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CHAPTER 5 Creating Customer Value, Satisfaction, and Loyalty PREPARED BY: Arceo, Mary Joyce M. Javier, Alyssa Mae L. Obligacion, Maria Teresa Z. BY THE END OF THIS CHAPTER, WE HOPE TO: Define the customer value, satisfaction, and loyalty, and how can companies deliver them. Define the lifetime value of customers and how can marketers maximize it. Know how can companies cultivate strong relationships. Be able to define the database marketing. INTRODUCTION Today, companies face their toughest competition ever. Moving from a product-and-sales philosophy to a holistic marketing philosophy, however gives them a better chance of outperforming competition. And the cornerstone of a well-conceived marketing orientation is strong customer relationships. Marketers must connect with customers-informing, engaging, and maybe even energizing them in the process. Successful marketers are the ones that fully satisfy their customers profitably. In this chapter, we spell out in detail the ways companies can go about winning customers and beating competitors. Building Customer Value, Satisfaction, and Loyalty (b) Modern Customer-oriented Organization Chart (a) Traditional Organization Chart CUSTOMERS Managers who believe the customer is the Top company’s only true mana- Frontline “profit center” consider gement people the traditional organization Middle Middle chart in Figure 5.1- a Manageme Manageme pyramid with the president nt Frontline nt people Top at the top management manage in the middle, and frontline ment people and customers at CUSTOMERS the bottom- obsolete. FIG.5.1 Traditional Organization versus Modern Customer-Oriented Company Organization Successful marketing companies invert the chart in Figure 5.1b. At the top are the 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) - is the difference between the prospective customer’s evaluation of all benefits and all costs of an offering and perceived alternatives. TOTAL CUSTOMER BENEFIT - is the perceived monetary value of the bundle of economic, functional, and psychological benefits customer expect from a given market offering because of the products, services, personnel, and image involved. TOTAL CUSTOMER COST - is the perceived bundle of costs customers expect to incur in evaluating, obtaining, using, and disposing of the given market offeringm including monetary, time, energy, and psychological costs. Very often, managers conduct a CUSTOMER VALUE ANALYSIS to reveal the company’s strengths and weaknesses relative to those of various competitors. The steps in this analysis are: 1. IDENTIFY THE MAJOR ATTRIBUTES AND BENEFITS THAT CUSTOMERS VALUE - Customers are asked what attributes, benefits, and performance levels they look for in choosing a product and vendors. 2. ASSESS THE QUANTITATIVE IMPORTANCE OF THE DIFFERENT ATTRIBUTES AND BENEFITS - Customers are asked to rate the importance of the different attributes and benefits. If their ratings diverge too much, the marketer should cluster them into different segments. 3. ASSESS THE COMPANY’S AND COMPETITOR’S PERFORMANCES ON THE DIFFERENT CUSTOMER VALUES AGAINST THEIR RATED IMPORTANCE - Customers describe where they see the company’s and competitor’s performances on each attribute and benefit. 4. EXAMINE HOW CUSTOMERS IN A SPECIFIC SEGMENT RATE THE COMPANY’S PERFORMANCE AGAINST A SPECIFIC MAJOR COMPETITOR ON AN INDIVIDUAL ATTRIBUTE OR BENEFIT BASIS - If the company’s offer exceeds the competitor’s offer on all important attributes and benefits, the company can charge a higher price (thereby earning higher profits), or it can charge the same price and gain more market share. 5. MONITOR CUSTOMER VALUES OVER TIME - The company must periodically redo its studies of customer values and competitors’ standings as the economy, technology, and features change. DELIVERING HIGH CUSTOMER VALUE - Consumers have varying degrees of loyalty to specific brands, stores, and companies. TOTAL CUSTOMER SATISFACTION Whether the buyer is satisfied after purchase depends on the offer’s performance in relationship to the buyer’s expectations, and whether the buyer interprets any deviations between the two. SATISFACTION - is a person’s feelings of pleasure or disappointed that result from comparing a product’s perceived performance (or outcome) to their expectations. If the performance falls short of expectations, the customer is DISSATISFIED. If the performance matches the expectations, the customer is SATISFIED. If the performance exceeds expectations, the customer is HIGHLY SATISFIED OR DELIGHTED. TOTAL CUSTOMER SATISFACTION HOW DO BUYERS FORM THEIR EXPECTATIONS - Expectations result from buying experience; friends’ and associates’ advise; and marketer’s and competitors’ information and promises. If marketers raise expectations too high, the buyer is likely to be disappointed. MONITORING SATISFACTION Many companies are systematically measuring how well they treat their customers, identifying the factors shaping satisfaction, and making changes in their operations and marketing as a result. MEASUREMENT TECHNIQUES 1. PERIODIC SURVEYS - can track customer satisfaction directly and also ask additional questions to measure repurchase intention and the respondent’s likelihood or willingness to recommend the company and brand to others. MONITORING SATISFACTION 2. Companies can monitor their CUSTOMER LOSS RATE and contact customers who have stopped buying or who have switched to another supplier to find out why. 3. Companies can hire MYSTERY SHOPPERS to pose as potential buyers and report on strong and weak points experienced in buying the company’s and competitors’ products. 4. In addition to tracking customer value expectations and satisfaction for their own firms, companies need to monitor their competitor’s performance in these areas. MONITORING SATISFACTION INFLUENCE OF CUSTOMER SATISFACTION For customer-centered companies, customer satisfaction is both a goal and a marketing tool. Companies need to especially concerned today with their customer satisfaction level because the internet provides a tool for consumers to quickly spread bad word of mouth – as well as good word of mouth – to the rest of the world. o Studies of customer dissatisfaction show that customers are dissatisfied with their purchases about 25% of the time but that only about 5% complain. The other 95% either feel complaining is not worth the effort, or they do not know how or to whom to complain, and they jus t stop buying. *The fact is no matter how perfectly designed and implemented a marketing program is, mistakes will happen. The following procedures can help to recover customer goodwill; 1. Set-up a 7-day, 24 hour toll-free “hotline” (y phone, fax or e-mail) to receive and act on customer complaints. 2. Contact the complaining customer as quickly as possible. 3. Accept responsibility for the customer’s disappointment; don’t blame the customer. 4. Use customer-service people who are empathic. 5. Resolve the complaints swiftly and to the customer’s dissatisfaction. Product and Service Quality What exactly is quality? •Fitness for use • Conformance to requirements • Freedom from variation American Society for Quality Control’s definition: “Quality is the totality of features and characteristics of a product or service that bear on its ability to satisfy stated or implied needs”. (this is clearly a customer-centered definition) Quality company –a company hat satisfies most of its customers' needs most of the time. “Performance Quality” “Conformance Quality” Impact of Quality Higher levels of quality result in higher levels of customer satisfaction. Quality is clearly the key to value creation and customer satisfaction. Total Quality To deliver high- quality goods and services to target customers, marketers should; bear the major responsibility for correctly identifying the customers’ needs and requirements must communicate customer expectations properly to product designers must make sure that customers’ orders are filled correctly and on time must check that customers have received proper instructions, training, and technical assistance in the use of the product must stay in touch with customers after the sale to ensure that they are satisfied and remain satisfied must gather customer ideas for product and service improvements and convey them to the appropriate departments. Maximizing Customer Lifetime Value The well-known 20-80 rule says that; the top 20% of the customers often generates 80% or more of the company’s profits. The implication is that a company could improve its profitability by “firing” its worst customers. Customer Profitability What makes a customer profitable? Profitable customer - a person, household, or company that over time yields a revenue stream that exceeds by n acceptable amount the company’s cost stream for attracting, selling, and servicing that customer. Customer Profitability Analysis Customers C1 C2 C3 P1 + + + High profitable product P2 + Profitable Products product P3 - - Unprofitable product P4 - High unprofitable product High-profit Mixed-bag Losing customer customer customer *Customer-Product Profitability Analysis What can the company do about customers 2 and 3? • Raise the price of its less profitable products or eliminate them • Try to sell the customer 2 and 3 its profit- making products Customer Profitability Analysis (CPA) - is best conducted with the tools of an accounting technique called activity-based costing (ABC). Different profit-tiers customers: Platinum customers – most profitable Gold customers – profitable Iron customers – low profitability but desirable for volume Lead customers – unprofitable and undesirable Customer Portfolios One perspective is that a firm’s portfolio consist of a combination of acquaintances, friends, and partners that are constantly changing. The 3 types of customers will differ in their product needs, their buying, selling, and servicing activities, and their acquisition costs and competitive advantages. Another perspective compares the individuals who make up the firm’s portfolio to the stocks that make up an investment portfolio. From this perspective, firms should assemble portfolios of negatively correlated individuals so that the financial contributions of one offset the deficits of another to maximize the portfolios risk-adjusted lifetime value. Measuring Customer Lifetime Value Customer lifetime value (CLV) – describes the net present value of the stream of the future profits expected over the customer’s lifetime purchases. CLV calculations provide a formal quantitative framework for planning customer investment and help marketers adopt a long-term perspective. Cultivating Customer Relationships Maximizing customer value means cultivating long- term customer relationships. Information has the advantages of being easy to differentiate, customize, personalize, and dispatch over networks t incredible speed. Customer empowerment has become a way of life for many companies that have o adjust to a shift in the power with their customer relationships. Customer Relationship Management (CRM) -- is the process of carefully managing detailed information about individual customers and all customer “touch points” to maximize customer loyalty. Customer touch point - is any occasion on which the customer encounters the brand and product– from actual experience to personal or mass communications to casual observation. CRM enables companies to provide excellent real-time customer service through the effective use of individual account information. One-to-One Marketing Don Peppers and Martha Rogers outline a four-step framework for one-to-one marketing that can be adapted to CRM marketing as follows: Identify your prospects and customers. Differentiate customers in terms of their needs and their value to your company. Interact with individual customers to improve your knowledge about their individual needs to build stronger relationships. Customize products, services and messages to each customer. Increasing Value of the Customer Base Winning companies improve the value of their customer base by excelling at strategies such as the following: Reducing the rate of customer defection. Increasing the longetivity of the customer relationship. Enhancing the growth potential of each customer through “share-of-wallet,” across selling and up- selling. Making low-profit customers more profitable or terminating them. Focusing disproportionate effort on high-value customers. Attracting and Retaining Customers To generate leads, company develop ads and place them in media that will reach new prospects; Send direct mail and make phone calls to possible new prospects; Purchases names from list brokers. Reducing Defection To reduce the defection rate, the company must: 1. Define and measure its retention rate. 2. Distinguish the causes of customer attrition and identify those that can be managed better. 3. Compare the lost profit equal to the customer’s lifetime value from a lost customer to the costs to reduce the defection rate. Building Loyalty Creating a strong tight connection is the dream of many marketer and often the key to long term marketing success. Interacting with customers Listening to customers is crucial to customer relationship management. It is also important also important to be advocate and as much as possible take the customers side on issues understanding their point of view Developing Loyalty Programs Two customers loyalty programs that companies can offer are frequency programs and club marketing programs. FREQUENCY PROGRAMS (FP’s) Are design to provide rewards to customers who buy frequently and in substantial amounts. CLUB MEMBERSHIP PROGRAMS It is open to everyone who purchase a product or service or it can be limited to an affinity group or to those willing to pay a small fee. Fee’s and membership conditions prevent those only a fleeting interest in a company’s products from joining. Examples of Highly successful clubs include the following: Apple Inc. - Harley Davidson Personalizing Market Company personnel can create strong bonds with customers by individualizing and personalizing relationships. TECHNOLOGY is an essential ingredient for the best relationship marketing today. Distinction between customer and clients: Customers Clients • may be nameless to the institute • cannot be nameless to the • served as part of the mass or as institute part of the larger segments • served on an individual basis • served by anyone who happens • served by the professional to be available assigned to them. Creating Institutional Ties The company may supply customers with special equipment or computer links that help customers manage orders, payroll, and inventory. Customers are less inclined to switch to another supplier when this would involve high capital costs, high research cost, or loss of loyal-customer discounts. A good examples is; McKesson Corporation Milliken & Company WIN-Backs Regardless of the nature of the category how hard companies may try some customer s inevitably become inactive or drop out. The challenge is to reactive dissatisfied customers through win-back strategies. It is often easier to reattract ex-customers than to find new one’s. The key is to analyze the causes of customer detection through exit interviews and lost customer surveys and win back only those who have strong profit potential. Customer Database and Database Marketing Customer Database Is an organized collection of comprehensive information about individual customers or prospects that is current, accesible and actionable for such marketing puposes as lead generation, lead qualification, sale of a product or services or maintenance of customer relationship. Database Marketing • is the process of building and maintaining and using customer databases and other databases (products, suppliers and resellers) to contract , transact, and build customer relationships. Customer Databases A customer mailing list is simply a set of names addresses and telephone numbers. A customer databases contains much more information, accumulated through customer transaction information, telephone queries, cookies, and every customer contract. Customer database Business database • Consumer past purchase • Business costumers past • Demographics purchase • psychographics • Past volumes • Media graphics • Prices • Others… • Profits • Buyer team member names • Status of current contract • Estimate of the supplier share of the customers business • Competitive supplier • Assessment of competitive strengths and weaknesses in selling and servicing account • Relevant buying practices and patterns and policies. Data warehouses and Data mining In Data Warehouse marketers can capture, query and analyze it to draw inferences about an individual customers needs and responses. Telemarketers can respond to customers inquiries based on a total picture of the customer relationship. Through DataMining, marketing statisticians can extract useful information about individuals, trends and segments from the mass of data. Datamining uses sophisticated statistical and mathematical techniques such as cluster analysis, automatic interaction detection, predictive modeling, and neural networking. In general, companies can use their database in 5 ways: 1. To identify Prospects Many companies generate sales leads by advertising their product or services. 2. To decide which customers should receive a particular offer Companies are intersted in selling, up-selling and cross selling their products and services. 3. To deepen customer loyalty Companies can build interest and enthusiasm by remembering customer preferences and by sending appropriate gifts, discount coupons, and interesting reading materials. 4. To reactive customer purchases Companies can install automatic mailing programs that send out birthday or anniversary cards, Christmas shopping reminders or off season promotions. 5. To avoid customers mistakes A major bank confessed to a number of mistakes it had made by not using its customers database well. Downside of Database Marketing and CRM There are four problems that can prevent a firm from effectively using CRM as follows: 1. Building and maintaining a customer database requires a large investment in computer hardware, database soft ware, analytical programs, communication links and skilled personnel. Building a customer database would not be wothwhile in the following cases: (a). When the product is a once-in-a-lifetime purchase (b). When customers show loyalty to a brand (c). When the unit sale is very small (d). When the cost of gathering information is too high. 2. Difficulty of getting everyone in the company to be customer oriented and to use the available information. Effective database marketing requires managing and training employees as well as dealers and suppliers 3. Not all customers want a relationship with the company, and they may resent knowing that the company has collected that much personal information about them. Marketers must be concerned about attitudes about privacy and security. 4. The assumption behind CRM may not always hold true. High-volume costumers often know their value to a company and can leverage it to extract premium service and/or price discounts. eBay Inc. Database Marketing is most frequently used by business marketers and service providers that normally and easily collect a lot of customer data. Four main perils of CRM Implementing CRM before creating a customer strategy Rolling out CRM before changing the organization to match Assuming more CRM technology is better Stalking, not wooing ,customers Companies that uses Database Marketing .
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