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. What are the pros and cons of database marketing?
CHAPTER SUMMARY
1. Customers are value maximizers. They form an expectation of value and act on it. Buyers
2. A buyer’s satisfaction is a function of the product’s perceived performance and the buyer’s
3. Losing profitable customers can dramatically affect a firm’s profits. The cost of attracting a
4. Quality is the totality of features and characteristics of a product or service that bear on its
5. Marketing managers must calculate customer lifetime values of their customer base to
6. Companies are also becoming skilled in customer relationship management (CRM), which
7. Customer relationship management often requires building a customer database and doing
data mining to detect trends, segments, and individual needs. A number of significant risks
also exist, so marketers must proceed thoughtfully.
C H A P T E R
5
CREATING LONG-TERM
LOYALTY
RELATIONSHIPS
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
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:
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?
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
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
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:
a) Profit from a sale (dollar or percent).
2) Subtract:
a) Appropriate discount rate.
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
2) What are Nordstrom’s greatest risks and who are its biggest competitors?
Suggested Answer: Nordstrom must constantly be adding new customers and cultivate the
“occasional” Nordstrom shopper to become a “regular.”
Marketing Excellence: TESCO
1) What’s next for Tesco? Where and how can it grow? Who will it target?
Suggested Answer: Student answers will vary but it is suggested that Tesco could move
2) 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
Today, companies face their toughest competition ever. Moving from a product-and-sales
philosophy to a holistic marketing philosophy, however, gives them a better chance of
BUILDING CUSTOMER VALUE, SATISFACTION, AND LOYALTY
Managers who believe the customer is the company’s only true “profit center” consider
the traditional organization chart in Figure 5.1a—a pyramid with the president at the top,
management in the middle, and frontline people and customers at the bottom—obsolete.
Customer Perceived Value
Consumers are better educated and informed than ever, and they have the tools to verify
companies’ claims and seek out superior alternatives.
A) Customers tend to be value–maximizers within the bounds of search costs and limited
knowledge, mobility, and income.
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.
Applying Value Concepts
A) Managers conduct a customer value analysis to reveal the company’s strengths and
weaknesses relative to those of competitors. These steps are:
1) Identify the major attributes and benefits customers’ value.
2) Assess the quantitative importance of the different attributes and benefits.
Choice Processes and Implications
Some marketers might argue the process we have described is too rational. Suppose the
customer chooses the Komatsu tractor. Here are three possibilities.
A) The buyer might be under orders to buy at the lowest price.
B) The buyer will retire before the company realizes the Komatsu tractor is more
expensive to operate.
It also implies that it is at a disadvantage and has two alternatives:
1) To increase total customer value (by strengthening or augmenting the offer’s
product, services, personnel, and image benefits).
Delivering High Customer Value
Consumers have varying degrees of loyalty to specific brands, stores, and companies.
A) Loyalty is defined as “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.”
Total Customer Satisfaction
Whether the buyer is satisfied after the purchase depends on the offer’s performance in
relation to the buyer’s expectations.
A) Satisfaction is a person’s feelings of pleasure or disappointment that result from
comparing a product’s perceived performance (or outcome) to expectations.
Monitoring Satisfaction
A) Many companies are systematically measuring how well they treat customers,
identifying the factors shaping satisfaction, and changing operations and marketing as
a result.
Measurement Techniques
A) Periodic surveys can track customer satisfaction directly.
Influence of Customer Satisfaction
A) For customer-centered companies, customer satisfaction is both a goal and a marketing
tool.
Marketing Insight: Net promoter and customer satisfaction
Defines customer satisfaction as “How likely would you recommend this product or service to
a friend or colleague.” This is the only question that matters in defining customer satisfaction.
Customer Complaints
Some companies think they’re getting a sense of customer satisfaction by tallying complaints.
A) Customers are dissatisfied 25% of the time
Product and Service Quality
Satisfaction will also depend on product and service quality.
Quality is the totality of features and characteristics of a product or service that bear on its
ability to satisfy stated or implied needs.
Impact of Quality
Marketing Memo: Marketing and Total Quality
Marketers play several roles in helping their companies define and deliver high-quality
goods and services to target customers
• They correctly identify customers’ needs and requirements.
MAXIMIZING CUSTOMER LIFETIME VALUE
Marketing is the art of attracting and keeping profitable customers.
A) The 20-80 rule says the top 20% of customers generate 80% or more of the company’s
profits.
Customer Profitability
Customer Profitability Analysis
A useful type of profitability analysis is shown in Figure 5.4.
A) Customer 1 is very profitable.
Customer profitability analysis (CPA) is best conducted with the tools of an accounting
technique called Activity–Based Costing (ABC).
1) Companies that fail to measure their costs correctly are also not measuring their
profit correctly and are likely to misallocate their marketing effort.
Measuring Customer Lifetime Value
Customer Lifetime Value (CLV) describes the net present value of the stream of future profits
expected over the customer’s lifetime purchases.
CULTIVATING CUSTOMER RELATIONSHIPS
Companies are using information about customers to enact precision marketing designed to
build strong long-term relationships
A) Information is easy to differentiate, customize, personalize, and dispatch over
networks at incredible speed.
1) Employee can create strong bonds with customers by individualizing and
personalizing relationships.
D) To adapt to customers’ increased desire for personalization, marketers have embraced
concepts such as permission marketing and one-to-one marketing.
1) Permission marketing is the practice of marketing to consumers only after gaining
2) Presumes consumers know what they want.
a) “Participatory marketing” may be more appropriate—marketers and
consumers work together to find out how the firm can best satisfy consumers.
A four-step approach to one-to–one marketing:
A) Identify your prospect and customers.
Customer Empowerment
A) Consumers are beginning in a very real sense to own brands and participate in their
creation.
Customer Reviews and Recommendations
A) An increasing important decision factor on consumer choice is “recommendations by
consumers.”
Attracting and Retaining Customers
A) Companies seeking to expand their profits and sales must spend considerable time and
resources searching for new customers.
B) Different acquisition methods yield customers with varying CLVs.
Reducing Defection
To reduce the defection rate, the company must:
1. Define and measure its retention rate.
Retention Dynamics
A) The marketing funnel identifies the percentage of potential target market at each stage
in the decision process, from merely aware to highly loyal (Figure 5.5).
Managing the Customer Base
A key driver of shareholder value is the aggregate value of the customer base. Winning
companies improve the value of their customer base by excelling at strategies such as:
A) Reducing the rate of customer defection.
Building Loyalty
Creating a strong, tight connection to customers is the dream of any marketer and often the
key to long–term marketing success.
Retention-building activities include:
a) Financial benefits
Two customer loyalty programs that companies can offer are frequency programs and club
marketing programs.
1. Frequency programs (FPs)
2. Club membership programs
C) Creating Institutional Ties
CUSTOMER DATABASES AND DATABASE MARKETING
Marketers must know their customers. And in order to know the customer, the company must
collect information and store it in a database from which to conduct database marketing.
A) A 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.
Customer Databases
A) Customer databases are not customer mailing lists.
1) A customer mailing list is simply a set of names, addresses, and telephone
numbers.
Data Warehouses and Data mining
A) Savvy companies capture information every time a customer comes into contact with
any of their departments.
1) These data are collected by the company’s contact center and organized into a data
warehouse.
In general, companies can use their databases in five ways:
1. To identify prospects.
2. To decide which customers should receive a particular offer.
The Downside of Database Marketing and CRM
A) Five main problems can prevent a firm from effectively using CRM.
1) Some situations are just not conducive to database management.
2) Building and maintaining a customer database requires a large, well-placed
investment in computer hardware, database software, analytical programs,
communication links, and skilled staff.