Building Customer

Relationships

Relationship Marketing
Relationship Value of Customers
Foundations for Relationship Strategies
The Customer Isnt Always Right
Customer Profitability Segments
Levels of Relationship Strategies

Building Customer Relationships

Explain relationship marketing, its goals, and the benefits of
long-term relationships for firms and customers.
Explain why and how to estimate customer lifetime value.
Specify the foundations for successful relationship
marketing--quality core services and careful market
segmentation.
Provide you with examples of successful customer retention
strategies.
Introduce the idea that the customer isnt always right.

Relationship Marketing
is a philosophy of doing business 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

Customer Goals of Relationship

Marketing

Profit Generated by a Customer

Over Time

Profit Impact of 5 Percent Increase in

Retention Rate

Lifetime Value of an Average Business

Customer at Telecheck International, Inc.

A Loyal Customer is One Who...

Shows Behavioral Commitment
buys from only one supplier, even though other
options exist
increasingly buys more and more from a particular
supplier
provides constructive feedback/suggestions
Exhibits Psychological Commitment
wouldnt consider terminating the relationship-psychological commitment
has a positive attitude about the provider
says good things about the provider

Customer Loyalty Exercise

Think of a service provider you are loyal to.
What do you do (your behaviors, actions, feelings) that
indicates you are loyal?
Why are you loyal to this provider?

Underlying Logic of Customer Retention

Benefits to the Organization
Customer Satisfaction

Customer Retention &

Increased Profits

Employee Loyalty

Quality
Service

Benefits to the Organization

of Customer Loyalty
loyal customers tend to spend more with the
organization over time
on average costs of relationship maintenance are
lower than new customer costs
employee retention is more likely with a stable
customer base
lifetime value of a customer can be very high

Benefits to the Customer

inherent benefits in getting good value
economic, social, and continuity benefits
contribution to sense of well-being and quality of
life and other psychological benefits
avoidance of change
simplified decision making
social support and friendships
special deals

The Customer Isnt Always Right

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

Steps in Market Segmentation and

Targeting for Services

STEP 1:

STEP 2:

Develop
Identify
Profiles of
Bases for
Segmenting Resulting
the Market Segments

STEP
3:
Develop

Measures
of Segment
Attractiveness

STEP4:
Select the
Target
Segments

STEP
5:
Ensure that
Segments
Are
Compatible

Strategies for Building Relationships

Foundations:
Excellent Quality/Value
Careful Segmentation
Bonding Strategies:
Financial Bonds
Social & Psychological Bonds
Structural Bonds
Customization Bonds
Relationship Strategies Wheel

The 80/20 Customer Pyramid

Most Profitable
Customers
Best
Customers

What segment spends more with

us over time, costs less to maintain,
spreads positive word of mouth?

Other
Customers

Least Profitable
Customers

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?

The Expanded Customer Pyramid

Most Profitable
Customers

Platinum

What segment spends more with

us over time, costs less to maintain,
spreads positive word of mouth?

Gold

Iron

Lead

Least Profitable
Customers

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?

Levels of Retention Strategies

Volume and
Frequency
Rewards

Stable
Pricing

Bundling and
Cross Selling
Continuous
Relationships

I. Financial
Bonds

Integrated
Information
Systems

IV.
Joint
Structural
Investments
Bonds
Shared
Processes
and
Equipment

Excellent
Quality
and
Value

II.
Social
Bonds

III. Customization
Bonds

Anticipation/
Innovation

Mass
Customization

Personal
Relationships

Social Bonds
Among
Customers

Customer
Intimacy

Targeting Customers,
Managing Relationships,
and Building Loyalty

Basic Segmentation Issues

Should target segments that fit well with firms:
mission, strategic goals
operational capabilities
Avoid targeting customers who might abuse:
our employees, facilities
other customers
Understand long-term value of a loyal customer
within different segments

Service-relevant Segmentation Variables

Timing of service use (e.g. by hour, day, season)
Level of skill and experience as co-producer/selfserver
Preferred language in face-to-face contact
Access to electronic delivery systems (e.g., Internet)
Attitudes toward use of new service technologies

Market Segmentation Variables

User characteristics
demographics
psychographics
geographic location
benefits sought
User behavior
when, where, how services used
quantity/value of purchases
frequency of use
profitability of relationship
sensitivity to marketing variables

Technographics: Segmenting Customers

Relative to Technology Use
FAMILY

ENTERTAINMENT

Fast
Forwards

New Age
Nurturers

Mouse
Potatoes

Technostrivers

Digital
Hopefuls

Gadget
Grabbers

PESSIMISTS

OPTIMISTS

CAREER

Handshakers

Traditionali
sts

More
Affluent
Less
Affluent

Media
Junkies

Sidelined Citizens: Not interested in technology.

Source: Forrester Research/Business Week

Classifying Relationships with

Customers
Type of Relationship--Firm and Customer
Nature of
Service Delivery
Continuous

Membership
No formal relationship
Cable TV
Radio station
Insurance
Police
College enrollment
Lighthouse

Discrete transactions Subscriber phone

Pay phone
Theater subscription Movie theater
Warranty repair
Public transport

How Customers See Relational Benefits

in Service Industries
Confidence benefits
less risk of something going wrong, less anxiety
ability to trust provider
know what to expect
get firms best service level
Social benefits
mutual recognition, known by name
friendship, enjoyment of social aspects
Special treatment benefits
better prices, discounts, special deals unavailable to others
extra services
higher priority with waits, faster service

How Much Profit a Loyal

Customer Generates over Time
Profit Index
(Year 1=100)
350
300
250
200
150
100
50
0

Year 1
Credit card

Year 2

Industrial laundry

Year 3

Year 4

Industrial distribution

Year 5
Auto servicing

Based on data from Reichheld and Sasser

What Makes Loyal Customers

More Profitable?
Tend to spend more as relationship develops
business customers may grow larger
may consolidate purchases from one supplier
Cost less to serve
less need for information and assistance
make fewer mistakes
Recommendations win new customers for firm (act as
unpaid sales people)
Trust leads to willingness to pay regular prices vs. shopping
for discounts

Calculating Customer Value

Value at Acquisition
revenues (application fee + initial purchase)
less costs (marketing +credit check + account
set up)
Annual Value (calculate each year)
revenues (annual account fee + sales + service
fees + value of referrals)
less costs (account management + cost of sales
+ write-offs)

Rewarding Most Valued Customers:

Benefits Offered by British Airways
Travel insurance
Lounge access
Immunization (UK)
Upgraded check in
Dedicated/priority reservations
Advance notification of delays (UK)
Special services assistance
Bonus air miles (US)