Welcome to services marketing.
And now we will talk about module 31st.
So as you know that this is a module that
covers managing relationships and building
loyalty.
So we this this section is comprises of three
module, module 30, 31, 32.
And we have talked about module 30, and now
we will start with module 31, and we are still
talking about managing relationships and building
loyalty.
Now let us see, what are the topics that will
be covered in this module.
The first is, we will try to understand how
to use service tiering to manage the customer
base and build customer loyalty.
Then, we will understand the relationship
between customer satisfaction and loyalty.
And then, we will try to understand to know
how to deepen the relationship between cross-selling
and bundling.
And then, to understand the role of financial
and non-financial loyalty rewards in enhancing
customer loyalty.
So, now to introduce, in the last module we
have discussed about the Wheel of Loyalty.
So, this is the Wheel of Loyalty that you
can see at the right hand side.
We have talked about that in the last module.
So, it is about building customer loyalty,
so that is the first is to build a foundation
for loyalty.
Then, moving on to create loyalty bonds.
And the third is to reduce churn drivers.
So, we are talking about this thing.
Under its first strategy of appreciating why
it is essential to target the right customers,
we covered two sub-themes, that is targeting
the right customers and search for value,
and not just volumes.
Today, we will start with the next sub-theme,
managing the customer base through effective
tiering of service.
Managing the customer base through effective
tiering the service.
So I will explain these concepts in a moment.
So, this Wheel of Loyalty is for building
a foundation for customer loyalty, and we
are talking about managing the customer base
through effective tiering of services.
So, marketers should adopt a strategic approach
to retaining, upgrading, and even ending relationships
with the customers.
So, it is not about retaining and upgrading
relationships but also about ending relationships
with the customers.
Customer retention involves developing long-term,
cost-effective links with customers for the
mutual benefit of both parties, but these
efforts need not necessarily target all the
customers of a firm with the same level of
intensity, because this intensity will be
different for different level of customers,
different targets of the customers.
Customer profitability and return on sales
can be increased by focusing a firm's resources
on top-tier customers, those customers who
are giving in more profits.
So if more resources are dedicated to those
customers who are giving more profits, then
it will create loyal customers.
Furthermore, different customer tiers often
have quite different service expectations
and needs.
Therefore, it is critical for service firms
to understand the need of the customers and
within different profitability tiers and adjust
their service levels accordingly.
So, first is that they understand what are
the needs of the customers and how profitable
they are.
And then accordingly, they should adjust their
service levels.
Now, service tiers can be developed around
the level of profit contribution of different
group of customers and their needs.
So, service tiers can be developed around,
first is the level of profit contribution
or different groups of customers and their
needs, which includes sensitivity to variables
such as price, comfort, and speed.
And then to identify personal profiles such
as the demographics.
So, first we will understand, first what the
company needs to do is, to find out the levels
of profit contribution of different customers,
and how their needs are different, depending
upon the sensitivities to variables such as
the price, comfort, and speed.
And then, so, that is the first thing, and
then you would identify and develop their
profiles.
For example demographics or geographics and
so on so forth.
So, Zeithaml and Rust, Lemon illustrate this
principle through a four-level pyramid.
That, we will see, this is the four level
pyramid.
And we are still talking about managing customer
base through effective tiering of service.
So, now you see that this pyramid, this is
a customer pyramid.
It has four levels at the top and which is
the smallest one is platinum, followed by
gold, iron and lead.
So, let us look at, so these are, at the base
of this pyramid are poor relationship customers
and at the top are good relationship customers.
So, this platinum, which segment sees high
value in our offer, spends more with us over
time, costs less to maintain, and spreads
positive word-of-mouth.
So, obviously they come in the first and the
best tier that is the platinum tier.
And at the bottom that is the lead customers,
which segments cost us time, effort and money
but does not provide the return we want, which
segment is difficult to do business with,
so that is at the bottom of this pyramid.
So, obviously what companies want is that
this should be platinum; this lower level
lead should turn platinum.
So that the companies can have huge number
of platinum customers.
But it does not so happen.
Now, also keep in mind that platinum customers,
they may come from the lowest level, the lead
customers.
So, now again look at this platinum.
These customers form a very small percentage
of a firm's customer base, but are heavy users
and tend to contribute a large share of profits.
So, although they are (lower) smallest in
number, or the least in numbers but they contribute
most to the profits.
This segment is usually less price sensitive,
but expects higher service level in return,
and it is likely to be willing to invest in
and try new services.
So, this is what the companies want, this
type of customers, the platinum type.
Now, let us look at what are the gold types
of customers.
This gold tier includes a larger percentage
of customers than the platinum.
So, the number of customers here are more
as compared to in platinum.
But individual customers contribute less profit
than platinum customers.
They tend to be slightly more price sensitive
and less committed to the firm.
So, the number of customers in gold are more
as compared to platinum but their profitability
per head is less.
They are also more price sensitive and they
are also less committed to the firm as compared
to the platinum.
This iron customers, these customers provide
the bulk of the customer base.
Their number gives the firm economies of scale.
Hence, they are important so that a firm can
build and maintain a certain capacity level
and infrastructure, which is often needed
for serving gold and platinum customers well.
However, iron customers on their own, may
only be marginally profitable.
Their level of business is not enough to justify
special treatment given to them.
Let us look at these lead customers, customers
in this tier tend to generate low revenues
for a firm, but often still require the same
level of service as iron customers, which
turns them into a loss making segment from
a firm's perspective.
Now, the precise characteristics of customer
tiers vary from one type of business to another
and even from one firm to another firm.
Customers' tiers are typically based on profitably
and their service needs.
So, rather than providing the same level of
service to all customers, each segment receive
a service level that is customized based on
its requirement and value to the firm.
For example, the platinum tier is provided
some exclusive benefits that are not available
to the other segments because obviously they
have, they contribute more to the profit of
the firm.
The benefit feature for platinum and gold
customers should be designed to encourage
them to remain loyal, because these customers
are the ones competitors would like to steal
the most.
So, now you see that it is the battle between
all competitors to catch and to retain those
platinum customers.
Marketing efforts can be used to encourage
an increased volume of purchases, upgrading
the type of service used, or cross-selling
additional services to any of the four tiers.
However, these efforts have different thrust
for the different tiers, as their needs, usage
behaviours, and spending patterns are usually
very different.
Among the segments for which the firm already
has a high share-of-wallet, the focus should
be on nurturing, defending, and retaining
these customers possibly by the use of loyalty
programs.
So, now for this platinum customers, you know
that they are the best and they give lots
of profits etcetera, etcetera.
So, there is a need to nurture and to defend
and retain these customers.
How?
By way of developing specific loyalty programs.
Otherwise if they are not tied in with this
loyalty programs, it is easier for the competitors
to catch hold of them.
So, in contrast, many lead tier customers
at the bottom of the pyramid, the option are
to either to move them to the iron segment
through increasing sales, increasing prices,
and, or cutting servicing cost or to end the
relationship with them.
So, now keep in mind that when we are talking
of this pyramid, obviously this triangle or
pyramid will have a huge base and a smaller
narrower top.
So, this lead customers they may be unprofitable
etcetera, etcetera, but the key is to identify
some of these customers who can then move
up this ladder.
Obviously, people from somewhere else will
not come here, they will move from bottom
to the top.
So, the key for the company's success is to
identify which customers have the potential
to be taken up, where the company can make
more profits and take the customers to the
iron or gold or platinum level.
If a customer does not have any kind of that
potential, then it is beneficial for the company
to end relationship with those customers.
But keep in mind that company should not be
ending relationships with all customers in
this lead segment, because from here these
customers will move up the ladder.
Migration can be achieved through a combination
of strategies, so this migration is necessary,
migration from the lowest level to the top
level.
How?
By including things like up-selling, cross-selling
and setting base fee and price increases.
For example, imposing a minimum fee that is
waived, when a certain level of revenue is
generated, may encourage customers to use
several suppliers to consolidate their buying
with a single firm instead.
So, now when the customers are told that they
will get some more benefits if they buy more.
So instead, so the customers instead of buying
from several different sellers they will consolidate
their buying, they will buy only from one
seller so that they are able to achieve that
kind of target.
Another way to move customers from the lead
tier to the iron tier is to encourage them
to use low-cost service delivery channels.
So, instead of coming to the branch which
is the costlier affair, they can use the internet.
For instance, lead tier customers may be charged
a fee for face-to-face interactions, but the
fee is waived when such customers use electronic
channels.
For example, in the cellular telephone industry,
low-use mobile users can be encouraged to
use prepaid packages that do not require the
firm to send out bills and collect payment,
which also eliminates the risk of bad debts
on such accounts.
Divesting or terminating customers come as
a logical consequence of the realization that
not all existing customer relationships are
worth keeping.
So, there are, in this lead segment there
are some customers who can be moved up, and
there are some customers who have to be moved
out.
So, some relationship may no longer be profitable
for the firm because they cost more to maintain
than the contribution they generate.
So, the cost of retaining those customers
is more than the profits that they generate.
So, obviously they become loss making for
the company.
Why is some customers no longer fit the firm's
strategy?
Either because that strategy has changed,
or because the customer's behaviour and needs
have changed.
So, some customers in that segment may no
longer be be good, because the company's strategy
has changed, or because their behaviour and
needs have changed.
Therefore, in these two cases the company
should end the relationship with these kind
of customers.
Then, there will be another category that
will move from lead to iron.
And then there will be some customers, some
potential customers, new customers who are
first in this lead segment.
LEAD.
And then obviously they are either moved out
or moved up and then new customers come and
the cycle continues.
So, each firm needs to examine its customer
portfolio regularly and consider ending unsuccessful
relationships.
Of course, legal and ethical considerations
will determine how to take such an action.
So, you just cannot end relationship one fine
morning.
But, so there can be legal and ethical considerations,
but but then these customers should be read
flagged that they are no longer profitable
and the company has to end relationship with
them.
For example, a bank may introduce a minimum
monthly fee for accounts with a low balance,
but for social responsibility consideration,
waive this fee for customers on social security.
So, those who are getting, those who are not
earning money, getting government subsidies,
government funds, for them this kind of minimum
fees can be waived off.
Now, let us look at how customer satisfaction
and service quality are prerequisites for
loyalty.
Customer satisfaction and service quality.
So the foundation for building true loyalty
lies in customer satisfaction.
So loyalty will come from satisfaction.
Highly satisfied or even delighted customers
are more likely to consolidate their buying
with one (seller) one supplier, (provide)
spread positive word-of-mouth, and become
loyal apostles of the firm.
So, these this highly satisfied or delighted
customers, they will obviously buy from one
supplier instead of buying from several different
suppliers.
They will spread the positive word-of-mouth
and they become positive apostles of the firm.
In contrast, dissatisfaction drives customers
away and is a key factor in switching behaviour.
So, the dissatisfaction has the opposite effect,
the customers may switch.
Now, just look at this customer satisfaction
and service quality and loyalty relationship.
This figure shows, on the x axis you have
satisfaction and on the y axis you have loyalty.
So, loyalty is also a prerequisite for retaining
the customers.
So, now you see that this curve moves from
left to right.
The biggest is this zone of tolerance.
And then comes the zone of indifference and
this zone of affection.
So, here at the top are apostles and here
these are the terrorist.
So, it moves from very dissatisfied, dissatisfied,
neither satisfied nor dissatisfied and very
satisfied and loyalty moves from 0 to 100.
So, when the customers are very satisfied
and they are 100 percent loyal, then they
are termed as apostle.
So, this satisfaction-loyalty relationships
can be divided into three main zone, defection,
indifference and affection.
So, in defection the people will defect in
this zone of defection, the people will defect.
In this zone of indifference, they are indifferent
and in zone of affection, the customers they
love the company.
So, this zone of tolerance occurs at low satisfaction
levels.
So customer will switch, if switching cost
are high or there are no viables or convenient
alternatives.
Extremely dissatisfied customers can turn
into terrorist providing an abundance of negative
word-of-mouth for the service provider.
This then, the second is the zone of indifference.
It is found as moderate satisfaction level.
So, at this moderate satisfaction level, there
comes the zone of indifference.
Customers are willing to switch if they find
a better alternatives.
And finally, the zone of affection is located
at very high satisfaction levels.
Customers have such high attitudinal loyalty
that they do not look for alternative service
providers and customers who praise the firm
in public and refers others to the firm are
described as apostle.
So, this is the area where the customers do
not shift and they spread positive word-of-mouth.
So this is what every company, every service
company wants to achieve.
But you see that this is the smallest area.
True loyalty is often defined as combining
both behavioural and attitudinal loyalty.
We are talking of both this behavioural and
attitudinal loyalty.
So, both of them combined makes a person truly
loyal.
It is also referred to as share-of-wallet
and the share-of-heart.
So, behavioural is share-of-wallet and attitudinal
is share-of-heart.
Behavioural loyalty, behaviour such as buying
again, a high share-of-wallet, providing positive
word-of-mouth.
And attitudinal loyalty is a true liking and
emotional attachment of the firm, service
and brand.
It is important to note though that satisfaction
can be seen as a necessary but not sufficient
driver of true customer loyalty.
It is necessary but not sufficient condition.
So this customer loyalty, this satisfaction
is necessary condition, but it is not all.
So, satisfied, some of the satisfied customers
may become loyal, while some may not.
Satisfaction alone does not explain a large
amount of variance in loyalty behaviour, and
has to be seen in combination with other factors.
So, what are these factors?
The factors that are to be considered along
with satisfaction include, first switching
costs and customer knowledge.
Knowledgeable customers feel more confident
in switching and have lower risk perceptions.
So, in addition to satisfaction, this is the
first thing that is needed.
The second thing is, how the firm compares
to competitors.
For example, if a firm is seen as offering
the best value proposition compared to that
of the next best alternative provider, switching
makes little sense and customers keep buying.
And the third is the loyalty bonds.
So, in addition to satisfaction, presence
of these three things are necessary for customer
loyalty.
So, firms can bond more closely with their
customers using a variety of strategies, including
first, deepening the relationship through
cross-selling and bundling.
Second is creating loyalty rewards and the
third is building high-level bonds such as
social, customization, and structural bonds.
So, now the firm has to bond with the customers,
and how?
So there are number of strategies to bond
with the customer.
So, the first is to deepen this relationship
by cross-selling and bundling, so that the
customers they are buying more and more from
this company.
Second is, because they are buying more and
more from the company, then you start creating
giving them loyalty rewards, for example loyalty
points that we have.
And the third is to build higher-level bonds
such as social, customization and structural
bond with the customers.
So, that will lead to loyal customers.
But all these things, all these three strategies
without a satisfied customer will not give
you anything.
So, the satisfied customer is a prerequisite
for converting them, for making him a loyal
customer.
Now, how to deepen the relationship?
To build closer ties with its customers, firm
can deepen the relationships through bundling
and or sometimes cross-selling of services.
For example, banks like to sell as many financial
products to an account or household as possible.
So, you have a bank account and then the bank
want to sell a number of financial products
to you.
So, once a family has a saving, or credit
card, or a current account, a safe deposit,
a car loan, a mortgage and so on with the
same bank, the relationship is so deep that
switching becomes a major exercise and is
unlikely, unless customers are extremely dissatisfied
with the bank.
So, now once the customer has so much exposure
to, that it has the credit card and debit
card, and car loans and lockers etcetera,
so, now it becomes very difficult for the
customers to shift all these things to some
other bank.
In addition to raising switching costs, there
is often value for the customers when buying
all particular services from a single provider.
One-stop shopping typically is more convenient
than buying individual services from different
provider.
If you have all these things from different
banks, so now you see how difficult it will
be for you to manage all these things, because
for one thing you go to one bank, for another
thing you go to another bank and so on so
forth.
So, it is beneficial for the customer also
to have all these things at one place.
So, obviously one-stop shopping typically
is more convenient than buying individual
services from different providers.
When having many services with the same firm,
the customer may achieve a higher service
tier and receive better services, and sometimes
service bundles do come with price discounts.
So, when you have so many things from the
same bank, so the bank will give you some
price discounts also.
Another thing is to encourage loyalty through
financial and non-financial rewards.
Few customers buy only from one supplier.
This is especially true in situations where
service delivery involves separate transactions,
such as a car rental instead of being continuous
in nature, as with insurance coverage.
So, when we are buying insurance, we continue
to buy from the same company.
But, when you are taking a car on rent, so
that can be from different companies.
In many instances, consumers are loyal to
several brands sometimes described as polygamous
loyalty but avoid others.
So, they are not buying from everyone, but
they are definitely buying from more than
one brand.
In such instances, the marketing goal is to
strengthen the customer preference for one
brand over others, and to gain a greater share
of the customer spending in that service category.
So, now in that case when a customer is loyal
to more than one brand, then the marketing
goal is to make him loyal to one brand and
then make him to spend more and more with
that one particular brand.
Once acquired, it tends to be reward-based
bonds often offered through a loyalty program,
that entice customers to spend more money
and increase a firm's share-of-wallet.
Incentives that offer rewards based on the
frequency of purchase, value of purchase,
or a combination of both, represent a basic
level of customer bonding.
How to encourage loyalty through financial
as well as non-financial rewards.
So, these rewards can be financial and non-financial
in nature.
Financial rewards are customer incentives
that have a financial value also called hard
benefits.
And, these includes discounts on purchases,
loyalty program rewards such as frequent flier
miles and the cash-back programs provided
by some credit card issuers.
Let us look at how to encourage loyalty through
financial rewards.
It is important for firms to be selective
in choosing loyalty program partners.
Even well-designed loyalty programs by themselves
are not enough to keep a firm's most desirable
customers.
Sometimes, what the customer want is just
for the firm to deliver the basic service
well, meet their needs, and solve their problems
quickly and easily, and they will remain loyal.
So, this is what the basic thing that the
customer want, to remain loyal.
Finally, customers can even get frustrated
especially with financial rewards-based programs,
so rather than creating loyalty and goodwill,
they breed dissatisfaction.
So, this can happen when customers feel they
are excluded from a reward program because
of low balances or volume of business, or
if the rewards are seen as having little or
no value.
The third, if they cannot redeem their loyalty
points because of black-out dates during high
demand periods.
And obviously, then the fourth one, if redemption
processes are too troublesome and time-consuming.
Also, some customers already have so many
loyalty cards in their wallet that they are
simply not interested in adding to that pile,
especially if customers see them as only of
marginable value.
So, the customer already has so many loyalty
cards, so adding just one more card, the customer
may not be interested in doing that.
So, then how to go about encouraging loyalty
through non-financial rewards, also called
as soft benefits?
Provide benefits that cannot be translated
directly into monetary terms.
For example, include giving priority to loyalty
program members on reservation waitlists and
virtual queues in call centers.
Some airlines provide benefits such as higher
baggage allowances, priority upgrading, access
to airport lounges, and the like, to its frequent
flyers even when they are only flying in economy
class.
These non-financial rewards especially if
linked to higher-tier service levels, are
typically more powerful than financial ones,
as the former can create tremendous value
for the customers.
In many cases, this non-financial rewards
are much more beneficial for the customers
as compared to the financial rewards.
So, unlike the financial rewards, non-financial
rewards directly relate to the firm's core
service and improve the customer experience
and value perception.
In the hotel context for example, redeeming
loyalty points for free gift does nothing
to enhance the customer experience.
However, getting high priority for reservation,
early check-ins, late check-outs, upgrades,
and receiving special attention and appreciation
will.
So make your stay more pleasant, leave you
with the fuzzy warm feeling that this firms
appreciate your business, and make you want
to come back again and again.
Small businesses often do not run formal loyalty
programs but can still employ effective bonds
with the customers.
For example, they can use informal loyalty
rewards that may take the form of one, periodically
giving regular customer a small treat as a
way of thanking them.
The second is reserving their favourite table
in the restaurant context.
And the third is paying them special attention,
and the like.
So, to conclude this module, today we have
learnt about using service tiering to manage
the customer base and build loyalty.
Then, we have tried to understand the relationship
between customer satisfaction and customer
loyalty.
We have also uncovered how to deepen the relationship
through cross-selling and bundling and up-selling.
Finally, we have discussed the role of financial
and non-financial loyalty rewards in enhancing
the customer loyalty.
And these are the three books from which the
material for this module was used.
Thank you.
