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Review: CHAPTER

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... Schlesinger, The Service Profit Chain, (New York, NY: The Free Press, 1997), p. 83. ... to phase out of bad ones...a new course idea for marketing majors! ... – PowerPoint PPT presentation

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Title: Review: CHAPTER


1
ReviewCHAPTER 5
  • Customer Perceptions of Service

2
Objectives
  • Understand what influences customer perceptions
    of service and the relationship among customer
    satisfaction, service quality, and individual
    service encounters
  • Demonstrate the importance of customer
    satisfaction, the factors that influence it, and
    the resulting outcomes.
  • Identify the five key dimensions of service
    quality
  • Demonstrate the importance of service encounters
    as essential building blocks from which customers
    form their perceptions Moments of Truth

3
Satisfaction vs. Service Quality
  • Satisfaction is generally viewed as a broader
    concept whereas service quality focuses
    specifically on dimensions of service.
  • Perceived service quality is a component of
    customer satisfaction.
  • Satisfaction is influenced by perceptions of
    service quality, product quality, price, and
    situational and personal factors.
  • Service quality is a focused evaluation that
    reflects the customers perception of
    reliability, assurance, responsiveness, empathy,
    and tangibles (RATER).
  • See Figure 5.1

4
Relationship between Customer Satisfaction and
Loyalty
Source James L. Heskett, W. Earl Sasser, Jr.,
and Leonard A. Schlesinger, The Service Profit
Chain, (New York, NY The Free Press, 1997), p.
83.
5
The Five Dimensions of Service Quality
Reliability
  • Ability to perform the promised service
    dependably and accurately.
  • Knowledge and courtesy of employees and their
    ability to inspire trust and confidence.
  • Physical facilities, equipment, and appearance of
    personnel.
  • Caring, individualized attention the firm
    provides its customers.
  • Willingness to help customers and provide prompt
    service.

Assurance
Tangibles
Empathy
Responsiveness
6
CHAPTER 7
  • Building Customer Relationships

7
Introduction
  • It is important for companies to focus on
    keeping their current customers and building
    long-term relationships with them. Some
    companies fail to understand the importance of
    their current customers and fixate on acquiring
    new customers. By adopting a relationship
    philosophy, companies can begin to understand
    customers over time and in great depth, and are
    better able to meet their changing needs and
    expectations. This requires DATA.

8
Objectives
  • Define and explain the importance of relationship
    marketing
  • Understand relationship value of customers
  • Understand customer profitability segments as a
    strategy for focusing on relationship marketing
    efforts
  • Identify relationship development strategies
  • Identify challenges in relationship development

9
Relationship Marketing
  • Relationship marketing a philosophy of doing
    business that focuses on keeping and improving
    relationships with current customers rather than
    only on acquiring new customers.
  • The philosophy assumes that customers prefer to
    have an ongoing relationship with one
    organization than to switch continually among
    providers. True??
  • It is much cheaper for an organization to keep a
    current customer than to attract a new one.
  • The bucket theory focuses on the importance of
    building long term relationship.

10
The Evolution of Customer Relationships
  • Customers as Strangers
  • Customers as Acquaintances
  • Customers as Friends
  • Customers as Partners

11
Figure 7.1Customer Goals of Relationship
Marketing
12
The Evolution of Customer Relationships
  • Customers as Strangers
  • Strangers are those customers who are not aware
    or have not yet had any transactions with the
    firm.
  • In this case, the firms primary goal is to
    initiate communication with these customers in
    order to attract and acquire their business.
  • Customers as Acquaintances
  • Once customer awareness and trial are achieved,
    familiarity is established and the customer and
    firm become acquaintances.
  • The firms primary goal is to satisfy the
    customer.

13
The Evolution of Customer Relationships
  • Customers as Friends
  • As a customer undergoes repetitive purchasing,
    the firm begins to acquire specific knowledge of
    the customers needs, allowing to create an
    offering that directly addresses the customers
    situation.
  • This service exchange relationship requires the
    development of trust between the customer and
    firm.
  • A primary goal for the firm is to gain customer
    retention.
  • Customers as Partners
  • For a customer-firm partnership to exist, the
    creation of commitment must exist. In order to
    reach this stage, a firm must use customer
    knowledge and information systems to deliver
    highly personalized and customized offerings.
  • The firms primary goal is concerned with
    enhancing the relationship. Customers are more
    likely to stay in the relationship if they feel
    that the company understands their changing needs
    and is willing to invest in the relationship by
    constantly improving and evolving its product and
    service mix.

14
The Goal of Relationship Marketing
  • The goal of relationship marketing is to build
    and maintain a base of committed customers who
    are profitable for the organization.
  • The ideal goal is move customers up the ladder
    from the point at which they are strangers to
    highly valued, long term customers.

15
Benefits of Long-term Relationships for Customers
  • Types of relational benefits that customers
    experience in long-term service relationships
    include
  • Confidence Benefits comprise feelings of trust
    or confidence in the provider along with a sense
    of reduced anxiety in knowing what to expect
  • Social Benefits a service provider becomes a
    part of the consumers social support system
  • Special Treatment Benefits includes getting the
    benefit of the doubt such as receiving a special
    deal or price

16
Benefits of Long-term Relationships for Firms
  • Types of benefits that firms experience in
    long-term relationships include
  • Economic Benefits increased revenues over time
    from the customer, reduced marketing and
    administrative costs, and the ability to maintain
    margins without reducing prices.
  • Customer Behaviour Benefits includes free
    word-of-mouth, customer voluntary performance,
    providing social benefits to other customers,
    serve as mentors.
  • Human Resource Management Benefits contribute
    to co-production of the service, social benefits,
    customer retention

17
Profit 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.
18
Profit Impact of 5 Percent Increase in Retention
Rate
Source F. F. Reichheld, Loyalty and the
Renaissance of Marketing, Marketing Management,
vol. 2, no. 4 (1994), p. 15.
19
Relationship Value of Customers
  • Relationship value of a customer is a concept or
    calculation that looks at customers from the
    point of view of their lifetime revenue and/or
    profitability contributions to a company.

20
Factors that Influence Relationship Value
  • The relationship value of customer is influenced
    by
  • length of an average customer lifetime
  • sales of additional products and service over
    time
  • referrals generated by the customer over time
  • costs associated with serving the customer

21
Estimating Customer Lifetime Value
  • If companies knew how much it really costs to
    lose a customer, they would be able to accurately
    evaluate investments designed to retain
    customers.
  • A firm can estimate the increased value or
    profits that accrue for each additional customer
    who remains loyal to the company rather than
    defecting to the competition.

22
Customer Profitability Segments
  • Companies may want to treat all customers with
    excellent service, but they generally find that
    customers differ in their relationship value and
    that it may be neither practical nor profitable
    to meet all customer expectations.
  • Companies may try to identify segments or tiers
    of customers that differ in current and/or future
    profitability to a firm.

23
Profitability Tiers The Customer Pyramid
  • Companies are aware that their customers differ
    in profitability and that a minority of their
    customers account for the highest proportion of
    sales or profit. This refers to the 80/20 rule
    where 20 of customers produce 80 of sales or
    profit.
  • The 20 of customers constitute the top tier
    which are identified as the most profitable.

24
Customer Profitability SegmentsThe 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
25
The Customer Pyramid
  • The Customer Pyramid includes
  • The platinum tier the companys most profitable
    customers which are typically the most heavy
    users, not overly price-sensitive, willing to
    invest and try new offerings, and committed to
    the firm.
  • The gold tier profitability levels are not as
    high perhaps because the customers want price
    discounts and are not as loyal.
  • The iron tier essential customers who provide
    the volume needed to utilize the firms capacity,
    but their spending levels, loyalty, and
    profitability are not substantial enough for
    special treatment.
  • The lead tier customers who are costing the
    company money.

26
The Customers View of Profitability Tiers
  • The profitability tiers is a helpful tool for
    companies, however, customers do not like to be
    categorized into a less desirable segment.
  • It becomes increasingly important that firms
    communicate with customers so they understand the
    level of service they can expect and what they
    would need to do to get better service.
  • The challenges which can result are
  • Customers believe they have been singled out for
    poor service
  • Issues of privacy

27
Relationship Development Strategies
  • Relationship drivers that firms use to keep their
    current customers include
  • Core service provisions
  • Relationship bonds
  • Switching barriers

28
Relationship Development Strategies
  • Core service provisions
  • A firm needs to provide good core service that
    meets customer expectations and creates service
    satisfaction.
  • Relationship Bonds
  • Relationship bonds attempt to give customers
    reasons to want to be loyal which include
    financial, social, customization, and structural
    bonds.
  • Switching Barriers
  • Customer inertia a certain amount of effort is
    required to change firms which may lead to a
    change in their behaviour.
  • Switching costs the costs of changing to and
    purchasing from a different firm is high.
    Switching costs include time, money, and effort.

29
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
30
Relationship Challenges
  • The customer is not always right
  • It is important that a company distinguishes
    between a profitable and unprofitable customers
    and what they want and expect.
  • If these expectations cannot be met profitably,
    and the reason is not simply the lack of will,
    the firm must find ways to reallocate its scarce
    resources.
  • Why are some customers unprofitable?
  • The Wrong Segment
  • Not Profitable in the Long Term
  • Difficult customers

31
Relationship ChallengesThe Customer Is NOT
Always Right
  • Closing Gap 1 What do profitable customers want?
    What do unprofitable customers want?
  • Not all customers are good relationship
    customers
  • wrong segment
  • not profitable in the long term
  • difficult customers
  • Need to know how to end relationships. (Not
    enough to know how to start relationships, have
    to know to phase out of bad onesa new course
    idea for marketing majors!)

32
Ending Business Relationships
  • Should firms fire their customers?
  • More companies are making these types of
    decision in the belief that troublesome customers
    are usually less profitable and less loyal and
    that it may be counterproductive to attempt to
    retain their business.
  • Another reason for firing a customer is the
    negative affect these customers have on employee
    quality of life and morale.
  • Firing a customer needs to be conducted in a way
    to minimize the risk of negative publicity or
    word-of-mouth.
  • Ways to fire a customer include
  • Increasing prices
  • Charging for services that previously had been
    given away
  • Finding the client a new service provider that
    can better meet their needs

33
Summary
  • Benefits for both the company and customers exist
    in building long-term relationships.
  • The strategies which can be used to develop
    long-term relationships with customers include
    core service provision, relationship bonds, and
    switching barriers.
  • There are various challenges in relationship
    development. Firms need to carefully select
    their customers in order to minimize the risk of
    the issues involved with firing nonprofitable
    customers.

34
Self-Test
35
Customer Loyalty Exercise
  • Think of a service provider to whom 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?

36
In Class Exercise
  • Exercise 4 Calculate your lifetime value to a
    company. Make your assumptions clear. Using ideas
    and concepts from this chapter, describe a
    relationship strategy that would increase the
    number of lifetime customers for this firm.
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