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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.
2. A buyer’s satisfaction is a function of the product’s perceived performance and
3. Losing profitable customers can dramatically affect a firm’s profits. The cost of
4. Quality is the totality of features and characteristics of a product or service that
5. Marketing managers must calculate customer lifetime values of their customer
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
C H A P T E R
5
CREATING 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
TEACHING STRATEGY AND CLASS ORGANIZATION
PROJECTS
1. At this point in the semester-long marketing plan project, students should have completed
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
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?
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
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
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).
3. Average age of a customer.
2) Subtract:
2. Costs of attracting 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
Marketing Excellence: NORDSTROM
1) How else can Nordstrom continue to provide exceptional customer service and grow brand
loyalty?
Suggested Answer: Nordstrom knows that its customers are value maximizers. Customers
form an expectation of value and act on it, that’s what makes Nordstrom and has made
Nordstrom so successful to date.
Nordstrom must begin to data mine and “grow” their customer base – their Fashion Rewards
Program has 4 levels based on customer spending. Nordstrom must “grow” their lowest level
shopper to become their “highest” level spender.
2) What are Nordstrom’s greatest risks and who are its biggest competitors?
Marketing Excellence: TESCO
1. What’s most important to the Tesco brand?
2. How will Tesco grow without losing focus on its core customer?
3. How can Tesco take its customer loyalty programs to the next level?
1) What’s most important to the Tesco brand?
2) How will Tesco grow without losing focus on its core customer?
Suggested Answer: Student answers will vary but it is suggested that Tesco could move
3) How can Tesco take its customer loyalty programs to the next level?
Suggested Answer: Student answers will vary but it is suggested that Tesco can/could increase
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.
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
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
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
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
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.
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
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
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
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
3. Compare the lost customer’s lifetime value to the costs of
reducing the defection rate
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
2. Increasing the longevity of the customer relationship
4. Making low-profit customers more profitable or terminating
them
1. Interact closely with customers
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
vi. Twelve value creation activities (in four categories) take place in brand
communities, including
1. Social Networking
2. Impression Management
3. Community Engagement
a. Staking
4. Brand use
a. Grooming
1. Enhance the timeliness of information exchanged
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
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
D. Companies should make it easy for customers to complain
2. Contact the complaining customer as quickly as possible.
4. Use customer service people who are friendly and empathic.
5. Resolve the complaint swiftly and to the customer’s satisfaction.
