Chapter 4 Building Longterm Relationships Learning objectives Building

Chapter 4 Building Long-term Relationships

Learning objectives • Building customer value, satisfaction, and loyalty • Maximizing customer lifetime value • Cultivating customer relationships • Customer databases and database marketing 2

Building customer value, satisfaction, and loyalty • Today, companies face their toughest competition ever • Moving from a product-and-sales philosophy to a holistic marketing philosophy gives them better chance of outperforming the competition • The cornerstone of a well-conceived holistic marketing orientation is strong customer relationships • Marketers must connect with customersinforming, engaging, and even energizing them in the process. 3

Traditional organization vs. moderncustomer-oriented company organization 4

Customer perceived value Customers are better educated and informed than ever, and they have the tools to verify companies’ claims and seek out superior alternatives. How then do customers make choices? They tend to be value maximizers within the bound of search costs and limited knowledge, mobility, and income. Customer perceived value is the difference between the prospective customer’s evaluation of all the benefits and all the costs of an offering and the perceived alternatives. Customer perceived value is thus based on the difference between what the customer gets and what he or she gives for different possible choices. The customer gets benefits and assumes costs. 5

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Delivering high customer value Consumers have varying degrees of loyalty to specific brands, stores, and companies. Loyalty can be 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. A company must design a competitively superior value proposition aimed at a specific market segment, backed by a superior value delivery system. The value proposition consists of the whole cluster of benefits the company promises to deliver; it is more than the core positioning of the offer. The value delivery system includes all the experiences the customer will have on the way to obtaining and using the offering. 7

Total customer satisfaction In general, satisfaction is a person’s feelings of pleasure or disappointment that result from comparing a product’s performance (or outcome) to expectations. Although customer-centered firm seeks to create high customer satisfaction, that is not its ultimate goal. Increasing customer satisfaction by lowering price or increasing customer services may result in lower profits. However, it should also think about delivering acceptable level of satisfaction to other stakeholders. 8

Customer expectations How do buyers form their expectations? From past buying experience, friends’ and associates’ advice, and marketers’ and competitors’ information and promises. If marketers raise expectations too high, the buyer is likely to be disappointed. However, if the company sets expectations too low, it won’t attract enough buyers. Some of today’s most successful companies are raising expectations and delivering performances to match. 9

Monitoring satisfaction Many companies are systematically measuring customer satisfaction and factors shaping it. A company would be wise to measure customer satisfaction regularly because one key to customer retention is customer satisfaction. A highly satisfied customer generally stays loyal longer, buys more as the company introduces new products and upgrades existing products, talks favorably about the company and its products and pay less attention to competing brands and less sensitive to price, offers product or service ideas to the company, and costs less to serve than customers because transactions are routine. 10

Monitoring satisfaction The link between customer satisfaction and customer loyalty is not proportional. For example, assume that customer satisfaction is rated on a scale from 1 to 5. At a very low level of satisfaction (Level 1), they will abandon the company even bad-mouth it. At level 2 to 4, they are fairly satisfied but still find it easy to switch when a better offer comes along. At level 5, they will repurchase and even spread good word of mouth. High satisfaction or delight creates an emotional bond with the brand or company, not just a rational preference. 11

Product and service quality Quality is the totality of features and characteristics of a product or service that bear on its ability to satisfy stated or implied needs. • Quality level is the level of quality that supports the product’s positioning (Performance Quality) • Conformance quality is the product’s freedom from defects and consistency in delivering a targeted level of performance. 12

Maximizing customer lifetime value Ultimately, marketing is the art of attracting and keeping profitable customers. Every company loses money on some of its customers. The well-known 20/80 rule says that the top 20 percent of the customers may generate as much as 80 percent of the company’s profits. It is not necessarily the company’s largest customers who yield the most profit. The largest customers demand considerable service and receive the deepest discounts. The smallest customers pay full price and receive minimal service, but the cost of transacting with small customers reduce their profitability. The midsize customers receive good service and pay nearly full price. 13

Customer profitability What makes a customer profitable? A profitable customer is a person, household, or company that over time yields revenue stream exceeding by an acceptable amount the company’s cost stream of attracting, selling, and servicing that customer. 14

Customer profitability analysis 15

Customer profitability analysis Customers are arrayed along the columns and products along the rows. Each cells contains a symbol for the profitability of selling that product to that customer. Customer 1 is very profitable; he buys three profit-making products (P 1, P 2, and P 4). Customer 2 yield a picture of mixed profitability; he buys one profitable product (P 2) and one unprofitable product (P 3). Customer 3 is a loosing customer because he buys one profitable product (P 1) and two Unprofitable products (P 3 and P 4). Customer profitability analysis (CPA) is best conducted with the tools of an accounting technique called Activity-Based Costing. The company estimates all revenue coming from the customer, less all costs. 16

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. The company must subtract from the expected revenues the expected costs of attracting, selling, and servicing that customer, applying the appropriate discount rate (e. g. 10%-20%), depending on cost of capital and risk attitude). Now suppose the company estimates average customer lifetime value as follows: • Annual customer revenue: $500 • Average number of loyal years: 20 • Company profit margin: 10% • Customer lifetime value: $1000 17

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Building loyalty Companies should strive to build loyalty for strong, enduring connections with customers. There are four marketing activities that improve loyalty and retention. • Interact closely with customers • Develop loyalty programs-frequency programs and club membership programs • Create institutional ties • Create value with brand communities. A brand community is a specialized community of consumers and employees whose identification and activities around the brand, such as Harley Owners Group. 19