1. Chapter 2: Relationship Marketing and the Concept of Customer Value

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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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 Vol 3, Iss.2, p 107

10. 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

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

12. 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

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

14. 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

15. 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

16. 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

17. 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