customer satisfaction profit chain
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Customer Satisfaction Profit Chain. Prof. Markus Christen INSEAD Singapore May/June 2007. Customer Satisfaction Is Decreasing. American Customer Satisfaction Index (ASCI) Based on annual poll of more than 50.000 consumes, measuring overall satisfaction with products and services. - PowerPoint PPT PresentationTRANSCRIPT
Customer Satisfaction Profit Chain
Prof. Markus Christen
INSEAD SingaporeMay/June 2007
Market Driving Strategies - May/June 2007© Prof. Markus ChristenSession 8 - 2
Scheduled Airlines
60
65
70
75
80
85
90
199419961998200020022004
-8.4%
Household Appliances
60
65
70
75
80
85
90
1994 1996 1998 2000 2002
-3.5%
Commercial Banks
60
65
70
75
80
85
90
1994 1996 1998 2000 2002
-2.7%
Parcel Delivery
60
65
70
75
80
85
90
1994 1996 1998 2000 2002
-2.5%
Personal Computers
60
65
70
75
80
85
90
1994 1996 1998 2000 2002
-9.0%
Publishing/ Newspapers
60
65
70
75
80
85
90
1994 1996 1998 2000 2002
-12.5%
Source: http://www.theacsi.org, University of Michigan
American Customer Satisfaction Index (ASCI)
Based on annual poll of more than 50.000 consumes,measuring overall satisfaction with products and services.
Customer Satisfaction Is Decreasing
Market Driving Strategies - May/June 2007© Prof. Markus ChristenSession 8 - 3
CRM InvestmentsApproximate Worldwide CRM Investments
(applications, hardware, and services)
13.5
20.0
23.725.9
29.7
34.6
40.0
47.5
0
10
20
30
40
50
1999 2000 2001 2002 2003 2004 2005 2006
Spendings in $billion
0%
10%
20%
30%
40%
50%
60%
Year-to-Year Growth
SpendingsYear-to-Year Growth %
Mean estimates as of 2002 and 2003 across various providersCRM outsourcing services not included Sources: IDC, Aberdeen, Gartner, Forrester
Approximate Worldwide CRM Investments(applications, hardware and services)
Market Driving Strategies - May/June 2007© Prof. Markus ChristenSession 8 - 4
Starbucks: Delivering Customer Service
Why successful• Tight alignment between target market (sophisticated, affluent coffee lover,
coffee drinking life style) and highly differentiated value proposition– Drinking coffee as self-indulgent ritual: Best coffee– Tendency to linger, in search of a sanctuary: Physical environment– Friendly people, social interactions: Service Philosophy
Impact of growth strategy• Retail expansion: Ubiquity of stores makes Starbucks less “special”• Customer acquisition: New customers with different service needs
– Routine– Pass through– Convenience
• Product innovation: Increased production complexity leads to longer lines
Market Driving Strategies - May/June 2007© Prof. Markus ChristenSession 8 - 5
Starbucks: Delivering Customer Service
Consequence• Conflicts between customer segments affects service quality
– Longer lines, more mistakes, less time to interact and socialize– Grumpy customers, grumpy employees
• Difficult to keep customer satisfaction very high with a larger and more diverse customer base
What are the appropriate metrics to manage different customers or customer segments? Customer acquisition and retention?
Market Driving Strategies - May/June 2007© Prof. Markus ChristenSession 8 - 6
Product Performance
Service Performance
EmployeePerformance
CustomerSatisfaction
Retention / Loyalty
Revenue /Profit
Satisfaction-Profit-Chain (SPC)
Market Driving Strategies - May/June 2007© Prof. Markus ChristenSession 8 - 7
Customer Satisfaction
t
Repurchase Intentions
t
Repurchase Intentions t 0.42 -
Number of Orders t -0.08 0.12
Number of Orders t+1 -0.07 0.11
Purchase Volume (ton) t 0.04 0.06
Purchase Volume (ton) t+1 0.05 0.06
Customer Profitability t -0.05 0.10
Customer Profitability t+1 -0.05 0.09
Correlations for 418 customers of European paper wholesaler
Source: Söderlund, Vilgon & Gunnarsson 2001, European Journal of Marketing
Satisfaction and Customer Behavior
Market Driving Strategies - May/June 2007© Prof. Markus ChristenSession 8 - 8
Zone of indifference
Source: Jones & Sasser, HBR, Nov/Dec. 1995
Customer Satisfaction and Loyalty
0
20
40
60
80
100
1 - Very dissatisfied2 - Dissatisfied
3 - Neutral 4 - Satisfied5 - Very satisfied
Customer Satisfaction
Repurchase Intent (%)
Market Driving Strategies - May/June 2007© Prof. Markus ChristenSession 8 - 9
Source: Ittner and Larcker, Journal of Accounting Research
Estimated impact of a one-unit change in customer satisfaction (ACSI) on the market value of equity
(millions of dollars)
Satisfaction and Performance
-800-600
-400-200
0200
400600
Non-Durable
Mfgr
DurableMfgr
Utilities Retail FinancialServices
Market Driving Strategies - May/June 2007© Prof. Markus ChristenSession 8 - 10
Product/ServiceImprovements
OptimalLevel
-Cost,-Revenues,-Profits Associated
Cost
AssociatedRevenues
AssociatedProfits
More Satisfaction Is Not Always Better
Market Driving Strategies - May/June 2007© Prof. Markus ChristenSession 8 - 11
Loyalty and Performance
Why are loyal customers more profitable?• They buy more (revenues)• They are less costly to serve (cost)• They pay higher prices• They generate more Word-of-mouth
Source: F. Reichheld & T.A. Teal (1996), The Loyalty Effect.
Base Profits
IncreasedPurchases
ReducedOperating Costs
Referrals
Price Premium
Years
1 2 3 4 5 6
Cost of Acquisition
Market Driving Strategies - May/June 2007© Prof. Markus ChristenSession 8 - 12
Source: Reinartz and Kumar (2002), HBR, July.
True friendsButterflies
BarnaclesStrangers
Loyalty and Performance
Market Driving Strategies - May/June 2007© Prof. Markus ChristenSession 8 - 13
-2000.00
0.00
2000.00
4000.00
6000.00
8000.00
10000.00
12000.00
14000.00
16000.00
18000.00
20000.00
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35
Month
($) Segment Profit
Short life, lowrevenue(Segment 4)
Short life, highrevenue(Segment 3)
Do Profits Increase over Time?
Loyalty and Performance
Market Driving Strategies - May/June 2007© Prof. Markus ChristenSession 8 - 14
The Relationship Continuum
Transactional Orientation
(Commodity)
RelationalOrientation
(Partnership)
ProcurementOrientation
(Deliver value added products and services)
Discrete transactions Adversarial relationship
Focus on price Multisourcing to exert power
Global sourcing
Repeat transactions Reduction in suppliers
Integrative negotiations (not only price)
Goal of cost reduction and quality improvement through
coordination More cooperative
relationships with the goal of pie expansion
Both parties focus on generating value for
end-user Buyer focuses on core
competence; strategically outsources remaining
activities Highly collaborative deep,
relationships with select suppliers (typically sole-
source relationships)
Very high competitive pressure
Achieve competitive advantage
Market Driving Strategies - May/June 2007© Prof. Markus ChristenSession 8 - 17
Calculating Current Customer Value
Revenues(A) -direct cost
= Gross margin
(B) -cost-to-serve (marketing, sales, terms and conditions, support, returns, etc.)
= Contribution margin
(C) -fixed cost= Operating margin (EBITDA) All on a per-customer basis!
Does not include intangibles (word-of-mouth, reference effects)
Market Driving Strategies - May/June 2007© Prof. Markus ChristenSession 8 - 18
Key Metric: Customer Value
Tangible value metrics
Current value Revenues Gross margin Cost-to-serve Contribution margin Share-of-wallet
Potential value Size-of-wallet Lifetime value
Non-tangible value metrics
Current value Reference value Referral value Cooperation value (e.g., shared
intelligence)
Potential value Future value
Market Driving Strategies - May/June 2007© Prof. Markus ChristenSession 8 - 19
Customer Value Concentration
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
% Clientes
% Venda
% R$ % R$ TV
A+ / ABCD
Brazilian Grocery Store
Market Driving Strategies - May/June 2007© Prof. Markus ChristenSession 8 - 20
Customer Value Concentration
0
0.2
0.4
0.6
0.8
1
1.2
0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100% of doctors
% of contribution
US Pharmaceutical Firm
Market Driving Strategies - May/June 2007© Prof. Markus ChristenSession 8 - 21
Customer Value Analysis
Objective: The result of the analysis should allow to evaluate the following:• Value level
– Average value over all customers• Value disparity
– Difference Highest – Lowest value– Ratio of 90th percentile /10th percentile (if > 15 then high disparity)
• Value concentration (heterogeneity)– 80/20 rule (80% of contribution come from x% of customers)– Gini Coefficient (> 80% = high concentration)
All analyses to be done • Across all customers • On segment level (geography, business line, etc)
Market Driving Strategies - May/June 2007© Prof. Markus ChristenSession 8 - 24
Personnel8.99
Models8.50
Information8.48
Delivery8.68 Car
Satisfaction9.26
StatedSales
Loyalty8.76 Insurance
Financing
VolvoCard
WorkshopLoyalty
Stated SalesSatisfaction
8.73
Profit NewCar
0.314
0.087
0.035
0.094
0.492
0.410
0.168
0.023
-0.055
0.072
0.115
Source: Johnson and GustafssonJossey-Bass, 2000
Putting It All TogetherSales Satisfaction Model for
Loyal Volvo Customers
Market Driving Strategies - May/June 2007© Prof. Markus ChristenSession 8 - 25
Customer Focus
Market Driving Strategies - May/June 2007© Prof. Markus ChristenSession 8 - 26
Summary
S-P chain is a powerful concept for guiding customer-level actions• Its all about optimal satisfaction and optimal retention levels• Need for careful application to own environment
– Necessitates “correct” measures and operationalizations– Forces to explore causal linkages– Sheds light on correct metrics
Market Driving Strategies - May/June 2007© Prof. Markus ChristenSession 8 - 27
Summary
Looking at value to and from customers • Provides focus: target only potentially profitable customers• Think about what drives customer value (to the firm) • Enables resource allocation that is fair from a customer perspective and
makes business sense economically
CRM is the strategic process of selecting the customers a firm can most profitably serve and shaping the interactions between a company and these customers.
Ultimate goal: Improve marketing decision-making and resource allocation
Market Driving Strategies - May/June 2007© Prof. Markus ChristenSession 8 - 28
Rule 10: Customer Value
Not all happy customersare loyal customers andnot all loyal customers
are worth keeping:
Measure & managecustomer profitability