SESSION II

Marketing Management

Strategies for building Customer Value, Loyalty, Satisfaction and Relationships

The task of any business is to deliver customer value at a profit.

a. Customer Value
b. Satisfaction
c. Loyalty

a) Customer Value:

- Customers tend to be value-maximizers.

- Customers estimate which offer will deliver the most perceived value and act on it.

Buyers will buy from the firm that they perceive to offer the highest customer-delivered value.

Customer perceived value (CPV) is the difference between the prospective customers
evaluation of all the benefits and all the costs of an offering and the perceived alternatives.

Customer perceived value is based on the difference between what the customer gets and
what he or she gives for different possible choices.
From the customers perspective-
-Value can be understood as what he or she is willing to pay & hence refers to perceived value in
the offer by the customer.

From the firms perspective-

-It is the value of the customer (i.e. customer lifetime value) and from a strategy perspective it
refers to the process firms use to create & deliver value to the customer.
Customer perceived value (CPV) is the difference between the prospective customers
evaluation of all the benefits and all the costs of an offering and the perceived alternatives.

Total customer value is the perceived monetary value of

the bundle of economic, functional, and psychological benefits customers expect from agiven
market offering because of the products, services, personnel, and image involved.

Total customer cost is the perceived bundle of costs that customers expect to incur in
evaluating, obtaining, using, and disposing of the given market offering, including monetary,
time, energy, and psychic costs.
Implications:

1. The marketer must assess the total customer benefit and total customer cost associated with
each competitor's offer to know how his or her offer rates in the buyer's mind.

2. The marketer who is at a customer-perceived-value disadvantage can try to increase total

customer benefit or decrease total customer cost.
Steps in a Customer Value Analysis:

-Identify major attributes and benefits that customers value.

-Assess the qualitative importance of different attributes and benefits

-Assess the companys and competitors performances on the different customer values against
rated importance

-Examine ratings of specific segments

-Monitor customer values over time
Value Delivery Process:

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.

Whether the promise is kept depends on the companys ability to manage its value-delivery
system.

The value-delivery system includes all the experiences the customer will have on the way to
obtaining and using the offering.

-Traditional marketing consists of creating a product and then finding a market to sell it.

- Value Creation marketing consists of identifying the market, and providing value.

The value creation and delivery process (marketing) involves choosing (or identifying),
providing (or delivering), and communicating superior value to the consumer.
-The Value Creation and Delivery sequence comprises three phases:

a) Choosing the Value:

-Marketers segment the market, select the appropriate market target , and develop the
offerings value positioning for the chosen market target(s).
-STP: Essence of strategic marketing.

b) Providing the Value:

-Through specific product features, service development, pricing, sourcing and making the
offering, and distributing and serving it.

c) Communicating the value:

-Through the salesforce, advertising and other communication tools to announce and promote
the product.
Nirmalya Kumar (London Business School) has proposed the 3 Vs approach:

i) Define the value segment or customers (and their needs)

ii) Define the value proposition

iii) Define the value network to deliver promised service.

Frederick Webster (Dartmouth College) views marketing in terms of:

i) value defining processes, like market research.

ii) value-developing processes including new-product development, sourcing strategy, and

vendor selection.

iii) value delivering processes such as advertising and managing distribution.

Michael Porters (Harvard), Value Chain identifies nine strategically relevant activities that
create value and costs (five primary and four support activities).

Primary activities:
- Inbound logistics (material procurement).
- Operations (turn into final product).
- Outbound logistics (shipping and warehousing).
- Marketing (marketing and sales).
- Servicing (service after the sale).

Support activities:
- Procurement.
- Technology development.
- Human resource management.
- Firm infrastructure.

The firms task is to examine its costs and performance in each value creating activity and look
for ways to improve.
Benchmarking against a) competitor, and b) best of class practices.
The value chain is a tool for identifying was to create more customer value because every firm is
a synthesis of primary and support activities performed to design, produce, market, deliver, and
support its product.
A Holistic Marketing Orientation and Customer Value:

-Holistic marketing proposing integrating the value exploration, value creation and value
delivery activities with the purpose of building long term mutually satisfying relationships and
co-prosperity among key stakeholders.

Holistic marketing addresses three key management questions:

1. Value exploration
how can a company identify new value opportunities.

2. Value creation
how can a company efficiently create more promising new value offerings.
3. Value delivery
how can a company use its capabilities and I nfrastructure to deliver the new value offerings
more efficiently.

Developing strategy requires the understanding of the relationships and interactions among
these three spaces.

b) Customer Loyalty:
-Consumers have varying degrees of loyalty to specific brands, stores, and companies.

-Oliver defines loyalty 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.
The key to generating high customer loyalty is to deliver high customer value.

Customer Value & Loyalty:

-Repeat business gets generated only when customers believe their suppliers and perceive them
as creating more value.
-Loyalty gets created only when customers perceive fairness, equity and transparency in his/her
relationship with the seller.
How do companies create loyalty?

- Mapping of customer experiences at all the touch points.

-Collecting information on specially dissatisfied customers and finding out the points they draw
value from within the company.

-Develop information into product design and specifications.

-Retention of business is important. The loyalty should be rewarded.

-And this reward should be directly linked to the strength of customers loyalty.

-Treat each customer as Guest at home.

-Focus on service

Key Marketing Activities that Companies use to build Customer Loyalty:

(i) Interacting with customers:

listen to customers and pay attention to them.

(ii) Develop Loyalty Programs:

(a) Frequency programs (FPs) designed to reward customers who buy frequently and in
substantial amounts.
(b) Club membership programs open to anyone who purchases a product or service or to
those who are willing to pay a small fee.

(iii) Personalized Marketing:

-form individualizing and personalizing relationships: use of email. Call centers, databases and
database software to foster continuous contact with customers.

(iv) Creating Institutional Ties:

B2B

c) Customer Satisfaction:
Whether the buyer is satisfied after the purchase depends on the offers performance in
relation to the buyers expectations.

Satisfaction is a persons feeling of pleasure or disappointment resulting from comparing a

products perceived performance (or outcome) in relation to his or her expectations.

A buyers satisfaction is a function of the products perceived performance and the buyers
expectations.
-If the performance falls short of expectations, the customer is dissatisfied.
-If performance matches expectations, the customer is satisfied; if exceeds expectations, the
customer is highly satisfied or delighted.
-Customer assessments of product performance depend on many factors, especially the type of
loyalty relationship the customer has with the brand."

We can say that a seller has delivered quality whenever the sellers product or service meets or
exceeds the customers expectations.

Customer Expectations How do buyers form their expectations?

- From past buying experiences.
- Friends and associates advice.
- Marketers and competitors information and promises.

Measuring Satisfaction:
- Periodic surveys can track customer satisfaction directly.

- Companies can monitor the customer loss rate and contact customers who have stopped
buying and learn why this happened.

- Companies can hire mystery shoppers to pose a potential buyers and report on strong and
weak points experienced in buying the companys and competitors products.

- For customer satisfaction surveys, it is important that companies ask the right questions.
Would you recommend this product or service to a friend?
d) Customer Lifetime Value:

Maximizing Customer Lifetime Value:

-Ultimately, marketing is the art of attracting and keeping profitable customers.

-Yet every firm loses money on some of its customers.

-The well-known 20-80 rule says that the top 20% of the customers often generates 80% or
more of the firm's profits.

-The largest customers don't always yield the most profit, because these customers can
demand considerable service and receive the deepest discounts.

-The smallest customers pay full price and receive minimal service, but transaction costs
reduce their profitability.

-The midsize customers who receive good service and pay nearly full price are often the
most profitable.

Customer Profitability:

-What makes a customer profitable?

-A profitable customer is a person, household, company that over time yields a revenue
stream that exceeds by an acceptable amount the company's cost stream for attracting,
selling, and servicing that customer.

-The emphasis is on the lifetime stream of revenue and cost, not on one transaction
profitability.

-Marketers can assess customer profitability individually, by market segment, or by channel.

The Figure shows a useful type of profitability analysis.

-Customers are arrayed along the columns and products are arrayed along the rows.

-Each cell contains a symbol representing the profitability of selling that product to that
customer.

Customer 1 is very profitable, buying two profitable products.

Customer 2 represents mixed profitability, buying one profitable and one unprofitable
product.
Customer 3 is a losing customer, buying one profitable and two unprofitable products.
What can the company do about customers 2 and 3?
-It can either (1) raise the price of its less profitable products or eliminate them; or
(2) try to sell customers 2 and 3 its profitable products.

In fact, the firm should encourage unprofitable customers to switch to competitors.

Customer
profitability analysis (CPA) is best conducted with an accounting technique called Activity-
Based Costing (ABC).

-The company estimates all revenue coming from the customer, less all costs (including
production, distribution, and all company resources that go into serving that customer).

-This helps classify customers into different profit tiers.

-The Table shows how a firm can classify its customers in

terms of which are valuable and vulnerable.

-Each of the four segments suggests different marketing and competitive activities.
 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.

-The company must subtract from its expected revenues the expected costs of attracting,
selling, and servicing that customer's account, applying the appropriate discount rate (say,
between 10% and 20%, depending on cost of capital and risk attitudes).

e) Cultivating Customer Relationships:

-Maximizing customer value means cultivating long-term customer relationships.

Companies are moving to more precision marketing designed to build strong customer
relationships.

Customer Relationship Management (CRM) 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.

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.

-Establishing long-term, mutually satisfying buyer-seller relationships allowing for

cooperation and mutual dependency.
-Customer relationship management enables companies to provide excellent real-time
customer service through the effective use of individual account information.

-Based on what they know about each valued customer, companies can customize market
offerings, services, programs, messages, and media.

-CRM is important because it is a major driver of company profitability is the aggregate

value of the company's customer base.
Attracting and Retaining Customers:
-More companies are recognizing the benefits of satisfying and retaining current customers.

-Acquiring new customers can cost five times more than the cost of satisfying and retaining
current customers.

-On average, companies lose 10% of their customers each year.

-Yet by reducing the customer defection rate by 5%, companies can increase profits by 25%
to 85%, depending on the industry.
 -Also, the customer profit rate tends to increase over the life of the retained customer, due
to increased purchases, referrals, price premiums, and reduced servicing costs.

The Figure shows the main steps in attracting and retaining customers.

-The starting point is everyone who might conceivably buy the product or service
(potentials).

-From these the company determines good prospects, people or organizations with the
motivation, ability and opportunity to buy.

-The firm uses marketing to convert prospects into first-time customers, then into repeat
customers, and then into clients, whom the company treats as special.

-The next challenge is to turn clients into members by starting a program that offers benefits
to customers who join and then into advocates who recommend the company and its
offerings to others.

-The ultimate challenge is to turn advocates into partners.

f) Customer Databases and Database Marketing:

-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.

-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.
Data Warehouses and Datamining

-Savvy companies are capturing information every time a customer comes into contact with
any of its departments.

-These data are collected by the companys contact center and organized into a data
warehouse where marketers can capture, query and analyze it to draw references about an
individual customers needs and responses.

A data warehouse contains all (including historical) relevant customer and prospect
information, marketing mix information, macro environmental data for respective
timeframes, value chain member information, and competitor information.
-Through data mining, marketing statisticians can extract useful information about
individuals, trends, and segments from the mass of data.

-Datamining is the process of analyzing data.

Organizations use databases to:

a) Identify the best prospect.

b) Match a specific offer with a specific customer to up-sell & cross-sell to the customer.

c) Deepen customer loyalty by using personalization techniques.

d) Reactivate customers through reminders or timely promotions.

e) Avoid mistakes by controlling customer communication.