CHAPTER 2

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Chapter Objectives

• To understand the benefits of loyalty to the customer
• To appreciate the importance of loyalty to profitability and growth
• To identify the shift from transactional to relationship ­marketing
• To outline the different customer loyalty strategies
• To appreciate how Customer Relationship Management (CRM) can promote customer loyalty
• To understand how loyalty is created and how easily it can be lost
• To appreciate the way service recovery can support loyalty
• To identify means of building loyalty

Chapter Profile

The aim of this chapter is to introduce a basic framework for the importance, management, and development of customer loyalty strategies. It will explore why customers are important and why customer loyalty strategies need to be developed to help cement relationships and deliver excellent customer service. It outlines why customers should be viewed as a business asset and customer expectations.

The importance of loyalty to both the customer, and the organization are considered. The value of loyalty to the organization is generally quite well-recognized; however, the value to the customer is often overlooked. Understanding the benefits the customer gains from being loyal and building on this mutuality can enable organizations to establish a much deeper level of loyalty.

Every connection with the customer creates the opportunity to build, or destroy loyalty, so frontline staff need to be aware of this, but also need to have the power to respond to opportunities to build loyalty when they arise. Finally, it looks at how to nurture and protect customers so that they remain loyal to the organization, and how to manage the service expectations of customers to deliver service excellence.

Why Are Customers Important?

Previous chapters have shown how customers, good management of ­individual relationships, and the whole customer base underpins service quality and innovation within the organization. The customer base is an asset, worthy of investment of time, money, and creativity as any other business asset. Different customer groups and their expectations can be used as a means of building loyalty and lasting relationships.

Customers as a Business Asset

Traditional sources of competitive advantage—innovation, economies of scale, production technology—have been eroded as all players learn the rules, so companies need to evolve a new basis for securing market share.

Of all the business sectors, the service sector is the one which most needs to develop and maintain an intimate knowledge and understanding of customer needs. The customer is part of the production process, and so too are other customers, who may be present when the service is being provided and can enhance or undermine the service.

A traditional butcher establishes a relationship with individual customers, based on the quality of the meat they select from him, and his ability to meet their specific needs. He uses his knowledge of their preferences to recommend what is especially good on a particular day, or to suggest something his knowledge of the customers’ preferences tells him will be well received. As he does so, he is aware of other customers waiting for service in the shop and must be sensitive to their needs as well. If he can make the wait informative and entertaining, he is adding value to their experience, as well as making the waiting time appear shorter. Posters and leaflets around the shop can provide information about the origins of the meats, giving assurance to the customer, or can give recipes to inspire the customer about how to prepare the raw ingredients.

Any service relationship works best when it can be managed face-to-face; a national service provider, with many branches gathers and stores information on customer needs in a quite different way from a traditional high-street retailer, but if the face-to-face encounter does not support the customer relationship in a way that feels personal and rewarding to the customer, the whole relationship breaks down. Similarly, all other encounters (touchpoints) must act to secure the interpersonal connections associated with the relationship.

Certain sectors struggle to achieve a customer focus; high-technology companies driven by research and development claim that customer focus stifles creativity and inhibits innovation, while some of the professional services feel customers lack the knowledge and understanding of what is needed. Academics see a conflict between their professional ethics and what they hear their customers—students—asking for. Ultimately though, an understanding of customer needs and anticipating them by using a customer persona is vital to success. This is one area in which the moderating effect of external stakeholders, such as educational awarding bodies, or academic gatekeepers fulfill a useful function.

Benefits of Customer Retention

It is a truism to say that customers are the life blood of any organization, and yet, it is astonishing how many companies will invest resources to maximize financial assets, or premises, and yet do not appear to regard their customer base, and existing customers as a valued asset that also needs to be nurtured, developed, and harvested. Given that it can be demonstrated that it costs five times as much to attract a new customer as it does to service an existing customer, it would be reasonable to assume that organizations would invest considerable resources in ensuring that they are meeting the needs of a loyal customer base effectively. Too often, though, the culture of organizations focuses on rewarding staff that attract new customers, while ignoring staff that satisfy and grow the needs of existing customers. And businesses have schemes to attract new customers but not reward loyal ones—the insurance industry is renowned for increasing premiums annually rather than offering a loyalty bonus, and the telecom industry acts in a similar manner.

This is shortsighted to say the least! There are many reasons why existing customers should be treasured, and why staff that do so should be rewarded, building internal loyalty, as well as external. It is also curious that, given that customers are such a valuable asset, the frontline staff who deal with them, are generally not only the bottom of the organizational heap, but also the lowest paid. Whilst the servant leadership approach to management acknowledges the need for frontline staff to be empowered to make autonomous decisions, there are few organizations that have gone so far as to raise remuneration to fully acknowledge the responsibility placed upon the shoulders of service staff.

Segmentation as the Basis for Building Long-Term Loyal Relationships

Segmenting the market enables the organization to present a completely relevant offering to its customer, whether in B2C, or B2B, through a clear understanding of who the customer is and their specific needs. Through this understanding, and the resulting relevance of the offering, the organization can forge a durable, loyal relationship, which will withstand competitor approaches offering price cuts and short-term “deals.” This ultimately creates a win-win situation for the customer, who gets a tailored service, and for the organization, which is able to maintain its profit margins.

Over time, a customer’s needs may change, the business objectives may change, and it may be that segments the organization serviced well in the past become more difficult to service effectively making them less attractive. Without regular monitoring of the productivity of the ­segments they serve, organizations have no means of knowing that the profitability has altered.

When a segment becomes unprofitable, the organization has a responsibility to customers in the segment to manage the relationship in such a way that it remains positive, even while it is terminating. This allows the departing customer to retain a positive feeling about the company (and still to be an advocate), while having the opportunity to secure a better provider for their future needs. Such customers will not then speak negatively about the organization. It also frees the organization from the burden of an unprofitable relationship. Often, providers seek out alternative provision for customers in this situation—for example, when an optician closes a branch in a town, it may introduce the nearest alternative, rather than leave the customer high and dry.

Matching Service Specifications to the Needs of Segments

A clear picture of which segments the organization wishes to focus on, and what customers within the segment need or want from the service, enables the organization to adapt their service offering. This may be as radical as a completely new service, or it may be a matter of adapting other aspects of the marketing mix, especially marketing communications in such a way as to attract the attention of the target segment and encourage repeat purchase and loyalty. The best method of understanding ­customer needs is to use a customer persona to identify their key concerns, their interest and habits. This is valuable not only for service or product design, but also for effective communication with customers.

Figure 2.1 Example of B2B customer persona reproduced with kind permission of Buyer Persona Institute

Source: https://uk.images.search.yahoo.com/yhs/search;_ylt=AwrIRhayx01bckUAzQd3Bwx.;_ylu=X3oDMTEycGpzbnVxBGNvbG8DaXIyBHBvcwMxBHZ0aWQDQjUxNTFfMQRzZWMDc2M-?p=customer+persona&fr=yhs-Lkry-SF01&hspart=Lkry&hsimp=yhs-SF01#id=0&iurl=https%3A%2F%2Fblog.usertesting.com%2Fwp-content%2Fuploads%2F2016%2F02%2Fcustomer-persona-example.png&action=click

Figure 2.2 Example of A B2C customer persona reproduced with kind permission from blog.alexa.com

Source: https://blog.alexa.com/wp-content/uploads/2017/10/Buyer-Persona-Examples-B2C-Retail.jpg

Managing Customer Expectations

In the context of loyalty, management of customer expectations is fundamental, since continued custom is based upon continuing to meet customer expectations. These are dynamic, so loyalty is forged by maintaining regular, useful communication with the customer to ascertain whether, and how, needs and expectations may have changed. Such discussions enable the organization to keep its offering fresh and relevant, so that customers need not look elsewhere to have their expectations and needs met.

The Move from Transactional to Relationship Marketing (CRM)

There has been a shift from transactional marketing into relationship marketing. The transactional approach was to purchase goods or services from the market seeking the “best” supplier on every purchase occasion. Each purchase decision becomes an individual transaction in its own right. The relationship between the buyer and the seller was quite short term, lasting for as long as the buyer and seller interacted to agree terms, hand over payment and agree delivery information. Once goods and services were delivered, there was usually no further relationship between the two parties.

Figure 2.3 Transaction marketing

The transactional model focuses on the single sale rather than generating repeated sales over time and having many interactions with the customer to change or adapt the goods and services you offer to meet changing customer needs. Transactional marketing puts a value on each customer relative to their transaction frequency and value. Sometimes with transactional marketing, it is seen as better to secure a large one-off sale rather than deal with lots of small transactions, as the costs of servicing each small transaction can equal those required for a single large sale.

Transactional marketing relies heavily on the organizational ability to attract attention in the marketplace and prompt purchase. It is less concerned with developing relationships and lifetime value. Often the effort you put into the “transaction” depends on the amount the transaction is worth. Such relationships could be passive or long term in nature, but the focus of organizational effort is on securing individual transactions rather than satisfying long-term customer needs.

However, transactional marketing is counterintuitive; it encourages the customer to spread their purchasing habits between many competitors in order to receive as many benefits from each as possible. Organizations want customers to patronize their establishment because it is pleasurable to do so. Sometimes customers expect special treatment and free services or have a hidden motive of getting as much as they can out of each organization they deal with. One of the features of transactional marketing is that customers have a brand repertoire from which they select on each purchase occasion. So each service provider enjoys only a percentage of the available business from each ­customer, rather than securing the full potential.

The transactional model favors what the producer can produce, rather than what the customer wants. Henry T. Ford (1863–1947) famously said, “You can have any car as long as it is black.” In the early days of American car production, cars could only be made in one color, black; today colors for cars are researched in detail to find out which colors are most fashionable and what customers would be most likely to purchase. Even products such as cars are beginning to acquire elements of customization that indicate a degree of service inherent in their design. The Fiat 500 marketing program is testament to this, where customers can design their own vehicle online. Nissan is currently researching color changing paint to enable customers to adapt the color of their cars during their ownership. Services lend themselves less to the transactional approach than products. As technology advances, it enables ever greater personalization and customization of products and services.

Advantages of the Transactional Model

• Constant drive for supplier to provide the “best” value through the competition for customers.
• A supplier specializing in a small number of products or ­services and supplying them to many customers can gain ­natural economies of scale, so may be able to offer lower prices.
• If supply is short, customers can simply switch to other ­suppliers.
• Specialist suppliers are more likely to have innovative ­products and services, which can be bought in faster and cheaper than an organization can make.
• Organizations can specialize in one thing rather than spreading their time and talents thinly.

Disadvantages of the Transactional Model

• There may be supply uncertainties in stocking the product or delivering the service and once an order is placed it is hard to guarantee its quality.
• Gathering information on which supplier is offering the “best” deal takes time and resources.
• There are strategic risks of subcontracting to others without a guarantee over the service level.
• The relationship does not allow partners to establish their respective needs apart from delivery or price information.
• There is little customer service and limited customer ­commitment to use the same supplier.
• There is little or moderate customer contact.
• Quality is the concern of those producing the goods or ­services, not the company selling them to the customer.
• It is short-sighted and does not value the consumer.
• As customers become more sophisticated, they are less likely to be swayed by the usual hype (Ours is the Best!) and more influenced by the organization that they believe cares about them.

Transactional marketing is the traditional method of selling a product or service with its focus on the four Ps (product, place, price, and promotion) to maximize the benefit of the transaction to the organization with customer needs as secondary. With this method, the organization is not concerned with any future exchanges, customer satisfaction, or ­customer loyalty to the organization. Marketing, quality, and customer service departments are seen as separate entities and are not linked to share information about customers and their specific needs. This lack of coordination between the three departments creates a fragmented approach to achieving customer satisfaction. The transactional approach often delivers less market share than is enjoyed by more relationship-focused organizations.

The Change from Transactional to Relationship Marketing

Transactional marketing focuses all marketing efforts on attracting the customer for a one-off sale. However, loyal customers end up spending more in the long term, so it makes sense to keep existing customers happy. A single sale repeated over and over a customer’s lifetime can significantly add profit to the organization. Customers often make a small purchase to “try” a supplier out; if the first small transaction is dismissed by the organization as paltry, a potential long-term customer can be lost. Moreover, each repeat sale does not require additional persuasion, there is less administration for sales staff, such as setting up a credit account, and customers tend not to be tempted by special deals, so profits rise.

Relationship marketing offers more revenue potential than transactional marketing. It builds long-term, committed, loyal, and profitable relationships with potential/existing customers through communication and the provision of quality goods and services.

Relationship marketing is often represented as a developmental process, aiming to increase customer loyalty, and improve the relationship with customers. The process evolves through a series of stages that reflect the customers’ increased importance or value to an organization.

The six stages are shown in the model below; an organization’s ultimate aim should be to gain as many partner customers as possible.

To retain customers, organizations must keep up to date with their changing needs. If the organization can provide these, the desired customer relationship can be continued into the future. The organization benefits from increased profit, market share, and brand awareness; the customer benefits from having their changing needs anticipated so they do not need to conduct a new supplier search.

Regularly ensuring that customers continue to receive what they want is important; very few dissatisfied people complain, but they just quietly choose another supplier to purchase from. This is especially true when there is no investment of loyalty to draw them back. Managing customer satisfaction in a proactive manner and responding to any customer complaints is crucial to customer retention. A complaining customer is, in effect, saying that they generally like what the company does, but are disappointed on this occasion with the experience of doing business. Putting right a problem provides the organization with an opportunity to show how much it values the customer by putting the problem right, and also by doing something to exceed expectations.

Figure 2.4 The ladder of loyalty adapted from Christopher, Payne, and Ballantyne

The Customer Relationship Management Model (CRM)

The term CRM can be considered from a number of perspectives; there is a wide variety of definitions incorporating software, management, ­people, and processes, which encompass CRM. Relationship marketing seeks to build a friendship with the target market and focuses on customer retention and lifetime value for the desired market segment. Examples of tactics to establish a relationship might be the car dealership that gives out free oil-change coupons after the purchase of a new car or the restaurant that subscribes customers to an e-mail list offering frequent dining discounts.

CRM can be a powerful tool to build customer relationships thereby enhancing customer loyalty. Managing services excellence and relationship management are philosophies rather than systems, and both are adolescent, rather than mature; their future offers many exciting openings.

Relationship marketing uses tactics to retain customers. Customer ­satisfaction must be exceeded to build a healthy two-way relationship with customers where customers feel feedback comments are welcome, and the company uses them to improve future customer service or ­product offerings.

CRM (UK) Ltd (2002) defines relationship marketing as follows:

The establishment, development, maintenance and optimisation of long-term mutually valuable relationships between consumers and organisations.

The key to this definition is long-term mutually valuable relationship. This considers marketing as a mutually satisfying system of exchanges. So relationship marketing is the building and maintenance of long-term customer relationships, delivering value to customers, and profits to organizations.

Relationship marketing involves a number of important activities. First, tactics to attract customers; methods include promoting the brand, offering good quality products/services, and competitive prices (marketing responsibility). Second, for the first purchase, customer expectations must be met (operations responsibility). Third, customers who are attracted to the organization have to be retained; methods may include loyalty cards, customer service departments or even an individual account manager for large clients, along with product variety and quality (making marketing the responsibility of every member of staff helps ensure that the customer experience is always one that will encourage repeat purchase).

Attracting customers is wasted if they are not retained; the organization must continue to satisfy. However, it is very difficult to keep 100% of customers satisfied all of the time. Some die, some move away, and others switch to better offers or promotions from competitors. Often organizations forget that customer needs change over time. To keep the customer satisfied organizations must continually monitor the customer environment.

Instead of simply researching a customer’s purchasing patterns to guide marketing decisions, understanding existing relationships can help determine strategy. This is particularly true of services where the customer is part of the production process. Customers should be segmented and selected on the basis of relationships rather than by the size of their transactions. For both transactional and relationship marketing, the effort of managing customers should focus on long-term profitability.

Figure 2.5 The customer loyalty pyramid

Relationship marketing requires the customer to commit to the organization with the reward of personalized attention and service. The organization enjoys marketing to a satisfied customer who brings more customers to their organization as well as making repeat purchases.

Relationship marketing is growing in popularity because it exposes one flaw with transactional marketing; the high spenders are not necessarily the best, they may not be loyal to the organization and may seek additional services such as immediate delivery, better terms and so on. which may be extremely costly over time.

Advantages of the Relationship Model

• Retaining customers offers many benefits, most importantly, and the lifetime value they bring long-term customers.
• Transactions become more profitable as time is not spent gathering information or selling.
• Loyal customers recommend the organization, expanding sales through “word of mouth” recommendation, the most powerful promotion tool.
• Buyers and sellers interact and improve communication.
• Loyal customers will try new products and services, because of the trust built up.
• Customers will pay more for your services/products because of loyalty and trust.
• Loyal customers share problems with you, creating opportunity for improvement, and new products.
• The ultimate benefit is increased sales, market share, and ­dominance.

Disadvantages of the Relationship Model

• There may be additional costs in holding and storing information about customers.
• Information about customers and purchasing patterns must be analyzed and used effectively.
• The relationship model needs to be supported (but not driven) by cutting edge IT, which needs resources and ­management commitment.
• The additional task of managing the CRM database is required.

Customer Relationship with the Brand

Loyalty grows through relationship not just with employees, but with the brand itself. Branding began as a differentiator of commodity products, such as flour, sugar, petrol; customers trust the brand to be consistent and deliver their expected benefits. Homepride flour is not substantially different from own label flour, but the concept that Homepride’s little men’s “Graded grains make finer flour” has stuck, enabling the manufacturer to charge a premium price. This was reinforced by the free gift of a Fred Pie funnel, so the brand was recalled every time a customer baked.

Branding has assumed part of the responsibility for communicating with customers, and for engendering loyalty. There are a range of branding models, but Keller’s brand resonance pyramid is the most ­relevant to the loyalty concept. It shows the stages of brand development, and branding objectives, as well as the increasing loyalty as the brand establishes greater meaning for the customer and complements their self-­concept. Establishing a powerfully resonant brand is one of the means by which organizations create perceptions of quality and embed emotions of commitment and loyalty in their customers. Loyalty is the greatest contribution marketing makes to boosting profitability for the organization. Both branding and loyalty are long-term, durable marketing approaches espoused by quality conscious organizations.

Figure 2.6 Fred the Homepride flour grader and complimentary pie funnel. Reproduced with kind permission from Homepride Flour

Customer Loyalty and CRM

It is important to acquire customers for the first time purchase, to retain for second and third purchases of a similar product or service, then to offer additional or extension products and services that will be bought longer term. Customers must be moved from simply being satisfied with the service given toward loyalty; this can be achieved through the use of software to manage knowledge about the customer’s preferences relating not only to the product or service, but to how they relate and communicate with the organization.

Figure 2.7 Keller’s brand resonance pyramid. Reproduced with kind permission from Vizual.blog

Technology and CRM

The proliferation of different software CRM packages tends to focus attention on the technology. CRM is more an attitude of mind from the organization to the customer at each stage of interaction, than just computer software. There are three key elements: customer touch points, applications, and data stores.

Customer Touch Points

Think of a small tea or coffee shop selling light refreshments throughout the day. Every time a customer walks in, they are greeted by the person serving; this is the first of many customer touch points during the service experience. Next the order is taken, another person may take payment, and another may be tidying tables for the next customer. So within a small tea or coffee shop, there could be three or four different customer touch points each delivering service in a slightly different way. Other contact points can include advertisements, telephone, Internet, letters, information leaflets, and for larger organizations contact points can include 5G telephones, video conferencing, websites, and interactive TV. All present opportunities for information gathering, which should be used to deepen the relationship with customers as knowledge of their preferences builds.

Ensuring message consistency across touchpoints will give the ­customer a harmonious impression of the organization. Different messages create a mismatch in cognitive beliefs for the customer, and are unsettling.

Applications

These are the software and computer programs that support the process of CRM. The term CRM covers applications that serve marketing (e.g., data mining software1 and permission marketing2), sales (e.g., monitoring customer touch points), and service (e.g., customer care).

Data Stores

These contain information on every aspect of the customer, and the customer life cycle (CLC). An organization can keep information or data on what customers buy, when they buy, where they buy, and where goods are sent. Every transaction through an electronic checkout with a swipe card records, stores, and processes information enabling retailers to make tempting money off promotions or new product offers based on the types of goods and services already purchased.

Organizations can track visitors to their websites and products/services they have bought or considered. On membership websites, more information can be stored about age, location, purchasing habits, interests and so on. Information can be kept on customers’ lifetime value and analyzed using software applications to establish purchasing profiles for segmentation and targeting.

CRM is about relationships between people, not technology. Business happens between people, and technology’s role is to allow quicker and more effective operations. The good practices of relating with customers and their needs did not emerge with the introduction of computers; all that has changed is the tools—organizations can use the same practices but speed things up with technology or see how the customer is navigating through a website to gain an insight to their search process.

Data can also reveal a great deal about what is going on in a consumer’s world through their purchases—dietary supplements for pregnancy indicate a new baby, with many new products needed in the future.

Too often, companies purchase off-the-shelf packages or use software developers who claim to understand the needs of a business sector and sell something that constrains the way the organization relates to customers. The CRM system should mirror what is already taking place; however, it takes time for an external supplier to analyze the knowledge and processes within the organization. CRM goes beyond automating sales, customer service, and call handling; it moves into managing relations and improving the quality of information flowing between the customer and the organization.

Changing market needs require organizations to update the CRM system to mirror changes in information needs. Often the realization that the system needs updating does not emerge until it is already overloaded with traffic and data records. The implementation of a new or updated system may take longer, cost more in hours, and reduce time available for customers.

A CRM system can help document and analyze historical data to establish service usage levels. An organization can take remedial action to improve services or provide information to new customers, helping increase satisfaction and loyalty. At a customer helpdesk, the majority of questions are repeated—if information can be provided to answer commonly asked questions at the point of sale, customers may not need to use the helpdesk as much. Importantly, this will also help to reduce customer frustration, improve satisfaction, and free staff to work with customers.

Customer Loyalty

It is important for organizations to develop strategies for moving ­customer relationships forward into the zone of loyalty. This can be achieved both by taking care of existing customers and establishing loyalty ­programs. Most successful long-term relationships are based on win-win situations, and, like a good wine, they improve with age. Marketing and the ­customer relationship is no exception. Loyalty benefits the customer and the organization.

The Makeup of Loyalty

Loyalty is an everyday, if somewhat old-fashioned concept, applied to any kind of relationship including an intimate personal one, through to a professional or commercial one. The Concise Oxford English ­Dictionary defines loyal as “showing firm or constant support or allegiance to a ­person or institution.”

For a marketer, it is a customer’s willingness to continue the relationship of purchasing goods or services on a repeat (and preferably unique) basis, and ideally recommending the organization and its services to ­family, friends, and colleagues.

Loyalty is a long-term objective for a customer relationship, and academic literature abounds with discussion on the components of ­loyalty. A study of loyalty in the airline industry suggested that to reach the ­Nirvana of loyalty, certain prerequisites combine to create feelings of ­loyalty. Customer satisfaction, trust, and perceived value are identified as antecedents of loyalty.

Benefits to the Customer

For a customer, loyalty is a convenient habit, saving the effort of searching for a new provider on each purchase occasion. It gives security; the customer stays within their comfort zone, with no need to deal with new people, explain their needs anew. Over time, any initial issues or problems can be resolved, and special requirements can be accommodated.

The more complex the service, the more this aspect gains importance, so for services in the legal, medical, or educational sector, customers particularly value continuity and longevity of the relationship.

In services that have a high level of ego involvement, such as a hair stylist, a tailor, or a health club this is equally true. The monetary value of the service provided can also make trust a big issue, and this requires to be built over time. In some personal services such as hair styling, alternative therapy, child care, the service provider becomes a personal friend, and switching would create a rift in the personal relationship as well as the business one.

One of the most stressful things we undertake in our lives is to move house. If a house move also involves a change of location, to another town, or even another country, the stress is higher still, in part because a whole range of regular service providers will no longer be accessible, and the customer must embark on a search process to replace them. This takes time, and the uncertain outcome creates stress. Organizations capitalize on this by offering a nationwide network of service branches so that customers can continue the relationship with a known and trusted brand. Even if the organization cannot grow organically, franchising can enable it to extend its services geographically. Saks and Toni & Guy are examples of franchised global hair salons that acknowledge loyalty to the brand in addition to the individual stylist.

Generally speaking, as long as the customer receives a service that at least meets their expectations, they do not look for alternatives. Switching providers is costly in terms of search time; there may also be costs associated with switching, for example, moving phone and broadband provider may require investment in new equipment, or commitment to a long contract.

Benefits to the Organization

There are many advantages to an organization of having loyal customers. Ultimately, although some appear to be “soft” benefits, they all make a contribution to profitability. Customer service creates a virtuous circle; satisfied customers give positive feedback and increased sales, staff morale rises, and creates a more pleasant atmosphere for customers, who visit more often, becoming more committed.

Figure 2.8 Benefits of customer satisfaction and service quality

Source: Adapted from Christopher, L., P.G. Patterson, and R. Walker. Services Marketing ­Australia and New Zealand 1998 reproduced from L. Christopher, S. Vandermerwe and B. Lewis. Services Marketing a European Perspective Prentice Hall, 1999.

Releasing the Profit Potential of a Customer Relationship

It is possible to assess the profitability of a loyal customer, and two researchers, Reichheld and Sasser, in 1990 analyzed the profit per ­customer in a range of service businesses over the years of loyalty.

They found that the longer a customer had been with the organization, the more profitable it became to serve them. The figure below shows the results of their findings comparing customers of a credit card, an industrial laundry, an industrial distribution firm, and an auto servicing firm. The main benefits are as follows:

Figure 2.9 How much profit a customer generates over time

Source: Based on data in Reichheld, F.F., and J.W. Sasser. 1990. Zero Defections: Quality Comes to Services. Reproduced in Bitner. MJ Services Marketing, Zeithaml, V., and L. Berry, 177, 1996. New York, NY: Reproduced with kind permission from McGraw-Hill.

Lower Servicing Costs

As customers learn the process of purchasing and using the service, they develop a pattern of purchasing that becomes more straightforward for them, and less demanding in terms of staff time for the organization. The costs of servicing them reduce, giving greater profitability on a per capita basis for loyal customers than for new ones.

Increased Purchases

As customers gain confidence in the organization, they see it as a source of as many of their needs as the organization’s services cover. A loyal banking customer is open to purchase other financial services: pensions, insurance, stock purchases, and so on. Industrial customers grow and continue to source their services from the same provider, whose revenues expand as it meets the increased demand.

Word-of-Mouth Advertising

A recommendation from a loyal satisfied customer is far more likely to result in a new customer making a first purchase than a chance viewing of an advertisement. Advertisements are expensive, personal recommendation is free, costing only what it costs to provide service to the desired standard anyway. Word-of-mouth advertising saves advertising costs and delivers a better conversion rate. The John Lewis Partnership, for many years, relied almost entirely on word of mouth as a means of promotion. Its renowned Christmas advertisements now generate as much excitement as Selfridge’s and Fenwick’s Christmas windows, and that generates word of mouth for the brand.

Lifetime Value of a Customer

Few corporate accounting systems are able to readily calculate the lifetime value of a customer, yet this is one of the key dimensions of securing long term profitability of the organization. Without it, it is hard to determine which the best customers are and which warrant investment to retain. Each transaction subsequent to the first costs the organization less, so it is possible to calculate the impact on profits of customer retention.

Tom Peters calculated the lifetime value of his organization’s value to FedEx by multiplying the average monthly spend by the average lifetime of a relationship in the industry. He assumed an average lifetime relationship of 10 years, and his average monthly spend in 1987 for a 20-person business was $1,500. The hard monetary value of his business to FedEx can be calculated as:

$1,500 × 12 months/year × 10 years = $180,000

A relatively small account suddenly assumes much greater significance, quite apart from the kudos of serving a management guru well (or the bad publicity of providing a less than stellar performance).

Employee Retention

Part of the virtuous circle created by excellence is that, when an organization has a loyal customer base, staff turnover falls. Working in an organization where customers are satisfied gives a higher level of job satisfaction, staff become more relaxed, and can invest time in making existing customer relationships profitable and fun, rather than chasing new ones. As a result of a stable staff base, continuity of communication is ensured, service standards improve, and profits rise further still.

Profiting from Loyalty

Companies have always recognized the value of monetary assets and invest time and money in maximizing those assets. The use of property is exploited, so an arts venue, such as a cinema, which conducts its main business in the evenings, will extend its daytime use through targeting groups who are free during the day, such as pensioners, stay-at-home mothers, and by attracting organizations who can also use the facilities at off-peak times for sales conferences and the like. Although there have always been excellent organizations who have nurtured and valued their customers on an individual basis, the concept of treating them as a resource, that can be leveraged in a similar way to money, property, and manpower is relatively new. Technology has facilitated this; databases enable the mining of data, digging beneath the surface to find gems of opportunity. These can also come from innovative ways of looking at the information.

A Framework for Customer Loyalty

Loyalty requires much greater definition. Zeithaml and Bitner’s model (Figure 2.10) suggests the components of loyalty, and the order in which they make their contribution. The model below explores varying degrees of loyalty, based on the benefits that the customer perceives he or she is likely to derive from making a choice to be loyal to a brand or an organization.

Figure 2.10 The makeup of loyalty, adapted from Zeithaml and Berry (1996)

This framework uses two dimensions to measure loyalty: relative attitude and repeat patronage, producing four levels of loyalty behavior: true loyalty, latent loyalty, spurious loyalty, and no loyalty.

Figure 2.11 Loyalty framework adapted from Dick and Basu (1994, pp. 99–113)

True (Sustainable) Loyalty

High repeat patronage and relative attitude produces the brand loyalty all marketers strive for. Customers are committed to the brand on a variety of levels, with a strong emotional attachment. A clear brand proposition delivers long-term benefits for the customer and is built over time by effective performance and communications. This is the type of two-way loyalty gained from a relationship marketing strategy. Ideally, an organization seeks to move as many as possible of its customers to this status. This also links to a concept proposed by Roberts (2006) of a “Lovemark”; these are brands about which customers feel really passionate, beyond simple loyalty and include Apple, Harley-Davidson, and Nike.

Latent Loyalty

Latent loyalty indicates a high relative attitude to the service, but for various reasons, repeat purchase is inhibited by circumstance. A customer may prefer to shop at Waitrose, but if there is not a branch nearby, he or she probably shops elsewhere the majority of the time. The recession has turned many shoppers away from their preferred grocery retailer toward Aldi, Lidl, and Netto based on price. The customer, despite a willingness to be loyal, has to search for a compromise that meets the more practical needs of the situation. Organizational strategy should attempt to remove the constraining factors, enabling customers to exercise their brand preferences. Until recent years, Waitrose was a southern only grocery retailer, unable to service the whole country from the existing Milton Keynes warehouse; a new warehouse in Leicestershire enabled them to serve the North of England.

Spurious Loyalty

Repeat purchase is high, but relative attitude is low. Repeat purchase is driven by situational factors such as price promotions, habit, and peer pressure. Customers in rural areas often have little option but to buy their petrol at the local station regardless of their feelings about the company. There is no emotional attachment to the brand, or maybe even a negative attitude. Loyalty programs can lock customers in despite their lack of emotional attachment to the brand by forming a significant financial investment that the customer feels unable to abandon.

It is relatively easy to woo a customer away with better deals, but unless there is a more significant investment in building the relationship, it will only result in brand switching and not in brand commitment and loyalty. Since deregulation in the energy supply industry in the UK, a plethora of websites enable customers to select the best price deal. Switching, rather than giving long-term relationships, has resulted in customers pursuing ever lower prices. In part, this is because the service is hard to differentiate, so companies now offer incentives such as energy use ­monitors to help customers reduce their energy use.

No Loyalty

Low relative attitude may simply be as a result of a service that is new to the market, so its brand is untried. It could flag up a communications strategy that is failing to reach its target market. Alternatively, if the market is a commodity market, as with energy supplies, there may be little basis for customers to select one brand from another.

Strong communications campaigns to build awareness, to offer ­purchase incentives, or, as in the case of grocery items such as washing powders, simply to proliferate brands in the interest of securing shelf space in retail outlets can allow loyalty to develop. Package holiday companies produce many differentiated or segmented brochures for holidays. Where there is no loyalty, a free trial promotion campaign can induce trial, moving customers into spurious loyalty, which can in turn, develop into a longer term relationship, and sustained loyalty.

Figure 2.12 The differences between levels of net promoter scores for loyalty, recommendation, trust, and reputation reproduced with kind permission of the Institute of Customer Service

Measuring Loyalty

The benefits of loyalty to both organizations and customers have been considered, but it is also useful to explore how loyalty can be measured. The diagram shown below explores a model for doing this, where loyalty is segregated into different factors. This study proposes a model for measuring brand loyalty in English newspapers. It is based on a survey of 180 respondents in three major cities in India. The model was based on the factors that influence loyalty. The study also examines the loyalty behavior of customers, especially from an Indian perspective, and measures the brand loyalty score of three major English newspapers by using the developed model, concluding with suggestions for promoting high loyalty among customers.

Customer Loyalty Strategies

FedEx is renowned for the standards of its service, and its website features many video examples of how its service quality service has generated loyalty.

Figure 2.13 Model for measuring brand loyalty

Adapted from Punniyamoorthy and Raj (2007, pp. 222–33).

Many service providers have recognized the advantages of building customer loyalty in the form of loyalty cards. Airlines offer free air miles; supermarkets offer loyalty cards: Tesco’s Clubcard is probably one of the best known programs. Nectar Cards provide a loyalty scheme for Sainsbury’s, DFDS, Sky, Virgin trains, and several others. Most programs use a selection of tools in a rather tactical way. Establishing true loyalty demands a combination of strategic design supported by relevant techniques. There are a number of steps to inspiring loyalty in the customer base:

• The process starts with effective segmentation and targeting to ensure that the organization woos customers that are relevant to its long-term objectives.
• It moves into strategies designed to retain customers through understanding their needs.
• Staff and employees are critical to building loyalty and they need to be empowered to be innovative about meeting ­customers’ needs and anticipating potential problems.
• Monitoring customer relationships enables the organization to flex to meet customer needs.
• Creating an environment in which learning can take place, and where experimentation is allowed helps keep things fresh for customers and embeds improvements.
• Evaluation of the loyalty program is important to ensure that it remains current and relevant.
• Finally, rewarding customers for their loyalty and front line staff for maintaining the relationships helps embed the program, and can be financed through savings made by not chasing expensive new customers.

Some aspects of the characteristics of services make loyalty schemes and relationship marketing especially beneficial both to the provider and to the consumer.

What Customers Think of Loyalty Programs

Many customers expect a brand to reward their loyalty.

“Almost six in 10 (59%) British adults think all brands should offer a loyalty program, and over three quarters (77%) are subscribed to at least one program—a figure that rises to 85% among women (vs 70% of men). More than seven in 10 (72%) think loyalty programmes are a great way for brands and businesses to reward their customers.” and the more mature (over 55) are likely to favor loyalty more, with a take-up of 83%, contrasting a 61% take-up in the 18–24 group. Young men are the least likely to be members of loyalty schemes. So it seems schemes are failing to attract the new users which will be essential for their survival.

Table 2.1 Characteristics of services from customer and company perspectives

	Provider	Consumer
Intangible	The provider needs to communicate the benefits offered by the service effectively	Intangibility of services means that the consumer has to depend on either existing knowledge of the service provider, or the brand itself to understand what they are likely to receive in terms of quality.
Perishable	At times when it looks as though the service has not been sold at its usual price, or demand is anticipated to be low, the organization can offer discounts to loyal customers.	Perishability has meant that customers can benefit from last minute deals in the travel and hospitality industries, as organizations seek to at least make a contribution to over heads by selling seats and rooms below the normal market price. The company last minute.com has capitalized upon this.
Inseparability	Using the brand to extend the reach of the organization, perhaps through franchising can help overcome the perception of customer risk. When a customer’s usual hairdresser is not available, providing an alternative has the support of the brand, which helps to overcome perceived risk of using somebody new	There is a perceived risk of having to establish new relationships with service providers.
Variability	Companies can guard against variability inherent in service delivery from both different Service providers, and different Service events by designing a set of robust standards that can offer a degree of uniformity.	Each service encounter is different, based on who is providing the service, their mood on the day, the mood of the customer themselves, external factors, such as the weather, the impact of other customers on the experience.

Loyalty programs have been around for ages (toys in Happy Meals, buy-one-get-one-free perks, come-back coupons handed over following a purchase, or credit card points). However, effective customer loyalty programs and other retention tactics are as much about customer service as they are about rewards.

• 68% of millennials say they wouldn’t be loyal to a brand if it doesn’t have a good loyalty program.
• The top two reasons why consumers disengage with a loyalty program are: the program did not provide offers that were of interest (56%), and it was too hard to earn points for rewards (54%).

Effective loyalty should be supported in in every phase of the customer journey, not just at the end of the purchase process. It needs to start with building a mutually friendly and rewarding relationship, and work at strengthening it.

The Importance of Loyalty Programs

A customer loyalty program that rewards customers who make repeat purchases or spend their time, money, and social currency with a company can be the cornerstone of competitive advantage, because:

• The perks could initiate sign up or first purchase, acting as the driver behind acquiring a new customer.
• Reinforcing the perks during a customer’s first few experiences with a brand may be the start of a life-long relationship.
• Customers who are rewarded with relevant perks, supported by targeted communication linked to their individual needs and preferences are more likely to continue to support the company through repeat business but also importantly through advocacy, bringing in new groups of first time ­customers.

The loyalty program drives personalized rewards and recommendations throughout a customer’s evolving relationship with a brand.

Overview of Loyalty Schemes

Established programs can learn from newer entrants that are adopting innovative methods of engagement. Virgin Red uses gamification to engage members, while Pets at Home VIP Club talks directly to pets instead of owners, engaging the emotional elements of the decision making process, as well as the cognitive.

Partner rewards represent a new approach for loyalty programs; partnerships can create attractive members’ rewards, often more cost effectively than the brand itself. Partner rewards have gained most traction in airlines, petrol stations, retail, pharmacies, and supermarkets. These brands are viewed as commodities that people need, rather than brands they love. Partner rewards could offer added excitement, emotional engagement, and inspiration in this sector.

Two sectors that stray from this pattern are hotels where both partner and the brand’s own rewards are valued equally (59%), and beauty salons where uniquely the brands own rewards are favored (62% want partner rewards vs 67% who want the brand’s own).

Supermarkets dominate the loyalty scheme arena; two programs have competed for 20 years leading to two of the most successful UK loyalty programs. The Tesco Clubcard, launched in 1995, and the Nectar Card, launched a year later, are extremely successful for a number of reasons. Both programs use very simple points per pound spent system, 1, or 2 points per pound respectively, which allows customers to clearly understand what rewards are available to them when they spend a set amount.

Both offer a wide range of rewards through partnership arrangements to offer discounts at restaurants through to days out at theme parks. Smaller businesses may struggle to team up with other businesses but offering a range of rewards that you can personally deliver will still help make your loyalty program appealing to as many potentially loyal ­customers as possible.

Loyalty schemes successfully increase recommendation and spend, with almost half (48%) of loyalty program subscribers feeling greater affinity to the brands they hold membership with. They spend more and are more likely to recommend a brand whose program they are a member of. Still, a scant 28% feel emotional connection to a brand despite their affiliation by membership.

A small group, the superloyal (13% of the nation), tick all three boxes, being more likely to recommend, spend more, and feel emotionally connected to a brand whose loyalty scheme they are a member of. Some schemes have a higher proportion of these people than others.

The key to engagement may lie in understanding people’s redemption habits. The table below shows the differences.

There is a group of tech-savvy customers who are

• always actively on the lookout for new tech devices and ­services (10% vs 3%);
• interested in video games (33%), websites (47%) and mobile apps (31%);
• keen to use new technology products as soon as they enter the market (12% vs 9%); and
• believe that there is a technological solution to humanity’s problems (37% vs 25%).

Brands could usefully adopt gamification or app supported schemes to attract this group.

Figure 2.14 Schemes favored by the superloyal

Table 2.2 Redemption habits of loyalty scheme members

Category	Habit	Percentage
The collectors	Collect points, save them up, aiming for a higher reward	44%
The regulars	Collect and redeem regularly	27%
The early redeemers	Early users, redeeming their points at regular intervals	20%

Responsibility for Excellence Within the Organization

In the initial stages: responsibility for excellence falls to the brand; the brand makes a promise to the customer of what they will receive upon purchase. At this point, operations, and importantly, staff take over ­delivery of the promise, as they perform service activities. This process will either meet, exceed, or fail to meet the expectations established by the initial encounter with the brand.

After the first purchase, excellence becomes again, the responsibility of marketing, to deepen the relationship with the customer, with the expectation of repeat purchase. Staff will ensure that feedback is obtained about the level of customer satisfaction felt from the first purchase. Too often, this is done by means of an anonymous e-mail, requesting customer feedback. This rather lazy way of gathering feedback has led to consumer apathy in responding, resulting in a potentially distorted picture of the service that is delivered, as customers tend only to respond in the event of an exceptionally good, or exceptionally bad experience. Many stores now offer free entry to a prize draw for customers who complete online evaluations.

Excellence in Staff Relations

Embedding excellence should be focused equally on making staff happy, as on making customers happy, or, arguably, even more so, as a happy workforce with a spring in their step and a smile on their faces, enhance the customer experience. Zappos, the online retailer follows this principle to the letter, fully empowering staff to spend as long as needed on calls, rather than timing them to measure productivity. As a result, they are revered by customers and enjoy high loyalty and advocacy.

Table 2.3 Marketing and operations roles throughout the customer relationship

Responsibility	Initial awareness	First Transaction	Service delivery Service/PPProduct use	Customer feedback	Relationship building	Embedding loyalty	Encouraging advocacy
Marketing	Establish engaging brand	Communicate brand values Sensory aspects of brand engagement	Provide supporting marketing materials	Design feedback process	Design reasons for relationship, for example., fun, rewards	Offer incentives for loyalty	Offer incentives for introducing people, or for blogging, vlogging and so on.
Operations	Putting service delivery aspects in place, liaising with marketing to give consistency with brand messages	Ensure purchase processes work Ensure necessary supplies are available Ensure staff are ready to delight	Deliver service at or above the promised level	Receive, ­interpret, and act on feedback	Ensure processes continue to deliver the ­promise and delight customers	Staff training, frontline staff empowerment	Welcome people introduced by advocates

For more than 30 years, organizations have been searching for a formula that works, appreciating the many potential benefits of flexible working. Technology has become an enabler, since most of us carry the tools required for efficient flexible working with us as a matter of course. What is holding organizations back is an inability to create the right culture to deliver flexible working schemes and policies. Flexible working is often more of a compromise or exception: a way of integrating workers who have time or mobility restrictions into the workplace. This has led to creation of policies that define boundaries around flexible working arrangements, making flexible working seem like an arrangement for lower level staff.

For flexible working to become a valuable element in meeting variable levels of demand, and enabling the organization to adapt rapidly, three factors can help:

1. Organizations don’t need a policy: Where flexible working succeeds best, flexibility is available to all, with a high degree of trust, rather than having meticulously crafted, individual arrangements. This also reflects the servant leadership principles of employee empowerment.

2. Employees take control: Successful flexible working has to be focused on the requirements of the organization, and its team members, so organizations need to surrender control and put employees in charge of their time.

3. Organizations that are flexible from the top-down: Flexibility works best when an organization endorses it openly by getting senior management involved. When this level shows that they enjoy working flexibly, the rest of the team will soon follow.

Flexible working empowers organizations to welcome a more diverse workforce, and helps employees advance and strengthen their collaboration skills, facilitating gatherings of the richest talent in whichever ­format best suits the work at hand. Empowered staff are best equipped to ­provide outstanding service that goes beyond customer expectations into the realms of customer delight.

Quotations from Key Practitioners/Leaders of Excellence Businesses

Make a customer, not a sale.

—Katherine Barchetti, Founder of K. Barchetti Shops, ­Pittsburgh

Every contact we have with a customer influences whether or not they’ll come back. We have to be great every time or we’ll lose them.

—Kevin Stirtz, Strategy Manager at Thomson Reuters, Author: More loyal customers

Disenchantment Example

Royal Caribbean’s sub-brand, Celebrity makes loyal customers take six Celebrity cruises before applying for Royal Caribbean rewards. Select and Elite members just recently received Internet and laundry privileges that Princess cruise line customers have had for a while.

The behind-the-scenes tours and increased access offered by Royal Caribbean look insubstantial when compared to the $75 to $400 credits that customers receive on competing line Oceania.

Enchantment Example

Amazon Prime’s loyalty scheme is so successful people are willing to pay £79 a year for it. Few other loyalty programs offer enough value to make people willing to pay to receive its benefits.

Amazon Prime offers perks such as free access to their streaming service, free two-day delivery, and even one-hour delivery in some cities exclusively to Amazon Prime members who therefore feel more valued compared to the average customer. An estimated 7 million Amazon Prime users spend twice as much on average as non-prime members, so clearly, both customer and Amazon find value in the closer relationship.

End of Chapter Summary

This chapter has investigated why it is important for organizations to focus on their customers and place customer loyalty strategies at the heart of their operations. It explored why organizations need to cement relationships with their customers and to deliver excellent customer service. If customers are viewed as a business asset and treasured for their lifetime value, organizations may pay more attention to ensuring customer satisfaction. Nurturing customer relationships over time can deliver significant revenue, profit, and market share to organizations.

The shift from transaction marketing to relationship marketing and ensuring customer satisfaction has begun. Organizations must now move from delivering satisfaction into having loyal customers who actively support the organization and promote it. Organizations need to plan a CRM program that covers the whole organization from shop floor to senior management. Effective CRM will enable organizations to reap rewards in customer loyalty and profitability. Successful implementation of CRM requires organizational-wide, cross-functional, customer-­focused business process reengineering. Although a large portion of CRM involves technology, managing a successful CRM implementation requires an integrated and balanced approach to technology, process, and people.

End of Chapter Review Questions

Customers Loyalty building	High Low
Is loyalty part of corporate strategy?
Do you actively promote loyalty through your marketing?
Does your segmentation, targeting, and ­positioning actively seek customers who are open to collaboration?
Do you reward loyal customers?
Do you maintain a CRM system?
Is it maintained at SBU level, or corporate level?
How do you deal with duplication?
How do you deal with communication?
Is the CRM integrated with other intelligence systems?
Are all staff trained to use CRM?
Do you calculate CRM performance?
Do you monitor the impact of CRM strategies on trust, commitment, loyalty, and satisfaction?
Do you give special attention to key accounts?
Is the concept of loyalty embedded in your brand?
Do you craft a unique service for each customer?
Does the quality of your service support your brand promise and engender loyalty?

References

Christopher, M., A. Payne, and D. Ballantyne. 2013. Relationship Marketing. Routledge.

Dick A.S., and K. Basu. 1994. “Towards an Integrated Conceptual Framework.” Journal of the Academy of Marketing Science 22, no. 2, pp. 99–113.

Peters, T., and R.H.Waterman. 2004. “In Search of Excellence.” Lessons from America’s Best run Companies.

Punniyamoorthy, M., and M.P.M. Raj. 2007. “An Empirical Model for Brand Loyalty Measurement.” Journal of Targeting Measurement and Analysis for Marketing 15, no. 4, pp. 222–33.

Roberts, K. 2006. Lovemarks: The Future Beyond Brands.

Zeithaml, V., and L. Berry. 1996. Bitner. MJ Services Marketing, 177. New York, NY: McGraw-Hill.

https://d25d2506sfb94s.cloudfront.net/r/53/what-the-british-think-of-loyalty-programmes.pdf

https://salesforce.com/blog/2016/10/customer-loyalty-program-examples-tips.html

https://sciencedirect.com/science/article/pii/S1057740814001089

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