Lecture 9

Question 1

Explain some ways to grow a service business

Answer 1

• Attract new customers eg. expand geographically
• Encourage existing customers to purchase more units of service
• Encourage existing customers to purchase higher value services
• Reduce the extent of turnover or ‘churn’, resulting from desirable customers that defect to a competing service supplier
• Regain lost customers
• Terminate unprofitable, stagnant or otherwise unsatisfactory relationships

Question 2

Explain the importance of customer loyalty and why long-term customer value is important

Answer 2

= Importance of customer loyalty

• Opportunities to cross-sell other company services
• Reduced operating costs
• Increased purchases
• Positive WoM

= Customers are more profitable over time

• Profit from price premium and referrals
• Profit from reduced operating costs
• Profit from increased purchases and higher balance

= Long-term customer vlaue is more likely to be important when

• High marketing expenses are required to obtain new customer
• High administration expenses are needed to ‘enter’ a new customer into the firm’s system
• Servicing costs relatively low
• There are reasonably high margins on sales
• There is a high sales volume per customer
• There is high WoM referral

Question 3

Explain reasons why loyalty does not always mean profitability

Answer 3

• Not all types of services incur heavy promotional expenditures to attract new customers
• Loyal customers may not necessarily spend more than one-off buyers, and they may even expect price discounts
• Many heavy users are multi-brand loyal
• Long-term customers are more knowledgeable and price sensitive
• Long-life customers are less costly to serve
• Higher average prices are paid by short-life customers
  Eg. Nypro -> global employee-owned company reduced its customer base from 800 to 30
  Adopted a customer initimacy strategy
  18 consecutive years of record sales

Question 4

How can you manage the different segments from the diamond of loyalty

Answer 4

= Managing loyals

• Your most profitable customers but only 10-20% customer base
• Place at the centre of communications strategy
• Develop partnership programs and preferred access
• Continuous improvement of product and service quality and service experience

= Managing habituals

• Profitable customers representing up to 30% customer base
• Multichannel integration and access
• Point-of-sale communications and convenience of purchase

= Managing multibranders

• High potential for profit increase representing 25-50% current base
• Continuous service improvement and portfolio development
• Multichannel integration and access
• Strategic and tactical communications

= Managing switchers

• Profits follow low costs of service for up to 25% customer base
• Manage for transactions, not relationships
• Short term hard sell
• Divest (deprive) problematical switchers

Question 5

Describe the customer tiers

Answer 5

= Platinum

• Small number of customers, heavy users and contribute large share of profits
• Less price sensitive but expect highest service levels

= Gold

• More customers than platinum but individual customers contribute less profit
• More price sensitive and less committed

= Iron

• Bulk of customer base and give the firm scale economies
• Only marginally profitable and do not warrant special treatment

= Lead

• Generate low revenues
• Loss making because require same level of service as lead, migrate or terminate

Question 6

Explain the first strategy for customer retention

Answer 6

= Build a foundation for customer retention

• Segment market to match customer needs with firm profile
• Manage customer database via effective tiering of services
• Deliver value and satisfaction to all customers
• Develop trust in the brand
• Install effective complaints handling and recovery procedures

1. Create loyalty bonds
   - Play on customer loyalty motives
   - Engage the customer
   - Give rewards for loyalty
   - Build higher level bonds

• Customer satisfaction
• Create value -> sum of benefits received from choosing and staying with one service supplier minus the sum of costs
• Customer loyalty motives
• • value the most**
• > Confidence benefits = feelings of trust or confidence in the provider along wth reduced anxiety and comfort in knowing what to expect
• > Social benefits = investments of time and energy that produce positive interpersonal relationships between the two parties
• > Special treatment benefits = special price deals or preferential treatment eg. free desert at restaurant
• Reward based bonds: strengthening the customer’s preference for one brand over another eg. loyalty programs - RACVs years of membership benefits programme is based on continuous years of membership and links to card colours -> benefits improve greatly for reaching year thresholds
• Customer engagement (forming strong emotional bond with brand) may be a better predictor of loyalty than satisfaction
• > Dimensions incl confidence and pride in the brand, integrity and passion for the brand
• Social brands eg. hairdresser
• Structural bonds eg. Boeing has meetings with American Airlines to work out what customers want in the plane

Question 7

Explain the second strategy for customer retention

Answer 7

2. Build in switching barriers
   = Economic
   - Switchig barriers = economic or financial disincentives to leave that are used to ‘lock-in’ customers eg. Frequent Flyer points, bank exit fees
   = Psychological
   - Switching barriers = valuing a personal relationship and finding it stressful to leave eg. doctor
   = Stages of customer retention
   - Level 1 = customer is linked to the firm through various financial or other incentives
   - Level 2 = a longer-term relationship is developed via stronger social bonds
   - Level 3 = involves developing structural bonds as well as economic and social ones; structural bonds forged when two parties adapt to each other in some economic or technical way eg. product or process adjustments

Question 8

Explain the third strategy for customer retention

Answer 8

3. Reduce churn drivers
   - Conduct churn diagnostics
   - Understand key defection triggers
   - Address key churn drivers
   - Develop retention strategies

= Strategies for reducing customer defection

• Analyse customer defections and monitor declining accounts
• Address key churn drivers
• Regain lost customers
• > Lost customers are a distinct target segment if serious about relationship marketing
• > Strategies for regaining lost customers may include comparative advertising, improved service provision and more favourable pricing
• Implement effective complaint handling and service recovery procedures

Question 9

Describe some of the buy-seller traits likely to impact on buy-seller relationship in service settings

Answer 9

= personal relationships
W -> developed in short-timeframe
E-> relationships take long time to establish

= face-to-face orientation
W -> less emphasis
E -> stress involvement with people and being together for emotional exchange

= communication
W -> tends to be direct, clear statement of intention and adherence to formal scripts and procedures
E -> more emphasis on indirect style of communication

= confrontation avoidance
W -> confrontation-solution oriented strategies
E -> avoid confrontation and attempt to maintain harmony

Question 10

Explain CRM and its outcomes

Answer 10

= A sophisticated software that permits a company to analyse customer revenue and costs, identify high-value customers, target direct marketing efforts, capture customer behviour data and track customer defections and retention levels (referred to as gaining 360 degree view of customers

= Allows a company to
- Understand, segment and tier its customer base better
Target promotions and cross-selling better
- Implement churn alerts systems that signal if a customer is in danger of defecting

= CRM outcomes

1. Coding
   - Customers are graded based on how profitable their business is
   - Service staff are instructed to handle customers differently based on their category code
   - >Eg. platinum customer of a hotel wants to propose to girlfriend, so they organise entry to Taj Mahal after hours, also provide flowers, upgraded suite and reception created by hotel staff
2. Routing
   - Cell centres route incoming calls based on the customer’s code
   - Customers in profitable code categories get to speak to live customer service representatives, less profitable customers are inventoried in automated telephone queues
   - > Eg. top 350 business clients are served by six people, the next 700 are handled by another 6 people, the next 30,000 are served by two representatives and the final 30,000 are routed to an automated telephone system
3. Targeting
   - Profitable customers have fees waived and are targeted for special promotions
   - Less profitable customers may never hear of special deals
   - > Eg. Centura Bank ranks its 2M customers on a profitability scale from 1 to 5
   - Most profitable customers are called several times a year (retention rate has increased 50%) while most unprofitable has decreased from 27% to 21%
4. Sharing
   - Sharing of customer info to other parts of the organisation, and selling of information to third parties can occur, although the customer may be new to the organisation, their purchase history and buying potential may be well-known
   - > Eg. Continental Airlnes has a customer info system that sends customer history and value to all 43,000 gates, reservation and service employees
   - System suggests specific service recovery remedies and perks (coupons) for delays and auto upgrades, enables more consistent staff behaviour and service delivery