Relationship Marketing

Relationship Marketing

Harryadin Mahardika, PhD

Harryadin Mahardika Pop Economist FEUI & laporsuap.com Research objective:

– “to liberate and empower consumer...” Current research:

– Consumer empowerment– Consumer intervention/engineering– Mobile advertising

Contact:– [email protected] / [email protected] – @HarrySastro

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mailto:[email protected]

mailto:[email protected]

Relationship marketing?



How do we create customers?– Identifying customer needs– Designing goods and services that meet those needs– Communicate Information about those goods and

services to prospective buyers– Making the goods or services available at times and

places that meet customers’ needs– Pricing goods and services to reflect costs,

competition, and customers’ ability to buy– Providing for the necessary service and follow-up

How do we create VALUE?

Identify the needs in the marketplace

Find out which needs the organization can profitably serve

Design goods and services that meet those needs

Developing a marketing mix that will convert potential customers into actual customers

Providing for the necessary service and follow-up after the service

Relationship Marketing

=

follow up, follow up, follow up

“4 Eras” of Marketing

From transaction-based marketing to relationship marketing…

Transaction–based marketing (Simple exchanges)

Relationship marketing

– Lifetime value of a customer– Converting new customers to advocates

From transaction-based marketing to relationship marketing…

Transaction vs. Relationship Marketing

Three Levels of Relationship Marketing

Characteristic Level 1 Level 2 Level 3

Primary bond Financial Social Structural

Degree of customization

Low Medium Medium to high

Potential for sustained competitive advantage

Low Moderate High

Building long term relationship is important…. But,

We need to determine which consumers we want this relationship with!!

– Target Market– “Costly” Consumers:

• Difficult to attain• Difficult to retain

Customer Relationship Management (CRM)

The combination of strategies and tools that drive relationship programs, re-orientating the entire organization to a concentrated focus on satisfying customers

Strategies for Building Customer Relationships

Affinity Programs

– a marketing effort sponsored by an organization that solicits responses from individuals who share common interests and activities

– Example: Credit Card ILUNI FEUI


Frequency Marketing

– frequent-buyer or user marketing programs that reward customers with cash, rebates, merchandise, or other premiums

– Examples: Garuda Frequent Flyer, Matahari Club Card


Database Marketing

– software that analyzes marketing information, then identifies and targets messages toward specific groups of potential customers.

– Examples: Telco operator (Telkomsel, Satelindo, etc)

Strategies for Building B2B Relationships Strategic alliance

– a partnership formed to create a competitive advantage

– These more formal long-term partnership arrangements improved each partner supply-chain relationships and enhance flexibility

– Example: SkyTeam (Garuda with other airlines e.g. Etihad)

Strategies for Building B2B Relationships

Electronic Data Interchange (EDI)

– involves computer-to-computer exchanges of invoices, orders, and other business documents.

Vendor Managed Inventory (VMI)

– is an inventory-management system in which the seller–based on existing agreement with a buyer– determines how much of a product is needed.

Strategies for Building B2B Relationships

Database Marketing– software that analyzes marketing information, then identifies and

targets messages toward specific groups of potential customers

Evaluating Relationships Lifetime Value (LTV)

– Refers to the net present value of the potential revenue stream for any particular customer over a # of years

– Starts with current purchase activity then extrapolates to include potential additions from cross-selling, upgrades, total ownership, etc.

The Value of Customer Retention On average, it is more costly acquire a new customer rather

than retain an existing one.

Customer retention ensure higher profit margin.

Voluntary spending to maintain relationship.

Relationship Lifecycle

Customer relationship lifecycle

Baines, et al, 2011, p. 568

LEVEL OF RELATIONSHIP

Five Different Levels of Relationships (I)

Basic. The company salesperson sells the product, but does not follow up in any way.

Reactive. The salesperson sells the product and encourages the customer to call whenever he or she has any questions or problems.

Accountable. The salesperson calls to the customer a short time after the sale to check whether the product is meeting customer expectation.

Five Different Levels of Relationships (II)

Proactive. The salesperson or other in the company phone the customer from time to time with suggestions about improved product use or helpful new product.

Partnership. The company works continuously with the customer and with other customers to discover ways to deliver better value

Case for discussion Perusahaan Listrik Negara (PLN) CEO acknowledges the importance

of relationship marketing to improve the quality of their services.

a. Does it necessary for PLN to adopt relationship marketing?b. If yes, until which level of relationship?

THE RELATIONSHIP MARKETING SOLUTION

The Marketing Challenge: The Relationship Marketing Solution

Time Horizon. Market Segmentation. Product or Service Design. Market Research. Marketing Communications. Customer Service. Pricing.

Time Horizon

The time horizon available for marketers to achieve results in many companies has shrunk: investors and financial managers have dramatically reduce the time frame available for building revenue.

Marketing which remain focused on transaction rather than relationship is time consuming.

The marketer will have two roles: To identify the customer base with which the firm is to

maintain and deepen relationship; To champion the changes needed within the company for

this to happen.

Market Segmentation

Marketers need to accept the fact that market segmentation no longer exist the way they were taught: there are no more market segments, just individual customers.

In B2B marketing this approach is well known. In B2C marketers have focused more on segment-based marketing principles.

Increasing competition push companies to differentiate products or services, but this strategy become more and more expensive.

Fragmentation

Product or Service Design

Customers are not equal – they want different things in different amount at different time - and the profit derived from each will vary.

The key challenge for the marketer is to identify the core strategic value that will be derived to the customer and the elements that customer can change.

Value Proposition Elements

PRODUCT

FUNCTION

PACKAGING DESIGN

PRICE FEATURES

BEFORESALESSERVICE

DURINGSALESSERVICE

GUARANTEES

WARRANTIES

ADD ONS

FINANCE

ADVICE

AVAILABILITY

DELIVERY

AFTERSALESSERVICE

VALUEPERCEPTIONS

QUALITYPERCEPTIONS

ORGANISATION

OTHERUSERRECOMMEN-DATION

REPUTATION

CORPORATEIMAGE

INTANGIBLES

SERVICES

Long Tail

Market Research

Market research can take more time than the marketer has available. Current research findings may actually be dealing with yesterday's issues.

Now marketers need to devise knowledge systems to learn more about individual customer so that firms can create the value each customer wants.

Marketing Communications

Previously, marketers relied on broadcasting their message (one way communication). No longer.

Today the marketer has opportunity to communicate with individual customer according to the media each prefer.

The challenge for the marketer is to apply technology to facilitate this relevant, timely, personalized and customized communication.

Narrowcasting

Customer Service

The old adage is that the customer is always right: make customers happy when they complain, engage then positively, offer restitution.

When customer complain, it is a signal of a broken process somewhere in the business.

Pricing

Customers want to participate in decisions regarding the value they receive and the price they pay.

Give them a standard offering and they will expect to pay a single price.

Offer them options in the product and they will want some more than others, and will pay more for these.

Group Exercise Think about pricing strategy that can be used to build relationship with

consumer, in each of the following product category:

– Automotives– Clothing retailer– Online store– Restaurant– Airlines

LOYALTY AND CUSTOMER VALUE

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Behavioral brand loyalty Measured by proportion of purchase

Undivided loyalty AAAAAAAAAA

Occasional switcher AAABAAACAA

Switched loyalty AAAAAABBBB

Divided loyalty AAABBBAABB

Indifference ABCDADCDBD

Loyalty Ladders

Partners

Clients

Customers

Prospects

Members

Advocates

Partners

Clients

Repeat Cust

Prospects

Members

Advocates

1st Time Cust

Suspects

Trad

itio

nal

Mar

keti

ng

Rel

atio

nsh

ipM

arke

tin

g

Payne et al 1995 Kotler 1997 Baines, et al 2011

Types of Loyalty

Some of the more general types of loyaltySource: Baines, et al (2011, p. 573)

Acquired Customer Base

YearValue US$ millions

AcquirerThousands of

CustomersPer Customer

Value US$

Powerco 1998 9 NGC 16 533

WEL Energy 1999 37 NGC 68 547

ETSA 2000 96 AGL 734 131

TransAlta NZ 2000 259 NGC 513 505

Powercor 2001 174 Origin 582 299

Enron Direct 2001 22 Centrica 160 140

New Power 2002 8 Centrica 215 38

Citipower 2002 75 Origin 272 276

Pulse 2002 451 AGL 1400 322

Contact Energy 2004 322 Origin Energy 608 530

Atlantic Energy 2004 19Scottish & Southern

300 63

Centrica 2004 18981Market

capitalisation45000 422

Origin Energy 2004 999Market


Contact Energy 2004 332Market


How Much Are Customers Worth?

Utility Customer Lifetime Value

Customer Lifetime Value

Customer Loyalty

Gradient represents customer profitability

Length of Relationship (Months)

Dimensions of Relationship Profitability

$RelationshipLongevity

RelationshipRevenue

RelationshipCosts

relationshipstrength

new pricecarriers

relationshipstructure

Source: Storbacka & Lehtinen 2001- dimensions for relationshp profitabilitySource: Storbacka & Lehtinen 2001- dimensions for relationshp profitability

CUSTOMER VALUATION

Customers as Assets

“Intangible assets are hard to see and even harder to fix a precise value for. But a widening

consensus is growing that the importance of (intangible) assets – from brand names and

customer lists … – means that investors need to know more about them.”

- New York Times -

Valuing High Growth Businesses Traditional finance approach

– P/E ratio

Marketing approach

– Customer Lifetime Value (CLV)

Relationship Lifecycle

Customer relationship lifecycle

Baines, et al, 2011, p. 568

Customer Lifetime ValueCustomer Equity – total of discounted lifetime values of all the firm’s

customers

Value – customers’ assessment of utility

Brand – customers’ assessment of image

Relationship – customers’ willingness to stay with brand

How much are you, as a customer,worth over your university lifetime? Rp8,000,000 at Kantin FE over your years in univ, not Rp10,000 per visit

Rp1,000,000 at the 21 Cineplex Margocity during your years in univ, not Rp25,000 per visit

Rp5,600,000 on KRL tickets during your years in univ, not Rp3,500 per trip

Rp4,000,000 on Ojek over your years in univ, not Rp5,000 per trip


m : Contribution margin

r : Retention rate

• The percentage of total customers minus customers who end their relationship with a company in a given period

i : Discount rate,

• The cost of capital used to discount future revenue from a customer.

• The current interest rate is sometimes used as a simple (but incorrect) proxy for discount rate.

ri

rmCLV1

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Lifetime value of a customer

Lifetime value with constant margins

0 )1(tt

tt

i

rmLV

ri

rmLV1

RetentionRate (r ) 10% 12% 14% 16%

60% 1.20 1.15 1.11 1.0770% 1.75 1.67 1.59 1.5280% 2.67 2.50 2.35 2.2290% 4.50 4.09 3.75 3.46

Discount Rate (i)

Margin Multiple

ri

r

1

Infinite

ri

rmCLV1

Finite

• mN is the gross profit for year N• i is the discount rate• r is the retention rate

Exercise 1 Calculate customers lifetime value for UI Ojek Association:

– Ojek’s margin per-trip: Rp4,000– Trip: 100 trips per-student per-year– Retention rate 80% – Discount rate 10%– Period 4 years (S1)

CLV for 4 years

Year 1 Year 2 Year 3 Year 4

CLV 400,000 290,900 211,600 153,900

Total value = Rp1,056,400

Exercise 2 Post-paid cellular mobile phone subscription:

– Monthly payment: Rp250,000– COGS: Rp150,000– Retention rate 50%– Discount rate 10%

Calculate the CLV

Finite

CLV = 100,000 x (0.5/(1-0.4))

= 100,000 x 0.83333

= Rp 83,334

ri

rmCLV1

Exercise 3Sehat Sentosa Gym

Sehat Sentosa Gym requested your consulting services in order to make an investment decision that could boost their revenue.

Sehat Sentosa Gym

Calculate the gym’s CLV for the next 5 years.

Here is some information about the Gym’s customer value:

– Annual membership fee is $300– The average member spends $100 a year at the gym

—café, nutrition, drinks, snacks, etc - 40% of which is COGS

– 80% rejoins in the following year– Discount rate is 10%

CLV for 5 years

Year 1 Year 2 Year 3 Year 4 Year 5

Revenue

COGS

Gross Profit

Probability of being active

Actual Profit

Present Value of Profit

One year profit per customer is $360

One Year

Revenue $400

COGS $40

Gross Profit

$360

How many years should we consider?

The norm is 5 years since any time longer, the assumptions could change

We can calculate the value looking into the future


Revenue $400 $400 $400 $400 $400

COGS $40 $40 $40 $40 $40

Gross Profit $360 $360 $360 $360 $360

Two problems• Profits earned in 5 years are less valuable than profits today• Customers may not be around in 5 years

Total customer value: $360 * 5= $1800

Only 80% of customers return next year (retention rate)


Revenue $400 $400 $400 $400 $400

COGS $40 $40 $40 $40 $40

Gross Profit $360 $360 $360 $360 $360


100% 80% 64% 51% 41%

Only 80% of customers return next year


Revenue $400 $400 $400 $400 $400

COGS $40 $40 $40 $40 $40

Gross Profit $360 $360 $360 $360 $360


100% 80% 64% 51% 41%

Actual Profit

$360 $288 $230 $184 $147

The club discounts future cash flow at 10% per year


Revenue $400 $400 $400 $400 $400

COGS $40 $40 $40 $40 $40

Gross Profit $360 $360 $360 $360 $360

Probability of being active 100% 80% 64% 51% 41%

Actual Profit $360 $288 $230 $184 $147

Present Value of Profit $360 $262 $190 $138 $101

Total value = $1051

Managerial question

Sehat Sentosa Gym currently faces two options to boost revenue

– Option 1 is to invest $500,000 on membership reward to

increase retention rate by 10% (from 80% to 88%)

– Option 2 is to invest the same amount in the facility and

increase annual fee by 10%

Which option should the gym choose?

Option 1 – higher retention rate


Revenue $400 $400 $400 $400 $400

COGS $40 $40 $40 $40 $40

Gross Profit $360 $360 $360 $360 $360

Probability of being active 100% 88% 77% 68% 60%

Actual Profit $360 $317 $279 $245 $216

Present Value of Profit $360 $288 $230 $184 $147

Total value = $1210 Increase = 15 %

Instead of 80%Consider 88%