Chapter 4 - Creating Customer Value and Customer Relationship
Chapter 4 - Creating Customer Value and Customer Relationship
- Chapter 4 - Creating Customer Value and Customer Relationship
I.
Learning ObjectivesAfter reading this chapter, students should:
q
Know what the Marketing marketing-based customer value is
q
Know how companies can deliver customer value, satisfaction, and loyalty
q
Know what the lifetime value of a customer is and how marketers can maximize it
q
Know how companies can cultivate strong customer relationships and customer equity
q
Know what database marketing is and why it is important
II.
Chapter SummaryCompanies can profit by putting marketing at the beginning of a three-part sequence in which they (1) choose the value by segmenting the market, selecting the appropriate market target,and developing the offering’s value positioning; (2) provide the value by determining product features, prices, and distribution; and (3) communicate the value using the sales force,advertising, and other tools.
The value chain identifies nine strategically relevant activities that create value and cost in a business. Among them are five core business processes: market sensing, new offering realization, customer acquisition, customer relationship management, and fulfillment management. In carrying out these core processes, companies nurture their core competencies, which lead to distinctive capabilities that build competitive advantage.
The holistic marketing framework shows how the interaction between relevant actors (customers, company, and collaborators) and value-based activities (value exploration, value creation, and value delivery) enables companies to create, maintain, and renew customer value.
Customers are value maximizers. They form an expectation of value and act on it. Buyers will purchase from the firm that they perceive to offer the highest customer-delivered value, defined as the difference between total customer benefit and total customer cost.
Satisfaction is a function of the product’s perceived performance and the buyer’s expectations. Recognizing that high satisfaction leads to high customer loyalty, many companies today are aiming for total customer satisfaction (TCS). For such companies, customer satisfaction is both a goal and a marketing tool. Satisfaction also depends on quality, the totality of features and characteristics of a product or service that bear on its ability to satisfy stated or implied needs.
Companies need to understand which customers are profitable and calculate the customer lifetime value, which is the net present value of the stream of future profits expected over the customer’s lifetime purchases. They must also determine ways to increase the value of the customer base.
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. Companies are also becoming skilled in customer relationship management (CRM), which focuses on developing programs to attract and retain the right customers and on meeting their individual needs.
Customer relationship management often requires building a customer database and doing data mining to detect trends, segments, and individual needs.
III.
Chapter Outline
I.
Marketing and Customer Value
A.
The Value Delivery Process
1.
Traditional marketing consists of creating a product and then finding a market to sell it to
2.
Value creation marketing consists of identifying the market, establishing needs and demand, and then creating the product that will optimally meet such needs while returning the targeted profit
3.
Establishing a strategy for each business (long-term)
4.
The value chain
5.
Five primary strategic activities - inbound logistics, operations, outbound logistics, marketing and sales, and services
6.
Four support activities – firm infrastructure, HR, technology development, and procurement
7.
Five core business processes
a)
Market sensing - gather intelligence, disseminate and act on it
b)
New offering realization – research, develop, and launch quickly and within budget
c)
Customer acquisition
d)
Customer relationship management
e)
Fulfillment management
B.
A Holistic Marketing Orientation and Customer Value
1.
Value exploration
2.
Value creation
3.
Value delivery
C.
Defining Customer Value and Satisfaction
1.
Customer perceived value
a)
Customer delivered value
(1)
The difference between total customer value and total customer cost, or “profit” to the customer
(2)
Total customer value is the expected bundle of benefits
b)
Total customer cost: bundle of costs consumers expect to incur in evaluating, obtaining, and using the product or service
2.
Total customer satisfaction
a)
Perceived performance and expectations contribute to overall satisfaction or dissatisfaction
b)
The value proposition and the value-delivery system deal with the process of generating high customer loyalty that in turn delivers high customer value
c)
The value-delivery system relates to the experiences the customer has in obtaining and using the offering. Based on such experiences, a firm can gain or lose very quickly in today’s economy
3.
Measuring satisfaction
a)
Satisfaction breeds loyalty but their relationship is not proportional
b)
Note discussion under “Marketing Skills: Gauging Customer Satisfaction”
4.
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)
Conformance quality is a delivery of need fulfillment whereas performance quality defines the different degrees of conformance, i.e. while two products can 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 widely regarded as delivering a superior transportation experience)
c)
Total quality management (TQM) is an organization-wide approach to continuously improving the quality of all the organization’s processes, products, and services
d)
Marketers play six roles in helping their organizations define and deliver high-quality goods and services to target customers:
(1)
Correctly identify customer needs and requirements
(2)
Properly communicate customer expectations to product designers
(3)
Ensure proper product and service fulfillment
(4)
Verify that customers received proper instructions, training, and technical assistance in use of product or service
(5)
Maintain postsale contact with customer to sustain satisfaction
(6)
Gather customer ideas for product or service improvements and convey to respective internal organizational resources for potential development
II.
Cultivating Customer Relationships
A.
Customer relationship management is the process of managing detailed information about individual customers and their “touch points” to maximize customer loyalty. A touch point is any occasion where a customer encounters the brand or product. Peppers and Rogers’ four-step framework for one-to-one marketing, which can be adapted for CRM, is to: 1) identify your prospects and customers, 2) differentiate customers by their needs and 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
B.
Attracting, Retaining, and Growing Customers – in light of 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)
Breeding high customer satisfaction (optimal)
3.
Customer development process - convert suspects into first-time customers into repeat customers into clients (who receive special treatment) into members (via programs) into advocates (who are recommenders) and finally into partners
C.
Building Loyalty - five levels of investing in customer relationship building
1.
Basic marketing - simply sell the product
2.
Reactive marketing - sell the product and encourage customers to provide feedback
3.
Accountable marketing - postsale conversations to ensure satisfaction and to determine areas for improvement
4.
Proactive marketing - periodic customer contacts to offer new uses of product or new products
5.
Partnership marketing - continual customer engagement
D.
Reducing Customer Defection - five steps:
1.
Define and measure customer retention rate
2.
Distinguish causes of customer attrition and identify those that could be managed better (lost-customer analysis)
3.
Estimate forgone profit with lost customers
4.
Determine cost to reduce attrition rate
5.
Listen to the customer
E.
Forming Strong Customer Bonds
1.
Adding financial benefits
a)
Frequency programs - reward customers who buy frequently and/or in substantial amounts
b)
Club membership programs – a powerful method to building long-term loyalty
2.
Adding social benefits - increase social bonds with customers by individualizing and personalizing customer relationships
3.
Adding structural ties to increase the consumer’s proclivity to repurchase the company’s brand. Some methods to create structural ties, suggested by Wunderman, are:
a)
Create long-term contracts
b)
Charge less for ongoing purchases
c)
Turn product into a long-term service
III.
Building Customer Equity
A.
Customer Profitability and Competitive Advantage
1.
Profitable customers yield revenue streams that exceed the costs of serving them
2.
Customer profitability analysis (CPA) 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 - the net present value of the stream of future profits expected over the customer’s lifetime purchases
C.
Brand Equity and Customer Equity - total of the discounted lifetime values of all the firm’s customers
1.
Value equity - customer’s objective assessment of the utility of an offering based on perceptions of its benefits relative to its costs
a)
Subdrivers are quality, price, and convenience
b)
Value equity contributes more to customer equity the more products are differentiated
2.
Brand equity - customer’s subjective and intangible assessment of the brand above and beyond its objectively perceived value
a)
Subdrivers are customer brand awareness, customer attitude toward the brand, and customer perception of brand ethics
b)
More important when products are less differentiated and have greater emotional impact
3.
Relationship entity - customer’s tendency to stick with the brand above and beyond objective and subjective assessments of its worth
a)
Subdrivers are loyalty programs, special recognition and treatment programs, community-building programs, and knowledge-building programs
b)
Especially important when personal relationships are critical or when customers tend to continue a relationship out of habit
IV.
Database Marketing
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). Database marketing is the process of building, maintaining, and using customer databases along with other databases (e.g. products, suppliers, and resellers) to make contact, facilitate transactions, and build and sustain customer relationships
A.
Data Warehouse and Data Mining
1.
A data warehouse contains all (including historical) relevant customer and prospect information, marketing mix information, macroenvironmental data for respective timeframes, value chain member information, and competitor information
2.
Data mining is the process of analyzing data. The data can be resident in a sophisticated repository such as a data warehouse or simply on a report or in a spreadsheet. There is a variety of software products and statistical methods that perform Data mining, each with 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 “data mart”
B.
The Downside of Database Marketing and CRM
1.
Large investment required for construction and maintenance of computer hardware, software, communication capabilities, data capture, and for management and skilled personnel
2.
Breaking the paradigm in organizations to move from traditional transaction marketing to customer-oriented marketing
3.
Customer privacy, ethical practices, and compliance with legal and social constraints
4.
CRM assumptions may not always be valid (e.g. organization fails at CRM execution; CRM cost exceeds benefits - either financial, strategic, or both)
V.
Summary
IV.
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 is not. Secondly, the distinction between satisfaction and total customer satisfaction for the consumer might be challenging for some. Students may have a hard time understanding the difference between perception and expectation. Finally, it might be necessary to re-emphasize 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 them are proficient in Internet usage and can cite examples of relationship marketing from their own favorite Internet sites such as Amazon.com.
V.
Teaching Strategy and Class OrganizationPROJECTS
1.
At this point in the semester-long marketing plan project, students should have completed their value proposition for the fictional product, and defined how they will deliver satisfaction and maintain customer loyalty.
2.
Have students (individually or in groups) select a local firm in their community, or a local division of a national firm, and seek permission to interview these corporate executives on their corporation’s definition of customer satisfaction, loyalty, and what their firm does to foster such customer relations. This project can be combined with the project on marketing research. As such, students can create questionnaires suitable for mailing to these executives. Students can then present these findings to the class individually or in groups. This project could span a few weeks or the entire semester.
ASSIGNMENTS
Small Group Assignments
1.
In small groups (five students suggested as the maximum), have students make appointments with local insurance agents, financial planners, or other service professionals in their area to discuss the agent’s and his or her company’s philosophy on customer value, satisfaction, and loyalty. There are some specific questions to ask: How do you (and your company) define customer satisfaction? How do you go about delivering value to your clients? How do you (and your company) calculate the lifetime value of a client? Students should prepare a report to be either presented to the class or submitted.
2.
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?
3.
To prepare a case study based on the following materials from Chapter 4 and to present this:
•
Mini case: Starbucks
•
Innovative Marketing: Hewlett Packard Co. vs Dell Inc.
Individual Assignments
1.
Customer relations management is a current business “buzz word”. Students can be directed to do an Internet research project from named marketing and business journals on the subject of customer relations management (the chapter’s endnotes can provide a good source of leads for students). Each student can be directed to research 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 with the material contained in this chapter.
2.
Students who patronize one of the main Internet sites (eBay, Amazon.com, or a local Asian travel portal) experience some customer bonding with the provider. Ask students to comment on their experiences with these providers by answering the following: Does the customization aspect of the provider encourage you to shop more, or is this more of an intrusion or hindrance? Does the customization provided concern you as to the level of personal information collected by the company? Do you feel that some of your right to privacy is being compromised for the sake of developing “bonds”?
Think-Pair-Share
1.
Key retailers emphasize service, customer satisfaction, and loyalty. Many local Asian retailers have a reputation for outstanding customer service and satisfaction. In small groups, have the students visit these key retailers (and other retailers pertinent to their area) and write down observations regarding the service quality cues they experienced during their in-store visits. Secondly, these students are to visit other contrasting retailers to look for similar signs and cues to quality service. A report is to be prepared, with students noting what elements of customer satisfaction were present and absent at each level of service provider. Taking the position a “shopper”, students should comment on which retailer would most likely retain customers and why.
2.
The research firm J.D. Powers and Associates lists eight categories of products for consumers to research before purchasing. Dividing the class into eight groups, have students research the top performers for each category and share their findings on what characteristics, policies, procedures, and vision these top-rated companies have in common. Is there a common link among all the winners? Are there differences? Based on the material in this chapter, how would you explain these similarities and differences?
CLASS DISCUSSION TOPIC
You and your classmates have decided to start a business upon graduation. Your expertise is in marketing so you have decided to start a marketing consultant firm. As one of your basic underlying competitive distinctions, you have decided on “exceptional service is our minimum” as your tag line. Now you must define “exceptional service” and translate that tag line into specifics.
Using each of the major headings contained in this chapter, detail how you plan to communicate “exceptional service”.
The following should be addressed:
1)
Define your customer’s perceived value of your service.
2)
Apply the value concept.
3)
How will you deliver high customer value?
4)
Define total customer satisfaction for your firm.
5)
Define customer expectations for your firm.
6)
How are you going to measure satisfaction?
7)
What is product and service quality—your definition or your customer’s definition?
8)
Is your firm going to use ROQ as a measure?
9)
How will you define customer profitability?
10)
What will be your measure of the customer’s lifetime value for your firm?
11)
How will you cultivate customer relationships and customer relation management?
12)
How will you retain and grow customers?
13)
How will you build customer loyalty, reduce customer defections, and build strong customer bonds?
END-OF-CHAPTER SUPPORT
MARKETING DEBATE
Online versus Offline Privacy?
As more and more firms practice relationship marketing and develop customer databases, privacy issues are emerging as an important topic. (1) Privacy is a bigger issue in the online world than the offline world versus Privacy is no different online than offline. (2) Consumers on the whole receive more benefit than risk from marketers knowing their personal information.
VI.
Case study
1.
Marketing In China: How Warner Copes with China’s Pirated DVD Market
1)
How did CAV Warner Home Entertainment Co cope with piracy, which was called the “cancer” of China’s market?
2)
Compare CAV Warner’s strategy of protecting copyrights in China with those of Microsoft and other multinational companies.
2.
Chapter Case: Yum! Brands Inc—
Breakthrough in China
1)
Name companies which rank first in the world but second in China in their trade; and companies which rank first in China but not in the world in their trade. Analyze reasons for this and the companies’ strategies.
2)
Identify the problems of Yum! China in marketing.
VII.
Main Topic(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 that provides a link with other areas of the text.
Marketing Insight: Winning Back Lost Customers (Reducing Customer Defection)
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 by which 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 and advancing technology afford customers the ability to learn significantly more about the products they will purchase and/or consider for purchase.
The same factors have also 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 products and services they truly desire. Technology, when used to create a customer database, is one way marketers are answering 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, not the marketer, determines value. The marketer’s responsibility is to create value, in both product and service quality, that leads to increased satisfaction and encourages 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 can also become experts at “guerrilla marketing”, or the implementation of local promotions for the purpose of getting closer to customers. Further, large organization marketers also have the ability to create a website 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, dishwasher soap, or toilet paper? The answer is that the consumer would not necessarily desire a relationship with these companies, but 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 have 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 because you were running low on them? What if, to help choose the groceries you wanted for your family, you asked the computer for a week’s worth of dinner menus with specific recipes and ingredients?
In many product categories, you are not really concerned what brand the computer selects, but in some product categories you have a list of “approved” brands and those you do not wish to use. 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 takes 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 do not wish to consider this for various internal reasons. They want customers to come into the store (or the “virtual store”) because they like to have customers walking the aisles (or virtual aisles), making impulse purchases. For a large part of their business, today’s retailers inconvenience customers by requiring them to visit their store (or virtual store) location to do their shopping.
However, consider that marketers today pack 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, just as how we must struggle through the proliferating barrage of products in or out of stores 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.
Being able to buy these products more conveniently does not mean people will completely stop going into stores, nor does it mean advertising will cease to exist. But if getting regularly consumed products could be made nearly as convenient as “pushing a button”, wouldn’t you go to 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 customer, one at a time. This is the essence of one-to-one marketing.
B.
“Consumer Concerns”Teaching Objectives·
To understand why and how marketers need to comprehend the constantly changing determinants behind customer perceptions of quality, service and value.
·
To understand the critical elements of value chain analysis and the nuances behind consumers’ perception of value.
·
To understand specific methods by which marketers can engage in value-creating activities.
DiscussionWhile 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 choices based on 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 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 a critical role in their company’s drive toward higher quality.
VIII.
Background Article
(s) Issue: Leveraging CRMSource: “Relationship Marketing: A Competitive Advantage For B2C,” Information Today, June 2001, pp. 16-19.
Web-based marketing is changing drastically due to changes in the concept of customer relationship management
The ever-evolving Internet is driving explosive growth in e-commerce, customer service, and other real-time, interactive, transaction-based business activities. According to AMR Research (amrresearch.com), despite the implosion of the dot.coms, Internet retail sales are projected to reach $100 billion by 2003, up from $29 billion over the past four quarters. Web-based marketing, based on a new concept of customer relationship management, is radically changing virtually all of our conventional business models and forcing corporate America to rebuild them from scratch.
Both buyers and sellers are seeing just the tip of the e-commerce iceberg in the form of globalization of markets, a transaction-based economy, marketing-driven business process re-engineering, elimination of conventional middlemen, and mergers and acquisitions in unprecedented volume. “Bricks-and-mortar” is swiftly being replaced by “clicks-and-mortar” as the new, ubiquitous, customer-focused, cyberspace paradigm inexorably takes hold.
The current, multichannel, e-commerce-driven, customer service climate demands instant gratification, at any time, from any place, in any way, through any medium—interactive website, telephone, email, fax, PC, or wireless device. In today’s consumer-centric environment, the rule is that if it takes a customer more than five seconds to get what they want, the company has lost that potential buyer. Failure to deliver personalized, consistent, reliable accessibility to customized service is a distinct competitive disadvantage.
Alternatively, taking advantage of this opportunity entails delivering a rapid but personalized response to the customer wherever—and whenever—he or she chooses to interact with the seller. Web-based, customer-focused marketing enables companies to consistently sell the right product to the right person at the right time at the right price.
Despite all the hype about the Internet, however, the basic rules of business remain the same. The recent failure of numerous dot-com-based businesses demonstrates that in any business environment, companies must adhere to established business practices while they are integrating e-business transactions into their business model. As companies adopt a customer-focused, e-business platform as an essential component of their business process infrastructure, it is imperative that they do not abandon all they have learned to date about what it takes to deliver and maintain customer satisfaction. Just as with the old, traditional business activities, the goal of e-commerce should be to optimize each transaction, so that each one is timely and cost-effective for the customer while at the same time being profitable to the seller.
THE EMERGENCE OF RELATIONSHIP MARKETINGMany companies spent the better part of 1999 making sure their enterprise systems were Y2K compliant. Now, with both feet firmly planted in the next millennium, information technology personnel are evaluating applications and implementations for the future. More and more companies are discovering the value of relationship marketing (RM) strategies. Convincing evidence can be found in The Cowles Database Marketing Newsletter, which reports that customer relationship programs launched within the past 12 months have increased by 37%.
In a way, the relationship marketing approach represents a modern way of going “back to the future”. Before the era of mass marketing, customer service was personal and tailored to the individual. Selling and product customizing was done on a one-to-one basis, and the salesperson and customer usually knew each other personally. But, at the same time that automation, computerization, and mass production grew, and as customer support shifted from the storefront to the back office, customer service became an all increasingly impersonal process. It turns out that the very agent of depersonalization—the computer—also has the power to collect enormous amounts of personal data, to analyze, and synthesize them, and then mine the results to draw valid conclusions based on discovered patterns of individual human behavior. As a result, over a relatively short time, the capabilities of the computer and the Internet have combined to enable present-day managers to dramatically reinvent and personalize the concept of customer service, which for so long has been based on the mass-marketing paradigm.
Ideally, contemporary relationship marketing can be defined as a business strategy that proactively builds a bias or preference for an organization with respect to three audiences—its individual employees, its channel partners, and its customers. It accomplishes that task by adopting a high-tech solution that, through enhanced performance, increases retention of those groups. Seen from that perspective, relationship marketing can be described as a set of automated functions that guide customer transactions so that they respond positively to the marketing message and goals of an online business campaign. Along those lines, successful relationship marketing is dependent on not only the ability to smoothly execute certain business and operational tactics, but also the ability to implement it using the right tools and technology as well. The perfect relationship marketing system would be able to handle all customer-marketing interactions in a fully automated way. In the real world, however, a relationship marketing system typically contains a mechanism for identifying questions that need to be referred to a customer service representative.
From a knowledge management standpoint, Internet-centric relationship marketing is a way for a firm to set up its set of user transactions so that—based on historical, contextual information and extrapolations—individual consumer interests and likely buying propensities can be recognized, profiled, and then catered to in a highly individualized way. The optimal solution redefines the customer experience. It eliminates phone conversations with customers, both e-customers and the brick-and-mortar variety. The goal is to guide the customer directly to those products and services that hold the most interest for him or her and to present them in a manner that encourages a positive conclusion to the transaction. In that manner, RM software can be used to create a website that can sell both products and services while promoting targeted messages.
Nowadays, sophisticated e-savvy consumers require a lot more than traditional marketing strategies because the marketplace is not the huge but simple setting for which those strategies were originally created. In today’s complex and evolving business environment, a winning e-commerce strategy entails more than executing transactions efficiently. Contemporary customers are essentially selfish: online, looking for even more individual attention, even more responsiveness, and much more customization. For them, state-of-the-art relationship marketing does not boil down to simply implementing tactics from a single specialty area such as branding, customer service, or CRM technology, and then expecting that activity to automatically trigger profitable, long-term relationships. Rather, it means spoiling those customers by delivering them value beyond the immediate transaction—and being able to target those customers to whom it is worth delivering that added value. Relationship marketing software meets this requirement and yields additional profitability for its users by supplying them with the programmatic means for identifying precisely those customers who harbor the most lucrative potential, so they can be selectively cultivated.
RELATIONSHIP MARKETING EQUALS COMPETITIVE ADVANTAGEToday’s emerging Internet paradigm continually challenges a business’ ability to differentiate itself from the competition. In this high-speed, computer-driven business world, customers prefer to deal with those companies that are the most consistently accessible. Ease of customer access to a company’s brand—and subsequent fulfillment of service requests—is fast becoming the most critical element of global business strategy.
Web-based relationship management solutions can be used to create virtual storefronts based on industry knowledge of retailing. The more that Web shopping is made to emulate a normal shopping experience—without the usual hassle—the more likely it is that people will be comfortable in visiting the Web storefront. Relationship marketing can make the virtual store look just exactly the way an individual would like it to appear (for example, the virtual store only carries their sizes and color preferences), as opposed to a real brick-and-mortar store, which offers the same menu and appearance to everyone.
The customized, browser-based, GUI is created from not just a general set of characteristics that are demographically driven, but is individually user-driven, based on the specific customer’s profile.
Customization is a particularly powerful factor in relationship marketing when it plays on the law of large numbers by broadcasting a personalized marketing message over the Internet. The accessibility of a vast, electronic, networked, interactive audience is the major factor that makes things so different now from pre-Internet times. High hit rates caused by more intensively focused target marketing, coupled with the vast reach of the World Wide Web, can create a multiplier effect that ends up driving market growth at geometric rates. Amazon.com and eBay.com are but two of the obvious examples that come to mind as examples of the powerful multiplier effect of wholly automated, Web-based relationship marketing.
Relationship marketing is more than another sales tool for increasing sales and market share. It’s a powerful device for retaining key customers as well.
For example, it is quickly becoming standard practice for a retailer to track each customer’s transaction history and behavior over their lifetime with that company, then apply a multiple-channel, intelligent profiling system that can forecast when a customer is changing his or her behavior, and act on that prediction.
That allows a company to ratchet up the attention it pays to a client when he or she is considering a change of vendors. The higher the quality of the client, the more mission-critical the situation becomes. Likewise, the more intense and continuous the dialogue between a retailer and a customer is, the more difficult it becomes for the customer to defect. The capability of rescuing potentially “lost” customers and turning them into loyal buyers is clearly a competitive advantage. Examples would include banks and insurance companies that use relationship marketing models that predict when a customer is ready to jump ship.
By using sophisticated and robust relationship marketing software, it is possible to identify customers visiting a company website, track their purchases, identify their interests, develop customer profiles, and display custom ads and custom product recommendations based on predefined rules that specifically address various kinds of profiles. This can be accomplished while ensuring that proper security measures are in place to protect the customer’s privacy.
Requirements of a Successful RM Software SolutionMost relationship marketing software functionality is managed with a user-friendly GUI that makes designing campaigns, profiling customers, and applying existing marketing resources intuitive and easy to manage—without the hassle of developing spreadsheets, learning scripting languages, or using command line programming. There are a number of tools and techniques for developing a successful relationship marketing solution.
Website content supported should include multiple catalogs, FAQs, product descriptions, complex searches, as well as customized views of the products and services being sold. Additionally, there should be support for accessories, substitutions, plus various packaging and bundling options. Content navigation options must incorporate hierarchical browsing in addition to feature-based search and product/price comparisons. Requirements for supported pricing methods include priority pricing, timed promotional pricing and customer group discount pricing, in a manifold of currencies, including Eurodollars.
A good RM software package will include powerful customer data management utilities that allow users to create and continuously update explicit customer profiles for all visitors to the site, and to process and refine implicit behavioral customer data sets. That capability enables a marketing manager or administrator to customize the company’s home page, maintain multiple lists, as well as automatically schedule orders and reschedule reminders. By making use of built-in catalog and rules-based capabilities, it is also possible to provide unique and personalized information to customers on the home page.
Additionally, robust business intelligence capabilities will enable out-of-the-box, multiple types of reports that organize website data and customer behavior into formats that include the following categories: revenue, orders, products, customers, page views by region, site overview, product, click paths, and customer search results. The existence of ready-to-use, predefined reports saves companies the time and expense of hiring a report writer to produce scores of different reports.
RM software should provide usage analysis on individual pages, time spent on each page and impressions, and visitor analysis, which would include classifying visitor origins, visitor interests, and visitor navigation behavior. Functions and reports will be primarily focused on site operation analysis (broken-link analysis, performance analysis, browsers used, etc.), while there will be other reports that focus on commerce analysis (campaign and initiative impressions, clicks, business results, sales by category, etc.). Additional business intelligence in the form of data mining can uncover hidden or implicit patterns of consumer purchasing behavior. Analysis results then can be used to create a campaign model, run it against sample data sets, and deploy the optimized campaign.
Relationship management personalization capabilities permit a marketing executive to categorize customer propensities, predict shopper behavior, define campaign parameters, and target specific customer groups by leveraging out-of-the-box components such as customer profiles, product attributes, and shopping carts. Those functions should be implemented with the aid of an easy-to-use GUI that enables and controls a powerful rules engine for creating and managing business rules, a runtime engine that executes rules and renders webpages, and development tools for extending various e-commerce business processes beyond the walls of the corporation.
Marketing executives and other nontechnical people can implement relationship marketing with browser-based RM software tools that provide four areas of functionality: marketing, merchandising, operations, and customer service. Using those tools, a marketing director can define, personalize, and maintain campaigns and initiatives around the company’s unique requirements with the aid of a set of demographic and profile-oriented templates that together serve as a model for building specific programs. They enable the business manager to control all of the different market segments that are dynamically generated as people go to the company website. Once the relationship management functionality is set up and implemented, staff personnel can operate the online store.
Through the use of RM software, a marketing manager can manipulate, customize, and manage the entire life cycle of a relationship marketing campaign on an ongoing basis. The first stage involves creating a model based on the analysis of previous campaign data, which leads to the development and promotion of a variety of relationship marketing elements.
For example, based on an analysis of customer interactions and preferences, the website developer would create a series of “e-marketing spots” that are defined by their location coordinates on a series of webpages that are dedicated to marketing messages and product descriptions—equivalent to the various aisles and counters in a virtual Web store.
Next, business intelligence routines would analyze what is taking place on an ad hoc basis and create a variety of reports—revenue, orders, products, customer search results, etc.—for the marketing executive who is free to adjust the campaign model accordingly.
For example, he or she can change the content of predefined e-marketing spots and populate them on an as-needed basis. Once the refined model is in place, more data can be collected and the cycle can be started over, albeit on a more fine-tuned basis. The result is a continuously running, “closed loop” management model that allows a marketing manager to optimize a company relationship marketing campaign by making incremental adjustments or even by radically reorganizing it, depending on up-to-the-minute feedback.
From Advantage to NecessityAs is so often the case in real life, relationships make the retail world go round. Relationship marketing architecture is like a complex ecosystem, with distinct but interconnected software layers optimized for sales and service, order processing, and decision support, which together essentially mimic all of the functions of an extremely intelligent marketing administrator and a personal sales representative, supported by a smooth-running back office. The decision to adopt a relationship marketing solution is primarily strategic in nature: the goodwill and repeat business generated through improved consumer interactions and increased wallet share should warrant the investment in a closed-loop relationship marketing architecture. Bottom-line benefits include increased customer loyalty and retention, maximization of revenue per customer, and website “stickiness”.
For the Web shopper, relationship marketing creates a richer, more consistent, more usable, and happier experience on an e-commerce site. Customers get more information out of their experience with less noise. They will be offered promotions on products that may be of interest, based on their customer profile, what they have placed in their shopping cart already, or other scenario-based criteria. They can more easily find what they want and purchase it. By anticipating their needs, a relationship marketing approach makes them feel special or known. Ultimately, a successful relationship marketing implementation will create for each customer the illusion that each and every one of his or her previous contacts and transactions has been remembered and carefully considered. In doing so, it adds value to the experience and makes each future visit appear as a progressive step in an interactive and growing relationship.
The power of relationship marketing at present is an intriguing but optional capability that gives companies a competitive advantage by personalizing their Web marketing campaigns. But today’s supercharged e-commerce marketplace is fast changing all of that. In the not-too-distant future, owning that marketing power no longer will constitute a competitive advantage, it will be an operational necessity.
Good Relationships Boost ProfitsEvery account manager knows that the cost of retaining an existing customer is a relatively small fraction of the cost of acquiring a new one. In fact, according to Deloitte & Touche (deloitte.com), it costs five times as much to acquire a new customer as it does to keep an existing one. By creating cross-selling opportunities and by opening new sales possibilities, high-quality customer service improves customer retention even as it increases customer “walletshare”. Indeed, according to “The Loyalty Effect” by Frederick Reichheld, an additional 5% retention in customers over their collective lifetimes results in an 85% to 125% increase in company margin over that same time period. Moreover, according to surveys by the Database Marketing Institute (dbmarketing.com), it is not unusual for the top 16% of a company’s customers to account for 105% of its profits, while the bottom 28% erode its profits by 22%. That suggests that developing strong relationships with the elite segment of a firm’s customer base will ensure healthy profits.
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