McGraw-Hill/Irwin Copyright © 2009 by the McGraw-Hill Companies, Inc. All rights reserved.

Chapter 16 Customer Retention and Maximization

THE NATURE OF A CUSTOMER Customer Relationships can be found at any level Always-A-Share Customer Lost-For-Good Customers Lowest Level Relationship Highest Level Relationship THE KEY FACTOR: SWITCHING COSTS The Direct and Indirect costs a buyer will have to pay to go to another supplier 16-3

LOST-FOR-GOOD ALWAYS-A-SHARE Customers are tied to a system. Switching costs may include: Specific investments Cancellation penalties Setup costs for a new supplier Retraining Finding/Evaluating a new supplier Customers can allocate their purchases to several vendors. A period of no purchases can be followed by a number of purchases. Doesn’t want to rely on a single vendor. Suppliers are largely interchangeable DEFINING THE EXTREMES OF CUSTOMER NATURE Exhibit

PAYOFFS TO SELLERS FROM LONG TERM CUSTOMER RELATIONSHIPS GROWS ADDITIONAL BUSINESS OPPORTUNITIES for new products or increased purchases PREMIUM PRICES result from giving first-rate service and product quality REDUCED SELLING COSTS from tighter coordination of production and logistics ADDITIONAL REVENUES POSSIBLE from customers’ referrals and joint sales calls with customers 16-5

Years in Relationship Exhibit 16-5 RELATIONSHIP BENEFITS TO SELLERS Profits Referrals Reduced costs Increased Purchases Base profit Price Premium 16-6

TWO REASONS COMPANIES STAY IN A BUSINESS RELATIONSHIP REASON 1.THEY HAVE TO No alternatives, binding actions such as contracts, product ties REASON 2.THEY WANT TO Relationship is satisfying because of cooperation and meeting financial objectives 16-7

TIES THAT BUILD RELATIONSHIPS SUPERIOR PERFORMANCE at a good price (value) SOCIAL RELATIONSHIPS created by frequent interaction TECHNICAL DEPENDENCIES brought about by reliance on a supplier’s products or support FORMAL AGREEMENTS involving investments or contracts 16-8

SOURCES OF COMPETITIVE ADVANTAGE 1.Superior performance 2.Quality products and support as defined by the customer 3.Distinctive and reliable service TO BUILD CUSTOMER LOYALTY, DEVELOP A COMPETITIVE ADVANTAGE BY PROVIDING 16-9

Exhibit 16-8 Relationship Termination Costs Relationship Benefits Shared Values Communication Opportunistic Behavior Uncertainty Functional Conflict Cooperation Propensity To leave Acquiescence Relationship Commitment Trust THE IMPACT OF TRUST AND COMMITMENT ON BUSINESS RELATIONSHIPS

COMMUNICATING WITH CUSTOMERS TelephoneConfirm appointment Answer a questionnaire about delivery FaxSummarize yesterday’s meeting FYI: an article in a trade magazine Request the name of a former consultant Give congratulations on a story in the press Request easy-to-find data in a planning document Business LetterFormally introduce a new account representative Summarize reasons for next quarter’s price increase Thank you for the order Face-to-faceNegotiate production commitments Resolve dispute about marketing effort Exhibit

REQUIREMENTS FOR A USEFUL SURVEY: 1.CHOOSE MAIL OR TELEPHONE TO DO THE SURVEY 2.DETERMINE THE KIND OF INFORMATION YOU NEED Ascertain satisfaction with overall relationship Measure specific aspects of the relationship The unspoken concerns of customers Determine what will get measured regarding customer expectations (The TERRA model works well) Having meaningful and measurable ratings and scores A TOOL FOR CUSTOMER RETENTION: CUSTOMER SATISFACTION SURVEYS 16-12

Process 5 (etc.) Attribute 1 Attribute 2 Attribute 3 Suggest change for improvement Process 4 (Technical Support ) Attribute 1 Attribute 2 Attribute 3 Suggest change for improvement Process 3 (Service manuals) Attribute 1 Attribute 2 Attribute 3 Suggest change for improvement Process 2 (Parts reps) Attribute 1 Attribute 2 Attribute 3 Suggest change for improvement Process 1 (Parts handling) Attribute 1 Attribute 2 Attribute 3 Suggest change for improvement Loyalty questions Willingness to recommend Repurchase intentions General overall Satisfaction question QUESTION SATISFACTION SURVEY Exhibit

MEASURING SATISFACTION AFTER THE SURVEYS MANAGEMENT QUESTIONS 1.WHAT DO THE SURVEYS TELL US? 2.HOW DO WE USE THE INFORMATION WE HAVE? 3.HOW RELIABLE IS THE INFORMATION? 16-14

SATISFACTION SURVEYS: GUIDELINES FOR USE 1.LOOK AT OVERALL SCORES 2.COMPARE SCORES TO PREVIOUS MEASURES, PREFERABLY OVER SEVERAL YEARS 3.ARE TRENDS UP, DOWN, STABLE? 4.HOW MANY FACETS OF SATISFACTION DO WE MEASURE? 5.HOW MANY ATTRIBUTES FOR EACH FACET SHOULD WE MEASURE 6.WHAT IS OUR RELATIONSHIP FACET PERFORMANCE SCORE (RFP score )? 16-15

DETERMINING THE RFP SCORE OVERALL SATISFACTION = f sales reps. report cards, warranty claims, product lit., tech support, etc. OVERALL SATISFACTION = (RFP warranty ) +.53 (RFP rep ) +.06 (RFP lit ) +.12 (RFP tech support ) + e THE REGRESSION COEFFICIENTS SHOW RELATIVE IMPORTANCE OF EACH FACET FOR WARRANTY CLAIMS IS MOST IMPORTANT FOR OVERALL SATISFACTION, FOLLOWED BY SALES REP PERFORMANCE 16-16

STRONG STATISTICAL MODEL OF CUSTOMER SATISFACTION Warranty Service RFP Score Satisfaction Score Exhibit

WEAK STATISTICAL MODEL OF CUSTOMER SATISFACTION Technical Support RFP Score Satisfaction Score Exhibit