Chapter 5: Creating Long-term Loyalty Relationships ● Building Customer Value, Satisfaction, and Loyalty ○ Creating loyal customers is at the heart of every business. As marketing experts Don Peppers and Martha Rogers say: ■ The only value your company will ever create is the value that comes from customers— the ones you If you want to learn more check out logistics study guide
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have now and the ones you will have in the future.Businesses succeed by getting, keeping, and growing customers. Customers are the only reason you build factories, hire employees, schedule meetings, lay fiber-optic lines, or engage in any business activity. Without customers, you don’t have a business. ○ Managers who believe the customer is the company’s only true “profit center”consider the traditional organization chart in Figure 5.1(a)—a pyramid with the president at the top, management in the middle,and frontline people and customers at the bottom—obsolete. ○ Successful marketing companies invert the chart as in Figure 5.1(b). At the top are customers; next in importance are frontline people who meet,serve,and satisfy customers; under them are the middle managers, whose job is to support the frontline people so they can serve customers well; and at the base is top management, whose job is to hire and support good middle managers. We have added customers along the sides of Figure 5.1(b) to indicate that managers at every level must be personally involved in knowing,meeting,and serving customers. Some companies have been founded with the customer-on-top business model, and customer advocacy has been their strategy—and competitive advantage—all along. With the rise of digital technologies such as the Internet, increasingly informed consumers today expect companies to do more than connect with them, more than satisfy them,and even more than delight them. They expect companies to listen and respond to them. ○ When Office Depot added customer reviews to its Web site in 2008, revenue and sales conversion increased significantly. The company also incorporated review-related terms to its paid search advertising campaign. As a result of these efforts, Web site revenue and the number of new buyers visiting the site both increased by more than 150 percent. ○ Customer Perceived Value ■ Consumers are better educated and informed than ever, and they have the tools to verify companies’ claims and seek out superior alternatives. ■ How then do customers ultimately make choices? They tend to be value maximizers, within the bounds of search costs and limited knowledge,mobility,and income.Customers estimate which offer they believe—for whatever reason—will deliver the most perceived value and act on it ( Figure 5.2). Whether the offer lives up to expectation affects customer satisfaction and the probability that the customer will purchase the product again. In one 2008 survey asking U.S. consumers “Does [Brand X] give good value for what you pay?” the highest scoring brands included Craftsman tools, Discovery Channel, History Channel, Google, and Rubbermaid. ■ 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. Total customer benefit is the perceived monetary value of the bundle of economic, functional, and psychological benefits customers expect from a given market offering because of the product, service, people, and image. Total customer cost is the perceived bundle of costs customers expect to incur in evaluating,obtaining,using, and disposing of the given market offering, including monetary, time, energy, and psychological costs. ■ Customer-perceived value is thus based on the difference between benefits the customer gets and costs he or she assumes for different choices. The marketer can increase the value of the customer offering by raising economic, functional, or emotional benefits and/or reducing one or more costs. The customer choosing between two value offerings,V1 and V2, will favor V1 if the ratio V1:V2is larger than one, favor V2 if the ratio is smaller than one, and be indifferent if the ratio equals one. ■ Applying Value Concepts ● Suppose the buyer for a large construction company wants to buy a tractor for residential construction from either Caterpillar or Komatsu. He wants the tractor to deliver certain levels of reliability, durability, performance, and resale value. The competing salespeople carefully describe their respective offers. The buyer decides Caterpillar has greater product benefits based on his perceptions of those attributes. He also perceives differences in the accompanying services—delivery, training, and maintenance—and decides Caterpillar provides better service as well as more knowledgeable and responsive staff.Finally,he places higher value on Caterpillar’s corporate image and reputation. He adds up all the economic, functional, and psychological benefits from these four sources—product,services,personnel,and image—and perceives Caterpillar as delivering greater customer benefits. ● Does he buy the Caterpillar tractor? Not necessarily. He also examines his total cost of transacting with Caterpillar versus Komatsu, which consists of more than money.As Adam Smith observed over two centuries ago in The Wealth of Nations, “The real price of anything is the toil and trouble of acquiring it.” Total customer cost also includes the buyer’s time, energy, and psychological costs expended in product acquisition, usage, maintenance, ownership, and disposal. The buyer evaluates these elements together with the monetary cost to form a total customer cost. Then he considers whether Caterpillar’s total customer cost is too high compared to total customer benefits. If it is, he might choose Komatsu. The buyer will choose whichever source delivers the highest perceived value. ● Now let’s use this decision-making theory to help Caterpillar succeed in selling to this buyer. Caterpillar can improve its offer in three ways. First, it can increase total customer benefit by improving economic, functional, and psychological benefits of its product, services, people, and/or image.Second,it can reduce the buyer’s nonmonetary costs by reducing the time, energy, and psychological investment. Third, it can reduce its product’s monetary cost to the buyer. ● Suppose Caterpillar concludes the buyer sees its offer as worth $20,000. Further, suppose Caterpillar’s cost of producing the tractor is $14,000. This means Caterpillar’s offer generates $6,000 over its cost,so the firm needs to charge between $14,000 and $20,000.If it charges less than $14,000,it won’t cover its costs; if it charges more,it will price itself out of the market. ● Caterpillar’s price will determine how much value it delivers to the buyer and how much flows to Caterpillar. If it charges $19,000, it is creating $1,000 of customer perceived value and keeping $5,000 for itself. The lower Caterpillar sets its price, the higher the customer perceived value and, therefore,the higher the customer’s incentive to purchase.To win the sale,the firm must offer more customer perceived value than Komatsu does. Caterpillar is well aware of the importance of taking a broad view of customer value. ● Very often, managers conduct a customer value analysis to reveal the company’s strengths and weaknesses relative to those of various competitors.The steps in this analysis are: ○ Identify the major attributes and benefits customers value. Customers are asked what attributes, benefits,and performance levels they look for in choosing aproduct and vendors. Attributes and benefits should be defined broadly to encompass all the inputs to customers’ decisions. ○ Assess the quantitative importance of the different attributes and benefits. Customers are asked to rate the importance of different attributes and benefits. If their ratings diverge too much,the marketer should cluster them into different segments. ○ Assess the company’s and competitors’ performances on the different customer values against their rated importance. Customers describe where they see the company’s and competitors’ performances on each attribute and benefit. ○ Examine how customers in a specific segment rate the company’s performance against a specific major competitor on an individual attribute or benefit basis. If the company’s offer exceeds the competitor’s offer on all important attributes and benefits,the company can charge a higher price (thereby earning higher profits), or it can charge the same price and gain more market share. ○ Monitor customer values over time. The company must periodically redo its studies of customer values and competitors’ standings as the economy, technology, and features change ■ Choice Processes and Implications ● Some marketers might argue the process we have described is too rational. Suppose the customer chooses the Komatsu tractor. How can we explain this choice? Here are three possibilities. ○ The buyer might be under orders to buy at the lowest price. The Caterpillar salesperson’s task is then to convince the buyer’s manager that buying on price alone will result in lower long-term profits and customer value. ○ The buyer will retire before the company realizes the Komatsu tractor is more expensive to operate. The buyer will look good in the short run; he is maximizing personal benefit. The Caterpillar salesperson’s task is to convince other people in the customer company that Caterpillar delivers greater customer value. ○ The buyer enjoys a long-term friendship with the Komatsu salesperson. In this case, Caterpillar’s salesperson needs to show the buyer that the Komatsu tractor will draw complaints from the tractor operators when they discover its high fuel cost and need for frequent repairs ● The point is clear: Buyers operate under various constraints and occasionally make choices that give more weight to their personal benefit than to the company’s benefit. ● Customer-perceived value is a useful framework that applies to many situations and yields rich insights. It suggests that the seller must assess the total customer benefit and total customer cost associated with each competitor’s offer in order to know how his or her offer rates in the buyer’s mind.It also implies that the seller at a disadvantage has two alternatives: increase total customer benefit or decrease total customer cost.The former calls for strengthening or augmenting the economical, functional, and psychological benefits of the offering’s product, services, personnel, and image. The latter calls for reducing the buyer’s costs by reducing the price or cost of ownership and maintenance, simplifying the ordering and delivery process, or absorbing some buyer risk by offering a warranty. ■ Delivering High Customer Value ● 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 effortshaving the potential to cause switching behavior.” Table 5.1displays brands with the greatest degree of customer loyalty according to one 2010 survey. ● 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.For example,Volvo’s core positioning has been “safety,”but the buyer is promised more than just a safe car;other benefits include good performance, design, and safety for the environment. The value proposition is thus a promise about the experience customers can expect from the company’s market offering and their relationship with the supplier. Whether the promise is kept depends on the company’s 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. At the heart of a good value delivery system is a set of core business processes that help deliver distinctive consumer value. ○ Total Customer Satisfaction ■ In general, satisfaction is a person’s feelings of pleasure or disappointment that result from comparing a product’s perceived performance (or outcome) to expectations. If the performance falls short of expectations, the customer is dissatisfied. If it matches expectations, the customer is satisfied. If it 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. Consumers often form more favorable perceptions of a product with a brand they already feel positive about. ■ Although the customer-centered firm seeks to create high customer satisfaction, that is not its ultimate goal. Increasing customer satisfaction by lowering price or increasing services may result in lower profits. The company might be able to increase its profitability by means other than increased satisfaction (for example, by improving manufacturing processes or investing more in R&D). Also, the company has many stakeholders, including employees, dealers, suppliers, and stockholders. Spending more to increase customer satisfaction might divert funds from increasing the satisfaction of other “partners.” Ultimately, the company must try to deliver a high level of customer satisfaction subject to also delivering acceptable levels to other stakeholders, given its total resources. ■ How do buyers form their expectations? Expectations result from past buying experience, friends’ and associates’ advice, and marketers’ and competitors’ information and promises. If marketer raise expectations too high, the buyer is likely to be disappointed. If it sets expectations too low, it won’t attract enough buyers (although it will satisfy those who do buy). Some of today’s most successful companies are raising expectations and delivering performances to match. Korean automaker Kia found success in the United States by launching low-cost, high-quality cars with enough reliability to offer 10-year, 100,000 mile warranties. ○ Monitoring Satisfaction ■ Many companies are systematically measuring how well they treat customers, identifying the factors shaping satisfaction,and changing operations and marketing as a result. ■ Wise firms measure customer satisfaction regularly, because it is one key to customer retention. A highly satisfied customer generally stays loyal longer, buys more as the company introduces new and upgraded products, talks favorably to others about the company and its products, pays less attention to competing brands and is less sensitive to price,offers product or service ideas to the company, and costs less to serve than new customers because transactions can become routine. Greater customer satisfaction has also been linked to higher returns and lower risk in the stock market. ■ The link between customer satisfaction and customer loyalty is not proportional, however. Suppose customer satisfaction is rated on a scale from one to five.At a very low level ofsatisfaction (level one), customers are likely to abandon the company and even bad-mouth it. At levels two to four,customers are fairly satisfied but still find it easy to switch when a better offer comes along. At level five,the customer is very likely to repurchase and even spread good word of mouth about the company. High satisfaction or delight creates an emotional bond with the brand or company, not just a rational preference. Xerox’s senior management found its “completely satisfied” customers were six times more likely to repurchase Xerox products over the following 18 months than even its “very satisfied”customers. ■ The company needs to recognize, however, that customers vary in how they define good performance. Good delivery could mean early delivery, on-time delivery, or order completeness, and two customers can report being “highly satisfied” for different reasons. One may be easily satisfied most of the time and the other might be hard to please but was pleased on this occasion. ■ Measurement Techniques ● Periodic surveys can track customer satisfaction directly and ask additional questions to measure repurchase intention and the respondent’s likelihood or willingness to recommend the company and brand to others. One of the nation’s largest and most diversified new-home builders, Pulte Homes,wins more awards in J.D.Power’s annual survey than any other by constantly measuring how well it’s doing with customers and tracking them over a long period of time.Pulte surveys customers just after they buy their homes and again several years later to make sure they’re still happy. “Marketing Insight: Net Promoter and Customer Satisfaction” describes why some companies believe just one well-designed question is all that is necessary to assess customer satisfaction. ● Companies need to monitor their competitors’ performance too. They can monitor their customer loss rate and contact those who have stopped buying or who have switched to another supplier to find out why. Finally, as described in Chapter 3, companies can hire mystery shoppers to pose as potential buyers and report on strong and weak points experienced in buying the company’s and competitors’ products. Managers themselves can enter company and competitor sales situations where they are unknown and experience firsthand the treatment they receive,or they can phone their own company with questions and complaints to see how employees handle the calls. ■ Influence of Customer Satisfaction ● For customer-centered companies, customer satisfaction is both a goal and a marketing tool. Companies need to be especially concerned with their customer satisfaction level today because the Internet provides a tool for consumers to quickly spread both good and bad word of mouth to the rest of the world. Some customers set up their own Web sites to air grievances and galvanize protest, targeting high-profile brands such as United Airlines, Home Depot, and Mercedes-Benz. ● The University of Michigan’s Claes Fornell has developed the American Customer Satisfaction Index (ACSI) to measure consumers’ perceived satisfaction with different firms, industries, economic sectors,and national economies. Table 5.2 displays some of the 2009 leaders. ● Companies that do achieve high customer satisfaction ratings make sure their target market knows it.Once they achieved number one status in their category on J.D.Power’s customer satisfaction ratings, Hyundai, American Express, Medicine Shoppe (a chain pharmacy), and Alaska Airways have communicated that fact. ■ Customer Complaints ● Some companies think they’re getting a sense of customer satisfaction by tallying complaints, but studies show that while customers are dissatisfied with their purchases about 25 percent of the time, only about 5 percent complain. The other 95 percent eitherfeel complaining is not worth the effort or don’t know how or to whom to complain. They just stop buying. ● Of the customers who register a complaint, 54 percent to 70 percent will do business with the organization again if their complaint is resolved. The figure goes up to a staggering 95 percent if the customer feels the complaint was resolved quickly. Customers whose complaints are satisfactorily resolved tell an average of 5 people about the good treatment they received. The average dissatisfied customer, however, gripes to 11 people. If each of these tells still other people, the number exposed to bad word of mouth may grow exponentially. ● No matter how perfectly designed and implemented a marketing program is,mistakes will happen.The best thing a company can do is make it easy for customers to complain. Suggestion forms, toll-free numbers, Web sites, and e-mail addresses allow for quick, two-way communication. The 3M Company claims that over two-thirds of its product improvement ideas come from listening to customer complaints. ● Given the potential downside of having an unhappy customer, it’s critical that marketers deal with negative experiences properly. Beyond that, the following procedures can help to recover customer goodwill: ○ Set up a 7-day, 24-hour toll-free hotline (by phone, fax, or e-mail) to receive and act on customer complaints. ○ Contact the complaining customer as quickly as possible. The slower the company is to respond,the more dissatisfaction may grow and lead to negative word of mouth. ○ Accept responsibility for the customer’s disappointment; don’t blame the customer. ○ Use customer service people who are empathic. ○ Resolve the complaint swiftly and to the customer’s satisfaction. Some complaining customers are not looking for compensation so much as a sign that the company cares. ○ Product and Service Quality ■ Satisfaction will also depend on product and service quality. What exactly is quality? Various experts have defined it as “fitness for use,” “conformance to requirements,” and “freedom from variation.” We will use the American Society for Quality’s definition: Quality is the totality of features and characteristics of a product or service that bear on its ability to satisfy stated or implied needs. This is clearly a customer-centered definition. We can say the seller has delivered quality whenever its product or service meets or exceeds the customers’ expectations. ■ A company that satisfies most of its customers’ needs most of the time is called a quality company, but we need to distinguish between conformance quality and performance quality (or grade). A Lexus provides higher performance quality than a Hyundai: The Lexus rides smoother, goes faster, and lasts longer. Yet both a Lexus and a Hyundai deliver the same conformance quality if all the units deliver their respective promised quality. ■ Impact of Quality ● Product and service quality, customer satisfaction, and company profitability are intimately connected. Higher levels of quality result in higher levels of customer satisfaction, which support higher prices and (often) lower costs. Studies have shown a high correlation between relative product quality and company profitability. The drive to produce goods that are superior in world markets has led some countries—and groups of countries—to recognize or award prizes to companies that exemplify the best qualitypractices, such as the Deming Prize in Japan, the Malcolm Baldrige National Quality Award in the United States,and the European Quality Award. ● Companies that have lowered costs to cut corners have paid the price when the quality of the customer experience suffers: When Northwest Airlines stopped offering free magazines, pillows, movies, and even minibags of pretzels on domestic flights, it also raised prices and reduced its flight schedule.As one frequent flier noted, “Northwest acts low cost without being low cost.” Not surprisingly, Northwest came in last of all top U.S. airlines in both the ACS index and J.D. Power’s customer satisfaction poll soon thereafter. Home Depot also encountered turbulence when it became overly focused on cost cutting. ● Quality is clearly the key to value creation and customer satisfaction. Total quality is everyone’s job, just as marketing is everyone’s job. “Marketing Memo: Marketing and Total Quality” outlines the role of marketing in maximizing total quality for the firm. ● Maximizing Customer Lifetime Value ○ Ultimately, marketing is the art of attracting and keeping profitable customers.Yet every company loses money on some of its customers. The well-known 80–20 rule states that 80 percent or more of the company’s profits come from the top 20 percent of its customers. Some cases may be more extreme—the most profitable 20 percent of customers (on a per capita basis) may contribute as much as 150 percent to 300 percent of profitability. The least profitable 10 percent to 20 percent,on the other hand, can actually reduce profits between 50 percent to 200 percent per account, with the middle 60 percent to 70 percent breaking even. The implication is that a company could improve its profits by “firing”its worst customers. ○ It’s not always the company’s largest customers,who can demand considerable service and deep discounts, who yield the most profit. The smallest customers pay full price and receive minimal service, but the costs of transacting with them can reduce their profitability. Midsize customers who receive good service and pay nearly full price are often the most profitable. ○ Customer Profitability ■ A profitable customer is a person, household, or company that over time yields a revenue stream exceeding by an acceptable amount the company’s cost stream for attracting, selling, and serving that customer.Note the emphasis is on the lifetime stream of revenue and cost,not the profit from a particular transaction. Marketers can assess customer profitability individually, by market segment,or by channel. ■ Many companies measure customer satisfaction, but few measure individual customer profitability. Banks claim this is a difficult task,because each customer uses different banking services and the transactions are logged in different departments. However, the number of unprofitable customers in their customer base has appalled banks that have succeeded in linking customer transactions. Some report losing money on over 45 percent of their retail customers. ■ Customer Profitability Analysis ● A useful type of profitability analysis is shown in Figure 5.3.44 Customers are arrayed along the columns and products along the rows. Each cell contains a symbol representing the profitability of selling that product to that customer. Customer 1 is very profitable; he buys two profit-making products (P1 and P2). Customer 2 yields mixed profitability; he buys one profitable product (P1) and one unprofitable product (P3). Customer 3 is a losing customer because he buys one profitable product (P1) and two unprofitable products (P3 and P4). ● What can the company do about customers 2 and 3? (1) It can raise the price of its less profitable products or eliminate them, or (2) it can try to sell customers 2 and 3 its profit-making products. Unprofitable customers who defect should not concern the company. In fact, the company should encourage them to switch to competitors.● Customer profitability analysis (CPA) is best conducted with the tools of an accounting technique called activity-based costing (ABC). ABC accounting tries to identify the real costs associated with serving each customer—the costs of products and services based on the resources they consume.The company estimates all revenue coming from the customer, less all costs. ● With ABC, the costs should include the cost not only of making and distributing the products and services,but also of taking phone calls from the customer,traveling to visit the customer,paying for entertainment and gifts—all the company’s resources that go into serving that customer. ABC also allocates indirect costs like clerical costs, office expenses, supplies, and so on, to the activities that use them, rather than in some proportion to direct costs. Both variable and overhead costs are tagged back to each customer. ● Companies that fail to measure their costs correctly are also not measuring their profit correctly and are likely to misallocate their marketing effort. The key to effectively employing ABC is to define and judge “activities”properly. One time-based solution calculates the cost of one minute of overhead and then decides how much of this cost each activity uses. ○ Measuring Customer Lifetime Value ■ The case for maximizing long-term customer profitability is captured in the concept of 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 the account of that customer, applying the appropriate discount rate (say, between 10 percent and 20 percent, depending on cost of capital and risk attitudes). Lifetime value calculations for a product or service can add up to tens of thousands of dollars or even into six figures. ■ Many methods exist to measure CLV. “Marketing Memo: Calculating Customer Lifetime Value” illustrates one. CLV calculations provide a formal quantitative framework for planning customer investment and help marketers adopt a long-term perspective. One challenge, however, is to arrive at reliable cost and revenue estimates. Marketers who use CLV concepts must also take into account the short-term, brand-building marketing activities that help increase customer loyalty. ● Cultivating Customer Relationships ○ Companies are using information about customers to enact precision marketing designed to build strong long-term relationships. Information is easy to differentiate, customize, personalize, and dispatch over networks at incredible speed. ○ But information cuts both ways. For instance,customers now have a quick and easy means of doing comparison shopping through sites such as Bizrate.com, Shopping.com, and PriceGrabber.com. The Internet also facilitates communication between customers. Web sites such as Epinions.com and Yelp.com enable customers to share information about their experiences with various products and services.Customer empowerment has become a way of life for many companies that have had to adjust to a shift in the power with their customer relationships. ○ Customer Relationship Management ■ Customer relationship management (CRM) is the process of carefully managing detailed information about individual customers and all customer “touch points” to maximize loyalty. 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. For a hotel, the touch points include reservations, check-in and checkout, frequent-stay programs, room service, business services, exercise facilities, laundry service, restaurants, and bars. The Four Seasonsrelies on personal touches, such as a staff that always addresses guests by name, high-powered employees who understand the needs of sophisticated business travelers, and at least one best-in-region facility, such as a premier restaurant or spa. ■ CRM 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 a major driver of company profitability is the aggregate value of the company’s customer base. ■ Personalizing Marketing ● The widespread usage of the Internet allows marketers to abandon the mass market practices that built brand powerhouses in the 1950s, 1960s, and 1970s for new approaches that are a throwback to marketing practices from a century ago, when merchants literally knew their customers by name. Personalizing marketing is about making sure the brand and its marketing are as relevant as possible to as many customers as possible—a challenge, given that no two customers are identical. ● An increasingly essential ingredient for the best relationship marketing today is the right technology. GE Plastics could not target its e-mail effectively to different customers if it were not for advances in database software. Dell could not customize computer ordering for its global corporate customers without advances in Web technology. Companies are using e-mail, Web sites, call centers, databases, and database software to foster continuous contact between company and customer. ● E-commerce companies looking to attract and retain customers are discovering that personalization goes beyond creating customized information. For example, the Lands’ End Live Web site offers visitors the opportunity to talk with a customer service representative. Nordstrom takes a similar approach to ensure online buyers are as satisfied with the company’s customer service as in-store visitors. Domino’s has put the customer in charge of ordering a pizza delivery every step of the way. ● Companies are also recognizing the importance of the personal component to CRM and what happens once customers make actual contact with the company. Employees can create strong bonds with customers by individualizing and personalizing relationships. In essence, thoughtful companies turn their customers into clients.Here is the distinction: ○ Customers may be nameless to the institution; clients cannot be nameless. Customers are served as part of the mass or as part of larger segments; clients are served on an individual basis. Customers are served by anyone who happens to be available; clients are served by the professional assigned to them. ● To adapt to customers’ increased desire for personalization, marketers have embraced concepts such as permission marketing and one-to-one marketing. Permission marketing, the practice of marketing to consumers only after gaining their expressed permission, is based on the premise that marketers can no longer use “interruption marketing” via mass media campaigns. According to Seth Godin, a pioneer in the technique, marketers can develop stronger consumer relationships by respecting consumers’ wishes and sending messages only when they express a willingness to become more involved with the brand. Godin believes permission marketing works because it is “anticipated, personal, and relevant.” ● Permission marketing, like other personalization approaches, presumes consumers know what they want. But in many cases,consumers have undefined, ambiguous, or conflicting preferences. “Participatory marketing” may be a more appropriate concept thanpermission marketing,because marketers and consumers need to work together to find out how the firm can best satisfy consumers. ● Don Peppers and Martha Rogers outline a four-step framework for one-to-one marketing that can be adapted to CRM marketing as follows: ○ Identify your prospects and customers. Don’t go after everyone. Build, maintain, and mine a rich customer database with information from all the channels and customer touch points. ○ Differentiate customers in terms of(1) their needs and (2) their value to your company. Spend proportionately more effort on the most valuable customers (MVCs). Apply activity-based costing and calculate customer lifetime value. Estimate net present value of all future profits from purchases, margin levels, and referrals,less customer-specific servicing costs. ○ Interact with individual customers to improve your knowledge about their individual needs and to build stronger relationships. Formulate customized offerings you can communicate in a personalized way. ○ Customize products, services, and messages to each customer. Facilitate customer interaction through the company contact center and Web site. ● One-to-one marketing is not for every company: It works best for firms that normally collect a great deal of individual customer information and carry a lot of products that can be cross-sold, need periodic replacement or upgrading, and offer high value. For others, the required investment in information collection, hardware, and software may exceed the payout. With automobiles that can cost over $100,000, Aston Martin engages in one-to-one marketing with a select group of customers. High-end dealerships offer separate owners-only clubroom sections and weekend getaways to test-drive new models. ■ Customer Empowerment ● Often seen as the flag bearer for marketing best practices, P&G’s former chairman, A.G. Lafley, created shockwaves with his Association of National Advertisers’ speech in October 2006. “The power is with the consumer,” proclaimed Lafley, and “marketers and retailers are scrambling to keep up with her.Consumers are beginning in a very real sense to own our brands and participate in their creation.We need to learn to let go.” In support of his contention, Lafley pointed out how a teenager had created an animated spot for Pringles snacks that was posted on YouTube;how Pantene,the hair care products company, had created a campaign that encouraged women to cut their hair and donate the clippings to make wigs for cancer patients; and how sales of Cover Girl Outlast lipstick increased 25 percent after the firm put mirrored ads in women’s restrooms asking, “Is your lipstick still on?”and ran targeted five-second TV ads with the same theme. ● Other marketers have begun to advocate a “bottom-up” grassroots approach to marketing, rather than the more traditional “top-down”approach in which marketers feel they are calling the shots. Burger King has launched attention-getting edgy campaigns in recent years (“Whopper Freakout,” “Subservient Chicken,” and “Wake Up With the King”) on consumer-friendly new media such as YouTube, MySpace, video games, and iPods. Allowing the customer to take charge just makes sense for a brand whose slogan is “Have It Your Way” and whose main rival, McDonald’s, already owns the more staid family market. ● Marketers are helping consumers become evangelists for brands by providing them resources and opportunities to demonstrate their passion.Doritos held a contest to let consumers name their next flavor. Converse asked amateur filmmakers to submit 30-second short films that demonstrated their inspiration from the iconic sneaker brand.The best of the 1,800 submissions were showcased in the Converse Gallery Web site, and the best of the best became TV commercials.Sales of shoes via the Web site doubled in the month after the gallery’s launch. ● Even business-to-business firms are getting into the action. PAETEC provides telecommunications services to hotels, universities, and other companies. It has grown into a $500 million company in six years, and its growth is due entirely to customer evangelism. PAETEC’s primary marketing strategy: Invite current customers and key prospects to dine on PAETEC’s tab and meet one another.No boring PowerPoint presentations here, just customers talking about their telecommunications challenges and their unfiltered experiences being PAETEC customers. Prospects are sold on the company by other customers. ● Although much has been made of the newly empowered consumer—in charge, setting the direction of the brand, and playing a much bigger role in how it is marketed—it’s still true that only some consumers want to get involved with some of the brands they use and, even then, only some of the time. Consumers have lives, jobs, families, hobbies, goals, and commitments, and many things matter more to them than the brands they purchase and consume. Understanding how to best market a brand given such diversity is crucially important. ■ Customer Reviews and Recommendations ● Although the strongest influence on consumer choice remains “recommended by relative/friend,”an increasingly important decision factor is “recommendations from consumers.” With increasing mistrust of some companies and their advertising, online customer ratings and reviews are playing an important role for Internet retailers such as Amazon.com and Shop.com. ● Online pet food retailer PETCO actually started using consumer product ratings and reviews in e-mails and banner ads, finding the click-through rate increased considerably as a result. Brick-and-mortar retailers such as Staples and Cabela’s are also recognizing the power of consumer reviews and have begun to display them in their stores. ● Despite consumer acceptance of such reviews, however, their quality and integrity is always in question. In one famous example, over a period of seven years, the cofounder and CEO of Whole Foods Market reportedly posted more than 1,100 entries on Yahoo! Finance’s online bulletin board under a pseudonym, praising his company and criticizing competitors. ● Some sites offer summaries of reviews to provide a range of product evaluations. Metacritic aggregates music, game, TV, and movie reviews from leading critics—often from more than 100 publications—averaged into a single 1 to 100 score. Review sites are important in the video game industry because of the influence they wield and the product’s high selling price—often $50 to $60. Some game companies tie bonuses for their developers to game scores on the more popular sites. If a major new release doesn’t make the 85-plus cutoff, the publisher’s stock price may even drop. ● Bloggers who review products or services have become important because they may have thousands of followers; blogs are often among the top links returned in online searches for certain brands or categories. A company’s PR department may track popular blogs via online services such as Google alerts, BlogPulse, and Technorati. Firms also court the favor of key bloggers via free samples, advance information, and special treatment. Most bloggers disclose when they are given free samples by companies. ● For smaller brands with limited media budgets, online word of mouth is critical. To generate pre-launch buzz for one of its new hot cereals, organic food maker Amy’sKitchen shipped out samples before its release to several of the 50 or so vegan, gluten-free,or vegetarian food bloggers the company tracks. When favorable reviews appeared on these blogs, the company was besieged by e-mails asking where the cereal could be bought. ● Negative reviews actually can be surprisingly helpful. A January 2007 Forrester study of 10,000 consumers of Amazon.com’s electronics and home and garden products found that 50 percent found negative reviews helpful. Most consumers purchased the products regardless of negative comments because they felt the comments reflected personal tastes and opinions that differed from their own. Because consumers can better learn the advantages and disadvantages of products through negative reviews, fewer product returns may result, saving retailers and producers money. ● Online retailers often add their own recommendations,“If you like that black purse,you’ll love this red blouse.”One source estimated that recommendation systems contribute 10 percent to 30 percent of an online retailer’s sales.Specialized software tools help online retailers facilitate customer “discovery” or unplanned purchases. When Blockbuster adopted one such system,cancellation rates fell and subscribers nearly doubled the number of movies on their order lists. ● At the same time, online companies need to make sure their attempts to create relationships with customers don’t backfire,as when customers are bombarded by computer-generated recommendations that consistently miss the mark. Buy a lot of baby gifts on Amazon.com, and your personalized recommendations suddenly don’t look so personal! E-tailers need to recognize the limitations of online personalization at the same time that they try harder to find technology and processes that really work. ○ Attracting and Retaining Customers ■ Companies seeking to expand their profits and sales must spend considerable time and resources searching for new customers.To generate leads,they develop ads and place them in media that will reach new prospects;send direct mail and e-mails to possible new prospects;send their salespeople to participate in trade shows where they might find new leads; purchase names from list brokers; and so on. ■ Different acquisition methods yield customers with varying CLVs. One study showed that customers acquired through the offer of a 35 percent discount had about one-half the long-term value of customers acquired without any discount. Campaigns that target loyal customers by reinforcing the benefits they enjoy often also attract new customers. Two-thirds of the considerable growth spurred by UK mobile communication leader O2’s loyalty strategy was attributed to recruitment of new customers,the remainder from reduced defection. ■ Reducing Defection ● It is not enough to attract new customers; the company must also keep them and increase their business.71 Too many companies suffer from high customer churn or defection.Adding customers here is like adding water to a leaking bucket. ● Cellular carriers and cable TV operators are plagued by “spinners,” customers who switch carriers at least three times a year looking for the best deal. Many lose 25 percent of their subscribers each year, at an estimated cost of $2 billion to $4 billion.Some of the dissatisfaction defecting customers cite comes from unmet needs and expectations, poor product/service quality and high complexity,and billing errors. ● To reduce the defection rate,the company must: ○ Define and measure its retention rate. For a magazine, subscription renewal rate is a good measure of retention. For a college, it could be first- to second-year retention rate, or class graduation rate.○ Distinguish the causes of customer attrition and identify those that can be managed better. Not much can be done about customers who leave the region or go out of business, but much can be done about those driven away by poor service, shoddy products, or high prices. ○ Compare the lost customer’s lifetime value to the costs of reducing the defection rate. As long as the cost to discourage defection is lower than the lost profit, spend the money to try to retain the customer. ■ Retention Dynamics ● Figure 5.4 shows the main steps in attracting and retaining customers in terms of a funnel and some sample questions to measure customer progress through the funnel. The marketing funnel identifies the percentage of the potential target market at each stage in the decision process, from merely aware to highly loyal. Consumers must move through each stage before becoming loyal customers. Some marketers extend the funnel to include loyal customers who are brand advocates or even partners with the firm. ● By calculating conversion rates—the percentage of customers at one stage who move to the next—the funnel allows marketers to identify any bottleneck stage or barrier to building a loyal customer franchise. If the percentage of recent users is significantly lower than triers, for instance, something might be wrong with the product or service that prevents repeat buying. ● The funnel also emphasizes how important it is not just to attract new customers,but to retain and cultivate existing ones. Satisfied customers are the company’s customer relationship capital. If the company were sold, the acquiring company would pay not only for the plant and equipment and brand name, but also for the delivered customer base, the number and value of customers who will do business with the new firm.Consider this data about customer retention: ○ Acquiring new customers can cost five times more than satisfying and retaining current ones.It requires a great deal of effort to induce satisfied customers to switch from their current suppliers. ○ The average company loses 10 percent of its customers each year. ○ A 5 percent reduction in the customer defection rate can increase profits by 25 percent to 85 percent, depending on the industry. ○ Profit rate tends to increase over the life of the retained customer due to increased purchases, referrals, price premiums, and reduced operating costs to service. ■ Managing The Customer Base ● Customer profitability analysis and the marketing funnel help marketers decide how to manage groups of customers that vary in loyalty, profitability, and other factors. A key driver of shareholder value is the aggregate value of the customer base. Winning companies improve that value by excelling at strategies like the following: ○ Reducing the rate of customer defection. Selecting and training employees to be knowledgeable and friendly increases the likelihood that customers’ shopping questions will be answered satisfactorily. Whole Foods, the world’s largest retailer of natural and organic foods, woos customers with a commitment to market the best foods and a team concept for employees. ○ Increasing the longevity of the customer relationship. The more engaged with the company,the more likely a customer is to stick around. Nearly 65 percent of new Honda purchases replace an older Honda. Drivers cited Honda’s reputation for creating safe vehicles with high resale value.○ Enhancing the growth potential of each customer through “share of wallet,” cross-selling, and up-selling. Sales from existing customers can be increased with new offerings and opportunities. Harley-Davidson sells more than motorcycles and accessories like gloves,leather jackets, helmets,and sunglasses. Its dealerships sell more than 3,000 items of clothing—some even have fitting rooms. Licensed goods sold by others range from predictable items (shot glasses, cue balls,and Zippo cigarette lighters) to the more surprising (cologne, dolls, and cell phones). ○ Making low-profit customers more profitable or terminating them. To avoid the direct need for termination, marketers can encourage unprofitable customers to buy more or in larger quantities, forgo certain features or services, or pay higher amounts or fees. Banks, phone companies,and travel agencies all now charge for once-free services to ensure minimum revenue levels. Firms can also discourage those with questionable profitability prospects. Progressive Insurance screens customers and diverts the potentially unprofitable to competitors. “Free”customers who pay little or nothing and are subsidized by paying customers— as in print and online media, employment and dating services,and shopping malls—may still create useful direct and indirect network effects,however,an important function. ○ Focusing disproportionate effort on high-profit customers. The most profitable customers can be treated in a special way. Thoughtful gestures such as birthday greetings, small gifts, or invitations to special sports or arts events can send them a strong positive signal. ○ Building Loyalty ■ Creating a strong,tight connection to customers is the dream of any marketer and often the key to long-term marketing success.Companies that want to form such bonds should heed some specific considerations (see Figure 5.5). One set of researchers sees retention-building activities as adding financial benefits, social benefits, or structural ties. The following sections explain three types of marketing activities companies are using to improve loyalty and retention. ■ Interacting With Customers ● Listening to customers is crucial to customer relationship management. Some companies have created an ongoing mechanism that keeps their marketers permanently plugged in to frontline customer feedback. ○ Deere & Company, which makes John Deere tractors and has a superb record of customer loyalty—nearly 98 percent annual retention in some product areas—has used retired employees to interview defectors and customers. ○ Chicken of the Sea has 80,000 members in its Mermaid Club,a core-customer group that receives special offers, health tips and articles, new product updates, and an informative e-newsletter. In return, club members provide valuable feedback on what the company is doing and thinking of doing.Feedback from club members has helped design the brand’s Web site,develop messages for TV advertising, and craft the look and text on the packaging. ○ Build-A-Bear Workshop uses a “Cub Advisory Board” as a feedback and decision-input body. The board is made up of twenty 8- to 12-year-olds who review new-product ideas and give a “paws up or down.” Many products in the stores are customer ideas. ● But listening is only part of the story. It is also important to be a customer advocate and, as much as possible,take the customers’ side and understand their point of view. USAAInsurance’s legendary quality of service has led to the highest customer satisfaction in the industry. USAA subscribers will often tell stories about how the company looks out for them,even counseling them not to take out more insurance than they need. With such levels of trust, USAA enjoys high customer loyalty and significant cross-selling opportunities. ■ Developing Loyalty Programs ● Frequency programs (FPs) are designed to reward customers who buy frequently and in substantial amounts. They can help build long-term loyalty with high CLV customers,creating cross-selling opportunities in the process. Pioneered by the airlines, hotels, and credit card companies, FPs now exist in many other industries. Most supermarket chains offer price club cards that grant discounts on certain items. ● Typically, the first company to introduce a FP in an industry gains the most benefit, especially if competitors are slow to respond. After competitors react, FPs can become a financial burden to all the offering companies, but some companies are more efficient and creative in managing them. Some FPs generate rewards in a way that locks customers in and creates significant costs to switching. FPs can also produce a psychological boost and a feeling of being special and elite that customers value. ● Club membership programs can be open to everyone who purchases a product or service, or limited to an affinity group or those willing to pay a small fee. Although open clubs are good for building a database or snagging customers from competitors, limited-membership clubs are more powerful long-term loyalty builders. Fees and membership conditions prevent those with only a fleeting interest in a company’s products from joining. These clubs attract and keep those customers responsible for the largest portion of business. Apple has a highly successful club ■ Creating Institutional Ties ● The company may supply customers with special equipment or computer links that help them manage orders, payroll, and inventory. Customers are less inclined to switch to another supplier when it means high capital costs, high search costs, or the loss of loyal-customer discounts. A good example is McKesson Corporation, a leading pharmaceutical wholesaler, which invested millions of dollars in EDI (Electronic Data Interchange) capabilities to help independent pharmacies manage inventory, order-entry processes, and shelf space. Another example is Milliken & Company, which provides proprietary software programs, marketing research, sales training, and sales leads to loyal customers. ○ Win-Backs ■ Regardless of how hard companies may try, some customers inevitably become inactive or drop out. The challenge is to reactivate them through win-back strategies. It’s often easier to reattract ex-customers (because the company knows their names and histories) than to find new ones. Exit interviews and lost-customer surveys can uncover sources of dissatisfaction and help win back only those with strong profit potential. ● Customer Databases and Database Marketing ○ Marketers must know their customers. And in order to know the customer, the company must collect information and store it in a database from which to conduct database marketing. A customer database is an organized collection of comprehensive information about individual customers or prospects that is current, accessible, and actionable for 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 (products, suppliers, resellers) to contact, transact, and build customer relationships.○ Customer Databases ■ Many companies confuse a customer mailing list with a customer database. A customer mailing list is simply a set of names, addresses, and telephone numbers. A customer database contains much more information, accumulated through customer transactions, registration information, telephone queries, cookies, and every customer contact. ■ Ideally, a customer database also contains the consumer’s past purchases, demographics (age, income, family members, birthdays), psychographics (activities, interests, and opinions), mediagraphics (preferred media), and other useful information. The catalog company Fingerhut possesses some 1,400 pieces of information about each of the 30 million households in its massive customer database. ■ Ideally, a business database contains business customers’ past purchases; past volumes, prices, and profits; buyer team member names (and ages, birthdays, hobbies, and favorite foods); status of current contracts; an estimate of the supplier’s share of the customer’s business; competitive suppliers; assessment of competitive strengths and weaknesses in selling and servicing the account;and relevant customer buying practices,patterns,and policies. ■ A Latin American unit of the Swiss pharmaceutical firm Novartis keeps data on 100,000 of Argentina’s farmers, knows their crop protection chemical purchases, groups them by value, and treats each group differently. ○ Data Warehouses and Data Mining ■ Savvy companies capture information every time a customer comes into contact with any of their departments,whether it is a customer purchase, a customer-requested service call, an online query, or a mail-in rebate card. Banks and credit card companies, telephone companies, catalog marketers, and many other companies have a great deal of information about their customers, including not only addresses and phone numbers,but also transactions and enhanced data on age,family size,income,and other demographic information. ■ These data are collected by the company’s contact center and organized into a data warehouse where marketers can capture,query,and analyze them to draw inferences about an individual customer’s needs and responses. Telemarketers can respond to customer inquiries based on a complete picture of the customer relationship, and customized marketing activities can be directed to individual customers. ■ Through data mining,marketing statisticians can extract from the mass of data useful information about individuals, trends, and segments. Data mining uses sophisticated statistical and mathematical techniques such as cluster analysis, automatic interaction detection, predictive modeling, and neural networking. Some observers believe a proprietary database can provide a company with a significant competitive advantage. See Figure 5.6 for some examples. In general, companies can use their databases in five ways: ● To identify prospects—Many companies generate sales leads by advertising their product or service. The ads generally contain a response feature, such as a business reply card or toll-free phone number, and the company builds its database from customer responses. It sorts through the database to identify the best prospects, then contacts them by mail or phone to try to convert them into customers. ● To decide which customers should receive a particular offer—Companies interested in selling, up-selling, and cross-selling set up criteria describing the ideal target customer for a particular offer. Then they search their customer databases for those who most closely resemble the ideal. By noting response rates,a company can improve its targeting precision. Following a sale, it can set up an automatic sequence of activities: One week later send a thank-you note; five weeks later send a new offer; ten weeks later (if customer has not responded) phone and offer a special discount.● To deepen customer loyalty—Companies can build interest and enthusiasm by remembering customer preferences and sending appropriate gifts, discount coupons, and interesting reading material. ● To reactivate customer purchases—Automatic mailing programs (automatic marketing) can send out birthday or anniversary cards, holiday shopping reminders, or off-season promotions. The database can help the company make attractive or timely offers. ● To avoid serious customer mistakes—A major bank confessed to a number of mistakes it had made by not using its customer database well. In one case, the bank charged a customer a penalty for late payment on his mortgage, failing to note he headed a company that was a major depositor in this bank. The customer quit the bank. In a second case, two different staff members of the bank phoned the same mortgage customer offering a home equity loan at different prices. Neither knew the other had made the call. In a third case, the bank gave a premium customer only standard service in another country. ○ The Downside of Database Marketing and CRM ■ Database marketing is most frequently used by business marketers and service providers that normally and easily collect a lot of customer data, like hotels, banks, airlines, and insurance, credit card, and phone companies. Other types of companies in the best position to invest in CRM are those that do a lot of cross-selling and up-selling (such as GE and Amazon.com) or whose customers have highly differentiated needs and are of highly differentiated value to the company. Packaged-goods retailers and consumer packaged-goods companies use database marketing less frequently, though some (such as Kraft, Quaker Oats, Ralston Purina, and Nabisco) have built databases for certain brands. Some businesses cited as CRM successes include Enterprise Rent-A-Car, Pioneer Hi-Bred Seeds, Fidelity Investments, Lexus, Intuit, and Capital One. ■ Having covered the upside of database marketing, we also need to cover the downside. Five main problems can prevent a firm from effectively using CRM ● Some situations are just not conducive to database management. Building a customer database may not be worthwhile when: (1) the product is a once-in-a-lifetime purchase (a grand piano); (2) customers show little loyalty to a brand (there is lots of customer churn); (3) the unit sale is very small (a candy bar) so CLV is low; (4) the cost of gathering information is too high; and (5) there is no direct contact between the seller and ultimate buyer. ● Building and maintaining a customer database requires a large, well-placed investment in computer hardware, database software, analytical programs, communication links, and skilled staff. It’s difficult to collect the right data, especially to capture all the occasions of company interaction with individual customers.Deloitte Consulting found that 70 percent of firms found little or no improvement from implementing CRM because the CRM system was poorly designed, it became too expensive, users didn’t make much use of it or report much benefit, and collaborators ignored the system. Sometimes companies mistakenly concentrate on customer contact processes without making corresponding changes in internal structures and systems. ● It may be difficult to get everyone in the company to be customer oriented and use the available information. Employees find it far easier to carry on traditional transaction marketing than to practice CRM. Effective database marketing requires managing and training employees as well as dealers and suppliers. ● Not all customers want a relationship with the company. Some may resent knowing the company has collected that much personal information about them. Online companies should explain their privacy policies and give consumers the right not to have theirinformation stored. European countries do not look favorably on database marketing and are protective of consumers’ private information. The European Union passed a law handicapping the growth of database marketing in its 27 member countries.“Marketing Insight:The Behavioral Targeting Controversy”reviews some privacy and security issues. ● The assumptions behind CRM may not always hold true. High-volume customers often know their value to a company and can leverage it to extract premium service and/or price discounts,so that it may not cost the firm less to serve them.Loyal customers may expect and demand more and resent any attempt to charge full prices.They may also be jealous of attention lavished on other customers.When eBay began to chase big corporate customers such as IBM, Disney, and Sears, some mom-and-pop businesses that helped build the brand felt abandoned.99 Loyal customers also may not necessarily be the best ambassadors for the brand.One study found those who scored high on behavioral loyalty and bought a lot of a company’s products were less active word-of-mouth marketers than customers who scored high on attitudinal loyalty and expressed greater commitment to the firm. ■ Thus, the benefits of database marketing do not come without significant costs and risks, not only in collecting the original customer data, but also in maintaining and mining them. When it works,a data warehouse yields more than it costs,but the data must be in good condition,and the discovered relationships must be valid and acceptable to consumers. ● 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 benefits and total customer cost. ○ A buyer’s satisfaction is a function of the product’s perceived performance and the buyer’s expectations. Recognizing that high satisfaction leads to high customer loyalty, companies must ensure that they meet and exceed customer expectations. ○ 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. Marketers play a key role in achieving high levels of total quality so that firms remain solvent and profitable. ○ Marketing managers must calculate customer lifetime values of their customer base to understand their profit implications. They must also determine ways to increase the value of the customer base. ○ Companies are also becoming skilled in customer relationship management (CRM), which focuses on developing programs to attract and retain the right customers and meeting the individual needs of those valued customers. ○ Customer relationship management often requires building a customer database and data mining to detect trends, segments, and individual needs. A number of significant risks also exist, so marketers must proceed thoughtfully.