Managing Customer Relationships Questions and Answers

Q: Explain why it is more profitable to retain existing customers than to continually try to attract new ones?

Research has shown that one loyal customer tend to become more profitable over time.  Apart from not having to outlay the initial costs of attracting new customers, there are four factors that create incremental profits for firms with long term customers.  These are:

  • Opportunities to cross sell other company services – once trust and confidence are established, firms will find it easier to sell existing customers a greater range of services.
  • Reduced operating costs – long term customers tend to have lower maintenance costs as they make fewer demands, ask fewer questions and have fewer problems.
  • Increased purchases – research shows that customers tend to spend more and require more services as they proceed through different stages of the family life cycle
  • Positive word-of-mouth advertising – existing customers are necessary to establish a reputation that in turn attracts new business.
Q:  What are the managerial implications of the idea of ‘stages in the relationship’ and the ‘relationship ladder’?

A:  Like any personal relationship, business and customer relationships are built over time with successive interactions and mutual experience.  This implies a number of stages in the process of building a relationship.

The managerial implications of these are essentially twofold.  In other words, the desired outcomes in terms of customer attitude and behavior will not occur without investment in achieving these over times, in stages and with due diligence.

Q:  Describe the major factors that determine whether a customer becomes committed or loyal to a service provider.  Are there any other factors not discussed in this chapter that you believe should be included?

A:  Key determinants of customer loyalty include a sense of reliability about, and trust in the service provider; satisfaction with past transactions; the regularity, accuracy and reliability of communications; personal recognition and reward; and the extent of individual experience with, and patronage of, the service organization.

Other factors that could be reasonably nominated include:

  • the nature, attitude and characteristics of individual members of staff
  • locational convenience
  • the general ambience of the place
  • the extent to which service product bonuses, extras and gifts, the offer of something special or the element of pleasant surprise, are made available.
Q: Describe the conditions under which you would recommend to a service firm that they seriously consider implementing a relationship marketing program?

A: A relationship marketing program is likely to be appropriate in situations where:

  • competition is intense
  • the time, effort and cost associated with attracting new customers is high
  • word-of-mouth referrals and recommendations are important
  • the risks and switching costs for a customer in changing service providers are high
  • social bonds with customers can be established and maintained
Q: Demonstrate your understanding of switching barriers (costs)?

Whenever a customer switches supplier of a service, they can incur a cost for the switch.  These costs can be financial (economic) or psychological.

Examples of economic switching costs include: breaking mobile phone contracts and incurring a fee, buying insurance from a new supplier and not getting a volume discount, switching to a new university and not graduating on time, retaining a new lawyer and having them read the entire case file to get up to speed, and using a different air carrier and not getting frequent flyer points.

Examples of psychological switching costs include: switching to a new university and having to make new friends, changing hairdressers and worrying about the quality of the cut, the embarrassment of telling a new doctor some personal details and wondering whether you can trust your new financial planner.

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