chapter 12 Flashcards
The important role of customer loyalty
*Customers become more profitable the longer they remain with a firm:
–Increase 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 priceWilling to pay higher price during peak periods
Calculate the lifetime value (LTV) of a loyal customer.
Assessing the value of a loyal customer
*Must not assume that loyal customers are always more profitable than those making one-time transactions:
–Large customers may expect price discounts in return for loyalty
–Revenues don’t necessarily increase with time for all types of customers
*Tasks:
–Determine costs and revenues for customers from different market segments at different points in their customer lifecycles
–Predict future profitability
Measuring Customer Equity: Lifetime Value of Each Customer
*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)
*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
how to calculate acquisition revenues less cost
–Revenues (application fee + initial purchase)
–Costs (marketing + credit check + account set up)
how to calculate projected annual revenues and costs (This considers the expected revenue and costs associated with keeping a customer for multiple years)
–Revenues (annual fee + sales + service fees + value of referrals)
–Costs (account management + cost of sales + write-offs)
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
why are customers loyal to a particular service firm?
*Customers stay loyal when we create value for them
*Value can be created for customers through use of technology to control quality
–Confidence benefits
–Confidence in correct performance
–Ability to trust the provider
–Lower anxiety when purchasing
–Knowing what to expect and receive
*Social benefits
–Mutual recognition and friendship between service provider and customer
*Special treatment
–Better price
–Discounts not available to most customer
–Extra services
–Higher priority when there is a wait
Know the core strategies of the Wheel of Loyalty (3)
1.Build a foundation for loyalty: segment the market to match needs with companies capabilities, offer tiered services, and deliver quality
2. Create loyalty bonds: make it personalized, give loyalty rewards, bundling
3. Reduce churn Drivers: proactive retention measures, reactive measures
why it is so important for service firms to target the “right” customers.
Targeting the right customers
*Target the right customer and match them to what firm can deliver
–How do customer needs relate to operations elements?
–How well can service personnel meet expectations of different types of customers?
–Can a company match or exceed competing services that are directed at same types of customers?
*Focus on number of customers served as well as 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 come from a large group of people that no other supplier is serving well
the tiering pyramid
lead, iron, gold, platinum
-lead segment cost us money, time, effort, and are difficult to do business with, dont provide the returns we want
-platinum segments see high value in our offers, spend more time with us, cost less, spread positive word of mouth
customer satisfaction and loyalty (3)
- Zone of Defection (Low Satisfaction, Low Loyalty)
Customers in this blue section are either very dissatisfied (1) or dissatisfied (2).
Their loyalty is extremely low, meaning they are very likely to leave and may even spread negative word-of-mouth.
The extreme case here is labeled “Terrorists”, representing customers who actively damage the company’s reputation by leaving bad reviews or discouraging others from using the service. - Zone of Indifference (Neutral Satisfaction, Moderate Loyalty)
Customers in this middle section are neither satisfied nor dissatisfied (3) or slightly satisfied (4).
Their loyalty is unpredictable—they might stay but could easily switch to a competitor if they find a better option.
These customers are passive—they won’t promote the brand but won’t necessarily damage it either. - Zone of Affection (High Satisfaction, High Loyalty)
Customers in this pink section are very satisfied (5) and have strong emotional connections to the brand.
Loyalty increases exponentially—high satisfaction creates repeat customers and brand advocates.
The most extreme case is labeled “Apostles”, referring to highly satisfied customers who actively promote the brand through word-of-mouth and recommendations.
how to deepen the relationship through cross-selling and bundling (4 types)
Cross-selling and bundling
-Bundling/cross-selling services makes switching a major effort that the customer is unwilling to go through unless extremely dissatisfied with service provider – eg Bell Canada
-Customers may benefit from buying all their various services from the same provider
–One-stop shopping, potentially higher service levels, higher service tiers, etc.
*Reward Based Bonds
–Can be financial or non-financial bonds or a combination of both
–Financial bonds
Discounts on purchases, loyalty program rewards (e.g. frequent flier miles), cash-back programs
–Non-financial rewards
Priority to loyalty program members for waitlists and queues in call centres; higher baggage allowances, priority upgrading, access to airport lounges for frequent flyers
–Intangible rewards
Special recognition and appreciation
Reward-based loyalty programs are relatively easy to copy and rarely provide a sustained competitive advantage
*Social Bonds
–Based on personal relationships between providers and customers
–Harder to and takes a longer time to build, but also harder to imitate and thus, better chance of retention in the long term
*Customization Bonds
–service provider provides customized service for loyal customers e.g. Starbucks
–Customers may find it hard to adjust to another service provider who cannot customize service
*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 email 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
financial vs non-financial loyalty rewards
*Financial Rewards: customer incentives that have a financial value
–Brand loyalty versus deal loyalty
–How buyers value rewards
–Timing
*Non-financial Rewards: benefits that cannot be translated directly into monetary terms
–Special recognition and appreciation of customers
–Status benefits to customers in the top tie
what factors cause customers to switch to a competitor and how to reduce such switching. (3)
1.Service failures
- core service failures: mistakes in service
-service encounter failures: employees are uncaring, unresponsive
-poor response to service failure: negative
- Value Proposition Issues
-high prices
-inconvenience: location, hours, long lines
-competition: better prices, service quality
Others: provider closed, ethical problems
address key churn drivers
*Deliver quality service
*Reduce inconvenience and non-monetary costs
*Have fair and transparent pricing
*Industry-specific drivers
*Take active steps to retain customers:
–Save teams: specially trained call centre staff to deal with customers who want to cancel their accounts
–Be careful about how save teams are rewarded
Other Ways to Reduce Churn
*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 bad word of mouth
Common Applications of CRM Systems (5)
*Data collection:
–Customer data such as contact details, demographics, purchasing history, service preferences, anything else special to the customer (location, personal history)
*Data analysis:
–Data captured is analysed and categorized
–Used to tier customer base and tailor service delivery accordingly
*Sales force automation
–Sales leads and cross-sell and up-sell opportunities can be effectively identified and processed
–Entire sales cycle from lead generation to close of sales and after-sales service can be tracked and facilitated through *Marketing automation:
–Mining of customer data enables the firm to target its market
–Goal to achieve one-to-one marketing and cost savings, often in the context of loyalty and retention programs
–Results in increasing the ROI on its marketing expenditure
–CRM systems also allows firms to judge effectiveness of marketing campaigns through the analysis of responses
*Call centre automation
–Call centre staff have customer information at their fingertips and can improve their service levels to all customers
–Caller ID and account numbers allow call centres to identify the customer tier the caller belongs to, and to tailor the service accordingly
-For example, platinum callers get priority in waiting loops.
Five key processes of an effective CRM strategy
*Strategy development:
-assessment of business strategy
-business strategy guides development of customer strategy
*Value creation
-translates business and customer strategies into specific value proposition for both customers and firm
-customers benefit from priority, tiered services, loyalty rewards, and customization
-dual creation of value: customers need to participate in CRM to reap value from firm’s CRM initiatives
*Multi-channel integration
-serves customer well across many potential interfaces
-offer a unified interface that delivers customization and personalization
*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
*Performance assessment
–Is the CRM creating value for the customers and the firm?
–Are its marketing objectives being achieved?
–Is the CRM system itself performing according to expectations?
Do CRM have high failure rates?
yes,
oViewing CRM as a technology Initiative
oLack of customer focus
oNot enough understanding of customer lifetime value (CLV)
oInadequate support from top management
oFailure to reengineer business processes
oUnderestimating the challenges in data integration
How to get CRM right
oHow should our value proposition change to increase customer loyalty?
oHow much customization or one-to-one marketing and service delivery is appropriate and profitable?
oWhat is the increase in profit from increasing share-of-wallet with current customers? How much does this vary by customer tier and/or segment?
oHow much time and resources can we provide to CRM right now?
oIf we believe in customer relationship management, why haven’t we taken more steps in that direction in past?
oWhat can we do today to develop customer relationships without spending on technology?
