relationship marketing
DESCRIPTION
Discussion on key aspects of relationship marketing. Delivered by Harryadin Mahardika at Universitas IndonesiaTRANSCRIPT
Relationship Marketing
Harryadin Mahardika, PhD
Harryadin Mahardika Pop Economist FEUI & laporsuap.com Research objective:
– “to liberate and empower consumer...” Current research:
– Consumer empowerment– Consumer intervention/engineering– Mobile advertising
Contact:– [email protected] / [email protected] – @HarrySastro
2
Relationship marketing?
Relationship marketing?
Relationship marketing?
How do we create customers?– Identifying customer needs– Designing goods and services that meet those needs– Communicate Information about those goods and
services to prospective buyers– Making the goods or services available at times and
places that meet customers’ needs– Pricing goods and services to reflect costs,
competition, and customers’ ability to buy– Providing for the necessary service and follow-up
How do we create VALUE?
Identify the needs in the marketplace
Find out which needs the organization can profitably serve
Design goods and services that meet those needs
Developing a marketing mix that will convert potential customers into actual customers
Providing for the necessary service and follow-up after the service
Relationship Marketing
=
follow up, follow up, follow up
“4 Eras” of Marketing
From transaction-based marketing to relationship marketing…
Transaction–based marketing (Simple exchanges)
Relationship marketing
– Lifetime value of a customer– Converting new customers to advocates
From transaction-based marketing to relationship marketing…
Transaction vs. Relationship Marketing
Three Levels of Relationship Marketing
Characteristic Level 1 Level 2 Level 3
Primary bond Financial Social Structural
Degree of customization
Low Medium Medium to high
Potential for sustained competitive advantage
Low Moderate High
Building long term relationship is important…. But,
We need to determine which consumers we want this relationship with!!
– Target Market– “Costly” Consumers:
• Difficult to attain• Difficult to retain
Customer Relationship Management (CRM)
The combination of strategies and tools that drive relationship programs, re-orientating the entire organization to a concentrated focus on satisfying customers
Strategies for Building Customer Relationships
Affinity Programs
– a marketing effort sponsored by an organization that solicits responses from individuals who share common interests and activities
– Example: Credit Card ILUNI FEUI
Strategies for Building Customer Relationships
Frequency Marketing
– frequent-buyer or user marketing programs that reward customers with cash, rebates, merchandise, or other premiums
– Examples: Garuda Frequent Flyer, Matahari Club Card
Strategies for Building Customer Relationships
Database Marketing
– software that analyzes marketing information, then identifies and targets messages toward specific groups of potential customers.
– Examples: Telco operator (Telkomsel, Satelindo, etc)
Strategies for Building B2B Relationships Strategic alliance
– a partnership formed to create a competitive advantage
– These more formal long-term partnership arrangements improved each partner supply-chain relationships and enhance flexibility
– Example: SkyTeam (Garuda with other airlines e.g. Etihad)
Strategies for Building B2B Relationships
Electronic Data Interchange (EDI)
– involves computer-to-computer exchanges of invoices, orders, and other business documents.
Vendor Managed Inventory (VMI)
– is an inventory-management system in which the seller–based on existing agreement with a buyer– determines how much of a product is needed.
Strategies for Building B2B Relationships
Database Marketing– software that analyzes marketing information, then identifies and
targets messages toward specific groups of potential customers
Evaluating Relationships Lifetime Value (LTV)
– Refers to the net present value of the potential revenue stream for any particular customer over a # of years
– Starts with current purchase activity then extrapolates to include potential additions from cross-selling, upgrades, total ownership, etc.
The Value of Customer Retention On average, it is more costly acquire a new customer rather
than retain an existing one.
Customer retention ensure higher profit margin.
Voluntary spending to maintain relationship.
Relationship Lifecycle
Customer relationship lifecycle
Baines, et al, 2011, p. 568
LEVEL OF RELATIONSHIP
Five Different Levels of Relationships (I)
Basic. The company salesperson sells the product, but does not follow up in any way.
Reactive. The salesperson sells the product and encourages the customer to call whenever he or she has any questions or problems.
Accountable. The salesperson calls to the customer a short time after the sale to check whether the product is meeting customer expectation.
Five Different Levels of Relationships (II)
Proactive. The salesperson or other in the company phone the customer from time to time with suggestions about improved product use or helpful new product.
Partnership. The company works continuously with the customer and with other customers to discover ways to deliver better value
Case for discussion Perusahaan Listrik Negara (PLN) CEO acknowledges the importance
of relationship marketing to improve the quality of their services.
a. Does it necessary for PLN to adopt relationship marketing?b. If yes, until which level of relationship?
THE RELATIONSHIP MARKETING SOLUTION
The Marketing Challenge: The Relationship Marketing Solution
Time Horizon. Market Segmentation. Product or Service Design. Market Research. Marketing Communications. Customer Service. Pricing.
Time Horizon
The time horizon available for marketers to achieve results in many companies has shrunk: investors and financial managers have dramatically reduce the time frame available for building revenue.
Marketing which remain focused on transaction rather than relationship is time consuming.
The marketer will have two roles: To identify the customer base with which the firm is to
maintain and deepen relationship; To champion the changes needed within the company for
this to happen.
Market Segmentation
Marketers need to accept the fact that market segmentation no longer exist the way they were taught: there are no more market segments, just individual customers.
In B2B marketing this approach is well known. In B2C marketers have focused more on segment-based marketing principles.
Increasing competition push companies to differentiate products or services, but this strategy become more and more expensive.
Fragmentation
Product or Service Design
Customers are not equal – they want different things in different amount at different time - and the profit derived from each will vary.
The key challenge for the marketer is to identify the core strategic value that will be derived to the customer and the elements that customer can change.
Value Proposition Elements
PRODUCT
FUNCTION
PACKAGING DESIGN
PRICE FEATURES
BEFORESALESSERVICE
DURINGSALESSERVICE
GUARANTEES
WARRANTIES
ADD ONS
FINANCE
ADVICE
AVAILABILITY
DELIVERY
AFTERSALESSERVICE
VALUEPERCEPTIONS
QUALITYPERCEPTIONS
ORGANISATION
OTHERUSERRECOMMEN-DATION
REPUTATION
CORPORATEIMAGE
INTANGIBLES
SERVICES
Long Tail
Market Research
Market research can take more time than the marketer has available. Current research findings may actually be dealing with yesterday's issues.
Now marketers need to devise knowledge systems to learn more about individual customer so that firms can create the value each customer wants.
Marketing Communications
Previously, marketers relied on broadcasting their message (one way communication). No longer.
Today the marketer has opportunity to communicate with individual customer according to the media each prefer.
The challenge for the marketer is to apply technology to facilitate this relevant, timely, personalized and customized communication.
Narrowcasting
Customer Service
The old adage is that the customer is always right: make customers happy when they complain, engage then positively, offer restitution.
When customer complain, it is a signal of a broken process somewhere in the business.
Pricing
Customers want to participate in decisions regarding the value they receive and the price they pay.
Give them a standard offering and they will expect to pay a single price.
Offer them options in the product and they will want some more than others, and will pay more for these.
Group Exercise Think about pricing strategy that can be used to build relationship with
consumer, in each of the following product category:
– Automotives– Clothing retailer– Online store– Restaurant– Airlines
LOYALTY AND CUSTOMER VALUE
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Behavioral brand loyalty Measured by proportion of purchase
Undivided loyalty AAAAAAAAAA
Occasional switcher AAABAAACAA
Switched loyalty AAAAAABBBB
Divided loyalty AAABBBAABB
Indifference ABCDADCDBD
Loyalty Ladders
Partners
Clients
Customers
Prospects
Members
Advocates
Partners
Clients
Repeat Cust
Prospects
Members
Advocates
1st Time Cust
Suspects
Trad
itio
nal
Mar
keti
ng
Rel
atio
nsh
ipM
arke
tin
g
Payne et al 1995 Kotler 1997 Baines, et al 2011
Types of Loyalty
Some of the more general types of loyaltySource: Baines, et al (2011, p. 573)
Acquired Customer Base
YearValue US$ millions
AcquirerThousands of
CustomersPer Customer
Value US$
Powerco 1998 9 NGC 16 533
WEL Energy 1999 37 NGC 68 547
ETSA 2000 96 AGL 734 131
TransAlta NZ 2000 259 NGC 513 505
Powercor 2001 174 Origin 582 299
Enron Direct 2001 22 Centrica 160 140
New Power 2002 8 Centrica 215 38
Citipower 2002 75 Origin 272 276
Pulse 2002 451 AGL 1400 322
Contact Energy 2004 322 Origin Energy 608 530
Atlantic Energy 2004 19Scottish & Southern
300 63
Centrica 2004 18981Market
capitalisation45000 422
Origin Energy 2004 999Market
capitalisation2000 499
Contact Energy 2004 332Market
capitalisation608 546
How Much Are Customers Worth?
Utility Customer Lifetime Value
Customer Lifetime Value
Customer Loyalty
Gradient represents customer profitability
Length of Relationship (Months)
Dimensions of Relationship Profitability
$RelationshipLongevity
RelationshipRevenue
RelationshipCosts
relationshipstrength
new pricecarriers
relationshipstructure
Source: Storbacka & Lehtinen 2001- dimensions for relationshp profitabilitySource: Storbacka & Lehtinen 2001- dimensions for relationshp profitability
CUSTOMER VALUATION
Customers as Assets
“Intangible assets are hard to see and even harder to fix a precise value for. But a widening
consensus is growing that the importance of (intangible) assets – from brand names and
customer lists … – means that investors need to know more about them.”
- New York Times -
Valuing High Growth Businesses Traditional finance approach
– P/E ratio
Marketing approach
– Customer Lifetime Value (CLV)
Relationship Lifecycle
Customer relationship lifecycle
Baines, et al, 2011, p. 568
Customer Lifetime ValueCustomer Equity – total of discounted lifetime values of all the firm’s
customers
Value – customers’ assessment of utility
Brand – customers’ assessment of image
Relationship – customers’ willingness to stay with brand
How much are you, as a customer,worth over your university lifetime? Rp8,000,000 at Kantin FE over your years in univ, not Rp10,000 per visit
Rp1,000,000 at the 21 Cineplex Margocity during your years in univ, not Rp25,000 per visit
Rp5,600,000 on KRL tickets during your years in univ, not Rp3,500 per trip
Rp4,000,000 on Ojek over your years in univ, not Rp5,000 per trip
Customer Lifetime Value
m : Contribution margin
r : Retention rate
• The percentage of total customers minus customers who end their relationship with a company in a given period
i : Discount rate,
• The cost of capital used to discount future revenue from a customer.
• The current interest rate is sometimes used as a simple (but incorrect) proxy for discount rate.
ri
rmCLV1
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Customer Lifetime Value
Lifetime value of a customer
Lifetime value with constant margins
0 )1(tt
tt
i
rmLV
ri
rmLV1
RetentionRate (r ) 10% 12% 14% 16%
60% 1.20 1.15 1.11 1.0770% 1.75 1.67 1.59 1.5280% 2.67 2.50 2.35 2.2290% 4.50 4.09 3.75 3.46
Discount Rate (i)
Margin Multiple
ri
r
1
Infinite
ri
rmCLV1
Finite
• mN is the gross profit for year N• i is the discount rate• r is the retention rate
Exercise 1 Calculate customers lifetime value for UI Ojek Association:
– Ojek’s margin per-trip: Rp4,000– Trip: 100 trips per-student per-year– Retention rate 80% – Discount rate 10%– Period 4 years (S1)
CLV for 4 years
Year 1 Year 2 Year 3 Year 4
CLV 400,000 290,900 211,600 153,900
Total value = Rp1,056,400
Exercise 2 Post-paid cellular mobile phone subscription:
– Monthly payment: Rp250,000– COGS: Rp150,000– Retention rate 50%– Discount rate 10%
Calculate the CLV
Finite
CLV = 100,000 x (0.5/(1-0.4))
= 100,000 x 0.83333
= Rp 83,334
ri
rmCLV1
Exercise 3Sehat Sentosa Gym
Sehat Sentosa Gym requested your consulting services in order to make an investment decision that could boost their revenue.
Sehat Sentosa Gym
Calculate the gym’s CLV for the next 5 years.
Here is some information about the Gym’s customer value:
– Annual membership fee is $300– The average member spends $100 a year at the gym
—café, nutrition, drinks, snacks, etc - 40% of which is COGS
– 80% rejoins in the following year– Discount rate is 10%
CLV for 5 years
Year 1 Year 2 Year 3 Year 4 Year 5
Revenue
COGS
Gross Profit
Probability of being active
Actual Profit
Present Value of Profit
One year profit per customer is $360
One Year
Revenue $400
COGS $40
Gross Profit
$360
How many years should we consider?
The norm is 5 years since any time longer, the assumptions could change
We can calculate the value looking into the future
Year 1 Year 2 Year 3 Year 4 Year 5
Revenue $400 $400 $400 $400 $400
COGS $40 $40 $40 $40 $40
Gross Profit $360 $360 $360 $360 $360
Two problems• Profits earned in 5 years are less valuable than profits today• Customers may not be around in 5 years
Total customer value: $360 * 5= $1800
Only 80% of customers return next year (retention rate)
Year 1 Year 2 Year 3 Year 4 Year 5
Revenue $400 $400 $400 $400 $400
COGS $40 $40 $40 $40 $40
Gross Profit $360 $360 $360 $360 $360
Probability of being active
100% 80% 64% 51% 41%
Only 80% of customers return next year
Year 1 Year 2 Year 3 Year 4 Year 5
Revenue $400 $400 $400 $400 $400
COGS $40 $40 $40 $40 $40
Gross Profit $360 $360 $360 $360 $360
Probability of being active
100% 80% 64% 51% 41%
Actual Profit
$360 $288 $230 $184 $147
The club discounts future cash flow at 10% per year
Year 1 Year 2 Year 3 Year 4 Year 5
Revenue $400 $400 $400 $400 $400
COGS $40 $40 $40 $40 $40
Gross Profit $360 $360 $360 $360 $360
Probability of being active 100% 80% 64% 51% 41%
Actual Profit $360 $288 $230 $184 $147
Present Value of Profit $360 $262 $190 $138 $101
Total value = $1051
Managerial question
Sehat Sentosa Gym currently faces two options to boost revenue
– Option 1 is to invest $500,000 on membership reward to
increase retention rate by 10% (from 80% to 88%)
– Option 2 is to invest the same amount in the facility and
increase annual fee by 10%
Which option should the gym choose?
Option 1 – higher retention rate
Year 1 Year 2 Year 3 Year 4 Year 5
Revenue $400 $400 $400 $400 $400
COGS $40 $40 $40 $40 $40
Gross Profit $360 $360 $360 $360 $360
Probability of being active 100% 88% 77% 68% 60%
Actual Profit $360 $317 $279 $245 $216
Present Value of Profit $360 $288 $230 $184 $147
Total value = $1210 Increase = 15 %
Instead of 80%Consider 88%