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Chapter

Building Customer Relationships

Relationship Marketing
Relationship Value of Customers
Customer Profitability Segments
Relationship Development Strategies
Relationship Challenges

Objectives for Chapter 7:


Building Customer Relationships
Explain relationship marketing, its goals, and the benefits of longterm 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.
Present relationship development strategiesincluding 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.
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2006 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

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2006 The McGraw-Hill Companies, Inc. All rights reserved.

Figure 7.1

Customer Goals of Relationship Marketing

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2006 The McGraw-Hill Companies, Inc. All rights reserved.

Benefits of Relationship Marketing


Benefits for Customers:
Receipt of greater value
Confidence benefits:
trust
confidence in provider
reduced anxiety

Social benefits:
familiarity
social support
personal relationships

Special treatment benefits:


special deals
price breaks

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Benefits for Firms:


Economic benefits:
increased revenues
reduced marketing and
administrative costs
regular revenue stream

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
2006 The McGraw-Hill Companies, Inc. All rights reserved.

Figure 7.2

Profit Generated by a Customer


Over Time

Source: An exhibit from F. F. Reichheld and W. E. Sasser, Jr., Zero Defection: Quality Comes to Services, Harvard
Business Review, SeptemberOctober 1990.
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2006 The McGraw-Hill Companies, Inc. All rights reserved.

Figure 7.3

Profit Impact of 5 Percent Increase in Retention Rate

Source: F. F. Reichheld, Loyalty and the Renaissance of Marketing, Marketing Management, vol. 2, no. 4 (1994), p. 15.
McGraw-Hill/Irwin

2006 The McGraw-Hill Companies, Inc. All rights reserved.

Table 7.1

Lifetime Value of an Average Business


Customer at Telecheck International

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2006 The McGraw-Hill Companies, Inc. All rights reserved.

Customer Loyalty Exercise


Think of a service provider to who 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?

McGraw-Hill/Irwin

2006 The McGraw-Hill Companies, Inc. All rights reserved.

Figure 7.4

The Customer Pyramid


Most profitable
customers

Platinum

What segment spends more with us


over time, costs less to maintain,
spreads positive word-of-mouth?

Gold

Iron

Lead

Least profitable
customers

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What segment costs us in time,


effort and money yet does not
provide the return we want?
What segment is difficult to do
business with?

2006 The McGraw-Hill Companies, Inc. All rights reserved.

Figure 7.5

Relationship Development Model


Customer Benefits

Relationship Bonds

Confidence benefits
Social benefits
Special treatment benefits

Financial bonds
Social bonds
Customization bonds
Structural bonds

Core Service Provision

Strong Customer
Relationship
(Loyalty)

Satisfaction
Perceived service quality
Perceived value

Firm Benefits
Switching Barriers
Customer inertia
Switching costs
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Economic benefits
Customer behavior benefits
Human resource management
benefits

2006 The McGraw-Hill Companies, Inc. All rights reserved.

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

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2006 The McGraw-Hill Companies, Inc. All rights reserved.

Figure 7.6

Levels of Relationship Strategies


Stable
pricing

Volume and
frequency
rewards

1.
Financial
bonds

Integrated
information
systems

bonds

Shared
processes
and
equipment

Continuous
relationships

Excellent
service
and value

4.

Joint
Structural
investments

2.
Social
bonds

3.
Customization
Bonds

Anticipation/
innovation

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Bundling and
cross selling

Mass
customization

Personal
relationships

Social bonds
among
customers
Customer
intimacy

2006 The McGraw-Hill Companies, Inc. All rights reserved.

The Customer Is NOT Always Right


Not all customers are good relationship customers:
wrong segment
not profitable in the long term
difficult customers

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2006 The McGraw-Hill Companies, Inc. All rights reserved.