Uneak White's Personal Brand Exploration Presentation
SQ Lecture Nine -Building Relationships & Service Recovery (Chapters 12 and 13)
1. JAN 2013 Semester
1
Service Quality
MKTG 1268
Lecture Nine
• Managing Relationships
and Building Loyalty (Chapter
12)
• Complaint Handling and
Service Recovery (Chapter 13)
2. Overview of Chapter 12
2
The Search for Customer Loyalty
The Wheel of Loyalty
Building a Foundation for Loyalty
Strategies for Developing Loyalty Bonds with
Customers
Strategies for Reducing Customers Defections
CRM: Customer Relationship Management
Systems
What a Comprehensive CRM Strategy
Includes
4. Opening Case Study – Harrah’s Entertainment’s
Customer Relationship Management (read page 359)
4
5. How Much Profit a Customer Generates
Over Time (Fig 12.3)
5
5
6. Why Is Customer Loyalty Important to A
Firm’s Profitability?
6
Customers become more profitable the longer they
remain with a firm:
Increase purchases and/or account balances
Customers / families purchase in greater quantities as they grow
Reduced operating costs
Fewer demands from suppliers and operating mistakes as customer
becomes experienced
Referrals to other customers
Positive word-of-mouth saves firm from investing money in sales and
advertising
Price premiums
Long-term customers willing to pay regular price
Willing to pay higher price during peak periods
10. Measuring Customer Equity:
Lifetime Value of Each Customer
10
Value of referrals
Percentage of customers influenced by other customers
Other marketing activities that drew the firm to an
individual‘s attention
Net Present Value
Sum anticipated annual values (future profits)
Suitably discounted each year into the future
See Worksheet on page 363 of
the text
11. Why are Customers Loyal? (1)
(Service Insights 12.1)
11
Customers stay loyal when we create value for them
Value can be created for customers through
Confidence benefits
Confidence in correct performance
Ability to trust the provider
Lower anxiety when purchasing
Knowing what to expect and receive
12. Why are Customers Loyal? (2)
(Service Insights 12.1)
12
Social benefits
Mutualrecognition and friendship between
service provider and customer
Special treatment
Better price
Discounts not available to most customer
Extra services
Higher priority when there is a wait
13. The Wheel of Loyalty
13
The Wheel of loyalty (Figure 12.6) shows that arriving
at customer loyalty involves 3 components:
Building a foundation for loyalty
Creating loyalty bonds
Reducing churn drivers
The rest of the chapter is organized around these 3
components.
15. Targeting the Right Customers and
Searching for Value, Not Volume
15
Target the right customer and match them to what firm can
deliver
How do customer needs relate to operations elements?
How well can service personnel meet expectations of
different types of customers?
Can company match or exceed competing services that are
directed at same types of customers?
Focus on number of customers served as well as value of each
customer
Some customers more profitable than others in the short term
Others may have room for long-term growth
―Right customers‖ are not always high spenders
Can come from a large group of people that no other
supplier is serving well
16. Targeting the Right Customers and
Searching for Value, Not Volume
16
Service companies should consider the financial value to the
firm of each customer, rather than just count how many
customers can be served. Heavy users (who buy more
frequently and in larger volumes) are generally more
profitable than occasional users. And because customers
interact with each other in many services, managers need to
think about whether different target segments are compatible
with one another.
Attracting the right customers is important as they bring in
long-term revenues, continued growth in referrals, etc. Emphasis
must also be given to prevent attracting the wrong customers
that typically results in costly churn, a diminished company
reputation and disillusioned employees.
18. Effective Tiering of Service :The Customer Pyramid
(Fig 12.8)
18
Service tiering, building loyalty bonds, and creating
membership programs are three of the strategies.
Customer tiers can be developed around different levels of
profit contribution, needs (including sensitivities to variables
such as price, comfort, and speed), and identifiable
personal profiles such as demographics. Each customer tier
requires significantly different service levels based on
customer requirements and customer value to the firm.
Slicing the customer base per se allows the firm to see
clearly where the profits and the loss making segments are
and tailor their marketing accordingly in response.
Read up on the four tiers of customers (platinum, gold, iron
and lead (page 369)
19. Relationship between Satisfaction and Loyalty
19
The satisfaction-loyalty relationship can be divided
into three zones:
zone of defection—occurs at low satisfaction levels
zone of indifference—found at moderate
satisfaction levels
zone of affection—occurs at very high satisfaction
where customers do not find the need to seek
alternative service providers
21. Strategies for Developing Loyalty Bonds with
Customers (1)
21
Deepening the relationship
Bundling/Cross-selling services makes switching a
major effort that customer is unwilling to go through
unless extremely dissatisfied with service provider
Customers benefit from buying all their various
services from the same provider
One-stop-shopping, potentially higher service
levels, higher service tiers etc
22. Strategies for Developing Loyalty Bonds
with Customers (2) See example of rewards used by British
Airways in Service Insights 12.4 on page
22
375 of the text (see Table 12.1)
Reward Based Bonds
Can be financial or non-financial bonds or a
combination of both
Financial bonds
Discounts on purchases, loyalty program rewards (e.g. frequent
flier miles), cash-back programs
Non-financial rewards
Priority to loyalty program members for waitlists and queues in
call centers; higher baggage allowances, priority upgrading,
access to airport lounges for frequent flyers
Intangible rewards
Special recognition and appreciation
Reward-based loyalty programs are relatively easy to
copy and rarely provide a sustained competitive
advantage
24. Strategies for Developing Loyalty Bonds
with Customers (3)
24
Social Bonds
Based on personal relationships between providers
and customers
Harder to and takes a longer time to build, but also
harder to imitate and thus, better chance of
retention in the long term
Customization Bonds
Customized service for loyal customers
e.g. Starbucks
Customers may find it hard to adjust to another
service provider who cannot customize service
26. Strategies for Developing Loyalty Bonds
with Customers (4)
26
Structural Bonds
Mostly seen in B2B settings
Align customers way of doing things with supplier‘s own
processes
Joint investments in projects and sharing of information,
processes and equipment.
Can be seen in B2C environment too
Airlines - SMS check-in, SMS email alerts for flight arrival and
departure times
Difficult for competition to draw customers away when
they have integrated their way of doing things with
existing supplier
27. Analyze Customer Defections and Monitor
Declining Accounts
27
Understand reasons for customer switching
Churn Diagnostics common in mobile phone
industry
Analysis of data warehouse information on
churned and declining customers
Exit interviews:
Ask a short set of questions when
customer cancels account; in-depth
interviews of former customers by third
party agency
29. Address Key Churn Drivers
Deliver quality service
Reduce inconvenience and non-monetary costs
Have fair and transparent pricing
Industry specific drivers
Cellular phone industry: handset replacement a common
reason for subscribers discontinuing services – offer handset
replacement programs
Take active steps to retain customers
Save teams: specially trained call center staff to deal with
customers who want to cancel their accounts
Be careful about how save teams are rewarded (see Service
Insights 12.5) 29
30. Other Ways to Reduce Churn
30
Implement Effective Complaint Handling
and Service Recovery Procedures
Increase Switching Costs
Natural switching costs
e.g. Changing primary bank account – many
related services tied to account
Can be created by instituting contractual
penalties for switching
Must be careful not to be perceived as holding
customers hostage
High switching barriers and poor service quality
likely to generate negative attitudes and bad
word of mouth
31. 31
CRM: CUSTOMER
RELATIONSHIP MANAGEMENT
SYSTEMS
32. Common Objectives Of CRM Systems (1)
32
Customer perspective
Unified customer interface that delivers
customization and personalization
Vast service improvement and increase customer
value
Company perspective
Better segment, tier customer base and target
promotion
Implement churn alert systems if customers are in
danger of defecting
33. Common Applications Of CRM Systems (1)
(Service Insights 12.6)
33
Data collection
Customer data such as contact details, demographics,
purchasing history, service preferences, and the like
Data analysis
Data captured is analyzed and categorized
Used to tier customer base and tailor service delivery
accordingly
Sales force automation
Sales leads, cross-sell and up-sell opportunities can be
effectively identified and processed
Entire sales cycle from lead generation to close of sales
and after- sales service can be tracked and facilitated
through CRM system
34. Common Objectives Of CRM Systems (2)
(Service Insights 12.6)
34
Marketing automation
Mining of customer data enables the firm to target its market
Goal to achieve one-to-one marketing and cost savings, often in
the context of loyalty and retention programs
Results in increasing the ROI on its marketing expenditure
CRM systems also allows firms to judge effectiveness of
marketing campaigns through the analysis of responses
Call center automation
Call center staff have customer information at their finger tips
and can improve their service levels to all customers
Caller ID and account numbers allow call centers to identify the
customer tier the caller belongs to, and to tailor the service
accordingly
For example, platinum callers get priority in waiting loops.
38. What a Comprehensive CRM Strategy Includes
Integrated Framework for CRM Strategy – Multi-Channel
Integration
Multi-channel Integration
• Serve customers well across many
potential interfaces
• Offer a unified interface that
delivers customization and
personalization
39. What a Comprehensive CRM Strategy Includes
Integrated Framework for CRM Strategy – Performance
Assessment
Performance Assessment
• Is CRM system creating value for
key stakeholders?
• Are marketing and service
standard objectives being
achieved?
• Is CRM system meeting
performance standards?
40. What a Comprehensive CRM Strategy Includes
Integrated Framework for CRM Strategy – Information
Management
Information Management
• Collect customer information from all
channels
• Integrate it with other relevant
information
• Make useful information available to the
frontline
• Create and manage data repository, IT
systems, analytical tools, specific
application packages
42. Common Failures in CRM Implementation
42
Unfortunately, there is a high failure rate for CRM
implementations
Common reasons for failures
Viewing CRM as a technology Initiative
Lack of customer focus
Not enough understanding of customer lifetime value
(CLV)
Inadequate support from top management
Lack of coordination
Failure to reengineer business processes
Underestimating the challenges in data integration
43. Implementation of CRM- key questions to ask when
defining customer relationship strategy:
43
How should our value proposition change to increase
customer loyalty?
How much customization or one-to-one marketing and
service delivery is appropriate and profitable?
What is the increase in profit from increasing share-of-
wallet with current customers? How much does this vary
by customer tier and/or segment?
How much time and resources can we provide to CRM
right now?
If we believe in customer relationship management, why
haven‘t we taken more steps in that direction in past?
What can we do today to develop customer
relationships without spending on technology?
44. Summary of Chapter 12: Managing Relationships
and Building Loyalty (1)
44
Customer loyalty as an important driver of profitability for service firms so
firms need to
Assess value of loyal customer
Narrow gap between actual and potential customer value
Wheel of Loyalty shows how firms can:
Build a foundation of loyalty
Create loyalty bonds
Reduce churn drivers
Building a foundation of loyalty involves
Good fit between customer needs and capabilities
Searching for value, not just volume
Tiering services effectively
Obtaining customer satisfaction through service quality
45. Summary of Chapter 12: Managing Relationships
and Building Loyalty (2)
45
Customer loyalty bonds include
Reward-based bonds
Social bonds
Customization bonds
Structural bonds
Strategies for reducing customer defections include
Analyzing customer defections and monitoring declining
accounts
Addressing key churn drivers
Implementing effective complaint-handling and service
recovery procedures
Increasing switching costs
46. Summary of Chapter 12: Managing Relationships
And Building Loyalty (3)
46
Customer relationship management (CRM) is a whole process
by which relations with customers are built and maintained.
An integrated CRM system includes
Strategy development process
Value creation process
Multichannel integration process
Performance assessment process
Cresting a successful CRM program requires understanding
common failures in CRM implementation and knowing how to
get it right
47. Overview of Chapter 13
47
Customer Complaining Behavior
Customer Responses to Effective Service
Recovery
Principles of Effective Service Recovery
Systems
Service Guarantees
Discouraging Abuse and Opportunistic
Customer Behavior
51. Customer response to service failures
51
1. Do nothing
2. Complain in some form to the service firm
3. Take some kind of overt action with a third
party (e.g. complain to a consumer claims
tribunal)
4. Defect and simply not patronise this firm again
55. Why do customers complain?
55
Compensation for a monetary loss—either in the
form of a refund and/or by having a service
performed again.
Complain to rebuild self-esteem. When customers
feel service employees have mistreated them,
their self-esteem, self-worth, or sense of fairness
may be negatively affected.
Help to improve the service
Because of concern for others
56. Key issues to investigate regarding customer
complaining behavior:
56
What proportion of unhappy customers
complain?
Why don‘t unhappy customers complain?
Who is most likely to complain?
Where do customers complain?
57. Why unhappy customers often don’t complain:
57
Customers usually give the following three reasons for
not complaining: (1) they don‘t think it‘s worth their time
and/or effort; (2) they don‘t believe the service
provider will be concerned about their problem and/or
resolve it; or (3) they don‘t know where to go and what
to do.
Cultural and social norms may also affect complaining
behavior. In some European and Asian countries,
customers feel awkward or embarrassed about making
a complaint. Social norms may discourage criticisms of
professional service providers, because they are viewed
as experts in their fields
59. What do customers expect once they have made a
complaint?
59
Once a complaint is made, customers expect to be
adequately compensated in a fair manner.
The firm is expected to assume responsibility in having
a convenient and responsive recovery process. Not only
must the employees of the firm be able to explain and
resolve the failure, they have to come across as genuine,
honest, and polite throughout.
Lastly, the compensation given has to cover the losses
incurred by the customer both in terms of actually
monetary loss and other potential cost incurred as a
result of the failure (e.g., time, effort).
60. The types of ‘justices’ (see page 342 and Figure
13.7)
60
Procedural justice
Concerns policies and rules that customer has to go
through in order to seek service recovery
Interactional justice
Dealing with employees of the firm; their behaviors
towards the aggrieved customer
Outcome justice
Compensation received by the customer
61. 3 Dimensions of Perceived Fairness in Service Recovery
Process (Fig. 13.6)
61
62. Rage behaviours evolving over time as complaints are poorly handled
despite multiple opportunities to enact good service recovery
62
63. Dealing with Complaining Customers and
Recovering from Service Failure
63
Take complaints professionally and not personally
Be prepared to deal with angry customer who may
behave in an insulting way to service personnel who
may not be at fault
Take the perspective that customer complaints allow
firm a chance to
Correct problems,
Restore relationships
Improve future satisfaction for all
Develop effective service recovery procedures
64. Service recovery
64
Service recovery involves actions taken
by the organisation to put things right
for the customer following a service
(core or supplementary) failure.
65. Importance of Service Recovery
65
Plays a crucial role in achieving customer
satisfaction
Tests a firm‘s commitment to satisfaction and
service quality
Employee training and motivation is highly
important
Impacts customer loyalty and future
profitability
Complaint handling should be seen as a profit
center, not a cost center
66. The Service Recovery Paradox
66
Customers who experience a service failure that is
satisfactorily resolved may be more likely to make
future purchases than customers without problems
(Note: not all research supports this paradox)
If second service failure occurs, the paradox
disappears—customers‘ expectations have been
raised and they become disillusioned
Severity and ―recoverability‖ of failure (e.g.,
spoiled wedding photos) may limit firm‘s ability to
delight customer with recovery efforts
Best strategy: Do it right the first time
68. Principles of effective service recovery systems
68
Table 13.1 recommends some strategies companies can
adopt to reduce customer complaint barriers. The activities
suggested have three main objectives;
(1) Making feedback easy and convenient—make feedback
tools easily accessible to customers,
(2) reassuring customers that their feedback would taken
seriously and acted upon—publish feedback from customers
and subsequent actions in company newsletters/publications,
and
(3) make the feedback process a positive experience for the
customers—training frontline staff to make customers feel
comfortable giving feedback; thanking customers for
feedback.
71. How to Enable Effective Service Recovery
71
Be proactive
On the spot, before customers complain
Plan recovery procedures
Identify most common service problems and have
prepared scripts to guide employees in service
recovery
Teach recovery skills to relevant personnel
Empower personnel to use judgment and skills to
develop recovery solutions
72. How Generous Should Compensation Be?
72
There is not hard and fast rule to how much to compensate,
but there are some rule of thumb that companies can turn to
for reference.
(1) Position of the firm—are you a service leader or
laggard? The higher you are, the more customer expect
from the service recovery.
(2) How severe was the service failure—naturally the
greater the damage caused, greater the cost to the
consumer (e.g., monetary cost, time, effort, distress), the
greater the amount of the compensation.
(3) Relationship between the affected customer and the
firm—if it is a long-term customer, naturally more is
demanded, at the same time, it pays to retain loyal
customers. On the other hand, first time customers can
become loyal if treated right.
73. How Generous Should Compensation Be?
(‘rule-of-thumb’)
73
The rule-of-thumb for recovery policies should be that
customers should be compensated with ‗well-dosed
generosity.‘
On the one hand, the firm cannot be perceived as
stingy and calculating, and on the other hand, it should
not be seen as overcompensating.
Overcompensation does not only fail to increase
satisfaction much further beyond a recovery perceived
as fair, it also may give the wrong incentives to the
wrong customers (jaycustomers?) to complain too much.
74. Service Insights 13.2 : guidelines companies can use to handle
complaining customers and recover from a service failure (read page 406)
74
1. Act fast
2. Acknowledge the customer‘s feelings
3. Don‘t argue with the customer
4. Empathize with the customer
5. Clarify the truth and sort out the cause
6. Give customers the benefit of doubt
7. Propose the steps needed to solve the problem
8. Keep customers informed of progress
9. Consider compensations
10. Continue to regain customer goodwill
11. Self-check the system and improve it
75. The Power of Service Guarantees
75
• Force firms to focus on what customers want
• Set clear standards
• Require systems to get & act on customer
feedback
• Force organizations to understand why they fail
and to overcome potential fail points
• Reduce risks of purchase and build loyalty
77. How to Design Service Guarantees
77
Unconditional
Easy to understand and communicate
Meaningful to the customer
Easy to invoke
Easy to collect
Credible
See Service Insights
13. 3 on page 408
80. Is it Always Suitable to Introduce a Guarantee?
80
It is not appropriate to introduce guarantees when:
Companies have a strong reputation for service
excellence
Company does not have good quality level
Quality cannot be controlled because of
external forces
Consumers see little financial, personal or
physiological risk associated with the purchase
81. Discouraging Abuse and Opportunistic Customer
Behavior
Jaycustomer: A customer who behaves in a
thoughtless or abusive fashion, causing problems
for the firm, its employees, and other customers
More potential for mischief in service businesses,
especially when many customers are present
No organization wants an ongoing relationship
with an abusive customer
81
82. Seven Types of Jaycustomers: (1)
The Cheat and Thief
82
The Cheat: thinks of various way to cheat the firm
The Thief: No intention of paying--sets out to steal or
pay less
Services lend themselves to clever schemes to
avoid payment
e.g., bypassing electricity meters, circumventing TV
cables, riding free on public transportation
Firms must take preventive actions against thieves,
but make allowances for honest but absent-minded
customers
83. Seven Types of Jaycustomers: (2)
The Rulebreaker
83
Many services need to establish rules to guide
customers safely through the service encounter
Government agencies may impose rules for health
and safety reasons
Some rules protect other customers from dangerous
behavior
e.g. ski patrollers issue warnings to reckless skiers
by attaching orange stickers on their lift tickets
Ensure company rules are necessary, not should not
be too much or inflexible
84. Seven Types of Jaycustomers: (3)
The Belligerent
84
Shouts loudly, maybe mouthing insults, threats and curses
Service personnel are often abused even when they are not to be
blamed
Confrontations between customers and service employees can
easily escalate
Firms should ensure employees have skills to deal with difficult
situations
In a public environment, priority
is to remove person from other
customers
May be better to support
employee’s actions and get
security or the police if
necessary if an employee has
been physically attacked
Confrontations between Customers and Service Employees Can Easily Escalate
86. Seven Types Of Jaycustomers: (4)
Family Feuders And Vandals
86
Family Feuders: People who get into arguments with
other customers – often members of their own family
The Vandal:
Service vandalism includes pouring soft drinks into
bank cash machines; slashing bus seats, breaking
hotel furniture
Bored and drunk young people are a common
source of vandalism
Unhappy customers who feel mistreated by service
providers take revenge
Prevention is the best cure
88. Seven Types Of Jaycustomers: (5)
The Deadbeat
88
Customers who fail to pay (as distinct from ―thieves‖
who never intended to pay in the first place)
Preventive action is better than cure--e.g., insisting
on prepayment; asking for credit card number
when order is taken
Customers may have good reasons for not paying
- If the client's problems are only temporary ones,
consider long-term value of maintaining the
relationship
89. Consequences of Dysfunctional Customer Behavior
89
Employees:
Mood or temper negatively affected
Long-term psychological damage
Staff morale will fall, affecting productivity
Other Customers:
Positive – rally to support an employee who is perceived to
be abused
Negative – Contagious bad behavior might escalate the
situation
90. Dealing with Customer Fraud
90
If in doubt, believe the customer
Keep a database of how often customers invoke service
guarantees or of payments made for service failure
Insights from research on guarantee cheating:
Amount of a guarantee payout had no effect on
customer cheating
Repeat-purchase intention reduced cheating intent
Customers are reluctant to cheat if service quality is
high (rather than just satisfactory)
91. Dealing with Customer Fraud
91
Managerial implications:
Firms can benefit from offering 100 percent money-
back guarantees
Guarantees should be offered to regular customers as
part of membership program since regular customers
are unlikely to cheat
Excellent service firms have less to worry about than
average providers
92. Summary of Chapter 13 –Service
Recovery and Customer Feedback (1)
92
When customers are dissatisfied, they can
Take some form of public action
Take some form of private action
Take no action
To understand customer responses to service failures, some
questions to ask are
Why do customers complain?
What proportion of unhappy customers complain?
Why don‘t unhappy customer complain?
Who is most likely to complain?
Where do customers complain?
What do customers expect once they have made a
complaint?
93. Summary of Chapter 13 –Service
Recovery and Customer Feedback (2)
93
Effective service recovery can lead to customer loyalty
The service recovery paradox does not always hold true—
better to get it right the first time
Guiding principles for effective service recovery include
Make it easy for customers to give feedback
Enable effective service recovery
Focusing on how generous compensation should be
Issues to consider in having services guarantees are
Power of service guarantees
How to design service guarantees
Is full satisfaction the best a firm can guarantee?
Is it always appropriate to introduce a service guarantee?
94. Summary of Chapter 13 –Service
Recovery and Customer Feedback (3)
94
There are seven types of jaycustomers
The Cheat
The Thief
The Rule Breaker
The Belligerent
The Family Feuders
The Vandal
The Deadbeat
To discourage abuse and opportunistic behavior, we
need to deal with customer fraud
95. Practice Exam Question
95
You are the chief marketing officer at XCel Pte Ltd.
From your perspective, for the benefit of the
organization, it is worthy to have service guarantees in
place. However, you need approval from the executive
board before you proceed with designing the service
guarantees. Explain to the executive board:
(a) the power of service guarantees
(b) how to design a service guarantee
(c) present the different types of service guarantees to the
board for consideration
96. Practice Examination Questions
96
The implementation of profitable service strategies
can include building relationships and customer
loyalty as well as putting effective complaint
handling/service recovery processes in place.
Describe the various strategies for building customer
loyalty (10 marks) and complaint handling/service
recovery (10 marks)
97. Practice Examination Question
97
As a graduate who has undertaken and successfully
completed the MKTG 1268 Service Quality course,
and a potential manager and owner of your own
service business, you know the importance of
building customer loyalty for the long-term success
of your business, as well as good service recovery
strategies when ‗things go wrong‘. Recall and list the
key theories and concepts you have learnt that are
important to building customer loyalty and
implementing good service recovery, and give
examples of how these may be implemented.
98. Practice Examination Question:
98
Research suggests that many dissatisfied
customers never complain but simply defect to
a competitor. What are the management
implications of this finding and how might
managers try to minimise such defections?
99. Practice Examination Question:
99
Using the most appropriate theory/conceptual
model taught in this course, explain why a
customer may be ‗satisfied‘ with consistently
poor levels of service (quality) they experience
from the same service provider.
100. Practice Exam Question
100
Café Rende is a small café well known among the locals for its delicious
cakes, well blended coffee and nice décor. To cater for rising customer
expectations, the owner has decided to update her shop by painting the
walls, changing the furniture and also installing credit card payment
facility because she noted that more customers ask to pay by credit
card. She also introduced, due to popular demand, a series of cake
baking classes. She also introduced home delivery service for locations
within a 3 km radius and for purchases of more than $50.
Question: Discuss the customer feedback collection took from which the
owner‘s service improvement ideas evolved and suggest TWO other
feedback collection tools that can potentially be implemented in the
future (by a small business like Café Rende), identifying each of their
strengths and weaknesses.
