Chapter 5 Developing Customer Relationships Through Quality

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					                 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
      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
            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.
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             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
                    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
                            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.
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     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
            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.
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              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
              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
              2.      Focus on issues that are controllable:
                      a.       Managers must focus on issues that can control—the marketing
                      b.       Core product quality, customer service, atmosphere, experiences,
                               pricing, convenience, distribution, and promotion must all be
              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
              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
              2.     Focus groups allow firms to more fully explore the subtleties of
              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.

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