MARKETING

MANAGEMENT
CHAPTER 5
CREATING LONG-TERM LOYALTY
RELATIONSHIPS
STARBUCKS
BUILDS
RELATIONSHIPS
 CUSTOMER-ORIENTATIONS
• Traditional companies believe
the customer is the only profit
center

• Successful marketing companies

invert the chart

• Everyone in the company is

involved in knowing, meeting,
and serving customers
 DELL REESTABLISHED
ITS COMMITMENT TO VALUE
WHAT IS
CUSTOMER • Customer perceived value is the difference
between the prospective customer’s evaluation of
PERCEIVED all the benefits and all the costs of an offering and
the perceived alternatives.
VALUE?
 DETERMINANTS OF
CUSTOMER PERCEIVED VALUE
Total customer benefit Total customer cost

Product benefit Monetary cost

Services benefit Time cost

Personal benefit Energy cost

Image benefit Psychological cost

TOTAL The perceived monetary value of the bundle of
CUSTOMER economic, functional, and psychological benefits
customers expect from a given market offering
BENEFIT because of the product, service, people, and image.
 • The perceived bundle of costs
TOTAL customers expect to incur in
evaluating, obtaining, using, and
CUSTOMER disposing of the given market
COST offering, including monetary, time,
energy, and psychological costs.
 STEPS IN A CUSTOMER VALUE ANALYSIS
Managers conduct a CVA to reveal company’s strengths and
weaknesses relative to competitors.

• Identify major attributes and benefits that customers value

• Assess the qualitative importance of different attributes and benefits
• Assess the company’s and competitor’s performances on the different
customer values against rated importance
• Examine ratings of specific segments
• Monitor customer values over time
 Loyalty is a deeply held commitment to re-buy or
re-patronize a preferred product or service in the
future despite situational influences and
WHAT IS marketing efforts having the potential to cause
switching behavior.
LOYALTY?
Note that consumers have varying degrees of
loyalty to specific brands, stores, and companies.
TOP BRANDS IN CUSTOMER LOYALTY
• Apple iPhone • Google
• Clairol • Amazon
• Samsung • Bing
• Mary Kay • J.Crew
• Grey Goose • AT&T Wireless
• Clinique • Discover Card
• Avis • Verizon Wireless
• Wal-Mart • Cheerios
 • 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.
• Ex. Volvo’s core positioning has been “safety,”
DELIVERING but the buyer is promised more than just a
safe car; other benefits include good
HIGH performance, design, and safety for the
environment
CUSTOMER • The value delivery system includes all the
VALUE experiences the customer will have on the way to
obtaining and using the offering.
• At the heart of a good value delivery system is
a set of core business processes that help
deliver distinctive consumer value
 • Satisfaction is a person’s feelings of
pleasure or disappointment that result
from comparing a product’s perceived
performance (or outcome) to
expectations.
TOTAL
CUSTOMER • How do buyers form their expectations?
SATISFACTION • Expectations result from past buying
experience, friends’ and associates’
advice, and marketers’ and
competitors’ information and
promises.
 • Periodic surveys
• Customer loss rate
MEASURING
• Mystery shoppers
SATISFACTION
• Monitor competitive
performance
 • It’s critical that marketers deal with negative
experiences properly. Beyond that, the following
procedures can help to recover customer goodwill:

• Set up a 7-day, 24-hour toll-free hotline (by phone,

MANAGING fax, or e-mail) to receive and act on customer
complaints.
CUSTOMERS BY • Contact the complaining customer as quickly as
possible. The slower the company is to respond,
HANDLING the more dissatisfaction may grow and lead to
negative word of mouth.
COMPLAINTS • Accept responsibility for the customer’s
disappointment; don’t blame the customer.
• Use customer service people who are empathic.
• Resolve the complaint swiftly and to the
customer’s satisfaction. Some complaining
customers are not looking for compensation so
much as a sign that the company cares.
 What is Quality?
The totality of features and characteristics of a product
or service that bear on its ability to satisfy stated or
implied needs.
PRODUCT AND
SERVICE • A company that satisfies most of its customers’ needs
most of the time is called a quality company, but we
QUALITY need to distinguish between conformance quality and
performance quality (or grade).

• Higher levels of quality result in higher levels of

customer satisfaction, which support higher prices
and (often) lower costs
 • Remember that marketing is the art of attracting
and keeping profitable customers. Yet every
company loses money on some of its customers
• Pareto Principle: 80–20 rule states that 80 percent
MAXIMIZING or more of the company’s profits come from the
top 20 percent of its customers
CUSTOMER • It is important for companies to maximize long-
LIFETIME VALUE term customer profitability
• Customer lifetime value (CLV) describes the net
present value of the stream of future profits
expected over the customer’s lifetime purchases.
 • Customer Profitability
• A profitable customer is a person, household, or company
that over time yields a revenue stream exceeding by an
acceptable amount the company’s cost stream for
attracting, selling, and serving that customer.

MAXIMIZING • Can be measured individually or by market segment

CUSTOMER • Customer Profitability Analysis (CPA)

LIFETIME VALUE • Best conducted with the tools of an accounting technique

called activity-based costing (ABC).
• ABC accounting tries to identify the real costs associated
with serving each customer—the costs of products and
services based on the resources they consume.
• The company estimates all revenue coming from the
customer, less all costs.
CUSTOMER-PRODUCT PROFITABILITY
ANALYSIS
TABLE 5.3 A Hypothetical Example to Illustrate CLV Calculations

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Number of Customers 100 90 80 72 60 48 34 23 12 6 2
Revenue per Customer 100 110 120 125 130 135 140 142 143 145
Variable Cost per 70 72 75 76 78 79 80 81 82 83
Customer
Margin per Customer 30 38 45 49 52 56 60 61 61 62
Acquisition Cost per 40
Customer
Total Cost or Profit –4,000 2,700 3,040 3,240 2,940 2,496 1,904 1,380 732 366 124
Present Value –4,000 2,454.55 2,512.40 2,434.26 2,008.06 1,549.82 1,074.76 708.16 341.48 155.22 47.81

TABLE 5.4
EXAMPLE CLV CALCULATION
Margin Multiple

Discount Rate

Retention Rate 10% 12% 14% 16%

60% 1.20 1.5 1.11 1.07
70% 1.75 1.67 1.59 1.52
80% 2.67 2.50 2.35 2.22
 • Companies are using
CULTIVATING information about customers to
enact precision marketing
CUSTOMER designed to build strong long-
RELATIONSHIPS term relationships
WHAT IS CRM is the process of carefully
CUSTOMER managing detailed information
RELATIONSHIP about individual customers and
MANAGEMENT all customer touch points to
maximize customer loyalty.
(CRM)?
 • Personalizing Marketing
• Making sure the brand and its
marketing are as relevant as
possible to as many customers as
possible
CUSTOMER
RELATIONSHIP • Framework for CRM
• Identify prospects and
MANAGEMENT customers
• Differentiate customers by
needs and value to company
• Interact to improve knowledge
• Customize for each customer
 • Customer Empowerment
• Other marketers have begun to
advocate a “bottom-up”
grassroots approach to
marketing, rather than the more
CUSTOMER traditional “top-down” approach
RELATIONSHIP in which marketers feel they are
calling the shots.
MANAGEMENT • Marketers are helping
consumers become evangelists
for brands by providing them
resources and opportunities to
demonstrate their passion.
CUSTOMER RELATIONSHIP
MANAGEMENT

• Customer Reviews and Recommendations

• the strongest influence on consumer choice
remains “recommended by relative/friend,”
• an increasingly important decision factor is
“recommendations from consumers.”
• Ex. Bloggers and influencers
• Ex. Magnum launch in the Philippines in
2012
 • Reduce the rate of defection
• Selecting and training employees to be knowledgeable
and friendly increases the likelihood that customers’
shopping questions will be answered satisfactorily.

ATTRACTING • Increase longevity

AND RETAINING • The more engaged with the company, the more likely
a customer is to stick around
CUSTOMERS
• Enhance share of wallet, cross-selling, and upselling
• Sales from existing customers can be increased with
new offerings and opportunities.
 • Make low-profit customers more profitable or
terminate low-profit customers
• Marketers can encourage unprofitable
customers to buy more or in larger quantities,
forgo certain features or services, or pay
higher amounts or fees
ATTRACTING
AND RETAINING • Focus more effort on high-profit customers
CUSTOMERS • The most profitable customers can be treated
in a special way
• Thoughtful gestures such as birthday
greetings, small gifts, or invitations to special
sports or arts events can send them a strong
positive signal
 THE MARKETING FUNNEL
• Consumers must move through each stage before becoming loyal
customers
 INTERACTING WITH CUSTOMERS Listening to customers is crucial to customer
relationship management. Some companies have created an ongoing mechanism that keeps their
marketers permanently plugged in to frontline customer feedback.
•
BUILDING LOYALTY
Deere & Company, which makes John Deere tractors and has a superb record of customer
loyalty—nearly 98 percent annual retention in some product areas—has used retired employees
to interview defectors and customers.81
• Chicken of the Sea has 80,000 members in its Mermaid Club, a core-customer group that receives
special offers, health tips and articles, new product updates, and an informative e-newsletter. In
return, club members provide valuable feedback on what the company is doing and thinking of
• Interacting with Customers
doing. Feedback from club members has helped design the brand’s Web site, develop messages for
TV advertising, and craft the look and text on the packaging.82
• Listening• to customers is crucial to customer relationship management.
Build-A-Bear Workshop uses a “Cub Advisory Board” as a feedback and decision-input body.
The board is made up of twenty 8- to 12-year-olds who review new-product ideas and give a
• It is also important to be a customer advocate and, as much as possible, take
“paws up or down.” Many products in the stores are customer ideas.83
the customers’ side
But listening and
is only part understand
of the story. It is alsotheir point
important of view.
to be a customer
84
advocate and, as
much as possible, take the customers’ side and understand their point of view. USAA Insurance’s
legendary quality of service has led to the highest customer satisfaction in the industry. USAA sub-
scribers will often tell stories about how the company looks out for them, even counseling them not
• Forming Strong Bonds
|Fig. 5.5|
• Create superior products, services, and experiences for the target market.
• Get cross-departmental participation in planning and managing the customer satisfaction and retention process. Forming Strong
• Integrate the “Voice of the Customer” to capture their stated and unstated needs or requirements in all Customer Bonds
business decisions.
• Organize and make accessible a database of information on individual customer needs, preferences,
contacts, purchase frequency, and satisfaction.
• Make it easy for customers to reach appropriate company staff and express their needs, perceptions, and complaints.
• Assess the potential of frequency programs and club marketing programs.
• Run award programs recognizing outstanding employees.
 • Developing Loyalty Programs
• Frequency programs (FPs) are designed
to reward customers who buy frequently
and in substantial amounts.
• Club membership programs can be open
to everyone who purchases a product or
BUILDING service, or limited to an affinity group or
those willing to pay a small fee.
LOYALTY
• Creating Institutional Ties
• The company may supply customers with
special equipment or computer links that
help them manage orders, payroll, and
inventory.
 CUSTOMER DATABASES AND
DATABASE MARKETING
• Customer database is an organized collection of comprehensive
information about individual customers or prospects that is current,
accessible, and actionable for lead generation, lead qualification, sale of a
product or service, or maintenance of customer relationships.
• a customer database also contains the consumer’s past purchases, demographics
(age, income, family members, birthdays), psychographics (activities, interests, and
opinions), mediagraphics (preferred media), and other useful information.

• Database marketing is the process of building, maintaining, and using

customer databases and other databases (products, suppliers, resellers) to
contact, transact, and build customer relationships.
 • Data Mining can extract from the mass of
data useful information about individuals,
trends, and segments.
CUSTOMER
• Uses of a Database
DATABASES AND • To identify prospects
DATABASE • To target offers
• To deepen loyalty
MARKETING • To reactivate customers
• To avoid mistakes
DON’T BUILD A • The product is a once-in-a-lifetime purchase
• Customers do not show loyalty
DATABASE • The unit sale is very small
WHEN • The cost of gathering information is too high
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