Customer Satisfaction Profit Chain Prof. Markus Christen INSEAD Singapore May/June 2007 Prof. Markus Christen INSEAD Singapore May/June 2007

Customer Satisfaction Profit ChainCustomer Satisfaction Profit Chain

Prof. Markus Christen

INSEAD SingaporeMay/June 2007

Prof. Markus Christen

INSEAD SingaporeMay/June 2007

Market Driving Strategies - May/June 2007© Prof. Markus ChristenSession 8 - 2

Scheduled Airlines

60

65

70

75

80

85

90

199419961998200020022004

-8.4%

Household Appliances

60

65

70

75

80

85

90

1994 1996 1998 2000 2002

-3.5%

Commercial Banks

60

65

70

75

80

85

90

1994 1996 1998 2000 2002

-2.7%

Parcel Delivery

60

65

70

75

80

85

90

1994 1996 1998 2000 2002

-2.5%

Personal Computers

60

65

70

75

80

85

90

1994 1996 1998 2000 2002

-9.0%

Publishing/ Newspapers

60

65

70

75

80

85

90

1994 1996 1998 2000 2002

-12.5%

Source: http://www.theacsi.org, University of Michigan

American Customer Satisfaction Index (ASCI)

Based on annual poll of more than 50.000 consumes,measuring overall satisfaction with products and services.

American Customer Satisfaction Index (ASCI)

Based on annual poll of more than 50.000 consumes,measuring overall satisfaction with products and services.

Customer Satisfaction Is Decreasing

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CRM InvestmentsApproximate Worldwide CRM Investments

(applications, hardware, and services)

13.5

20.0

23.725.9

29.7

34.6

40.0

47.5

0

10

20

30

40

50

1999 2000 2001 2002 2003 2004 2005 2006

Spendings in $billion

0%

10%

20%

30%

40%

50%

60%

Year-to-Year Growth

Spendings

Year-to-Year Growth %

Mean estimates as of 2002 and 2003 across various providersCRM outsourcing services not included Sources: IDC, Aberdeen, Gartner, Forrester

Approximate Worldwide CRM Investments(applications, hardware and services)

Approximate Worldwide CRM Investments(applications, hardware and services)


Starbucks: Delivering Customer Service

Why successful• Tight alignment between target market (sophisticated, affluent coffee lover,

coffee drinking life style) and highly differentiated value proposition– Drinking coffee as self-indulgent ritual: Best coffee– Tendency to linger, in search of a sanctuary: Physical environment– Friendly people, social interactions: Service Philosophy

Impact of growth strategy• Retail expansion: Ubiquity of stores makes Starbucks less “special”• Customer acquisition: New customers with different service needs

– Routine– Pass through– Convenience

• Product innovation: Increased production complexity leads to longer lines


Starbucks: Delivering Customer Service

Consequence• Conflicts between customer segments affects service quality

– Longer lines, more mistakes, less time to interact and socialize

– Grumpy customers, grumpy employees

• Difficult to keep customer satisfaction very high with a larger and more diverse customer base

What are the appropriate metrics to manage different customers or customer segments? Customer acquisition and retention?


Product

Performance

Service

Performance

Employee

Performance

Customer

Satisfaction

Retention /

Loyalty

Revenue /

Profit

Satisfaction-Profit-Chain (SPC)


Customer

Satisfaction

t

Repurchase

Intentions

t

Repurchase Intentions t 0.42 -

Number of Orders t -0.08 0.12

Number of Orders t+1 -0.07 0.11

Purchase Volume (ton) t 0.04 0.06

Purchase Volume (ton) t+1 0.05 0.06

Customer Profitability t -0.05 0.10

Customer Profitability t+1 -0.05 0.09

Correlations for 418 customers

of European paper wholesaler

Correlations for 418 customers

of European paper wholesaler

Source: Söderlund, Vilgon & Gunnarsson 2001, European Journal of Marketing

Satisfaction and Customer Behavior


Zone of indifference

Source: Jones & Sasser, HBR, Nov/Dec. 1995

Customer Satisfaction and Loyalty

0

20

40

60

80

100

1 - Very dissatisfied

2 - Dissatisfied3 - Neutral 4 - Satisfied

5 - Very satisfied

Customer Satisfaction

Repurchase Intent (%)


Source: Ittner and Larcker, Journal of Accounting Research

Estimated impact of a one-unit change in customer satisfaction (ACSI) on the market value of equity

(millions of dollars)

Estimated impact of a one-unit change in customer satisfaction (ACSI) on the market value of equity

(millions of dollars)

Satisfaction and Performance

-800

-600

-400

-200

0

200

400

600

Non-Durable

Mfgr

DurableMfgr

Utilities Retail FinancialServices


Product/ServiceImprovements

OptimalLevel

-Cost,-Revenues,-Profits Associated

Cost

AssociatedRevenues

AssociatedProfits

More Satisfaction Is Not Always Better


Loyalty and Performance

Why are loyal customers more profitable?• They buy more (revenues)• They are less costly to serve (cost)• They pay higher prices• They generate more Word-of-mouth

Source: F. Reichheld & T.A. Teal (1996), The Loyalty Effect.

Base Profits

IncreasedPurchases

ReducedOperating Costs

Referrals

Price Premium

Years

1 2 3 4 5 6

Cost of Acquisition


Source: Reinartz and Kumar (2002), HBR, July.

True friendsButterflies

BarnaclesStrangers



-2000.00

0.00

2000.00

4000.00

6000.00

8000.00

10000.00

12000.00

14000.00

16000.00

18000.00

20000.00

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35

Month

($) Segment Profit

Short life, lowrevenue(Segment 4)

Short life, highrevenue(Segment 3)

Do Profits Increase over Time?Do Profits Increase over Time?



The Relationship Continuum

Transactional Orientation

(Commodity)

RelationalOrientation

(Partnership)

ProcurementOrientation

(Deliver value added

products and services)

Discrete transactions Adversarial relationship

Focus on price Multisourcing to exert power

Global sourcing

Repeat transactions Reduction in suppliers

Integrative negotiations (not only price)

Goal of cost reduction and quality improvement through

coordination More cooperative

relationships with the goal of pie expansion

Both parties focus on generating value for

end-user Buyer focuses on core

competence; strategically outsources remaining

activities Highly collaborative deep,

relationships with select suppliers (typically sole-

source relationships)

Very high competitive pressure

Achieve competitive advantage


Calculating Current Customer Value

Revenues

(A) -direct cost

= Gross margin

(B) -cost-to-serve (marketing, sales, terms and conditions, support, returns, etc.)

= Contribution margin

(C) -fixed cost

= Operating margin (EBITDA) All on a per-customer basis!

Does not include intangibles (word-of-mouth, reference effects)


Key Metric: Customer Value

Tangible value metrics

Current value

Revenues

Gross margin

Cost-to-serve

Contribution margin

Share-of-wallet

Potential value

Size-of-wallet

Lifetime value

Non-tangible value metrics

Current value

Reference value

Referral value

Cooperation value (e.g., shared intelligence)

Potential value

Future value


Customer Value Concentration

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

% Clientes

% Venda

% R$ % R$ TV

A+ / A

B

C

D

Brazilian Grocery StoreBrazilian Grocery Store


Customer Value Concentration

0

0.2

0.4

0.6

0.8

1

1.2

0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100

% of doctors

% of contribution

US Pharmaceutical FirmUS Pharmaceutical Firm


Customer Value Analysis

Objective: The result of the analysis should allow to evaluate the following:• Value level

– Average value over all customers

• Value disparity– Difference Highest – Lowest value– Ratio of 90th percentile /10th percentile (if > 15 then high disparity)

• Value concentration (heterogeneity)– 80/20 rule (80% of contribution come from x% of customers)– Gini Coefficient (> 80% = high concentration)

All analyses to be done • Across all customers • On segment level (geography, business line, etc)


Personnel8.99

Personnel8.99

Models8.50

Models8.50

Information8.48

Information8.48

Delivery8.68

Delivery8.68

CarSatisfaction

9.26

CarSatisfaction

9.26

StatedSales

Loyalty8.76

StatedSales

Loyalty8.76 InsuranceInsurance

FinancingFinancing

VolvoCard

VolvoCard

WorkshopLoyalty

WorkshopLoyalty

Stated SalesSatisfaction

8.73

Stated SalesSatisfaction

8.73

Profit NewCar

Profit NewCar

0.314

0.087

0.035

0.094

0.492

0.410

0.168

0.023

-0.055

0.072

0.115

Source: Johnson and Gustafsson

Jossey-Bass, 2000

Putting It All TogetherSales Satisfaction Model for

Loyal Volvo CustomersSales Satisfaction Model for

Loyal Volvo Customers


Customer Focus


Summary

S-P chain is a powerful concept for guiding customer-level actions• Its all about optimal satisfaction and optimal retention levels• Need for careful application to own environment

– Necessitates “correct” measures and operationalizations

– Forces to explore causal linkages

– Sheds light on correct metrics


Summary

Looking at value to and from customers • Provides focus: target only potentially profitable customers• Think about what drives customer value (to the firm) • Enables resource allocation that is fair from a customer perspective and

makes business sense economically

CRM is the strategic process of selecting the customers a firm can most profitably serve and shaping the interactions between a company and these customers.

Ultimate goal: Improve marketing decision-making and resource allocation


Rule 10: Customer Value

Not all happy customersare loyal customers andnot all loyal customers

are worth keeping:

Measure & managecustomer profitability

Documents

Customer Satisfaction Profit Chain Prof. Markus Christen INSEAD Singapore May/June 2007 Prof. Markus Christen INSEAD Singapore May/June 2007