stefan.michel@dplanet.ch Linking customer satisfaction and loyalty for profits Dr. Stefan Michel CH-6330 Cham
2 Agenda The new marketing paradigm The full satisfaction-loyalty-profits model The satisfaction link The customer loyalty link Service recovery for customer retention Discussion
3 Defensive marketing - a new paradigm cost savings defensive marketing customer satisfaction customer loyalty amount purchased price premium margin quality word of mouth profits offensive marketing image market share revenues advertising sales promotion
4 The full model Product quality Customer value Service quality Customer bondings Customer satisfaction Customer loyalty Higher revenues Lower costs Employee productivity Employee loyalty Better image Higher profits
5 The satisfaction link Product quality Customer value Service quality Customer bondings Customer satisfaction
6 Tolerance zone for customer satisfaction quality tolerance zone customer evaluation desired quality expected quality delighted satisfied dissatisfied
7 Implication of must have, should have, and could have factors and customer satisfaction customer satisfaction 5 4 3 2 1 0-1 -2-3 -4-5 very low low high very high quality must have should have could have
8 The customer loyalty link Customer bondings Customer satisfaction Customer loyalty
9 Customer Lifetime Value (CLV) Industry Car manufacturing Telecommunication Customer lifetime spending (US$) Average loyalty in years CLV for the company 105 000 20 35 000 50 000 50 50 000 Grocery store 175 000 4.5 23 000 Consumer goods 7 500 20 3 750 Banking 7 500 17 3 500 Beer brewery 10 000 4 2 000 Source: Rapp 1992, in Peter 1999: 44
10 The strengths of the satisfaction-loyalty link depends on customer bondings and competition customer satisfaction 5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 very low low high very high Local telephone Airlines Hospitals Business PC Cars Loyalty Source: Jones/Sasser 1995 in Bothe 1996: 36
11 The Loyalty-Profits Link Customer loyalty Higher revenues Lower costs Higher profits
12 Loyal customers are more profitable 300 Profits per customer (US$) 200 100 0 Insurance Car repair Logistics B2B loundry Credit cards -100 1st year 2nd year 3rd year 4th year 5th year Loyalty Source: Reichheld 1996: 38
13 Calculating the loyalty effect Customer base t0 1000 Growth p.a. 10% Initial costs $ 100 Profits t0 $ 50 Profit growth p.a. $ 10 The file can be downloaded on www.dienstleistungsmarketing.ch Retention 90% Loyalty (years) 10,00 Year 1 Year 2 Year 3 Customer base 1.000 1.100 1.210 Lost customers -100-110 -121 New Customers 200 220 242 Profit per Custom. $ 100 $ 100 $ 100 Total Profits $ 100.000 $ 110.000 $ 121.000 Initial Costs $ -20.000 $ -22.000 $ -24.200 90% $ 80.000 $ 88.000 $ 96.800 Net Profits 10 years $ 1.274.994
14 The impact of product and service failures on customer satisfaction and word-ofmouth Product quality Customer value Service quality Customer satisfaction
15 Study design Swiss financial service provider 3852 valid telephone interviews with customers 6 core process pre-definied Average length of interview 14 minutes
16 72.5% of the customers did not report a failure/error, 475 did report a core process failure, 638 reported other problems No core process failure Core process failure No other problem 2791 (72.5%) 423 (11.0%) Other problem 586 (15.2%) 52 (1.3%)
17 The satisfaction rate drops from 4.47 to 3.51 if a failure/error occured 5 4.5 4 3.5 3 2.5 without failure with failure 2 1.5 1 without failure with failure
18 11.6% of the failures were regarded as absolutely not acceptable, 23.8% as not acceptable 250 200 150 100 Count 50 0 acceptable not acceptable absolutely not acc.
19 Dissatisfaction increases when failures are not acceptable 5 4.5 4 Satisfaction 3.5 3 2.5 2 1.5 1 acceptable not acceptable absolutely not acc. no failure
20 It s a dog s world
21 Service Recovery Service Recovery refers to the actions a service provider takes in response to service failures Grönroos 1988 Service Recovery may be defined as the process of returning an aggrieved/dissatisfied customer to a state of satisfaction with the company/service and making a special effort to get things right for the customer when something is wrong Lewis 1993
22 Tolerance zone for customer satisfaction desired quality tolerance zone expected quality customer evaluation after failure
23 Recovery paradox Positive recommendation 5.0 4.5 4.0 3.5 3.0 2.5 2.0 4.19 4.59 4.10 3.81 3.53 3.15 Service Recovery 1.5 1.0 no error much better better as expected worse much worse Customer group
24 57% of the customers were satisfied or very satisfied with the speed of service recovery 25 20 % 15 10 Count 5 0 very sat. neutral very dis.
25 73.6% of the customers were satisfied or very satisfied with the outcome of service recovery % 35 30 25 20 15 10 5 Count 0 very sat. neutral very dis.
26 Service Recovery process Acknowledge that the customer is experiencing an inconvenience and apologize for it Listen, empathize, and ask open questions Offer a fair fix to the problem Offer some value-added atonement for the inconvience Follow up and keep your promises Source: Zemke 1995
27 Acknowledge that the customer is experiencing an inconvenience and apologize for it
28 Listen, empathize, and ask open questions
29 Offer a fair fix to the problem Offer some value-added atonement for the inconvience
30 Follow up and keep your promises
31 Discussion