5Creating Long-Term

Loyalty Relationships

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Chapter Questions What are customer value, satisfaction, and

loyalty, and how can companies deliver them?

What is the lifetime value of customers? How can companies both attract and retain

customers? How can companies deliver total quality? What is database marketing?

Figure 5.1 Customer-Orientations

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Customer Perceived Value (CPV)

CPV = the difference between the prospective customer’s evaluation of all benefits and all the costs of an offering and the perceived alternatives.

CPV = Total Customer Value – Total Customer Cost

Figure 5.2 Determinants of Customer Perceived Value

Image benefit Psychological cost

Personal benefit Energy cost

Services benefit Time cost

Product benefit Monetary cost

Total customer benefit Total customer cost

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Delivering High Customer Value to build Loyalty

A deeply held commitment to re-buyor re-patronize a preferred product

or service in the future despite situationalinfluences and marketing efforts having

the potential to cause switching behavior.

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A Tale of A Loyal Consumer

Morgan Spurlock @ 2004

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The Value Proposition

The whole cluster of benefits the

company promisesto deliver

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Total Customer Satisfaction

Satisfaction :

a person’s feelings of pleasure or disappointment resulting from comparing

a product’s perceived performance (or outcome) in relation to his or her

expectations.

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Measuring Satisfaction

Periodic surveys Customer loss rate Mystery shoppers Monitor competitive performance

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Product and Service Quality

Quality is the totality of features andcharacteristics of a product or

service that bear on its ability to satisfy

stated or implied needs.

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Quality

Conformance (delivering promised quality) Performance (the grade of the quality)

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Total Quality Management

TQM is an organization-wide approach to continuously improving the quality of

all the organization’s processes, products, and services.

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Maximizing Customer Lifetime Value

Customer profitability Customer lifetime value

(the NPV of the stream of future profits expected over the customer’s lifetime purchases)

Customer equity

(the total of the discounted lifetime values of ALL of the firm’s customers)

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Estimating Lifetime Value

Annual customer revenue: $500 Average number of loyal years: 20 Company profit margin: 10 Customer lifetime value: $1000

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Loyalty Will satisfaction lead to loyalty? (e.g., Moderating

variable of variety-seeking behavior) Two levels of loyalty: attitudinal loyalty and

behavioral loyalty Four levels of loyalty:

- Contractual loyalty- Transactional loyalty- Functional loyalty- Emotional loyalty

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Drivers of Customer Equity Value equity

customer’s objective assessment of the utility of an offering based on perceptions of its benefits relative to its costs.

Brand equitycustomer’s subjective and intangible assessment of the brand, above and beyond its objectively perceived value.

Relationship equitycustomer’s tendency to stick with the brand, above and beyond objective and subjective assessment of its worth.

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Framework for CRM

Identify prospects and customers Differentiate customers by needs and

value to company Interact to improve knowledge Customize for each customer (mass

customization).

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CRM Strategies

Reduce rate of defection Increase longevity Enhance share of wallet Terminate low-profit customers Focus more effort on high-profit customers

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Mass vs. One-to-One Marketing

Mass Average customer Customer anonymity Standard product Mass production Mass distribution Mass advertising One-way message Economies of scale

One-to-One Individual customer Customer profile Customized market

offering Customized production Economies of scope Share of customer

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Customer Retention

Acquisition of customers can cost 5 times more than retaining current customers.

The average customer loses 10% of its customers each year.

A 5% reduction to the customer defection rate can increase profits by 25% to 85%.

The customer profit rate increases over the life of a retained customer.

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Describing Market Dynamics

Permanent capture markets(once a customer, always a customer)

Simple retention markets(customers can permanently lost after each period)

Customer migration markets(customer can leave and come back)

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Building Loyalty

Basic marketing Reactive marketing Accountable marketing Proactive marketing Partnership marketing

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Reducing Customer Defection

Define and measure retention rate Distinguish causes of customer attrition Estimate profit loss associated with loss of

customers Assess cost to reduce defection rate Gather customer feedback

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Forming Strong Customer Bonds Add financial benefits

(e.g., Frequent flyer program)

Add social benefits (e.g., Karimun Club)

Add structural ties (via contracts, lower price to large buyers, long term service)

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Creating Customer Evangelists

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Database Key Concepts

Customer database Database marketing Mailing list

Business database Data warehouse Data mining

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Using the Database

To identify prospects To target offers To deepen loyalty To reactivate customers To avoid mistakes

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The Downside of Database Marketing and CRM Database marketing is useful when:

product is a once-in-a-lifetime purchase, customers show little loyalty to the company, and the cost of gathering information is too high.

Difficulty of getting everyone in the company to be customer oriented.

Not all customers want a relationship with the company

It may not cost less to serve loyal customers.