Chapter 11 Building Customer Loyalty Through Quality Poor quality costs 25% of gross sales in manufacturing firms; 40% of gross sales in service firms - Tom Peters Chapter Objectives Define customer value and customer satisfaction. Understand the difference between customer satisfaction and customer loyalty. Discuss attracting new users and retaining current customers by developing relationship marketing. Know tactics for resolving customer complaints and understand the importance of resolving complaints. Define quality and discuss the importance of the benefits of quality. Implement capacity and demand management tactics. Key Concepts • Customer centered Functional quality • Customer-delivered Product features value • Customer loyalty Relationship marketing • Customer partnerships Societal (ethical) quality • Customer retention Technical quality • Expected service • Freedom from deficiencies Product-centric vs. customer centric To win in today’s market companies must be customer centered. To win in the marketplace, organizations must be customer-centered. They must deliver superior value to their target customers. Organizations must become adept in building customers, not just building products. Customer Delivered Value (Products, services, Total Customer Value personnel, and image values) (*) Minus Total Customer (Monetary, time, energy, Cost and psychic costs) (**) Customer Delivered (“Profit” to the Equals Value consumer) * Refers to benefits and ** refers to costs, including mental costs Customer Satisfaction The customer’s satisfaction depends on the product’s or service’s performance relative to the customer’s expectations. Product/service performance = Customer Expectations Satisfied customers Product/service performance > Customer expectations Delighted customers Product/service performance < Customer expectations Unsatisfied customers Customer Satisfaction vs. Customer Loyalty Customer satisfaction measures how well a customer’s expectations are met. Customer loyalty measures how likely customers are to return and their willingness to perform partnership activities for the organization. Customer satisfaction is a prerequisite for customer loyalty. However, customer satisfaction does not mean your customers will certainly return. Relationship Marketing A relationship that leads to customer loyalty Relationship Marketing: Creating, maintaining, and enhancing strong relationships with profitable customers Extends to relationships with all “stakeholders” including employees and marketing intermediaries. The focus is on one-to-one relationships with individual customers. Three customer value building approaches: financial benefits, social benefits, and structural ties, e.g, airline CRS systems for travel agents. Approaches to Relationship Marketing Marketing tools for customer relationships Adding financial benefits (e.g., frequent flyer programs) Add social benefits (e.g., recognizing repeats guests and greats them by name) Add structural ties (e.g. reservation systems for travel agents, special phone lines, flexible check-in, check-out time for best customers, send limousine) Five Levels of Relationships The company sells the product but does not Basic follow-up The company sells the product and encourages the customer to call when the Reactive have problems or questions. The company’s representative checks on customer after the sales and the event to make Accountable sure things were satisfactory and to get feedback. The salesperson or others in the company Proactive phone customers from time to time to seek suggestions. The company works continuously with the Partnership customer to discover ways to develop better value. Relationship Marketing Compared With Traditional Marketing Relationship marketing Traditional Marketing Orientation to customer retention Orientation to single sales Continuous customer contact Discontinuous customer contact Focus on customer value Focus on product features Short time scale Long time scale Little emphasis on customer service High customer service emphasis Limited commitment to meeting High commitment to meeting customer expectations customer expectations Quality is the concern of the Quality is concern of all staff production staff Benefits of Customer Loyalty Cost of Lost Customers: When a customer is lost, the cost is the customer’s lifetime value to the organization. LCV Resolving Customer Complaints: A critical component of customer retention. A problem is that most customers do not complain. Complaint is a gift Retaining Customers The cost of gaining a new customer is about six times the cost required to retain an existing one. A dissatisfied guest will tell 10 other people about the complaint. 91% of customers who have an unresolved complaint will not return. 65% to 85% of switchers are dissatisfied guests. Only 4% of dissatisfied customers will complain. More than 65% of customers who will not return do so because of the way they were treated, not because of the product. Source: Rowe, M. (1998, February), “Why Service Still Stinks.” Lodging Hospitality, pp. 18-20 The Link Between Marketing and Quality • Quality and customer service are the top priorities • Quality service has emerged as an important area in the hospitality management. • In 1992, Ritz-Carlton became the first hospitality company to win the Malcolm Baldrige National Quality Award. • The hospitality industry involves a high degree of contact and coordination between employees and guests • The pursuit of quality is a never ending journey in the hospitality. What is Quality -Quality: Conformance to specifications, an act controlled by the firm -Quality: Meeting or exceeding the guest’s expectations. The first two distinctions: 1. Product features: Enhance customer satisfaction while increasing the costs of the product or service. 2. Freedom from deficiencies: Increase customer satisfaction. What is Quality Three categories of service quality: Technical quality: What the customer is left, with after the customer-employee interactions have been completed. Functional quality: The process of delivering the service or product. (Ex. check-in process) Societal (ethical) quality: A credence quality that is hard for customers to evaluate. --Some products can provide satisfaction in the short term but may have long-term adverse effects for their users. Chapter 11: Figure 11-2: Managing the perceived service quality Benefits of Service Quality 1. Customer Retention: High quality builds loyal customers and creates positive word of mouth. To get a customer first time costs $10, but only $1 to get this guest to return. Satisfied guest will tell five others, dissatisfied guest will tell ten Hospitality firms that seek excellent quality set a goal of zero errors 2. Avoiding of price competition: High quality helps to avoid price competition and maximize potential revenue. 3. Retaining good employees: Good quality operations retain good employees. 4. Reduction of Costs: There is a cost to poor-quality products and services. Capacity and Demand Management Quality in the hospitality industry requires a different focus from the quality in manufacturing firms. Hospitality products are produced and consumed simultaneously. In the hospitality industry during periods of peak demand, quality controls became difficult to carry out !!! When demand exceeds capacity and customers receive a poor quality product, some will go away unhappy. Capacity and Demand Management Managing Capacity 1. Involve the customer in the service delivery system Self-service food and beverage operations Self check-in counters Get your own drinks in fast food restaurants 2. Cross-train employees 3. Use part-time employees 4. Rent or share extra facilities and equipment If there is no space in the property, rent an outdoor place Work with sister properties Capacity and Demand Management Managing Capacity 5. Schedule downtime during periods of low capacity Schedule repairs and maintenance during the low season. Employees can take vacations during low periods 6. Extend service hours Increase capacity by extending service hours 7. Use technology Automatic wake-up Checking the bills from the room TV’s 8. Change configuration of the service Airlines shift planes to reduce or increase capacity Capacity and Demand Management Managing Demand 1. Use price to create or reduce demand Use yield management techniques 2. Use reservations When there is more demand, save capacity for more profitable segments Purchase tickets in advance, prepay or ask deposit 3. Overbooking Overbooking in hotels Overbooking in airlines Capacity and Demand Management Managing Demand 4. Revenue management (Yield management) A sophisticated approach to demand management 5. Use queuing Inform guests about the estimated waiting time Capacity and Demand Management Managing Demand 6. Shift demand If the date is flexible the manager will shift the demand to a lower-demanded period. 7. Change the salesperson’s assignment 8. Create promotional events Casinos have slot tournaments and table game tournaments during their slow periods.