Services+Marketing+People,+Technology+and+Strategy

Services Marketing People, Technology, Strategy S I X T H E D I T I O N

Christopher Lovelock

Yale University

Jochen Wirtz

National University of Singapore

Upper Saddle River, New Jersey 07458

Chapter

Chapter Managing Relationships and Building Loyalty The first step in managing a loyalty-based business system is finding and acquiring the right customers.

F REDERICK F. R EICHHELD

Strategy first, then CRM.

S TEVEN S. R AMSEY

T argeting, acquiring, and retaining the “right” customers is at the core of many successful service firms. In Chapter 7 we discussed segmentation and positioning. In this chapter, we emphasize the impor-tance of focusing carefully on desirable, loyal customers within the cho-sen segments, and then taking pains to strengthen their loyalty through well-conceived relationship marketing strategies. The objective is to build relationships and to develop loyal customers who will do a grow-ing volume of business with the firm in the future.Building relationships is a challenge, especially when a firm has vast numbers of customers who interact with the firm in many different ways, from email and web sites to call centers and face-to-face interac-tions. When customer relationship management (CRM) systems are implemented well, they provide managers with the tools to understand their customers and tailor their service, cross-selling, and retention efforts, often on a one-on-one basis.

In this chapter, we explore the following questions:

1.Why is customer loyalty an important driver of profitability for ser-vice firms?

2.Why is it so important for service firms to target the “right” cus-tomers?

3.How can a firm calculate the lifetime value of its customers?12

1234

567

Y ear Profit from Price Premium

Key Profit from References

Profit from Reduced Operating Costs

Profit from Increased Usage

Base Profit

Loss

Credit Card Industrial Laundry Industrial Distribution

Auto Servicing 0

P r o f i t I n d e x

(y e a r 1 = 100)50

250300

350

400

100

150

200Y ear 1

Y ear 2Y ear 3Y ear 4Y ear 5

T YPE OF R ELATIONSHIP B ETWEEN THE S ERVICE

O RGANIZATION AND I TS C USTOMERS

N ATURE OF S ERVICE D ELIVERY M EMBERSHIP R ELATIONSHIP N O F ORMAL R ELATIONSHIP Continuous delivery of Insurance Radio station service Cable TV subscription Police protection

College enrollment Lighthouse

Banking Public highway Discrete transactions Long-distance calls from Car rental

subscriber phone Mail service

Theater series subscription Toll highway

Travel on commuter ticket Pay phone

Repair under warranty Movie theater

Health treatment for HMO Public transportation

member Restaurant

1. Build A Foun ation For Loyalty

2. Create Loyalty Bond s

3. Reduce

Churn Drivers

CUSTOMER LOYALTY

? Be selective: Acquire only customers who fit the core value proposition.? Conduct churn diagnostic and

monitor declining/churning

customers.

? Segment the market to match customer needs and firm capabilities.? Manage the customer base via effective tiering of service.? Deliver quality service.? Deepen the relationship via: – Cross-selling – Bundling

? Give loyalty rewards: – Financial

– Nonfinancial

– Higher-tier service

levels

– Recognition and

appreciation ? Build higher-level

bonds :

– Social

– Customization

– Structural ? Put effective complaint

handling and service recovery

processes in place.

? Address key churn drivers:

– Proactive retention

measures

– Reactive retention measures

(e.g., save teams)

? Increase switching

costs.Enabled through:? Frontline staff ? Account managers ? Membership

programs

? CRM

Systems