Chapter 13 Managing relationships and building loyalty 385
never be profitable, given their banking activity (their use of resources relative to the revenue they
supply). Any bank would be wise to target and serve only those customers whose needs it can meet
better than its competitors in a profitable manner. These are the customers who are most likely to
remain with that bank for long periods, who will purchase multiple products and services, who will
recommend that bank to their friends and relations, and who may be the source of superior returns
to the bank’s shareholders.27
Truly loyal customers are by definition not buying commodity services. Customers who
buy strictly based on lowest price (a minority in most markets) are not good target customers
for relationships in the first place. They are deal-prone, and continuously seek the lowest price
on offer.
Loyalty leaders are serious about acquiring only the ‘right customers’, that is, those for
whom the firm has designed a product(s) to deliver excellent service and thus value. Acquiring
the right customers can bring in long-term revenues, continued growth from referrals and
enhanced satisfaction from employees whose daily jobs are improved when they can deal
with appreciative customers. Attracting the wrong customers typically results in costly churn, a
diminished company reputation and disillusioned employees. Ironically, it is often the firms that
are highly focused and selective in their acquisition rather than those that focus on unbridled
acquisition that are growing fast over long periods.28
Customer retention strategies
Retention strategy 1—Create loyalty bonds
What makes customers truly loyal to a service firm and how can marketers increase their loyalty?
In this section we first review the common loyalty drivers and then explore how firms can build
or enhance such loyalty drivers.
Research has consistently shown that the key determinants of a successful customer
relationship are:
• Customer satisfaction
• Value
• Loyalty motives
• Reward-based bonds
• Customer engagement
• Social bonds
• Structural bonds
It was shown in Chapter 12 that high levels of customer satisfaction (delight) are strongly
linked to loyalty.
Value
Customers today are loyal to value. We define customer-perceived value as the sum of benefits
received from choosing and staying with one service supplier minus the sum of costs (financial
and non-financial). Customers are more likely to stay in a relationship when they perceive that
the sum of benefits (e.g. satisfaction with core service attributes, supplementary services and
relationship benefits) exceeds the costs. Value therefore represents a trade-off between the get
and the give components. When a firm consistently delivers value, the customer has a powerful
incentive to stay in the relationship.
Sometimes it is the relationship benefits rather than the quality of the core service attributes
that provide the motives for a customer staying with one service provider. For example, you
might decide to be a regular customer of a hairdresser, travel agent, car mechanic or fitness
centre—even when you learn of an alternative attractive competitive offering because: (1) you
are recognised and thus feel valued by the firm, (2) you know what to expect, (3) you have
established a friendship with individuals in the service firm, (4) you know they will take care of
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386 Part 3 Challenges for senior management
you if you have an urgent or unusual request and (5) your sense of perceived risk associated with
choosing another service provider is reduced by staying with one firm. Recent research has found
a number of specific types of relational benefits, similar to those described above, that motivate
customers to become regular customers of one service provider.
Service firms that continually provide this perceived value stand a better chance of retaining
their established customers, even in the face of intense competition and attractive alternatives.
Value, of course, may take many forms. One customer may place a high value on the friendship
developed with a particular service employee, while others may value the convenient office
location, the boost to self-esteem and a sense of belonging by being recognised consistently
whenever they enter the premises, the psychological attachment to a particular brand name,
or the fact that they believe the service provider is truly looking after their best interests in all
dealings. After all, customers are not loyal due to altruism—the benefits must go both ways.
When a firm consistently delivers value, customers have little incentive to try competing services.
Consider the example below.
Remember, though, that not all customers want or see themselves in a ‘relationship’ with an
organisation or brand. However, when customers view themselves as having a relationship, we
need to understand their motives.29
Customer motives for loyalty
An extensive study by Kevin Gwinner30 and colleagues, later replicated by Patterson and Smith in
South-East Asia, showed that customers remain loyal to a service provider for three fundamental
reasons (or motives).
1 Condence benets
These benefits comprise feelings of trust or confidence in the service provider, along with a sense
of reduced anxiety and comfort in knowing what to expect. Across all of the services studied in
LEARNING OBJECTIVE 13.5
Understand customers’
loyalty motives
Jiraporn has an important relationship. Every morning
Monday to Friday she goes out of her way to call into
Gloria Jean’s café immediately after her morning swim.
She could go to a range of other coffee shops, but she
has a relationship with Gloria Jean’s. It must be the
coffee. Wrong—truth be told Jiraporn cannot taste the
difference between Gloria Jean’s coffee and several
other coffee shops nearby, but is still happy to pay a
premium price at Gloria Jean’s. The employees greet her
by name every morning and know, without asking, that
she has an extra hot, large, café latte.
Jiraporn isn’t buying just coffee. She is buying an
experience. She is buying a 30-minute break, before
going to her office, in an environment that she finds
relaxing, inviting, even uplifting, among the leather
chairs and abstract paintings on the walls. Sometimes
she turns on her computer and uses the wireless Internet
available, finding it relaxing to check her emails in the
store. To Jiraporn, it’s all about the feeling she has—
the emotional experience if you like—not simply the
coffee. It is a combination of elements and the coffee
that generates this feeling and provides the value for
Jiraporn.31
EXAMPLE
The servicescape and atmosphere create
an environment of relaxation and welcome.
These intangible elements are just as
important as the coee in a customer’s
purchase decision
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Chapter 13 Managing relationships and building loyalty 387
the research cited above, confidence benefits were the most important to customers in terms of
value. Because you are recognised as a regular customer, you believe the service provider will
ensure they perform the core service in a quality manner. For example, because the car service
centre knows you as a regular customer, you perceive they will be more likely to do a proper job
of servicing your car.
2 Social benets
Regular customers often develop a social relationship with their service providers. They are
instantly recognised, feel welcome and have developed a personal rapport with service personnel.
These social bonds make it less likely that they will switch, even if they learn about a competitor
that might have an alternative service offer or a lower price. A quote from the research just cited
illustrates this.
A customer describes her hair stylist as follows: ‘I like him . . . He’s really funny and always has lots of
good jokes. He’s kind of like a friend now . . . It is more fun to deal with somebody that you’re used
to. You enjoy doing business with them.’
In some long-term customer–firm relationships, a service provider may actually become
part of the consumer’s social-support system. Hairdressers, lawyers, doctors or even bar staff,
for example, often serve as personal confidantes. Less common examples include proprietors
of local retail stores who become central figures in neighbourhood networks; the health club
or restaurant staff who know their customers personally; or the private-school principal who
knows an entire family and its special needs. These types of social bonds can develop for B2B
customers, for example between a sales representative and client, as well as for consumers of
services. The social support benefits resulting from these relationships are important to the
consumer’s quality of life (personal and/or work life) above and beyond the technical benefits of
the service provided.32
Financial advisors try to restore the investors’ faith
It’s all about trust in the service provider. Following a
deluge of customer complaints and adverse government
reports, the Australian Financial Planning Association
(FPA) has worked on a series of measures, including
new codes, standards, remuneration guidelines and
principles, to improve professional standards and
customers’ faith in financial planning advisors. The first
guideline prohibited volume-based remuneration and
required financial advisors to register any alternative,
mostly non-monetary benefits of more than $300.
The second guideline concerned rebates and related
payments through the financial planning process. The
third principle set out how FPA members should manage
conflicts of interest when giving advice to investors.
The guidelines aimed to help rebuild client trust
in financial advisors after some very negative publicity
in recent years, so that advisors were seen to work in
the interest of their clients. Guidelines stated how the
fee for financial planning advice was to be charged to
clients to avoid conflict of interest. In addition, holders
of Australian Financial Services Licences may not pay
their representatives (i.e. financial advisors) in a way
that might influence how they give advice. By removing
many of the practices that have undermined the public’s
trust in financial advisors, the principles represented an
understanding of how these advisors can avoid conflict
of interest and deliver the best possible outcomes for
investors and their firm.
Source: Based on Simon Hoyle (2006), ‘Financial
advisers try to restore the investors’ faith’, The Sydney
Morning Herald, 3 March, p. 23.
MANAGERIAL INSIGHT 13.2
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388 Part 3 Challenges for senior management
3 Special-treatment benets
Special treatment includes such things as getting the benefit of the doubt, being given a special
deal or price and getting preferential treatment. Consider the following:
‘My mechanic will book me in at a moment’s notice if I have an urgent problem. Others have to book
two to three days ahead.’
‘I think you get special treatment [when you have established a relationship]. My local doctor allowed
me to use the back door to the office so my daughter could avoid contact with other sick children.
Other times I have been in a hurry and they take me right in.’
‘You get the benefit of the doubt in many situations. For example, I always pay my telephone bill on
time, before a late-fee charge is imposed. One time, my payment didn’t quite arrive on time. When
I called them, by looking at my past history, they realised that I always pay on time. Therefore, they
waived the late fee.’
Interestingly, the special-treatment benefits, while important, were less important than the
other types of benefits received in service relationships. While it is clearly the case that specialtreatment benefits can be critical for customer loyalty in some industries (think of frequent flyer
benefits in the airline industry), they seem to be less important to customers overall. However,
it is also known that services are far from homogeneous. Hence, relational benefits may vary
by service type. For example, social benefits are likely to be more important in service settings
where there is a high degree of interpersonal contact and the service is highly customised (such
as hairdressing, physiotherapy or personal fitness training) than in a situation of low-contact
and standardised service (such as retail banking). In medium- and low-contact services specialtreatment benefits might be most valued. For services high in credence properties, however
(medical, other professional services), where customers have difficulty evaluating quality even
after consumption, then trust and confidence benefits might be most important.
Reward-based bonds
Within any competitive product category, managers recognise that few customers consistently
buy only one brand, especially when service delivery involves discrete transactions (such as
a travel agent) rather than being continuous in nature (as with insurance coverage). In many
instances, consumers are loyal to several brands (sometimes described as ‘polygamous loyalty’).
In such instances, the marketing goal becomes one of strengthening the customer’s preference
for one brand over the others, and well-designed loyalty programs can achieve increased loyalty
and share-of-wallet.33
Incentives that offer rewards based on frequency of purchase, value of purchase or a
combination of both represent a basic level of customer bonding. Reward-based bonds can be
financial or non-financial in nature. Financial bonds are built when loyal customers are rewarded
with incentives that have a financial value, such as discounts on purchases and loyalty program
rewards such as frequent flyer miles or the cash-back programs provided by some credit card
issuers. Non-financial rewards provide customers with benefits or value that cannot be translated
directly into monetary terms. Examples include giving priority to loyalty program members for
waitlists and queues in call centres, and access to special services. Airlines provide benefits such
as higher baggage allowances, priority upgrading, access to airport lounges and the like to their
frequent flyers, even when they are only flying in economy class. Informal loyalty rewards,
sometimes found in small businesses, may take the form of periodically giving regular customers
a small surprise as a way of thanking them for their custom.
Customer engagement
Research by the Gallup Organisation suggests that customer satisfaction is an inadequate
predictor of brand loyalty, and customer engagement has been shown in some studies to be a
better predictor. Engagement is about forming strong emotional bonds with customers—what
they term a ‘brand marriage’, a necessity for customers to be truly loyal. But marriages are not
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Chapter 13 Managing relationships and building loyalty 389
created overnight. One must move over time, from a
first date to ultimate marriage (loyalty). Both hearts and
minds of customers are important and the service brand
must deliver on all its promises. Gallup developed a
scale to measure customer engagement to quantify the
strength of emotional bonds that characterise a ‘brand
marriage’ (as distinct from a mere ‘date’). The four
dimensions of customer engagement are (1) confidence
in the brand, (2) brand integrity, (3) pride in brand and (4)
passion for the brand.34
Social bonds
Many services involve a period of interpersonal interaction
between the service provider and their customer, and this
interaction is the basis for developing a successful and
longer client–supplier relationship. As noted by Czepiel:
‘The essential social nature of service encounters, a short
run phenomenon, provides the occasions in which the
buyer and seller negotiate the terms of their exchange
relationship, a long-term phenomenon.’35 Thus the
very nature of many services gives the astute marketer
an opportunity to establish social and other bonds
(such as trust) with customers—keys to forging longer
relationships. More recently Bove and Johnson36 found
in a study of hairdressers (a high-contact, customised
service) that customer loyalty was predominantly to the
individual hairdresser rather than the firm. Social bonds or
‘friendships’ lead to higher levels of commitment by both
parties. The point about friendship is that it is specific to
the two parties in a relationship and cannot be sold or exchanged. Its very value is the social bond
created over time. While the customer knows it is a commercial relationship, they want it to feel like
a personal one. Customers love to be recognised. Using customers’ names is crucial to making them
feel that they are in a valued relationship. Hairdressers, for example, have little, if any, formal training
in marketing, yet studies show that their clients’ commitment to a continued relationship is incredibly
strong. Why? Because of the social bonds developed during the extended service encounter, when
discussion concerns not only the hairstyle but sometimes intimate family and social matters, thus
forming bonds between the parties. In fact, it has been suggested that this social bonding is one of the
competitive advantages of small businesses as they compete with larger enterprises.37
Structural bonds
Structural bonds are seen mostly in B2B settings and aim to stimulate loyalty through structural
relationships between the provider and the customer. Examples include joint investments in
projects and sharing of information, processes and equipment. Structural bonds can be created
in a B2C environment, too. For instance, some airlines have introduced short message service
(SMS) check-in, and SMS email alerts for flight arrival and departure times so that travellers do
not have to waste time waiting at the airport in the case of delays. Some car rental companies
offer travellers the opportunity to create customised pages on the firm’s website, where they can
retrieve details of past trips including the types of cars, insurance coverage and so forth. This
simplifies and speeds up the task of making new bookings. Once customers have integrated
their way of doing things with the firm’s processes, structural bonds are created that link the
customers to the firm and make it more difficult for competition to draw them away.
Have you noticed that while all of these bonds tie a customer closer to the firm, when
combined they also deliver the confidence, social and special-treatment benefits customers
desire? In general, bonds will not work well unless they also generate value for the customer.
The social bonds that develop between
hairdresser and client strengthen the client’s
commitment to the relationship
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390 Part 3 Challenges for senior management
Retention strategy 2—Build in switching barriers
The second strategy used for customer retention is to build switching barriers (or costs) into
the very fabric of service products. Any time consumers switch service providers they incur a
number of costs such as psychological, emotional, search effort (time) and even financial costs.
Switching a housing mortgage in the first two years of the loan from one bank to another may
incur a financial penalty; switching family doctors or travel agents after you have got to know
them personally over several years may be psychologically stressful. Switching cost therefore
is the perception of the magnitude of the additional costs required to terminate a current
relationship and secure an alternative.38 Firms should, however, be careful when considering
building in switching costs as customers may perceive that they are ‘hostages’ and resent it,
and consequently spread negative word of mouth or even sabotage the firm. There are two
fundamental types of switching-barriers: economic and psychological.
Economic switching barriers
These represent economic or financial disincentives to defecting. For example, defecting from
a superannuation fund or housing mortgage in the first two years would result in a financial
(economic) penalty. So would flying Garuda Airlines when you are a member of the One World
frequent flyer club, which includes Thai Airways and Singapore Airlines (but not Garuda).
The economic (dis)incentive deters flyers from using an alternative international carrier. Other
organisations also erect switching barriers as a means of ‘locking in’ customers—for example,
department store credit cards, fitness centre membership cards and financial bonuses for minimum
length of patronage (not selling your Qantas shares for 12 months after the float earned a financial
bonus). NRMA Insurance induces its customers to sign up and then retain all their insurance (car,
home, contents, life and disability policies) with them by providing progressively larger discounts
on annual premiums the more policies they have. Not only does this reflect the incentives offered
for ‘loyalty’ but it also emphasises a shift in thinking away from ‘share of market’ to ‘share-ofwallet’ (i.e. getting a larger share of customer insurance ‘spend’). Such schemes are effectively
building switching barriers (costs) into their service offerings.
Psychological switching barriers
Having established a rapport with a personal physician, dentist or accountant over a long period
of time, many regular customers are reluctant to leave the relationship because they value the
personal side of the relationship and find it stressful to leave. Research among hairdressers in
several South-East Asian countries and among travel agents has shown that the stronger the social
bonds built up between provider and customer, the greater the psychological switching ‘costs’ if
a customer considers switching to another supplier. Thus a key strategy is to develop a sense of
recognition, familiarity and even friendship with clients, which acts as a powerful inducement to
stay (i.e. barrier to switching).39 Furthermore customers would have to build a new quasi-social
relationship all over again with a new service provider (dentist, doctor, accountant, dry cleaner).
There is also a degree of perceived risk in changing services, such as negative word of mouth and
possible complaining behaviour.
Stages of customer retention
Establishing a relationship with a customer may be conceived as comprising two parts: first,
acquiring the customer and, second, building and managing the relationship over time so that the
economic (and sometimes social) objectives of both parties are achieved.
Even today some companies achieve a sale and then turn most of their attention to seeking
new customers, without appreciating the importance of maintaining and enhancing relationships
with existing customers. The first aim is to attract new ‘prospects’ using marketing mix tools,
and to begin creating a relationship (we refer to this attract/establish/create phase as relationship
marketing) over time. The next objective should be to move customers up the loyalty ladder to
the point where they become ‘clients’, ‘advocates’ and, finally, ‘evangelists’, who not only spread
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Chapter 13 Managing relationships and building loyalty 391
positive word of mouth, but have emotional equity—are passionate about their service provider.
The role of the organisation in these latter stages moves from offensive marketing to defensive—
from relationship management to maintaining, enhancing and retaining via value-added service,
developing trust, satisfaction and stronger social bonds.
Levitt has this to say about relationship management in professional service firms:
It is not surprising that in professional partnerships, such as law, medicine, architecture, consulting,
investment banking and advertising, individuals are rated and rewarded by the client relationships
they control. These relationships, like other assets, can appreciate or depreciate . . . Relationship
management requires company-wide programs for maintenance, investment, improvement, and
even for replacement.40
Berry and Parasuraman developed a framework for understanding categories of retention
strategies. Their framework proposes that retention marketing (i.e. managing the relationship)
occurs at three levels and that each successive level of strategy requires greater customisation or
individualised service, but results in bonds being formed that tie the customer a little closer to
the firm (see also the loyalty ladder concept previously presented). At each level the potential for
sustainable competitive advantage is also enhanced. The three levels of strategy are shown in
Table 13.1.
Level 1
At level 1, the customer is linked to the firm through various financial or other incentives, such
as price discounts for volume purchases, free airline kilometres (e.g. frequent flyer programs)
or discounts in exit fees if customers refrain from switching superannuation funds in the first
several years of a relationship. Effectively, the aim is to lock in customers for a period of time.
The economic incentives make the customer a ‘hostage’ of the firm at this level. These incentive
schemes are relatively easy for competitors to imitate, so in the medium term no sustainable
competitive advantage is gained. They do, however, give the firm some breathing space to
attempt to form a genuine relationship and move customers to the next level.
Level 2
Although economic incentives are important, a longer-term relationship is developed via stronger
social bonds at level 2. Customers are recognised and viewed as individuals. As noted earlier in
this chapter, social benefits have value to most clients. Clients like being recognised and having
their name instantly known, or developing friendships with individuals in the service firm and
generally being treated as someone with special status.
For example, a study of B2B markets (business clients of an insurance company) found that
simple things like staying in touch on a regular basis, providing personal touches such as cards
and small gifts on special occasions, sharing personal information (such as is done between
friends) and developing rapport at a personal level all enhanced the likelihood of client retention.
Building in switching costs should be considered at this stage.
Table 13.1 Three levels of customer retention strategy

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392 Part 3 Challenges for senior management
Level 3
Strategies at level 3 are the most difficult for competitors to imitate. This level involves developing
structural bonds as well as economic and social ones. Structural bonds involve providing highly
customised services to individual clients; these services are designed into the service delivery
system and are increasingly technology based. Examples include giving valued clients a special
access phone number for bookings (banking or airlines).
Retention strategy 3—Reduce customer churn
Strategies for reducing customer defections
So far, we have discussed drivers of loyalty and strategies to tie customers more closely to the
firm. A complementary approach is to understand the drivers of customer defections, also called
customer churn, and work on eliminating or reducing those drivers.
How to make switching costly
Both theoretical and empirical research recognises
switching costs as an important driver of customer
retention in many service industries such as banking,
airlines, credit cards and telecommunications.
Switching costs significantly influence customers’
repurchase behaviour and their decisions to remain
with a service provider. In their research, Polo and Sese
addressed this issue by investigating the extent to which
switching costs are affected by marketing variables and
relationship characteristics.
The researchers evaluated the impact of both the
focal firm and its competitors’ marketing strategies
on retaining customers in order to understand the
role of competition in customer switching behaviour.
The results show that price and advertising have an
important impact on switching costs. When your
brand has the most favourable price and customers
compare price charged by competitors, it influences
their perceived ‘savings’, thus raising switching costs;
setting a higher price than competitors will lead to
higher potential monetary savings from switching
and hence lower switching costs. While a lower price
(than directly competing brands) has raised switching
costs, both customer service and brand advertising
increase the cost of switching. Advertising creates
favourable brand preference, highlights the advantages
and benefits of the focal brand and strengthens the
relationship between customers and the service
provider. Therefore, even when a relationship has been
established, price and advertising are still important
variables in stimulating customer repurchase behaviour
(now we don’t say loyalty but rather repurchase).
The study also found that the length, depth and
breadth of the relationship have a stronger impact on
retaining customers than price and advertising. The
longer a customer is involved with a service provider, the
more trust, experience and interdependencies are built
up, and hence their psychological attachment grows. The
breadth of relationship increases as additional products
and services are purchased from a firm over time,
provides customers with better knowledge of the offer,
more accurate expectations, less uncertainty and makes
it inconvenient to leave the current service provider.
The research suggests that service firms can
use price and advertising as important marketing
instruments to increase the switching costs (and thus
customer retention). While reducing price makes it
more difficult for existing customers to switch, the
effect of advertising is greater. Advertising not only acts
as a communication channel to customers, but also
helps increase the size of the company’s customer base
by reducing the switching costs for its competitors’
customers. Since similar actions could be taken by the
competitors, the firm should react in a timely manner
to their rivals’ marketing strategies in order to prevent
future defections. While such strategies can effectively
retain customers, firms should also be aware of negative
reactions from customers if they feel locked in a firm in
which they would prefer not to be.
Source: Based on Yolanda Polo and F. Javier Sese (2009),
‘How to make switching costly: the role of marketing
and relationship characteristics’, Journal of Service
Research, 12(2), pp. 119–37.
RESEARCH INSIGHT 13.1
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Chapter 13 Managing relationships and building loyalty 393
Analyse customer defections and monitor declining accounts
The first step is to understand the reasons for customer switching. Susan Keaveney conducted a
large-scale study across a range of services and found several key reasons why customers switch to
another provider.41 Core service failures were mentioned by 44 per cent of respondents as a reason
for switching; dissatisfactory service encounters by 34 per cent; high, deceptive or unfair pricing by
30 per cent; inconvenience in terms of time, location or delays by 21 per cent; and poor response to
service failure by 17 per cent. Many respondents described a decision to switch as resulting from
interrelated incidents, such as a service failure followed by an unsatisfactory service recovery.
In the mobile phone industry, players regularly conduct what is called churn diagnostics. This
includes the analysis of data on churned and declining customers, exit interviews (call centre staff
often have a short set of questions they ask when a customer cancels an account, to gain a better
understanding of why customers defect) and in-depth interviews of former customers by a thirdparty research agency, which typically yield a more detailed understanding of churn drivers.42
Many mobile phone service operations use churn alert systems, which monitor the activity in
individual customer accounts with the objective of predicting impending customer switching.
Accounts at risk are flagged and trigger proactive retention efforts such as sending a voucher
and/or having a customer service representative call the customer to check on the health of the
customer relationship and initiate corrective action if needed.
Address key churn drivers
Keaveney’s findings underscore the importance of addressing some generic churn drivers by
delivering quality service, minimising inconvenience and other non-monetary costs, and fair
and transparent pricing. In addition to these generic drivers, there are often industry-specific
drivers as well. For example, handset replacement is a common reason for mobile phone service
subscribers to discontinue an existing relationship, as new subscription plans typically come with
heavily subsidised new handsets. To prevent handset-related churn, many providers now offer
proactive handset replacement programs, in which their current subscribers are offered heavily
discounted new handsets at regular intervals. Some providers even provide handsets free to highvalue customers or against redemption of loyalty points.
Regaining lost customers
Lost customers have in recent times become a distinct target segment for firms serious about
relationship marketing. Firms develop specific strategies to win back (profitable) customers who
either give notice to terminate or whose relationship has already ended. Essential for this to
succeed is a customer database that allows segmentation of lost customers and a unique selling
point that addresses or even reverses the reasons that prompted defection in the first place.43
Witness the concerted national advertising campaign by Telstra in Australia several years back to
win back lost telecommunications customers by claiming that (1) the competitors’ performance
is not matching their promises and (2) Telstra has improved both customer service and price in
recent times. St. George Bank has developed a predictive model that signals (based on certain
behaviours such as the number of complaints received, requesting a bank account statement
history, cancelling a credit card, etc.) when a particular customer is about to switch. This then
allows the bank to take pre-emptive action to salvage the account.44
In addition to such proactive retention measures, some firms use reactive measures as well.
These include specially trained call centre staff, so-called save teams, who deal with customers
who intend to cancel their accounts. The main job of save-team employees is to listen to customer
needs and issues, and try to address them with the key focus of retaining the customer.
Implement eective complaint-handling and service-recovery procedures
Effective complaint handling and excellent service recovery are crucial to keeping unhappy
customers from switching providers. That includes making it easy for customers to voice their
problems with the firm, and then responding with strong service recovery. This is discussed in
depth in Chapter 14.
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394 Part 3 Challenges for senior management
Other factors aecting the nature of relationships
Customer relationships in the context of Eastern cultures
The highly collectivist nature of Eastern cultures means they are ‘relationship rich’—loyalty to
people with whom regular dealings have been established over time is high. In a collectivist
culture, we would expect a strong cultural incentive to stay in relationships, and thus higher
levels of loyalty to service providers. As Jean-Claude Usunier noted, ‘Loyalty is a key concept
in collectivist cultures, which spreads from people to product, in as much as they are extensions
of the self.’45 Furthermore, once cemented, relationships are expected to endure. As Triandis
notes of collectivists, ‘They expect a relationship to last a long time. Often they cultivate
relationships for some time before expecting the relationships to provide benefits.’46 Other crosscultural researchers present collectivist Eastern cultures as being highly loyal because of their
greater reliance on word of mouth about a product, and reliance on group evaluation of product
performance rather than media claims.
An examination of fundamental cultural values (see Chapter 2 for more details) provides
some insight into the nature of buyer–seller relationships. Australia, along with the USA, Canada
and the UK, are what has been referred to as ‘low-context orientation’ cultures, whereas China,
Taiwan, Indonesia, Malaysia, Vietnam and Thailand are ‘high-context orientation’ cultures.47
Some sociocultural traits that are likely to impact on buyer–seller relationships in service industry
contexts are shown in Table 13.2.
Customer relationship management (CRM)
CRM has come to mean different things depending on whom you talk to. Some consider it to be
a sophisticated software that permits a company to analyse customer revenue and costs, identify
high-value customers, target direct marketing efforts, capture customer behaviour data and track
customer defections and retention levels (referred to as gaining ‘a 360 degree view’ of customers).
Service marketers have understood for some time the power of CRM, and certain industries
have applied it for decades. Examples include the corner grocery store, the neighbourhood car
repair shop and providers of banking services to high-net-worth clients. Mention the term CRM,
however, and costly, complex IT systems and infrastructure and CRM vendors such as SAP,
Siebel Systems and Oracle come immediately to mind. But CRM actually signifies the whole
process by which relations with customers are built and maintained (Figure 13.8). It should be
seen as an enabler of the successful implementation of the loyalty process. Let us first look at
CRM systems before we move to a more strategic perspective.
Table 13.2 Sociocultural traits likely to impact on buyer–seller relationships in service settings

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Chapter 13 Managing relationships and building loyalty 395
Common objectives of CRM systems
Many firms have large numbers of customers (sometimes millions), many different touchpoints
(for instance, tellers, call centre staff, self-service machines and websites) at multiple geographical
locations. At a single large facility, it’s unlikely that a customer will be served by the same frontline
staff member on two consecutive visits. In such situations, managers historically lacked the tools
to practise relationship marketing. Today, however, CRM systems act as an enabler, capturing
customer information and delivering it to the various touchpoints.
From a customer perspective, well-implemented CRM systems can offer a unified customer
interface that delivers customisation and personalisation. This means that at each transaction,
the relevant account details, knowledge of customer preferences and past transactions or history
of a service problem are at the fingertips of the person serving the customer. This can result in a
vast service improvement and increased customer value.
From a company perspective, CRM systems allow the company to understand, segment
and tier its customer base better, target promotions and cross-selling better, and even implement
churn alert systems that signal if a customer is in danger of defecting.48 Figure 13.9 highlights
some common CRM applications.
Figure 13.8 What customer relationship management really comprises
Source: Reprinted by permission of Harvard Business Review from ‘Avoid the four perils of CRM’, by D. Rigby, F. Reichheld and P. Schefter, copyright ©
2002 by the Harvard Business School Publishing Corporation, all rights reserved.
Acquiring the
right customer
Developing the right
value proposition
Implementing the
best processes
Role of
employees
Learning to
retain customers
• You’ve identified your
valuable customers.
• You‘ve estimated your
share of their wallet.
• You’ve studied what
services your
customers need
today and will need
tomorrow.
• You’ve surveyed what
products or services
your competitors
offer today and will
offer tomorrow.
• You‘ve spotted what
products or services
you should be
offering.
• You’ve researched the
best way to deliver
your services to
customers, including
the alliances you
need, the
technologies you
need to invest in, and
the service
capabilities you need
to develop or acquire.
• You know what tools
your employees need
to foster customer
relationships.
• You‘ve identified the
HRM issues you need
to address in order to
boost employee
loyalty (i.e. service
climate,
empowerment, etc.).
• You understand why
customers defect and
how to win them
back.
• You‘ve analysed what
your competitors are
doing to win your
high-value
customers.
• Senior management
monitors
customer-defection
metrics.
You get it when …
CRM imperative
• Analyse customer
revenue and cost data
to identify current
and future high-value
customers.
• Target your direct
marketing efforts
better.
• Capture relevant
service behaviour
data.
• Create new
distribution channels.
• Develop new pricing
models.
• Build communities.
• Process transactions
faster.
• Provide better
information to the
frontline.
• Manage logistics and
the supply chain
more efficiently.
• Align incentives and
metrics.
• Deploy knowledge
management
systems.
• Track
customer-defection
and retention levels.
• Track
customer-service
satisfaction levels.
CRM technology can help …
Executives often mistake the easy promise of CRM software for the hard reality of creating a unique strategy for acquiring, building
relationships with, and retaining customers. This chart highlights the five imperatives of CRM—and where technology fits in.
Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2015 – 9781486002702 – Lovelock/Services Marketing 6e
Lovelock, C., Patterson, P., & Wirtz, J. (2014). Services marketing ebook. ProQuest Ebook Central <a onclick=window.open(‘http://ebookcentral.proquest.com’,’_blank’)
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396 Part 3 Challenges for senior management
Figure 13.9 Common CRM applications
• Data collection The system captures customer data such as contact details, demographics, purchasing history,
service preferences and the like.
• Data analysis The data captured are analysed and categorised by the system according to criteria set by the firm.
This information is then used to tier the customer base and tailor service delivery accordingly.
• Salesforce automation Sales leads, and cross-selling and upselling opportunities, can be effectively identified and
processed, and the entire sales cycle from lead generation to close of sales and after-sale service can be tracked
and facilitated through the CRM system.
• Marketing automation Mining of customer data enables the firm to target its market. A good CRM system enables
the firm to achieve one-to-one marketing and cost savings, often in the context of loyalty and retention
programs. This results in increasing the return on its marketing expenditure. CRM systems also enable
assessment of the effectiveness of marketing campaigns through the analysis of responses.
• Call centre automation Call centre staff have customer information at their fingertips and can improve their
service levels to all customers. Furthermore, caller ID and account numbers allow call centres to identify the
customer tier to which the caller belongs, and to tailor the service accordingly. For example, platinum callers get
priority in waiting queues.
Figure 13.10 An integrated framework for CRM strategy
Source: Reprinted with permission from Journal of Marketing, published by the American Marketing Association, from Adrian Payne and
Pennie Frow, 69(4), (October 2005), p. 171, Figure 2.

Value customer
receives
• Value
proposition, incl.
– Higher tier
services
– Loyalty
rewards
– Customisation
Value
creation process
Value organisation
receives
• Acquisition
economics
• Retention
economics
• Share-of-wallet
Dual creation
of value
Customer segment lifetime value analysis
Multichannel
integration process
Salesforce

Integrated channel management
Direct
marketing
Mobile
commerce
Electronic
commerce
Outlets
Telephony

Information management process
Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2015 – 9781486002702 – Lovelock/Services Marketing 6e
Lovelock, C., Patterson, P., & Wirtz, J. (2014). Services marketing ebook. ProQuest Ebook Central <a onclick=window.open(‘http://ebookcentral.proquest.com’,’_blank’)
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Chapter 13 Managing relationships and building loyalty 397
What does a comprehensive CRM strategy encompass?49
Rather than viewing CRM as a technology, we subscribe to a more strategic view of CRM that
focuses on the profitable development and management of customer relationships. Figure 13.10
provides an integrated framework of five key processes involved in a CRM strategy.
1 Strategy development involves the assessment of business strategy (including articulation
of the company’s vision, industry trends and competition). The business strategy is
typically the responsibility of top management. Once determined, the business strategy
should be guiding the development of the customer strategy, including the choice of target
segments, customer base tiering, the design of loyalty bonds, switching barriers and churn
management (as discussed in the framework for customer retention).
2 Value creation translates the business and customer strategies into specific value propositions
for customers and the firm. The value created for customers includes all the benefits
that are delivered through priority tiered services, loyalty rewards and customisation
and personalisation. The value created for the firm needs to include reduced customer
acquisition and retention costs and increased share-of-wallet. The core of CRM is the
concept of dual creation of value—customers need to participate in CRM (e.g. through
volunteering information) so that they can reap value from the firm’s CRM initiatives. For
instance, if my driver’s licence, billing address, credit card details and car and insurance
preferences are stored in a car rental’s CRM system, I can benefit from the increased
convenience of not having to provide those data for each reservation. Firms can even create
value through information drawn from one customer for others (e.g. Amazon’s analysis of
which other books customers with a profile similar to yours have bought, and customer
ratings of books). CRM seems most successful when there is a win–win situation for the
firm and its customers.50
3 Multichannel integration. Most service firms interact with their customers through a multitude
of channels, and it has become a challenge to serve customers well across these many
potential interfaces and to offer a unified customer interface that delivers customisation and
personalisation. CRM’s channel integration addresses this challenge.
4 Information management. Service delivery across many channels relies on the firm’s ability to
collect customer information from all channels, integrate it with other relevant information
and make the relevant information available to the frontline (or to the customer in a
self-service context) at the various touchpoints. The information management process
encompasses the data repository (which contains all the customer data), IT systems (which
encompasses the IT hardware and software), analytical tools (which include data-mining
packages, and more specific application packages such as campaign management analysis,
credit assessment, customer profiling and churn alert systems), frontstage applications (which
support activities that involve direct customer contact, including salesforce automation and
call centre management applications) and back-office applications (which support internal
customer-related processes, including logistics, procurement and financial processing).
5 Performance assessment must address three critical questions. First, is the CRM strategy
creating value for its key stakeholders (i.e. customers, employees and shareholders)?
Second, are the marketing objectives (ranging from customer acquisition, share-of-wallet,
retention to customer satisfaction) and service delivery performance objectives (e.g. call
centre service standards such as call waiting, abortion and first-time resolution rates) being
achieved? Third, is the CRM process itself performing up to expectations (e.g. are the
relevant strategies being set, is customer and firm value being created, is the information
management process working effectively, and is integration across customer service
channels being achieved effectively)? The performance assessment process should drive the
continuous improvement of the CRM strategy itself.
Common failures in CRM implementation
Unfortunately, the majority of CRM implementations failed in the past. According to the Gartner
Group, the implementation failure rate is 55 per cent and Accenture claims it to be around 60 per
cent. A key reason for this high failure rate is that firms often equate installing CRM systems with
Copyright © Pearson Australia (a division of Pearson Australia Group Pty Ltd) 2015 – 9781486002702 – Lovelock/Services Marketing 6e
Lovelock, C., Patterson, P., & Wirtz, J. (2014). Services marketing ebook. ProQuest Ebook Central <a onclick=window.open(‘http://ebookcentral.proquest.com’,’_blank’)
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398 Part 3 Challenges for senior management
having a customer relationship strategy. They forget that the system is just a tool to enhance the
firm’s customer servicing capabilities, and is not the strategy itself.
Furthermore, CRM cuts across many departments and functions (e.g. from customer
contact centres, online services and distribution to branch operations, employee training and IT
departments), programs (ranging from sales and loyalty programs to launching of new services,
cross-selling and upselling initiatives) and processes (e.g. from credit-line authorisation all the way to
complaint handling and service recovery). The wide-ranging scope of CRM implementation, and the
unfortunate reality that it is often the weakest link that determines the success of an implementation,
shows the challenge of getting it right. Common reasons for CRM failures include:51
• Viewing CRM as a technology initiative. It’s easy to let the focus shift towards technology
and its features, with the result that the IT department rather than top management or
marketing takes the lead in devising CRM strategy. This often results in a lack of strategic
direction and of understanding of customers and markets during implementation.
• Lack of customer focus. Many firms implement CRM without the ultimate goal to enable
consistent service delivery for valued customers across all customer service processes and
delivery channels.
• Insufficient appreciation of customer lifetime value. The marketing program of many
firms is not sufficiently structured around the vastly different profitabilities of different
customers. Furthermore, servicing costs for different customer segments are often not well
captured (e.g. by using activity-based costing, as discussed in Chapter 6).
• Inadequate support from top management. Without ownership and active involvement of
top management, the CRM strategic intent will not survive the implementation intact.
• Failing to re-engineer business processes. It is virtually impossible to implement CRM
successfully without redesigning customer service and backstage processes. Many
implementations fail because CRM is being fitted into existing processes, rather than
redesigning the processes to fit a customer-centric CRM implementation. Redesigning also
requires effective change management and employee engagement and support, which are
often lacking.
• Underestimating the challenges in data integration. Firms frequently fail to integrate
customer data, which are often scattered all over the organisation. A key to unlocking
the full potential of CRM is to make customer knowledge available in real time to all
employees who need it.
In the long run, firms put their CRM strategies
at substantial risk if customers believe that
CRM is being used in a way that is detrimental
to them. Examples include perceptions of not
being treated fairly (including not being offered
attractive pricing or promotions that are offered,
for example, to new accounts, but not to existing
customers) and potential privacy concerns. Being
aware and actively avoiding these pitfalls is a first
step towards successful CRM implementation.
Rigby, Reichheld and Schefter pose the
question:
If your best customers knew that you planned
to invest $130 million to increase their loyalty
. . . , how would they tell you to spend it?
Would they want you to create a loyalty card
or would they ask you to open more cash
registers and keep enough milk in stock? The
answer depends on the kind of company you
are and the kinds of relationships you and your
customers want to have with one another.52
Airport self-check-in kiosks represent another service touchpoint that
needs to be integrated into an airline’s CRM system
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Lovelock, C., Patterson, P., & Wirtz, J. (2014). Services marketing ebook. ProQuest Ebook Central <a onclick=window.open(‘http://ebookcentral.proquest.com’,’_blank’)
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