Chapter 4 - Creating Long-term Loyalty Relationships
I.  Chapter Overview/Objectives/Outline
A. Overview
Today’s customers face a growing range of choices in the products and services they can buy. They are making their choice on the basis of their perceptions of quality, service, and value. Companies need to understand the determinants of customer value and satisfaction. Customer delivered value is the difference between total customer value and total customer cost. Customers will normally choose the offer that maximizes the delivered value.
Customer satisfaction is the outcome felt by buyers who have experienced a company performance that has fulfilled expectations. Customers are satisfied when their expectations are met and delighted when their expectations are exceeded. Satisfied customers remain loyal longer, buy more, are less price sensitive, and talk favorably about the company.
A major challenge for high performance companies is that of building and maintaining viable businesses in a rapidly changing marketplace. They must recognize the core elements of the business and how to maintain a viable fit between their stakeholders, processes, resources, and organization capabilities and culture. Typically, high performing businesses develop and emphasize cross-functional skills rather than functional skills (overall project management and results versus functional strengths (best engineers, etc.).  They also build their resources into core capabilities that become core competencies, distinctive abilities and competitive advantages. This, along with a corporate culture of shared experiences, stories, beliefs, and norms unique to the organization, are the keys to their success.
To create customer satisfaction, companies must manage their value chain as well as the whole value delivery system in a customer-centered way. The company’s goal is not only to get customers but even more importantly, to retain customers. Customer relationship marketing provides the key to retaining customers and involves providing financial and social benefits as well as structural ties to the customers. Companies must decide how much relationship marketing to invest in different market segments and individual customers, from such levels as basic, reactive, accountable, proactive, to full partnership. Much depends on estimating customer lifetime value against the cost stream required to attract and retain these customers.
Total quality marketing is seen today as a major approach to providing customer satisfaction and company profitability. Companies must understand how their customers perceive quality and how much quality they expect. Companies must then strive to offer relatively higher quality than their competitors. This involves total management and employee commitment as well as measurement and reward systems. Marketers play an especially critical role in their company’s drive toward higher quality.
B. Learning Objectives
• Understand what constitutes customer value and satisfaction.
• Know how leading companies organize to produce and deliver high customer value and satisfaction.
• Understand how companies can retain customers as well as attract customers.
• Know how companies can determine customer profitability.
• Understand how companies can practice total quality marketing strategy.
C. Chapter Outline
I. Introduction
II. Building Customer Value and Satisfaction
A. Customer perceived value
1. Customer perceived value
a) The difference between total customer value and total customer cost, or “profit” to the customer 
b) Total customer benefit is perceived monetary value of benefits
2. Total customer cost: Perceived bundle of costs consumers expect to incur in evaluating, obtaining, and using the product or service
3. Loyalty as defined by Oliver, 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”.
4. Value proposition consists of the whole cluster of benefits the company promises to deliver.
5. Company must manage its value delivery system, i.e. all the experiences the customer will have on the way to obtaining and using the offering.
B. Total customer satisfaction
1. Perceived performance and expectations contribute to overall satisfaction or dissatisfaction
2. Satisfaction is a person’s feelings that result from comparing a product or service’s perceived performance or outcome to expectations
3. Companies must be able to manage customer expectations. Raising expectations requires increase in value delivered.
4. Companies may not want to increase customer satisfaction to a level that would not allow them to also sustain optimal relationships with shareholders and other partners.
C. Monitoring satisfaction
1. Satisfaction breeds loyalty but the relationship between the two  is not proportional. (e.g. very highly satisfied customers, per Xerox, may be 6x’s ads likely to repurchase and spread positive word-of-mouth over very satisfied customers)
2. Note discussion under “Marketing Skills: Gauging Customer Satisfaction”
D. Product and service quality
1. Quality is the totality of features and characteristics of a product or service that bear on its ability to satisfy stated or implied needs
2. Conformance quality is a delivery of need fulfillment whereas performance quality defines the different degrees of conformance (i.e., assuming two products deliver the same conformance for need fulfillment, one may have a higher level of performance (e.g. Lexus and Hyundai both deliver transportation but Lexus is highly regarded as delivering a more superior transportation experience)
3. Total quality management (TQM) is an organization-wide approach to continuously improving the quality of all of the organization’s processes, products, and services
4. Marketers play six roles in helping their organizations define and deliver high-quality goods and services to target customers:
a) Correctly identify customer needs and requirements
b) Properly communicate customer expectations to product designers
c) Ensure proper product and service fulfillment
d) Verify that customers received proper instructions, training, and technical assistance in use of product or service
e) Maintain post sale contact with customer to sustain satisfaction
f) Gather customer ideas for product or service improvements and convey to respective internal organizational resources for potential development    
III. Maximizing Customer Lifetime Value (20 percent of customers generate as much as 80 percent of profits). Extreme cases show 150% - 300% of profits. Least profitable 10% - 20% can reduce profits by 50% - 200%.  Fire worst customers. 
A. Customer profitability
1. Profitable customers over time yield revenue streams that exceed the costs of serving them. Emphasis here is on the lifetime stream of revenue and cost and not profit from a specific transaction. 
2. Customer profitability analysis (CPA) (refer to Figure 4.2) classifies customers into different profit tiers by subtracting all costs associated with serving the customer from all revenues generated from the customer. Use of activity-based costing (ABC) greatly enhances this type of analysis
B. Measuring Customer Lifetime Value (refer to Table 4.1 for a CLTV calculation example)
1. Measuring customer lifetime value - the net present value of the stream of future profits expected over the customer’s lifetime purchases
2. Subtract acquisition costs and “cost-to-serve”
IV. Cultivating Customer Relationships
Customer relationship management (CRM) is the process of managing detailed information about individual customers and carefully managing all customer “touch points” to maximize customer loyalty. A touch point is any occasion on which a customer encounters the brand or product. Peppers and Rogers’s four-step framework for one-to-one marketing, which can be adapted for CRM, is as follows: 1) identify your prospects and customers, 2) differentiate customers in terms of needs and their value to the organization, 3) interact with individual customers to acquire more information as well as sustain the relationship, 4) customize the offerings and communication to each customer
A. Attracting, retaining, and growing customers - becoming harder to please, smarter, more demanding, and less forgiving
1. Suspects - individuals or organizations who may have an interest in purchasing but may not have the means or real intention to buy
2. Customer churn (turnover) reduction strategies include:
a) Erection of higher switching costs (not optimal in some cases as it may breed resentment)
b) Optimal method is to breed high customer satisfaction
3. Customer development process - potentials into first-time customers into repeat customers into clients (specially treated customers) into members (programs) into advocates (become recommenders) and finally into partners.  This is illustrated by the concept called “The Marketing Funnel” in figure 4.3
B. Building loyalty - five levels of investing in customer relationship building
1. Interacting with customers – listen to customer and pay attention to customer evangelists who are a referral source to other potential customers
2. Develop Loyalty Programs
            a)     Frequency programs (FPs) designed to reward customers who buy
                    frequently and in substantial amounts
            b)     Club membership programs – open to anyone who wants to
                    purchase or may involve a nominal fee for the privilege of
                    purchasing, Long term loyalty builders.
3. Creating Institutional Ties – Creating structural ties raises customer  switching costs -

V. Customer Databases and Database Marketing
            
A. Introduction:
1          A customer database is an organized collection of comprehensive
             information about individual customers or prospects that is current,
             accessible, and actionable for marketing purposes (e.g. lead generation,
             customer relationship maintenance, product selling, cross-selling, and
             up-selling)
2.           Database marketing is the process of building, maintaining, and using  
              customer databases along with other databases (e.g. products, suppliers,
              resellers) to make contact, facilitate transactions, and build and sustain
              customer relationships
3.           Customer and prospect databases are used for both consumers and
              businesses

B. Data Warehouses and Datamining
1.           A data warehouse contains all (including historical) relevant customer
              and prospect information, marketing mix information, macro
              environmental data for respective timeframes, value chain member
               information, and competitor information
2.            Datamining is the process of analyzing data. The data can be resident
               in a sophisticated repository such as a data warehouse or it may be a
               simple set of data present on a report or in a spreadsheet. There is a
               variety of software products and statistical methods that perform
               DataMining, each having specific capabilities. The analysis can be
               simple or complex.  Some organizations extract part of the large
               volume of data resident in a data warehouse and place it into a smaller
               database often referred to as a DataMart
3.            Organizations use databases to:
                a)        Identify the best prospects
                b)        Match a specific offer with a specific customer to up-sell &
                           cross-sell to the customer
                c)        Deepen customer loyalty by using personalization techniques
                d)        Reactivate customers
                e)         Avoid mistakes by controlling customer communication
4.             The Downside of Database Marketing and CRM
      a)       Some situations not conducive to investment in database
                systems. Infrequently purchased items (durable goods such as
                refrigerators) do not create multiple interaction opportunities
                and frequency of purchase. However, an opportunity may exist
                to sell services surround the product such as warranty and
                repair.
 b)       Large investment required for construction and maintenance of
               computer hardware, software, communication capabilities
      c)      Difficulty of getting all employees to be customer centric and 
               breaking the paradigm in organizations to move from
               traditional transaction marketing to customer-orientated
               marketing
     d)     Customer privacy, ethical practices, and compliance with legal
             and social constraints and knowing that not all customers want a
              relationship and may resent personal information being
              captured and used by organizations for marketing purposes
              (refer to Marketing Insight “The Behavioral Targeting
              Controversy”)
      e)    CRM assumptions may not always be valid (organization fails at
             CRM execution; CRM cost exceeds benefits - either financial,
             strategic, or both.
VI. Executive Summary
II.  Lecture(s)
A. “Creating Customer Relationships that Last”
A primary marketing focus is on the increasingly powerful role of customers in the marketing process and the need for marketers to provide value that exceeds customer expectations.   Within this context is relationship marketing, providing a link with other areas of the text.
Teaching Objectives
• To explain the concepts of product and service quality as they contribute to perceived value for the customer.
• Help students to better understand the changing role of the customer in today’s marketplace.
• To present specific methods whereby marketers can engage in value-creating activities.
Discussion
 INTRODUCTION
In the contemporary marketplace it is hard to believe there was ever a time when customers were not treated as an integral part of the exchange process. Prior chapters of the text consider some of the many shifts taking place in today’s marketing environment. Competition in the marketplace, along with advancing technology, affords customers the ability to learn significantly more about the products they will purchase and/or consider for purchase.  
The same factors also have created both the need and the opportunity for marketers to know their customers on a more personal level. Ever increasing competition has forced marketers to seek out the information necessary to provide customers with the products and service they truly desire. Technology, when used to create a customer database, is one way marketers are answering to this new trend. Product development will be discussed in a later chapter; for now, we will focus on building satisfaction through customer relationship development activities.
The concept of perceived value is based on Kotler’s explanation of customer delivered value.  Customers, like marketers, seek to profit from an exchange. Perceived value is aptly named because it supports the notion that the customer and not the marketer determine value. The marketer’s responsibility is to create value, in both product and service quality that lead to increased satisfaction and encourage a high perceived value. 
For example, service excellence is determined by customer perceptions and motivated by customer needs. Ken Blanchard, author of The One Minute Manager, says that the secret to competing successfully in today’s environment is to provide customers with service that is so far above their expectations that it is perceived to be legendary.  
Marketers, with both large and small organizations, can engage in activities that exceed expectations and lead to customer delivered value. Marketers with large organizations have the ability to tap into a sophisticated database, utilizing past purchase data to customize marketing programs. These marketers also can become experts at “guerrilla marketing,” or the implementation of local promotions for the purpose of getting closer to customers.  Furthermore, large organization marketers also have the ability to create a Web site and store-specific marketing programs that create retailer loyalty, build differentiation, and increase sales in desired market areas.
Small business marketers, however, also have many opportunities to create strong customer relationships. By placing extra focus on what might generally be considered a commodity product, these marketers can stimulate demand and compete with large rivals in the same industry. If a company is small enough, its top executives can serve as the communication link for the company and various external publics, such as customers and retailers. Even internal publics, such as the sales staff, should be encouraged to make suggestions to top management.  Finally, database programs are becoming more and more affordable, making direct mail programs a viable option even for smaller firms. This leads to a discussion of an evolving direction for relationship marketing.
RELATIONSHIP MARKETING EXPANDED
Even though it is becoming increasingly possible, why would any rational customer actually want a “relationship” with the company that makes his or her razor blades, or dishwasher soap, or toilet paper? The answer is that the consumer probably would not necessarily desire a “relationship” with these companies, but the customer will want more spare time.  Accordingly, he or she might like to have routine or repeat purchases for soap, paper towels, grocery staples, etc., automated.
What if you could turn on your personal computer or your interactive television set, call up a list of last week’s grocery purchases, make a few changes, and then simply order them delivered to your door? And what if, when you did this, the computer reminded you to order certain items such as toothpaste and paper towels, since you might be running low on those items? What if, to help choose the groceries you wanted for your family, you asked the computer for a week’s worth of dinner menus, specifying recipes and ingredients?
In many product categories, you don’t really care what brand the computer selects, but in some product categories you have a list of “approved” brands, as well as brands you never want to see again. The computer automatically seeks out the least expensive basket of products that meet these criteria. Once you confirm it, your order is paid for via credit card or direct debit.  The elapsed time for all this shopping was just seven minutes.
Now, from the marketer’s side of the equation, consider the immense business opportunity in serving customers more thoroughly. Delivering grocery staples is one situation, but what about pharmaceuticals? What about dry cleaning and laundry, ready-made meals, FedEx and other pickups and deliveries? The companies become, in essence, share-of-customer marketers.
A marketer’s primary task in the one-to-one future is not to find customers for the marketer’s products but rather to find more products and services for its customers. Consider that most retail chains have not really tried to figure out how to offer such conveniences as home delivery, because they don’t want to consider this, for various internal reasons. They want customers to need to come into the store (or into the “virtual store”) because they like to have customers walking up and down the aisles (or virtual aisles), making last-minute impulse purchases. For a large part of their business, today’s retailers depend on inconveniencing customers by requiring them to drive to their store (or virtual store) location to do their shopping.
However, consider that marketers today jam twice as many products in the average supermarket as there were just over a decade ago (30,000 products now, compared with 15,000 in 1985). Furthermore, commercial messages abound for these products, the overwhelming majority of which do not now appeal to any particular consumer. Instead, we must all fight our way through the increasing number of advertising messages to pick out the information we need. The same as how we must struggle through the proliferating barrage of products in or out of stores just to select the ones we want to buy. Every shopping trip becomes an increasingly difficult attempt to accomplish the same basic task, thus adding to the increasing use of the Internet.
Having an ability to buy these products more conveniently doesn’t mean people will completely stop going into stores, nor does it mean advertising will cease to exist. But if getting your regularly consumed products could be made nearly as convenient as “pushing a button,” wouldn’t you go into the store less frequently? Wouldn’t you, for the most part, prefer not having to shop for routine things? You could always choose to go out if you wanted to—after all, shopping is often a social experience, as well as a necessity.
As with stores and other enterprises that cater to the interests of the interactive consumer (including information and entertainment providers), the manufacturer will only be able to succeed competitively by relying on individual feedback. For the manufacturer, success in the one-to-one marketing environment will mean soliciting information from consumers, individually, and then using that feedback to customize an offering to each individual customer, one at a time. This is the essence of one-to-one marketing.
B.  “Consumer Concerns”
Teaching Objectives
• To better understand why and how marketers need constantly to understand the constantly changing determinants behind customer perceptions of quality, service and value .
• How to better understand the critical elements of value chain analysis and the nuances behind the consumer perception of value.
• Understand specific methods whereby marketers can engage in value-creating activities.
Discussion
While customers face a growing range of choices in the products and services they can buy, there remain substantial opportunities for marketing and consumer-oriented firms. Customers continue to make their choice on the basis of their perceptions of quality, service, and value, but companies need to understand the determinants of customer value and satisfaction. Customer delivered value is the difference between total customer value and total customer cost. Customers will normally choose the offer that maximizes the delivered value.
Customer satisfaction is the outcome felt by buyers who have experienced a company performance that has fulfilled expectations. Customers are satisfied when their expectations are met and delighted when their expectations are exceeded. Satisfied customers remain loyal longer, buy more, are less price sensitive, and talk favorably about the company.
A major challenge for high performance companies is that of building and maintaining viable businesses in a rapidly changing marketplace. They must recognize the core elements of the business and how to maintain a viable fit between their stakeholders, processes, resources and organization capabilities and culture.  Typically, high performing businesses develop and emphasize cross-functional skills rather than functional skills (overall project management and results versus functional strengths, best engineers, etc.).  They also build their resources into core capabilities that become core competencies, distinctive abilities, and competitive advantages. This, along with a corporate culture of shared experiences, stories, beliefs, and norms unique to the organization, are the keys to their success.
To create customer satisfaction, companies must manage their value chain as well as the whole value delivery system in a customer-centered way. The company’s goal is not only to get customers but even more importantly, to retain customers. Customer relationship marketing provides the key to retaining customers and involves providing financial and social benefits as well as structural ties to the customers. Companies must decide how much relationship marketing to invest in different market segments and individual customers, from such levels as basic, reactive, accountable, proactive, to full partnership. Much depends on estimating customer lifetime value against the cost stream required to attract and retain these customers.
Total quality marketing is seen today as a major approach to providing customer satisfaction and company profitability. Companies must understand how their customers perceive quality and how much quality they expect. Companies must then strive to offer relatively higher quality than their competitors. This involves total management and employee commitment as well as measurement and reward systems. Marketers play an especially critical role in their company’s drive toward higher quality.

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