Chapter 3 Building Customer Satisfaction Value and Retention

Kotler on Marketing It is no longer enough to satisfy customers. You must delight

Chapter Objectives § In this chapter, we will address the following questions: § What are customer value and satisfaction, and how can companies deliver them? § What makes a high-performance business? § How can companies both attract and retain customers? § How can companies improve both customer and company profitability? § How can companies deliver total quality? 3 Copyright © 2003 Prentice-Hall, Inc.

Customer Perceived Value Is the difference between the prospective customer’s evaluation of all benefits and all the costs of an offering and the perceived alternatives. Example: Caterpillar & Komatsu 4 Copyright © 2003 Prentice-Hall, Inc.

Figure 3 -1: Determinants of Customer Delivered Value 5 Copyright © 2003 Prentice-Hall, Inc.

Total Customer Satisfaction § Satisfaction: is a person’s feelings of pleasure or disappointment resulting from comparing a product’s perceived performance (outcome) in relation to his or her expectations. § Customer Expectations Customers form their expectations from past buying experience, friends and associates’ advice and marketers’ and competitors’ information and promises. (High VS Low expectation). 6 Copyright © 2003 Prentice-Hall, Inc.

Total Customer Satisfaction § Delivering High Customer Value: Delivering a competitively superior value proposition aimed at a specific market segment, backed by a superior value-delivery system. ü Value proposition: whole benefits a company promises to deliver. ü Value-delivery system: all experiences the customer will have on the way to obtaining and using the offering. 7 Copyright © 2003 Prentice-Hall, Inc.

Table 3 -1: Tools for Tracking and Measuring Customer Satisfaction Complaint and suggestion systems: Customer satisfaction surveys: A customer-centered organization makes it easy for customers to register suggestions and complaints. Some customer-centered companies-P&G, General Electric, Whirlpool—establish hot lines with toll-free numbers. Companies are also using Web sites and e-mail for quick, two-way communication. Studies show that although customers are dissatisfied with one out of every four purchases, less than 5 percent will complain. Most customers will buy less or switch suppliers. Responsive companies measure customer satisfaction directly by conducting periodic surveys. While collecting customer satisfaction data, it is also useful to ask additional questions to measure repurchase intention and to measure the likelihood or willingness to recommend the company and brand to others. 8 Copyright © 2003 Prentice-Hall, Inc.

Table 3 -1: Tools for Tracking and Measuring Customer Satisfaction Ghost shopping: Companies can hire people to pose as potential buyers to report on strong and weak points experienced in buying the company’s and competitors’ products. These mystery shoppers can even test how the company’s sales personnel handle various situations. Managers themselves should leave their offices from time to time, enter company and competitor sales situations where they are unknow, and experience firsthand the treatment they receive. A variant of this for managers to phone their own company with questions and complaints to see how the calls are handled. Lost customer analysis: Companies should contact customers who have stopped buying or who have switched to another supplier to learn why this happened. Not only is it important to conduct exit interviews when customers first stop buying; it is also necessary to monitor the customer loss rate. Copyright © 2003 Prentice-Hall, Inc. 9

Total Customer Satisfaction § Measuring Satisfaction: CSI (Customer Satisfaction Index) 10 Copyright © 2003

Would you feel more brand loyalty for a company that tried to immediately resolve a complaint via E-mail, or a company that had a customer service representative call within two business days to resolve the problem over the phone? 11 Copyright © 2003 Prentice-Hall, Inc.

The High Performance Business (keys to Success) 12 Copyright © 2003 Prentice-Hall, Inc.

The Nature of High Performance Business § Stakeholders § Processes § Resources § Core competency § Distinctive capabilities § Organization and Organizational Culture § § § Organization Corporate culture Scenario analysis 13 Copyright © 2003 Prentice-Hall, Inc.

Can you name a company that has changed the public’s perception of their corporate

Delivering Customer Value and Satisfaction § How can a company creates and delivers superior value? § Understand customer value § Create customer value § Deliver customer value § Capture customer value § Sustain customer value § Value chain: is a tool for identifying ways to create more customer value. 15 Copyright © 2003 Prentice-Hall, Inc.

Figure 3 -3: The Generic Value Chain 16 Copyright © 2003 Prentice-Hall, Inc.

Delivering Customer Value and Satisfaction § Benchmarks: estimation of the company competitor’s costs and performances against its own costs and performance. § Core Business Processes § The market sensing process § The new offering realization process § The customer acquisition process § The customer relationship management process § The fulfillment management process 17 Copyright © 2003 Prentice-Hall, Inc.

Delivering Customer Value and Satisfaction § The Value Delivery Network (Supply Chain) 18 Copyright

Attracting and Retaining Customers § Partner relationship management (PRM): Building partnering relationship with specific distributors and suppliers to create a superior value-delivery network. § Customer relationship management (CRM): § Managing the detailed information about individual customers and carefully managing all the customer “touch points” with the aim of maximizing customer loyalty. 19 Copyright © 2003 Prentice-Hall, Inc.

Attracting and Retaining Customers § Attracting Customers: (satisfaction & loyalty) § Computing the Cost of Lost Customers: Possible causes: high price, shoddy product, poor service, little attention from suppliers …etc). The solution: Listen to customers 20 Copyright © 2003 Prentice-Hall, Inc.

On the Lands’ End Web site, customers can click a button to talk with

Attracting and Retaining Customers § The Need for Customer Retention: § Listen to the customer and respond quickly and constructively to the complaints. § Acquiring new customers can cost five times more than the costs involved in satisfying and retaining current customers. § A 5% reduction in the customer defection rate can increase profits by 25% to 85% depending on the industry. § Customer profit rate tends to increase over the life of retained customer. 22 Copyright © 2003 Prentice-Hall, Inc.

Attracting and Retaining Customers § Measuring Customer Lifetime Value (CLV): present value of the stream of future profits expected over the customer’s lifetime purchases. § Customer Relationship Management (CRM): The Key § Customer equity: is the total of the discounted lifetime values of all of the firm’s customers. 23 Copyright © 2003 Prentice-Hall, Inc.

§ Three drivers of customer equity 1. Value equity: o is the customer’s objective assessment of the utility of an offering based on perception of its benefits relative to its costs o Sub-drivers: quality, price, convenience. o Important when the products are differentiated (business markets). 2. Brand equity: o is the customer’s subjective and intangible assessment of the brand, above and beyond its objectively perceived value. o Sub-drivers: customer brand awareness, customer attitude, customer perception of brand ethics. § Important when products are less defferentiated and have more emotional impact. 24 Copyright © 2003 Prentice-Hall, Inc.

§ Three drivers of customer equity (cont. ) 3. Relationship equity: o is the customer’s tendency to stick with brand, above and beyond objective and subjective assessments of its worth. o Sub-drivers: loyalty programs, special recognition and treatment programs, community building programs, knowledge building programs. o Important where personal relationships count for a lot. 25 Copyright © 2003 Prentice-Hall, Inc.

Figure 3 -5: The Customer. Development Process 26 Copyright © 2003 Prentice-Hall, Inc.

Attracting and Retaining Customers § Five levels of investment in customer relationship building: § Basic marketing: simply sell § Reactive marketing: sell & encourage to call § Accountable marketing: phone and ask for feedback. § Proactive marketing: contact from time to time. § Partnership marketing: work continuously to improve the company performance. 27 Copyright © 2003 Prentice-Hall, Inc.

Figure 3 -6: Levels of Relationship Marketing 28 Copyright © 2003 Prentice-Hall, Inc.

Attracting and Retaining Customers § Forming Strong Customer Bonds: The Basics § Cross-departmental participation § Integrate the Voice of the Customer into all business decisions § Create superior offering for the target market 29 Copyright © 2003 Prentice-Hall, Inc.

Forming Strong Customer Bonds: The Basics § Organize and make accessible a database of customer information § Make it easy for customers to reach the appropriate personnel § Reward outstanding employees 30 Copyright © 2003 Prentice-Hall, Inc.

Forming Strong Customer Bonds: The Basics § Other three retention-building approaches: 1. Adding financial benefits: § Frequency programs (FPs): awards to customers who buy frequently and substantially (20/80). § Club membership programs: open or limited. 31 Copyright © 2003 Prentice-Hall, Inc.

Forming Strong Customer Bonds: The Basics § Other three retention-building approaches (cont. ): 2. Adding social benefits: by: § Individualizing and personalizing customer relationship. § Turning Customer into Clients (customers are nameless, part of mass, served by any one). 32 Copyright © 2003 Prentice-Hall, Inc.

Forming Strong Customer Bonds: The Basics § Other three retention-building approaches (cont. ): 3. Adding structural ties: § Create long-term contracts (newspapers) § Charge a lower price to consumers who buy larger supplies. § Turn the product into a long-term service (transportation instead of car) 33 Copyright © 2003 Prentice-Hall, Inc.

Customer Profitability, Company Profitability, and Total Quality Management § Measuring Profitability § Marketing is the art of attracting and keeping profitable customer. § 20/80 rule and 20/80/30 rule. § 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. § Two solutions to handle unprofitable customer: raise fees or reduce service support. § Customer profitability analysis (CPA). 34 Copyright © 2003 Prentice-Hall, Inc.

Figure 3 -7: Customer-Product Profitability Analysis 35 Copyright © 2003 Prentice-Hall, Inc.

Figure 3 -8: Allocating marketing investment according to customer value 36 Copyright © 2003

Customer Profitability, Company Profitability, and Total Quality Management § Increasing Company Profitability § Competitive advantage: is a company’s ability to perform in one or more ways that competitors cannot or will not match. § Sustainable competitive advantage (Microsoft) § CA must be seen by customers as a customer advantage (speed of service). 37 Copyright © 2003 Prentice-Hall, Inc.

Customer Profitability, Company Profitability, and Total Quality Management § Implementing TQM § Total Quality Management: is an organizational wide approach to continuously improving the quality of all the organization’s processes, products and services. § Quality: is the totality of features and characteristics of a product or service that bear on its ability to satisfy stated or implied needs. § Conformance quality VS performance quality (Mercedes & Hyundai). § Product and service quality, customer satisfaction, and company profitability are connected. 38 Copyright © 2003 Prentice-Hall, Inc.