SM

Chapter 6

BUILDING
CUSTOMER
RELATIONSHIPS

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 Relationship Marketing

• is a philosophy of doing business that focuses on keeping

and improving current customers
• does not necessarily emphasize acquiring new customers
• is usually cheaper (for the firm)--to keep a current
customer costs less than to attract a new one
• goal = to build and maintain a base of committed
customers who are profitable for the organization
• thus, the focus is on the attraction, retention, and
enhancement of customer relationships

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 Figure 6-1
Customer Goals of
Relationship Marketing

Partners
Enhancing

Retaining Friends

Satisfying Acquaintances

Getting Strangers

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 – Strangers are those customers who have not yet had any transactions
and may not even be aware of the firm. Company wants to
communicate with these customers to attract them and acquire their
businesses.

– When customers become acquaintances, an exchange relationship is

established. Primary goal is to satisfy customer.

– Friendship requires the development of trust. Primary goal is

customer retention. Offers should be more unique and difficult for
competitors to imitate.

– A firm must use customer knowledge and information systems to

deliver highly personalized and customized offerings. At this stage the
firm is concerned with enhancing the relationship.

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 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
– wouldn’t consider terminating the relationship--
psychological commitment
– has a positive attitude about the supplier
– says good things about the supplier

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Benefits to the Organization of Customer Loyalty

• Economic benefits: loyal customers tend to spend

more with the organization over time. Average costs of
relationship maintenance are lower than new customer
costs. Lifetime value of a customer can be very high.
• Customer Behavior benefits: WOM, Social support
and positive attitude.
• Human resource Management benefits: Assist
employee with service delivery, employee retention is
more likely with a stable customer base.

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 Lifetime Value of a Customer

• Assumptions
• Income
– Expected Customer Lifetime
– Average Revenue (month/year)
– Other Customers convinced via WOM
– Employee Loyalty??
• Expenses
– Costs of Serving Customer Increase??

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 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
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 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?

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 The “80/20” Customer Pyramid

Most Profitable
What segment spends more with
Customers
Best
us over time, costs less to maintain,
Customers spreads positive word of mouth?

Other
Customers What segment costs us in
time, effort and money yet
does not provide the return
Least Profitable we want? What segment is
Customers difficult to do business with?

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 The Expanded Customer Pyramid

Most Profitable
What segment spends more with
Customers Platinum us over time, costs less to maintain,
spreads positive word of mouth?
Gold

Iron

What segment costs us in

Lead time, effort and money yet
does not provide the return
Least Profitable we want? What segment is
difficult to do business with?
Customers

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 Switching Barriers

• Customer Inertia: The amount of effort

may be required to change the firm. People
do not like to change their behavior. Firms
can increase perceived effort required on
the part of the customer to switch service
provider.

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 Switching Barriers

• Switching Costs: It can be both real and

perceived, monetary and nonmonetary. It includes
investments of time, money or effort such as setup
cost, learning cost and contractual costs. Firm can
make their switching costs more difficult for
customers to exit the relationship.

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 Switching Barriers Continued
Bonding Strategies:

– Financial Bonds
– Social & Interpersonal Bonds
– Customization Bonds
– Structural Bonds

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 Financial Bonds
 Lower prices for greater volume purchases or lower prices for
customers who have been with the firm a long time.

 Financial incentive is not difficult to initiate and frequently

result in short-term profit gain.

 Unfortunately, financial incentives do not generally provide

long-term advantages to a firm.

 Bundling and cross-selling of services.

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 Social & Interpersonal Bonds
 Customers are viewed as “clients”.

 Common among professional service provider such as lawyer,

accountants and teachers as well as among personal care
providers such as hairdresser, counselor and personal trainers
and their clients.

 It is also common in B2B environment.

 Social bond develops among customers rather than between

customers and the provider of the service.

 Much more difficult for competitors to imitate.

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 Customization Bonds
 Intimate knowledge of individual customers and
provide one-to-one solution.

 Some common elements is present from both

financial and social bonds.

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 Structural Bonds

 Most difficult for a firm to imitate.

 It is created by providing the services to the client that are

designed right into the service delivery system.

 It is usually created by providing customized services and help

from technology.

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 “The Customer Isn’t Always Right”

• Not all customers are good relationship

customers:

– wrong segment
– not profitable in the long term
– difficult customers

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