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The Best Practices for Creating Customer Loyalty Across Multi-

Channels in Service Industry


What are best practices for creating loyal customers in tourism and hospitality industry?

Why some loyalty programmes of tourism and hospitality business operators don’t work properly? Why others can?

How can the operators of tourism and hospitality industry use multiple channels to create a cross-channel experience with their customers?

How can segmentation and analytics help in driving loyalty? How can in-store marketing services be used for creating customer

loyalty?


Managing Customer Relationships and Building Loyalty


Contents

• The Search for Customer Loyalty

• Understanding the Customer-Firm Relationship

• The Wheel of Loyalty

• Building a Foundation for Loyalty

• Creating Loyalty Bonds

• Strategies for Reducing Customers Defections

• CRM: Customer Relationship Management


The Search for Customer Loyalty


Why Is Customer Loyalty Important to a Firm’s Profitability?

• 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


How Much Profit a Customer Generates Over Time

Credit card Industrial laundry Industrial distribution Auto servicing

0

50

250

300

350 –

100

150

200

Year 1 Year 2 Year 3 Year 4 Year 5


Assessing the Value of a Loyal Customer (1)

Must not assume that loyal customers are always more profitable than those making one-time transactions– Costs

• Not all types of services incur heavy promotional expenditures to attract a new customer

• Walk-in traffic more important at times

– Revenue

• Large customers may expect price discounts in return for loyalty

• Revenues don’t necessarily increase with time for all types of customers


• to stage of service in product life cycle– For example referrals and negative word-of-mouth have a higher

impact in early stages• Tasks

– Determine costs and revenues for customers from different market segments at different points in their customer lifecycles

– Predict future profitability Profit impact of a customer varies according

Assessing the Value of a Loyal Customer (2)


Measuring Customer Equity: Lifetime Value of Each Customer

• Acquisition revenues less costs– Revenues (application fee + initial purchase)– Costs (marketing + credit check + account set up)

• Projected annual revenues and costs – Revenues (annual fee + sales + service fees + value of

referrals)– Costs (account management + cost of sales + write-offs)

• 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


Gap Between Actual and Potential Customer Value

• What is current purchasing behavior of customers in each target segment?

• What would be impact on sales and profits if they exhibited ideal behavior profile of: – (1) buying all services offered by the firm, – (2) using these to the exclusion of any purchases from competitors, – (3) paying full price?

• How long, on average, do customers remain with firm?

• What impact would it have if they remained customers for life?


Understanding the Customer-Firm Relationship


Relationship Marketing (1)

• Transactional Marketing

– One transaction or a series of transactions does not necessarily constitute a relationship

– Requires mutual recognition and knowledge between the parties

• Database Marketing:

– Includes market transaction and information exchange

– Technology is used to

• (1) identify and build database of current and potential customers

• (2) deliver differentiated messages based on customers’ characteristics

• (3) track each relationship to monitor cost of acquiring that customer and lifetime value of resulting purchases


Relationship Marketing (2)

• Interaction Marketing:

– Face-to-face interaction between customers and supplier’s representatives

– Value is added by people and social processes

– Increasing use of technologies make maintaining meaningful relationships with customers a marketing challenge

• For example, self-service technology, interactive websites, call centers

• Network Marketing:

– Common in b2b context where companies commit resources to develop positions in network of relationships with stakeholders and relevant agencies


The Wheel of Loyalty


The Wheel of Loyalty

1. Build aFoundationfor Loyalty

2. Create LoyaltyBonds

3. Reduce Churn Drivers

CustomerLoyalty

Be selective in acquisition

Conduct churn diagnosticSegment the market

Use effective tiering of service.

Deliver quality service.

Deepen the relationshipGive loyalty

rewards

Build higher level bonds

Implement complaint handling and service recovery

Address key churn drivers

Increase switching costs

Enabled through: Frontline staff Account

managers Membership

programs CRM Systems


Building a Foundation for Loyalty


Customer Needs and Company Capabilities

• Identify and target the right customers

– 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?

• Should result in a superior service offering in the eyes of those customers who value what firm has to offer


Searching for Value—Not Just Volume

• Focus on number of customers served as well as value of each customer – Heavy users who buy more frequently and in larger volumes are

more profitable than occasional users

– Avoid targeting customers who buy based on lowest price

• Firms that are highly focused and selective in their acquisition of customers grow faster

• “Right customers” are not always high spenders– Can come from a large group of people that no other supplier is

serving well

• Different segments offer different value


Effective Tiering of Service : The Customer Pyramid

Which segment sees high value in our offer, spends more with us over time, costs less to maintain, and spreads positive word-of-mouth?

Which segment costs us time, effort, and money, yet does not provide return we want? Which segment is difficult to do business with?Lead

Iron

Gold

Platinum

Good Relationship Customers

Poor Relationship Customers


The Customer Satisfaction and Loyalty Relationship

0

20

40

60

80

100

1 2 3 4 5

Lo

yalt

y (R

eten

tio

n)

VeryDissatisfied

Dissatisfied Neither Satisfied VerySatisfied

Satisfaction

Near Apostle

Zone of Defection

Zone of Indifference

Zone of Affection

Terrorist

Apostle


Creating Loyalty Bonds


Strategies for Developing Loyalty Bonds with Customers (1)

• Deepening the relationship

– Bundling/cross-selling services makes switching a major effort that customer is unwilling to undertake unless extremely dissatisfied with service provider

– Customers benefit from consolidating their purchasing of various services from the same provider

– See Research Insights : How do customers see relational benefits?

• One-stop-shopping, potentially higher service levels, higher service tiers, etc.



• Reward-based Bonds– Incentives that offer rewards based on frequency of purchase, value

of purchase, or 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, tiered loyalty programs– Reward-based loyalty programs are relatively easy to copy and

rarely provide a sustained competitive advantage



Social Bonds – Based on personal relationships between providers and customers – Harder to build and 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

Source: PAL Library; Asset ID: AAFHKTO0



• Structural Bonds– Mostly seen in b2b settings– Stimulate loyalty through structural relationships between provider

and customer

• Joint investments in projects and sharing of information, processes and equipment

– Can be seen in b2c environment too

• Airlines—SMS check-in, SMS e-mail 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


Creating Customer Bonds by Membership Relationships and Loyalty Programs (1)

• Transform discrete transactions into relationships – Discrete transactions: Each usage involves payment to service

supplier by an essentially "anonymous" consumer – Membership cards: Capture transactions, communicate

customer preferences to frontline– Loyalty reward programs increasingly used by all businesses in

response to competition

• Frequent fliers program—rewards dominated in miles

– Customers may get frustrated with reward programs

• For example: Feel excluded from rewards program because of low balances, rewards seen as having little value, cumbersome redemption process

– Don’t lose sight of broader goals of offering high service quality, nor allow service to other customers to deteriorate


Create Customer Bonds by Membership Relationships and Loyalty Programs (2)

• How customers perceive reward programs– Brand loyalty versus deal loyalty– Buyers value rewards according to:

• Cash value of redemption award

• Range of choice among rewards

• Aspirational value of rewards

• Amount of usage required to obtain award

• Psychological benefits of belonging to reward program – Timing

• Send customers periodic updates on account status and progress towards particular milestones


Strategies for Reducing Customer Defections


Analyze Customer Defections and Monitor Declining Accounts • 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

– Churn Alert Systems: • Monitor activity in individual customer accounts to predict

impending customer switching• Proactive detention efforts—send voucher, customer service

representative calls customer


Addressing Key Churn Drivers

• Delivery quality

• Minimize inconvenience and nonmonetary costs

• Fair and transparent pricing

• Industry specific drivers

– Cellular phone industry: Handset replacement a common reason for subscribers discontinuing services—offer proactive handset replacement programs

• Reactive measures

– 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


Other Ways to Reduce Churn

• Implement effective complaint handling and service recovery procedures

• Increase switching costs– Natural switching costs

• For example, 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 word of mouth


CRM: Customer Relationship Management


Strategy Development

Process

Value Creation

Process

Multi-Channel Integration

Process

Performance Assessment

Process

Information Management Process

Integrated Framework for CRM Strategy


Integrated Framework for CRM Strategy Development

• Strategy Development– Assessment of business strategy – Business strategy guides

development of customer strategy


• Value Creation

– Translates business and customer strategies into specific value propositions for both customers and firm

• Customers benefit from priority, tiered services, loyalty rewards, and customization

• Company benefits from reduced customer acquisition and retention costs, and increased share-of-wallet

– Dual creation of value: Customers need to participate in CRM to reap value from firm’s CRM initiatives

Integrated Framework for CRM Strategy: Value Creation


• Multi-Channel Integration

– Serve customers well across many potential interfaces

– Offer a unified interface that delivers customization and personalization

Integrated Framework for CRM Strategy: Multi-Channel Integration


• Performance Assessment– Is CRM system creating value for key

stakeholders?

– Are marketing and service standard objectives being achieved?

– Is CRM system meeting performance standards?

Integrated Framework for CRM Strategy: Performance Assessment


• 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

Integrated Framework for CRM Strategy: Information Management


Common Objectives Of CRM Systems (1)(Service Perspectives )

• 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


Common Objectives Of CRM Systems (2)(Service Perspectives )

• 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 enable the assessment of the effectiveness of

marketing campaigns through the analysis of responses

• Call center automation

– Call center staff have customer information at their fingertips 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


Common Failures in CRM Implementation

• Service firms often equate installing CRM systems with having a customer relationship strategy

• Challenge of getting it right with wide-ranging scope of CRM

• Common reasons for failures– Viewing CRM as a technology initiative– Lack of customer focus– Insufficient appreciation of customer lifetime value (CLV)– Inadequate support from top management– Failure to reengineer business processes– Underestimating the challenges in date integration


Key Issues in Defining a Customer Relationship Strategy

• 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 incremental profit potential of 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 allocate 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?


Improving Service Quality and Productivity


What Is Service Quality?


Different Perspectives of Service Quality

Transcendent:

Product-based:

User-based:

Manufacturing-based:

Value-based:

Quality = Excellence. Recognized only through experience

Quality is precise and measurable

Quality lies in the eyes of the beholder

Quality is in conformance to the firm’s developed specifications

Quality is a trade-off between price and value


Performance: Primary operatin.g characteristics

Features: Bells and whistles

Reliability: Probability of malfunction or failure

Conformance: Ability to meet specifications

Durability: How long product continues to provide value to customer

Serviceability: Speed, courtesy, competence

Esthetics: How product appeals to users

Perceived Quality: Associations such as brand name


Components of Quality: Service-based

Tangibles: Appearance of physical elements

Reliability: Dependable and accurate performance

Responsiveness: Promptness; helpfulness

Assurance: Competence, courtesy, credibility, security

Empathy: Easy access, good communication, understanding of customer


Capturing the Customer’s Perspective of Service Quality: SERVQUAL (1)

• Survey research instrument based on premise that customers evaluate firm’s service quality by comparing– Their perceptions of service actually received – Their prior expectations of companies in a

particular industry

• Poor quality– Perceived performance ratings < expectations

• Good quality– Perceived performance ratings > expectations


How Customers Might Evaluate Online Businesses: Seven Dimensions of E-S-QUAL

• Accessibility : Is site easily found?

• Navigation: How easy is it to move around the site?

• Design and presentation: Image projected from site?

• Content and purpose: Substance and richness of site

• Currency and accuracy

• Responsiveness:Firm’s propensity to respond to e-mails

• Interactivity, customization, and personalization

• Reputation and security.


Other Considerations in Service Quality Measurement

• In uncompetitive markets or in situations where customers do not have a free choice, researchers should use needs or wants as comparison standards– Time constraints

• Services high in credence characteristics may cause consumers to use process factors and tangible cues as proxies to evaluate quality—halo effect– Process factors: Customers’ feelings


The Gaps Model—A Conceptual Tool to Identify and Correct Service Quality Problems


.

Customer experience relative to expectations

1. Knowledge Gap

2. Standards Gap

3. Delivery Gap

5. Perceptions Gap

7. Service Gap

Customer needs and expectations

6. Interpretation Gap

4. Internal Communications Gap

MANAGEMENT

CUSTOMER

4.

Customer perceptions of service execution

Management definition of these needs

Translation into design/delivery specs

Execution of design/delivery specs

Advertising and sales promises

Customer interpretation of communications


Prescriptions for Closing the Seven Service Quality Gaps (1)

1. Standards gap: Specify SQ standards that reflect expectations– Set, communicate, and reinforce customer-oriented service

standards for all work units– Measure performance and provide regular feedback

2. Knowledge gap: Learn what customers expect– Understand customer expectations – Improve communication between frontline staff and

management– Turn information and insights into action– Reward managers and employees



3. Delivery gap: Ensure service performance meets standards– Clarify employee roles– Train employees in priority setting and time management– Eliminate role conflict among employees– Develop good reward system

4. Internal communications gap: Ensure that communications promises are realistic– Seek comments from frontline employees and operations

personnel about proposed advertising campaigns– Get sales staff to involve operations staff in meetings with

customers– Ensure that communications sets realistic customer

expectations



5. Perceptions gap: Educate customers to see reality of service quality delivered – Keep customers informed during service delivery and debrief

after delivery – Provide physical evidence

6. Interpretation gap: Pretest communications to make sure message is clear and unambiguous– Present communication materials to a sample of customers in

advance of publication

7. Service gap: Close gaps 1 to 6 to meet customer expectations consistently


Measuring and Improving Service Quality


Soft and Hard Measures of Service Quality

• Soft measures—not easily observed, must be collected by talking to customers, employees, or others– Provide direction, guidance, and feedback to employees on ways to

achieve customer satisfaction – Can be quantified by measuring customer perceptions and beliefs

• For example: SERVQUAL, surveys, and customer advisory panels

• Hard measures—can be counted, timed, or measured through audits– Typically operational processes or outcomes– Standards often set with reference to percentage of occasions on

which a particular measure is achieved – Control charts are useful for displaying performance over time

against specific quality standards


Defining and Measuring Productivity


Productivity in a Service Context

• Productivity measures amount of output produced relative to the amount of inputs.

• Improvement in productivity means an improvement in the ratio of outputs to inputs.

• Intangible nature of many service elements makes it hard to measure productivity of service firms, especially for information-based services– Difficult in most services because both input and output are hard

to define – Relatively simpler in possession-processing services, as

compared to information- and people-processing services


Service Efficiency, Productivity, and Effectiveness

• Efficiency: Involves comparison to a standard, usually time-based (for example: how long employee takes to perform specific task)– Problem: Focus on inputs rather than

outcomes– May ignore variations in service quality/value

• Productivity: Involves financial valuation of outputs to inputs– Consistent delivery of outcomes desired by

customers should command higher prices• Effectiveness: Degree to which firm meets goals

– Cannot divorce productivity from quality and customer satisfaction


Measuring Service Productivity: Variability Is a Major Problem

• Traditional measures of service output tend to ignore variations in quality or value of service– Focus on outputs rather than outcomes– Stress efficiency but not effectiveness

• Firms that consistently deliver outcomes desired by customers can command higher prices; loyal customers are more profitable

• Measures with customers as denominator include:– Profitability by customer– Capital employed per customer– Shareholder equity per customer


Improving Service Productivity


Questions When Developing Strategies to Improve Service Productivity

How to transform inputs into outputs efficiently? Will improving productivity hurt quality? Will improving quality hurt productivity? Are employees or technology the key to

productivity? Can customers contribute to higher productivity?


Generic Productivity Improvement Strategies

• Typical strategies to improve service productivity:– Careful control of costs at every step in process– Efforts to reduce wasteful use of materials or labor– Replacing workers by automated machines– Installing expert systems that allow paraprofessionals to take on

work previously performed by professionals who earn higher salaries

• Although improving productivity can be approached incrementally, major gains often require redesigning entire processes

? ? ?


Long Waiting Times May Indicate Need for Service Process Redesign


Improving Service Productivity: (1) Operations-driven Strategies

• Control costs, reduce waste

• Set productive capacity to match average demand

• Automate labor tasks

• Upgrade equipment and systems

• Train employees

• Broadening array of tasks that a service worker can perform

• Leverage less-skilled employees through expert systems

• Service process redesign


Improving Service Productivity: (2) Customer-driven Strategies

• Change timing of customer demand– By shifting demand away from peaks, managers can make

better use of firm’s productive assets and provide better service • Involve customers more in production

– Get customers to self-serve– Encourage customers to obtain information and buy from firm’s

corporate websites • Ask customers to use third parties

– Delegate delivery of supplementary service elements to

intermediary organizations


Backstage and Front-stage Productivity Changes: Implications for Customers

• Backstage improvements can ripple to front and affect customers– Keep abreast of proposed backstage changes, not only to identify

such ripples but also to prepare customers for them

• For example: New printing peripherals may affect appearance of bank statements

• Front-stage productivity enhancements are especially visible in high contact services– Some improvements only require passive acceptance, while others

require customers to change behavior– Must consider impacts on customers and address customer

resistance to changes– Better to conduct market research first if changes are substantial


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