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Chapter 14: Customer Relationship Management
Chapter Objectives
After reading this chapter, students should understand:
·The economics of customer loyalty (i.e., why long-term customer relationships
are good business)
·A general framework for customer relationship management
·The importance of a customer relationship database
·Defining, measuring, and building customer satisfaction
·Loyalty or frequency marketing programs
·The growing importance of mass customization
·New metrics for measuring the success of customer relationship management
Chapter Overview
The purpose of this chapter is to introduce concepts underlying the development
and maintenance of long-term customer relationships.
Chapter Outline and Key Terms
Key Terms:
·Transaction buyers
·Relationship customers
·Customer relationship management (CRM)
·Lifetime customer value (LTV)
·Acquisition costs
·Customer information file (CIF)
·Datamining
·Expectation confirmation/disconfirmation model
·Customer service
·Loyalty programs
·Frequency marketing
·Mass customization
·Community
Copyright© 2011 Pearson Education, Inc., publishing as Prentice Hall 1
A. Definitions
1. Transaction buyers: Buyers who are interested only in the particular purchase at
hand, rather than a long-term relationship
2. Relationship customers: Customers who see the benefits of interdependency
between the buyer and seller
3. Customer relationship management (CRM): Develops programs that match the kind
of relationship the customer wants with the company, whether it is relational or
transactional
4. Lifetime customer value (LTV): The present value of a stream of revenue that can
be produced by a customer
5. Acquisition costs: The incremental costs involved in obtaining any new customer
6. Customer information file (CIF): A customer database including information on
past and current purchasing, contact, response to marketing variables, and monetary
value to the company
7. Datamining: Analyzing a customer information file for the best prospects to target
8. Expectation confirmation/disconfirmation model: A basic customer satisfaction
model that presumes that levels of customer satisfaction with a product or service
are determined by how well the product performs compared to what the customer
expects
9. Customer service: Service that supplements or complements the main product or
service purchased
10. Loyalty programs: Also called frequency marketing programs that encourage repeat
purchasing through a formal program enrollment process and the distribution of
benefits
11. Frequency marketing: Also called loyalty programs, which encourage repeat
purchasing through a formal program enrollment process and the distribution of
benefits
12. Mass customization: Also called one-to-one marketing, a new marketing process
whereby a company takes a product or service that is widely marketed and develops
a system for customizing it to each customer’s specifications
13. Community: A group of customers who share information between themselves and
the company abut their experiences with the product or service
B. Customer Relationship Management
1. Buyer-seller relationship
·Transaction buyer: only interested in the purchase
·Relationship customer sees the benefit of the interdependency
·Customer relationship management (CRM): Used to describe programs
that focus on the long-term nature of the relationship between buyer and
seller
·CRM programs should tailor specific strategies depending on the nature
of the relationship that the customer desires.
·Technology can be used to know customers desires and make
recommendations for their purchase.
·Figure 14.1 Page 407 The Buyer-Seller Relationship Outlines the
nature of the buyer-seller relationship
C. The Economics of Loyalty
1. Customer loyalty: allows companies to retain customers.
·Importance of loyalty illustrated by lifetime customer value (LCV)
·Loyal customers represent continued economic stream for the company.
·Research suggests that it is less expensive for a company to retain customers
than to gain new ones.
·If a repeat customer leaves the company, the company loses not only short-
term business but every future transaction that customer would have made.
·Figure 14.2 Page 409 Impact of a five-Percentage-Point Increase in
Retention Rate on Customers Net Present Value Shows the impact of a 5
percentage point increase in retention
·Figure 14.3 Page 409 Why Loyal Customers Are More Profitable Breaks
down the differences in profits
2. Components of customer loyalty as illustrated by Figure 14.3:
·Acquisition Cost: cost in acquiring new customers. These costs represent
initial loss on any customer due to the company having to spend money
prior to any possible future purchase for a customer
·Base Profit: the profit margin the company gains from a customer
·Revenue Growth: retained customers have been shown to increase their
purchases over time
·Operating Costs: fewer costs on repeat customers. Repeat customers are
familiar with the company. New customers need to be given more
assistance.
·Referrals: word of mouth from repeat customers
·Price Premium: loyal customers are less price sensitive because they find
value in the product
D. Framework for Customer Relationship Management
1. Figure 14.4 Page 411 Customer Relationship Management Model Outlines
major components of a complete framework:
·Constructing a customer database
·Analyzing the database
·Based on analysis, selecting customers to target
·Targeting the selected customers
·Developing relationship programs with the customers in the target group(s)
·
E. Creating the database: core of CRM sometimes called CIF (Customer Information File)
1. Figure 14.5 Page 411 Customer Information File Shows some optimal contents
of a CIF
2. CIF: Serves as information to select market of potential as well as current customer
market. Companies view the database as competitive advantage.
3. Components of the CIF
·Basic customer descriptors
·Purchase history
·Contact history
·Response information
·Value of the customer (monetary value)
4. Figure 14.6 Page 413 Getting More Customer Interaction One of the goals of
relationship marketing
·Illustration: Harrah’s (www.harrahs.com) Page 413
·Illustration: Nestlé in Japan (www.nestle.com) Page 413
F. Analyzing the Database
1. Analyzing the Database: data mining.
·One purpose is to estimate lifetime customer value for the purpose of resource
allocation decisions.
·One advantage of the Internet is that the information is tracked, stored and
analyzed in real time.
2. Methods for Calculating Lifetime Customer Value (LCV)
·Many types of analyses that can be performed on CIF. General name is data
mining
·Estimating lifetime customer value (LCV) is an important analysis that takes
purchase information along with information about profit margins.
·Relatively simple formula to calculate (LCV) is shown on Page 414.
·Mathematical formula that calculates the retention rate for the product, the
discount or cost of capital rate used by the company.
·Table 14.2 Page 415 Margin Multiple
E. Customer Selection
1. Customer profitability analysis can be used to separate customers who will provide
2. Current and future profitability (LCV) and how similar are the customers to ones
that are currently profitable help managers with customer selection.
·Illustration: Best Buy Page 416 (www.bestbuy.com)
·Illustration: ING Direct Page 417 (www.ingdirect.com)
·Illustration: Fidelity Investments Page 418 (www.fidelity.com)
·Illustration: The Wireless Industry Page 418
F. Customer Targeting for Retention
1. Once customer selection is completed, conventional direct marketing approaches
(1- to-1 marketing) are used to retain customers.
2. Activities such as special promotions, prices, perks, product are used.
·Illustration: The Royal Bank of Canada Page 419
(www.rbroyalbank.com)
G. Relationship Marketing Programs
1. Relationship marketing programs are designed for the purpose of retaining customers
2. Customer satisfaction:
·Studies show a positive relationship between satisfaction, loyalty and
profitability.
·Companies measure customer satisfaction and the impact it has on business.
·Figure 14.9 Page 420 Customer Satisfaction Model Model is often called
an expectation confirmation/disconfirmation model
·Customer satisfaction can be measured in several ways: Multi-attribute
model
·Figure 14.10 Page 420 Customer Satisfaction Scales Shows several
common scale types.
·Figure 14.11 Page 422 The American Customer Satisfaction Index Example
shows airline and specialty retail customer satisfaction measures for companies
and industries tracked by National Quality Research Center at University of
Michigan
·Relationship between satisfaction and loyalty is complex:
·One study classified customers into 4 categories comparing satisfaction
and loyalty
·Loyalist/apostle: highly satisfied and loyal will make word-of-mouth
referrals
·Defector/Terrorist: dissatisfied or somewhere in the middle, switch
to competitors and spend negative word of mouth
·Mercenary: high satisfaction but high switching behavior are price
sensitive and no long-term profitability
·Hostage: dissatisfied but loyalty because there may not be a viable
alternative.
3. Customer Service
·Can lead to customer satisfaction and loyalty
·Using customer service to develop long-term relationships can be a
differentiating factor
·Figure 14.12 Page 424 The Augmented Product Illustrates this effort.
·To differentiate you need to reach a third level (going beyond expectations)
·Illustration: Rackspace Page 425 (www.rackspace.com)
·Illustration: Zappos Page 425 (www.zappos.com)
·Figure 14.17 Page 426 Illustration of Outstanding Customer Service
·Useful customer service principles include:
· Service the backbone of any business.
·Great service is measured by customer satisfaction.
·Compensation plans determine behavior
·Sales and service departments are complementary.
·The hours your service department is open sends signals to customers about
your dedication to customer service.
·Illustration: EMC Corporation Page 427 (www.emc.com)
4. Loyalty Programs
·Programs that encourage repeat customers by a formal enrollment process and
distribution of benefits. Example: frequent flyer programs
·These programs can have several problems:
·Making the reward too high
·Ubiquity
·Kind of loyal customers you attract
·Lack of inspiration
·Lack of communication with customers
·Insufficient analysis of database
·These programs work best under the following conditions:
·Program supports and is consistent with brand’s value proposition
·Program adds value to the product or service
·Lifetime customer value is high
·
