MKTG 29 : Service Marketing ManagementChapter 5 : Targeting Customers, Managing

Relationships and Building Loyalty

Professor : Mr. Abelito T. Quiwa. MBASchool Year : 2012 - 2013

Chapter Outline

Targeting the Right CustomersSearching for Value, Not Just NumbersTechnographic Segmentation Segmentation Strategies for Effective

Capacity UtilizationSelecting the Appropriate Customer

Portfolio Creating and Maintaining Valued

RelationshipSearch for Customer Loyalty

Introduction “The first step in managing a loyalty-based business

system is finding and acquiring the right customer.” – Frederick F. Reichheld

The term “mass marketing” is used less and less these days. Instead, today’s marketers are concerned with “focus” or “targeting” or “mass customization “. Underlying such terms is the notion of market segmentation.

More and more firms are trying to decide which types of customers they can serve well rather than trying to be all things to all people.

Managers in innovative firms constantly debate what improvements in product elements, or what new services they need to offer, to attract and retain customers from specific segments that are believed to present good opportunities for growth and profits.

In this chapter, we emphasise the importance of choosing to serve a mix of several carefully chosen target segments and taking pains to build and maintain their loyalty, through well-conceived relationship marketing strategies. We explore the following questions:

1. What segmentation variables are particularly relevant to service organization?

2. Why do capacity-constrained firms need to target multiple market segments?

3. What do we mean by “loyalty”?4. How can a firm calculate the financial value of a customer

who remains loyal over many years?5. What are the strategies associated with relationship

marketing?

Introduction

Targeting the Right Customers “Who should we be serving ?” is a question that every

service business needs to raise periodically. Customers often differ widely in terms of needs. They also differ in terms of the value that they can contribute to a company.

Not all customers offer a good fit, with the organization’s capabilities, delivery technologies and strategic direction. In short, companies should be selective about the market segments they target.

Market segmentation is one of the central concepts in marketing and there are many different traditional ways to segment a market. Effective market segmentation should group buyers in ways that result in similarity within each segment and dissimilarity between segments on relevant characteristics.

The nature of services may offer advantageous approaches to segmentation not commonly used in manufacturing and include:

Timing of service use (helpful for planning demand-management strategies designed to fill available capacity at specific times)

Level of skill and experience (especially relevant for situations in which customers will be working with a service provider as co-producers or when customers perform self-service).

Preferred language (important in planning marketing communications of any sort, especially face-to-face contact)

Access to electronic delivery systems (e,g, the Internet) and attitudes toward use of new service technologies.

Targeting the Right Customers

Searching for value, Not just Numbers Too many service firms still focus on the number of customers

they serve, without giving sufficient attention to the value of each customer.

Generally speaking, heavy users, who buy more frequently and in large volumes, are more profitable than occassional users.

Matching customers to the firm’s capabilities is vital. Managers must think carefully about how customer needs relate to such operational elements as speed and quality, the times when service is available, the firm’s capacity to serve many customers simultaneously and the physical features and appearance of service facilities.

They also need to consider how well their service personnel can meet the expectations of specific types of customers in terms of both personal style and technical competence.

Finally, they need to ask themselves: Can my company match or exceed competing services that are directed at the same types of customers?

Technographic SegmentatioBecause of the dramatic increase in technology-

related goods and services, some marketers are now suggesting a new technolographic segmentation variables, reflecting customer’s willingness and ability to use the latest technology.

Consulting firm, Forester Research, has created a ten-category segmentation scheme called “ Technograhics” which is based on the interaction between three variables: attitude toward technology,(optimistic versus pessimistic), financial situation ( more affluent or less affluent) and application of technology (career, family or entertainment).

Technographic SegmentationFast ForwardsThese consumers are thebiggest spenders andthey are early adopters ofnew technology for homeoffice and personal use.

CareerNew Age NurturersAlso big spenders butfocused on technology forhome usee, such as afamily PC.

Mouse PotatoesThey like the online world for entertainmentand are willing to spendfor the latest intechnology.

Family Entertainment

Techno-StriversUse technology from cellphones and pagers to online services primarilyto gain a career edge.

Digital HopefulsFamilies with a limitedbudget but still interested in new technology; good candidates for the under $1,000 PC.

Gadget GrabbersThey also favour online entertainment but have less cash to spend on it

Hand-ShakersOlder consumers –Typically managers-whoDo not touch their Computers at work; theyLeaves that to youngerAssistants.

TraditionalistsWilling to use technology,but slow to upgrade; not convinced upgrades andother add-ons are worthpaying for.

Media JunkiesSeeks entertainment and cannot find much of it online; prefer TV and other, older media

Figure 5.1 Segmentation Customers Relative to Technology Use

Segmentation Strategies for Effective Capacity Utilization Capacity-constrained service businesses need to make the

best use of their productive capacity. The problem for such businesses is to find enough customers to use their service at any given time and place.

Managers should recognize the risks involved in trying to fill capacity with just any warm body. Instead, they should be asking themselves whether they have attracted the right sort of customers at the right places, times and prices.

In people-processing services, where customers themselves become part of the product, conflicts may arise when people from distinctively dfferent segments come together simultneously in the same facility.

Customer as Part of the Service Experience When service users share a common facility, such

as a hotel, restaurant or retail store, other customers become part of the product. As a result, the size and composition of the customer base have important implication for both the image of the service organization and the nature of the service experience.

Since customers contribute strongly to the atmoshere of many high-contact services, a firm should seek to attract and retain customers form the most appropriate market segments. Managers also need to ensure that prospective customers are aware of what constitutes appropriate dress and behaviour.

Segmentation Strategies for Effective Capacity Utilization

Can Firm Restrict Service to Target Customers Only?Many marketers would probably like to be able to

decline request for service from prospective customers who do not fit the market position sought by their firm. There are always way to discourage unwanted persons from requesting services, for instance, by insisting on certain standard of dress.

However, outright refusal to admit someone toa service facility may be viewed as illegal or unethical if the person has the ability to pay and is not behaving in a disorderly manner.

Segmentation Strategies for Effective Capacity Utilization

Customer As Part of the Service Exprience If you are a customer of a high-contact, shared service, you can

quickly determine whether it is well or poorly patronized. You can also see what sort of people are using the service –their appearance, age range, apparent income bracket, dress (formal or casual) and whether they appear to have come alone, in couples or in group.

Since customers contribute strongly to the atmosphere of many high-contact servicesm a firm should seek to attract and retain customers from the most appropriate market segments. Managers also need to ensure that prospective customers are aware of what constitutes appropriate dress and behaviour.

A uniform customer base is not always possible or even desirable for many service businesses. Two or more distinct market segments may each contribute importantly to the organization’s success, yet they may not mix well. Ideally, potentially conflicting segments should be separated in place and time.

Can Firms Restrict Service to Target Customers Only?Many marketers would probably like to be decline

requests for service from prospective customers who do not fit the market position sought by their firm.

There are ways to discourage unwanted persons from requesting services, for instance, by insisting on certain standard of dress. However, outright refusal to admit someone to a service facility may be viewed as illegal or unethical if that person has the ability to pay and is not behaving in a disorderly manner.

Prospective customers should be informed in advance about the specific nature of a service, so that they know what to expect. This increases the chances of a satisfactory “fit” between customers and the organization.

Selecting the Appropriate Customer Portfolio

Creating a Portfolio of Market Segments. Different segments offer different value for a service

firm. Some types of customers may be more profitable than others in the short term, but others may have greater potential for long-term growth.

Similarly, the spending patterns of some customers may be stable over time, while others my be more cyclical, spending heavily in boom times, but cutting back sharply in recessions. A wise firm may seek a mix of such customers in order to reduce the risks associated with such cyclical behaviour.

Historical data can be adapted to reflect pricing and cost changes,Promotional efforts and market-related risks-including the Anticipated impact of competitive actions or changes in marketDynamics.

Attracting, Retaining, Upgrading and Terminating Customers All too often, rewards and recognition for sales people go to

those who bring in new business. However, this is not necessarily the most profitable strategy. A widely circulated statement is that on average it costs a firm to six times as much to attract a new customer as it does to implement retention strategies to hold on to an existing one.

Well-managed firms understand the importance of working hard to retain and increase their existing customers and develop compensation packaged designed to encourage such behaviour.

Customer retention involves marketing and account-management activities aimed at developing long-term, cost-effective links with the organizations to benefit both paries.

Service firms can use a variety of strategies to maintain and enhance relationships, including such basics as treating customer fairly, offering service augmentations and treating each customer as though he or she were a segment of one-the essence of mass customization.

Selecting the Appropriate Customer Portfolio

Selecting the Appropriate Customer Portfolio

“Pacesseters”

Significant Projects

“ Bread and Butter “ Projects

Analytical Work on Project Data

Major, state-of-the-art challengesfor the firm’s principles that givethe firm high visibility

Demanding client assignment offeringa learning experienc for the firm’s mostexperienced associates.

Routing client project sharedAmong principals and associates

Entry-level tasks for newAssociates or for researchAssistant and paraprofessionals

Figure 5.2 Product Mix for a Professional Service Firm

Selecting the Appropriate Customer Portfolio

In the Asian context it has been shown that in many service setting where customers jointly participate in the service production and consumption process, relationship building rest not only with the contact personnel, but also with all the other customers-firm interface.

Research findingg indicate that different aspects of the customer interface, namely, contact personnel, and physical and customer environment are important in enhancing the quality of the relationship for high-end and low-end service providers.

This implies the need for a service firm to leverage strategically,on the key customer-firm antecedents in its pursuit of customerretention and loyalty.

Creating and Maintaining Valued RelationshipWhat is valued relationship? It is one in which the

customer finds value because the benefit received from service delivery significantly exceed the associated costs of obtaining them.

Kumar emphasises that relationships in a business-to-business service are largely dependent on the quality of interactions between individuals at each of the partnering firms.

Kumar observes:” As relationships strengthen over a period of time the service provider’s personnel often asssume the role of outsourced departments and make cretical decisions on behalf of thei clients.

For the firm, a valued relationship is one that is financially profitable over time and in which the benefits of serving a customer may extend beyond revenues, to include such intangibles as the knowledge and pleasure obtained from working with that customer.

A good working relationship betwee two parties implies that they relate positively to one another, as opposed to just conducting a series of almost anonymous transaction.

In a healthy and mutually profitable relationship, both parties have an incentive to ensure that it extends for many years. The seller, in particular, recognises that it pays to take an investments perspective, justifying the initial costs of acquiring new customers and learning about their needs, by an expectation of future profits.

Creating and Maintaining Valued Relationship

Relationship Versus TransactionA fundamental distinction in marketing exists between

strategies intended to bring about a single transaction and those designed to create extended relationship with customers. The term “ relationship marketing” has been widely used to describe the latter type of activity, but until recently it was only loosely defined.

There are four distinct types of marketing:1.Transactional marketing2.Three categories of what they call relational marketing: - database marketing - interaction marketing - network marketing

Transactional marketingA transaction is an event during which an

exchange of value takes place between two parties. One transaction, or even aseries of transactions, does not necessarily constitute a relationship, since these require mutual recognition and knowledge among the parties.

When each transaction between a customer and a supplier is essentially discrete and anonymous, with no long-term record kept of a customer’s purchasing history and little or no mutual recognition between a customer and the firm’s employees, no meaningful marketing relationship can be said to exist.

Relationship Versus Transaction

Database marketing In this type of marketing, the focus is still on the market

transaction, but now includes information exchange. Marketers relay on information technology, possibly in teh form of a data base or the internet, to form a relationship with targeted customers and retain their patronage over time.

However, the nature of aged by the seller. Technology is used to ;

1) Identify and build a database of current and potential customers2) Deliver differentiated messages based on consumers’

characteristics and preferences;3) Track each relatioship to monitor the cost acquiring the

consumer and the lifetime value of the resulting purchases. Although technology can be used to personalise the raltionship (

as in word-processed letters that insert the customer’s name), relations remain somewhat distant. Utility services such as power supply, gas and cable television are good exsamples.

Relationship Versus Transaction

Interaction marketingA closer relationship exists in situations where there is

face-to-face interaction between customers and representatives of the supplier (or “ear-to-ear interaction over telephone). Although the service itself remains important, value is added by people and social processes.

Interaction may include negotiations and sharing of insights in both directions. This type of relationship has long existed in many local environment where buyers and sellers know and trust, each other,as in community banks or a dental clinic.It is also commonly found in many business-to-business services.

Both the firm and the customer are prepared to invest resources, including time, to develop a mutually beneficial relationship. This investment may include time spent sharing and recording information.

Relationship Versus Transaction

Network marketing This type of marketing occurs primarily in a

business-to-business context, where firmrs commit resources to develop positions in a network of relationships with customers, distributions, suppliers, the media, consultants, government agencies, competitors and even their customers’ customers.

There is often a team of individual within a supplier, who must collaborate to provide effective service to a parallel team within the customer organization. However, the concept of networking is also relevant in consumer-marketing environments, where customers are encouraged to refer friends and acquantances to the service provider.

Relationship Versus Transaction

Creating “Members” Relationships Although some services involve discrete transactions,

in other instances purchasers receive service on a continuing basis. Even where the transactions are themselves discrete, there may still be an opportunity to create an ongoing relationship.

The difference in thses situations offer an opportunity for categorising services. First, we can ask: Does the supplier entet into a formal “membership” relationship with customers as with telephone subsriptions, banking and the family doctor? Or is there no defined relationship?

Second: Is the service delivered on a continuous basis, as in insurance, broadcasting and police protection? Or is each transaction recorded and charged separately?

Relationship Versus Transaction

Creating “Members” Relationships

Table 5.1 shows the matrix resulting from this categorisation, with examples in each category.

Relationship Versus Transaction

Typer of Relationship betwee the Service Organization and Its Customers

Nature ofService Delivery

MembershipRelationship

No FormalRelationship

Continuous deliveryof service

Insurance Cable TV subscriptionCollege enrolmentBanking

Radio Police protectionLighthousePublic highway

Discrete transactions Long-distance calls fromSubscriber phone

Theather series subscriptionTravel on commuter ticketRepair under warrantyHealth treatment for HBO member

Car rental Mail service

Toll highwayPay phoneMovie theatre Public transporationRestaurant

Creating “Members” RelationshipsA membership relationship is a formalized

relationship between the firm and an identifiable customer, which may offer special benefits to both parties. Service involving discrete transactions can be transformed into membership relationship either by selling the service in bulk(for instance, a theater series subscriptions or a commuter ticket on public transport) of by offering extra benefits to customers who choose to register with the firm (loyalty programmes for hotels, airlines and car rental firms fall into this category).

Relationship Versus Transaction

The Search for Customer Loyalty Loyalty is an old-fashioned work that has traditionally been used

to describe fidelity and enthusiastic devoiton to a country, cause or individual.

More recently, in a business context, it has been used to describe a customer’s willingness to continue a partronising a firm over the long term, purchasing and using its goods and service s on a repeated and preferably exclusive basis and voluntarily recommending the firm’s product to friends and associates.

Richard Oliver has argued that consumers first become loyal in a cognitive sense, perceiving from brand attribute information that one brand is preferable to its alternatives.

The second stage is effective loyalty, where a consumer develops a liking towards the brand based on cumulatively satisfying usage occasions. Such attitudes are not easily dislodged by counter arguments by competitors.

The third stage is contive loyalty, where the consumer is committed to buy the same brand again,which should lead to the fourth stage, called action loyalty, where the repurchase is made.

“Few companies think of customers as annuities,” says Frederick Reichheld, author of The Loyalty Effectand a major researcher in this field. And yet that is precisely what a loyal customer can mean to afirm: a consistent source of revenues over a period of many years.

However, this loyalty cannot be taken for granted. It will only continue as long as the customer feels that he or she is receiving better value (including superior quality relative to price) than can be obtained by switching to another supplier.

If the firm does something to disappoint the customer, or if a competitor starts to offer significantly better value, then there is a risk that the customer will defect.

The Search for Customer Loyalty

Realising the Full Profit Potential of a Customer Relationship

How much is a loyal customer worth in terms fo profits? In 1990, Reichheld and Sasser analyzed the profit per customer in different service businesses, entegorished by the number of years that a customer had been with the firm.

They found out that the longer number of years that a customers had been with the firm in each of these industries, the more profitable they became to serve.

In order of magnitude at the end of seven years, these factors are:

1. Profit derived from increased purchase2. Profits from reduced operating costs.3. Profits from referrals to other customers4. Profit from price premium

Reinforcing Loyalty by Rewarding Repeat UsersCustomer loyalty programmes seek to bond customers to a

company (or to specific products) by offering additional incentives. Informal loyalty prorammes, sometimes found in small businesses, may take the form of periodically giving regular customers a small treas as a way of thanking them.

Within any competitive product category, managers recognize that few customers consistently buy one brand, especially in situations where service delivery involves a discrete transaction, such as a car rental.

In many instance, consumers are loyal to several brands while spurning others, sometimes described as “ polygamous loyalty”(not to be confused with variety seeking, which results in consumers changing brands without any fixed allegiance at all).

To assess the potential of a loyalty programmes to alte normal patterns of behaviour . Dowling and Uncles argue that marketers need to examine theree psychological effects.

1.Brand loyalty versus deal loyalty. Marketers should focus on loyalty programmes that directly suppor the value and positioning of the product in question,rather than just creating a point of differentiation.

2.How buyers value rewards. Several elements combine to determine a loyalty programme’s value to customers:

Reinforcing Loyalty by Rewarding Repeat Users

Reinforcing Loyalty by Rewarding Repeat Users To assess the potential of a loyalty programmes to alte normal

patterns of behaviour . Dowling and Uncles argue that marketers need to examine theree psychological effects.

2. How buyers value rewards. Several elements combine to determine a loyalty programme’s value to customers:

2.1. the cash value of the redemption rewards; 2.2. the range of choice among rewards 2.3. the aspirational value of the rewards 2.4. whether the amount of usage required to obtain in award places it within the realm of possibility for any give n consumer; 2.5. the ease of using the programme and making claims for redemption; 2.6. the psychological benefits of belonging to the programme and accumulating points.

To assess the potential of a loyalty programmes to alte normal patterns of behaviour . Dowling and Uncles argue that marketers need to examine theree psychological effects.

3. Timing. How soon are the benefits from participating in the rewards programme obtained by customers? Deferred gratification tends to weaken the appeal of a loyalty programme. One solution is to send customers a periodic statement of their account status, indicating progress towards reaching a particular milestone and promoting the rewards that might be fortcoming when that point is reached.

Reinforcing Loyalty by Rewarding Repeat Users

Conclusion When customers have a high level of contact with the

service organization and with one another, the customer portfolio helps to define the character of the organization, because customers themselves become a part of the product.

Too diverse a portfolio may result in an ill-defined image, especially if all segments are present at the same time “ Unsuitable” customers may spoil the experience for others and hurt profitability in other ways, too.

Thus, marketers must be selective in targeting the desired customer segments, and guidelines must be established for customers’ behaviour while theyare using the service.

For services that are capacity constrained, the marketer’s task in not only to balance supply and demand, but also to obtain the must desirable types of customers at a particular point in time. This may require targeting different segments at different times.

Marketers need to pay special attention to those customers who offer the firm the greatest value, since they purchase its products with the frequency and spend the most on premium services.

Programmes to reward frequent users, of which the most highly developed are the frequent flyer clubs created by the airlines, not only serve to identify and provide rewards for high-value customers, they also enables marketers to track the former’s behaviour in terms of where and when they uses the service, what service calsses or types of product they buy and how much they spend.

The greatest success is likely to go to organizations, which can give their best customers incentives to remain loyal, rather than playing the field and spreading their patronage among many suppliers.

Conclusion