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From Dr. Scott Sampson's Understanding Services Businesses Book (click for table of contents)
—[in Unit 6: Identifying Strategic Threats]— Next⇒SBP 6b: Competing With Customers

SBP 6a: Swaying Divided Loyalties

With services, customers often have a greater opportunity to be disloyal when each opportunity for service is a separate transaction. However, producers often have a greater opportunity to build loyalty by personalization.

Why it occurs

This principle occurs because the service customer does not own the service provider as do goods customers (see SBP: Server-Ownership Perspective). Thus, service customers are less likely to have any long-term commitment to that particular service provider.

Details

Think back to the Server-Ownership Perspective Service Business Principle. There was an example given comparing a manufactured plunger to a service-providing plumber. Even though they both can be employed to unstop a clogged sink, a major difference is that the customer takes ownership of the plunger, but not the plumber. The fact that the customer has expended a fixed cost (although small) in procuring the plunger makes the customer more likely to employ that plunger whenever a drain is clogged. The customer is “loyal” to the plunger he owns, and is unlikely to purchase a new and different plunger every time he needs to plunge a drain.

On the other hand, the customer may potentially employ a completely different plumber each time a plumber is needed. Even if he tries to call the plumber he used last time, it would generally not take much to get him to try another plumber. For example, if he calls the plumber he used last time and the line is busy, that may be enough to push him to instead try the next plumber in the phone book. That is not loyalty.

In summary, the reason customers tend to be disloyal to service providers is that, since they do not take ownership of the service provider, every occasion to seek that service is a separate transaction. A major problem with this phenomena is that loyal customers have been shown to be much more profitable to a company than shop-around customers.1) Some have estimated that it costs five times as much to gain new customers as it does to retain old customers.

How it affects decisions

Service providers must determine the costs of non-loyalty, such as costs of customer turnover (recruiting new customers instead of keeping the ones you have). From that, decisions regarding appropriate efforts to increase customer loyalty should be made.

What to do about it

There are a couple of things a service provider might do to counter the non-loyalty propensity of his service business. For both, the idea is to increase the affiliation that the customer feels with the service provider.

The first is not unique to services: It is to establish a membership, or frequent user relationship, with customers. Customers might pay a fixed cost for a membership, and receive subsequent discounts (e.g. Sam's Club). Or, they might establish a service contract to receive service over an extended time at a specific price. Or, customers might receive a reward for repeat patronage of the service provider (such as frequent flier clubs).

The second way of countering the non-loyalty propensity of service customers is unique to services. It is to increase the personalization of the service to give the customers the sense of belonging with that service provider. A “personalized” service is one that treats each customer as a unique individual, rather than just another “consumer.” (“Personalization” is often confused with “personable,” which is friendly and warm interactions. A service can be personalized with or without also being personable.)

Pizza Hut tracks customer information so they can provide personalized service each time

A technique for personalizing a service is to track information about each customer, so that on subsequent visits you already know about the customer and her needs. An example of this is some Pizza Hut delivery locations, who keep data on the last pizza order for each customer. That way, when a customer calls in to order pizza, the Caller ID triggers the store's computer to display the last order. Then, the employee simply asks if the customer would like the same pizza as they ordered previously. The point is to simplify the process of placing an order by personalized suggestions.

It seems that most automobile owners would like to identify an auto repair shop which knew the needs of their particular car. However, auto repair shops generally treat each visit as unique, even if the same care had been in for a related problem a few weeks prior. (Why else would we keep needing to explain the situation to the mechanic?) Customers may or may not want personable service from mechanics, but we all want service that meets the specific needs of our individual vehicle.

In order to personalize service, the company needs to (a ) determine relevant things about the customers or their inputs, (b ) store that information so that it can be later used, and (c ) use the information in guiding service delivery. The information may be stored in a card file or computer file. In some cases, the information is stored in the minds of employees who work with particular customers. That way, when a customer returns, the employee can recall the situation and needs of that particular customer and personalize the service accordingly. The problem with this latter approach is that the customers are likely to be loyal to that employee, not to the service organization. Loss of the employee may mean loss of those customers.

For example

Taxi companies could seek to personalize their services so as to attract more loyal customers Automobile owners tend to be very loyal to cars they own–whenever they need local transportation, they are much more likely to take their own car than one they do not yet own. (Except for in some places of high crime.) However, customers that use taxi services are likely to consider using a different taxi company every time they need local transportation. How might a taxi company improve customer loyalty? Well, certainly they can provide a better service, just as auto manufacturers can provide a better product. Further, they can provide a membership relationship, such as a “frequent rider” program. With services, a primary way to promote increased customer loyalty is to act upon the uniqueness of customer inputs and needs. Taxi companies could store information about locations, route preferences, and receipt requirements of customers, increasing the ability to give those customers exactly what they need on subsequent trips.

My airline example

Airlines certainly recognize the propensity customers have for shopping around whenever they need air transportation service–thus the prevalence of frequent flier programs.

How manufacturing differs

With manufacturing, the customer owns the service provider, and often uses it repeatedly to recover the fixed procurement cost.

Analysis questions

  1. Do customers choose a potentially different service provider each time they need the service?
  2. Are there means and advantages to allowing the customer to purchase the service by some type of membership or contract?
  3. Can the relationship/service with each individual be enhanced by providing more personalization? At what cost?

Application exercise

Design a plan for customer retention at your target service business. List three or more major reasons why customers would not be loyal, but would continually shop around for that service. List three or more advantages to the company from customers being loyal. List three or more advantages that could be presented to customers to them to encourage them to be loyal and give repeat business. How might an effective customer retention program be built around those advantages? (One that would promote good customer loyalty at a reasonable cost.)

1) “Zero Defections: Quality Comes to Services” by Fredrick F. Reichheld and W. Earl Sasser Jr., Harvard Business Review September/October 1990.<