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CHAPTER
5
CREATING CUSTOMER
VALUE, SATISFACTION,
AND LOYALTY
LEARNING OBJECTIVES
After reading this chapter, students should:

Know what are customer value, satisfaction, and loyalty, and how can companies
deliver them

Know what is the lifetime value of customers

Know how companies can both attract and retain customers

Know how companies can cultivate strong customer relationships

Know how companies can deliver total quality

Know what is database marketing
CHAPTER SUMMARY
Customers are value-maximizers. They form an expectation of value and act on it. Buyers will
buy from the firm that they perceive to offer the highest customer-delivered value, defined as
the difference between total customer value and total customer cost.
A buyer’s satisfaction is a function of the product’s perceived performance and the buyers’
expectations. Recognizing that high satisfaction leads to high customer loyalty, many
companies today are aiming for TCS—total customer satisfaction. For such companies,
customer satisfaction is both a goal and a marketing tool.
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.
Quality is the totality of features and characteristics of a product or service that bear on its
ability to satisfy stated or implied needs. Today’s companies have no choice but to implement
total quality management programs if they are to remain solvent and profitable.
Marketing managers have two responsibilities in a quality-centered company. First, they must
participate in formulating strategies and policies designed to help the company win through
total quality excellence. Second, they must deliver marketing quality alongside production
quality.
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Companies are also becoming skilled in Customer Relationship Management (CRM) that
focuses on meeting the individual needs of valued customers. The skill requires building a
customer database and doing data mining to detect trends, segments, and individual needs.
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
is not. Secondly, the distinction between satisfaction and total customer satisfaction for the
consumer might be challenging for some students. Some students may have a hard time
understanding the distinction between perception and expectation. Finally, it might be
necessary to reemphasize 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 the students today are proficient in
Internet usage and can cite examples of relationship marketing from their own favorite
Internet sites such as Amazon.com.
TEACHING STRATEGY AND CLASS ORGANIZATION
PROJECTS
1. At this point in the semester-long marketing plan project, students should have completed
their value proposition for the fictional product, defined how they will deliver satisfaction
and maintain customer loyalty.
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
their corporation’s definition of customer satisfaction, loyalty, and what their particular
firm does to foster such customer relations. This project can be combined with the project
on marketing research and as such, students can create questionnaires suitable for mailing
to these executives. The students can then present these findings to the class in a group or
by individual presentations. This could be a full-semester project or limited to a few weeks
of the semester.
3. Sonic PDA Marketing Plan Sonic has decided to focus on total customer satisfaction,
because studies have shown that customers who are “completely satisfied” with the
product or service are much more likely to buy more from the company than customers
who report they are “satisfied.” You have been asked by Jane Melody to:

Recommend how Sonic should measure total customer satisfaction.
Review the possible ways to gain customer satisfaction information and write the
recommended approach in a marketing plan or into the Positioning section of Marketing
Plan Pro.
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ASSIGNMENTS
Small Group Assignments
1. In small groups (five students suggested as the maximum), have the students make
appointments with local insurance agents, financial planners, or other service professionals
in their area to discuss the agent and his company’s philosophy on customer value,
satisfaction, and loyalty. There are some specific questions to ask: How does your
company (and you individually) 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 presented either to the class or as
written group paper.
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?
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/business journals on the
subject of customer relations management (the chapter’s endnotes can provide a good
source of leads for the students). Each student can be directed to research, read, 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 the material contained in this
chapter.
2. Students who regularly shop at one of the main Internet sites (eBay, Amazon.com, Land’s
End.com, etc.) experience some customer bonding with the provider. Ask students to
comment on their experiences with these providers in terms of: Does the customization
aspect of the provider encourage you to shop more, or is the customization aspect of the
provider 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. Retailers such as
Nordstrom, Saturn, Lexus, Infiniti, and others have a reputation for outstanding customer
service and satisfaction. In small groups, have the students visit these key retailers (and
other retailers pertinent to your trading area) and write down their observations regarding
what service quality clues they experienced during their in-store visits. Secondly, these
same students are to visit other contrasting retailers and are to look for similar signs and
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clues to quality service. In a prepared report, students should note what elements of
customer satisfaction was and was not present at each level of service provider. Taking the
position then of 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 the product or service. Breaking up the class into
eight groups, have the students research the top performers for each category and be able
to share their findings as to what characteristics, policies, procedures, and vision these top
rated companies have in common. Is there a “common” link among all of the winners?
Are there differences? In terms of the material contained in this chapter, how would you
explain these similarities and differences?
MARKETING TODAY—CLASS DISCUSSION TOPICS
You and your class colleagues 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 upon “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.”
For example, answer the following questions:
1) Define your customer’s perceived value of your service.
2) Apply the value concept.
3) Deliver high customer value.
4) Define total customer satisfaction for your firm.
5) Define customer expectations for your firm (after all you have said that
“exceptional service is our minimum” so now define what the customers’
expectations will be after reading this statement on your business cards).
6) How are you going to measure satisfaction?
7) What is product and service quality—your definition or your customer’s
definition?
8) Are/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?
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13) How will you build customer loyalty, reduce customer defections, and build strong
customer bonds?
END-OF-CHAPTER SUPPORT
MARKETING DEBATE—Online Versus Off-Line Privacy
As more and 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. Concerns are also being
raised about potential theft of online credit card information or other potentially sensitive or
confidential financial information. Others maintain that the online privacy fears are unfounded
and that security issues are every bit as much a concern in the off-line world. They argue that
the opportunity to steal information exists virtually everywhere and that it is up to the
consumer to protect his or her interests.
Take a position: (1) Privacy is a bigger issue in the online world than the off-line world versus
privacy is no different online than off-line. (2) Consumers on the whole receive more benefit
than risk from marketers knowing their personal information.
(1) 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
receiving this information and storing this information is unknown to the consumer. In the offline world, the consumer has the opportunity to know the company, personnel, or firm
receiving this information and has the opportunity to accept or decline sharing their personal
information.
Con: Transmission of personal information in the off-line world still travels electronically, in
many cases. The act of paying with a credit card still involves the transmission of data
electronically at some point in the transaction. What differs is the fact that the consumer is
initially interfacing with a person (or firm). Although this does not mitigate the risks involved
to the consumer, it does present some concrete knowledge of the people, or firm involved in
the transaction.
(2) Pro: With an active CRM program in place by a firm, consumers can receive more benefit
than risks with the marketer knowing their personal information. A firm with an active CRM
program can and does allow the consumer to move through the Customer Development
Process (from suspects to partners) thus establishing strong ties to the firm and the reception of
increased specially designed promotional and service programs unavailable to the general
public. This is seen in frequent flyer discounts, member discount, special shopping days, and
advance notices of new products, promotions, and reminders for service opportunities (oil
change reminders, medical appointment reminders, and others). In today’s fast paced world,
consumers stand to benefit from such attention to detail.
Con: In current society, the dissemination of one’s personal information is scary and a concern
to the public in general as opportunities for misuse of this information abound. The public
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does not like intrusions into their personal lives, unless invited. Consumers do not feel that the
benefits of this sharing of information outweigh the cost of the lost of privacy. The recent “Do
Not Call Registry” established to limit the telemarketing industry is an example of consumers
revolting in opposition.
MARKETING DISCUSSION
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
organizations 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).
b) Number of sales per customer per year.
c) Average age of a customer.
d) Average expected lifespan of a customer.
2) Subtract:
a) Appropriate discount rate.
b) Costs of attracting one customer.
c) Selling one customer.
d) Servicing one customer.
B) Organizations would change by beginning to take a long-term perspective rather than a
short-term (quarter-to-quarter view). No longer viewing a customer as a “transaction” but
rather as a “lifetime value” solidifies and demonstrates the impact that a single consumer has
to a firm in a language they understand—dollars. Firms would begin to customize offerings
and messages to each customer, ensure that retention strategies are in place, differentiate
customers in terms of needs and value to the company, and build stronger relationships with
key customers. Because of a change in the loci of focus for the firm, strategies, and actions
based upon which would provide the best return on its marketing investments would be
implemented.
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MARKETING SPOTLIGHT—Dell
Discussion Questions:
1) What have been the key success factors for Dell?
a. Dell information about its customers.
b. Its production process.
c. JIT inventory practices.
2) Where is Dell vulnerable?
a. Changes in usage of computers.
b. Changes in technology that makes the personal computer obsolete.
c. A lapse of marketing research caused by corporate changes or financial
setbacks.
3) What should it watch out for?
a. Corporate complacency due to success.
b. The effectiveness of its marketing research in identifying emerging trends.
c. The temptation to expand into other consumer products outside of its core
competencies.
4) What recommendations would you make to senior marketing executives going
forward?
a. Accept your competencies, accept your limitations, and capitalize on your
strengths.
b. Continue to believe that marketing research is the underlying foundation of
your product development processes and marketing successes.
5) What should they be sure to do with their marketing?
a. Continue to target their marketing to identify those segments of the total
market that are receptive to new and innovative products and ideas.
DETAILED CHAPTER OUTLINE
Today, companies face their toughest competition ever. The cornerstone of a wellconceived marketing orientation is strong customer relationships. Marketers must
connect with customers—informing, engaging, and energizing them in the process.
BUILDING CUSTOMER VALUE, SATISFACTION, AND LOYALTY
Managers who believe the customer is the company’s only true “profit center” consider
the traditional organizational chart obsolete.
Figure 5.1(a) Traditional Organization versus Modern Customer-Orientated Company
organization
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Successful marketing companies invert the chart.
Figure 5.1(b) Determinants of Customer Delivered Value
A) With the rise of digital technologies like the Internet, today’s increasingly informed
consumers expect companies to do more than connect with them, more than satisfy
them, and even more than delight them.
Customer Perceived Value
A) Customers tend to be value-maximizers.
B) Customers estimate which offer will deliver the most perceived value and act on it.
Figure 5.2 Determinants of customer-delivered value.
C) Customer perceived value (CPV) is the difference between the prospective customer’s
evaluation of all the benefits and all the costs of an offering and the perceived
alternatives.
Review Key Definition here: customer perceived value
D) Total customer value is the perceived monetary value of the bundle of economic,
functional, and psychological benefits customers expect from a given market offering.
Review Key Definition here: total customer value
E) Total customer cost is the bundle of costs customers expect to incur in evaluating,
obtaining, using, and disposing of the given market offering, including monetary, time,
energy, and psychic costs.
Review Key Definition here: total customer cost
F) Customer perceived value is thus based on the difference between what the customer
gets and what he or she gives for different possible choices.
Applying Value Concepts
A) The customer adds up values from the four sources for Caterpillar—product, services,
personnel, and image and compares them to Komatsu.
B) The buyer evaluates these elements together with the monetary cost to form a total
customer cost.
C) The buyer will choose whichever source he thinks delivers the highest perceived
customer value.
Choices and Implications
Buyers operate under various constraints and occasionally make choices that give more
weight to their personal benefit than to the company’s benefit.
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A) In the above example, suppose the customer chooses to buy the Komatsu tractor, there
are three possibilities:
1) The buyer might be under orders to buy at the lowest price.
2) The buyer will retire before the company realized that the Komatsu tractor is more
expensive to operate.
3) The buyer enjoys a long-term friendship with the Komatsu salesperson.
B) Customer perceived value is a useful framework that applies to many situations and
yields rich insights. Its implications are:
1) First, the seller must assess the total customer value and total customer cost
associated with each competitor’s offer.
2) Second, the seller who is at a customer perceived value disadvantage has two
alternatives:
a. To increase total customer value (by strengthening or augmenting the offer’s
product, services, personnel, and image benefits).
b. To decrease total customer cost (by reducing price, simplifying the ordering,
and delivery process, or absorbing some buyer risk by offering a warranty.
Delivering High Customer Value
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.”
B) The key to generating high customer loyalty is to deliver high customer value.
C) The value proposition consists of the whole cluster of benefits the company promises
to deliver, it is more than the core positioning of the offering.
D) Whether the promise is kept depends on the company’s ability to manage its valuedelivery system.
E) The value-delivery system includes all the experiences the customer will have on the
way to obtaining and using the offering.
Review Key Definitions here: value proposition and value-delivery system
F) Whether customers will actually receive, the promised value proposition will depend
upon the marketer’s ability to influence various core business processes.
Total Customer Satisfaction
Whether the buyer is satisfied after the purchase depends on the offer’s performance in
relation to the buyer’s expectations.
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B) Satisfaction is a person’s feeling of pleasure or disappointment resulting from
comparing a product’s perceived performance (or outcome) in relation to his or her
expectations.
C) A company must operate on the philosophy that it is trying to deliver a high level of
customer satisfaction subject to delivering acceptable levels of satisfaction to the other
stakeholders, given its total resources.
Customer Expectations
A) How do buyers form their expectations?
1) From past buying experiences.
2) Friends and associates advice.
3) Marketers’ and competitors’ information and promises.
A customer’s decision to be loyal or to defect is the sum of many small encounters with
the company.
Companies need to create a “branded customer experience.”
Measuring Satisfaction
A) Many companies are systematically measuring customer satisfaction and the factors
shaping it.
B) A company would be wise to measure customer satisfaction regularly because one key
to customer retention is customer satisfaction.
C) The link between customer satisfaction and customer loyalty, however, is not
proportional.
D) A number of methods exist to measure customer satisfaction.
1) Periodic surveys can track customer satisfaction directly.
2) Companies can monitor the customer loss rate and contact customers who have
stopped buying and learn why this happened.
3) Companies can hire mystery shoppers to pose a potential buyers and report on
strong and weak points experienced in buying the company’s and competitor’s
products.
4) For customer satisfaction surveys, it is important that companies ask the right
questions.
a. “Would you recommend this product or service to a friend”?
E) In addition to tracking customer value expectations and satisfaction, companies need
to monitor their competitor’s performance in these areas as well.
F) For customer-centered companies, customer satisfaction is both a goal and a
marketing tool.
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G) Companies that do achieve high customer satisfaction ratings make sure that the target
market knows it.
H) American Customer Satisfaction Index (ACSI).
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.
Review Key Definition here: quality
A) We can say that a seller has delivered quality whenever the seller’s product or service
meets or exceeds the customers’ expectations.
B) Distinguish between conformance quality and performance quality.
C) Total quality is the key to value creation and customer satisfaction.
D) Marketing managers have two responsibilities in a quality-centered company.
1) First, they must participate in formulating strategies and policies to help the
company win through total quality excellence.
2) Second, they must deliver marketing quality alongside production quality.
Total Quality Management
A) Total quality management (TQM) is an organization-wide approach to continuously
improve the quality of all the organization’s processes, products, and services.
Review Key Definition here: total quality management
B) Product and service quality, customer satisfaction, and company profitability are
intimately connected.
C) TQM ran into implementation problems as firms became overly focused on how they
were doing business and not the why they were in business. Companies lost sight of
consumer needs and wants.
D) Companies are now concentrating efforts on “return on quality” or ROQ.
E) ROQ advocates improving quality only on those dimensions that produce tangible
customer benefits, lower costs, or increased sales.
F) Marketers play several roles in helping their companies define and deliver high-quality
goods and services to target customers.
1) They bear the major responsibility for correctly identifying the customers’ needs
and requirements.
2) They must communicate customer expectations properly to product designers.
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3) They must check that customers’ orders are filled correctly and on time.
4) They must make sure that customers have received proper instructions, training,
and technical assistance in the use of the product.
5) They must stay in touch with customers after the sale to ensure that they are
satisfied and remain satisfied.
6) They must gather customer ideas for product and service improvements and
convey them to the appropriate departments.
MAXIMIZING CUSTOMER LIFETIME VALUE
Marketing is the art of attracting and keeping profitable customers.
A) The 80/20 rule states that the top 20 percent of the customers may generate as much as
80 percent of the company’s profits.
B) Suggests amending the rule to read 20-80-30, to reflect the idea that the top 20 percent
of customers generate 80 percent of the company’s profits, half of which are lost
serving the bottom 30 percent of unprofitable customers.
1) The implication is that a company could improve its profits by “firing” its worst
customers.
Customer Profitability
A) A profitable customer is a person, household, or company that over time yields a
revenue stream that exceeds by an acceptable amount the company’s cost stream of
attracting, selling, and servicing that customer.
B) Customer profitability can be assessed individually, by market segment, or by channel.
C) Most companies fail to measure individual customer profitability.
Customer Profitability Analysis
Figure 5.3 shows a profitability analysis.
A) Customer 1 is very profitable.
B) Customer 2 is mixed profitability.
C) Customer 3 is a losing customer.
1) What can the company do about customers 2 and 3?
a. It can raise the price of its less profitable products or eliminate them.
b. It can try to sell them its profit-making products.
c. It can encourage customer 3 to switch to competitors.
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D) Customer profitability analysis (CPA) is best conducted with the tools of an
accounting technique called Activity-Based Costing (ABC).
1) Platinum customers (most profitable).
2) Gold customers (profitable).
3) Iron customers (low profitability but desirable).
4) Lead customers (unprofitable and undesirable).
Competitive Advantage
Competitive advantage is a company’s ability to perform in one or more ways that
competitors cannot or will not match.
Review Key Definition here: competitive advantage
A) Michael Porter urged companies to build a sustainable competitive
advantage.
B) Few competitive advantages are sustainable, at best they may be leverageable.
1) A leverageable advantage is one that a company can use as a springboard to new
advantages.
2) Any competitive advantage must be seen by customers as a
customer advantage.
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.
Review Key Definition here: customer lifetime value
A) CLV calculations provide a formal quantitative framework for planning customer
investment and helps marketers to adopt a long-term perspective.
Customer Equity
Customer equity is the total of the discounted lifetime values of all of the firm’s
customers.
Review Key Definition here: customer equity
A) Rust, Zeithaml, and Lemon distinguish three drivers of customer equity:
1)
Value equity: Is the customer’s objective assessment of the utility of an offering
based on perceptions of its benefits relative to its costs?
a. The sub-drivers of value equity are quality, price, and convenience.
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2)
Brand equity: Is the customer’s subjective and intangible assessment of the brand,
above and beyond its objectively perceived value?
a. The sub-drivers of brand equity are customer brand awareness, customer
attitude toward the brand, and customer perception of brand ethics.
3)
Relationship equity: Is the customer’s tendency to stick with the brand, above and
beyond objective and subjective assessments of its worth?
a. Sub-drivers of relationship equity include loyalty programs, special
recognition and treatment programs, community building programs, and
knowledge-building programs.
B) This formulation integrates value management, brand management, and relationship
management within a customer-centered focus.
C) Blattberg, Getz, and Thomas view customer equity as driven by three components:
1) Acquisition.
2) Is the function of the efficiency of add-on selling, the number of add-on selling
offers given to existing.
a. Is affected by the number of prospects, probability of a prospect, and spending
per prospect.
3) Retention.
a. Is influenced by the retention rate and retention spending level.
b. Add-on-selling customers and the response rate to new offers.
D) Marketing equity represents a promising approach to marketing management.
Relational equity is the cumulative value of the firm’s network of customers, partners,
suppliers, employees, and investors.
CULTIVATING CUSTOMER RELATIONSHIPS
Maximizing customer value means cultivating long-term customer relationships.
A) Companies are moving to more precision marketing designed to build strong customer
relationships.
B) Mass customization is the ability of a company to meet each customer’s
requirements—to prepare on a mass basis individually designed products, services,
programs, and communications.
Review Key Definition here: mass customization
Customer Relationship Management (CRM)
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.
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Review Key Definition here: customer relationship management
A) A customer “touch point” is any occasion on which a customer encounters the brand
and product—from actual experience to personal or mass communications to casual
observation.
B) Customer relationship management enables companies to provide excellent real-time
customer service through the effective use of individual account information.
C) Peppers and Rogers outlined a four-step framework for one-to-one marketing that can
be adapted to CRM marketing:
1) Identify your prospects and customers.
2) Differentiate customers in terms of: (1) their needs and (2) their value to your
company.
3) Interact with individual customers to improve your knowledge about individual
needs and to build stronger relationships.
4) Customize products, services, and messages to each customer.
Table 5.1 lists the main differences between mass marketing and one-to-one marketing.
D) 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:
1) Reducing the rate of customer defection.
2) Increasing the longevity of the customer relationship.
3) Enhancing the growth potential of each customer through “share-of-wallet, crossselling, and up-selling.”
4) Making low-profit customers more profitable or terminating them.
5) Focusing disproportionate effort on high-value customers.
Attracting, Retaining, and Growing Customers
A) Customers are becoming harder to please.
B) Companies seeking to expand profits and sales have to spend considerable time and
resources searching for new customers.
1) Suspects are people or organizations that might conceivably have an interest in
buying but many not have the means or real intention to buy.
2) Prospects—customers with the motivation, ability, and opportunity to make a
purchase
3) Customer churn—high customer defection
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4) Two main ways to strengthen customer retention:
a. Erect high switching costs.
b. Deliver high customer satisfaction.
C) Most companies now recognize the importance of satisfying and retaining customers.
D) Satisfied customers constitute the company’s customer relationship capital.
1) Acquiring new customers cost five times more than the costs involved in
satisfying and retaining current customers.
2) The average company loses 10 percent of its customers each year.
3) A 5 percent reduction in customer defection rate can increase profits by 25 percent
to 85 percent depending on the industry.
4) Customer profit rate tends to increase over the life of the retained customer.
Figure 5.4 shows the main steps in the process of attracting and keeping customers.
E) The starting point is everyone who might conceivably buy the product or service
(suspects).
1) Prospects.
2) First-time customers.
3) Repeat customers.
4) Clients—people whom the company treats very specially and knowledgeably.
5) Members.
6) Advocates—customers who enthusiastically recommend the company.
7) Partners.
F) Markets can be characterized by long-term buying dynamics and how easily
customers can enter and leave.
1) Permanent capture markets—once a customer always a customer.
2) Simple retention markets—customers lost after each period.
3) Customer migration markets—customers can leave and come back.
Building Loyalty
A) Five different levels of investment in customer-relationship building:
1) Basic marketing.
2) Reactive marketing.
3) Accountable marketing.
4) Proactive marketing.
5) Partnership marketing.
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Figure 5.5 shows the likely level of relationship marketing depends upon the number of
customers and profit margin levels.
Table 5.2 highlights five imperatives of CRM and where technology fits in.
Reducing Customer Defection
A) Five main steps a company can take to reduce the defection rate:
1) The company must define and measure its retention rate.
2) The company must distinguish the cause of customer attrition and identify those
that can be managed better.
3) The company needs to estimate how much profit it loses when it loses customers.
4) The company needs to figure out how much it would cost to reduce the defection
rate.
5) Finally, listening to customers.
Forming Strong Customer Bonds
A) Berry and Parasuraman have identified three retention-building approaches:
1) Adding financial benefits.
2) Adding social benefits.
3) And adding structural ties.
Adding Financial Benefits
A) Two financial benefits companies can offer are:
1) Frequency programs—designed to provide rewards to customers who buy
frequently and in substantial amounts; good way to build long-term loyalty with
the 20 percent of the customers who contribute 80 percent of the profits.
2) Club marketing programs—limited to an affinity group or to those willing to pay a
small fee. Limited membership clubs are more powerful long-term loyalty
builders.
Adding Social Benefits
A) Company personnel work on cementing social bonds with customers by
individualizing and personalizing customer relationships.
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Chapter 5: Creating Customer Value, Satisfaction, and Loyalty
Adding Structural Ties
A) The company may supply customers with special equipment or computer links that
help customers manage orders, payroll, and inventory.
B) The marketer’s aim should be to increase the consumer’s proclivity to repurchase.
1) Create long-term contracts.
2) Charge a lower price to consumers who buy larger supplies.
3) Turn the product into a long-term service.
CUSTOMER DATABASES AND 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 such
marketing purposes as lead generation, lead qualification, sale of a product or service,
or maintenance of customer relationships.
Review Key Definition here: customer database
A) Database marketing is the process of building, maintaining, and using customer
databases and other databases for the purpose of contacting, transacting, and building
customer relationships.
Review Key Definition here: database marketing
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.
a. Ideally, a customer database contains the consumer’s past purchases,
demographics, income, family members, psychographics, mediagraphics, and
other useful information.
2) A business database would contain business customers’ past purchases, past
volumes, prices, and profits, buyer team members’ names, and other useful
information.
Figure 5.6 displays a method for selectively gaining greater share of a customer’s
business.
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Chapter-by-Chapter Instructional Material
Data Warehouses and Datamining
A) Savvy companies are capturing information every time a customer comes into contact
with any of its departments.
1) These data are collected by the company’s contact center and organized into a
data warehouse.
2) Through data mining, marketing statisticians can extract useful information about
individuals, trends, and segments from the mass of data.
Using the Database
A) To identify prospects.
B) To decide which customers should receive a particular offer.
C) To deepen customer loyalty.
D) To reactivate customer purchases.
E) To avoid serious customer mistakes.
The Downside of Database Marketing and CRM
A) Four problems can deter a firm from effectively using CRM.
1) Building and maintaining a customer database requires a large investment in
computer hardware, database software, analytical programs, communication links,
and skilled personnel.
2) The difficulty of getting everyone in the company to be customer orientated and to
use the available information.
3) Not all customers want a relationship with the company.
4) That the assumptions behind CRM may not always hold true—i.e. it might not be
the case that it costs less to serve the more loyal customers.
B) Businesses where the CLV is low, who have a high churn and where there is little or
no contact between seller and ultimate buyer may not benefit from a CRM.
1) Four main perils of CRM:
a. Implementing CRM before creating a customer strategy.
b. Rolling out CRM before changing organization to match.
c. Assuming more CRM technology is better.
d. Stalking, not wooing customers.
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