Services Marketing
Chapter 12:
Managing Customer
Relationships &
Building Loyalty
Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 12 – Page 1
Overview of Chapter 12
Services Marketing
The Search for Customer Loyalty
Understanding the Customer-Firm Relationship
The Wheel of Loyalty
Building a Foundation for Loyalty
Strategies for Building Loyalty Bonds with Customers and
Reducing Customers' Defections
CRM: Customer Relationship Management
Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 12 – Page 2
Services Marketing
The Search for
Customer Loyalty
Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 12 – Page 3
How Much Profit a Customer
Generates Over Time
Services Marketing
Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 12 – Page 4
Why Customers Are More Profitable
Over Time
Services Marketing
Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 12 – Page 5
Why is Customer Loyalty Important
to a Firm’s Profitability?
Services Marketing
Customers become more profitable the longer they remain
with a firm:
Increased purchases and/or account balances
- Customers/families purchase in greater quantities as they grow
Reduced operating costs
- Fewer demands from suppliers and operating mistakes as
customer becomes experienced
Referrals to other customers
- Positive word-of-mouth saves firm from investing money in sales
and advertising
Price premiums
- Long-term customers willing to pay regular price
- Willing to pay higher price during peak periods
Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 12 – Page 6
Assessing the Value of a Loyal
Customer
Services Marketing
Must not assume that loyal customers are always more
profitable than those making one-time transactions
Costs
- Not all types of services incur heavy promotional expenditures to
attract a new customer
- Walk-in traffic more important at times
Revenue
- Large customers may expect price discounts in return for loyalty
- Revenues don’t necessarily increase with time for all types of
customers
Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 12 – Page 7
Assessing the Value of a Loyal
Customer
Services Marketing
Profit impact of a customer varies according to stage of
service in product life cycle
e.g., referrals and negative word-of-mouth have a higher impact in
early stages
Tasks:
determine costs and revenues for customers from different market
segments at different points in their customer lifecycles
predict future profitability
Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 12 – Page 8
Measuring Customer Equity:
Lifetime Value of Each Customer
Services Marketing
Acquisition revenues less costs
Revenues (application fee + initial purchase)
Costs (marketing + credit check + account set up)
Projected annual revenues and costs
Revenues (annual fee + sales + service fees + value of referrals)
Costs (account management + cost of sales + write-offs)
Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 12 – Page 9
Measuring Customer Equity:
Lifetime Value of Each Customer
Services Marketing
Value of referrals
Percentage of customers influenced by other customers
Other marketing activities that drew the firm to an individual’s
attention
Net Present Value
Sum anticipated annual values (future profits)
Suitably discounted each year into the future
Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 12 – Page 10
Gap Between Actual and Potential
Customer Value
Services Marketing
What is current purchasing behavior of customers in each target
segment?
What would be impact on sales and profits if they:
buy all services offered by the firm,
use these to the exclusion of any purchases from competitors,
pay full price?
How long, on average, do customers remain with firm?
What impact would it have if they remained customers for life?
Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 12 – Page 11
Why are Customers Loyal?
(Service Insights 12.1)
Services Marketing
Customers stay loyal when we create value for them
Value can be created for customers through:
Confidence benefits Special treatment
- Confidence in correct - Better price
performance - Discounts not available
- Ability to trust the to most customers
provider - Extra services
- Lower anxiety when - Higher priority when
purchasing there is a wait
- Knowing what to expect
and receive
Social benefits
- Mutual recognition and
friendship
Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 12 – Page 12
Services Marketing
Understanding the
Customer-Firm Relationship
Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 12 – Page 13
Transactional Marketing
Services Marketing
Transactional Marketing
One transaction or a
series of transactions
does not necessarily
constitute a relationship
Requires mutual
recognition and
knowledge between the
parties
Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 12 – Page 14
Relationship Marketing
Services Marketing
Marketing that creates extended relationships with
customers
Database Marketing:
Includes market transaction and information exchange
Technology is used to
(1) Identify and build database of current and potential customers
(2) Deliver differentiated messages based on customers’
characteristics
(3) Track each relationship to monitor cost of acquiring that customer
and lifetime value of resulting purchases
Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 12 – Page 15
Relationship Marketing
Services Marketing
Interaction Marketing:
Face-to-face interaction between customers and supplier’s
representatives
Value is added by people and social processes
Increasing use of technologies make maintaining relationships
with customers a challenge
e.g., self service technology, interactive website, call centers
Network Marketing:
Common in B2B context
Companies commit resources to develop positions in a network
Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 12 – Page 16
Relationships with Customers
Services Marketing
Type of Relationship Between the Service
Organization and its Customers
Nature of Membership No Formal
Service Delivery Relationship Relationship
Continuous • Cable TV • Radio Station
• Insurance Policy • Police
• College enrollment • Lighthouse
Discrete • Subscriber phone • Pay Phone
Transactions • Theater subscription • Movie Theatre
• Warranty repair • Public Transport
Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 12 – Page 17
Services Marketing
The Wheel of Loyalty
Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 12 – Page 18
The Wheel of Loyalty
Services Marketing
Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 12 – Page 19
Services Marketing
Building a
Foundation for Loyalty
Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 12 – Page 20
Targeting the Right Customers
Services Marketing
Target the right customer
How do customer needs relate to operations elements?
How can service personnel meet expectations of different customers?
Can company match or exceed competing services that are directed at
same types of customers?
Focus on number of customers served and value of each
customer
Some customers more profitable than others in the short term
Others may have room for long-term growth
“Right customers” are not always high spenders
Can be a large group of people that no other supplier is serving well
Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 12 – Page 21
Effective Tiering of Service
The Customer Pyramid
Services Marketing
Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 12 – Page 22
The Customer Satisfaction
Loyalty Relationship
Services Marketing
Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 12 – Page 23
Services Marketing
Strategies for Building Loyalty
Bonds with Customers
Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 12 – Page 24
Strategies for Developing Loyalty
Bonds with Customers
Services Marketing
Deepening the relationship
Bundling/Cross-selling services
makes switching a major effort
that customer is unwilling to
undertake
Customers benefit from
consolidating their purchasing
of various services from the
same provider
- One-stop-shopping,
potentially higher service
levels
- Higher service tiers, etc.
Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 12 – Page 25
Strategies for Developing Loyalty
Bonds with Customers
Services Marketing
Reward Based Bonds: Incentives that offer rewards based on
frequency of purchase, value of purchase, or combination of
both
Financial bonds
- Discounts on purchases, loyalty program rewards (e.g., frequent
flyer miles), cash-back programs
Non-financial rewards
- Priority to loyalty program members for waitlists and queues in call
centers; higher baggage allowances, priority upgrading
Intangible rewards
- Special recognition and appreciation, tiered loyalty programs
Reward-based loyalty programs are relatively easy to copy and
rarely provide a sustained competitive advantage
Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 12 – Page 26
Strategies for Developing Loyalty
Bonds with Customers
Services Marketing
Social Bonds
Based on personal relationships between providers and customers
Harder to build and imitate and thus, better chance of retention in
the long term
Customization Bonds
Customized service for loyal customers
e.g., Starbucks
Customers may find it hard to adjust to another service provider
who cannot customize service
Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 12 – Page 27
Strategies for Developing Loyalty
Bonds with Customers
Services Marketing
Structural Bonds
Mostly seen in B2B settings
Align customers' way of doing things with supplier’s own
processes
- Joint investments in projects and sharing of information,
processes and equipment
Can be seen in B2C environment too
- Airlines - SMS check-in, SMS e-mail alerts for flight arrival and
departure times
Difficult for competition to draw customers away when they have
integrated their way of doing things with existing supplier
Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 12 – Page 28
Services Marketing
Strategies for Reducing
Customer Defections
Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 12 – Page 29
Analyze Customer Defections and
Monitor Declining Accounts
Services Marketing
Understand reasons for customer switching
Churn Diagnostics
Analysis of data warehouse information on churned and declining
customers
Exit interviews:
- Ask a short set of questions when customer cancels account;
in-depth interviews of former customers by
third party agency
Churn Alert Systems:
- Monitor activity in individual customer accounts to predict
impending customer switching
- Proactive detention efforts – send voucher, customer service
representative calls customer
Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 12 – Page 30
What Drives Customers to Switch?
Services Marketing
Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 12 – Page 31
Addressing Key Churn Drivers
Services Marketing
Delivery quality
Minimize inconvenience and non-monetary costs
Fair and transparent pricing
Industry specific drivers
Cellular phone industry: handset replacement a common reason for
subscribers discontinuing services – offer proactive handset
replacement programs
Reactive measures
Save teams
Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 12 – Page 32
Other Ways to Reduce Churn
Services Marketing
Implement Effective Complaint Handling and Service
Recovery Procedures
Increase Switching Costs
Natural switching costs
- e.g., Changing primary bank account – many related services tied
to account
Can be created by instituting contractual penalties for switching
- Must be careful not to be perceived as holding customers hostage
- High switching barriers and poor service quality likely to generate
negative attitudes and word of mouth
Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 12 – Page 33
Services Marketing
CRM: Customer
Relationship Management
Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 12 – Page 34
Objectives of CRM Systems
Services Marketing
Data collection
Customer data such as contact details, demographics, purchasing
history, service preferences
Data analysis
Data captured is analyzed and categorized
Used to tier customer base and tailor service delivery accordingly
Sales force automation
Sales leads, cross-sell and up-sell opportunities effectively identified
and processed
Track and facilitate entire sales cycle
Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 12 – Page 35
Objectives of CRM Systems
Services Marketing
Marketing automation
Mining of customer data enables the firm to target its market
Goal to achieve one-to-one marketing and cost savings
Results in increasing the ROI on its marketing expenditure
Enables the assessment of the effectiveness of marketing campaigns
through the analysis of responses
Call center automation
Call center staff have customer information at their fingertips resulting in
improved service levels to customers.
Caller ID and account numbers allow call centers to identify the customer
tier the caller belongs to, and to tailor the service accordingly.
Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 12 – Page 36
Integrated Framework for
CRM Strategy
Services Marketing
Strategy Multi-channel Performance
Value Creation
Development Integration Assessment
Process Process Process
Process
Information Management Process
Source: Adapted from: Adrian Payne and Pennie Frow, “A Strategic Framework for Customer Relationship Management,” Journal of Marketing 69 (October 2005): 167-
176.
Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 12 – Page 37
CRM: Strategy Development
Services Marketing
Strategy Development
Responsibility of top management
Used to guide the development for the
customer strategy
Assessment of business strategy
Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 12 – Page 38
CRM: Value Creation
Services Marketing
Value Creation
Translates business and customer strategies into specific
value propositions for both customers and firm
- Customers benefit from priority, tiered services,
loyalty rewards, and customization
- Company benefits from reduced customer acquisition
and retention costs, and increased share-of-wallet
Dual creation of value: customers need to participate in CRM
to reap value from firm’s CRM initiatives
Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 12 – Page 39
CRM: Multi-Channel Integration
Services Marketing
Multi-Channel Integration
Serve customers well across many
potential interfaces
Offer a unified interface that delivers
customization and personalization
Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 12 – Page 40
CRM: Performance Assessment
Services Marketing
Performance Assessment
Is CRM system creating value for key stakeholders?
Are marketing and service standard objectives
being achieved?
Is CRM system meeting performance standards?
Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 12 – Page 41
CRM: Information Management
Services Marketing
Information Management
Collect customer information from all channels
Integrate it with other relevant information
Make useful information available to the frontline
Create and manage data repository, IT systems,
analytical tools, specific application packages
Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 12 – Page 42
Integrated Framework for
CRM Strategy
Services Marketing
Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 12 – Page 43
Common Failures in
CRM Implementation
Services Marketing
Service firms often equate installing CRM systems with
having a customer relationship strategy
Common reasons for failures
Viewing CRM as a technology initiative
Lack of customer focus
Insufficient appreciation of customer lifetime value (CLV)
Inadequate support from top management
Failure to reengineer business processes
Underestimating the challenges in date integration
Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 12 – Page 44
Defining a CRM Strategy
Services Marketing
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 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 resources can we allocate to CRM right now?
If we believe in customer relationship management, why haven’t we
taken more steps in that direction in the past?
What can we do today to develop customer relationships without
spending on technology?
Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 12 – Page 45
Summary
Services Marketing
Customer loyalty is an important driver of profitability so firms
need to assess lifetime customer value and narrow gap between
actual and potential value
Building a foundation of loyalty involves
Good fit between customer needs and capabilities
Tiering services effectively
Obtaining customer satisfaction through service quality
Customer loyalty bonds include
Reward-based, social, customization, and structural bonds
Created through membership and loyalty programs
Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 12 – Page 46
Summary
Services Marketing
Strategies for reducing customer defections include
Analyzing customer defections and monitoring declining accounts
Addressing key churn drivers, increasing switching costs
Implementing effective complaint-handling and service recovery
procedures
A successful CRM program requires understanding of common
failures while including the following processes
Strategy development process
Value creation process
Multichannel integration process
Performance assessment process
Slide © 2010 by Lovelock & Wirtz Services Marketing 7/e Chapter 12 – Page 47
