Chapter 10 Lecture Notes
Developing and Maintaining Long-Term Customer Relationships
Chapter 10: Developing and Maintaining Long-Term Customer Relationships
Chapter Outline
I. Introduction
A. Beyond the Pages 10.1 explains how 1-800-Flowers.com has developed a
comprehensive understanding of its customers.
B. All of the activities involved in developing and implementing the marketing
program have one key purpose: to develop and maintain long-term customer
relationships.
C. Implementing a marketing strategy that can effectively satisfy customers’ needs
and wants has proven difficult in today’s rapidly changing business environment.
D. In times past, developing and implementing the “right” marketing strategy was all
about creating a large number of transactions with customers in order to maximize
the firm’s market share.
E. In today’s economy, the emphasis has shifted to developing strategies that attract
and retain customers over the long term.
II. Managing Customer Relationships
A. Customer relationship management is defined as a business philosophy aimed at
defining and increasing customer value in ways that motivate customers to remain
loyal. In essence, CRM is about retaining the right customers.
B. CRM involves a number of different groups, including customers, employees,
supply chain partners, and external stakeholders.
C. A full appreciation of CRM requires a new perspective on the customer that shifts
from “acquiring customers” to “maintaining clients.” [Exhibit 10.1]
D. Firms that are exceptionally good at developing customer relationships possess
“relationship capital”—a key asset that stems from the value generated by the
trust, commitment, cooperation, and interdependence among relationship partners.
E. Developing Relationships in Consumer Markets [Exhibit 10.2]
1. The objective of CRM is to move customers from having a simple
awareness of the firm and its product offering, through levels of increasing
relationship intensity, to the point where the customer becomes a true
advocate for the firm and/or its products.
2. One of the most viable strategies to build customer relationships is to
increase the firm’s share of customer by focusing more fully on serving
the needs of current customers.
3. Focusing on share of customer requires an understanding that customers
have different needs and that not all customers have equal value to a firm.
4. Some customers—those that require considerable handholding or that
frequently return products—are simply too expensive to keep given the
low level of profits they generate.
5. The firm’s top-tier customers are the most obvious candidates for retention
strategies. [Exhibit 10.3]
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1. Business relationships rarely approach the cult-like, emotional
involvement found in some consumer markets. Nonetheless, businesses
can become structurally bound to their supply chain partners.
2. Relationship development in business markets can be more involving,
more complex, and much riskier than relationships in consumer markets.
3. Business relationships must be built on win-win strategies that focus on
cooperation and improving the value of the exchange for both parties, not
on strict negotiation where one side wins and the other side loses.
4. Over the past several years, a number of changes have occurred in
business relationships:
a) a change in buyers’ and sellers’ roles
b) an increase in sole sourcing
c) an increase in global sourcing
d) an increase in team-based buying decisions
e) an increase in productivity through better integration
III. Quality and Value: The Keys to Developing Customer Relationships
A. To build relationship capital, a firm must be able to fulfill the needs of its
customers better than its competitors.
1. If the quality of a good or service is poor, the firm obviously has little
chance of satisfying customers or maintaining relationships with them.
2. Good quality is not an automatic guarantee of success—it is a necessary
but insufficient condition of customer relationship management.
B. Understanding the Role of Quality
1. Quality is a relative term that refers to the degree of superiority of a firm’s
goods or services. Quality is relative because it can only be judged in
comparison to competing products, or when compared to an internal
standard of excellence.
2. The total product offering of any firm consists of at least three
interdependent components: [Exhibit 10.4]
a) Core product—the part of the offering that delivers the core
benefits desired by customers.
1) If the core product is inferior, the firm has little chance of
success because the product will not meet customer needs.
2) Customers expect the core product to be of high quality.
3) In service offerings, the core product is typically composed
of three interrelated dimensions: people, processes, and
physical evidence.
b) Supplemental products—goods or services that add value to the
core product, thereby differentiating the core product from
competing product offerings.
1) In many product categories, the true difference between
competing products lies in the supplemental products.
Chapter 10 Lecture Notes
Developing and Maintaining Long-Term Customer Relationships
2) Most companies do not market products with the core
product in mind. Instead, they focus on supplemental
product attributes.
c) Symbolic and experiential attributes—attributes associated with
image, prestige, and brand.
C. Delivering Superior Quality
1. Delivering superior quality day in and day out is one of the most difficult
things that any organization can do with regularity. In essence, it is
difficult to get everything right all or even most of the time.
2. Four key issues in improving quality:
a) Understand customers’ expectations
b) Translate expectations into quality standards
c) Uphold quality standards
d) Don’t overpromise
3. Beyond the Pages 10.2 discusses the pitfalls associated with setting
1. Offering exceptionally high product quality is of little use to the firm or its
customers if the customers cannot afford to pay for it or if the product is
too difficult to obtain.
2. Value is critical to maintaining long-term customer relationships because
it allows for a balance among the five types of utility (form, time, place,
possession, psychological) and the elements of the marketing program.
3. Value is a useful guiding principle of marketing strategy because it
includes the concept of quality, but is broader in scope.
4. Value is defined as a customer’s subjective evaluation of benefits relative
to costs to determine the worth of a firm’s product offering relative to
other product offerings. The value formula: [Exhibit 10.5]
5. Core Product, Supplemental Product, and Experiential Quality
a) Good value depends on a holistic assessment of the quality of the
core product, supplemental products, and experiential attributes.
Although each can be judged independently, most customers look
at the collective benefits provided by the firm in their assessments
of value.
b) Firms can create unique combinations of core, supplemental, and
experiential benefits that help drive value perceptions.
6. Monetary and Nonmonetary Costs
a) Customer costs include anything that the customer must give up to
Costs)y Nonmonetar + Costs(Monetary
Quality)alExperientiQualityoductPralSupplement+QualityProduct(Core
= ValuePerceived +
Chapter 10 Lecture Notes
Developing and Maintaining Long-Term Customer Relationships
b) The most obvious cost is the monetary cost of the product:
1) Transactional costs include the immediate financial outlay
or commitment that must be made to purchase the product.
2) Life-cycle costs include any additional costs that customers
will incur over the life of the product.
c) Nonmonetary costs are not quite as obvious as monetary costs, and
customers sometimes ignore them. These costs include time, effort,
risk, and opportunity costs.
E. Competing on Value
1. By altering each element of the marketing program, the firm can enhance
value by increasing core, supplemental, or experiential quality and/or
reducing monetary or nonmonetary costs.
2. In consumer markets, retailers compete by altering one or more parts of
the value equation.
3. In business markets, value is often defined in terms of product
specifications, availability, and conformity to a delivery schedule, rather
than in terms of price or convenience.
4. Each marketing program element is vital to delivering value. Strategic
decisions about one element alone can change perceived value for better
or worse.
IV. Customer Satisfaction: The Key to Customer Retention
A. Understanding Customer Expectations
1. Customer satisfaction is typically defined as the degree to which a product
meets or exceeds the customer’s expectations about that product.
2. Customers can hold many different types of expectations. [Exhibit 10.6]
3. The Zone of Tolerance
a) The zone of tolerance is the difference between the upper (desired
expectations) and lower (adequate expectations) end of the range
of possible customer expectations.
b) The width of the zone of tolerance represents the degree to which
customers recognize and are willing to accept variability in
performance.
c) Performance can fall above the zone of tolerance, within the zone
of tolerance, or below it: [Exhibit 10.7]
1) Customer delight occurs when actual performance exceeds
the desired performance expectation.
2) Customer satisfaction occurs when actual performance falls
within the zone of tolerance.
3) Customer dissatisfaction occurs when actual performance
falls below the adequate performance expectation.
d) If the zone of tolerance is narrow, the marketer will have a
relatively more difficult time matching performance to customer
expectations.
e) Customers will typically hold different expectation levels and zones
of tolerance for different factors of performance.
Chapter 10 Lecture Notes
Developing and Maintaining Long-Term Customer Relationships
b) Average order value (AOV)—A customer’s purchase dollars
divided by the number of orders over a period of time.
c) Customer acquisition/retention costs—It is typically less expensive
to retain current customers than to acquire new customers. As long
as this holds true, a company is better off keeping its current
customers satisfied.
d) Customer conversion rate—The percentage of visitors or potential
customers that actually buy.
e) Customer retention rate—The percentage of customers who are
repeat purchasers.
f) Customer attrition rate—The percentage of customers who do not
repurchase (sometimes called the churn rate).
g) Customer recovery rate—The percentage of customers who leave
the firm (through attrition) that can be lured back using various
offers or incentives.
h) Referrals—Dollars generated from customers referred to the firm
by current customers.
i) Social communication—Companies can track satisfaction by
monitoring customers’ online commentary in blogs, newsgroups,
chat rooms, and general websites.
Questions for Discussion
1. One of the common uses of customer relationship management (CRM) in consumer
markets is to rank customers on profitability or lifetime value measures. Highly profitable
customers get special attention, while unprofitable customers get poor service or are often
“fired.” What are the ethical and social issues involved in these practices? Could CRM be
misused? How and why?
This use of CRM certainly has the potential for misuse. Students will understand the
2. Given the commoditized nature of many markets today, does customer relationship
management—and its associated focus on quality, value, and satisfaction—make sense?
If price is the only true means of differentiation in a commoditized market, why should a
firm care about quality? Explain.
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3. Of the two types of customer expectations, adequate performance expectations fluctuate
the most. Describe situations that might cause adequate expectations to increase, thereby
narrowing the width of the zone of tolerance. What might a firm do in these situations to
achieve its satisfaction targets?
Adequate expectations vary based on the situation, the customer, and the conditions
Exercises
1. Visit 1to1 Media (www.1to1media.com) to learn more about customer relationship
management. You can register for free access to useful tools, articles, discussions, and
webinars about CRM and its use in a number of different industries.
This is a useful website to learn more about CRM.
2. Think about all of the organizations with which you maintain an ongoing relationship
(banks, doctors, schools, accountants, mechanics, etc.). Would you consider yourself to
be unprofitable for any of these organizations? Why? How might each of these
organizations fire you as a customer? What would you do if they did?
3. J.D. Power and Associates (www.jdpower.com) is a well-known research company
specializing in the measurement of product quality and customer satisfaction. Explore
their website to look at their customer satisfaction ratings for a number of industries.
What role will third-party firms like J.D. Power play in the future, given the increasing
use of internal customer satisfaction metrics?