Chapter 2: Relationship Marketing and the Concept of Customer Value

Overview Topics discussed: The Link between CRM and Database Marketing, and the Importance of Customer Value Satisfaction-Loyalty-Profit Chain

Link Between CRM and Database Marketing Identify and analyze customer population Group based on similarities Recommend separate marketing campaigns for different groups CRM Applies database marketing techniques at customer level Develops strong company-to-customer relationships

CRM Capture customer data and interact with the customer simultaneously Develop specific strategies for interaction with each customer Better relationships with profitable customers Locating and enticing new customers that will be profitable Finding appropriate strategies to deal with unprofitable customers, including termination of relationships

Link Between CRM and Customer Value The economic value of the customer relationship to the firm CRM: Practice of analyzing and utilizing marketing databases and leveraging communication technologies to determine corporate practices and methods that will maximize the lifetime value of each individual customer to the firm Adoption of CRM with customer value at its core strategy helps us define CRM from a customer value perspective

Benefits of customer value-based approach in Marketing Decisions Decrease in Costs Maximization in revenues Improvement in Profits and ROI Acquisition and Retention of Profitable Customers Reactivation of Dormant Customers

Conceptualizations of CRM Functional level: focuses on technology Sales force automation in the sales function Campaign management in the marketing function Customer facing front-end level: focuses on total customer experience To build a single-view of customers across contact channels To distribute customer intelligence to all customer-facing functions Strategy level: focuses on customer satisfaction Frees CRM from technology underpinnings Describes CRM as a process to implement customer centricity in the market and build shareholder value Knowledge about customers affects the entire organization

Components of CRM from a Business Strategy Perspective Strategic process Spans multiple organizational functions Continuous effort towards becoming customer-centric Selection Resource allocation based on economic value of customer Interactions Exchange of information and goods between customer and firm evolves as a function of past exchanges Customers End-users and intermediaries such as distributors and retailers Greater fine-tuning of segmentation strategies to eventually target individual customers with customized product offerings Optimizing current and future value of customer Maximizing customer equity by maximizing profits over a series of transactions

Satisfaction-Loyalty-Profit Chain Increased customer satisfaction will lead to greater customer retention, which is often used as a proxy for customer loyalty, which then is expected to lead to greater profitability Product Performance Customer Retention / Revenue / Service Performance Satisfaction Loyalty Profit Employee Performance Source: Strengthening the satisfaction-profit chain”, Eugene W Anderson, Vikas Mittal. Journal of Service Research, Nov 2000. Vol 3, Iss.2, p 107

Direct Link between Customer Satisfaction and Profits Direct link suggests, that as customers experience greater satisfaction with a firm’s offering, profits rise Positive correlation between customer satisfaction and ROA Improving customer satisfaction comes at a cost and once the cost of enhancing satisfaction is factored in, offering “excessive satisfaction” doesn’t pay Marginal gains in satisfaction decrease, while the marginal expenses to achieve the growth in satisfaction increase There is an optimum satisfaction level for any firm, beyond which increasing satisfaction does not pay

Link between Satisfaction and Retention Source: “Strengthening the satisfaction-profit chain”, Eugene W Anderson, Vikas Mittal. Journal of Service Research, Nov 2000. Vol 3, Iss.2, p 114

Link between Satisfaction and Retention (2) Link between satisfaction and retention is asymmetric: Dissatisfaction has a greater impact on retention than satisfaction Even if the level of satisfaction is high, retention is not guaranteed If customers are dissatisfied, other products become more enticing The link is nonlinear in that the impact of satisfaction on retention is greater at the extremes The flat part of the curve in the middle has also been called the “zone of indifference” Factors like the aggressiveness of competition, degree of switching cost, and the level of perceived risk influence the shape of the curve and the position of the elbows

Link between Satisfaction and Retention (3) Source: “Why satisfied customers defect”, Jones, Thomas O, Sasser, W Earl Jr. Harvard Business Review. Boston: Nov/Dec 1995. Vol. 73, Iss. 6

Link between Loyalty and Profits Reichheld’s hypotheses Long term customers spend more per period over time Cost less to serve per period over time Have greater propensity to generate word-of-mouth Pay a premium price when compared to that paid by short-term customers Does not hold true in a non-contractual relationship Revenue stream must be balanced by the cost of constantly sustaining the relationship and by fending off competitive attacks Efforts at increasing customer satisfaction and retention not only consume a firm’s resources but are subject to diminishing returns

Lifetime Duration-Profitability Association Reinartz and Kumar: Across the different firms, There is a segment of customers that is loyal but not very profitable (due to excessive resource allocation) There is a segment that generates very high profits although it has only a short tenure Since these short-term customers can be very profitable, it is clear that loyalty is not the only path to profitability

Lifetime Duration-Profitability Association (2) Overall trend shows a direct correlation between loyalty and profitability Outliers on the graph who generate high profits while not having high loyalty will outperform those customers who have a high level of loyalty but who are not very profitable High Lifetime Profit Low Low High Loyalty

Summary Rapid advances in technology allowed increase in customer database, which marketers use to target specific segments Marketing is increasingly focused on the individual customer and delivering products that meets customer’s needs Relationship marketing seeks to establish individual relationships and monitor them over time, delivering specifically targeted marketing campaigns. CRM marketers can generate more profit and increase customer satisfaction Various links in the PSC are almost always nonlinear, asymmetric, and certainly segment and industry specific