheCustomers
Perspective,JournaloftheAcademyofMarketingScience26,no.2
(1998):101114.
LO4
KnowthecorestrategiesoftheWheelofLoyaltythatexplainhowtodevelopaloyal
customerbase.
The Wheel of Loyalty

Buildingcustomerloyaltyisdifficult.Justtryandthinkofalltheservicefirmsyouyourself
areloyalto.Youarelikelytoonlycomeupwithveryfewexamples.Thisshowsthat,
althoughfirmsspendhugeamountsofmoneyandeffortonbuildingloyalty,theyoftenare
notsuccessfulinbuildingtruecustomerloyalty.WeusetheWheelofLoyaltyshownin
Figure12.6asanorganizingframeworkforthinkingofhowtobuildcustomerloyalty.Itis
madeupofthreesequentialstrategies.
First,thefirmneedsasolidfoundationforcreatingcustomerloyaltythatincludes
targetingtherightportfolioofcustomersegments,attractingtherightcustomers,tiering
theservice,anddeliveringhighlevelsofsatisfaction.
Second,totrulybuildloyalty,afirmneedstodevelopclosebondswithitscustomers.It
caneitherdeepentherelationshipthroughcrosssellingandbundling,oraddvaluetothe
customerthroughloyaltyrewardsandhigherlevelbonds.
Third,thefirmneedstoidentifyandreducethefactorsthatresultinchurn,thelossof
existingcustomersandtheneedtoreplacethemwithnewones.
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Figure12.6.TheWheelofLoyalty.
WediscusseachofthecomponentsoftheWheelofLoyaltyinthesectionsthatfollow.
Building a Foundation for Loyalty

Manyelementsareinvolvedincreatinglongtermcustomerrelationshipsandloyalty.In
Chapter3wediscussedsegmentationandpositioning.Inthissection,weemphasizethe
importanceoffocusingonservingseveraldesirablecustomersegmentsandthenbuilding
andmaintainingtheirloyaltythroughcarefullythoughtoutrelationshipmarketing
strategies.
LO5
Appreciatewhyitissoimportantforservicefirmstotargettherightcustomers.
Targeting the Right Customers

Loyaltymanagementstartswithsegmentingthemarkettomatchcustomerneedsand
firmcapabilitiesinshort,identifyandtargettherightcustomers.Whoshouldwebe
serving?isaquestionthateveryservicebusinessneedstoaskregularly.Companiesneed
tochoosetheirtargetsegmentscarefullyandmatchthemtowhatthefirmcandeliver.
Managersmustthinkcarefullyabouthowcustomerneedsrelatetosuchoperational
elementsasspeedandquality,thetimeswhenserviceisavailable,thefirmscapacityto
servemanycustomersallatonce,andthephysicalfeaturesandappearanceofservice
facilities.Theyalsoneedtoconsiderhowwelltheirservicepersonnelcanmeetthe
expectationsofspecifictypesofcustomers,intermsofbothpersonalstyleandtechnical
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ability. Finally,theyneedtoaskthemselveswhethertheircompanycanmatchorexceed
competingservicesthataredirectedatthesametypesofcustomers(Figure12.7).
Figure12.7Acompanythatisabletoexceedcustomerexpectationswill
wintheirloyalty.
Theresultofcarefullytargetingcustomersbymatchingthecompanycapabilitiesand
strengthswithcustomerneedsshouldbeasuperiorserviceofferingintheeyesofthose
customerswhovaluewhatthefirmhastooffer.AsFrederickReichheldsaid,...theresult
shouldbeawinwinsituation,whereprofitsareearnedthroughthesuccessandsatisfaction
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ofcustomers,andnotattheirexpense.
Searching for Value, Not Just Volume

Toomanyservicefirmscontinuetofocusonthenumberofcustomerstheyservewithout
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givingsufficientattentiontothevalueofeachcustomer. Generallyspeaking,heavyusers
whobuymorefrequentlyandinlargervolumesaremoreprofitablethanoccasionalusers.
Servicecustomerswhobuystrictlybasedonlowestprice(aminorityinmostmarkets)are
notgoodtargetcustomersforrelationshipmarketing.Theyaredealprone,continuously
seekthelowestpriceonoffer,andswitchbrandseasily.
Loyaltyleadersarechoosyaboutacquiringonlytherightcustomers.Gettingtheright
customerscanbringinlongtermrevenuesandcontinuedgrowthfromreferrals.Itcanalso
enhancesatisfactionfromemployeeswhosedailyjobsareimprovedwhentheycandeal
withappreciativecustomers.Firmsthatarehighlyfocusedandselectiveintheircustomer
acquisitionratherthanthosethatfocusongettingnewcustomerswithoutbeingselective
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tendtoshowrapidgrowthoverlongperiods. ServiceInsights12.2showshowthe
VanguardGroup,aleaderinthemutualfundsindustry,designeditsproductsandpricingto
attractandretaintherightcustomersforitsbusinessmodel.
Differentsegmentsofferdifferentvalueforaservicefirm.Likeinvestments,sometypesof
customersmaybemoreprofitablethanothersintheshortterm,butothersmayhave
greaterpotentialforlongtermgrowth.Similarly,thespendingpatternsofsomecustomers
maybestableovertime,whileothersmaybevaried,e.g.spendingheavilyinboomtimes
butcuttingbacksharplyinrecessions.Awisemarketerseeksamixofsegmentsinorderto
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reducetherisksassociatedwithvariationsindemand.
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ServiceInsights12.2:VanguardDiscouragesthe
AcquisitionofWrongCustomers
TheVanguardGroupisagrowthleaderinthemutualfundindustrythatbuilt
its$1.6trillioninmanagedassetsby2011throughcarefullytargetingthe
rightcustomersforitsbusinessmodel.Itsshareofnewsales,whichwas
around25%,reflecteditsshareofassetsormarketshare.However,ithada
farlowershareofredemptions(customerdefectionsinthefundcontext),
whichgaveitamarketshareofnetcashflowsof55%(newsalesminus
redemptions),andmadeitthefastestgrowingmutualfundinitsindustry.
HowdidVanguardachievesuchlowredemptionrates?Thesecretwasinits
carefulcustomeracquisition,anditsproductandpricingstrategies,which
encouragedtheacquisitionoftherightcustomers.
JohnBogle,Vanguardsfounder,believedthatthequalityofindexfundsand
theirlowermanagementfeeswouldleadtohigherreturnsoverthelongrun.
HeofferedVanguardsclientsthelowestmanagementfeesthroughapolicy
ofnottrading(itsindexfundsholdthemarkettheyaredesignedtotrack),not
havingasalesforce,andspendingonlyasmallportionofwhatits
competitorsdidonadvertising.Anotherimportantpartofkeepingitscosts
lowwasitsaimtodiscouragetheacquisitionofcustomerswhowerenot
longtermindexholders.
BogleattributesthehighcustomerloyaltyVanguardhasachievedtoagreat
dealoffocusoncustomerdefectionsorlowredemptionrates.Low
redemptionratesmeantthatthefirmwasattractingtherightkindofloyal,
longterminvestors.Thestabilityofitsloyalcustomerbasehasbeenkeyto
Vanguardscostadvantage.Whenaninstitutionalinvestorredeemed$25
millionfromanindexfundboughtonlyninemonthsearlier,heregardedthe
acquisitionofthiscustomerafailureofthesystem.Heexplained,Wedont
wantshortterminvestors.Theymuckupthegameattheexpenseofthelong
terminvestor.AttheendofhischairmanslettertotheVanguardIndex
Trust,Boglerepeated:Weurgethem[shortterminvestors]tolookelsewhere
fortheirinvestmentopportunities.
Thiscareandattentiontoacquiringtherightcustomersisfamous.For
example,Vanguardonceturnedawayaninstitutionalinvestorwhowantedto
invest$40millionbecausethefirmsuspectedthatthecustomerwouldchurn
theinvestmentwithinthenextfewweeks,creatingextracostsforexisting
customers.ThepotentialcustomercomplainedtoVanguardsCEO,whonot
onlysupportedthedecision,butalsouseditasanopportunitytoremindhis
teamswhytheyneededtobeselectiveaboutthecustomerstheyaccept.
Furthermore,Vanguardintroducedanumberofchangestoindustrypractices
thatdiscouragedactivetradersfrombuyingitsfunds.Forexample,Vanguard
didnotallowtelephonetransfersforindexfunds,redemptionfeeswere
addedtosomefunds,andthestandardpracticesubsidizingnewaccountsat
theexpenseofexistingcustomerswasrejectedbecausethepracticewas
consideredasdisloyaltoitscoreinvestorbase.Theseproductandpricing
policiesineffectturnedawayheavytraders,butmadethefundextremely
attractiveforlongterminvestors.
Finally,Vanguardspricingwassetuptorewardloyalcustomers.Formanyof
itsfunds,investorspayaonetimefeeupfront,whichgoesintothefunds
themselvestomakeupforallcurrentinvestorsfortheadministrativecostsof
sellingnewshares.Thisfeesubsidizeslongterminvestors,andpenalizes
shortterminvestors.
Source:AdaptedfromFrederickF.Reichheld,LoyaltyRules!How
TodaysLeadersBuildLastingRelationships.Boston:MA,Harvard
BusinessSchoolPress,2001,2429,8487,144145
www.vanguard.com(http://www.vanguard.com) ,accessedonMarch12,2012.
Finally,managersshouldntassumethattherightcustomersarealwaysbigspenders.
Dependingontheservicebusinessmodel,therightcustomersmaycomefromalarge
groupofpeoplethatnoothersupplierisdoingagoodjobofserving.Manyfirmshavebuilt
successfulstrategiesonservingcustomersegmentsthathadbeenneglectedbyestablished
players,whichdidntseethemasbeingvaluableenough.ExamplesincludeEnterprise
RentACar,whichtargetscustomerswhoneedatemporaryreplacementcar.Itavoided
themoretraditionalsegmentofbusinesstravelerstargetedbyitsprincipalcompetitors.
Similarly,CharlesSchwabfocusedonretailstockbuyers,andPaychexprovidessmall
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businesseswithpayrollandhumanresourceservices.
LO6
Useservicetieringtomanagethecustomerbaseandbuildloyalty.
Managing the Customer Base through Effective Tiering of Service

Marketersshouldadoptastrategicapproachtoretaining,upgrading,andevenending
relationshipswithcustomers.Customerretentioninvolvesdevelopinglongterm,cost
effectivelinkswithcustomersforthemutualbenefitofbothparties.However,theseefforts
neednotnecessarilytargetallthecustomersinafirmwiththesamelevelofintensity.
Researchhasconfirmedthatcustomerprofitabilityandreturnonsalescanbeincreasedby
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focusingafirmsresourcesontoptiercustomers. Furthermore,differentcustomertiers
oftenhavequitedifferentserviceexpectationsandneeds.AccordingtoValarieZeithaml,
RolandRust,andKatharineLemon,itisimportantforservicefirmstounderstandthe
needsofcustomerswithindifferentprofitabilitytiersandadjusttheirservicelevels
21
accordingly. Zeithaml,Rust,andLemonillustratethisprinciplethroughafourlevel
pyramid(Figure12.8).
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Source:ValerieA.Zeithaml,RolandT.Rust,andKatherineN.LemonThe
CustomerPyramid:CreatingandServingProfitableCustomers,California
ManagementReview43,no.4,Summer2001,Figure1,pp.118142Copyright
2001bytheRegentsoftheUniversityofCalifornia.Reprintedbypermission
ofTheRegentsforelectronicpostingaddAllrightsreserved.Thisarticleis
forpersonalviewingbyindividualsaccessingthissite.Itisnottobecopied,
reproduced,orotherwisedisseminatedwithoutwrittenpermissionfromthe
CaliforniaManagementReview.Byviewingthisdocument,youherebyagreeto
theseterms.Forpermissionorreprints,contact:cmr@haas.berkeley.edu.
Figure12.8.Thecustomerpyramid.
Platinum.Thesecustomersformaverysmallpercentageofafirmscustomerbase.They
areheavyusersandcontributealargeshareoftheprofits.Thissegmentisusuallylessprice
sensitive,butexpectshighestservicelevelsinreturn.Theyarelikelytobewillingtoinvest
inandtrynewservices.
Gold.Thegoldtierincludesalargerpercentageofcustomersthantheplatinum.However,
individualcustomerscontributelessprofitthanplatinumcustomersdo.Theytendtobe
slightlymorepricesensitiveandlesscommittedtothefirm.
Iron.Thesecustomersprovidethebulkofthecustomerbase.Theirnumbersgivethefirm
economiesofscale.Hence,theyareimportantsothatafirmcanbuildandmaintaina
certaincapacitylevelandinfrastructure,whichareoftenneededforservinggoldand
platinumcustomerswell.However,ironcustomersinthemselvesmayonlybemarginally
profitable.Theirlevelofbusinessisnotenoughtojustifyspecialtreatment.
Lead.Customersinthistiertendtogeneratelowrevenuesforafirm.However,they
oftenstillrequirethesamelevelofserviceasironcustomersdo.Therefore,fromthefirms
perspective,theyarefrequentlyalossmakingsegment.
Tieringtheservicemeansthatthefirmdeliversdifferentservicesandservicelevelsto
differentcustomergroups.Thebenefitfeaturesforplatinumandgoldcustomersshouldbe
designedtoencouragethemtoremainloyalbecausethesecustomersaretheveryones
competitorswouldlikemosttosteal.Amongloyalsegments,thefocusshouldbeon
22
developingandgrowingtherelationship,perhapsvialoyaltyprograms.
Bycontrast,amongleadtiercustomersatthebottomofthepyramid,theoptionsareto
eithertomovethemtotheironsegment(e.g.,throughincreasingsales,increasingprices,
and/orcuttingservicingcosts)ortoendtherelationshipwiththem.Imposingaminimum
balanceorfeethatiswaivedwhenacertainlevelofrevenueisgeneratedmayencourage
customerswhouseseveralsupplierstoconsolidatetheirbuyingwithasinglefirminstead.
Anotherwaytomovecustomersfromtheleadtiertoironistoencouragethemtouselow
costservicedeliverychannels.Forinstance,leadtiercustomersmaybechargedafeefor
facetofaceinteractionsbutthefeeiswaivedwhensuchcustomersuseelectronicchannels.
Inthecellulartelephoneindustry,forexample,lowusemobileuserscanbeencouragedto
useprepaidpackagesthatdonotrequirethefirmtosendoutbillsandcollectpayment.This
alsoreducestheriskofbaddebtsonsuchaccounts.
Divestingorterminatingcustomerscomeswhenthefirmrealizesthatnotallexisting
23
customerrelationshipsareworthkeeping. Somerelationshipsmaynolongerbeprofitable
forthefirmbecausetheycostmoretomaintainthanthecontributionstheygenerate.
Somecustomersnolongerfitthefirmsstrategyeitherbecausethatstrategyhaschanged
orbecausethecustomersbehaviorandneedshavechanged.
Occasionally,customersarefiredoutright.INGDirectisonesuchcompanythatdoesso.
Itsellsanofrillstypeofconsumerbankingitonlyhasahandfulofbasicproducts,andit
lureslowmaintenancecustomerswithnominimumbalancenorfeesandslightlyhigher
interestrates(itsOrangesavingsaccountpaid1.5%inAugust2010)(Figure12.9).Tooffset
thatgenerosity,itsbusinessmodelpushesitscustomerstowardonlinetransactions,andthe
bankroutinelyfirescustomerswhodontfititsbusinessmodel.Whenacustomercallstoo
often(theaveragecustomerphonecallcoststhebank$5.25tohandle)orwantstoomany
exceptionstotherule,thebankssalesassociatesbasicallysay:Look,thisdoesntfityou.
Youneedtogobacktoyourcommunitybankandgetthekindofcontactyoure
comfortablewith.Asaresult,INGDirectscostperaccountisonlyonethirdofthe
24
industryaverage.
Figure12.9.INGDirectoffershighinterestratesthatkeepcustomers
happy.
Eachservicefirmneedstoregularlyexamineitscustomerportfolioandconsiderending
unsuccessfulrelationships.Legalandethicalconsiderations,ofcourse,willdetermineand
howtotakesuchactions.Forexample,abankmayintroduceaminimummonthlyfeefor
accountswithalowbalance(e.g.,below$1,000),but,forsocialresponsibility
considerations,waivethisfeeforcustomersonsocialsecurity.
LO7
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Understandtherelationshipbetweencustomersatisfactionandloyalty.
Customer Satisfaction and Service Quality Are Prerequisites for Loyalty

Thefoundationforbuildingtrueloyaltyliesincustomersatisfaction.Highlysatisfiedoreven
delightedcustomersaremorelikelytoconsolidatetheirpurchases,spreadpositivewordof
25
mouth,andbecomeloyaladvocatesofafirm. Ontheotherhand,dissatisfactiondrives
customersawayandisakeyfactorinswitchingbehavior.Recentresearchevenshowed
thatincreasesincustomersatisfactionleadtoincreasesinstockprices.SeeServiceInsights
12.3.
Thesatisfactionloyaltyrelationshipcanbedividedintothreemainzones:defection,
indifference,andaffection(Figure12.10).Thezoneofdefectionoccursatlowsatisfaction
levels.Customerswillswitchunlessswitchingcostsarehighortherearenootherchoices.
Extremelydissatisfiedcustomerscanturnintoterroristsprovidingalotofnegativeword
26
ofmouthfortheserviceprovider. Thezoneofindifferenceisfoundatmoderate
satisfactionlevels.Here,customersarewillingtoswitchiftheyfindabetterchoice.Finally,
thezoneofaffectionislocatedatveryhighsatisfactionlevels,wherecustomersmayhave
suchhighattitudinalloyaltythattheydonotlookforalternativeserviceproviders.
Customerswhopraisethefirminpublicandreferotherstothefirmaredescribedas
27
apostles.Highsatisfactionlevelsleadtoimprovedfuturebusinessperformance.
Source:AdaptedfromThomasO.JonesandW.EarlSasser,Jr.,WhySatisfied
CustomersDefect,HarvardBusinessReview,NovemberDecember1995,p.
91.
Figure12.10.Thecustomersatisfactionloyaltyrelationship.
ServiceInsights12.3:CustomerSatisfactionandWall
StreetHighReturnsandLowRisk!
Doesafirmscustomersatisfactionlevelshaveanythingtodowithitsstock
price?ThiswastheinterestingresearchquestionClaesFornellandhis
colleagueswantedtoanswer.Morespecifically,theyexaminedwhether
investmentsincustomersatisfactionledtoexcessstockreturns.Ifso,were
thesereturnsassociatedwithhigherrisksaswouldbepredictedbyfinance
theory?
Theresearchersbuilttwostockportfolios,onehypotheticalbackdated
portfolioandarealworldportfolio.Bothportfoliosconsistedonlyoffirmsthat
didwellintermsoftheircustomersatisfactionratings,asmeasuredbythe
AmericanCustomerSatisfactionIndex(ACSI).Theirfindingsarestrikingfor
managersandinvestorsalike!Fornellandhiscolleaguesdiscoveredthat
ACSIwassignificantlyrelatedtostockpricesoftheindividualfirmsand
outperformedthemarket.However,simplypublishingthelatestdataonthe
ACSIindexdidnotimmediatelymoveshareprices.Instead,shareprices
seemedtoadjustslowlyovertime,asfirmspublishedotherresults(perhaps
earningsdataorotherhardfactsthatmaylagcustomersatisfaction).
Therefore,actingfasterthanthemarkettochangesintheACSIindex
generatedexcessstockreturns.Theresultsareinlinewithresearchin
marketing,whichholdsthatsatisfiedcustomersimprovethelevelandthe
stabilityofcashflow.
Formarketingmanagers,thisstudysfindingsconfirmthatinvestments(or
expensesifyoutalktoaccountants)inmanagingcustomerrelationshipsand
thecashflowstheyproduceincreaseafirmsvalue.Althoughtheresultsare
convincing,becarefulifyouwanttoinvestinfirmsthatshowhighincreases
incustomersatisfactioninfutureACSIreleases.Yourfinancefriendswilltell
youthatefficientmarketslearnfast!Youknowthishashappenedwhenyou
seestockpricesmoveasaresponsetofutureACSIreleases.Youcanlearn
moreabouttheACSIatwww.theacsi.org (http://www.theacsi.org) .
Cancustomersatisfactiondatahelptooutperformthemarket?
Sources:ClaesFornell,SunilMithas,ForrestV.MorgesonIII,andM.S.
Krishnan,CustomerSatisfactionandStockPrices:HighReturns,Low
Risk,JournalofMarketing70(January2006):314.LerzanAksoy,
BruceCooil,ChristopherGroening,TimothyL.Keiningham,andAtakan
Yalin,TheLongTermStockMarketValuationofCustomer
Satisfaction,JournalofMarketing72,no.4(2008):105122.
Strategies for Developing Loyalty Bonds with Customers

Havingtherightportfolioofcustomersegments,attractingtherightcustomers,tieringthe
service,anddeliveringhighlevelsofsatisfactionareasolidfoundationforcreatingcustomer
loyaltyasshowninthewheelofloyaltyinFigure12.6.However,firmscandomoreto
bondmorecloselywiththeircustomers.Researchshowsthat,whencustomersareloyal
toacompany,theyareattractedtovisitthecompany.However,oncethere,itisthe
28
loyaltyprogramthatwillattractthemtospendmoney. Therefore,thereisaneedto
haveavarietyofstrategiestodeveloployaltybondswithcustomers.Specificstrategies
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include(1)deepeningtherelationshipthroughcrosssellingandbundling,(2)creating
loyaltyrewards,and(3)buildinghigherlevelbondssuchassocial,customization,and
29
structuralbonds. Wewilldiscusseachofthesethreestrategiesnext.
LO8
Knowhowtodeepentherelationshipthroughcrosssellingandbundling.
Deepening the Relationship

Tobuildclosertieswithitscustomers,firmscandeepentherelationshipthroughbundling
and/orcrosssellingservices.Forexample,banksliketosellasmanyfinancialproductsto
anaccountorhouseholdaspossible.Onceafamilyhasitscurrentaccount,creditcard,
savingsaccount,safedepositbox,carloan,mortgage,etc.withthesamebank,the
relationshipissodeepthatswitchingbecomesamajorhassle.Therefore,customersarenot
likelytoswitchunlesstheyareverydissatisfiedwiththebank.
Inadditiontohigherswitchingcosts,thereisoftenalsovalueforthecustomertoowhen
buyingallparticularservicesfromasingleprovider.Onestopshoppingtypicallyismore
convenientandlesshasslethanbuyingindividualservicesfromdifferentproviders.When
havingmanyserviceswiththesamefirm,thecustomermayachieveahigherservicetier
andreceivebetterservices,andsometimesservicebundlesdocomewithpricediscounts.
LO9
Understandtheroleoffinancialandnonfinancialloyaltyrewardsinenhancingcustomer
loyalty.
Encouraging Loyalty through Financial and Nonfinancial Rewards

Fewcustomersbuyonlyfromonlyonesupplier.Thisisespeciallytrueinsituationswhere
servicedeliveryinvolvesseparatetransactions(suchasacarrental)insteadofbeing
continuousinnature(aswithinsurancecoverage).Inmanyinstances,consumersareloyal
toseveralbrands(sometimesdescribedaspolygamousloyalty)butavoidothers.Insuch
instances,themarketinggoalistostrengthenthecustomerspreferenceforonebrandover
othersandtogainagreatershareofthecustomersspendingonthatservicecategory(also
referredtoasincreasingshareofwallet).Welldesignedloyaltyprogramscanachieve
30
increasedshareofwalletrewardbasedbonds. Incentivesthatofferrewardsbasedonthe
frequencyofpurchase,valueofpurchase,oracombinationofboth,representabasiclevelof
customerbonding.Theserewardscanbefinancialornonfinancialinnature.
Financial Rewards
Financialrewardsarecustomerincentivesthathaveafinancialvalue(alsocalledhard
benefits).Theseincludediscountsonpurchases,loyaltyprogramrewardssuchasfrequent
fliermiles(Figure12.11),andthecashbackprogramsprovidedbysomecreditcardissuers.
Figure12.11.AmericanAirlinestriestomakeitsloyaltyprogramenticing.
Besidesairlinesandhotels,anincreasingnumberofservicefirmsrangingfromretailers
31
(suchasdepartmentstores,supermarkets, bookshops,andpetrolstations),
telecommunicationsproviders,andcafchainstocourierservicesandcinemachainshaveor
arelaunchingsimilarrewardprogramsinresponsetotheincreasingcompetitivenessof
theirmarkets.Manyfirmsdenominatetheirawardsinmilesthatcanbecreditedtoa
selectedfrequentflyerprogram.Inshort,airmileshavebecomeaformofpromotional
32
currencyintheservicesector.
Recentresearchinthecreditcardindustrysuggeststhatfinancialrewardsbasedloyalty
programsstrengthenthecustomersperceptionofthevaluepropositionandleadto
33
increasedrevenuesduetofewerdefectionsandhigherusagelevels.
Interestingly,ifafirmhasloyaltyprogrampartners,(e.g.,anairlinemaypartnercredit
cardcompanies,hotels,carrentalfirms,whereloyaltyprogrampointscanalsobeearned
withthesecompanies),satisfactionwiththecoreservicecanhaveapositiveimpacton
buyingfromprogrampartners.Inthesameway,satisfactionwiththeserviceofprogram
34
partnerscanhaveapositiveimpactonthebuyingofthecoreservice.
Evenwelldesignedrewardsprogramsbythemselvesarenotenoughtokeepafirmsmost
desirablecustomers.Ifyouaredissatisfiedwiththequalityofservice,orbelievethatyou
cangetbettervaluefromalessexpensiveservice,youmayquicklybecomedisloyal.No
servicebusinessthathasarewardsprogramforfrequentuserscaneveraffordtolosesight
ofitsbroadergoalsofofferinghighservicequalityandgoodvaluerelativetothepriceand
35
othercostsincurredbycustomers. Sometimes,whatthecustomerwantsisjustforthe
firmtodeliverthebasicservicewell,meettheirneeds,andsolvetheirproblemsquickly
36
andeasily,andtheywillbeloyal.
Finally,customerscanbefrustratedwithfinancialrewardsbasedprogramssothatinstead
ofcreatingloyaltyandgoodwill,theybreeddissatisfaction.Thiscanhappenwhencustomers
feeltheyareexcludedfromarewardprogrambecauseoflowbalancesorvolumeof
business,iftherewardsareseenashavinglittleornovalue,iftheycannotredeemtheir
loyaltypointsbecauseofblackoutdatesduringhighdemandperiods,andifredemption
37
processesaretootroublesomeandtimeconsuming.
Andsomecustomersalreadyhavesomanyloyaltycardsintheirwalletthattheysimply
arenotinterestedinaddingmorecardstothatpile.
Nonfinancial Rewards
Nonfinancialrewards(alsocalledsoftbenefits)providebenefitsthatcannotbetranslated
directlyintomonetaryterms.Examplesincludegivingprioritytoloyaltyprogram
membersonreservationwaitlistsandvirtualqueuesincallcenters.Someairlinesprovide
benefitssuchashigherbaggageallowances,priorityupgrading,accesstoairportloungesand
theliketoitsfrequentflyers,evenwhentheyareonlyflyingineconomyclass.
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Importantintangiblerewardsincludespecialrecognitionandappreciation.Customerstend
tovaluetheextraattentiongiventotheirneedsandappreciatetheimplicitservice
guaranteeofferedbyhightierloyaltyprogrammemberships.Thisincludeseffortstomeet
theiroccasionalspecialrequests.Manyloyaltyprogramsalsoprovideimportantstatus
benefitstocustomersinthetoptierswhofeelpartofanelitegroup(e.g.,theSevenStars
cardholderswithHarrahsEntertainmentinouropeningvignette)andenjoytheirspecial
38
treatment.
Nonfinancialrewards,especiallyiflinkedtohighertierservicelevels,aretypicallymore
powerfulthanfinancialones.Highertierservicecancreatealotofvalueforcustomers.
Unlikefinancialrewards,nonfinancialrewardsdirectlyrelatetothefirmscoreserviceand
improvethecustomersexperienceandvalueperception.Inthehotelcontext,forexample,
redeemingloyaltypointsforfreegiftsdoesnothingfortheguestexperience.However,
gettingpriorityforreservations,earlycheckin,latecheckout,upgrades,andreceiving
specialattentionandappreciationmakeyourstaymorepleasantandmakesyouwantto
comeback.
ServiceInsights12.4describeshowBritishAirwayshasdesigneditsExecutiveClub,
effectivelycombiningfinancialandnonfinancialloyaltyrewards.
ServiceInsights12.4:RewardingValueofUse,NotJust
Frequency,atBritishAirways
Unlikesomefrequentflyerprograms,inwhichcustomerusageismeasured
simplyinmiles,BritishAirways(BA)ExecutiveClubmembersreceiveboth
airmilestowardredemptionofairtravelawardsandpointstowardsilveror
goldtierstatusfortravelonBA.WiththecreationoftheOneWorldalliance
withAmericanAirlines,Qantas,CathayPacific,andotherairlines,Executive
Clubmembershavebeenabletoearnmiles(andsometimespoints)by
flyingthesepartnerairlines,too.
AsshowninTable12.1,silverandgoldcardholdersareentitledtospecial
benefits,suchaspriorityreservationsandasuperiorlevelofontheground
service.Forinstance,evenifagoldcardholderisonlytravelingineconomy
class,heorshewillbeentitledtofirstclassstandardsoftreatmentatcheckin
andintheairportlounges.Milescanbeaccumulatedforuptothreeyears
(afterwhichtheyexpire),buttierstatusisvalidforonly12monthsbeyondthe
membershipyearinwhichitwasearned.
Table12.1.BenefitsofferedbyBritishAirwaystoitsmost
valuedpassengers
Thismeansthattherighttospecialprivilegesmustbereearnedeachyear.
Theobjectiveofawardingtierstatusistoencouragepassengerswhohavea
choiceofairlinestoconcentratetheirtravelonBritishAirways.Few
passengerstravelsooftenthattheywillbeabletoobtainthebenefitsofgold
tierstatus(oritsequivalent)onmorethanoneairline.
Pointsgivenalsovaryaccordingtotheclassofservice.Longertripsearn
morepointsthanshorterones.However,ticketsatdeeplydiscountedprices
mayearnfewermilesandnopointsatall.Torewardpurchaseofhigher
pricedtickets,passengersearnpointsatdoubletheeconomyrateifthey
travelinclub(businessclass),andattripletherateinfirstclass.
Althoughtheairlinemakesnopromisesaboutcomplimentaryupgrades,
membersofBAsExecutiveClubaremorelikelytoreceivesuchinvitations
thanotherpassengers.Tierstatusisanimportantconsideration.Unlikemany
airlines,BAtendstolimitupgradestosituationsinwhichalowerclassof
cabinisoverbooked.Theydonotwantfrequenttravelerstobelievethatthey
canplanonbuyingalessexpensiveticketandthenautomaticallyreceivean
upgradedseat.
Source:BritishAirwaysExecutiveClub,
www.britishairways.com/travel/ecbenftgold/public/en_us
(http://www.britishairways.com/travel/ecbenftgold/public/en_us) ,accessedJuly2011.
LO10
Appreciatethepowerofsocial,customization,andstructuralbondsinenhancingloyalty.
Building Higher-Level Bonds

Oneobjectiveofloyaltyrewardsistomotivatecustomerstocombinetheirpurchaseswith
oneprovideroratleastmakeitthepreferredprovider.However,rewardbasedloyalty
programsarequiteeasyforothersupplierstocopyandseldomprovideasustained
competitiveadvantage.Incontrast,higherlevelbondstendtoofferalongerterm
competitiveadvantage.Wediscussnextthethreemaintypesofhigherlevelbonds,which
are(1)social,(2)customization,and(3)structuralbonds.
Social Bonds
Haveyouevernoticedhowyourfavoritehairdressercallsyoubyyournamewhenyougo
forahaircutorhowsheaskswhyshehasntseenyouforalongtime?Socialbondsare
usuallybasedonpersonalrelationshipsbetweenprovidersandcustomers.Thereisan
39
elementoftrust,whichisimportantforloyalty. Socialbondsaremoredifficulttobuild
thanfinancialbondsandmaytakelongertoachieve,buttheyarealsoharderforother
supplierstoimitate.Afirmthathascreatedsocialbondswithitscustomershasabetter
chanceofkeepingthemforthelongtermbecauseofthetrustthecustomersplaceinthe
40
staff. Whensocialbondsincludesharedrelationships(Figure12.12)orexperiences
betweencustomers,suchasincountryclubsoreducationalsettings,theycanbeamajor
41
loyaltydriverfortheorganization.
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Figure12.12.Aknowledgeableandcharismaticlecturerhelpsbuildsocial
bondswithstudents.
Customization Bonds
Thesebondsarebuiltwhentheserviceprovidersucceedsinprovidingcustomizedserviceto
itsloyalcustomers.Forexample,Starbucksemployeesareencouragedtolearntheir
regularcustomerspreferencesandcustomizetheirserviceaccordingly(Figure12.13).Many
largehotelchainscapturethepreferencesoftheircustomersthroughtheirloyaltyprogram
42
databases.Firmsofferingcustomizedservicearelikelytohavemoreloyaltycustomers.
Forexample,whencustomersarriveattheirhotel,theyfindthattheirindividualneeds
havealreadybeenmet.Theserangefrompreferreddrinksandsnacksintheminibar,to
thekindofpillowtheylike,andthenewspapertheywanttoreceiveinthemorning.When
acustomerbecomesusedtothisspecialservice,heorshemayfinditdifficulttoadjustto
anotherserviceproviderwhoisnotabletocustomizetheservice(atleastimmediatelyas
43
ittakestimeforthenewprovidertolearnaboutsomeonesneedsandpreferences).
Figure12.13.Starbucksemployeesareencouragedtolearntheir
customerspreferences.
Structural Bonds
StructuralbondsarecommonlyseeninB2Bsettings.Theyarecreatedbygetting
customerstoaligntheirwayofdoingthingswiththesuppliersownprocesses,thuslinking
thecustomertothefirm.Thissituationmakesitmoredifficultforcompetitorstodraw
themaway.Examplesincludejointinvestmentsinprojectsandsharingofinformation,
processes,andequipment.StructuralbondscanbecreatedinaB2Cenvironment,too.For
instance,somecarrentalcompaniesoffertravelerstheopportunitytocreatecustomized
pagesonthefirmswebsitewheretheycangetdetailsofpasttripsincludingthetypesof
cars,insurancecoverage,andsoforth.Thissimplifiesandspeedsupthetaskofmakingnew
bookings.
Haveyounoticedthat,whileallthesebondstieacustomerclosertothefirm,theyalso
delivertheconfidence,social,andspecialtreatmentbenefitsthatcustomersdesire(referto
ServiceInsights12.1)?Ingeneral,bondswillnotworkwellunlesstheyalsogeneratevalue
forthecustomer!
LO11
Understandwhatfactorscausecustomerstoswitchtoacompetitor,andhowtoreducesuch
switching.
Strategies for Reducing Customer Defections

Sofar,wehavediscusseddriversofloyaltyandhowtotiecustomersmorecloselytothe
firm.Acomplementaryapproachistounderstandthedriversforcustomerdefections,also
calledcustomerchurn,andworkoneliminatingoratleastreducingthosedrivers.
Analyze Customer Defections and Monitor Declining Accounts

Thefirststepistounderstandthereasonsforcustomerswitching.SusanKeveaney
conductedalargescalestudyacrossarangeofservicesandfoundseveralkeyreasonswhy
44
customersswitchtoanotherprovider(Figure12.14). Thesewere:
Source:AdaptedfromSusanM.Keaveney,CustomerSwitchingBehaviorin
ServiceIndustries:AnExploratoryStudy,JournalofMarketing59(April
1995),7182.
Figure12.14.Whatdrivescustomerstoswitchawayfromaservicefirm?
Coreservicefailures(44%ofrespondents).
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Dissatisfactoryserviceencounters(34%).
High,deceptive,orunfairpricing(30%).
Inconvenienceintermsoftime,location,ordelays(21%).
Poorresponsetoservicefailure(17%).
Manyrespondentsdecidedtoswitchafteraseriesofrelatedincidents,suchasaservice
failurefollowedbyanunsatisfactoryservicerecovery.
Manyservicefirmsregularlyconductwhatiscalledchurndiagnostics.Thisincludesthe
analysisofdatafromchurnedanddecliningcustomers,exitinterviews(callcenterstaff
oftenhaveashortsetofquestionstheyaskwhenacustomercancelsanaccounttogaina
betterunderstandingofwhycustomersdefect),andindepthinterviewsofformer
customersbyathirdpartyresearchagency,whichtypicallyyieldamoredetailed
45
understandingofchurndrivers.
Somefirmseventrytopredictchurnofindividualaccounts.Forexample,cellphoneservice
providersusechurnalertsystems.Thesesystemskeeptrackoftheactivityinindividual
customeraccounts.Theobjectiveistopredictwhenacustomermightswitch.Important
accountsatriskareflaggedandeffortsaremadetokeepthecustomer,suchassendinga
voucherand/orhavingacustomerservicerepresentativecallthecustomertocheckonthe
healthofthecustomerrelationshipandstartcorrectiveactionifneeded.
Address Key Churn Drivers

Keaveneysfindingsshowtheimportanceofaddressingsomegeneralchurndriversby
deliveringqualityservice(seeChapter14),reducinginconvenienceandothernonmonetary
costs,andhavingfairandtransparentpricing(Chapter6).Thereareoftenindustryspecific
churndriversaswell.Forexample,handsetreplacementisacommonreasonforcellular
phoneservicesubscriberstodiscontinueanexistingrelationship,asnewsubscriptionplans
usuallycomewithheavilysubsidizednewhandsets.Topreventhandsetrelatedchurn,
manyprovidersnowofferhandsetreplacementprograms,offeringcurrentsubscribers
heavilydiscountednewhandsetsatregularintervals.Someprovidersevenprovide
handsetsfreetohighvaluecustomersoragainstredemptionofloyaltypoints.
Inadditiontomeasurestopreventchurn,manyfirmstakeactivestepstoretaincustomers.
Theytraincallcenterstaff,calledsaveteams,whodealwithcustomerswhointendto
canceltheiraccounts.Themainjobofsaveteamemployeesistolistentocustomerneeds
andissuesandtrytoaddressthesewiththekeyfocusofretainingthecustomer.Butbe
carefulonhowtorewardsaveteamsseeServiceInsights12.5.
Implement Effective Complaint Handling and Service Recovery Procedures

Effectivecomplainthandlingandexcellentservicerecoveryareimportanttokeepunhappy
customersfromswitchingproviders.Wellmanagedfirmsmakeiteasyforcustomersto
voicetheirproblemsandrespondwithsuitableservicerecoverystrategies.
ServiceInsights12.5:ChurnManagementGoneWrong
AmericaOnline(AOL)founditselfonthewrongendofchurnmanagement
whenabout300ofitssubscribersfiledcomplaintswiththeNewYorkstate
attorneygeneralsoffice,sayingthatAOLhadignoredtheirdemandsto
canceltheserviceandstopbillingthem.AfteraninvestigationbytheState
ofNewYork,AOLeventuallyagreedtopay$1.25millioninpenaltiesand
costsandtochangesomeofitscustomerservicepracticestosettlethecase.
Whatwentwrong?AOLhadbeenrewardingitscallcenteremployeesfor
savingcustomerswhocalledintocanceltheirservice.Employeescould
earnhighbonusesiftheywereabletopersuadehalformoreofsuch
customerstostaywiththefirm.Asclaimedbytheattorneygeneralsoffice,
thismayhaveledAOLsemployeestomakeitdifficulttocancelservice.Asa
response,AOLagreedinasettlementtohaveservicecancellationsrequests
recordedandverifiedbyathirdpartymonitor,andtoprovideuptofour
monthsworthofrefundstoallNewYorksubscriberswhoclaimthattheir
cancellationshadbeenignored(AOLdidnotadmittoanywrongdoingin
thatsettlement).EliotSpitzer,NewYorksAttorneyGeneralatthetime,said,
ThisagreementhelpstoensurethatAOLwillstrivetokeepitscustomers
throughqualityservice,notstealthretentionprograms.
Source:TheAssociatedPress,AOLtoPay$1,25MtoSettleSpitzer
Probe,USAToday,25.08.2005,p.5B.
46
Inthatway,customerswillremainsatisfied,andthiswillreducetheintentiontoswitch.
WewilldiscussindepthonhowtodothateffectivelyinChapter13.
Increase Switching Costs
47
Anotherwaytoreducechurnistoincreaseswitchingbarriers. Manyserviceshavenatural
switchingcosts.Forexample,itisalotofworkforcustomerstochangetheirprimary
bankingaccount,especiallywhenmanydirectdebits,credits,andotherrelatedbanking
servicesaretiedtothataccount.Also,manycustomersarereluctanttolearnaboutthe
48
productsandprocessesofanewprovider.
Switchingcostscanalsobecreatedbyhavingcontractualpenaltiesforswitching,suchasthe
transferfeespayabletosomebrokeragefirmsformovingsharesandbondstoanother
financialinstitution.However,firmsneedtobecarefulsothattheyarenotseenasholding
theircustomershostage.Afirmwithhighswitchingbarriersandpoorservicequalityis
likelytogeneratenegativeattitudesandbadwordofmouth.Atsomepoint,apreviously
49
inertcustomermayhaveenoughandswitchtheserviceprovider.
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LO12
UnderstandthepartplayedbyCustomerRelationshipManagement(CRM)systemsin
deliveringcustomizedservicesandbuildingloyalty.
CRM: Customer Relationship Management

Servicemarketershaveunderstoodforsometimethepowerofrelationshipmanagement,
andcertainindustrieshaveapplieditforyears.Examplesincludethecornergrocerystore,
theneighborhoodcarrepairshop,andprovidersofbankingservicestohighnetworth
clients.However,mentionCRM,andimmediatelycostlyandcomplexITsystemsand
infrastructurecometomind.ButCRMisactuallythewholeprocessbywhichrelationswith
50
thecustomersarebuiltandmaintained. Itshouldbeseenasenablingthesuccessful
implementationoftheWheelofLoyalty.LetsfirstlookatCRMsystemsbeforewemove
toamorestrategicperspective.
Common Objectives of CRM Systems

CRMsystemsallowcustomerinformationtobecapturedanddeliverittothevarious
touchpoints.Fromacustomerperspective,wellimplementedCRMsystemsdeliver
customizationandpersonalization.Thismeansthat,ateachtransaction,thepersonserving
thecustomerwillhaveeasyaccesstothecustomersrelevantaccountdetails,knowledgeof
customerpreferencesandpasttransactions,orhistoryofaserviceproblem.Thiscanresult
inavastserviceimprovementandincreasedcustomervalue.Personalizationandimproved
51
communicationwillresultinmoreloyalty.
Fromacompanysperspective,CRMsystemsallowthecompanytobetterunderstand,
segment,andtieritscustomerbase,bettertargetpromotionsandcrossselling,andeven
52
implementchurnalertsystemsthatsignalifacustomerisindangerofdefecting. Service
Insights12.6highlightssomecommonCRMapplications.
ServiceInsights12.6:CommonCRMApplications
Datacollection.Thesystemcapturescustomerdatasuchascontactdetails,
demographics,purchasinghistory,servicepreferences,andthelike.
Dataanalysis.Thedatacapturedisanalyzedandgroupedbythesystem
accordingtocriteriasetbythefirm.Thisisusedtotierthecustomerbaseand
tailorservicedeliveryaccordingly.
Salesforceautomation.Salesleads,crosssell,andupsellopportunities
canbeeffectivelyidentifiedandprocessed.Theentiresalescyclefromlead
generationtocloseofsalesandaftersalesservicecanbetrackedthroughthe
CRMsystem.
Marketingautomation.Miningofcustomerdataallowsthefirmtotargetits
market.AgoodCRMsystemallowsthefirmtoachieveonetoonemarketing
andcostsavings,oftenthroughloyaltyandretentionprograms.Thisresultsin
increasingthereturnoninvestment(ROI)onitsmarketingexpenditure.CRM
systemsalsoallowfirmstojudgetheeffectivenessofmarketingcampaigns
throughtheanalysisofresponses.
Callcenterautomation.Callcenterstaffhavecustomerinformationattheir
fingertipsandcanimprovetheirservicelevelstoallcustomers.Furthermore,
callerIDandaccountnumbersallowcallcenterstoidentifythecustomertier
thecallerbelongsto,andtotailortheserviceaccordingly.Forexample,
platinumcallersgetpriorityinwaitingloops.
53
What Does a Comprehensive CRM Strategy Include?
RatherthanviewingCRMasatechnology,weshouldviewitasasystemthatfocuseson
theprofitabledevelopmentandmanagementofcustomerrelationships.Figure12.15
providesfivekeyprocessesinvolvedinaCRMstrategy:
1.Strategydevelopmentinvolveslookingatbusinessstrategy,includingthecompanys
vision,industrytrends,andcompetition.Itisusuallytheresponsibilityoftopmanagement.
Forcustomerrelationshipmanagementtohaveapositiveimpactonafirmsperformance,
54
thefirmsstrategyiskey. Therefore,businessstrategyshouldguidethedevelopmentof
customerstrategy,includingthechoiceoftargetsegments,customerbasetiering,the
designofloyaltybonds,andchurnmanagement(asdiscussedintheWheelofLoyalty,
Figure12.6).
2.Valuecreationtranslatesbusinessandcustomerstrategiesintovaluepropositionsfor
customersandthefirm.Thevaluecreatedforcustomersincludesallthebenefitsthatare
deliveredthroughprioritytieredservices,loyaltyrewards,andcustomizationand
personalization.Thevaluescreatedforthefirmincludereducedcustomeracquisitionand
retentioncosts,increasedshareofwallet,andreducedcustomerservingcosts.Customers
needtoparticipateinCRM(e.g.,throughvolunteeringinformation)sothattheybenefit
fromthefirmsCRMstrategy.CRMseemsmostsuccessfulwhenthereisawinwin
55
situationforthefirmanditscustomers.
Source:Adaptedfrom:AdrianPayneandPennieFrow,AStrategic
FrameworkforCustomerRelationshipManagement,JournalofMarketing
69(October2005):167176.
Figure12.15.AnintegratedframeworkforCRMstrategy.
3.Multichannelintegration.Mostservicefirmsinteractwiththeircustomersthrough
amultitudeofchannels,andithasbecomeachallengetoservecustomerswellacrossthese
manypotentialinterfaces,andofferaunifiedcustomerinterfacethatdeliverscustomization
andpersonalization.CRMschannelintegrationaddressesthischallenge.
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4.Informationmanagement.Servicedeliveryacrossmanychannelsdependsonthe
firmsabilitytocollectcustomerinformationfromallchannelsatthevarioustouchpoints
(Figure12.16).Theinformationmanagementprocessincludes:
Thedatarepositorythatcontainsallthecustomerdata.
ITsystemsincludingIThardwareandsoftware.
Analyticaltoolssuchasdataminingpackages.
Specificapplicationpackagessuchascampaignmanagementanalysis,creditassessment,
customerprofiling,andchurnalertsystems.
Frontofficeapplications,whichsupportactivitiesthatinvolvedirectcustomercontact,
includingsalesforceautomationandcallcentermanagementapplications.
Backofficeapplications,whichsupportinternalcustomerrelatedprocesses,including,
logistics,procurement,andfinancialprocessing.
Figure12.16.Airportselfcheckinkiosksrepresentanotherservice
touchpointthatneedstobeintegratedintoanairlinesCRMsystem.
5.Performanceassessmentmustaddressthreecriticalquestions:
IstheCRMstrategycreatingvalueforitskeystakeholders(i.e.,customers,employees,
andshareholders)?
Arethemarketingobjectives(rangingfromcustomeracquisition,shareofwallet,and
retentiontocustomersatisfaction)andservicedeliveryperformanceobjectives(e.g.,call
centerservicestandardssuchascallwaiting)beingachieved?
IstheCRMprocessitselfperforminguptoexpectations?(e.g.,Aretherelevantstrategies
beingset?Iscustomerandfirmvaluebeingcreated?Istheinformationmanagement
processworkingeffectively?Isintegrationacrosscustomerservicechannelsbeingachieved
effectively?)
Common Failures in CRM Implementation

Unfortunately,themajorityofCRMimplementationshavefailedinthepast.Accordingto
theGartnerGroup,theCRMimplementationfailurerateis55%,andAccentureclaimsitto
beashighasaround60%.Akeyreasonforthishighfailurerateisthatfirmsoftenthinkjust
installingCRMsystemsishavingacustomerrelationshipstrategy.Theyforgetthatthe
systemisjustatooltoenhancethefirmscustomerservicingcapabilities,andisnotthe
strategyitself.
Furthermore,CRMcutsacrossmanydepartmentsandfunctions(e.g.,fromcustomer
contactcenters,onlineservicesanddistributions,tobranchoperations,employeetraining,
andITdepartments),programs(rangingfromsalesandloyaltyprogramstolaunchingof
newservices,andcrosssellinginitiatives),andprocesses(e.g.,fromcreditlineauthorization
allthewaytocomplainthandlingandservicerecovery).ThewiderangingscopeofCRM
makesitchallengingtoimplementandtogetitright.CommonreasonsforCRMfailures
56
include:
ViewingCRMasatechnologyinitiative.Itseasytoletthefocusshifttoward
technologyanditsfeatures,withtheresultthattheITdepartmentratherthantop
managementormarketingtakingtheleadincomingupwiththeCRMstrategy.Thisoften
resultsinalackofdirectionfrommanagementandalackofunderstandingofcustomersand
marketsduringimplementation.
Lackofcustomerfocus.ManyfirmsimplementCRMwithoutthegoalofallowingfor
improvingservicedeliveryforvaluedcustomersacrossalldeliverychannels.
Insufficientappreciationofcustomerlifetimevalue(LTV).Marketingdoesnot
takeintoaccountthedifferentprofitabilitiesofdifferentcustomers.Furthermore,the
servicingcostsfordifferentcustomersareoftennotwellcaptured(e.g.,byusingactivity
basedcostingasdiscussedinChapter6).
Inadequatesupportfromtopmanagement.Withoutownershipandactive
involvementfromtopmanagement,theCRMimplementationwillnotbesuccessful.
Failingtoreengineerbusinessprocesses.Itisnearlyimpossibletoimplement
CRMsuccessfullywithoutredesigningcustomerserviceandbackofficeprocesses.Many
implementationsfailbecauseCRMisbeingfittedintoexistingprocesses,ratherthan
redesigningtheprocessestofitacustomercentricCRMimplementation.Redesigningalso
requireschangemanagementandemployeeinvolvementandsupport,whichareoften
lacking.
Underestimatingthechallengesindataintegration.Firmsfrequentlyfailto
integratecustomerdatathatusuallyarescatteredacrosstheorganization.However,one
waytotakeadvantageofthefullpotentialofCRMistomakecustomerknowledge
availableinrealtimetoallemployeeswhoneedit.
Inthelongrun,firmscanputtheirCRMstrategiesatriskifcustomersbelievethatCRMis
57
beingusedinawaythatisharmfultothem. Examplesincludefeelingthattheyarenot
beingtreatedfairly(includingnotbeingofferedattractivepricingorpromotionsthatare
offered,forexample,tonewaccounts,butnottoexistingcustomers)andpotentialprivacy
concerns(seeServiceInsights12.7).Beingawareandactivelyavoidingtheseweaknessesis
afirststeptowardasuccessfulCRMimplementation.
How to Get CRM Implementation Right

DespitethehorrorstoriesofmillionsofdollarssinkingintounsuccessfulCRMprojects,more
andmorefirmsaregettingitright.Nolongerablackhole,CRMisbecomingabasic
58
buildingblockofcorporatesuccess,argueDarrellRigbyandDianneLedingham. Even
CRMsystemsthathavebeenimplementedbuthavenotyetshownresultscanbewell
positionedforfuturesuccess.ExperiencedMcKinseyconsultantsbelievethatevenCRM
systemsthathaveyettoshowresultscanstillbeturnedaround.Theyrecommendtakinga
stepbackandfocusingonhowtobuildcustomerloyalty,ratherthanfocusingonthe
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59
technologyitself. RatherthanusingCRMtotransformentirebusinessesthroughthe
implementationoftheCRMmodelshowninFigure12.15,servicefirmsshouldfocuson
clearlydefinedproblemswithintheircustomerrelationshipcycle.ThesenarrowCRM
strategiesoftenrevealadditionalopportunitiesforfurtherimprovements,which,taken
together,candevelopintobroadCRMimplementationextendingacrosstheentire
60
company.
Amongthekeyquestionsmanagersshouldaskwhendefiningtheircustomerrelationship
strategyare:
1.Howshouldourvaluepropositionchangetoincreasecustomerloyalty?
2.Howmuchcustomizationoronetoonemarketingandservicedeliveryisappropriate
andprofitable?
3.Whatistheincrementalprofitpotentialofincreasingtheshareofwalletwithour
currentcustomers?Howmuchdoesthisvarybycustomertierand/orsegment?
4.HowmuchtimeandresourcescanweallocatetoCRMrightnow?
5.Ifwebelieveincustomerrelationshipmanagement,whyhaventwetakenmoresteps
inthatdirectioninthepast?Whatcanwedotodaytodevelopcustomerrelationships
withoutspendingalotontechnology?
61
AnsweringthesequestionscanevenleadtotheconclusionthataCRMsystemmaynotbe
thebestinvestmentorhighestpriorityatthemoment.Inanycase,weemphasizethatthe
systemismerelyatooltodrivethestrategyandmustthusbecustomizedtodeliverthat
strategy(Figure12.17).
Figure12.17.CRMcanhelpcompaniescreatetwowaychannelswith
customers.
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ServiceInsights12.7:CRMExtremeAGlimpseinto
OrderingPizzain2018?
Operator:ThankyouforcallingPizzaDelight.Lindaspeaking,howmayI
helpyou?
Customer:Goodevening,canIorder...
Operator:Sir,beforetakingyourorder,couldIpleasehavethenumberof
yourmultipurposesmartcard?
Customer:Holdon....its....um...CA45559831.
Operator:Thankyou!CanIpleaseconfirmyoureMrThompsoncallingfrom
10940WilfordBoulevard?Youarecallingfromyourhomenumber432
3876,yourcellphonenumberis9924566,andyourofficenumberis432
9377.
Customer:Howintheworlddidyougetmyaddressandallmynumbers?
Operator:Sir,weareconnectedtotheIntegratedCustomerIntimacy
System.
Customer:Iwouldliketoorderalargeseafoodpizza...
Operator:Sir,thatsnotagoodidea.
Customer:Why?!?
Operator:Accordingtoyourmedicalrecords,youhaveveryhighblood
pressureandafartoohighcholesterollevel,Sir.
Customer:What?...Whatdoyourecommendthen?
Operator:TryourLowFatSoybeanYoghurtPizza.Youlllikeit.
Customer:Howdoyouknow?
Operator:YouborrowedthebookPopularSoybeanDishesfromtheCity
Librarylastweek,Sir.
Customer:OK,Igiveup...Getmethreelargeonesthen.Howmuchwill
thatbe?
Operator:Thatshouldbeenoughforyourfamilyofeight,Sir.Thetotalis
$54.90.
Customer:CanIpaybycreditcard?
Operator:Imafraidyoullhavetopayuscash,Sir.Yourcreditcardisover
thelimitandyourcheckingaccounthasanoverduebalanceof$2,435.88.
Thatsexcludingthelatepaymentchargesonyourhomeequityloan,Sir.
Customer:IguessIllhavetoruntotheATMandwithdrawsomecash
beforeyourguyarrives.
Operator:Youcantdothat,Sir.Basedontherecords,youvereachedyour
dailymachinewithdrawalslimitfortoday.
Customer:Nevermind.Justsendthepizzas,Illhavethecashready.How
longisitgonnatake?
Operator:About45minutesSir,butifyoudontwanttowaityoucanalways
comeandcollectitonyourHarley,registrationnumberL.A.6468...
Customer:#@$#@%^%%@
Operator:Sir,pleasewatchyourlanguage.Remember,on28thApril2017
youwereconvictedofusingabusivelanguageatatrafficwarden...
Customer:(Speechless)
Operator:Isthereanythingelse,Sir?
Source:Thisstorywasadaptedfromvarioussources,including
www.lawdebt.com/gazette/nov2004/nov2004.pdf
(http://www.lawdebt.com/gazette/nov2004/nov2004.pdf) (accessedinJanuary2006)and
avideocreatedbytheAmericanCivilLibertiesUnion(ACLU)availableat
www.aclu.org/pizza (http://www.aclu.org/pizza) .Thisvideoaimstocommunicate
theprivacythreatsthatCRMposestoconsumers.ACLUisanonprofit
organizationthatcampaignsagainstgovernmentsandcorporations
aggressivecollectionofinformationonpeoplespersonallifeandhabits.
Chapter Summary
LO1Customerloyaltyisanimportantdriverofaservicefirmsprofitability.The
profitsderivedfromloyalcustomerscomefrom(1)increasedpurchases,(2)reduced
operationcosts,(3)referralofnewcustomers,and(4)pricepremiums.Also,customer
acquisitioncostscanbeamortizedoveralongerperiodoftime.
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LO2However,itisnottruethatloyalcustomersarealwaysmoreprofitable.
Theymayexpectpricediscountsforstayingloyal.Totrulyunderstandtheprofitimpactof
thecustomers,firmsneedtolearnhowtocalculatetheLTVoftheircustomers.LTV
calculationsneedtoinclude(1)acquisitioncosts,(2)revenuestreams,(3)accountspecific
servicingcosts,(4)expectednumberofyearsthecustomerwillstaywiththefirm,and(5)
discountrateforfuturecashflows.
LO3Customersareonlyloyalifthereisabenefitforthemtobeso.Common
benefitscustomersseeinbeingloyalinclude:
Confidencebenefits,includingfeelingthatthereislessriskofsomethinggoingwrong,
abilitytotrusttheprovider,andreceiptofthefirmshighestlevelofservice.
Socialbenefits,includingbeingknownbyname,friendshipwiththeserviceprovider,and
enjoymentofcertainsocialaspectsoftherelationship.
Specialtreatmentbenefits,includingbetterprices,extraservices,andhigherpriority.
LO4Itisnoteasytobuildcustomerloyalty.TheWheelofLoyaltyoffersa
systematicframeworkthatguidesfirmsonhowtodoso.Theframeworkhasthree
componentsthatfollowasequence.
First,firmsneedtobuildafoundationforloyaltywithoutwhichloyaltycannotbe
achieved.Thefoundationdeliversconfidencebenefitstoitsloyalcustomers.
Oncethefoundationislaid,firmscanthencreateloyaltybondstostrengthenthe
relationship.Loyaltybenefitsdeliversocialandspecialtreatmentbenefits.
Finally,besidesfocusingonloyalty,firmsalsohavetoworkonreducingcustomerchurn.
Tobuildthefoundationforloyalty,firmsneedto:
LO5Segmentthemarketandtargettherightcustomers.Firmsneedto
choosetheirtargetsegmentscarefullyandmatchthemtowhatthefirmcandobest.Firms
needtofocusoncustomervalue,insteadofjustgoingforcustomervolume.
LO6Managethecustomerbaseviaservicetiering,whichdividesthecustomer
baseintodifferentvaluetiers(e.g.,platinum,gold,iron,andlead).Ithelpstotailor
strategiestothedifferentservicetiers.Thehighertiersofferhighervalueforthefirmbut
alsoexpecthigherservicelevels.Forthelowertiers,thefocusshouldbeonincreasing
profitabilitythroughbuildingvolume,increasingprices,cuttingservicingcosts,andasalast
resortevenendingunprofitablerelationships.
LO7Understandthatthefoundationforloyaltyliesincustomersatisfaction.The
satisfactionloyaltyrelationshipcanbedividedintothreemainzones:defection,indifference,
andaffection.Onlyhighlysatisfiedordelightedcustomerswhoareinthezoneofaffection
willbetrulyloyal.
Loyaltybondsareusedtobuildrelationshipswithcustomers.Therearethreedifferent
typesofcustomerbonds:
LO8Crosssellingandbundlingdeepenrelationshipsthatmakeswitchingmore
difficultandoftenincreaseconveniencethroughonestopshopping.
LO9Loyaltyprogramsaimatbuildingshareofwalletthroughfinancialrewards
(e.g.,loyaltypoints)andnonfinancialrewards(e.g.,highertierservicelevels,and
recognitionandappreciation).
LO10Higherlevelbondsincludesocial,customization,andstructuralbonds.
Thesebondstendtobemoredifficulttobecopiedbycompetitionthanrewardbasedbonds.
LO11ThefinalstepintheWheelofLoyaltyistounderstandwhatcauses
customerstoleaveandthensystematicallyreducethesechurndrivers.
Commoncausesforcustomerstoswitchincludecoreservicefailuresanddissatisfaction,
perceptionsthatpricingisdeceptiveandunfair,inconvenience,andpoorresponsetoservice
failures.
Topreventcustomersfromswitching,firmsshouldanalyzeandaddresskeyreasonswhy
theircustomersleavethem,havegoodcomplainthandlingandservicerecoveryprocesses
inplace,andpotentiallyincreasecustomersswitchingcosts.
LO12Finally,CRMsystemsshouldbeseenasenablingthesuccessful
implementationoftheWheelofLoyalty.CRMsystemsareparticularlyusefulwhenfirms
havetoservelargenumbersofcustomersacrossmanyservicedeliverychannels.An
effectiveCRMstrategyincludesfivekeyprocesses:
Strategydevelopment,includingchoiceoftargetsegments,tieringofservice,anddesign
ofloyaltyrewards.
Valuecreation,includingdeliveringbenefitstocustomersthroughtieredservicesand
loyaltyprograms(e.g.,prioritywaitlistingandupgrades).
Multichannelintegrationtoprovideaunifiedcustomerinterfaceacrossmanydifferent
servicedeliverychannels(e.g.,fromthewebsitetothebranchoffice)
Informationmanagement,whichincludesthedatarepository,analyticaltools(e.g.,
campaignmanagementanalysisandchurnalertsystems),andfrontandbackoffice
applications.
Performanceassessment,whichhastoaddressthethreequestionsof:
(1)IstheCRMcreatingvalueforcustomersandthefirm?
(2)Areitsmarketingobjectivesbeingachieved?
(3)IstheCRMsystemitselfperformingaccordingtoexpectations?
PerformanceassessmentshouldleadtocontinuousimprovementoftheCRMstrategyand
system.
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Unlock Your Learning
ThesekeywordsarefoundwithinthesectionsofeachLearningObjective(LO).Theyare
integraltounderstandingtheservicesmarketingconceptstaughtineachsection.Havinga
firmgraspofthesekeywordsandhowtheyareusedisessentialtohelpingyoudowellon
yourcourse,andintherealandverycompetitivemarketingsceneoutthere.
LO11Customerloyalty
2Loyaltyeffect
3Pricepremium
4Profitability
5Referrals
6Valueofloyalcustomers
LO27Acquisitioncosts
8Acquisitionrevenues
9Customerlifetimevalue
10Netpresentvalue
11Valueofreferrals
LO312Confidencebenefits
13Relationalbenefits
14Socialbenefits
15Specialtreatmentbenefits
LO416Buildfoundationforloyalty
17Createloyaltybonds
18Reducechurndrivers
19WheelofLoyalty
LO520Loyaltyleaders
21Searchingforvalue
22Targeting
LO623Customerbase
24Customerpyramid
25Customerretention
26Gold
27Iron
28Lead
29Loyaltyprograms
30Platinum
31Tieringofservice
LO732Customersatisfaction
33Satisfactionloyaltyrelationship
34Servicequality
35Zoneofaffection
36Zoneofdefection
37Zoneofindifference
LO838Deepeningtherelationship
LO939Financialrewards
40Polygamousloyalty
41Shareofwallet
42Nonfinancialrewards
LO1043Customizationbonds
44Higherlevelbonds
45Socialbonds
46Structuralbonds
LO1147Churndiagnostics
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48Churndrivers
49Churnmanagement
50Complainthandling
51Customerchurn
52Customerdefections
53Decliningaccounts
54Servicerecovery
55Switchingcosts
LO1256CRMapplications
57CRMimplementation
58CRMstrategy
59CRMsystems
60Customerlifetimevalue
61Customerrelationshipmanagement
62Dataintegration
63FailuresinCRM
64Informationmanagement
65Multichannelintegration
66Performanceassessment
67Strategydevelopment
68Valuecreation
Howwelldoyouknowthelanguageofservicesmarketing?Quizyourself!
Notfortheacademicallyfaintofheart
Foreachkeywordyouareabletorecallwithoutreferringtoearlierpages,give
yourselfapoint(andapatontheback).Tallyyourscoreattheendandseeifyou
earnedtherighttobecalledaservicesmarketeer.
Score
013ServicesMarketingisdoneagreatdisservice.
1425Themidnightoilneedstobelit,pronto.
2640Iknowwhatyoudidntdoallsemester.
4152ByGeorge!Youregettingthere.
5364Now,goforthandmarket.
6568Thereshouldbeamarketingconceptnamedafteryou.
KnowYourESM
ReviewQuestions
1.Whyiscustomerloyaltyanimportantdriverofprofitabilityforservicefirms?
2.Whyistargetingtherightcustomerssoimportantforsuccessfulcustomer
relationshipmanagement?
3.Howcanyouestimateacustomerslifetimevalue(LTV)?
4.HowdothevariousstrategiesdescribedintheWheelofLoyaltyrelateto
oneanother?
5.Howcanafirmbuildafoundationforloyalty?
6.Whatistieringofservices?Explainwhyitisusedandwhatareits
implicationsforfirmsandtheircustomers.
7.Identifysomekeymeasuresthatcanbeusedtocreatecustomerbondsand
encouragelongtermrelationshipswithcustomers.
8.Whataretheargumentsforspendingmoneytokeepexistingcustomers
loyal?
9.WhatistheroleofCRMindeliveringacustomerrelationshipstrategy?
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WorkYourESM
ApplicationExercises
1.Identifythreeservicebusinessesthatyoubuyfromonaregularbasis.Now,
foreachbusiness,completethefollowingsentence:Iamloyaltothis
businessbecause...
2.Whatconclusionsdoyoudrawabout(a)yourselfasaconsumer,and(b)
theperformanceofeachofthebusinessesinExercise1?Assesswhetherany
ofthesebusinessesmanagedtodevelopasustainablecompetitive
advantagethroughthewayitwonyourloyalty.
3.Identifytwoservicebusinessesthatyouusedseveraltimesbuthavenow
stoppedtobuyingfrom(orplantostopsoon)becauseyouweredissatisfied.
Completethesentence:Istoppedusing(orwillsoonstopusing)this
organizationasacustomerbecause...
4.Again,whatconclusionsdoyoudrawaboutyourselfandthefirmsin
Exercise3?Howwouldeachofthesefirmsavoidyourdefection?Whatcould
eachofthesefirmsdotoavoiddefectionsinthefutureofcustomerswitha
profilesimilartoyours?
5.Evaluatethestrengthsandweaknessesoftwofrequentuserprograms,
eachonefromadifferentserviceindustry.Assesshoweachprogramcouldbe
improvedfurther.
6.Designaquestionnaireandconductasurveyaskingabouttwoloyalty
programs.Thefirstisaboutmembership/loyaltyprogramsyourclassmatesor
theirfamilieslikebestandkeepthemloyaltothatfirm.Thesecondshould
beaboutaloyaltyprogramthatisnotwellperceivedanddoesnotseemto
addvaluetothecustomer.Useopenendedquestions,suchasWhat
motivatedyoutosignupinthefirstplace?,Whyareyouusingthis
program?,Hasparticipatingintheprogramchangedyourpurchasing/usage
behaviorinanyway?,Hasitmadeyoulesslikelytousecompeting
suppliers?,Whatdoyouthinkoftherewardsavailable?,Didmembership
intheprogramleadtoanyimmediatebenefitsintheuseoftheservice?,
Whatarethethreethingsyoulikebestaboutthisloyaltymembership
program?,Whatdidyoulikeleast?andWhataresomesuggested
improvements?Analyzewhatfeaturesmakeloyalty/membershipprograms
successful,andwhatfeaturesdonotachievethedesiredresults.Use
frameworkssuchastheWheelofLoyaltytoguideyouranalysisand
presentation.
7.ApproachserviceemployeesintwoorthreefirmswithimplementedCRM
systems.Asktheemployeesabouttheirexperienceinterfacingwiththese
systems,andwhetherornottheCRMsystems(a)helpthemunderstandtheir
customersbetterand/or(b)leadtoimprovedserviceexperiencesfortheir
customers.Askthemaboutpotentialconcernsandimprovementsuggestions
theymayhaveabouttheirorganizationsCRMsystems.
Endnotes
1 .Stanley,T.(2006),Highstakesanalytics.Optimize:BusinessStrategy&Execution
forCIOs,(February).www.cognos.com/company/success/harrahs.html
(http://www.cognos.com/company/success/harrahs.html),accessedMarch12,2012Voight,J.(2007),
TotalrewardspaysoffforHarrahs,Brandweek.com,17,(September).
www.brandweek.com/bw/news/recent_display.jsp?vnu_content_id=1003641351
(http://www.brandweek.com/bw/news/recent_display.jsp?vnu_content_id=1003641351),accessedMarch12,
2012J.N.Hoover,2007ChiefOfTheYear:TimStanley,InformationWeek,8.
(December2007)www.informationweek.com/story/showArticle.jhtml?
articleID=204702770 (http://www.informationweek.com/story/showArticle.jhtml?articleID=204702770),
accessedMarch12,2012JamesL.Heskett,W.EarlSasser,andJoeWheeler,The
OwnershipQuotient.Boston:HarvardBusinessPress,2008:913www.harrahs.com
(http://www.harrahs.com),accessedMarch12,2012.
2 .FrederickF.ReichheldandThomasTeal,TheLoyaltyEffect,Boston:Harvard
BusinessSchoolPress,1996.
3 .RuthBolton,KatherineN.Lemon,andPeterC.Verhoef,TheTheoretical
UnderpinningsofCustomerAssetManagement:AFrameworkandPropositionsforFuture
Research,JournaloftheAcademyofMarketingScience32,no.3(2004):271292.
4 .FrederickF.ReichheldandW.EarlSasser,Jr.,ZeroDefections:QualityComesto
Services,HarvardBusinessReview(October1990):105111.
5 .ReichheldandSasser,op.cit.
6 .FrederickF.ReichheldandPhilSchefter,ELoyaltyYourSecretWeapononthe
Web,HarvardBusinessReview(JulyAugust,2002):105113.
7 .ChristianHomburg,NicoleKoschate,andWayneD.Hoyer,DoSatisfiedCustomers
ReallyPayMore?AStudyoftheRelationshipBetweenCustomerSatisfactionand
WillingnesstoPay,JournalofMarketing69(April2005):8496.
8 .GrahameR.DowlingandMarkUncles,DoCustomerLoyaltyProgramsReally
Work?SloanManagementReview(Summer1997):7181WernerReinartzandV.Kumar,
TheMismanagementofCustomerLoyalty,HarvardBusinessReview(July2002):86
94.
9 .WernerJ.ReinartzandV.Kumar,OntheProfitabilityofLongLifeCustomersina
NoncontractualSetting:AnEmpiricalInvestigationandImplicationsforMarketing,
JournalofMarketing64(October2000):1735.
10.JochenWirtz,IndranilSen,andSanjaySingh,CustomerAssetManagementatDHLin
Asia,inServicesMarketinginAsiaACaseBook,byJochenWirtzandChristopher
Lovelockeds.,(Singapore:PrenticeHall,2005,379396).
11.JohnE.Hogan,KatherineN.Lemon,andBarakLibai,WhatistheTrueCostofaLost
Customer?JournalofServicesResearch5,no.3(2003):196208.
12.Foradiscussiononhowtoevaluatethecustomerbaseofafirm,seeSunilGupta,
DonaldR.Lehmann,andJenniferAmesStuart,ValuingCustomers,JournalofMarketing
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13.Touseacustomerlifetimevaluecalculatorandseeaworkedproblem,see
http://hbsp.harvard.edu/multimedia/flashtools/cltv/index.html
(http://hbsp.harvard.edu/multimedia/flashtools/cltv/index.html),accessedMarch12,2012.
14.Ithasevenbeensuggestedtoletchronicallydissatisfiedcustomergotoallowfront
linestafffocusonsatisfyingtherightcustomers,seeKashingWooandHenryK.Y.Fock,
RetainingandDivestingCustomers:AnExploratoryStudyofRightCustomers,AtRisk
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15.FrederickF.Reichheld,LoyaltyRulesHowTodaysLeadersBuildLasting
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16.YupingLiu,TheLongTermImpactofLoyaltyProgramsonConsumerPurchase
BehaviorandLoyalty,JournalofMarketing71,no.4(October2007):1935.
17.FrederickF.Reichheld,LoyaltyRulesHowTodaysLeadersBuildLasting
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18.RaviDharandRashiGlazer,HedgingCustomers,HarvardBusinessReview81,(May
2003):8692
19.DavidRosenblum,DougTomlinson,andLarryScott,BottomFeedingforBlockbuster
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110130.
21.ValarieA.Zeithaml,RolandT.Rust,andKatharineN.Lemon,TheCustomer
Pyramid:CreatingandServingProfitableCustomers,CaliforniaManagementReview43,
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7799.
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UnprofitableCustomers,HarvardBusinessReview(April2008):95102.
24.ElizabethEsfahani,HowtoGetToughwithBadCustomers,INGDirect,October
2004,andhttps://home.ingdirect.com/index.html,accessedMarch12,2012.
25.Notonlyisthereapositiverelationshipbetweensatisfactionandshareofwallet,but
thegreatestpositiveimpactisseenattheupperextremelevelsofsatisfaction.Fordetails,
refertoTimothyL.Keiningham,TiffanyPerkinsMunn,andHeatherEvans,TheImpactof
CustomerSatisfactiononShareofWalletinaBusinesstoBusinessEnvironment,Journal
ofServiceResearch6,no.1(2003):3750Seealso:BethDavisSramek,CorneliaDroge,
JohnT.Mentzer,andMatthewB.Myers,CreatingCommitmentandLoyaltyBehavior
amongRetailersWhatAretheRolesofServiceQualityandSatisfaction?Journalofthe
AcademyofMarketingScience37,no.4(2009):440454InaGarnefeld,SabrinaHelm,
andAndreasEggert,WalkYourTalk:AnExperimentalInvestigationoftheRelationship
betweenWordofMouthandCommunicatorsLoyalty,JournalofServiceResearch14,no.
1(2011):93107.
26.FlorianV.Wangenheim,PostswitchingNegativeWordofMouth,JournalofService
Research8,no.1(2005):6778.
27.NeilA.MorganandLopoLeotteRego,TheValueofDifferentCustomerSatisfaction
andLoyaltyMetricsinPredictingBusinessPerformance,MarketingScience25,no.5
(SeptemberOctober2006):426439.
28.HeinerEvanschitzky,B.Ramaseshan,DavidM.Woisetschlager,VerenaRichelsen,
MarkusBlut,andChristofBackhaus,ConsequencesofCustomerLoyaltytotheLoyalty
ProgramandtotheCompany,JournaloftheAcademyofMarketingScience26(July
2011)(publishedonline).
29.LeonardL.BerryandA.Parasuraman,ThreeLevelsofRelationshipMarketing,in
MarketingServicesCompetingthroughQuality(NewYork,NY:TheFreePress,1991,
136142)andValarieA.Zeithaml,MaryJoBitner,andDwayneD.Gremler,Services
Marketing.5thed.,(NewYork,NY:McGrawHill,2008),Chapter7.
30.MichaelLewis,TheInfluenceofLoyaltyProgramsandShortTermPromotionson
CustomerRetention,JournalofMarketingResearch41(August2004):281292Jochen
Wirtz,AnnaS.Mattila,andMayOoLwin,HowEffectiveAreLoyaltyRewardProgramsin
DrivingShareofWallet?JournalofServiceResearch9,no.4(2007):327334.
31.RichardHo,LeoHuang,StanleyHuang,TinaLee,AlexanderRosten,andChristopher
S.Tang,AnApproachtoDevelopEffectiveCustomerLoyaltyPrograms:TheVIP
ProgramATT&TSupermarketsInc.,ManagingServiceQuality19,no.6(2009):702
720.
32.KatherineN.LemonandFlorianV.Wangenheim,TheReinforcingEffectsofLoyalty
ProgramPartnershipsandCoreServiceUsage,JournalofServiceResearch11,no.4
(2009):357370FrederickDeKay,RexS.TohandPeterRaven,LoyaltyPrograms:
AirlinesOutdoHotels,CornellHospitalityQuarterly50,no.3(2009):371382.
33.RuthN.Bolton,P.K.Kannan,andMatthewD.Bramlett,ImplicationsofLoyalty
ProgramMembershipandServiceExperienceforCustomerRetentionandValue,Journal
oftheAcademyofMarketingScience28,no.1(2000):95108MichaelLewis,The
InfluenceofLoyaltyProgramsandShortTermPromotionsonCustomerRetention,
JournalofMarketingResearch41,no.3(2004):281292.
34.KatherineN.LemonandFlorianV.Wangenheim,TheReinforcingEffectsofLoyalty
ProgramPartnershipsandCoreServiceUsage,JournalofServiceResearch11,no.4
(2009):357370.
35.See,forexample:IselinSkoglandandJudySiguaw,AreYourSatisfiedCustomers
Loyal?CornellHotelandRestaurantAdministrationQuarterly45,no.3(2004):221234.
36.MatthewDixon,KarenFreeman,andNicholasToman,StopTryingtoDelightYour
Customers,HarvardBusinessReviewJulyAugust(2010):116122.
37.BerndStauss,MaxieSchmidt,andAdreasSchoeler,CustomerFrustrationinLoyalty
Programs,InternationalJournalofServiceIndustryManagement16,no.3(2005):229
252.
38.Ontheperceptionofdesignofloyaltytiers,see:XavierDrzeandJosephC.Nunes,
FeelingSuperior:TheImpactofLoyaltyProgramStructureonConsumersPerceptionsof
Status,JournalofConsumerResearch35,no.6(2009):890905.
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39.NelsonOlyNdubisi,RelationshipMarketingandCustomerLoyalty,Marketing
Intelligence&Planning25,no.1(2007):98106.
40.PaoloGuenzi,MichaelD.Johnson,andSandroCastaldo,AComprehensiveModelof
CustomerTrustinTwoRetailStore,JournalofServiceManagement20,no.3(2009):
290316AlessandroArbore,PaoloGuenzi,andAndreaOrdanini,LoyaltyBuilding,
RelationalTradeoffsandKeyServiceEmployees:TheCaseofRadioDJs,Journalof
ServiceManagement20,no.3(2009):317341.
41.MarkS.Rosenbaum,AmyL.Ostrom,andRonaldKuntze,LoyaltyProgramsanda
SenseofCommunity,JournalofServicesMarketing19,no.4(2005):222233Isabelle
Szmigin,LouiseCanning,andAlexanderE.Reppel,OnlineCommunity:Enhancingthe
RelationshipMarketingConceptthroughCustomerBonding,InternationalJournalof
ServiceIndustryManagement16,no.5(2005):480496IngerRoos,AndersGustafsson,
andBoEdvardsson,TheRoleofCustomerClubsinRecentTelecomRelationships,
InternationalJournalofServiceIndustryManagement16,no.5(2005):436454Dennis
Pitta,FrankFranzak,DanielleFowler,AStrategicApproachtoBuildingOnlineCustomer
Loyalty:IntegratingCustomerProfitabilityTiers,JournalofConsumerMarketing23,no.
7(2006):421429.
42.RickFergusonandKellyHlavinka,TheLongTailofLoyalty:HowPersonalized
DialogueandCustomizedRewardsWillChangeMarketingForever,JournalofConsumer
Marketing23,no.6(2006):357361.
43.RickFergusonandKellyHlavinka,TheLongTailofLoyalty:HowPersonalized
DialogueandCustomizedRewardsWillChangeMarketingForever,JournalofConsumer
Marketing23,no.6(2006):357361.
44.SusanM.Keaveney,CustomerSwitchingBehaviorinServiceIndustries:An
ExploratoryStudy,JournalofMarketing59(April1995):7182.
45.Foramoredetaileddiscussionofsituationspecificswitchingbehavior,refertoInger
Roos,BoEdvardsson,andAndersGustafsson,CustomerSwitchingPatternsinCompetitive
andNoncompetitiveServiceIndustries,JournalofServiceResearch6,no.3(2004):256
271.
46.GianfrancoWalsh,KeithDinnie,andKlausPeterWiedmann,HowDoCorporate
ReputationandCustomerSatisfactionImpactCustomerDefection?AStudyofPrivate
EnergyCustomersinGermany,JournalofServicesMarketing20,no.6(2006):412420.
47.JonathanLee,JanghyukLee,andLawrenceFeick,TheImpactofSwitchingCostson
theConsumerSatisfactionLoyaltyLink:MobilePhoneServiceinFrance,Journalof
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Erramilli,andBvsanMurthy,CustomerValue,Satisfaction,Loyalty,andSwitchingCosts:
AnIllustrationfromaBusinesstoBusinessServiceContext,JournaloftheAcademyof
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48.MoonkyuLeeandLawrenceF.Cunningham,ACost/BenefitApproachto
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50.ForanoverviewonCRM,see:V.KumarandWernerJ.Reinartz,Customer
RelationshipManagement:ADatabaseApproach.Hoboken,NJ:JohnWiley&Sons,2006
B.Ramaseshan,DavidBejou,SubhashC.Jain,CharlotteMason,andJosephPancras,
IssuesandPerspectiveinGlobalCustomerRelationshipManagement,JournalofService
Research9,no.2(2006):195207V.Kumar,SarangSunder,andB.Ramaseshan,
AnalyzingtheDiffusionofGlobalCustomerRelationshipManagement:ACrossRegional
ModelingFramework,JournalofInternationalMarketing19,no.1(2011):2339.
51.DwayneBall,PedroS.Coelho,andManuelJ.Vilares,ServicePersonalizationand
Loyalty,JournalofServicesMarketing20,no.6(2006):391403.
52.KevinN.QuiringandNancyK.Mullen,MoreThanDataWarehousing:AnIntegrated
ViewoftheCustomer,inTheUltimateCRMHandbookStrategies&Conceptsfor
BuildingEnduringCustomerLoyalty&Profitability,JohnG.Freeland,ed.,(NewYork:
McGrawHill,2002,102108).
53.Thissectionisadaptedfrom:AdrianPayneandPennieFrow,AStrategicFramework
forCustomerRelationshipManagement,JournalofMarketing69(October2005):167
176.
54.MartinReimann,OliverSchilke,andJacquelynS.Thomas,CustomerRelationship
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RelationshipManagementRoadmap:WhatIsKnown,PotentialPitfalls,andWheretoGo,
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56.Thissectionislargelybasedon:SudhirH.Kale,CRMFailureandtheSevenDeadly
Sins,MarketingManagement(September/October2004):4246.
57.WilliamBoulding,RichardStaelin,MichaelEhret,andWesleyJ.Johnston,ACustomer
RelationshipManagementRoadmap:WhatIsKnown,PotentialPitfalls,andWheretoGo,
JournalofMarketing69,no.4(2005):155166.
58.DarrellK.RigbyandDianneLedingham,CRMDoneRight,HarvardBusiness
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59.ManuelEbner,ArthurHu,DanielLevitt,andJimMcCrory,HowtoRescueCRM?
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60.DarrellK.RigbyandDianneLedingham,CRMDoneRight,HarvardBusiness
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61.DarrellK.Rigby,FrederickF.Reichheld,andPhilSchefter,AvoidtheFourPerilsof
CRM,HarvardBusinessReview(February2002):108.
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Chapter 12. Managing Relationships and Building Loyalty

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The Search for Customer Loyalty

Why Is Customer Loyalty so Important to a Firms Profitability?

Assessing the Value of a Loyal Customer

Worksheet for Calculating Customer Lifetime Value

Why Are Customers Loyal?

The Wheel of Loyalty

Building a Foundation for Loyalty

Targeting the Right Customers

Searching for Value, Not Just Volume

Managing the Customer Base through Effective Tiering of Service

Customer Satisfaction and Service Quality Are Prerequisites for Loyalty

Strategies for Developing Loyalty Bonds with Customers

Deepening the Relationship

Encouraging Loyalty through Financial and Nonfinancial Rewards

Building Higher-Level Bonds

Strategies for Reducing Customer Defections

Analyze Customer Defections and Monitor Declining Accounts

Address Key Churn Drivers

Implement Effective Complaint Handling and Service Recovery Procedures

Increase Switching Costs

CRM: Customer Relationship Management

Common Objectives of CRM Systems

What Does a Comprehensive CRM Strategy Include?

Common Failures in CRM Implementation

How to Get CRM Implementation Right

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