Build Customer Relationships

• Relationship Marketing

• Relationship Value of Customers

• Customer Profitability Segments

• Relationship Development Strategies

• Relationship Challenges

McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Relationship 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
The “Bucket Theory of Marketing”
 Goals of Relationship Marketing

The primary goal of relationship

marketing is to build and
maintain a base of committed
customers who are profitable
for the organization
Benefits of Relationship Marketing- Implementing relationship marketing programs in service
organizations

• Benefits for Customers: • Benefits for Firms:

• Receipt of greater value • Economic benefits:
• Confidence benefits: • increased revenues
• reduced marketing and administrative
• trust
costs
• confidence in provider • regular revenue stream
• reduced anxiety • Customer behavior benefits:
• Social benefits: • strong word-of-mouth endorsements
• familiarity • customer voluntary performance
• social support • social benefits to other customers
• personal relationships • mentors to other customers
• Special treatment benefits: • Human resource management
• special deals
benefits:
• easier jobs for employees
• price breaks
• social benefits for employees
• employee retention
Customer Loyalty Exercise
• Think of a service provider to whom 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?

 The “80/20” Customer Pyramid or Two Tier Customer Pyramid

Most Profitable
What segment spends more with
Customers us over time, costs less to maintain,
Best
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?
The Customer Pyramid- Customer Profitability
Segments
The Customer Pyramid- Customer Profitability
Segments
Company’s most profitable customers, typically heavy
Platinum users of the product, not overly price sensitive, willing
to invest in and try new offerings, and committed
Tier customers of the firm
 

Profitability levels are not as high, perhaps because

customers want price discounts that limit margins or
Gold Tier are simply not as loyal. May be heavy users who
minimize risk by working with multiple vendors.

Essential customers that provide the volume needed

to utilize the firm'’ capacity but their spending levels,
Iron Tier loyalty, and profitability are not substantial enough for
special treatment

Customers who are costing the firm money. They

demand more attention than they are due given their
Lead Tier spending and profitability and are sometimes problem
customers—complaining about the firm to others and
tying up firm resources.
Consumer Evaluation
Processes for Services
• Search Qualities
• attributes a consumer can determine prior to purchase of a product
• Experience Qualities
• attributes a consumer can determine after purchase (or during
consumption) of a product
• Credence Qualities
• characteristics that may be impossible to evaluate even after
purchase and consumption
Services : Search versus experience versus
credence properties
Search- color ,style, price, fit, feel ,hardness and
smell.
Experience- taste and wearability
Credence- Impossible to evaluate even after
purchase and consumption
 Continuum of Evaluation for Different Types of
Products

Most Most
Goods Services

Easy to evaluate
Difficult to evaluate
Clothing

Jewelry

Furniture

Houses

Automobiles

Restaurant meals

Vacations

Haircuts

Child care

Television repair

Legal services

Root canals

Auto repair

Medical diagnosis
{
{
{
High in search High in experience High in credence
qualities qualities qualities
SERVQUAL
• Used to operationalize the gaps influencing customer
perceptions

• SERVQUAL is a 22-item instrument that measures

both expectations and customer perceptions of the
service encounter

• Scale reflects the respondent’s “zone of tolerance” or

the range of the company’s performance between
“acceptable” and “desired” service levels
Benefits of SERVQUAL
Can serve as an effective diagnostic tool for uncovering
broad areas of a company’s service quality shortfalls
and strengths
The SERVQUAL scale offers the potential to determine
the relative importance of the 5 major service quality
dimensions-- Reliability, Responsiveness, Assurance,
Tangibles, and Empathy -- and to track service quality
performance over time
The scale serves as a suitable generic measure of service
quality, transcending specific functions, companies,
and industries
• Servqual scale is used for comparing company performance
with that of competitors- benchmark.
• Used in multiple contexts, cultures and countries
• Used for variety of purpose
• To determine the average gap score for each service attribute
• To assess a company’s service quality along each of the five
SERVQUAL dimension
• To track customer’s expectations and perceptions over time
• To compare a company’s SERVQUAL score against those of
competitors
• To identify and examine customer segments that differ
significantly in their assessments of a company's performance
• To assess internal service quality

15
Relationship Development Model
Strategies 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
Levels of Relationship
Strategies (Four levels of retention strategies)
• The four levels of retention strategies are: Level 1—
Financial Bonds; Level 2—Social Bonds; Level 3—
Customization Bonds; Level 4—Structural Bonds.
• Clearly the higher levels forge stronger bonds with
customers and are more difficult for competitors to
imitate.
• A retention strategy based on financial bonds is one
that rewards more purchases or customer longevity
financially—e.g. frequent buyer, frequent flyer
programs, loyalty programs etc.
• A Level 2 strategy combines these financial
incentives with social or interpersonal bonds
between the customer and the organization’s
employees. 19
• A Level 3 strategy focuses on building ties through
service customization.
• The assumption is that customers who receive
individualized service, suited to their own particular
needs and circumstances, will be more satisfied and less
vulnerable to competitors.
• The investment of time on their part to educate a new
provider regarding their needs also makes it more
difficult to switch.
• A Level 4 strategy is the hardest to imitate, and the
most difficult from which a customer can disengage,
since it also includes a structural component often
based on shared systems or technology.
20
 GLOBALIZATION OF SERVICES

McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
Domestic Growth & Expansion Strategies

Single Service Multiservice

Focused service: Clustered service:

Single * Dental practice * Stanford University
Location * Retail Store * Mayo Clinic
* Family restaurant * USAA Insurance

Focused network: Diversified network:

Multisite * Federal Express * Nations Bank
* McDonald’s * American Express
* Red Roof Inns * Accenture

10-22
 1. Focused service
• Service innovation begins
• At a single location
• With an initial service concept
• Fedex: hub and spoke network for overnight delivery
• Walmart: Save money, live better
• Success leads to increased demands
• Facility is expanded and personnel are added
• To win as many customers as possible
• To add peripheral services
• Risks with a single service location
• Captive to the future economic growth of that area
• Competition move in
• Advantage
• Much simpler management and control
• Successful focused service
• Award-winning Chef
• Nationally recognized heart surgeon
23
2.Focused Network
• Readily accessible to customers is important to achieve growth
• Fast-food restaurants
• Retail banking
• Management must ensure consistency of service across all
locations
• Service quality & costs
• Advantages
• Ability to reach mass market quickly
• Reduce the financial risk of localized economic downturns
• Risks
• Overexpansion
• Lost control
• The miles of “franchise rows”
• Homogenized the American landscape

24
3. Clustered service
• Service firm with large fix facilities
• Small colleges expanded into four years regional university
• USAA
• Automobile insurance for military officers
• Banking, mutual funds. Auto and homeowners’ insurance, …
• Medical centers
• Risks
• Potential loss of focus
• Neglect the core service
• Facility management becomes extremely complex
• Hotel serving tourist and business traveler
• Concentric diversification
• Synergistic logic around the core service
• Convenience stores
• Self-serve gasoline, microwave meals
• Economies of scope
25
• 4. Diversified Network
• Growth through acquisition
• Multisite & multiservice
• Airlines
• United airlines has Apollo Reservation system
• Acquired Hotels, car rentals
• Later United Airlines sold off peripheral service and
concentrated on its core airline business
• American Express – global service network offers
financial and travel services
• 
• 
26
Franchising
• Benefits to the Franchisee
Management Training
Brand Name
National Advertising
Acquisition of Proven Business
Economies of Scale
• Issues for the Franchisor
Franchisee Autonomy
Franchise Contract
Conflict Resolution

10-27
• Franchising
• Replicating a service geographically
• By attracting investors
• Who become independent owners
• Bound by contractual agreement
• Nature of franchising
• Franchiser
• Guarantee a consistent service
• Standardized in design, operation, and price
• Right to dictate conditions
• Standard operating procedures must be followed
• Material must be purchased from approved suppliers
• Franchisee
• Own the business
• Assume responsibility of all normal operating activities

28
• Benefits to the franchisee
• Management training
• McDonald’s offer two weeks training at Hamburger University
• Franchisee become prepared to operate a business profitably
• McDonald’s ensures all procedures will be followed
• Subsequent training
• Online or traveling consultants

• -Brand name
• Gain immediate customer recognition
• Break-even is reached sooner
• National advertising
• Impossible for small business to conduct
• Attract customers from outside the immediate geographical regions

• Acquisition of a proven business

• Entrepreneur face high rate of failure
• Franchiser has track record
• Selecting appropriate site
• Operating a reliable accounting system
• Delivery a service already accepted by the public
• Economies of scale
• Benefit from centralized purchasing
• Material, equipment
29
• Issues for the franchiser
• To expand rapidly with minimal capital requirements
• Screening potential franchisee
• Necessary capital
• Competent to run a business
• Franchisee autonomy
• Amount of freedom permitted in operation
• Uniform standard of quality
• Throughout the entire chain
• Franchiser specifications
• Day-to-day operating procedures, site selection, facility design,
accounting system, supplies used and their sources, pricing and menu
items for the restaurant.
• Frequent inspections
• The right to purchase the outlet for noncompliance

30
 • Franchise contract
• Prevent misuse control and power of franchiser
• Specific obligations to franchisee
• Ambiguous obligation to franchiser
• Facilitate cooperative relationship
• Preserve competitive strength of the entire
franchise
• Conflict resolution
• How should fees be established and profits
distributed
• When should facilities be upgraded
• How are cost to be shared
• How far to saturate a single market
• 
31
• Globalization is more than duplicating service
overseas
• Federal express
• 1988 began international delivery
• First quarterly loss
• Face competitions from DHL
• Unprepared for government regulations
• Took 3 years to be permitted to fly Memphis to Tokyo directly
• No package weighing more than 70lbs allowed
• Obsession with tight central control
• All shipping bills were printed in English
• Cut-off time for package pickup is 5pm
• Spain typically work until 8pm after a lengthy midday break
• Lack of supporting infrastructure
• McDonald’s Moscow
• Teach local how to plant and harvest potatoes, tomato

• Most growth opportunities comes from overseas

32
• Global strategy
• The world is one big market
• Doing business
• in a homogeneous way
• or integrated across countries
• Ikea
• Singapore airlines
• Citibank, global retail bank
• Do banking anywhere, anytime, anyway

33
• Multidomestic strategy
• Professional service firm
• Law
• Consulting
• Overseas offices
• Autonomous units
• Serving the needs of local market

34
• Transnational strategy
• Leveraging certain corporate assets
• R&D expertise
• Service delivery adapted to local needs
• Toy”R”us
• Formula store layout
• Centralized procurement
• Address local toys tastes
• 

35
 SERVICE SUPPLY
RELATIONSHIPS

McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
Service supply relationship
• Customer-supplier duality
• Manufacturing goods
• Pass from one entity to another
• Service objects
• Minds
• Education, entertainment, religion
• Bodies
• Transportation, lodging, healthcare
• Belonging
• auto repair, dry cleaning , banking
• Information
• Tax preparation, insurance, legal defense
Customer-Supplier Duality in Service Supply
Relationships (Hubs)
Services act on something provided by the customers
Bidirectional relationship
Supplier

Service Service
Provider Customer
Design

Material transfer Information transfer

9-38
Single-Level Bidirectional Service Supply Relationship
Single level service supply chains

Service Customer >Input Service

Category -Supplier Output> Provider

Minds Student >Mind Professor

Knowledge>
Bodies Patient >Tooth Dentist
Filling>
Belongings Investor >Money Bank
Interest>
Information Client >Documents Tax Preparer
1040>

9-39
 Two-Level Bidirectional Service Supply Relationship
Two-level service supply chains

Service Customer >Input Service >Input Provider’s

Category -Supplier Output> Provider Output> Supplier

Minds Patient >Disturbed Therapist >Prescription Pharmacy

Treated> Drugs>

Bodies Patient >Blood Physician >Sample Lab

Diagnosis> Test Result>

Belongings Driver >Car Garage >Engine Machine

Repaired> Rebuilt> Shop

Information Home >Property Mortgage >Location Title

Buyer Loan> Company Clear Title> Search

9-40
• Service supply relationships are hubs, not chains
• Service providers act as agent for the customer
• Dentist
• Dentures
• Dental procedures
• Service capacity is analogous to inventory
• Goods supply chains
• Inventory is used to buffer customer demands
• Service
• Excess capacity is held in reserve
• Seasonal workers for high season
• Part time employees for rush hours
• Reservation
• To smooth the demand
• Customers supplied inputs can vary in
quality
• Incomplete
• Tax documents
• Unprepared
• Naïve backpacker
• Students
• Unrealistic expectation
• Cancer patients
• Effective communication
• To avoid misunderstanding
Managing service relationship
• Home health care
• Healthy enough
• No need for
hospitalization or
nursing home care
• Not mobile enough
• To visit a healthcare
provider
• Nurse, dietitians,
therapists
• Visit patients at home
Sources of Value in Service Supply
Relationship

1. Bidirectional optimization- implies the

possibility of doing what is best from the
customer’s perspective while doing best for
the service enterprise
• Patients
• Highly individualized service
• Organization
• Very cost effective operations
• “Time windows” reservation
• Between noon and 5pm
• Route, customers sequencing,
language, worker skills, worker
licenses, supplies on the vehicle
• No information available
• Optimization is impossible
• Better information for optimization
2. Management of Productive capacity
• Value
• Time at customer site
• Lost productive capacity
• Time spent traveling
1. Transfer
• Make knowledge available to customers
• For self service
• Information –transfer tool
• Web-based frequent asked questions
• Side effects of medicine, explanation of symptoms,
procedure to follow
2. Replacement
• Substituting technology for human
resources
• Blood pressure measurement
• Automated measurement system to be
substituted for a nurse visit
• Digital blood pressure measurement
device
3. Embellishment customer skills to
enable self service
• Teach patient or patient’s family to
change a surgical dressing
3.Management of Perishability
• Minimize the negative impact of idle productive
capacity
• Dynamic job allocation
• Schedules are constructed and revised up
until the very last possible moment
• Before dispatch a worker
• Mobile data communication required
• Potential idle time
• Training, refining, extending skills and
capability of worker
Outsourcing services

• Transaction cost for outsourcing

• Search cost- finding a capable supplier
• Bargaining cost- reaching an
acceptable agreement and drawing up a
contract
• Enforcement cost- Stick to the term
of the contract
Benefits and risks of outsourcing services
Reasons for outsourcing
• Focus on its core competence
• Decreases costs by purchasing from an outside
source ( janitorial services
• Access to latest technology without
investment( MRI services for hospitals )
• Leverages benefits from a supplier who has
economies of scale
• Risks of outsourcing
• Loss of direct control over quality
• Jeopardizes employee loyalty because of job-loss fears
• Exposure to data security
• Dependence on suppliers
• Additional coordination expense and delay
• Decline of in-house capability