5 Creating Long-Term Loyalty Relationships 1 5 Creating Long-Term Loyalty Relationships

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?

Figure 5.1 Customer-Orientations Managers who believe the customer is the company’s only true “profit center” consider the traditional organization chart in Figure 5.1 (a)—a pyramid with the president at the top, management in the middle, and frontline people and customers at the bottom—obsolete. Successful marketing companies invert the chart as in Figure 5.1 (b). At the top are customers; next in importance are frontline people who meet, serve, and satisfy customers; under them are the middle managers, whose job is to support the frontline people so they can serve customers well; and at the base is top management, whose job is to hire and support good middle managers. We have added customers along the sides of Figure 5.1 (b) to indicate that managers at every level must be personally involved in knowing, meeting, and serving customers.

Customer Perceived Value (CPV) CPV = the difference between the prospective customer’s evaluation of all benefits and all the costs of an offering and the perceived alternatives. CPV = Total Customer Value – Total Customer Cost

Figure 5.2 Determinants of Customer Perceived Value Total customer benefit Total customer cost Product benefit Monetary cost Services benefit Time cost Figure 5.2 illustrates the relationships between and components of total customer benefit and total customer cost. Personal benefit Energy cost Image benefit Psychological cost

Delivering High Customer Value to build 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 behavior.

A Tale of A Loyal Consumer Morgan Spurlock @ 2004

The Value Proposition The whole cluster of benefits the company promises to deliver

Total Customer Satisfaction a person’s feelings of pleasure or disappointment resulting from comparing a product’s perceived performance (or outcome) in relation to his or her expectations.

Measuring Satisfaction Periodic surveys Customer loss rate Mystery shoppers Monitor competitive performance

Product and Service Quality Quality is the totality of features and characteristics of a product or service that bear on its ability to satisfy stated or implied needs.

Quality Conformance (delivering promised quality) Performance (the grade of the quality)

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

Maximizing Customer Lifetime Value Customer profitability Customer lifetime value (the NPV of the stream of future profits expected over the customer’s lifetime purchases) Customer equity (the total of the discounted lifetime values of ALL of the firm’s customers)

Estimating Lifetime Value Annual customer revenue: $500 Average number of loyal years: 20 Company profit margin: 10 Customer lifetime value: $1000

Loyalty Will satisfaction lead to loyalty? (e.g., Moderating variable of variety-seeking behavior) Two levels of loyalty: attitudinal loyalty and behavioral loyalty Four levels of loyalty: - Contractual loyalty - Transactional loyalty - Functional loyalty - Emotional loyalty

Drivers of Customer Equity Value equity customer’s objective assessment of the utility of an offering based on perceptions of its benefits relative to its costs. Brand equity customer’s subjective and intangible assessment of the brand, above and beyond its objectively perceived value. Relationship equity customer’s tendency to stick with the brand, above and beyond objective and subjective assessment of its worth.

Framework for CRM Identify prospects and customers Differentiate customers by needs and value to company Interact to improve knowledge Customize for each customer (mass customization).

CRM Strategies Reduce rate of defection Increase longevity Enhance share of wallet Terminate low-profit customers Focus more effort on high-profit customers

Mass vs. One-to-One Marketing Average customer Customer anonymity Standard product Mass production Mass distribution Mass advertising One-way message Economies of scale One-to-One Individual customer Customer profile Customized market offering Customized production Economies of scope Share of customer

Customer Retention 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.

Describing Market Dynamics Permanent capture markets (once a customer, always a customer) Simple retention markets (customers can permanently lost after each period) Customer migration markets (customer can leave and come back)

Building Loyalty Basic marketing Reactive marketing Accountable marketing Proactive marketing Partnership marketing

Reducing Customer Defection Define and measure retention rate Distinguish causes of customer attrition Estimate profit loss associated with loss of customers Assess cost to reduce defection rate Gather customer feedback

Forming Strong Customer Bonds Add financial benefits (e.g., Frequent flyer program) Add social benefits (e.g., Karimun Club) Add structural ties (via contracts, lower price to large buyers, long term service)

Creating Customer Evangelists

Database Key Concepts Customer database Database marketing Mailing list Business database Data warehouse Data mining

Using the Database To identify prospects To target offers To deepen loyalty To reactivate customers To avoid mistakes

The Downside of Database Marketing and CRM Database marketing is useful when: product is a once-in-a-lifetime purchase, customers show little loyalty to the company, and the cost of gathering information is too high. Difficulty of getting everyone in the company to be customer oriented. Not all customers want a relationship with the company It may not cost less to serve loyal customers.