7ChapterChapter

Building Customer RelationshipsBuilding Customer Relationships

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

© 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Relationship MarketingRelationship 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

© 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Figure 7.2

Profit Generated by a CustomerOver Time

Figure 7.2

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, September–October 1990.

© 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Figure 7.3

Profit Impact of 5 Percent Increase in Retention Rate

Figure 7.3

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.

© 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Table 7.1

Lifetime Value of an Average Business Customer at Telecheck International

Table 7.1

Lifetime Value of an Average Business Customer at Telecheck International

© 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Customer Loyalty ExerciseCustomer 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?

© 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Figure 7.5

Relationship Development ModelFigure 7.5

Relationship Development Model

Customer BenefitsConfidence benefitsSocial benefitsSpecial treatment benefits

Relationship BondsFinancial bondsSocial bondsCustomization bondsStructural bonds

Switching BarriersCustomer inertiaSwitching costs

Core Service ProvisionSatisfactionPerceived service qualityPerceived value

Strong CustomerRelationship

(Loyalty)

Firm BenefitsEconomic benefitsCustomer behavior benefitsHuman resource management benefits

© 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Figure 7.1

Customer Goals of Relationship MarketingFigure 7.1

Customer Goals of Relationship Marketing

© 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Benefits of Relationship MarketingBenefits 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

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

© 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Strategies for Building RelationshipsStrategies for Building Relationships

Core Service Provision: service foundations built upon delivery of excellent service:

satisfaction, perceived service quality, perceived value Switching Barriers:

customer inertia switching costs:

set up costs, search costs, learning costs, contractual costs Relationship Bonds:

financial bonds social bonds customization bonds structural bonds

© 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Excellentservice

and value

1. Financial

bonds

2.Socialbonds

4. Structural

bonds

3. Customization

Bonds

Volume and frequency rewards

Bundling and cross selling

Stable pricing

Social bonds among

customers

Personal relationships

Continuous relationships

Customer intimacy

Mass customization

Anticipation/ innovation

Sharedprocesses

and equipment

Joint investments

Integrated information

systems

Figure 7.6

Levels of Relationship StrategiesFigure 7.6

Levels of Relationship Strategies

© 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Most profitable customers

Least profitable customers

What segment spends more with us over time, costs less to maintain, spreads positive word-of-mouth?

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?

Gold

Iron

Lead

Platinum

Figure 7.4

The Customer PyramidFigure 7.4

The Customer Pyramid

© 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

“The Customer Is NOT Always Right”“The Customer Is NOT Always Right”

Not all customers are good relationship customers:

wrong segment

not profitable in the long term

difficult customers