10 C H A P T E R © 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Developing and Maintaining Long-Term Customer Relationships

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Is not about creating a large number of transactions Is one that attracts and retains customers over the long-term Considers customer needs, wants, and expectations Develops long-term relationships The “Right” Marketing Strategy 2

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. A business philosophy aimed at defining and increasing customer value in ways that motivate customers to remain loyal CRM is about retaining the “right” customers. CRM Stakeholders Customers Employees Supply chain partners External stakeholders (government, media, advocacy groups) Customer Relationship Management (CRM) 3

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Shift from Acquiring Customers to Maintaining Clients (Exhibit 10.1) 4

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Goal is to move consumers through levels of increasing relationship intensity Recognizes that not all customers have equal value to the firm (based on the lifetime value of customers) Focuses on building share of customer Fully serving the needs of current customers, rather than acquiring new customers Encourage current customers to do more business with the firm Developing Relationships in Consumer Markets 5

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Stages of Customer Relationship Development (Exhibit 10.2) 6

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Financial Incentives Using financial incentives to increase customer loyalty Examples: Coupons, frequent customer programs Adv: Easy to use, effective in the short term Dis: Easy to imitate, hard to end once started Social Bonding Using social and psychological bonds to maintain a clientele Examples: Membership programs, customer-only events Adv: Difficult to imitate, reduces brand switching Dis: Takes time, must build customer trust Customer Relationship Strategies (Exhibit 10.3) 7

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Enhanced Customization Using intimate customer knowledge to provide one-to-one solutions or mass customization Examples: Reminder notices, personal shoppers Adv: Promotes brand loyalty, very hard to imitate Dis: Can be expensive, takes time to develop Structural Bonding Creating customized product offerings that create a unique delivery system for each client Examples: Contractual relationships; structured, lock-step programs Adv: Ultimate reduction in brand switching Dis: Time consuming and costly, customer resistance Customer Relationship Strategies (Exhibit 10.3) (continued) 8

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Like CRM in consumer markets, involves moving buyers through increasing levels of relationship intensity Typically based on creating structural connections between partners Creates win-win scenarios Is more involving and complex than CRM in consumer markets Developing Relationships in Business Markets 9

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Change in Buyers’ and Sellers’ Roles Shift from competitive negotiation to collaboration Increase in Sole Sourcing Creates solutions at lower costs Increase in Global Sourcing Easier to find partners that meet exacting needs Increase in Team-Based Buying Decisions Better decisions come from diverse expertise Increase in Productivity through Better Integration Reduces inefficiency and hard/soft costs; increases profitability Changes in Business Relationships 10

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. After firms rank their customers on profitability or lifetime value measures, highly profitable customers get special attention, while unprofitable customers get poor service or are “fired.” What are the ethical and social issues involved in these practices? Could CRM be misused? How and why? 11

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Quality is a relative term that refers to the degree of superiority of a firm’s goods or services The Core Product Satisfies the basic customer need Core product in services (people, processes, and physical evidence) Supplemental Products Goods or services that add value to the core product Symbolic and Experiential Attributes Usually based on image, prestige, or branding Understanding the Role of Quality 12

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Components of the Total Product Offering (Exhibit 10.4) 13

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Most firms struggle with improving quality Customers have very high expectations Most products compete in mature markets Very little differentiation among product offerings Keys to improving quality Understand customers’ expectations Translate expectations into quality standards Uphold quality standards Don’t overpromise Delivering Superior Quality 14

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Value is the subjective evaluation of benefits relative to costs to determine the worth of a firm’s product offering relative to other product offerings. Value can be used to guide marketing strategy. It balances the five types of utility. It includes the concept of quality, but is broader in scope. It takes into account every marketing program element. It can be used to explicitly consider customer perceptions. Understanding the Role of Value 15

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. A simple formula for value (from Chapter 6): A more strategic formula for value: The Value Formula 16 Perceived Value = Customer Benefits Customer Costs Perceived Value = Core Product Quality + Supplemental Product Quality + Experiential Quality Monetary Costs + Nonmonetary Costs

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Core Product, Supplemental Product, and Experiential Quality Firms can create unique combinations to drive value perceptions. Monetary Costs Transactional costs include the immediate financial outlay that must be made to purchase the product. Life-cycle costs include additional costs that will be incurred over the life of the product. Nonmonetary Costs Time, effort, risk, and opportunity costs Not as obvious as monetary costs, so customers sometimes ignore them. The Value Formula (continued) 17

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Value and the Marketing Program (Exhibit 10.5) 18

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Understanding Customer Expectations Range of customer expectations Ideal expectations Normative expectations Experience-based expectations Minimum tolerable expectations Customer expectations can vary based on the situation Expectations increase during highly involving or important purchase situations. Expectations decrease when customers are more tolerant of poor performance, when they have few alternatives, or when performance is beyond the control of the firm. Customer Satisfaction: The Key to Customer Retention 19

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Range of Customer Expectations (Exhibit 10.6) 20

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The difference between the upper and lower end of the range of possible customer expectations The width of the zone represents the degree to which customers recognize and are willing to accept variability in performance. Three potential outcomes Customer delight – performance exceeds desired expectations Customer satisfaction – performance falls within the zone Customer dissatisfaction – performance falls below adequate expectations The Zone of Tolerance 21

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. The Zone of Tolerance (Exhibit 10.7) 22

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Of the two types of customer expectations, adequate performance expectations fluctuate the most. Describe situations that might cause adequate expectations to increase, thereby narrowing the width of the zone of tolerance. What might a firm do in these situations to achieve its satisfaction targets? 23

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Why are Customer Expectations Unrealistic? Typically, customers are not unrealistic. They only want the basics of performance. Should We Delight the Customer? May not be worth the effort if: It does not increase loyalty or retention. It lowers performance for other customers. It increases expectations over time. Competitors can easily copy it. The firm should look for small ways to delight customers without it becoming an everyday occurrence. Managing Customer Expectations 24

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Quality is narrowly defined and judged on an attribute-by-attribute basis. Value includes quality, but it also includes monetary and nonmonetary costs. Satisfaction is based on expectations and is typically considered holistically. Satisfaction can be based on quality, value, or factors that have nothing to do with quality or value. Expectations and satisfaction can be affected by nonquality and nonvalue issues over which the firm has little control. Satisfaction versus Quality versus Value 25

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Understand what can go wrong Focus on controllable issues Manage customer expectations Offer satisfaction guarantees Make it easy for customers to complain Create relationship programs Make customer satisfaction measurement an ongoing priority Customer Satisfaction and Customer Retention 26

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Examples of Customer Satisfaction Guarantees (Exhibit 10.8) 27

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Measuring Expectations and Performance (Exhibit 10.9) 28

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Lifetime Value of a Customer (LTV) Average Order Value (AOV) Customer Acquisition/Retention Costs Customer Conversion Rate Customer Retention Rate Customer Attrition Rate Customer Recovery Rate Referrals Social Communication Customer Satisfaction Measurement 29

© 2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Given the commoditized nature of many markets today, does customer relationship management – and its associated focus on quality, value, and satisfaction – make sense? If price is the only true means of differentiation in a commoditized market, why should a firm care about quality? Explain. 30