MKT702 Marketing Management

CHAPTER 5 Creating Long-term Loyalty Relationships BUILDING CUSTOMER VALUE, SATISFACTION, AND LOYALTY Customer-Perceived Value

Customer-perceived value (CPV): difference between prospective customer’s evaluation of all benefits and al costs of an offering and the perceived alternatives

o Can increase value of customer offering by raising economic, functional, or emotional benefits and/or reducing one or more costs

Total customer benefit: perceived monetary value of the bundle of economic, functional, and psychological benefits customers expect from a given market offering because of product, service, people, and image

Total customer cost: perceived bundle of costs customers expect to incur in evaluating, obtaining, using, an disposing given market offering, including monetary, time, energy, and psychological costs

Customer value analysis: reveals company’s strengths and weaknesses relative to those of various competitors 1. Identify major attributes and benefits customers value 2. Assess quantitative importance of different attributes and benefits 3. Assess company’s and competitors’ performance on the different customer values against their rated

importance 4. Examine how customers in specific segment rate the company’s performance against a specific major

competitor on an individual attribute or benefit basis 5. Monitor customer values over time

Buyers operate under various constraints and occasionally make choices that give more weight to their personal benefits than company’s benefit

Loyalty: deeply head commitment to re-buy or re-patronize preferred product or service in the future despite situational influences and marketing efforts having potential to cause switching behaviour

Value proposition: consists of whole cluster of benefits the company promises to deliver; it is more than the core positioning of the offering

Value-delivery system: all experiences customer will have on the way to obtaining and using offering Total Customer Satisfaction

Satisfaction: person’s feelings of pleasure or disappointment that result from comparing product’s perceived performance (or outcome) with his or her expectations

o Customer assessment of product performance depends on many factors, especially type of loyalty relationship customer has with the brand

Company must try to deliver high level of customer satisfaction subject to also delivering acceptable levels to other stakeholders, given total resources

Monitoring Satisfaction

Periodic surveys can track customer satisfaction directly and ask additional questions to measure repurchase intention and respondent’s likelihood or willingness to recommend company and brand to others

Customer loss rate are customers who have stopped buying or have switched to another supplier to find out why

Mystery shoppers pose as potential buyers and report on strong and weak points experienced in buying company’s and competitors’ products

Product and Service Quality

Quality: totality of features and characteristics of a product or service that bear on its ability to satisfy stated or implied needs; conformance quality and performance quality (or grade)

o Quality is the key to value creation and customer satisfaction

Total quality: organization-wide approach to continuously improving quality of all organization’s processes, products, and services

MAXIMIZING CUSTOMER LIFETIME VALUE Customer Profitability

Profitable customer: person, household, or company that overtime yields a revenue stream exceeding by an acceptable amount the company’s cost stream for attracting, selling and serving that customer

o Emphasizes lifetime stream of revenue and cost

MKT702 Marketing Management

Customer profitability analysis (CPA): means of assessing and ranking customer profitability through accounting techniques such as activity-based costing (ABC)

Activity-based costing (ABC): accounting procedure that quantify true profitability of different activities by identifying their actual costs

o Costs should account for all company resources that go into serving that customer, direct and indirect Measuring Customer Lifetime Value

Customer lifetime value (CLV): net present value of stream of future profits expected over the customer’s lifetime purchases

o Subtract expected revenues and expected costs of attracting, selling, and servicing account of that customer, applying appropriate discount rate

CLV provides formal quantitative framework for planning customer investment and help marketers adopt a long-term perspective

CULTIVATING CUSTOMER RELATIONSHIPS Customer Relationship Management

Customer relationship management (CRM): process of carefully managing detailed information about individual customers and all customer “touch points” to maximize loyalty

o Customer touch point is any occasion on which customer encounters brand and product – from actual experience to personal or massive communications to causal observation

Personalized marketing is about making sure the brand and its marketing are relevant as possible to as many customers as possible

o Employees can create strong bonds with customers by individualizing and personalizing relationships

Permission marketing is based on the premise that marketers can no longer use “interruption marketing” via mass media campaigns

Participatory marketing allows marketers and consumers to work together to find out how the firm can best satisfy consumers

One-to-one marketing can adapt to CRM marketing 1. Identify your prospects and customers 2. Differentiate customers in terms of their needs and their value to your company 3. Interact with individual customers to improve your knowledge about their individual needs and to build

stronger relationships 4. Customize products, services, and messages to each customer

Attracting and Retaining Customers

Different acquisition methods yield customers with varying CLVs

Customer churn: customer deflection o To reduce defection rate, company must do the following:

1. Define and measure its retention rate 2. Distinguish the causes of customer attrition and identify those that can be managed better 3. Compare the lost customer’s lifetime value with the costs of reducing the defection rate

Marketing funnel: identifies percentage of potential target market at each stage in decision process, from merely aware to highly aware

o Customers must move through each stage before becoming loyal customers o Calculating conversion rate – percentage of customers at one stage who move to the next – the funnel allows

marketers to identify any bottleneck stage or barriers to building loyal customer franchise

Customer profitability analysis and marketing funnel help marketers decide how to manage groups of customers that vary in loyalty, profitability, and other factors

Winning companies improve value by excelling in strategies: o Reducing rate of customer deflection o Increasing longevity of customer relationship o Enhancing growth potential of each customer through “share of wallet,” cross-selling, and up-selling

Sales from existing customers can be increased with new offerings and opportunities o Making low-profit customers more profitable or terminating them o Focusing disproportionate effort on high-profit customers

MKT702 Marketing Management Building Loyalty

Three types of marketing activities to improve loyalty and retention 1. Interacting with customers

Be a customer advocate and take customers’ side and understand their point of view 2. Developing loyalty programs

Frequency programs (FPs): designed to reward customers who buy frequently and in substantial amounts

Helps build long-term loyalty with high-CLV customers, creating cross-selling opportunities in the process

Club membership programs: open to everyone who purchases a product or service, or limited to an affinity group of those willing to pay a small fee

3. Creating institutional ties

Company may supply customers with special equipment or computer links that help them manage orders, payroll, and inventory

Customers less inclined to switch to another supplier when it means higher capital costs, high search costs, or loss of loyal-customer discounts

CUSTOMER DATABASE AND DATABASE MARKETING

Customer database: organized collection of comprehensive information about individual customers or prospects that is current, accessible, and actionable for lead generation, lead qualification, sale of a product or service, or maintenance of customer relationships

Database marketing: process of building, maintaining, and using customer databases and other databases to contact, transact, and build customer relationships

Customer Database

Customer mailing list: set of names, addresses, and telephone numbers

Customer database contains information, accumulated through customer transactions, registration information, telephone queries, cookies, and customer contact

Business database: contains business customers’ past purchase; past volumes, prices, and profits; buyer team names; status of current contracts; estimate of supplier’s share of customer’s business; competitive suppliers; assessment of competitive strengths and weaknesses in selling and servicing account; and relevant customer buying practices, patterns and policies

Data Warehouses and Data Mining

Data warehouse: capture, query, and analyze data to draw inferences about individual customer’s needs and responses

Data mining: extract from mass of data useful information about individuals, trends, and segments o Uses statistical and mathematical techniques such as cluster analysis, automatic interaction detection, predictive

modelling, and neural networking The Downside of Database Marketing and CRM

Five main problems from effectively using CRM: 1. Some situations are just not conductive to database management 2. Building and maintaining a customer database requires a large, well-placed investment in computer hardware,

database software, analytical programs, communication links, and skilled staff 3. It may be difficult to get everyone in the company to be customer oriented and use available information 4. Not all customers want a relationship with the company 5. Assumption behind CRM may not always hold true