Chapter 6-1

Chapter 6

McGraw-Hill/Irwin © 2018 The McGraw-Hill Companies, All Rights Reserved

 Chapter 6-2

Building Customer Chapter

Relationships 6
• Relationship Marketing
• Relationship Value of Customers
• Customer Profitability Segments
• Relationship Development Strategies
• Relationship Challenges

McGraw-Hill/Irwin © 2018 The McGraw-Hill Companies, All Rights Reserved

 Chapter 6-3

Objectives for Chapter 6:

Building Customer Relationships, 1
• Explain relationship marketing, its goals, and
the benefits of long-term relationships for
firms and customers.
• Explain why and how to estimate customer
relationship value.
• Introduce the concept of customer profitability
segments as a strategy for focusing relationship
marketing efforts.

McGraw-Hill/Irwin © 2018 The McGraw-Hill Companies, All Rights Reserved

 Chapter 6-4

Objectives for Chapter 6:

Building Customer Relationships, 2
• Present relationship development strategies—
including quality core service, switching
barriers, and relationship bonds.
• Identify challenges in relationship
development, including the somewhat
controversial idea that “the customer is not
always right.”

McGraw-Hill/Irwin © 2018 The McGraw-Hill Companies, All Rights Reserved

 Chapter 6-5

Relationship Marketing, 1

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

McGraw-Hill/Irwin © 2018 The McGraw-Hill Companies, All Rights Reserved

 Chapter 6-6

Relationship Marketing, 2

• Thus, the focus is less on attraction, and more

on retention and enhancement of customer
relationships

McGraw-Hill/Irwin © 2018 The McGraw-Hill Companies, All Rights Reserved

 Chapter 6-7

Figure 6.1: The “Bucket Theory of

Marketing”

Jump to Figure 6.1: The “Bucket Theory of Marketing”, Appendix

McGraw-Hill/Irwin © 2018 The McGraw-Hill Companies, All Rights Reserved

 Chapter 6-8

Exhibit 6.1: A Typology of Exchange

Relationships, 1
Customers as… Strangers Acquaintances Friends Partners
Product offering Attractive relative On a par with Differentiated Customized,
to competitors industry with adaptation individualized
standards to segments offerings
Source of Attractiveness Satisfaction Satisfaction + Satisfaction +
competitive Trust Trust +
advantage Commitment
Buying activity Interest, Reduced need for Buying without Commitment in
(what customer exploration, trial search perfect the form of
does) information information
sharing, specific
investments
Focus of selling Encouraging trial Familiarity and Specific segment Specific
activities (what facilitates initial general knowledge knowledge,
firm does) selling knowledge idiosyncratic
investments

McGraw-Hill/Irwin © 2018 The McGraw-Hill Companies, All Rights Reserved

 Chapter 6-9

Exhibit 6.1: A Typology of Exchange

Relationships, 2
Customers as… Strangers Acquaintances Friends Partners
Relationship time None Short Medium: trust Long: detailed
horizon takes time to knowledge,
build interconnections
Sustainability of Low: must Low: must build Medium: must High: depends on
competitive continue to unique value into understand uniqueness &
advantage attract, induce standard product various customer effectiveness of
trial needs interconnections
Primary Acquire Satisfy customer Retain customer’s Enhance
relationship customer’s needs business relationship with
marketing goal business customer

McGraw-Hill/Irwin © 2018 The McGraw-Hill Companies, All Rights Reserved

 Chapter 6-10

Figure 6.2: Customer Goals of Relationship

Marketing

Jump to Figure 6.2: Customer Goals of Relationship Marketing, Appendix

McGraw-Hill/Irwin © 2018 The McGraw-Hill Companies, All Rights Reserved
 Chapter 6-11

Benefits of Relationship Marketing, 1

Benefits for Customers:

• Receipt of greater value
• Confidence benefits:

• Trust
• Confidence in provider
• Reduced anxiety
• Social benefits:

• Familiarity
• Social support
McGraw-Hill/Irwin © 2018 The McGraw-Hill Companies, All Rights Reserved
 Chapter 6-12

Benefits of Relationship Marketing, 2

• Special treatment benefits:

• Special deals
• Price breaks

Benefits for Firms:

• Economic benefits:

• Increased revenues
• Reduced marketing and administrative costs
• Regular revenue stream
McGraw-Hill/Irwin © 2018 The McGraw-Hill Companies, All Rights Reserved
 Chapter 6-13

Benefits of Relationship Marketing, 3

• 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

McGraw-Hill/Irwin © 2018 The McGraw-Hill Companies, All Rights Reserved

 Chapter 6-14

Relationship Value of Customers

The relationship value of a customer considers

customers from the point of view of their lifetime
revenue and slash or profitability contributions to
a company.
It is influenced by:

• Length of average customer “lifetime”

• Additional sales over time
• Referrals by the customer over time
• Costs associated with serving the customer
McGraw-Hill/Irwin © 2018 The McGraw-Hill Companies, All Rights Reserved
 Chapter 6-15

Table 6.1: Lifetime Value of a Customer, 1

Source: J. L. Heskett, W. E. Sasser, L. A. Schlesinger, The Service Profit Chain: How Leading Companies Link Profit and Growth to Loyalty (New York: The Free
Press, 1997), p. 201.

Subject Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Revenue:a
QuickResponse — 33,000 39,600 47,520 57,024 68,429
dollars dollars dollars dollars dollars
FastTrack — — 5,500 6,600 7,920 9,504
Costs:
QuickResponse 6,600 24,090 28,908 34,690 41,627 49,953
dollars dollars dollars dollars dollars dollars
FastTrack — — 4,152 4,983 5,980 7,175

McGraw-Hill/Irwin © 2018 The McGraw-Hill Companies, All Rights Reserved

 Chapter 6-16

Table 6.1: Lifetime Value of a Customer, 2

Subject Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Lifetime customer
value:
QuickResponse profit (6,600 8,910 10,692 12,830 15,397 18,476
dollars) dollars dollars dollars dollars dollars
FastTrack profit — — 1,348 1,617 1,940 2,329
Reduced overhead — — 1,155 1,486 1,663 1,995
allocationb
Profit from referralsc — — 1,100 1,650 3,300 6,600
Total profit (6,600 8,910 14,295 17,583 22,300 29,400
dollars) dollars dollars dollars dollars dollars

Note: Product names and data have been disguised. As a result, profit on these products is overstated.
a
Assuming revenue increases on both products of 20 percent per year.
b
Declining at the rate of 15 percent per year in relation to revenue, to reflect lower costs of customer relationship associated with both customer and supplier
learning curve effects.
c
Estimated, based on assumptions concerning (1) the importance of referrals to new customers from old customers, (2) the frequency with which satisfied
customers refer new customers, (3) the size of customers referred, and (4) the lifetime value calculations for new customers.

McGraw-Hill/Irwin © 2018 The McGraw-Hill Companies, All Rights Reserved

 Chapter 6-17

Figure 6.3: The Customer Pyramid

Jump to Figure 6.3: The Customer Pyramid, Appendix

McGraw-Hill/Irwin © 2018 The McGraw-Hill Companies, All Rights Reserved
 Chapter 6-18

The Customer Pyramid

Tier Explanation
Company’s most profitable customers, typically heavy users of
Platinum the product, not overly price sensitive, willing to invest in and try
Tier new offerings, and committed customers of the firm
 
Profitability levels are not as high, perhaps because customers
want price discounts that limit margins or are simply not as loyal.
Gold Tier May be heavy users who minimize risk by working with multiple
vendors.
Essential customers that provide the volume needed to utilize
Iron Tier the firm'’ capacity but their spending levels, loyalty, and
profitability are not substantial enough for special treatment
Customers who are costing the firm money. They demand more
Lead Tier attention than they are due given their spending and profitability
and are sometimes problem customers—complaining about the
firm to others and tying up firm resources.

McGraw-Hill/Irwin © 2018 The McGraw-Hill Companies, All Rights Reserved

 Chapter 6-19

Customer Profitability Segmentation, 1

• Companies can improve their profitability

when they increase shares of purchases by
customers who 1) have the greatest need for
the service, or 2) show the greatest loyalty.
• Keep in mind that customers in lower
profitability tiers who receive lower levels of
service may resist or resent their unequal
treatment.

McGraw-Hill/Irwin © 2018 The McGraw-Hill Companies, All Rights Reserved

 Chapter 6-20

Customer Profitability Segmentation, 2

• Further, what a customer spends today, or has

spent in the past, may not necessarily be
reflective of what they will spend in the future.

McGraw-Hill/Irwin © 2018 The McGraw-Hill Companies, All Rights Reserved

 Chapter 6-21

Figure 6.4: Relationship Development

Model
Sources: Adapted
from D. D. Gremler
and S. W. Brown,
“Service Loyalty:
Antecedents,
Components, and
Outcomes,” in 1998
AMA Winter
Educators’
Conference:
Marketing Theory
and Applications,
vol. 9, ed. D. Grewal
and C. Pechmann
(Chicago, IL:
American Marketing
Association), pp. 165
to 166.

Jump to Figure 6.4: Relationship Development Jump to Figure 6.4: Relationship

Model, Appendix 1 Development Model, Appendix 2

McGraw-Hill/Irwin © 2018 The McGraw-Hill Companies, All Rights Reserved

 Chapter 6-22

Relationship Development Strategies, 1

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

McGraw-Hill/Irwin © 2018 The McGraw-Hill Companies, All Rights Reserved
 Chapter 6-23

Relationship Development Strategies, 2

Relationship Bonds:

• Financial bonds
• Social bonds
• Customization bonds
• Structural bonds

McGraw-Hill/Irwin © 2018 The McGraw-Hill Companies, All Rights Reserved

 Chapter 6-24

Figure 6.5: Levels of Relationship Strategies

 Chapter 6-25

“The Customer Is NOT Always Right”

Not all customers are good relationship

customers:

• The wrong segment

• Not profitable in the long term
• Difficult customers

McGraw-Hill/Irwin © 2018 The McGraw-Hill Companies, All Rights Reserved

 Chapter 6-26

Ending Business Relationships

• Should firms fire their customers?

McGraw-Hill/Irwin © 2018 The McGraw-Hill Companies, All Rights Reserved

 Chapter 6-27

Appendices

McGraw-Hill/Irwin © 2018 The McGraw-Hill Companies, All Rights Reserved

 Chapter 6-28

Figure 6.1: The “Bucket Theory of

Marketing”, Appendix
New customers and increased purchases by some customers are
analogous to the water in the bucket. Lost customers and
decreased purchases by some customers are analogous to the
holes in the bucket.

Jump back to Figure 6.1: The “Bucket Theory of Marketing”

McGraw-Hill/Irwin © 2018 The McGraw-Hill Companies, All Rights Reserved
 Chapter 6-29

Figure 6.2: Customer Goals of Relationship

Marketing, Appendix
These stages starting from the bottom are as follows:
Acquiring
Satisfying
Retaining
Enhancing

Jump back to Figure 6.2: Customer Goals of Relationship Marketing

McGraw-Hill/Irwin © 2018 The McGraw-Hill Companies, All Rights Reserved

 Chapter 6-30

Figure 6.3: The Customer Pyramid,

Appendix
The four tiers starting from the bottom to top are as follows:
Lead
Iron
Gold
Platinum

The figure also shows that the lead tier consists of the segments
that cost the organization time, effort, and money but do not
provide the return the organization wants. The platinum tier
consists of segments that spend more with the organization over
time, cost less to maintain, and spread positive word of mouth.
Jump back to Figure 6.3: The Customer Pyramid
McGraw-Hill/Irwin © 2018 The McGraw-Hill Companies, All Rights Reserved
 Chapter 6-31

Figure 6.4: Relationship Development

Model, Appendix 1
The relationship drivers are as follows:
Switching barriers, which includes customer inertia and switching
costs
Core service provision, which includes satisfaction, perceived
service quality, and perceived value
Relationship bonds, which include financial bonds, social bonds,
customization bonds, and structural bonds

Jump back to Figure 6.4: Relationship Development Model

McGraw-Hill/Irwin © 2018 The McGraw-Hill Companies, All Rights Reserved

 Chapter 6-32

Figure 6.4: Relationship Development

Model, Appendix 2
The outcomes of strong customer relationship, such as loyalty are
as follows:
Customer benefits, which include confidence benefits, social
benefits, and special treatment benefits
Firm benefits, which include economic benefits, customer
behavior benefits, and human resource management benefits

Jump back to Figure 6.4: Relationship Development Model

McGraw-Hill/Irwin © 2018 The McGraw-Hill Companies, All Rights Reserved