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

Chapter 12
Managing Relationships
and Building Loyalty
Slide 2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 2
Four Stages of Brand Loyalty in a Consumer

Cognitive loyalty perception from brand attribute
information that one brand is preferable to its alternatives
Affective loyalty developing a liking for the brand based
on cumulatively satisfying usage occasions
Conative loyalty commitment to rebuying the same brand
Action loyalty exhibiting consistent repurchase behavior
Slide 2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 3
Loyalty is Important to Profitability :
Index of Customer Profits over Time (Fig. 12.1)
Credit card Industrial laundry Industrial distribution Auto servicing
0
(Year 1=100)
50
250
300
350
100
150
200
Year 1 Year 2 Year 3 Year 4 Year 5
Based on data from Reichheld and Sasser
Slide 2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 4
What Makes Loyal Customers More Profitable?
Tend to spend more as relationship develops
customers balances may grow
may consolidate purchases to one supplier
Cost less to serve
less need for information and assistance
make fewer mistakes
Recommend new customers to firm (act as unpaid sales
people)
Trust leads to willingness to pay regular prices vs. shopping
for discounts
Slide 2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 5
Analyzing Why Customers Are More Profitable
over Time (Fig. 12.2)
1 2 3 4 5 6 7
Year
Profit from price
premium
Profit from references
Profit from reduced
op. costs
Profit from increased
usage
Base Profit
Source: Reichheld and Sasser
Slide 2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 6
Measuring Customer Equity:
Calculating Life Time Value of Each Customer

Value at Acquisition
revenues (application fee + initial purchase)
Less costs (marketing +credit check + account set up)
Annual Value (project for each year of relationship)
revenues (annual fee + sales + service fees + value of referrals)
Less costs (account management + cost of sales + write-offs)
Net Present Value
Determine anticipated customer relationship lifetime
Select appropriate discount figure
Sum anticipated annual values (future profits) at chosen discount
rate
Customer Equity is total sum of NPVs of all current customers
Slide 2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 7
Customer-Firm Relationship
Database Marketing: Involves the use of technology by
delivering differentiated service levels to consumers and
subsequently tracking the relationship.
Interaction Marketing: Usually in B2B context where people and
the social process also add mutually beneficial value.
Network Marketing: Common in B2B context where companies
commit resources to develop positions in a network of
relationships with the stakeholders and relevant agencies.
Todays marketers seek to develop long-term relationships
with customers. Relationship marketing includes:
Slide 2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 8
Types of Relationships with Customers (Table 12.1)
Type of Relationship--Firm and Customer
Nature of
Service Delivery
Membership No formal relationship
Continuous Cable TV Radio station
Insurance Police
College enrollment Lighthouse

Discrete transactions Subscriber phone Pay phone
Theater subscription Movie theater
Warranty repair Public transport
Slide 2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 9
Basic Segmentation Issues:
Building an Appropriate Customer Portfolio


Target customers whose needs match firms capabilities
Focus on value of prospective customers within each
segment, not just numbers
Avoid targeting customers who might abuse:
our employees, facilities
other customers
Create a mix of segments to reduce risks of volatility during
swings of economic cycles
Slide 2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 10
Service-Relevant Segmentation Variables
Timing of service use (e.g., by hour, day, season)
Level of skill and experience as co-producer/self-
server
Preferred language in face-to-face contact
Access to electronic delivery systems (e.g., Internet)
Attitudes toward use of new service technologies
Slide 2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 11
Identifying and Selecting Target Segments
(Mgt Memo 12.2)
User characteristics
demographics
psychographics
geographic location
benefits sought
User behavior
when, where, how services used
quantity/value of purchases
frequency of use
profitability of relationship
sensitivity to marketing variables
Slide 2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 12
Portfolio of Professional Assignments (Fig. 12.4)
Analytical Work on Project Data
Bread and Butter Projects
Significant Projects
Pacesetters
Major, State-of-the-art challenges for the firms
principals that give the firm high visibility
Demanding client assignments offering a
learning experience for the firms most
experienced associates
Routine client projects shared
among principals and associates
Entry-level tasks for new
associates or for research
assistants & paraprofessionals
Slide 2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 13
The Customer Pyramid (Fig. 12.5)
Lead
Iron
Gold
Which segment sees high value in
our offer, spends more with us over
time, costs less to maintain, and
spreads positive word-of-mouth?
Which segment costs us in time,
effort and money, yet does not
provide the return we want?
Which segment is difficult to do
business with?
Platinum
Good Relationship
Customers
Poor Relationship
Customers
Slide 2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 14
How Customers See Relational Benefits in
Service Industries (Research Insights 12.1)
Confidence benefits
less risk of something going wrong, less anxiety
ability to trust provider
know what to expect
get firms best service level
Social benefits
mutual recognition, known by name
friendship, enjoyment of social aspects
Special treatment benefits
better prices, discounts, special deals unavailable to others
extra services
higher priority with waits, faster service
Slide 2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 15
The Customer Satisfaction-Loyalty Relationship
(Fig. 12.6)
0
20
40
60
80
100
1 2 3 4 5
L
o
y
a
l
t
y

(
R
e
t
e
n
t
i
o
n
)

Very
dissatisfied
Dissatisfied
Neither
satisfied
nor dissatisfied
Satisfied
Very
Satisfied
Satisfaction
Near Apostle
Zone of Defection
Zone of Indifference
Zone of Affection
Terrorist
Apostle
Slide 2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 16
The Wheel of Loyalty (Fig. 12.7)
1. Build a
Foundation
for Loyalty

2. Create Loyalty
Bonds
3. Reduce
Churn Drivers
Customer
Loyalty
Be selective in acquisition

Conduct churn diagnostic
Segment the market
Use effective tiering
of service.
Deliver quality
service.
Deepen the
relationship
Give loyalty
rewards
Build higher
level bonds

Implement complaint
handling & service
recovery
Address key churn drivers
Increase switching
costs
Enabled through:
Frontline staff
Account
managers
Membership
programs
CRM
Systems
Slide 2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 17
Rewarding Value of Use, Not Just Frequency at
British Airways (Best Practice in Action 12.2)
Dedicated reservations
Reservations assurance
Priority waitlist and standby
Advance notification of delays
exceeding 4 hours
Upgraded check-in
Preferred boarding
Special services assistance
Bonus air miles
Upgrade for two
Slide 2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 18
Drivers of Service Switching (Fig. 12.9)
Service
Switching
Service Encounter Failures
Uncaring
Impolite
Unresponsive
Unknowledgeable
Response to Service Failure
Negative Response
No Response
Reluctant Response
Pricing
High Price
Price Increases
Unfair Pricing
Deceptive Pricing
Inconvenience
Location/Hours
Wait for Appointment
Wait for Service
Competition
Found Better Service
Ethical Problems
Cheat
Hard Sell
Involuntary Switching
Customer Moved
Provider Closed
Value Proposition
Others
Service Failure / Recovery
Core Service Failure
Service Mistakes
Billing Errors
Service Catastrophe
Unsafe
Conflict of Interest

Slide 2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 19
Common CRM Applications (Mgt Memo 12.2)
Signifies the whole process by which relationships with
customers are built and maintained.
CRM as an enabler, offering a unified customer interface
and allow firms to better understand and segment the
customers etc. Applications include:
Data collection
Data analysis
Sales force automation
Marketing automation
Call center automation

Slide 2004 by Christopher Lovelock and Jochen Wirtz Services Marketing 5/E 12 - 20
Customer Relationship Strategies with CRM
Systems: Key Questions
How should our value proposition change to increase customer
loyalty?
How much customization or one-to-one marketing and service
delivery is appropriate and profitable?
What is the incremental profit potential of increasing share of
wallet with current customers? How much does this vary by
customer tier and/or segment?
How much time and resource can we allocate to CRM right now?
If we believe in CRM, why have we not taken steps in that
direction before? What can we do today to develop customer
relationship without spending on technology?