Building Customer Relationships

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Building Customer Relationships
Chapter
7

• Relationship Marketing
• Relationship Value of Customers
• Customer Profitability Segments
• Relationship Development Strategies
• Relationship Challenges

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Relationship Marketing

• is a philosophy of doing business, a strategic
  orientation, that focuses on keeping current
  customers and improving relationships with them
• does not necessarily emphasize acquiring new
  customers
• is usually cheaper (for the firm)
• keeping a current customer costs less than
  attracting a new one
• thus, the focus is less on attraction, and more
  on retention and enhancement of customer
  relationships

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Figure 7.1Customer Goals of Relationship
Marketing
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Benefits of Relationship Marketing

• Benefits for Customers
• Receipt of greater value
• Confidence benefits
• trust
• confidence in provider
• reduced anxiety
• Social benefits
• familiarity
• social support
• personal relationships
• Special treatment benefits
• special deals
• price breaks

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Benefits of Relationship Marketing

• Benefits for Firms
• Economic benefits
• increased revenues
• reduced marketing and administrative costs
• regular revenue stream
• Customer behavior benefits
• strong word-of-mouth endorsements
• customer voluntary performance
• social benefits to other customers
• mentors to other customers
• Human resource management benefits
• easier jobs for employees
• social benefits for employees
• employee retention

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Figure 7.2Profit Generated by a CustomerOver
Time
Source An exhibit from F. F. Reichheld and W. E.
Sasser, Jr., Zero Defection Quality Comes to
Services, Harvard Business Review,
SeptemberOctober 1990.
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Customer Loyalty Exercise

• Think of a service provider to who you are loyal.
• What do you do (your behaviors, actions,
  feelings) that indicates you are loyal?
• Why are you loyal to this provider?
• What factors have influenced the formation of
  your loyalty?

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A Loyal Customer is one who

• Show Behavioral Commitment
• Buys from one supplier (sole loyalty)
• Buys a large proportion, increasingly buys more
• Provides constructive feedback/suggestions
• Exhibits Psychological Commitment
• Commitment-doesnt consider terminating the
  relationship
• Has a positive attitude toward
• Say good things about

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Figure 7.5 Relationship Development Model
Customer Benefits Confidence benefits Social
benefits Special treatment benefits
Relationship Bonds Financial bonds Social
bonds Customization bonds Structural bonds
Strong Customer Relationship (Loyalty)
Core Service Provision Satisfaction Perceived
service quality Perceived value
Firm Benefits Economic benefits Customer behavior
benefits Human resource management benefits
Switching Barriers Customer inertia Switching
costs
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Strategies for Building Relationships

• Core Service Provision
• service foundations built upon delivery of
  excellent service
• satisfaction, perceived service quality,
  perceived value
• quality in the core service
• Segmentation and Targeting
• Traditional Segmentation
• Focus and Competitive Advantage
• Not worth the effort
• Profitability Segments
• USA Today Article

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Figure 7.4The Customer Pyramid
Most profitable customers
What segment spends more with us over time, costs
less to maintain, spreads positive word-of-mouth?
Platinum
Gold
Iron
What segment costs us in time, effort and money
yet does not provide the return we want? What
segment is difficult to do business with?
Lead
Least profitable customers
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The Customer Is NOT Always Right

• Not all customers are good relationship
  customers
• wrong segment
• not profitable in the long term
• difficult customers

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Strategies for Building Relationships

• Switching Barriers
• customer inertia
• switching costs
• set up costs, search costs, learning costs,
  contractual costs,
• Perceived risk

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Strategies for Building Relationships

• Relationship Bonds
• financial bonds
• social bonds
• customization bonds
• structural bonds

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Figure 7.6 Levels of Relationship Strategies
Stable pricing
Bundling and cross selling
Volume and frequency rewards
1. Financial bonds
Integrated information systems
Continuous relationships
Excellent service and value
2. Social bonds
4. Structural bonds
Personal relationships
Joint investments
Shared processes and equipment
Social bonds among customers
3. Customization Bonds
Customer intimacy
Anticipation/ innovation
Mass customization
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Level 1 Financial Bonds

• Volume/ Loyalty Pricing
• Bundling and Cross Selling
• Rewards/ Loyalty Programs

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Critique of Reward Programs

• 1. The Underlying Assumptions
• Many want a relationship
• Proportion are sole loyal (100)
• Loyal are Profitable
• You can make them more loyal

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Critique of Reward Programs

• 2. Challenging the Assumptions
• Loyal to the service or the reward program
• Value of the Rewards, how motivating, negative
  effects
• Timing Factors
• short term are more effective
• Locked In

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Critique of Reward Programs

• How to build a good program
• 1. Should Support the core service value
• 2. Fully cost the program
• 3. Truly motivates to be more loyal

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Level 2 Social Bonds

• Personal Relationships
• Memberships/ Formal Informal
• Affinity Programs
• Multi-level Relationships Paper

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Level 3 Customization

• Mass Customization Dell computer
• Customer Intimacy- Home Depot, Ritz Carlton

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Level 4 Structural Bonds

• Information Exchange
• Operational Linkages
• Specific Adaptations