Chapter 5: Developing Customer Relationships Through Quality, Value, and Satisfaction 5-1 Chapter 5: Developing Customer Relationships Through Quality, Value, and Satisfaction I. Customer Relationship Management A. Customer Relationship Management (CRM) is the holistic process of identifying, attracting, differentiating, and retaining customers. It means integrating a firm’s entire supply chain to create customer value at every step through either increased benefits or lowered costs. [Exhibit 5.1] B. CRM involves a number of stakeholders: 1. Employees: Firms must manage relationships with their employees if they are to have any hope of fully serving customers needs. 2. Supply chain partners: Virtually all firms buy and sell products upstream and/or downstream in the supply chain. 3. Lateral partners: Relationships with other stakeholders must also be managed effectively. 4. Customers: The end users of a product, whether businesses or individual consumers. C. One of the most basic principles of CRM is the shift away from market share toward share of customer. 1. This involves abandoning the old notions of acquiring new customers and increasing transactions to focus on more fully serving the needs of current customers. 2. Focusing on share of customer requires understanding that all customers have different needs and therefore that not all customers have equal value to a firm. 3. Some customers—those that require considerable handholding or frequently return products—are simply too expensive to keep given the low level of profits they generate. D. One-to-one marketing and mass customization can be prohibitively expensive to deliver. To make customized marketing mixes viable, two issues are critical: 1. The delivery of the marketing mix (product, pricing, distribution, and promotion) must be automated to a degree that makes it cost efficient. 2. The second critical issue in mass customization is the notion of personalization. We use the term to describe the idea of giving customers choices, not only in terms of product configuration, but also in terms of the entire marketing mix. 3. To grow in today’s business environment, a firm must build its relationship capital—the ability to build and maintain relationships with customers, suppliers, and partners. a. To build relationship capital, a firm must be able to fulfill the needs of its customers better than its competitors. b. It must be able to fulfill those needs with high-quality goods and services, offer products that are a good value for the price, and achieve a high level of customer satisfaction. E. The Role of Quality in Developing Customer Relationships 1. Quality refers to the degree of superiority of a firm’s goods or services. Chapter 5: Developing Customer Relationships Through Quality, Value, and Satisfaction 5-2 2. Quality applies to many different aspects of a firm’s total product offering: the core product, customer services, and symbolic attributes. [Exhibit 5.2] a. The core product is the firm’s justification for existence – the benefit desired by customers. b. Customers expect the core product to be of high quality to meet their needs. c. Customer services involve activities that add value to the core product. d. Customers also focus on symbolic differences, such as image, style, prestige, and brand. F. Delivering superior quality day in and day out is one of the most difficult things any organization can do with regularity. 1. Most businesses struggle with improving the quality of service-- either as a core product or as customer services that add value to a core product. 2. Research has determined businesses can improve the quality of their services by: a. Understanding customers’ expectations, needs and wants. 1) Improving service quality is the starting point for effective customer relationship management. 2) Delivery of superior quality begins with a solid understanding of customers’ expectations. 3) Managers must stay in touch with customers by conducting research to better identify their needs and wants. b. Translating customer research into specifications for quality. 1) Firms that can successfully convert customer information into quality specifications ensure that the voice of the customer is heard. 2) Managers must be committed to giving customers what they want and expect. c. Delivering on specifications. 1) The ability of managers and employees to deliver quality that is consistent with established specifications is an issue. 2) Successfully achieving specifications depends mostly on the training and motivation of the firm’s employees. d. Promising only what can be delivered. 1) Communication with customers must be honest and realistic with respect to the degree of quality that can be delivered. 2) Improving quality has been the hallmark of a successful marketing strategy for many years. II. Creating Value to Develop Customer Relationships A. An aspect of developing and maintaining solid relationships is to create good value for customers. Value is quite useful because: 1. it includes the concept of quality. 2. it takes into account every marketing mix element. Chapter 5: Developing Customer Relationships Through Quality, Value, and Satisfaction 5-3 3. it can be used to consider explicitly customer perceptions of the marketing mix in the strategy development process. B. Value means different things to different people. 1. Some equate good value with high product quality. 2. Others see value as nothing more than a low price. 3. The most common definition relates customer benefits to costs. C. Customer benefits can include anything that a customer receives in his or her dealings with the firm. [Exhibit 5.3] 1. These benefits include the quality of the firm’s core products, including all of the features possessed by its products. 2. They benefit from customer services, such as installation, delivery, training, or layaway programs. 3. The quality of customer service depends on how reliable and responsive the firm is to customer requests, and on employee characteristics, such as friendliness and empathy. 4. Business customers receive benefits from their experiences, such as interacting with salespeople. D. Monetary and nonmonetary customer costs include anything that the customer must give up to obtain the benefits provided by the firm. 1. The monetary cost of the product comes in two forms: transactional costs and life cycle costs. a. Transactional costs include the immediate financial outlay or commitment that must be made to purchase the product. b. Life cycle costs include any additional costs that customers will incur over the life of the product. 2. Nonmonetary are the time and effort customers expend to find and purchase goods and services. a. To reduce time and effort, the firm must increase product availability. b. They must make it more convenient for customers to purchase the firm’s products. 3. Risk, another nonmonetary cost, can be reduced by offering good basic warranties or extended warranties for an additional charge. 4. Opportunity costs, the final nonmonetary cost, is harder for the firm to control. Some firms attempt to reduce opportunity costs by: a. Promoting their products as being the best or by promising good service after the sale. b. Considering all competitors, including total budget competitors, that offer customers alternatives for spending their money. E. Competing on Value 1. By altering each element of the marketing mix, the firm can enhance value by increasing core product, customer service, or experience-based quality and/or reducing monetary or nonmonetary costs. 2. The marketing manager must understand the different value requirements of each target market and adapt the marketing mix accordingly. Chapter 5: Developing Customer Relationships Through Quality, Value, and Satisfaction 5-4 3. From a strategic perspective, it is important to remember that all four marketing mix elements are important to delivering value. III. Maintaining Customer Satisfaction Over the Long-Term To maintain and manage customer satisfaction from a strategic point of view, managers must understand the differences between satisfaction, value, and quality. They must also make customer satisfaction measurement a long-term, continuous commitment. A. Satisfaction vs. Value vs. Quality 1. Customer satisfaction is defined as the degree to which a product meets or exceeds the customer’s expectations about that product. 2. Customers can hold expectations about any part of the product offering, including value and quality. a. Quality is a concept whereby customers judge the product on an attribute-by-attribute basis. b. When the customer considers the issue of value, they include things other than quality—price, time and effort, and opportunity costs. 3. It is possible for a customer to be satisfied with the quality, but dissatisfied with its value. 4. Customers think of satisfaction based on the totality of their experience, without overtly considering issues like quality and value. 5. Customers’ expectations (satisfaction) can be based on any number of factors, even factors that have nothing to do with quality or value. B. Maintaining customer satisfaction is based on three issues from a strategic point of view. 1. Understand what can go wrong: a. An endless number of things can and will go wrong in fulfilling customers’ needs and wants. b. The best strategies will not work when things are simply uncontrollable. 2. Focus on issues that are controllable: a. Managers must focus on issues that can control—the marketing mix. b. Core product quality, customer service, atmosphere, experiences, pricing, convenience, distribution, and promotion must all be managed. 3. Make customer satisfaction measurement an ongoing priority: a. Know what customers want, need, and expect. b. A program to measure customer satisfaction is the cornerstone of customer relationship management. C. Firms serious about customer relationship management have adopted a robust means of tracking satisfaction that are based on actual customer behaviors. 1. Lifetime Value of a Customer (LTV): the net present value of the revenue stream generated by a specific customer over a period of time. Chapter 5: Developing Customer Relationships Through Quality, Value, and Satisfaction 5-5 2. Average Order Value (AOV): a customer’s purchase dollars divided by the number of orders over a period of time. 3. Customer Acquisition/Retention Costs: it is typically less expensive to retain current customers than to acquire new customers. 4. Customer Retention Rate: the percentage of customers who are repeat purchasers. 5. Referrals: dollars that are generated from customers referred to the firm by current customers. 6. Viral Marketing: an electronic form of word-of-mouth communication D. Firms also have another research method at their disposal: the focus group. 1. Focus groups are being used more often in the measurement of customer satisfaction. 2. Focus groups allow firms to more fully explore the subtleties of satisfaction. 3. By better understanding the roots of customer satisfaction, marketers should be better able to develop marketing strategies that can meet customers’ needs. Questions for Discussion 1. How can one-to-one marketing and mass customization be used to develop customer relationships and increase a firm’s share of customer? Is the strategic shift from ―acquiring customers‖ to ―maintaining clients‖ universally applicable, or are there firms or industries where ―acquiring customers‖ is still a viable strategy? 2. What ethical issues are involved in ―firing‖ customers because they are unprofitable for the firm? 3. Why do you think many firms do such a poor job of understanding the needs, wants, and expectations of their customers? Do they buy into the ―better mousetrap‖ philosophy and believe that quality is the only necessary requirement of maintaining customer relationships? Explain. 4. As a marketing manager, what can you do to better understand the things that can go wrong with respect to customer satisfaction? How can you be more responsive to customers even if their expectations have nothing to do with the quality or value that your product delivers? Marketing Strategy, 2e by Ferrell, Hartline, and Lucas. 2002.