Week 3

Question 1

pathways to growth

Answer 1

1. Attract new customers, e.g., expand geographically
2. Encourage existing customers to purchase more units of service
3. Encourage existing customers to purchase higher-value services
4. Reduce the extent of turnover—or ‘churn’—resulting from desirable customers that defect to a competing service supplier
5. Regain lost customers
6. Terminate unprofitable, stagnant or otherwise unsatisfactory relationships

Question 2

Define Relationship Marketing (RM)

Answer 2

Proactively creating, developing and maintaining committed (emotional engagement with the brand) interactive (multiple transactions) and profitable exchanged with selected customers over time

Question 3

Why is customer loyalty important for a firm’s profitability?:

Answer 3

Opportunities to cross-sell other company services e.g. foxtel packages

o Reduced operating costs (streamline majority of regular employees know what to expect

o Increased purchases (and value of purchases)

o Positive word of mouth (cut back on promotional expenditure, highly viable and vital in early product creation)

Question 4

Long-term Customer value is more likely to be important when:

Answer 4

o High marketing expenses are required to obtain/find a new customer
o High administration expenses are needed to enter a new customer into the firms system
o Servicing costs are relatively low
o There are reasonably high margins on sales
o There is a high sales volume per customer
o There is a high word of mouth referral (e.g. B2B = fewer customers, but spend more with you)

Question 5

An alternative view of loyalty profitability linkage:

Answer 5

o Mistake to assume that all loyal (long-term) customers are more profitable than those who make one-time purchases (e.g. doctor)
o Revenue does not necessarily increase with time for all types of customers
o Not all types of services incur heavy promotional expenditures to attract new customers
o Loyal customers may not necessarily spend more than one-off buyers, and they may even expect price discounts

o Typically 20% of a firm’s customers generate approximately 80% of revenue (80/20 rule), but are the top 20% loyal? Many heavy users are multi-brand loyal
o High lifetime revenues drive profit, not duration
o Long-term customers are more knowledgeable and price sensitive (not only price reduction necessary)
o Customers resent firms that try to profit excessively from their loyalty
o Long-life customers are less costly to serve
o Short-life customers become unprofitable if invested in (segmentation issue) (firms may run short term promotions e.g. spirit of TAS)
o Higher average prices are paid by short-life customers

Question 6

define platinum customers

Answer 6

small number of customers, heavy users and contribute a large share of firm’s profit. Less price sensitive, but expect highest service levels.

Question 7

define gold customers

Answer 7

more customers than platinum tier, but individual customers contribute less profit. More price sensitive and less committed.

Question 8

define iron customers

Answer 8

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

Question 9

define lead customers

Answer 9

generate low revenues. Loss making because they require the same level of service as lead. Migrate or terminate.

Question 10

3 customer retention stratergies

Answer 10

1. Create loyalty bonds
2. Build in switching barriers
3. Reduce churn drivers

Question 11

explain creating loyalty bonds

Answer 11

play on loyalty motives
engage the customer
give rewards for loyalty
Build higher level bonds

Question 12

explain building switch barriers

Answer 12

Economic or financial disincentives to leave that are used to ‘lock-in’ customers e.g. frequent flyer points, bank exit fees, multi policy discount

Stages of customer retention:
•Level 1: the 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, such as product or process adjustments

Question 13

explain the 3 types of customer loyalty motives

Answer 13

1.Confidence benefits:
feeling of trust or confidence in the provider along with reduced anxiety and comfort in knowing what to expect

2.Social benefits:
Investement of time and energy that produce positive interpersonal relationships between the two parties

3.Special treatment benefits:
special price deals or preferential treatment e.g. free tickets at football

Question 14

explain the difference between economic and psychological barriers

Answer 14

Economic or financial disincentives to leave that are used to ‘lock-in’ customers e.g. frequent flyer points, bank exit fees, multi policy discount

Physiological switching barriers: Valuing a personal relationship and finding it stressful to leave e.g. doctor, trust, relationship, guilt, embracement, social problems

Question 15

explain ‘reducing customer churn;’ retention stratergy

Answer 15

o Analyse customer defections and monitor declining accounts
o Address key churn drivers
o Regaining lost customers:
• Lost customers are a distinct target segment if serious about relationship marketing
• Strategies for regaining lost customers may include comparative advertising (addressing competitors), improved service provision and more favorable pricing
o Implement effective complaint handling and service recovery procedures (service recovery paradox)

Question 16

Define customer relationship management

Answer 16

“A sophisticated software that permits a company to analyse customer revenue and costs, identify high-value customers, target direct marketing efforts, capture customer behavior data and track customer defections and retention levels (referred to as gaining a ‘369O view’ of customers)

e.g. Airline loyalty software

Question 17

CRM allows a company to

Answer 17

o Understand, a segment and tier it’s customer bas better
o Target promotions and cross-selling better
o Implement churn alert systems that signal if a customer is in danger of leaving / defecting from the business.

CRM outcomes:
o	Coding
o	Routing
o	Targeting
o	Sharing

Question 18

explain the CRM outcome of coding

Answer 18

Customers are graded based on how profitable their business is.
Service staff are instructed to handle customers differently based on their category code.

e.g. American Express’ platinum credit card customers gain complimentary access to private airport clubs worldwide.

Question 19

explain the CRM outcome of ‘routing’

Answer 19

Call centres route incoming calls based on the customers code. Customer in profitable code categories get to speak to live customer service representatives. Less profitable customers are inventoried in automated telephone queues

Question 20

explain the CRM outcome of ‘targeting’

Answer 20

Profitable customers have fees waived and are targeted for special promotions. Less profitable customers may never hear of the special deals

• e.g. The most profitable customers are called several times a year for what the bank calls ‘friendly chats’ and the CEO calls once a year to wish these same customers ‘Happy Holiday’
• The retention rate of the most profitable group has increased by 50%
• In comparison, the most unprofitable group has decreased from 27% to 21%

Question 21

Explain the CRM outcome of ‘sharing’

Answer 21

The sharing of customer information to other parts of the organisation, and the selling of information to other companies can occur. Although the customer may be new to the organisation, their purchase history and buying potential may be well known to insiders
e.g. “data mining’

Question 22

Why Should a Restaurant Invest in human resource management (HRM) to create long-term relationships with customers?

Answer 22

o Develop inter-personal / social relationship with the customer establishing loyalty bonds
o Achieving customer commitment means obtaining real employee commitment
o The longer the employee works for the company, the more they get to know the customer and the system and the more effective they will be in creating social bonds and stronger relationships with customers over time. Often, the employee is seen as the service: If they leave the customer may follow
o o
o Conversely, poor staff / anti social can deter potential and loyal customers