Part 3

CONNECT

Chapter 4
Understanding Customers
and Relationships
 Introduction
The Problem:
It is not always clear who the customer is!
(e.g., the customers of a nursery are not only the children but also their
parents and other stakeholders such as education authorities and
health and safety officials, as well as internal customers the staff)
The service operations managers need to know:
Who their customers are ?
What are the benefits of providing a good service ?
What are the benefits of retaining good customers ?
How to provide services to multiple customers ?
 Who are the customers?
A customer is the recipient and often a provider (co-
producer) in a service process.
Customer can refer to an individual, unit or organization to
whom the service is provided
For example consider making travel arrangements for your
family. The parties involved in the process of providing this
service are (among others): your family (they are your
customers), you, the travel agent, hotel, airline, the HR and
IT that support the airline, airport, the aviation authority,
hotel employees, restaurant in the hotel, etc. (see the next slide)
Customers and services in booking a holiday
 Classifying Customers

1) External or Internal customers

2) Intermediaries or end users or customers

3) Stakeholders : payers, beneficiaries or

participants

4) Valuable or not so valuable customers

 Classifying Customers
1) External versus internal customers
For consumer services such as restaurants and
banks, consumers are the individuals or group of
people, external to the organization, who are
receiving and often paying for the service. In this
case, there is a clear time connection (i.e., the
service will be provided upon the receipt of the required price
such as in a fast food restaurant)

These customers are sometimes referred to as

users, end users, or consumers; they tend to be the
people in mind when the managers or employees talk
about customers.
 Classifying Customers
1) External versus internal customers (continued)
Internal customers are individuals or groups of
individuals who are a part of the same organization but
from a different unit or operations (e.g., IT department, HR
department and Accountancy department all provide services to the
other parts of the organization just as they also require services
from the rest of the organization).

It is important to know that the quality and cost of the

service provided to external customers depends upon
the quality of service provided to and by the network of
internal customers (e.g., the airline industry).
 Classifying Customers

2) Intermediaries or end users or consumers

An important design issue for many service supply
chains is whether on not to use Intermediaries.
Intermediaries: The middlemen who sell a product
or service to an end customer on behalf of one or more
suppliers (e.g. Amazon.com and UPS)

When using intermediaries, organizations need to

manage those intermediaries, while at the same time
be aware of the needs of the end consumers.
 Classifying Customers
3) Stakeholders: payers, beneficiaries or participants
This category explores customers extent of involvement with the service
In a restaurant, the customers participate in the service
process and they care about the outcome because they are
beneficiaries. Since they also pay for the service, they can
take corrective action, if necessary.
In public organizations like police service, the beneficiary
is the society at large, although the participants (criminals)
may not see the actions of the police as a benefit!
In conclusion: It is important to identify all the
stakeholders of a service and understand their different
perspectives so that the operations manager will be able to
identify the varying requirements of each stakeholder group.
 Classifying Customers

4) Valuable and not-so-valuable customers

The service marketing literature suggest that organizations
prioritize service towards customers who can create the
most value for the organization.
The problem is:
What is meant by value is not always clear.
Let us define a valuable customer as one that is either
of high value and/or valued.
Note: customer loyalty is not the same as value (i.e., a
customer may be loyal but not very profitable or helpful to
the organization)
 Classifying Customers

4) Valuable and not-so-valuable customers

High value customers: customer with high financial
value over the long term. They also spend more per transaction
than other customers (incremental value) and purchase additional
services (strategic value) and they may recommend the service to others.

The life-time value of customer should be approximated.

Equipment related services: the customers differentiate
between lifetime cost of ownership and the cost of acquisition
(thus, in some industries, it is common to make a loss on the sale of
original equipment, knowing that 25 years of spares and service
contracts would ensure long term profitability).
 Classifying Customers

4) Valuable and not-so-valuable customers

Valued customers: those individuals who are positively
disposed to the organization and are relatively easy
to deal with.
Valued customers can create financial value for the
organization.
Valued customers can be involved in revenue
generation by providing positive word-of-mouth
advertising and by encouraging others to use or
support the service.
Valued customers can support and help the
organization to improve its service (e.g. providing
suggestions, completing questionnaires).
 Customer Segmentation An Operations View

Why market segmentation ?

It makes sense to target marketing effort on people who
most likely buy the service.
Segmentation helps operations managers design their
facilities appropriately and provide the right service,
experience and outcomes.
Consider a restaurant. If it is targeting couples for
romantic dinners for two, the design of seating and
ambience will be rather different from a restaurant that
considers families as its prime source of revenue. These
two customer groups require different furnishing,
lighting, music, staff and food.
 Customer Segmentation An Operations View

Segmentation is the first critical step in developing

relationships with customers, whether those
relationships are transactional or strategic.
Market segmentation is traditionally based on customer
characteristics (e.g., specific economic groups, a
particular geographic area, family circumstances,
lifestyle).
Transactional relationship are on-off relationship we
have with organization (e.g. retailers).
Strategic relationship are more deeply embedded
relationships and have higher level of information
exchange (e.g. lawyer, doctor).
 Customer Segmentation An Operations View

Customer types

The nature of the individual customers and their resultant

behaviors could significantly influence the following:

The type of service provided

The way customers are dealt with by staff

Their potential impact on other customers in the

operation
 Customer Segmentation An Operations View
Customer types
The Ally
The Hostage
The Anarchist
The patient
The Tolerant
The Intolerant
The Victim
The Terrorist
The Incompetent
The Champion
 Customer types

Tolerant Champion

Positive Ally
Patient
ATTITUDE
Incompetent Hostage
Intolerant
Negative
Victim Anarchist
Terrorist

Passive Active
ACTIVITY
 Customer Segmentation An Operations View
Customer types

The Ally : usually arrive in a positive frame of mind, willing to

help and give positive feedback to facilitate the service.

The Hostage : they require service but are locked in to

another service provider contractually. May be difficult to deal
with them when service is not provided right.

The Anarchist : they dislike rules and systems.

The Patient : they are locked into the service (like hospital
patients, students at a university) and are willing to submit
themselves to the rules and regulations. However, unnecessary
restriction may turn them into hostage or anarchist.
Customer Segmentation An Operations View
Customer types (continued)
The Tolerant : they are passive and always waiting
patiently for the service provider to deliver service.

The Intolerant : they are seldom passive or patient, and

often cause stress and problems within the service for
themselves, the service providers and other customers.

The Victim : they are customers with bad luck. May react
in different ways.

The Terrorist : they mount damaging attack when you

least expected (e.g., the customer who declares their
dissatisfaction in loudly in the middle of a crowded restaurant).
Customer Segmentation An Operations View
Customer types (continued)
The Incompetent : Front line staff should pay
particular attention to them.
The Champion : Valued customers who are not
only supportive, but provide positive word-of-mouth
about the organization, its services and staff.
 Customer Segmentation An Operations View
Creating Allies
Referring to the Customer types figure:
Converting customers from the top left quadrant
(Tolerant, Patient) into top right quadrant (Allies) is quite
an easy task.
Allies are already positively disposed to the organization
but require engaging in the service process.
Converting customers from the bottom left quadrant
(Incompetent, Victim) into Allies may require counselling
and support.
Converting the Anarchists and Terrorists into Allies are
the most difficult.
 Creating Allies

COMMUNICATION
Positive

INVOLVEMENT
ATTITUDE

EJECT
Negative

Passive Active
ACTIVITY
 Benefits of Retaining Good Customers
A key task for operations manager:
retain the valuable customers
NOTE: Retention may be of limited concern to some
service organizations, such as local government
services, police, charities and health services, who
may not be able to choose their customers, or whose
customers have no or little choice.
These organizations have to accept and deal with
whoever comes through the door.
These organizations still have to have relationship
with their customers and manage them as well as
they can.
 Benefits of Retaining Good Customers
Retaining valuable customers have significant benefits
to the organization because these customers:
Are easy to deal with
Provide positive word-of-mouth advertising
Assist in service provision
Reduce operating costs
Increase revenues
Help the organization to improve its services
Do not place undue demands on the service
Generate long-term revenue (high lifetime value)
Spend more than other customers
Increase spending over time
May pay premium prices
 Develop Good Customer relationships
Customer Relationship

Good marketing alone will not develop

relationships with customers.

The operations of the business must

deliver something of value to ensure
loyalty and customer support.
 Develop Good Customer relationships
Customer Loyalty vs. Customer Relationship
Consider a mass transit system or a financial service provider,
customers may be extremely loyal (and use them every day) but not
have a relationship with the organization (in fact they may despise the
company).

Managing customer relationships (or relationship marketing) is to

establish, maintain and enhance relationships with customers for
mutual benefit.
Develop relationships with individual customers (one-to-one
marketing).

Develop relationships with groups of like-minded customers (affinity

groups).
Relationship marketing may not be desirable in all situations (e.g.,
high-volume or commodity-based services delivered to mass consumer markets such
as retail operations).
 Develop Good Customer relationships
Three types of Customer Relationships

1) Portfolio relationships
2) Personal relationships
3) Temporary Customer relationships
NOTE:
It is important to assess the risk in a customer
relationship and the means of managing customer
relationships in high volume consumer services (CRM).
 Three Forms of Customer Relationships
1) Portfolio Relationship (e.g., club card for supermarkets,
frequent flyer programs)
It involves the capture of the customer using a variety of products
(e.g. a bank offering to its customers multiple products
such as current accounts, loans, insurance, house loan,
line of credit, etc.)
This kind of relationships provide customers with the following
benefits:
Single point of contact for the service/product
portfolio
Discount for new products
Loyalty bonuses
 Three Forms of Customer Relationships
1) Portfolio Relationship (continued)
The downside of portfolio relationship for the customers is the difficulty of
switching to another service provider.

The benefits of Portfolio Relationship to the organization:

The gaining of higher-value customers
Long-term revenue stream
Opportunities to cross sell other products or services
Valuable information about customers

Service providers (e.g. retailers, airlines, and restaurants) are usually

more interested in buying loyalty rather than building relationships
Other service providers (e.g. hotels) are more interested in building
relationships by holding information about customers needs.
 Three Forms of Customer Relationships
2) Personal Relationship
This kind of relationships is usually found in low-
volume high-margin services where there is time and
value in developing one-on-one relationships with clients
or customers (e.g., consultancy).
The objective of the service providers part is to create a
situation where the customer thinks of them when the
customer next needs the service.
For example: in personal relationships in B2B
organizations there are advantages for both sides :
The service provider gets to know the customers business
well. This leads to a more effective service with a faster
response.
 Three Forms of Customer Relationships
2) Personal Relationship (continued)
There are four key elements to a personal relationship
between service provider and customer:
1) Communication: the extent to which there is of two-way
communication
2) Trust: the degree to which one partner depends on the
work or recommendation of the other
3) Intimacy: the extent to which each partner shares their
plans, strategies, profits, etc.
4) Rules: a mutual acceptance of how this particular
relationship operatesi.e., what is acceptable and
desirable, and what is not.
 Three Forms of Customer Relationships
3) Temporary Customer Relationship

This is found in High-volume consumer

services, where customer connection are made
quickly.

A combination of perceived risk and lack of

knowledge on the customers part will mean that the
possibility for a relationship will increase, given the
need for reassurance on the customers partfor
example: purchasing a used car, where the customer
is often incapable of making a totally informed decision.
 Customer Relationships
Risk and Relationship
There is often a link between customers perceived risk in
purchasing or using a service and their desire for a
personal relationship with the provider.

Where the customer does not feel that there is much risk,
either in making the purchase or in receiving the service,
there may be limited opportunity for relationship building
e.g., the majority of supermarket customers probably do not
have any depth of relationship with Walmart.

If there is a significant service failure, customers may move

quickly from low to high perceived risk.
 Customer Relationships
Risk and Relationship
There is often a link between customers perceived risk in
purchasing or using a service and their desire for a
personal relationship with the provider.

Where the customer does not feel that there is much risk,
either in making the purchase or in receiving the service,
there may be limited opportunity for relationship building
e.g., the majority of supermarket customers probably do not
have any depth of relationship with Walmart.

If there is a significant service failure, customers may move

quickly from low to high perceived risk.
 Customer Relationship Management ( CRM )
CRM is a term given to the management customer relationships in a
high-volume consumer services.
The objective of CRM is to develop a closer understanding of the needs
of individual customers in order to increase profitability.
CRM attempts to integrate many communication channels between an
organizations units and its customers to record information about customer
preferences in order to develop and strengthen the relationship and the profitability
of customer.

CRM heavily uses technologies such as data warehouse, data mart, and data
mining.
Readiness for CRM
 Developing Business Relationships

Drivers for improving B2B relationships:

Gain in market share
Acquisition of intellectual property rights (IPR) or
technology
Portfolio re-balancing
Reduce cost base
Improved productivity
Margin growth
 Developing Business Relationships

Benefits of improved business relationships:

Improved bottom line
Long-term differentiation
Growth
Shifts in behavior
Increased trust
Fruitful co-operation
Improved working patterns
Enhanced capacity for problem solving
 Developing Business Relationships
Forms of business relationships:
Contracts: non-equity agreement
Partnerships/Alliances: can be contractual or informal,
parity-type relationships built on equal input of both
partners with shared goals.
Strategic alliances (global alliances): Involves exchange,
sharing, or co-development of products, technologies or
services.
Partnering: Closer relationship with openness and trust
Joint ventures (JVs): the partners build a new, separate
subsidiary, jointly owned, to exploit a particular
opportunity.
Networks: Interconnecting partnership, alliances or JVs.
 Developing Business Relationships
Transactional and strategic relationships:
Any relationship can be one of the following:
1) Transactional 2) Strategic
These two types must be managed and measured quite differently
 Developing Business Relationships

Measuring business relationships:

Where is the relationship currently?
Why is it like that?
What is the best the relationship might be?
What might need to change to get there?
How should we monitor the progress?

The above question a major concern for operations

managers: how to assess and measure relationships
 Measuring business relationships
Assessing transactional relationships
Ittends to be concerned almost entirely with financial and hard
measures of operational performance (e.g., price, on-time delivery), and
is frequently defined by service-level agreements (SLAs) which are
often imposed on the supplier by the purchaser.

Itis important to note that relationships are two-way and shared

(relationships are owned by both parties).

SLA measures provide a basis for review of how well the contract is
working. The disadvantage of SALs is that it is impossible to
describe all aspects of service provision through an SLA.
 Measuring business relationships
Assessing strategic relationships
Partner organizations try to work closely together in a long-
term relationship.
It is almost always based on the joint development of a
process for capturing and monitoring an agreed set of hard
and soft (e.g., attitude, behavior and trust) metrics.
 Measuring business relationships
The seven dimensions of business relationships
Dimension Definition
Partner selection Who you choose to work with

Nature of contract Impact of the contract on the relationship and

vice versa

Understanding each other Understanding each others expectations and

perceptions

Interpersonal relationships One-on-one relationships

Way of working Relationships at an organizational level

Dealing with problems Dealing with and learning from problems

Performance management Using measures to drive action and

improvement
 Developing business relationships
From traditional bow tie relationship to diamond relationship
Keyaccount management (KAM) defines full relationship between
your business and your customers. The main objective of KAM is to
create long everlasting business relationship
KAM turns the traditional bow tie relationship into much stronger
diamond. In this format, links are encouraged across the boundary
between the two organizations.

Key account manager acts as an enabler for the relationship (e.g., if the
customer has a particular need, KAM is focused on setting up the
dialogue between the appropriate parties).
bow tie and diamond relationships
 Building interpersonal relationships in business
Interpersonal business relationships can be established
and enhanced in four key ways:

1) Going the extra mile: Providing higher than expected levels of

service on a current project, greater accessibility of staff, etc.

2) Increasing the amount of client contact: Making frequent visits

or telephone calls, scheduling frequent meetings and feedback sessions,
etc.

3) Building the business relationship: Putting on special seminars

for the client, assisting with benchmarking, referring business to clients,
etc.

4) Building a social relationship: Providing social activities and

tickets for events, remembering personal anniversaries, etc.