Customer Value, Satisfaction & Loyalty

MARKETING MANAGEMENT Creating Customer Value, Satisfaction, and Loyalty Presented By Jalaj Mathur

Figure 5.1 Organizational Charts

Customer Perceived Value 

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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

Figure 5.2 Determinants of Customer Perceived Value Total customer benefit

Total customer cost

Product benefit

Monetary cost

Services benefit

Time cost

Personal benefit

Energy cost

Image benefit

Psychological cost

A Customer-Oriented Model?

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The Value Proposition The cluster of benefits the company promises to deliver

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Customer Value & Satisfaction 

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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 Periodic Periodic Surveys Surveys Customer Customer Loss Loss Rate Rate Mystery Mystery Shoppers Shoppers Monitor Monitor competitive competitive performance performance

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.

BUILDING CUSTOMER VALUE, SATISFACTION, AND LOYALTY 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.

BUILDING CUSTOMER VALUE, SATISFACTION, AND LOYALTY 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 and characteristics of a product or service that bear on its ability to satisfy stated or implied needs.

BUILDING CUSTOMER VALUE, SATISFACTION, AND LOYALTY Total Quality Management

TQM is an organization-wide approach to continuously improving the quality of all the organization’s processes, products, and services.

•Total quality management (TQM) is an organizationwide 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.

BUILDING CUSTOMER VALUE, SATISFACTION, AND LOYALTY •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.

BUILDING CUSTOMER VALUE, SATISFACTION, AND LOYALTY •

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

MAXIMIZING CUSTOMER LIFETIME VALUE Marketing 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

MAXIMIZING CUSTOMER LIFETIME VALUE Customer Profitability

Customer Profitability

Customer Equity

Lifetime Value

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.

MAXIMIZING CUSTOMER LIFETIME VALUE A profitability analysis.

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

MAXIMIZING CUSTOMER LIFETIME VALUE 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).

MAXIMIZING CUSTOMER LIFETIME VALUE 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

MAXIMIZING CUSTOMER LIFETIME VALUE 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

MAXIMIZING CUSTOMER LIFETIME VALUE 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 RELATIONSHIPS Customer 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. •

CULTIVATING CUSTOMER RELATIONSHIPS

Identify prospects and customers Differentiate customers by needs and value to company Interact to improve knowledge Customize for each customer

Peppers and Rogers outlined a fourstep 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.

CULTIVATING CUSTOMER RELATIONSHIPS

Reduce Reduce the the rate rate of of defection defection Increase Increase longevity longevity Enhance Enhance “share “share of of wallet” wallet” Terminate Terminate low-profit low-profit customers customers Focus Focus more more effort effort on on highhighprofit profit customers customers

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 upselling.” •Making low-profit customers more profitable

CULTIVATING CUSTOMER RELATIONSHIPS

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

CULTIVATING CUSTOMER RELATIONSHIPS Building Loyalty

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

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.

Breaking Down CRM: What CRM Really CRM Imperative Comprises Acquiring the right customer

Crafting the right value proposition

Instituting the best processes

Motivating employees

Learning to retain customer

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 •Know what tools the best way to our employees deliver need to use to products/services to foster customer customers relationships •Including alliance •Have identified HR need to strike, tech systems needed to need to invest, and boost employee services capabilities loyalty that need to be developed or acquired CRM Technology Can Help…

•Analyze customer revenue & cost data to identify current and future high value customers •Target directmarketing 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

•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 •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