Customer Value, Satisfaction & Loyalty

MARKETING MANAGEMENTCreating

Customer Value, Satisfaction, and

Loyalty

Presented ByJalaj Mathur

Figure 5.1 Organizational Charts

Customer Perceived Value

CPV is the difference between the prospective customers evaluation of all the benefits and all the costs of an offering and the perceived alternatives.

Total customer value is the perceived monetary value of the bundle of economic, functional & psychological benefits customers expect from a given market offering.

Total customer cost is the bundle of costs customers expect to incur in evaluating, obtaining, using, disposing of the given market offering, including monetary, time, energy & psychic costs.

Figure 5.2 Determinants of Customer Perceived Value

Image benefit Psychological cost

Personal benefit Energy cost

Services benefit Time cost

Product benefit Monetary cost

Total customer benefit Total customer cost

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A Customer-Oriented Model?

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The Value Proposition

The cluster of benefits thecompany promises to deliver

Customer Value & Satisfaction Value delivery system includes all the

experiences the customer will have on the way to obtaining & using the offering.

Satisfaction is a person’s feeling of pleasure or disappointment resulting from comparing a product’s perceived performance in relation to his or her’s expectations.

BUILDING CUSTOMER VALUE, SATISFACTION, AND LOYALTY

Customer perceived value is a useful framework that applies to many situations and yields rich insights. Its implications are:

First, the seller must assess the total customer value and total customer cost associated with each competitor’s offer.

Second, the seller who is at a customer perceived value disadvantage has two alternatives:

To increase total customer value (by strengthening or augmenting the offer’s product, services, personnel, and image benefits).

To decrease total customer cost (by reducing price, simplifying the ordering, and delivery process, or absorbing some buyer risk by offering a warranty.

Periodic SurveysPeriodic Surveys

Customer Loss RateCustomer Loss Rate

Mystery ShoppersMystery Shoppers

Monitor competitive performance

Monitor competitive performance


Delivering High Customer Value

•Loyalty is defined as “a deeply held commitment to rebuy or repatronize a preferred product or service in the future despite situational influences and marketing efforts having the potential to cause switching behavior.”

•The key to generating high customer loyalty is to deliver high customer value.

•The value proposition consists of the whole cluster of benefits the company promises to deliver, it is more than the core positioning of the offering.

•Whether the promise is kept depends on the company’s ability to manage its value-delivery system.


Customer Expectations

How do buyers form their expectations?

From past buying experiences.

Friends and associates advice.

Marketers’ and competitors’ information and promises.

A customer’s decision to be loyal or to defect is the sum of many small encounters with the company.

Companies need to create a “branded customer experience.”

We can say that a seller has delivered quality whenever the seller’s product or service meets or exceeds the customers’ expectations.

What is Quality?

Quality is the totality of features andcharacteristics of a product or

service that bear on its ability to satisfy

stated or implied needs.


Total Quality Management

•Total quality management (TQM) is an organization-wide approach to continuously improve the quality of all the organization’s processes, products, and services.

•TQM ran into implementation problems as firms became overly focused on how they were doing business and not the why they were in business. Companies lost sight of consumer needs and wants.

•Companies are now concentrating efforts on “return on quality” or ROQ.

TQM is an organization-wide approach to continuously improving the quality of

all the organization’s processes, products, and services.


ROQ advocates improving quality only on those dimensions that produce tangible customer benefits, lower costs, or increased sales.

Companies define and deliver high-quality goods and services to target customers.

Marketers play several roles in helping their They bear the major responsibility for correctly identifying the customers’ needs and requirements.

They must communicate customer expectations properly to product designers.

They must check that customers’ orders are filled correctly and on time.


They must make sure that customers have received proper instructions, training, and technical assistance in the use of the product.

They must stay in touch with customers after the sale to ensure that they are satisfied and remain satisfied.

They must gather customer ideas for product and service improvements and convey them to the appropriate departments.

MAXIMIZING CUSTOMER LIFETIME VALUEMarketing is the art of attracting and keeping profitable customers.

The 80/20 rule states that the top 20 percent of the customers may generate as much as 80 percent of the company’s profits.

Suggests amending the rule to read 20-80-30, to reflect the idea that the top 20 percent of customers generate 80 percent of the company’s profits, half of which are lost serving the bottom 30 percent of unprofitable customers.

The implication is that a company could improve its profits by “firing” its worst customers.

MAXIMIZING CUSTOMER LIFETIME VALUE

Customer Profitability

A profitable customer is a person, household, or company that over time yields a revenue stream that exceeds by an acceptable amount the company’s cost stream of attracting, selling, and servicing that customer.

Customer profitability can be assessed individually, by market segment, or by channel.

Most companies fail to measure individual customer profitability.

Customer Profitability

Customer Equity

LifetimeValue


Customer Profitability Analysis

Customer 1 is very profitable.

Customer 2 is mixed profitability.

Customer 3 is a losing customer.

What can the company do about customers 2 and 3?

It can raise the price of its less profitable products or eliminate them.

It can try to sell them its profit-making products.

It can encourage customer 3 to switch to competitors.

A profitability analysis.


Customer profitability analysis (CPA) is best conducted with the tools of an accounting technique called Activity-Based Costing (ABC).

Platinum customers (most profitable).

Gold customers (profitable).

Iron customers (low profitability but desirable).

Lead customers (unprofitable and undesirable).

A profitability analysis.


Competitive Advantage

Competitive advantage is a company’s ability to perform in one or more ways that competitors cannot or will not match.

Michael Porter urged companies to build a sustainable competitive advantage.

Few competitive advantages are sustainable, at best they may be leverageable.

A leverageable advantage is one that a company can use as a spring-board to new advantages.

Any competitive advantage must be seen by customers as a customer advantage.


Measuring Customer Lifetime Value

Customer Lifetime Value (CLV) describes the net present value of the stream of future profits expected over the customer’s lifetime purchases.

•CLV calculations provide a formal quantitative framework for planning customer investment and helps marketers to adopt a long-term perspective.


Simple Example

Customer acquisition cost:

•Cost of average sales call (including salary, commission, benefits, and expenses) :$300/call

•Average number of sales calls to convert an average prospect into a customer: 4 times

Cost of attracting a new customer: $1,200

(perhaps other costs e.g., ads, promotion, probability of failure case that may probably end up become a cost of success case, etc)

Estimate Average Customer Lifetime Value

•Annual customer revenue: $500

•Average number of loyal years: 20 years

•Company profit margin: .10

Customer Lifetime value = $1,000

•This mean co. is spending more to attract new customers than they are worth.

•Unless the co. can sign up customers with fewer sales calls, spend less per sales call, stimulate higher new-customer annual spending, retain customers longer, or sell them higher-product products, it is headed for bankruptcy.

CULTIVATING CUSTOMER RELATIONSHIPSCustomer Relationship Management (CRM)

Customer relationship management (CRM) is the process of managing detailed information about individual customers and carefully managing all customer “touch points” to maximize customer loyalty.

•A customer “touch point” is any occasion on which a customer encounters the brand and product—from actual experience to personal or mass communications to casual observation.

•Customer relationship management enables companies to provide excellent real-time customer service through the effective use of individual account information.

CULTIVATING CUSTOMER RELATIONSHIPS

Peppers and Rogers outlined a four-step framework for one-to-one marketing that can be adapted to CRM marketing:

Identify your prospects and customers.

Differentiate customers in terms of: (1) their needs and (2) their value to your company.

Interact with individual customers to improve your knowledge about individual needs and to build stronger relationships.

Customize products, services, and messages to each customer.

Identify prospects and customers

Differentiate customers by needs and value to company

Interact to improve knowledge

Customize for each customer


A key driver of shareholder value is the aggregate value of the customer base. Winning companies improve the value of their customer base by excelling at strategies such as:

Reducing the rate of customer defection.

Increasing the longevity of the customer relationship.

Enhancing the growth potential of each customer through “share-of-wallet, cross-selling, and up-selling.”

Making low-profit customers more profitable or terminating them.

Focusing disproportionate effort on high-value customers.

Reduce the rate of defectionReduce the rate of defection

Increase longevityIncrease longevity

Enhance “share of wallet”Enhance “share of wallet”

Terminate low-profit customers

Terminate low-profit customers

Focus more effort on high-profit customers

Focus more effort on high-profit customers


Two main ways to strengthen customer retention:

Erect high switching costs.

Deliver high customer satisfaction.

Most companies now recognize the importance of satisfying and retaining customers.

Satisfied customers constitute the company’s customer relationship capital.

Acquiring new customers cost five times more than the costs involved in satisfying and retaining current customers.

The average company loses 10 percent of its customers each year.

CULTIVATING CUSTOMER RELATIONSHIPSBuilding Loyalty

Five different levels of investment in customer-relationship building:

Basic marketing: salesperson simple sale the product

Reactive marketing: salesperson sell & encourages to call if has questions, complaint, comments

Accountable marketing: phones to check whether product meet expectations, suggest & ask for product/service improvements

Proactive marketing: salesperson contacts from time to time with suggestions about improve products uses or new product

Partnership marketing: company works continuously with its large customers to help improve their performance.

The likely level of relationship marketing depends upon the number of customers and profit margin levels.

Breaking Down CRM: What CRM Really Comprises

Acquiring the right customer

Crafting the right value proposition

Instituting the best processes

Motivating employees

Learning to retain customer

CRM Imperative

You Get It When…

•Have identified most valuable customers•Have calculated share of their wallet for goods/services

•Have studied what products/services customers need today, tomorrow•Have surveyed what competitors offer today, tomorrow•Have spotted what products/services we should offer

•Have researched the best way to deliver products/services to customers•Including alliance need to strike, tech need to invest, and services capabilities that need to be developed or acquired

•Know what tools our employees need to use to foster customer relationships•Have identified HR systems needed to boost employee loyalty

•Have learned why customers defect and how to win them back•Have analyzed what competitors do to win your high value customers•Senior management monitors customer defection metrics

CRM Technology Can Help…

•Analyze customer revenue & cost data to identify current and future high value customers•Target direct-marketing efforts better

•Capture relevant product/service behavior data•Create new distribution channels•Develop new pricing models•Build communities

•Process transaction faster•Provide better info to the front line•Manage logistic and supply chain more efficiently•Catalyze collaborative commerce

•Align incentives and metrics•Deploy knowledge management systems

•Track customer defection and retention levels•Track customer service satisfaction levels

Source: Darrel K., Reichheld F., and Schefter P., “Avoid the Four Perils of CRM” Harvard Business Review (Feb, 2002) pg. 106

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Customer Value, Satisfaction & Loyalty