LEARNING OBJECTIVES
In this chapter, we will address the following questions:
1. What are customer value, satisfaction, and loyalty, and how can companies
deliver them?
2. What is the lifetime value of customers and how can marketers maximize it?
3. How can companies attract and retain the right customers and cultivate strong
customer relationships?
4. How do customers’ new capabilities affect the way companies conduct their
marketing?
CHAPTER SUMMARY
1. Customers are value maximizers. They form an expectation of value and act on it.
Buyers will buy from the firm that they perceive to offer the highest customer-delivered
value, defined as the difference between total customer benefits and total customer cost.
2. A buyer’s satisfaction is a function of the product’s perceived performance and
the buyer’s expectations. Recognizing that high satisfaction leads to high customer
loyalty, companies must ensure that they meet and exceed customer expectations.
3. Losing profitable customers can dramatically affect a firm’s profits. The cost of
attracting a new customer is estimated to be five times the cost of keeping a current
customer happy. The key to retaining customers is relationship marketing.
4. Quality is the totality of features and characteristics of a product or service that
bear on its ability to satisfy stated or implied needs. Marketers play a key role in
achieving high levels of total quality so that firms remain solvent and profitable.
5. Marketing managers must calculate customer lifetime values of their customer
base to understand their profit implications. They must also determine ways to increase
the value of the customer base.
6. Companies are also becoming skilled in customer relationship management (CRM),
which focuses on developing programs to attract and retain the right customers and meeting
the individual needs of those valued customers.
OPENING THOUGHT
Although most students understand the concept of “buying,” some will have difficulty in
understanding the differences between total customer value and total customer cost. It will be
beneficial for long-term understanding and retention to cover what the definition is and what it
is not. Secondly, the distinction between satisfaction and total customer satisfaction for the
C H A P T E R
5CREATING LONG-TERM
LOYALTY RELATIONSHIPS
consumer might be challenging for some students. Some students may have a hard time
understanding the distinction between perception and expectation. Finally, it might be
necessary to reemphasize the concepts of Customer Relationship Management (CRM),
customer databases, and database mining often in the lecture. Students may confuse the
concept of mailing lists with databases. However, most of the students today are proficient in
Internet usage and can cite examples of relationship marketing from their own favorite
Internet sites such as Amazon.com.
TEACHING STRATEGY AND CLASS ORGANIZATION
PROJECTS
1. At this point in the semester-long marketing plan project, students should have completed
their value proposition for the fictional product, defined how they will deliver satisfaction
and maintain customer loyalty.
2. Have students (in groups or individually) select a local firm in their community, or a local
division of a national firm, and seek permission to interview their corporate executives on
their corporation’s definition of customer satisfaction, loyalty, and what their particular
firm does to foster such customer relations. This project can be combined with the project
on marketing research and as such, students can create questionnaires suitable for mailing
to these executives. The students can then present these findings to the class in a group or
by individual presentations. This could be a full-semester project or limited to a few weeks
of the semester.
3. Sonic PDA Marketing Plan: Sonic has decided to focus on total customer satisfaction,
because studies have shown that customers who are “completely satisfied” with the
product or service are much more likely to buy more from the company than customers
who report they are “satisfied.” You have been asked by Jane Melody to:
Recommend how Sonic should measure total customer satisfaction.
Review the possible ways to gain customer satisfaction information and write the
recommended approach in a marketing plan or enter into the Positioning section of Marketing
Plan Pro.
ASSIGNMENTS
Key manufacturers and others must be concerned with how customers view products
(customer satisfaction perceptions) being disseminated throughout the “electronic world” via
the Internet. No longer can one discount the “power of the mouse” for affecting potential
customers. In small groups, students are to select a particular firm or product and are to
research what is being said on the Internet regarding this company/product. What
affects/effects does this type of dissemination of consumer opinions via the Internet have on
the company’s marketing strategies? What can the company do to stem the tide of such
comments? How does a company defend itself against blatantly untrue consumer opinions?
Have each of the students read Michael Tsiros, Vikas Mittal, William T. Ross Jr., “The
Role of Attributions in Customer Satisfaction: A Reexamination,” Journal of Consumer
Research, 31 (September), 2004, pp. 476-483 and comment on their findings.
Customer relationship management is a current business “buzz word.” Students can be
directed to do an Internet research project from named marketing/business journals on the
subject of customer relations management (the chapter’s endnotes can provide a good source
of leads for the students). Each student can be directed to research, read, and compile a report
on their findings from a minimum of five articles from five different marketing (and business
magazines such as Fortune). The student’s report is to comment on how these articles
compare, complement, or contrast the material contained in this chapter.
The research firm J.D. Powers and Associates (jdpower.com) lists eight categories of products
for consumers to research before purchasing the product or service. Breaking up the class into
eight groups, have the students research the top performers for each category and be able to
share their findings as to what characteristics, policies, procedures, and vision these top rated
companies have in common. Is there a “common” link among all of the winners? Are there
differences? In terms of the material contained in this chapter, how would you explain these
similarities and differences?
END-OF-CHAPTER SUPPORT
MARKETING DEBATE—Online Versus Off-Line Privacy
As more firms practice relationship marketing and develop customer databases, privacy issues
are emerging as an important topic. Consumers and public interest groups are scrutinizing—
and sometimes criticizing—the privacy policies of firms and raising concerns about potential
theft of online credit card information or other potentially sensitive or confidential financial
information. Others maintain online privacy fears are unfounded and that security issues are as
much a concern offline. They argue that the opportunity to steal information exists virtually
everywhere and it’s up to the consumer to protect their interests.
Take a position: (1) Privacy is a bigger issue online than off-line versus Privacy is no
different online than off-line.
Pro: Privacy is a larger issue in the online world than the off-line world simply because the
information has a greater opportunity to be exposed to more people than off-line transactions.
The transmission of private information electronically travels through electronic channels each
of which presents opportunity for misdirection or computer “hacking” activities. In many of
these cases, the person, or firm transmitting this information, redirecting this information
receiving this information and storing this information is unknown to the consumer. In the
off-line world, the consumer has the opportunity to know the company, personnel, or firm
receiving this information and has the opportunity to accept or decline sharing their personal
information.
Con: Transmission of personal information in the off-line world still travels electronically, in
many cases. The act of paying with a credit card still involves the transmission of data
electronically at some point in the transaction. What differs is the fact that the consumer is
initially interfacing with a person (or firm). Although this does not mitigate the risks involved
to the consumer, it does present some concrete knowledge of the people, or firm involved in
the transaction.
MARKETING DISCUSSION: Using CLV
Consider the lifetime value of customers (CLV). Choose a business and show how you would
go about developing a quantitative formulation that captures the concept. How would that
business change if they totally embraced the customer equity concept and maximized CLV?
Suggested Response
A) CLV describes the net present value of the stream of future profits expected over the
customers’ lifetime purchases. Each student’s example will differ but the main tenets of each
report should include the following:
1) Add:
1. Profit from a sale (dollar or percent).
2. Number of sales per customer per year.
3. Average age of a customer.
4. Average expected lifespan of a customer.
2) Subtract:
1. Appropriate discount rate.
2. Costs of attracting one customer.
3. Selling one customer.
4. Servicing one customer.
B) Organizations would change by beginning to take a long-term perspective rather than a
short-term (quarter-to-quarter view). No longer viewing a customer as a “transaction” but
rather as a “lifetime value” solidifies and demonstrates the impact that a single consumer has
to a firm in a language they understand—dollars. Firms would begin to customize offerings
and messages to each customer, ensure that retention strategies are in place, differentiate
customers in terms of needs and value to the company, and build stronger relationships with
key customers. Because of a change in the loci of focus for the firm, strategies, and actions
based upon which would provide the best return on its marketing investments would be
implemented.
DETAILED CHAPTER OUTLINE
Opening Vignette: Customer-centered companies are using technology to connect with
customers and build customer relationships. Pandora tracks preferences and makes
recommendations to drive customer preference for its service and loyalty.
I. Building Customer Value, Satisfaction and Loyalty
A. Managers who believe the customer is the only true profit center place
customers at the top of the organizational chart, followed by the people who
serve them.
a. Managers at every level must be personally engaged in knowing,
meeting and serving customers
b. Increasingly informed consumers expect companies to connect, satisfy,
delight, listen and respond to them
B. Customer-Perceived Value
a. Customers tend to be value maximizers within the bounds of search
costs and limited knowledge, mobility, and income.
b. Customers choose the offer they believe will deliver the highest value
and act on it
c. Customer-perceived value is the difference between the prospective
customer’s evaluation of all the benefits and costs of an offering and
the perceived alternatives
d. Total customer benefit is the perceived monetary value of the bundle
of economic, functional and psychological benefits customers expect
from a given market offering because of the product, service, people,
and image
e. Total customer cost is the perceived bundle of costs customers expect
to incur in evaluating, obtaining, using and disposing of the given
market offering, including monetary, time, energy, and psychological
costs
C. Applying Value Concepts
a. Customer value analysis is used to reveal the company’s strengths and
weaknesses relative to those of competitors
b. Steps in the analysis
i. Identify the major attributes and benefits that customers value
ii. Assess the quantitative importance of the different attributes
and benefits
iii. Assess the company’s and competitor’s performances on the
different customer values against their rated importance
iv. Examine how customers in a specific segment rate the
company’s performance against a specific major competitor on
an individual attribute or benefit basis
v. Monitor customer values over time
c. Choice Processes and Implications
i. The buyer might be under orders to buy at the lowest price
ii. The buyer might make choices to look good in the short-run
iii. The buyer might have more weight to their personal benefit
than the company’s benefit
d. The seller must assess the total customer benefit and total customer
cost associated with each competitor’s offer in order to know how its
own offer rates in the buyer’s mind.
e. The seller at a disadvantage has two alternatives: increase total
customer benefit or decrease total customer cost.
D. Consumers have varying degrees of loyalty to specific brands, stores, and
companies.
a. Loyalty is 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 value proposition consists of the whole cluster of benefits the
company promises to deliver; it is more than the core positioning of
the offering.
c. The value delivery system includes all the 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.
E. Satisfaction is a person’s feeling of pleasure or disappointment that result
from comparing a product or service’s perceived performance (or outcome) to
expectations
a. If the performance or experience falls short of expectations, the
customer is dissatisfied.
b. If it matches expectations, the customer is satisfied.
c. If it exceeds expectations, the customer is highly satisfied or delighted
d. Customer assessments of product or service performance depend on
many factors, including the type of loyalty relationship the customer
has with the brand.
e. Although the customer-centered firm seeks to create high customer
satisfaction, increasing customer satisfaction by lowering price or
increasing services may result in lower profits.
f. Expectations result from past buying experience, friends’ and
associates’ advice, public information and discourse, and marketers’
and competitors’ information and promises.
g. Many companies systematically measure how well they treat
customers, identify factors shaping satisfaction and change operations
and marketing as a result because satisfaction affects retention and
word of mouth
h. High satisfaction or delight creates an emotional bond with the
brand or company, not just a rational preference.
i. Periodic surveys can track customers’ overall satisfaction directly
and ask additional questions to measure repurchase intention,
likelihood or willingness to recommend the company and brand to
others, and specific attribute or benefit perceptions likely to be related
to customer satisfaction.
j. American Customer Satisfaction Index (ACSI) measures
consumers’ perceived satisfaction with different firms, industries,
economic sectors, and national economies
k. The Net Promoter score is a 1-to-10 scale on which to rate their
likelihood of recommending the company.
i. Marketers then subtract Detractors (those who gave a 0 to 6)
from Promoters (those who gave a 9 or 10) to arrive at the Net
Promoter Score (NPS).
ii. Customers who rate the brand with a 7 or 8 are deemed
Passively Satisfied and are not included.
iii. A typical set of NPS scores falls in the 10 percent to 30
percent range, but world-class companies can score over 50
percent.
l. Companies need to monitor their competitors’ performance and their
customer loss rate
m. For customer-centered companies, customer satisfaction is both a goal
and a marketing tool.
F. Satisfaction will also depend on product and service quality
a. Quality is the totality of features and characteristics of a product or
service that bear on its ability to satisfy stated or implied needs
b. Higher levels of quality result in higher levels of customer satisfaction,
which support higher prices and (often) lower costs.
c. Marketing plays an especially important role in helping companies
identify and deliver high-quality goods and services to target
customers.
i. Correctly identify customers’ needs and requirements
ii. Communicate customer expectations properly to product
designers
iii. Make sure customers’ orders are filled correctly and on time
iv. Check that customers have received proper instructions,
training, and technical assistance in the use of the product
v. Stay in touch with customers after the sale to ensure they are,
and remain, satisfied
vi. Gather customer ideas for product and service improvements
and convey them to the appropriate departments
II. Maximizing Customer Lifetime Value
A. The 80-20 rule states that 80 percent or more of the company’s profits come
from the top 20 percent of its customers.
B. Companies need to concern themselves with Return on Customer (ROC) and
how efficiently they create value from the customers and prospects available
i. 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.
ii. Marketers can assess customer profitability individually, by market
segment, or by channel
iii. Companies that conduct customer profitability analysis:
1. Can raise the price of its less profitable products or eliminate
them
2. Can try to sell less profitable profit-making products
3. Can ignore unprofitable customers/encourage them to switch to
competitors
iv. Activity-based costing accounting tries to identify the real costs
associated with serving each customer and estimates all revenue
coming from the customer, less all costs (including making and
distriuting the products and services, taking phone calls, traveling,
entertainment and gifts, etc.)
C. Customer lifetime value describes the net present value of the stream of future
profits expected over the customer’s lifetime purchases
i. Expected revenues minus the expected costs of attracting, selling and
servicing the account, after the appropriate discount rate is applied
ii. Provide a formal framework for planning customer investment
iii. Help marketers adopt a long-term perspective
iv. Harrah’s tracks customer data and uses predictive analyses to
maximize lifetime value
v. Lifetime value can be estimated for three to five years or use an
infinite time horizon
D. Attracting and Retaining Customers
i. Companies incur time and money costs looking for new customers
ii. Different acquisiton methods yield different CLVs
iii. A company must keep customers and increase their business, or avoid
customer churn
iv. To reduce the defection rate, the company must
1. Define and measure its retention rate
2. Distinguish the causes of customer attration and identify those
that can be managed better
3. Compare the lost customer’s lifetime value to the costs of
reducing the defection rate
v. Retention dynamics can be envisioned as a marketing funnel that
identifies the percentage of potential target customers at each stage in
the decision process.
1. Firms can calculate conversion rates, or the percentage of
customers at one stage who move to the next
2. Satisfied customers are the company’s customer relationship
capital
vi. Winning companies improve the aggregate value of the customer base
by:
1. Reducing the rate of customer defection
2. Increasing the longevity of the customer relationship
3. Enhancing customer growth 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-profit customers
vii. Companies that want to build loyalty should:
1. Interact closely with customers
2. Develop loyalty programs/frequency programs/club
membership programs
3. Create institutional ties
E. Brand communities are specialized communities of consumers and employees
whose identification and activities focus around the brand, characterized by:
i. A consciousness of kind/felt connection to the brand, company,
product or other community members
ii. Shared rituals, stories, and traditions that help convey the meaning of
the community
iii. A shared moral responsibility or duty to both the community as a
whole and individual community members
iv. Brand communities can rise organically from brand users or can be
company-sponsored/facilitated
v. The more connected members are, the more likely he or she will spend
more
vi. Twelve value creation activities (in four categories) take place in brand
communities, including
1. Social Networking
a. Welcoming
b. Empathizing
c. Governing
2. Impression Management
a. Evangelizing
b. Justifying
3. Community Engagement
a. Staking
b. Milestoning
c. Badging
d. Documenting
4. Brand use
a. Grooming
b. Customizing
c. Commoditizing
vii. To make online brand communities more effective:
1. Enhance the timeliness of information exchanged
2. Enhance the relevance of information posted
3. Extend the conversation
4. Increase the frequency of information exchanged
F. Win-back strategies should be use to reattract ex-customers
III. Cultivating Customer Relationships
A. Information is easy to differentiate, customize, personalize and dispatch over
networks at incredible speed
B. Customer relationship management is the process of carefully managing
detailed information about individual customers and all customer “touch
points to maximize loyalty
i. Enables real-time customer service through effective use of inidivual
account information
ii. Behavioral targeting allows companies to track online behavior of
target customers and find the best match between ads and prospects
iii. Customer value management describes the company’s organization of
the value or the customer base
iv. Personalizing marketing is about making sure the brand and its
marketing are as personally relevant as possible to as many customers
as possible
v. Permission marketing is the practice of marketing to consumer only
after gaining their expressed permission (in contrast to interruption
marketing via mass media campaigns)
vi. Participatory marketing is more appropriate since consumers
participate in the solution
C. Customers are empowered to become evangelists and demonstrate their
passion.
i. Reviews and recommendations are an important source of information
for consumer decision-making
ii. The quality and integrity of reviews can be in question
iii. Bloggers who review many products can be influential
iv. Online word of mouth is especially critical for small brands
D. Companies should make it easy for customers to complain
1. Set up a seven-day, 24-hour toll-free hotline (by phone, fax, or e-mail)
2. Contact the complaining customer as quickly as possible.
3. Accept responsibility for the customer’s disappointment; don’t blame the
customer.
4. Use customer service people who are friendly and empathic.
5. Resolve the complaint swiftly and to the customer’s satisfaction.
E. Some customers are opportunistic, and firms can fight back if a complaint is
unjustified or build a strong image/generate goodwill