CH-5+CREATING+CUSTOMER+VALUE_+SATISFACTION_+AND+LOYALTY

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					5
CREATING CUSTOMER VALUE,
SATISFACTION, AND LOYALTY

DETAILED CHAPTER OUTLINE

Today, companies face their toughest competition ever. The cornerstone of a well-conceived
marketing orientation is strong customer relationships. Marketers must connect with
customers—informing, engaging, and energizing them in the process.

BUILDING CUSTOMER VALUE, SATISFACTION, AND LOYALTY

Managers who believe the customer is the company’s only true “profit center” consider the
traditional organizational chart obsolete.



Figure 5.1(a) Traditional Organization versus Modern Customer-Orientated Company
organization



Successful marketing companies invert the chart.

A) With the rise of digital technologies like the Internet, today’s increasingly informed
consumers expect companies to do more than connect with them, more than satisfy them, and
even more than delight them.



Customer Perceived Value



A) Customers tend to be value-maximizers.
B) Customers estimate which offer will deliver the most perceived value and act on it.



Figure 5.2 Determinants of customer-delivered value.

C) Customer perceived value (CPV) is the difference between the prospective customer’s
evaluation of all the benefits and all the costs of an offering and the perceived alternatives.

Review Key Definition here: customer perceived value

D) Total customer value is the perceived monetary value of the bundle of economic, functional,
and psychological benefits customers expect from a given market offering.

Review Key Definition here: total customer value

E) Total customer cost is the bundle of costs customers expect to incur in evaluating, obtaining,
using, and disposing of the given market offering, including monetary, time, energy, and psychic
costs.

Review Key Definition here: total customer cost



F) Customer perceived value is thus based on the difference between what the customer gets
and what he or she gives for different possible choices.



Applying Value Concepts



A) The customer adds up values from the four sources for Caterpillar—product, services,
personnel, and image and compares them to Komatsu.



B) The buyer evaluates these elements together with the monetary cost to form a total
customer cost.



C) The buyer will choose whichever source he thinks delivers the highest perceived customer
value.



Choices and Implications
Buyers operate under various constraints and occasionally make choices that give more
weight to their personal benefit than to the company’s benefit.



Figure 5.1(b) Determinants of Customer Delivered Value



A) In the above example, suppose the customer chooses to buy the Komatsu tractor, there are
three possibilities:



1) The buyer might be under orders to buy at the lowest price.



2) The buyer will retire before the company realized that the Komatsu tractor is more expensive
to operate.



3) The buyer enjoys a long-term friendship with the Komatsu salesperson.



B) Customer perceived value is a useful framework that applies to many situations and yields
rich insights. Its implications are:



1) First, the seller must assess the total customer value and total customer cost associated with
each competitor’s offer.



2) Second, the seller who is at a customer perceived value disadvantage has two alternatives:



a. To increase total customer value (by strengthening or augmenting the offer’s product,
services, personnel, and image benefits).



b. To decrease total customer cost (by reducing price, simplifying the ordering, and delivery
process, or absorbing some buyer risk by offering a warranty.
Delivering High Customer Value



A) Loyalty is defined as “a deeply held commitment to rebuy or repatronize a preferred product
or service in the future despite situational influences and marketing efforts having the potential
to cause switching behavior.”



B) The key to generating high customer loyalty is to deliver high customer value.



C) The value proposition consists of the whole cluster of benefits the company promises to
deliver, it is more than the core positioning of the offering.



D) Whether the promise is kept depends on the company’s ability to manage its value-delivery
system.



E) The value-delivery system includes all the experiences the customer will have on the way to
obtaining and using the offering.



Review Key Definitions here: value proposition and value-delivery system



F) Whether customers will actually receive, the promised value proposition will depend upon
the marketer’s ability to influence various core business processes.



Total Customer Satisfaction

Whether the buyer is satisfied after the purchase depends on the offer’s performance in
relation to the buyer’s expectations.



B) Satisfaction is a person’s feeling of pleasure or disappointment resulting from comparing a
product’s perceived performance (or outcome) in relation to his or her expectations.
C) A company must operate on the philosophy that it is trying to deliver a high level of customer
satisfaction subject to delivering acceptable levels of satisfaction to the other stakeholders,
given its total resources.



Customer Expectations



A) How do buyers form their expectations?



1) From past buying experiences.



2) Friends and associates advice.



3) Marketers’ and competitors’ information and promises.



A customer’s decision to be loyal or to defect is the sum of many small encounters with the
company.

Companies need to create a “branded customer experience.”

Measuring Satisfaction



A) Many companies are systematically measuring customer satisfaction and the factors shaping
it.



B) A company would be wise to measure customer satisfaction regularly because one key to
customer retention is customer satisfaction.



C) The link between customer satisfaction and customer loyalty, however, is not proportional.
D) A number of methods exist to measure customer satisfaction.



1) Periodic surveys can track customer satisfaction directly.



2) Companies can monitor the customer loss rate and contact customers who have stopped
buying and learn why this happened.



3) Companies can hire mystery shoppers to pose a potential buyers and report on strong and
weak points experienced in buying the company’s and competitor’s products.



4) For customer satisfaction surveys, it is important that companies ask the right questions.



a. “Would you recommend this product or service to a friend”?



E) In addition to tracking customer value expectations and satisfaction, companies need to
monitor their competitor’s performance in these areas as well.



F) For customer-centered companies, customer satisfaction is both a goal and a marketing tool.

G) Companies that do achieve high customer satisfaction ratings make sure that the target
market knows it.



H) American Customer Satisfaction Index (ACSI).



Product and Service Quality

Satisfaction will also depend on 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.

Review Key Definition here: quality



A) We can say that a seller has delivered quality whenever the seller’s product or service meets
or exceeds the customers’ expectations.



B) Distinguish between conformance quality and performance quality.



C) Total quality is the key to value creation and customer satisfaction.



D) Marketing managers have two responsibilities in a quality-centered company.



1) First, they must participate in formulating strategies and policies to help the company win
through total quality excellence.



2) Second, they must deliver marketing quality alongside production quality.



Total Quality Management

A) Total quality management (TQM) is an organization-wide approach to continuously improve
the quality of all the organization’s processes, products, and services.

Review Key Definition here: total quality management



B) Product and service quality, customer satisfaction, and company profitability are intimately
connected.
C) TQM ran into implementation problems as firms became overly focused on how they were
doing business and not the why they were in business. Companies lost sight of consumer needs
and wants.



D) Companies are now concentrating efforts on “return on quality” or ROQ.



E) ROQ advocates improving quality only on those dimensions that produce tangible customer
benefits, lower costs, or increased sales.



F) Marketers play several roles in helping their companies define and deliver high-quality goods
and services to target customers.



1) They bear the major responsibility for correctly identifying the customers’ needs and
requirements.



2) They must communicate customer expectations properly to product designers.



3) They must check that customers’ orders are filled correctly and on time.



4) They must make sure that customers have received proper instructions, training, and
technical assistance in the use of the product.



5) They must stay in touch with customers after the sale to ensure that they are satisfied and
remain satisfied.



6) They must gather customer ideas for product and service improvements and convey them to
the appropriate departments.



MAXIMIZING CUSTOMER LIFETIME VALUE
Marketing is the art of attracting and keeping profitable customers.



A) The 80/20 rule states that the top 20 percent of the customers may generate as much as 80
percent of the company’s profits.



B) Suggests amending the rule to read 20-80-30, to reflect the idea that the top 20 percent of
customers generate 80 percent of the company’s profits, half of which are lost serving the
bottom 30 percent of unprofitable customers.



1) The implication is that a company could improve its profits by “firing” its worst customers.



Customer Profitability



A) A profitable customer is a person, household, or company that over time yields a revenue
stream that exceeds by an acceptable amount the company’s cost stream of attracting, selling,
and servicing that customer.



B) Customer profitability can be assessed individually, by market segment, or by channel.



C) Most companies fail to measure individual customer profitability.



Customer Profitability Analysis

Figure 5.3 shows a profitability analysis.



A) Customer 1 is very profitable.



B) Customer 2 is mixed profitability.
C) Customer 3 is a losing customer.



1) What can the company do about customers 2 and 3?



a. It can raise the price of its less profitable products or eliminate them.



b. It can try to sell them its profit-making products.



c. It can encourage customer 3 to switch to competitors.



D) Customer profitability analysis (CPA) is best conducted with the tools of an accounting
technique called Activity-Based Costing (ABC).



1) Platinum customers (most profitable).



2) Gold customers (profitable).



3) Iron customers (low profitability but desirable).



4) Lead customers (unprofitable and undesirable).



Competitive Advantage

Competitive advantage is a company’s ability to perform in one or more ways that
competitors cannot or will not match.

Review Key Definition here: competitive advantage
A) Michael Porter urged companies to build a sustainable competitive advantage.



B) Few competitive advantages are sustainable, at best they may be leverageable.



1) A leverageable advantage is one that a company can use as a springboard to new advantages.



2) Any competitive advantage must be seen by customers as a customer advantage.



Measuring Customer Lifetime Value

Customer Lifetime Value (CLV) describes the net present value of the stream of future profits
expected over the customer’s lifetime purchases.

Review Key Definition here: customer lifetime value



A) CLV calculations provide a formal quantitative framework for planning customer investment
and helps marketers to adopt a long-term perspective.



Customer Equity

Customer equity is the total of the discounted lifetime values of all of the firm’s customers.

Review Key Definition here: customer equity



A) Rust, Zeithaml, and Lemon distinguish three drivers of customer equity:



1) Value equity: Is the customer’s objective assessment of the utility of an offering based on
perceptions of its benefits relative to its costs?



a. The sub-drivers of value equity are quality, price, and convenience.
2) Brand equity: Is the customer’s subjective and intangible assessment of the brand, above and
beyond its objectively perceived value?



a. The sub-drivers of brand equity are customer brand awareness, customer attitude toward the
brand, and customer perception of brand ethics.



3) Relationship equity: Is the customer’s tendency to stick with the brand, above and beyond
objective and subjective assessments of its worth?



a. Sub-drivers of relationship equity include loyalty programs, special recognition and treatment
programs, community building programs, and knowledge-building programs.



B) This formulation integrates value management, brand management, and relationship
management within a customer-centered focus.



C) Blattberg, Getz, and Thomas view customer equity as driven by three components:



1) Acquisition.



2) Is the function of the efficiency of add-on selling, the number of add-on selling offers given to
existing.



a. Is affected by the number of prospects, probability of a prospect, and spending per prospect.



3) Retention.
a. Is influenced by the retention rate and retention spending level.



b. Add-on-selling customers and the response rate to new offers.



D) Marketing equity represents a promising approach to marketing management. Relational
equity is the cumulative value of the firm’s network of customers, partners, suppliers,
employees, and investors.



CULTIVATING CUSTOMER RELATIONSHIPS

Maximizing customer value means cultivating long-term customer relationships.



A) Companies are moving to more precision marketing designed to build strong customer
relationships.



B) Mass customization is the ability of a company to meet each customer’s requirements—to
prepare on a mass basis individually designed products, services, programs, and
communications.



Review Key Definition here: mass customization

Customer Relationship Management (CRM)

Customer relationship management (CRM) is the process of managing detailed information
about individual customers and carefully managing all customer “touch points” to maximize
customer loyalty.



Review Key Definition here: customer relationship management



A) A customer “touch point” is any occasion on which a customer encounters the brand and
product—from actual experience to personal or mass communications to casual observation.
B) Customer relationship management enables companies to provide excellent real-time
customer service through the effective use of individual account information.



C) Peppers and Rogers outlined a four-step framework for one-to-one marketing that can be
adapted to CRM marketing:



1) Identify your prospects and customers.



2) Differentiate customers in terms of: (1) their needs and (2) their value to your company.



3) Interact with individual customers to improve your knowledge about individual needs and to
build stronger relationships.



4) Customize products, services, and messages to each customer.



Table 5.1 lists the main differences between mass marketing and one-to-one marketing.



D) A key driver of shareholder value is the aggregate value of the customer base. Winning
companies improve the value of their customer base by excelling at strategies such as:



1) Reducing the rate of customer defection.



2) Increasing the longevity of the customer relationship.



3) Enhancing the growth potential of each customer through “share-of-wallet, cross-selling, and
up-selling.”
4) Making low-profit customers more profitable or terminating them.



5) Focusing disproportionate effort on high-value customers.



Attracting, Retaining, and Growing Customers



A) Customers are becoming harder to please.



B) Companies seeking to expand profits and sales have to spend considerable time and
resources searching for new customers.



1) Suspects are people or organizations that might conceivably have an interest in buying but
many not have the means or real intention to buy.



2) Prospects—customers with the motivation, ability, and opportunity to make a purchase



3) Customer churn—high customer defection



4) Two main ways to strengthen customer retention:



a. Erect high switching costs.



b. Deliver high customer satisfaction.



C) Most companies now recognize the importance of satisfying and retaining customers.
D) Satisfied customers constitute the company’s customer relationship capital.



1) Acquiring new customers cost five times more than the costs involved in satisfying and
retaining current customers.



2) The average company loses 10 percent of its customers each year.



3) A 5 percent reduction in customer defection rate can increase profits by 25 percent to 85
percent depending on the industry.



4) Customer profit rate tends to increase over the life of the retained customer.



Figure 5.4 shows the main steps in the process of attracting and keeping customers.



E) The starting point is everyone who might conceivably buy the product or service (suspects).



1) Prospects.



2) First-time customers.



3) Repeat customers.



4) Clients—people whom the company treats very specially and knowledgeably.



5) Members.
6) Advocates—customers who enthusiastically recommend the company.



7) Partners.



F) Markets can be characterized by long-term buying dynamics and how easily customers can
enter and leave.



1) Permanent capture markets—once a customer always a customer.



2) Simple retention markets—customers lost after each period.



3) Customer migration markets—customers can leave and come back.



Building Loyalty



A) Five different levels of investment in customer-relationship building:



1) Basic marketing.



2) Reactive marketing.



3) Accountable marketing.



4) Proactive marketing.



5) Partnership marketing.
Figure 5.5 shows the likely level of relationship marketing depends upon the number of
customers and profit margin levels.

Table 5.2 highlights five imperatives of CRM and where technology fits in.

Reducing Customer Defection



A) Five main steps a company can take to reduce the defection rate:



1) The company must define and measure its retention rate.



2) The company must distinguish the cause of customer attrition and identify those that can be
managed better.



3) The company needs to estimate how much profit it loses when it loses customers.



4) The company needs to figure out how much it would cost to reduce the defection rate.



5) Finally, listening to customers.



Forming Strong Customer Bonds



A) Berry and Parasuraman have identified three retention-building approaches:



1) Adding financial benefits.



2) Adding social benefits.
3) And adding structural ties.



Adding Financial Benefits



A) Two financial benefits companies can offer are:



1) Frequency programs—designed to provide rewards to customers who buy frequently and in
substantial amounts; good way to build long-term loyalty with the 20 percent of the customers
who contribute 80 percent of the profits.



2) Club marketing programs—limited to an affinity group or to those willing to pay a small fee.
Limited membership clubs are more powerful long-term loyalty builders.



Adding Social Benefits



A) Company personnel work on cementing social bonds with customers by individualizing and
personalizing customer relationships.



Adding Structural Ties



A) The company may supply customers with special equipment or computer links that help
customers manage orders, payroll, and inventory.



B) The marketer’s aim should be to increase the consumer’s proclivity to repurchase.



1) Create long-term contracts.
2) Charge a lower price to consumers who buy larger supplies.



3) Turn the product into a long-term service.



CUSTOMER DATABASES AND DATABASE MARKETING



A) A customer database is an organized collection of comprehensive information about
individual customers or prospects that is current, accessible, and actionable, for such marketing
purposes as lead generation, lead qualification, sale of a product or service, or maintenance of
customer relationships.



Review Key Definition here: customer database



A) Database marketing is the process of building, maintaining, and using customer databases
and other databases for the purpose of contacting, transacting, and building customer
relationships.



Review Key Definition here: database marketing

Customer Databases



A) Customer databases are not customer mailing lists.



1) A customer mailing list is simply a set of names, addresses, and telephone numbers.



a. Ideally, a customer database contains the consumer’s past purchases, demographics, income,
family members, psychographics, mediagraphics, and other useful information.
2) A business database would contain business customers’ past purchases, past volumes, prices,
and profits, buyer team members’ names, and other useful information.



Figure 5.6 displays a method for selectively gaining greater share of a customer’s business.

235 Chapter-by-Chapter Instructional Material

Data Warehouses and Datamining



A) Savvy companies are capturing information every time a customer comes into contact with
any of its departments.



1) These data are collected by the company’s contact center and organized into a data
warehouse.



2) Through data mining, marketing statisticians can extract useful information about individuals,
trends, and segments from the mass of data.



Using the Database



A) To identify prospects.



B) To decide which customers should receive a particular offer.



C) To deepen customer loyalty.



D) To reactivate customer purchases.



E) To avoid serious customer mistakes.
The Downside of Database Marketing and CRM



A) Four problems can deter a firm from effectively using CRM.



1) Building and maintaining a customer database requires a large investment in computer
hardware, database software, analytical programs, communication links, and skilled personnel.



2) The difficulty of getting everyone in the company to be customer orientated and to use the
available information.



3) Not all customers want a relationship with the company.



4) That the assumptions behind CRM may not always hold true—i.e. it might not be the case
that it costs less to serve the more loyal customers.



B) Businesses where the CLV is low, who have a high churn and where there is little or no
contact between seller and ultimate buyer may not benefit from a CRM.



1) Four main perils of CRM:



a. Implementing CRM before creating a customer strategy.



b. Rolling out CRM before changing organization to match.



c. Assuming more CRM technology is better.
d. Stalking, not wooing customers.

				
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