CH-05-Creating Customer Value, Satisfaction and Loyalty

Marketing Management 1

Marketing Management

Chapter-05

Creating Customer Value, Satisfactionand

Loyalty

Part : 03

Connecting with

Customers


MARKETING MANAGEMENT12th edition

5 Creating

Customer Value, Satisfaction, and

Loyalty

Kotler Keller


Chapter Questions

What are customer value, satisfaction, and loyalty, and how can companies deliver them?

What is the lifetime value of customers?

How can companies both attract and retain customers?

How can companies deliver total quality?

What is database marketing?


Traditional vs Modern Organizational Chart

Traditional Organizational Chart puts Top Management at the top, then Middle Management, Front-line people and finally Customers.

Modern Customer-Oriented Organizational Chart puts Customer at the top, then Front-line people who are in contact with the customers, then Middle managers, then finally Top managers. The managers at every level must be personally involved in knowing, meeting and serving customers.


Organizational Charts


Customer Perceived Value (CPV) CPV (Customer Perceived Value) : It is based on the

difference between what the customer gets and what he or she gives for different possible choices.

Total Customer benefit : The perceived monetary value of the bundle of economic, functional and psychological benefits customers expect from a given market offering.

Total Customer Cost : Total cost customers expect to incur in evaluating, obtaining, using and disposing of the given market offering including monetary, time, energy and psychic costs.


Customer Perceived Value (CPV)

Caterpillar sells tractors like this one not just on theproduct’s attributes, but also on the value of the services,

personnel, and image the company offers


Loyalty

A deeply held commitment to re-buyor re-patronize a preferred product

or service in the future despite situationalinfluences and marketing efforts having

the potential to cause switching behavior.


Loyalty and Value Loyalty : A deeply held commitment to re-buy or re-

patronize a preferred product or service in the future despite situational influences and marketing efforts having the potential to cause switching behaviour.

Value Proposition : It consists of the whole cluster of benefits the company promises to deliver.

Value-Delivery System : It includes all the experiences the customer will have on the way to obtaining and using the offering.


The Value Proposition

The whole cluster of benefits thecompany promises to deliver


Total Customer Satisfaction Satisfaction : Person’s feelings of pleasure or

disappointment resulting from comparing a product’s perceived performance in relation to his/her expectations.

a. If the performance of product falls short of expectations, then the customer is “dissatisfied”.

b. If the performance of product matches expectations, then the customer is “satisfied”.

c. If the performance of product exceeds expectations, then the customer is “delighted”.


Total Customer Satisfaction Customer Expectations

Customer Expectations : Buyer’s form their expectations from past buying experience, friend’s advice, marketer’s promises, competitor’s information.

If marketers raise expectations too high, the buyer is likely to be disappointed, however if the company sets expectations too low, it will not attract enough buyers.

Some of today’s most successful companies are raising expectations and raising performances to match.


Total Customer Satisfaction Measuring Satisfaction

Measuring Satisfaction : It is important to measure customer satisfaction as 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 favourably about the company and its products, pays less attention to competing brands and is less sensitive to price and costs less to serve than new customers.

The methods of measuring customer satisfaction include Periodic Surveys, Customer Loss Rate, and Mystery Shoppers.

In addition to measuring customer satisfaction, companies also need to monitor their competitors’ performance in these areas.



Periodic SurveysPeriodic Surveys

Customer Loss RateCustomer Loss Rate

Mystery ShoppersMystery Shoppers

Monitor Competitive Performance

Monitor Competitive Performance



i. Periodic Surveys : They can track customer satisfaction directly.

ii. Customer Loss Rate : Companies can monitor the customer loss rate and contact customers who have stopped buying or who have switched to another supplier to learn why this happened.

iii. Mystery Shoppers : Companies can hire mystery shoppers to pose as potential buyers and report on strong and weak points experienced in buying the company’s and competitors’ products.

iv. Competitors’ Performance : In addition to tracking customer value expectations and satisfaction, companies need to monitor their competitors’ performance in these areas.


Product and Service Quality Satisfaction depends on product and service quality. Quality : The quality can be defined as “Fitness for

use”, “Freedom from variation”, “conformance to requirements” etc., however the most authentic and customer-centred definition is “Quality is the totality of features and characteristics of a product or service that bear on its ability to satisfy needs”.

Performance and Conformance Quality (See Next Slide)

Total Quality Management (TQM) : It is an organization-wide approach to continuously improving the quality of all the organization’s processes, products and services.


Product and Service Quality

ConformanceQuality

PerformanceQuality


Product and Service Quality

Performance and Conformance Quality : A Lexus provides higher performance quality than a Hyundai. The Lexus rides smoother, goes faster, and lasts longer. Yet both a Lexus and a Hyundai can be said to deliver the same conformance quality if all the units deliver their respective promised quality.


Maximizing Customer Life-time Value Largest Customers, Mid-Size Customers, Smallest

Customers : 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 costs of transacting with small customers reduce their profitability.

The midsize customers receive good service and pay nearly full price and are often the most profitable.


Maximizing Customer Life-time Value Customer Profitability : A Profitable Customer is a person,

household or company that overtime yields a revenue stream that exceeds by an acceptable amount the company’s cost stream of attracting, selling and servicing that customer.

Customer Profitability Analysis (CPA) : It is best conducted with the tools of an accounting technique called “Activity-Based Costing (ABC)” in which the company estimates all revenue coming from the customer, less all costs.

When ABC is done for each customer, it is possible to classify customers into different profit tiers, i.e. Platinum (most profitable), Gold (profitable), Iron (low profitability but desirable), Lead (unprofitable and undesirable) customers.


Maximizing Customer Life-time Value Competitive Advantage : It is a company’s ability to

perform in one or more ways that competitors cannot or will not match.

Few Competitive Advantage are sustainable, at best they may be ’Leverageable’.

A ‘Leverageable Advantage’ is the one that a company can use as a springboard to new advantages.

Example : Microsoft has leveraged its operating system to Microsoft Office and then to networking applications. In general, a company that hopes to endure must be in the business of continuously inventing new advantages.


Maximizing Customer Life-time Value Customer Lifetime Value (CLV) : It is the net present

value of the stream of future profits expected over the customer’s life-time purchases.

The company must subtract from the expected revenues the expected costs of attracting, selling, and servicing that customer, applying the appropriate discount rate (10%-20% depending on cost of capital and risk attitudes). An estimation of CLV is given as follows.

Annual customer revenue: $500Average number of loyal years: 20Company profit margin: 10%Customer Lifetime Value (CLV) : $1000


Estimating Lifetime Value

Customer Equity : It is the total of the discounted lifetime values of all the firm’s customers. Three drivers of customer equity are Value Equity, Brand Equity, and Relationship Equity.


CRM (Customer Relationship Management)

Customer Relationship Management (CRM) is the process of managing detailed information about individual customers to maximize customer loyalty.

Mass Customization : It is the ability of a company to meet each customer’s requirements.


Cultivating Customer RelationshipsCRM (Customer Relationship Management)

Attracting, Retaining and Growing Customers : There are two main ways to strengthen customer retention.

i. To erect high switching barriersii. To deliver high customer satisfaction

However the best thing a company can do is to make it easy for customers to complain, also the company must respond quickly and constructively to any complaint.


Cultivating Customer Relationships CRM (Customer Relationship Management)

The markets can be characterized by how easily and often customers can enter and leave.

i. Permanent Capture Markets (once a customer, always a customer)

ii. Simple Retention Markets (Customers can permanently be lost after each period)

iii. Customer Migration Markets (Customers can leave and come back).


Cultivating Customer Relationships CRM (Customer Relationship Management)

PermanentCaptureMarkets

SimpleRetentionMarkets

CustomerMigrationMarkets


Cultivating Customer Relationships CRM (Customer Relationship Management) Building Loyalty

Five different levels of investment in customer relationship building.

Building Loyalty

i. Basic Marketingii. Reactive Marketingiii. Accountable Marketingiv. Proactive Marketingv. Partnership Marketing



Partnership

Proactive

Accountable

Reactive

Basic



i. Basic Marketing : The salesperson simply sells the product.

ii. Reactive Marketing : The salesperson sells the product and encourages the customer to call if he or she has questions , comments, or complains.

iii. Accountable Marketing : The salesperson phones the customer to check whether the product is meeting expectations.

iv. Proactive Marketing : The salesperson contacts the customer from time to time with suggestions about improved product uses or new products.

v. Partnership Marketing : The company works continuously with its large customers to help improve their performance. For example, General Electric has stationed engineers at large utilities to help them produce more power.



Most companies practice only ‘Basic Marketing’ when their markets contain many customers and their unit profit margins are small. Like Nestle is not going to phone each KitKat buyer to express their feedback.

However in markets with few customers and high profit margins, most sellers will move toward ‘Partnership Marketing’. Like Boeing, works closely with American Airlines to design airplanes that fully satisfy American Airlines requirements.



Levels of Relationship Marketing


Cultivating Customer Relationships CRM (Customer Relationship Management) Customer Retention-Some Statistics

Acquisition of customers can cost 5 times more than retaining current customers.

The average customer loses 10% of its customers each year.

A 5% reduction to the customer defection rate can increase profits by 25% to 85%.

The customer profit rate increases over the life of a retained customer.


Cultivating Customer Relationships CRM (Customer Relationship Management) Reducing Customer Defection

Reducing Customer Defection : Five main steps to reduce the defection rate.

i. First, the company must define and measure its retention rate.

ii. Second, the company must distinguish the causes of customer attrition.

iii. Third, the company needs to estimate how much profit it loses when it loses customers.

iv. Fourth, the company needs to figure out how much it would cost to reduce the defection rate. As long as the cost is less than the lost profit, the company should spend the money.

v. Fifth, listening to customers.


Cultivating Customer Relationships CRM (Customer Relationship Management) Forming Strong Customer Bonds

Add FinancialBenefits

Add SocialBenefits

Add StructuralTies



Three retention-building approaches.

a. Adding Financial Benefitsb. Adding Social Benefitsc. Adding Structural Ties



a. Adding Financial Benefits : Like Frequency Programs (FPs) are designed to provide rewards to customers who buy frequently and in substantial amounts. Also many companies have created ‘Club Membership Programs’. Club membership can be open to everyone who purchases a product or service, or it can be limited to an affinity group or to those willing to pay a small fee.

b. Adding Social Benefits : Company personnel work on cementing social bonds with customers by individualizing and personalizing customer relationships. In short, thoughtful companies turn their customers into clients.

c. Adding Structural Ties : The company may supply customers with special equipments or computer links that help customers manage orders, payroll and inventory, like EDI : Electronic Data Interchange.



Financial BenefitsPathmark Advantage Club Cards

The world-famous motorcycle company,Harley-Davidson,

sponsors the Harley Owners Group (H.O.G.), which now numbers 650,000 members.


Focus on

CRM

This Enterprise Rent-A-Car ad focuses on CRM : “There’s a place where the number one priority

is you.”


Customer Databases and Database MarketingDatabase Key Concepts

Customer Database

Database Marketing S

Customer Mailing List

Business Database

Data Warehouse

Data Mining


Customer Databases and Database Marketing Customer Databases

A Customer Database is an organized collection of comprehensive information of individual customers or prospects that is current, accessible and actionable for such marketing purposes as lead generation, lead qualification, sale of a product or service or maintenance of customer relationships.

A Business Database would contain business customers’ past purchase, past volumes, prices, and profits; buyer team member names, status of current contracts etc.

A Customer Mailing List is simply a set of names, addresses, and telephone numbers. While a customer database contains much more information, accumulated through customer transactions, telephone queries etc.


Customer Databases and Database Marketing Data Warehouses and Datamining

Data Warehouse : The data is collected by the company’s contact centre and organized into Data Warehouse. Company personnel can capture, query, and analyze the data.

Datamining : The use of sophisticated statistical and mathematical techniques to extract useful information about individuals, trends and segments from the mass of data.


Customer Databases and Database Marketing Usage of Database

To identify prospectsTo identify prospects

To target offersTo target offers

To deepen loyaltyTo deepen loyalty

To reactivate customersTo reactivate customers

To avoid mistakesTo avoid mistakes


Customer Databases and Database Marketing Usage of Database

In general, companies can use their database in five ways.

a. To identify prospects.b. To decide which customers should receive a particular

offer.c. To deepen customer loyalty.d. To reactivate customer purchases.e. To avoid serious customer mistakes (mistakes that

made by not using its customer database well).


Customer Databases and Database Marketing Database Marketing

Database Marketing is the process of building, maintaining, and using customer databases and other databases (products, suppliers, resellers) for the purpose of contacting, transacting and building customer relationships.

Database Marketing is most frequently used by business marketers and service providers (hotels, banks, airlines, insurance, credit card and telephone companies that normally collect a lot of customer data.

Database Marketing is used less often by packaged-goods retailers and consumer packaged goods companies where CLV is low and where there is no direct contact between the seller and ultimate buyer may not benefit as much from CRM.


Customer Databases and Database Marketing Database Marketing-Disadvantages

The Downside of Database Marketing and CRM

a. Large investment in hardwares, softwares and skilled personnel

b. Difficulty of getting everyone in the company to be customer-oriented and to use the available information

c. Not all customers want a relationship with the company and they may resent knowing that the company has collected that much personal information about them

d. Assumptions behind CRM may not always hold true. For example, it may not be the case that it costs less to serve more loyal customers. High-volume customers often know their value to a company and can leverage it to extract premium service and price discounts.


Activity

CH-05-Creating Customer Value, Satisfaction and Loyalty

Documents

Transcript of CH-05-Creating Customer Value, Satisfaction and Loyalty