1. 5 Creating Long-Term Loyalty Relationships1
5 Creating Long-Term Loyalty Relationships

2. 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?

3. 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.

4. 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

5. 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

6. 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.

7. A Tale of A Loyal Consumer
Morgan 2004

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

9. 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.

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

11. 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.

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

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

14. 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)

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

16. 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

17. 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.

18. 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).

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

20. 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

21. 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.

22. 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)

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

24. 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

25. 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)

26. Creating Customer Evangelists

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

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

29. 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.