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Chapters 3 and 4Chapters 3 and 4

Understanding Market Understanding Market Potential, Customer Satisfaction Potential, Customer Satisfaction

and Loyalty - Links to Firm and Loyalty - Links to Firm Performance. Performance.

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Let’s start by understanding what Let’s start by understanding what drives performancedrives performance

• Make a short list of the things that drive Make a short list of the things that drive firm performance. firm performance.

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Market-Based Performance DriversMarket-Based Performance Drivers

• Share Growth.Share Growth.

• Sales Growth.Sales Growth.

• Improvements in market position.Improvements in market position.

• Improvements in price position.Improvements in price position.

• Successful new product introductions.Successful new product introductions.

But, what drives these factors?But, what drives these factors?

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Market-Driven Organizations:Market-Driven Organizations:• Characterized by a focus on Characterized by a focus on customer customer

needs and interests.needs and interests. • Resulting in generation, dissemination and Resulting in generation, dissemination and

utilization of market intelligence, resulting in utilization of market intelligence, resulting in coordinated inter-functional action directed coordinated inter-functional action directed at creating at creating superior customer valuesuperior customer value..

• It is through delivery of superior customer It is through delivery of superior customer value that market driven firms attain value that market driven firms attain superior performance. superior performance. e.g. Apple. e.g. Apple.

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Market Orientation, Competitive Advantage Market Orientation, Competitive Advantage and Business Performanceand Business Performance

Market Orientation •Customer Focus•Competitor Focus•Inter-Functional Coordination and Response.

Core Capabilities •Customer Service•Quality•Innovation•Responsiveness•Value

Competitive Advantage •New Prod. Success•Share Growth•Differentiation•Cost Efficiency

Business Performance •Sales Growth•Satisfaction•Loyalty•Profitability

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Market Driven FirmMarket Driven Firm

CustomerInformation

CompetitorInformation

Other Mkt.Information

Information Acquisition

InterfunctionalAssessment

SuperiorCustomerValueShared

Diagnosis and

CoordinatedAction

Organizational Values and Culture

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Internally OrientedInternally Oriented

Who are our customers?Who are our customers?

What are their needs?What are their needs?

Who is the competition?Who is the competition?

What are our capabilities?What are our capabilities?

What is our competitiveWhat is our competitiveadvantage?advantage?

What is the product?What is the product?

What channels are used?What channels are used?

How does the market respond toHow does the market respond topricing and promotionpricing and promotion

Market Driven vs. Internal OrientationMarket Driven vs. Internal Orientation

Where can we sell our products?Where can we sell our products?

What can we provide?What can we provide?

Why worry about competition?Why worry about competition?

What can we do to be more efficient ?What can we do to be more efficient ?

How do we make more money?How do we make more money?

What can R&D come up with?What can R&D come up with?

How can we drive channel efficiency?How can we drive channel efficiency?

How we set price to make the most $.How we set price to make the most $.

How can we get customers to buy?How can we get customers to buy?

Market-DrivenMarket-Driven

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Where can we find new customers?Where can we find new customers?

What new needs can be created?What new needs can be created?

Who do we want as competition?Who do we want as competition?

What new capabilities can we develop?What new capabilities can we develop?

What type of competitive advantageWhat type of competitive advantageshould we develop?should we develop?

What new products can be created?What new products can be created?

What new channels can be created?What new channels can be created?

What new pricing and promotionWhat new pricing and promotionapproaches can be created?approaches can be created?

Market-DrivenMarket-Driven Market-DrivingMarket-Driving

Who are our customers?Who are our customers?

What are their needs?What are their needs?

Who is the competition?Who is the competition?

What are our capabilities?What are our capabilities?

What is our competitiveWhat is our competitiveadvantage?advantage?

What is the product?What is the product?

What channels are used?What channels are used?

How does the market respond toHow does the market respond topricing and promotionpricing and promotion

Market Driving - The Next StepMarket Driving - The Next Step

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IssuesIssues

• How do we become a market-driver?How do we become a market-driver?

• Is the customer the main focus of our Is the customer the main focus of our action?action?

• Are managers focused on acting in the Are managers focused on acting in the interest of customers?interest of customers?

• Do we have the data to support action?Do we have the data to support action?

• Not just Marketing Dept’s job.Not just Marketing Dept’s job.

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Understanding Market PotentialUnderstanding Market Potential

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Market Potential and Market GrowthMarket Potential and Market Growth

• Forces affecting rate of market growthForces affecting rate of market growthMarket potentialMarket potentialMarket penetrationMarket penetrationRate of entryRate of entry

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Market GrowthMarket Growth

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Market ShareMarket Share

• Market Share Index (MSI) = Market Share Index (MSI) =

Product X Product X Price X Product X ServiceProduct X Product X Price X Product X Service Awareness Preference Acceptability Availability Awareness Preference Acceptability Availability

ExperienceExperience

• Share Development Index (SDI) = Share Development Index (SDI) = Market Share Index Market Share Index x 100x 100

Share Index PotentialShare Index Potential

• Note: This is predicated on having the data to do the Note: This is predicated on having the data to do the calculations.calculations.

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Market Demand vs PotentialMarket Demand vs Potential

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Customer Value CreationCustomer Value Creation

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Building Customer FocusBuilding Customer Focus

• The FundamentalsThe Fundamentals

• Determining Buyer NeedsDetermining Buyer Needs

• Setting PrioritiesSetting Priorities

• Aligning the OrganizationAligning the Organization

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Customer Focus is Built on Customer Focus is Built on Information:Information:• From CustomersFrom Customers• From Internal SystemsFrom Internal Systems

Trouble Reporting/Tracking.Trouble Reporting/Tracking.Complaints.Complaints.Customer Satisfaction Programs.Customer Satisfaction Programs.

• From Field Contact Personnel.From Field Contact Personnel.Reporting and tracking systems.Reporting and tracking systems.

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External StimuliExternal Stimuli Buyer’sBuyer’sBlack BoxBlack Box

ResponseResponse

Marketing MixMarketing Mix

““Other” ExternalOther” ExternalInfluencesInfluences

ProductProduct PricePrice

PromotionPromotion DistributionDistribution

DecisionDecisionProcessProcess

InternalInternalInfluencesInfluences

PurchasePurchase

Post-PurchasePost-PurchaseBehaviorBehavior

Understanding Buyer Behavior

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Problem Recognition

Customer Decision Process

Information Search

Alternative Evaluation

Purchase

Post-Purchase

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Customer BuyingCustomer Buying

• Remember that many purchases (even Remember that many purchases (even B2B) are habit-based.B2B) are habit-based.

• Customer does not do extended Customer does not do extended problem solving and search.problem solving and search.

• Rather they see the need to rebuy and Rather they see the need to rebuy and simply do.simply do.

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TotalCustomerBenefits

TotalCustomer

Costs

TotalCustomer

Value

Customer Value is a Function of Benefits Received and Costs to Obtain

Do BenefitsReceivedOutweigh

Costs?

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Automobile Purchase Benefits & Costs

TotalCustomerBenefits

TotalCustomer

Costs

TotalCustomer

Value

ServiceService

SearchSearch

TV AdsNewspaper Ads

.

.Web Site

Part CostsFrequency

.

.Distance

PricePrice

Base ModelAccessories

.

.Trade-In

ServiceService

Sales Sales StaffStaff

InformedFriendlyAttitude

ImageHandling

AttitudeTimely

InformedHoursParts

ProductProduct

BenefitsWarranty

Test DriveCondition

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Life Cycle Costs and Economic ValueLife Cycle Costs and Economic Value

Life-Cycle Cost =Life-Cycle Cost =

Price + Acquiring + Ownership + DisposalPrice + Acquiring + Ownership + DisposalPaid Cost Cost Paid Cost Cost Cost Cost

Economic Value =Economic Value =

Competing Product’s – Our Product’s Competing Product’s – Our Product’s Life-Cycle Cost Life-Cycle Cost Life-Cycle CostLife-Cycle Cost

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Life Cycle Costs and Economic ValueLife Cycle Costs and Economic Value

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Life Cycle Cost Component ExamplesLife Cycle Cost Component Examples

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Benefit and Cost MappingBenefit and Cost Mapping

Implementation Issues:Implementation Issues:

• Value Map Must Be Developed From Value Map Must Be Developed From the the Customer’s PerspectiveCustomer’s Perspective

• What’s measured becomes ‘Real’

• Avoid ‘washing out’ differences.

• Abstract Goals Must Be ActionableAbstract Goals Must Be Actionable

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Objective - Find Value Gaps!Objective - Find Value Gaps!Performance

High

Low

LowPrice

RAV4

HighPrice

Outback

OldWrangler

Real Hummer

Xterra

Where are the need gaps?

Explorer

Hummer 2

NewWrangler

4 DrWrangler

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Turning Value Positions into ActionTurning Value Positions into Action

• Just knowing where the customer finds Just knowing where the customer finds value is obviously not enough. value is obviously not enough.

• Your firm must strive to deliver the value Your firm must strive to deliver the value customers desire.customers desire.

• This means implementing strategies This means implementing strategies designed to capture and hold the designed to capture and hold the desired position.desired position.

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CustomerCustomerSatisfactionSatisfaction

Service ReliabilityService Reliability

Fast Service ResponseFast Service Response

1 Hour Response 1 Hour Response 99.999 % of the time99.999 % of the time

Org. Obj.Org. Obj.

Action ItemAction Item

Make Abstract Objectives ActionableMake Abstract Objectives ActionableThe Drill Down

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Action Items - System DevelopmentAction Items - System Development

• Example: Customer contact tracking Example: Customer contact tracking system for field reps.system for field reps.Sales representativesSales representativesCustomer service personnelCustomer service personnel

• What feedback should we give the What feedback should we give the customer?customer?

• What information should be widely What information should be widely available within the company.available within the company.

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The Satisfaction - Loyalty LinkThe Satisfaction - Loyalty LinkCustomer Loyalty

High

Low

1 2 3 4 5Completely Dissat. Completely Sat.

LessCompetition

MoreCompetition

PersonalComputers

Automobiles

Airlines

Hospitals

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INITIALEXPECTATIONS

Customer Satisfaction is a Customer Satisfaction is a Confirmation/DisconfirmationConfirmation/Disconfirmation

of Expectationsof Expectations

EXPERIENCE

PERCEIVED OUTCOME

CUSTOMERSATISFACTION

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Information is the KeyInformation is the Key• We must understand the benefits We must understand the benefits

customers receive from use.customers receive from use.

• Who do we ask?Who do we ask?CustomersCustomersCompany SourcesCompany SourcesCompetitive MonitoringCompetitive Monitoring

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Importance

Which Components RequireWhich Components RequireImmediate Attention?Immediate Attention?

high

medium

low

highmediumlow

NeedsNeedsImprovementImprovement

OverachievingOverachieving

Performance

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Satisfied Customers Typically:Satisfied Customers Typically:• Find more value in the firm’s products.Find more value in the firm’s products.• Are willing to spend more to maintain Are willing to spend more to maintain

this high level of need satisfaction.this high level of need satisfaction.• Are less influenced by competitor Are less influenced by competitor

promotions.promotions.• Are very willing to tell others about your Are very willing to tell others about your

product (WOM).product (WOM).• Are often willing to try other products you Are often willing to try other products you

sell.sell.

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Does it Work? Does it Work? Evidence from the Trucking IndustryEvidence from the Trucking Industry

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A Recent StudyA Recent Study

• We looked at trucking firms strategies We looked at trucking firms strategies for evidence that they were for evidence that they were implementing a market-driven implementing a market-driven approach, then looked at their approach, then looked at their performance.performance.

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ConclusionsConclusions

• Better customer value (e.g., higher Better customer value (e.g., higher customer service levels and customer customer service levels and customer relations) lead to increased share and relations) lead to increased share and higher ROA despite a 1 pt loss in higher ROA despite a 1 pt loss in efficiency. efficiency.

• Thus, to build satisfaction, you must Thus, to build satisfaction, you must understand the customer needs.understand the customer needs.

• Let’s look at how to do this.Let’s look at how to do this.

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Conclusions for Typical Organization:Conclusions for Typical Organization:• Customer orientation will require Customer orientation will require

changes in operating procedures.changes in operating procedures.

• Specific customer satisfaction metrics Specific customer satisfaction metrics are needed.are needed.

• Culture must evolve to support use of Culture must evolve to support use of customer information and Sat. metrics.customer information and Sat. metrics.

• Information gathering systems must Information gathering systems must evolve to support needed customer evolve to support needed customer information. information.

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Information System Needs.Information System Needs.• Database of customer requirements.Database of customer requirements.

Primary needsPrimary needs Secondary needs.Secondary needs. Priorities!Priorities! Current usage. Current usage. Satisfaction levels for customer groupsSatisfaction levels for customer groups Date last contacted.Date last contacted. Name of contact.Name of contact. Competitor information.Competitor information.

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Additional IssuesAdditional Issues

• Processes for dealing with customers Processes for dealing with customers must be revised. must be revised.

• New ideas and solutions must be New ideas and solutions must be implemented quickly to resolve implemented quickly to resolve customer problems and meet needs.customer problems and meet needs.

• Bureaucracy must be reduced to aid Bureaucracy must be reduced to aid quick response (delegation!). quick response (delegation!).

• Competitor information must be Competitor information must be developed and refined.developed and refined.

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• Segmentation is needed and will help Segmentation is needed and will help define customer value proposition and define customer value proposition and methods to deliver.methods to deliver.

• Price sensitive customers may defect.Price sensitive customers may defect.

• Quality Sensitive customers may defect Quality Sensitive customers may defect if quality not made priority.if quality not made priority.

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A Customer Lifetime Value ExampleA Customer Lifetime Value Example

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Lifetime Value of a CustomerLifetime Value of a Customer

• The long term profits obtained by The long term profits obtained by retaining customers over their lifetime.retaining customers over their lifetime.

• Enables firm to reduce marketing Enables firm to reduce marketing expenses.expenses.

• NPV is useful to assign valuation.NPV is useful to assign valuation.

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A Customer Loyalty ExampleA Customer Loyalty Example• Loyalty is an attitude towards a Loyalty is an attitude towards a

product/service and the providerproduct/service and the provider

• Loyalty is driven by perceived value and Loyalty is driven by perceived value and satisfactionsatisfaction

• Loyalty is related to repeat purchase, WOM, Loyalty is related to repeat purchase, WOM, motivation to search and resistance to motivation to search and resistance to counter-persuasion but is not always counter-persuasion but is not always translated into these post-purchase behaviorstranslated into these post-purchase behaviors

• Many loyalty programs cost more than they Many loyalty programs cost more than they generate in additional profitability (at least in generate in additional profitability (at least in the short-run)the short-run)

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Mobile Telephone LoyaltyMobile Telephone Loyalty• Average churn rate in mobile telephony today is Average churn rate in mobile telephony today is

2.1% per month2.1% per month So average customer life is only 48 months – So average customer life is only 48 months –

which is the life of the service contract.which is the life of the service contract.

Mobile providers must replace all its customers every 4 years. The potential is to only replace them every 8 years!

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Assessing The Value of LoyaltyAssessing The Value of Loyalty• Existing Cellular ProviderExisting Cellular Provider

Cost of Acquisition $350Cost of Acquisition $350 Monthly revenue $45Monthly revenue $45 Monthly network cost $5Monthly network cost $5 Monthly operating cost 15%Monthly operating cost 15% NPV of customer over 48 monthsNPV of customer over 48 months

$915$915 NPV of customer over 96 monthsNPV of customer over 96 months

$1,700$1,700

Cellular can increase share owner value by 86% by just realizing the real customer life potential of their customers.

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Questions?Questions?