4.4
It is important to note that there is a difference between customer loyalty and having a rela-tionship with the customer; it is easy to confuse the two, particularly in high-volume services delivered to the mass consumer market. For organisations such as train companies, mass transit systems and even fi nancial service providers, customers may be extremely loyal (and use them every day) but not have a ‘relationship’ with the organisation (indeed they may despise the company!).
Managing customer relationships (sometimes referred to as relationship marketing) is about establishing, maintaining and enhancing relationships with customers for mutual ben-efi t. The emphasis in relationship marketing is on the requirement to develop relationships with individual customers – one-to-one marketing – and with groups of like-minded people – affi nity groups – rather than see any and every service as a one-off transaction.
While the notion of relationship marketing appears to be very attractive, it is not appropri-ate in all situations. For example, in high-volume or commodity-based services, such as retail operations or mass transit systems, many customers may be more infl uenced by value for money than by a concept as intangible as a relationship. Indeed, many customers do not wish for a relationship with some organisations and their staff. Despite this, there is no doubt that people often make decisions based on emotional or unconscious factors, even when they think that they have been driven totally by logic. Indeed some marketing professionals believe that brands and brand values far outweigh any other factor in customer decision-making.
Three types of customer relationships
There are essentially three main types of customer relationships. Firstly, there is a relationship based on a portfolio of services or products frequently found in higher-volume operations.
Secondly, there is a personal relationship created between an individual customer and an employee, particularly prevalent in low-volume professional organisations. Thirdly, we also cover here temporary customer relationships, recognising the transactional, one-off nature of many services. We will also cover the risk in a customer relationship and the means of managing customer relationships in high-volume consumer services – customer relationship management (CRM).
4.4.1 Portfolio relationships
Portfolio relationships involve the ‘capture’ of the customer using a variety of products or services. Banks, for example, work hard to establish a relationship with their customers by selling (and in order to sell) multiple ‘products’, such as current accounts, loans, house loans, insurance and executor services. This provides the customer with benefi ts such as a sin-gle point of contact for their service/product portfolio, discounts for new services/prod-ucts bought, loyalty bonuses etc. The downside for customers who wish to switch is often the diffi culty in untying themselves from the set of services/products. The benefi ts for the organisation are that portfolio relationships provide higher-value customers, a longer-term revenue stream, opportunities to cross-sell other services or products to customers who are already engaged with the organisation, and also valuable information from and about that customer base.
Many service providers, such as retailers, airlines and restaurant chains, actively promote portfolio relationships and loyalty on existing services and products through loyalty schemes such as frequent-fl yer programmes or ‘club’ cards for supermarkets. Most of these are in essence discount schemes encouraging the customer to earn points by spending more money with a particular provider rather than the competition. Such providers are ‘buying loyalty’
rather than building relationships. However, the relationship can be developed by holding in-formation about a customer’s needs: for example, some hotels store inin-formation about their card-holding customers so that these customers are provided with a room that meets their requirements. Customers may also gain certain privileges: airline loyalty customers may be provided with access to executive lounges, free seat reservations, cheque-cashing facilities, company newsletters, opportunities to participate in special events and opportunities to pro-vide information to the organisation.
The Harley Owners Group ( Case Example 4.3 ) demonstrates that there is more than one way to build loyalty with customers who have some affi nity with the company, its products and services, and with each other. This case demonstrates that Harley-Davidson has clearly
understood the breadth of the service concept, recognising that customers are buying rather more than a manufactured product. With this knowledge, Harley-Davidson has been able to capitalise on what has become virtually a cult of owners, each fi ercely loyal to the brand, some even having the name of the company tattooed on their bodies.
4.4.2 Personal relationships
Personal relationships exist in many professional and low-volume, high-margin services, where there is time and value in developing one-on-one relationships with clients or custom-ers. These relationships, often using key account managers (see later), create multilayered or deep personal relationships with customers.
The objective on the service provider’s part is to create a situation where the customer thinks of them when the customer next needs the service, or when planning to place more orders. For personal relationships in B2B organisations there are advantages on both sides.
Harley-Davidson does not just make world-famous motorbikes – it sells a dream. From its start more than 100 years ago, Harley-Davidson has had a profound impact on the sport of motorcycling and the people who ride motorbikes.
From its humble beginnings in a small shed in Milwaukee where three friends turned out their fi rst bike, the company now produces over 300,000 bikes a year.
The company’s turnover for the year end-ing 2010 was around $4 billion, generatend-ing a gross profi t of around $1.4 billion. Besides making its famous bikes, such as the Ultra Classic Electra Glide touring bike weighing over 370 kilograms with a twin-cam 1500 cc
engine, the company also produces parts and accessories and a range of branded clothes and collectables.
It is a global company, selling bikes all over the world; the fastest growth area in bike sales is currently in Asia.
Not content with simply owning a bike, Harley owners wanted to have an organised way to share their passion and show pride in their bikes so, in 1983, Harley-Davidson established the Harley Owners Group (HOG). By 1985, 49 local chapters had sprouted around the USA, with a total membership of 60,000. By 2010 HOG had over 1 million members worldwide, making HOG the largest factory-sponsored motorcycle organisation in the world.
HOG has a simple intent: ‘To ride and have fun’. The organisation is split into local chapters where people who share the Harley passion come together. Each chapter is sponsored by a local dealership with events organised by the members. Membership (which costs around $45/£50 a year) provides a range of benefi ts, including HOG Magazine, the offi cial publication of the Harley Owners Group. A HOG handbook provides maps, dealer locations, climate information and riding laws for members planning long-distance trips. The local chapters organise member events, including national and international rallies, touring rallies, open houses and pit stops. There is also a members’ website with details, dates and information about all HOG activities and events.
Source: This illustration is based on information from www.harley-davidson.com and www.hog.com.
Case Example 4.3
Harley Owners Group (HOG)Source: Shutterstock.com/Adriano Castelli
The provider gets to know the customer’s business well and this leads to a more effective serv-ice with a faster response, because providers do not have to go through another development phase. Many B2B services take place over weeks, months and in some cases years. Manage-ment consultants may work alongside the client’s employees and it is frequently critical that effective relationships are built in order to carry out the assignment. Technical expertise is clearly only part of the requirement for an effective consultant; the ability to build personal relationships with clients and clients’ employees is also essential.
There are four key elements to a personal relationship between service provider and customer: 9
● Communication . The extent to which there is two-way communication; the ability to
deliver clear messages and the ability to listen carefully.
● Trust . The degree to which one partner depends on the work or recommendation of the other, without seeking extra justifi cation or collaboration. In some cases, the partner may commit the other to work without prior consultation.
● Intimacy . The extent to which each partner shares their plans, strategies, profi ts, etc.
● Rules . A mutual acceptance of how this particular relationship operates: what is acceptable
and desirable, and what is not.
Developing personal relationships often has signifi cant operational implications. In Table 4.1 we compare two organisations, one a professional service (business-to-business), the other a high-volume consumer service (business-to-customer), and identify the issues that must be dealt with by operations managers. As we can see from Table 4.1 , there may be
Table 4.1 Developing personal relationships
Professional service: management
consultant Consumer service: restaurant chain Communication Two-way
Free fl owing
Transfer of knowledge
Relates to business possibilities as well as current contracts
A signifi cant amount of time is devoted to communication
Largely one-way – from provider to customer, apart from order-giving and paying
Formal communication Relates to formal service offer No budget for signifi cant informal communication
Trust Built between individuals (clients and consultants) in the course of the involvement
Built between customer and organisation largely by reliability (delivery to promise) May involve signifi cant amounts of
confi dential and sensitive information
Scope strictly limited to providing value-for-money meals in safe surroundings
Intimacy Consultants become completely involved with the life of the client’s organisation and are often regarded as semi-permanent employees
Part of the team
Involvement between employees and customers may be limited to order-taking and basic service
Customer intimacy is often linked to fortuitous discovery of common interests
Rules May be developed as part of the initial relationship-forming process
Largely set by the organisation or service sector
Negotiation as to who does what is often part of initial evaluation, but the brief may change as the relationship develops
Based on established ‘scripts’, expected behaviour and assumed knowledge
considerable resource implications in adopting an approach based on broadening the rela-tionship between customer and provider. Some of these implications are:
● Processes and activities become less well defi ned and harder to predict.
● Capacity management is less precise and effi ciency goals become harder to achieve.
● Processes must be more fl exible in order to meet requirements that are ill-defi ned at the start of the relationship.
● Staff will require a different set of competencies.
4.4.3 Temporary customer relationships
High-volume consumer services often require the formation of temporary relationships, where customer connections are made quickly. Many sales processes depend on the ability of the salesperson to establish common ground with the prospective customer. When the customer is buying something that cannot be readily assessed, part of the purchasing process may include a conscious or unconscious assessment of the competence and honesty of the organisation’s representative.
A combination of perceived risk and lack of knowledge on the customer’s part will mean that the possibility for a relationship will increase, given the need for reassurance on the cus-tomer’s part. Examples might include purchasing a used car or a personal pension, where the customer is often incapable of making a totally informed decision.
These relationships might, at face value, appear relatively shallow, but there are clear impli-cations for the service operation that recognises their value. The development of information systems to give customer history, training of customer contact staff and allocated time for each customer transaction (performance targets) are examples of areas that can be addressed.
Some contact centres have intentionally relaxed their ‘talk time’ targets to allow more space for these temporary relationships and have found that although each agent may talk to fewer customers, orders of higher value are being taken as a result of the effectiveness of the tem-porary relationship.
4.4.4 Risk and relationships
There is often a link between customers’ perceived risk in purchasing or using the service and their desire for a personal relationship with the provider (see Table 4.2 ). Where the cus-tomer does not feel that there is much risk, either in making the purchase or in receiving the service, there may be limited opportunity for relationship building. The majority of super-market customers probably do not have any depth of relationship with Tesco or Walmart, though they may have preferences as to which store they shop in. This reluctance on the part of supermarket customers to build a meaningful relationship with Tesco or Walmart only applies, of course, when things are going well. If there is a signifi cant service failure, custom-ers may move quickly from low to high perceived risk. We will discuss this in more depth in the section on learning from problems in Chapter 13 . Where there is high customer perceived risk, but as yet a weak, transaction-based relationship, there is an opportunity for the organi-sation to build stronger links.
Table 4.2 Links between customer relationship and customer perceived risk Weak relationship
(transaction-based)
Strong relationship (partnership-based) High customer perceived risk Opportunity Protected Low customer perceived risk Buy loyalty Familiarity
Where there are strong personal relationships in situations where the customer feels there is signifi cant risk, the emotional switching costs for customers are high. It is likely that these customers will not move unless the relationship is signifi cantly damaged in some way. An example of services of this type is a consultant who may have both a particular expertise and intimate knowledge of the client’s company and markets. These relationships are most com-mon in professional services and/or B2B services.
Of course, strong personal relationships may exist where there is low perceived risk, though they are probably rare in commodity services. In many cases these may be one-sided relation-ships where the customer has a stronger emotional bond to the company than is possible for any one employee to reciprocate. Again, we will return to these customers in our discussion of service recovery in Chapter 13 , but it is suffi cient to say that if there is service failure, these customers may feel let down, rather than merely angry that something has gone wrong.
It is important to recognise that in many cases the relationship is formed at the deepest level between individuals rather than with the organisation as a whole. This is particularly true with professional services. When a senior partner leaves to join another fi rm, their clients may follow them. The risk for the client in forming a relationship with an unknown quantity, even from the same organisation, may be too great.
In this instance, risk may also have an explicit or implicit cost dimension. The time spent on the client’s behalf so that the professional can understand the issues fully in order to make informed judgements will represent a personal investment that will not be undertaken lightly.
Cost is clearly not the only issue. If the process demands that client and professional work together for signifi cant periods of time, personal chemistry may well be a signifi cant factor.
4.4.5 Customer relationship management (CRM)
Customer relationship management (CRM) is a term given to the management of customer relationships in high-volume consumer services, with the objective of growing a more profi t-able business and trying to form some closer understanding of the needs of individual cus-tomers. The essential difference between CRM and other approaches to customer retention is that the identifi cation and enhancement of customer relationships is facilitated by technology.
CRM attempts to integrate the many communication channels between an organisation’s units and its customers, for example recording information about customer preferences and then using the information to develop and strengthen the relationship and the profi tability of the customer.
The aim of CRM is to collect data from all parts of the organisation to enable tracking and analysis of a single customer relationship, as well as the identifi cation of more general trends.
For example, until recently it was possible that a customer of a fi nancial services company would have a number of the products – a mortgage (house loan), savings accounts and in-surance. Each of these products would be handled by separate parts of the business, with no knowledge of the others. As a result, customers rarely felt that they had a relationship with
‘the company’.
To redress this, many fi nancial service organisations are turning to data warehousing.
A data warehouse is an integrated source of data that collects, cleans and stores informa-tion about customers. This is sometimes referred to as ‘informainforma-tion-based continuous relationship marketing’. 10 Data warehousing allows the organisation to view relationships and profi tability across the organisation.
Companies are now moving to integrated CRM solutions with the advent of e-commerce.
Internet-enabled activity allows companies to give information to their customers and col-lect data from them in a much more structured manner than previously. A smaller version of the data warehouse is the data mart. This serves a division or department of the organisa-tion and should ideally be integrated with the enterprise’s data warehouse. Such integraorganisa-tion avoids repetition of the original problem of invisibility of customer relationships across the company.
Finally, these data marts and warehouses are linked to the various forms of technology at the customer interface. Telephone contact centres are rapidly being replaced by multimedia contact centres. Customers have a choice of routes into the organisation, whether by letter, phone or internet. Paper-based transactions have virtually disappeared from most organisa-tions, though companies must guard against devaluing such transactions to the extent that insuffi cient attention is paid to them. An increasing number of transactions are carried out electronically. Computer telephony integration (CTI) allows the customer to browse the com-pany website and to make contact with a human agent only if required.
CRM is therefore aimed at both customer retention and relationship growth approaches.
CRM is defi ned as ‘the management process that uses individual customer data to enable a tailored and mutually trusting and valuable proposition. In all but the smallest of organisa-tions, CRM is characterised by the IT enabled integration of customer data from multiple sources .11 Case Example 4.4 demonstrates that CRM demands much more than the introduc-tion of an IT system, but also demands signifi cant changes in the way the company operates.
Not least, CRM requires the commitment of customer-facing staff to think behind the raw data from IT systems to apply insight to each customer transaction.
Moira Clark, Director of the Henley Centre for Customer Management
Travelco is a large UK package holiday company that has experienced diffi cult times since September 11th, SARS, the Iraq War and the economic recession. Travelco’s customer retention rate was around 20 per cent annually and its market was declining by 10 per cent annually. As a result of this the
Travelco is a large UK package holiday company that has experienced diffi cult times since September 11th, SARS, the Iraq War and the economic recession. Travelco’s customer retention rate was around 20 per cent annually and its market was declining by 10 per cent annually. As a result of this the