Creating customer value, satisfaction, and loyalty

Building customer value, Satisfaction, and Loyalty Customer Perceived Value: Consumers are more educated and informed than ever, and they have the tools to verify companys claims and seek out superior alternatives Total customer benefit Its the perceived monetary value of the bundle of economic, functional, and psychological benefits customers expect from a given market offering because of the products, services, personnel, and image involved. Customer value analysis: 1. Identify the major attributes and benefits that customers value 2. Assess the quantitative importance of the different attributes and benefits. 3. Assess the company's and competitors performances on the different customer values against their rated importance. 4. Examine how customers in a segment rate the company performance against a specific major competitor on an. individual attribute or benefit basis. 5. Monitor customer values over time. Delivering High Customer Value Loyalty is a deeply held commitment to re-buy or repatronize a preferred product or service in the future despite situational influences and marketing efforts having the potential to cause switching behavior. Total Customer Satisfaction: Satisfaction is a person's feelings of pleasure or dissatisfied. If the performance matches the expectations, the customer is satisfied or delighted, customer assessments of product depends on many factors especially the type of loyalty relationship the customer has with the brand. Monitoring Satisfaction: A company would be wise to measure customer satisfaction regularly, because one key to customer retention is customer satisfaction. A highly satisfied customer generally stays loyal longer, buys more as the company introduces new products and upgrades existing products. Measurement Techniques 1. Periodic surveys 2. Customer loss rate 3. Mystery shoppers

According to Reichheld, a customers willingness to recommend to a friend results from how well the customer is treated by frontline employees, which in turn is determined by all functional areas that contribute to a customers experience. Influence of Customer Satisfaction: For customer-centered companies, customer satisfaction is both a goal and a marketing tool. Companies that do achieve high customer satisfaction ratings make sure their target markets know it. Customer Complaints: Some companies think theyre getting a sense of customer satisfaction by tallying complaints, but studies of customer dissatisfaction show that customers are dissatisfied with their purchases about 25% of the time but only about 5% complain. Product and Service Quality: Satisfaction will also depend on product and service quality. Quality is the totality of features and characteristics of product or service that bear on its ability to satisfy stated or implied needs. A company that satisfies most of its customers needs most of the time is called a quality company. Impact of Quality : Product and service quality, customers satisfaction, and company profitability are intimately connected. Higher levels of quality results in higher levels of customer satisfaction, which support higher prices and (often) lower costs. Total Quality: Total quality is everyones job, just as marketing is everyones job. Marketers play several roles in helping their companies define and deliver high-quality goods and services to target customers.

Maximizing Customer Lifetime Value (CLV)

Marketing is the art of attracting and keeping profitable customers. Every Company loses money on some of its customers. Company could improve its profits by firing its worst customers. Customer Profitability: A profitable customer is a person, household, or company that over time yields a revenue stream that exceeds by an acceptable amount the companys cost stream for attracting, selling, and servicing that customer.

Customer Profitability Analysis (CPA): Its best conducted with the tools of accounting technique called activity-based costing (ABC). The company estimates all revenue coming from the customer, less all costs. The cost should include not only cost of making and distributing the products and services, but also of taking phone calls from the customer, travelling to visit customers, paying for entertainment and gifts-all the companys resources that go into serving that customer. Customer Portfolios: Marketers are recognizing the need to manage customer portfolios, made of different groups of customers defined in terms of their loyalty, profitability, and other factors. One perspective is that a firms portfolio consists of a combination of acquaintances, friends and partners that are constantly changing. There are three types of customer will differ in their in their product needs, their buying, selling, and servicing activities, and their acquisition costs and competitive advantages.

Cultivating customer relationships

Maximizing customer value means cultivating long-term customer relationships. Companies are now moving away from wasteful mass marketing to precision marketing designed to build strong customer relationships. Todays economy is supported by informational businesses. For instance, customers now have a quick and easy means of doing comparison shopping through web sites like Epinions.com and Amazon.com Customer relationship management: Customer relationship management (CRM) It is the process of carefully managing detailed information about individual customers and all customer touch points to maximize customer loyalty. A customer touch point is any occasion on which a customer encounters the brand and product. CRM enables companies to provide excellent real-time customer service through the effective use of individual account information. CRM is important because a major driver of company profitability is the aggregate value of the companys customer base. One to-one marketing: Some of the groundwork for CRM was laid by don peppers and Martha rogers. They outline a four-step framework for one-to-one marketing that can be adapted to CRM marketing as follows: 1. Indentify your prospects and customers: dont go after everyone. Build, maintain, and mine a rich customer database with information derived from all the channels and customer touch points.

2. Differentiate customers in terms of (1) their needs and (2) their value to your company: spends proportionately more effort on the most valuable customers (MVCs). Apply ABC (activity-based cost accounting) and calculate CLV (customer lifetime value). 3. Interact with individual customers to improve your knowledge about their individual needs and to build stronger relationships: formulate customized offerings that you can communicate in a personalized way. 4. Customize products, services, and messages to each customer- facilitate customer: company interaction through the company contact centre and website. Increasing Value of the Customer Base: A key driver of shareholder value is the aggregate value of the customer base. Reducing the rate of customer defection: selecting and training employees to be knowledgeable and friendly increases the likelihood that the inevitable shopping questions from customers will be answered satisfactorily. Increasing the longevity of the customer relationship: The more involved a customer is with the company, the more likely he is to stick around. Some companies treat their customers as partners-especially in business-to-business markets-soliciting their help in the design of new products or improving their customer service. Enhancing the growth potential of each customer through share-of-wallet, crossselling, and up-selling- New offerings and opportunities increase sales from existing customers. Harley-Davidson sells more accessories than motorcycles. 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 or pay higher amounts or fess. Focusing disproportionate effort on high-value customers- The MVCs can be treated in special way. Thoughtful gestures such as birthday greetings, small gifts etc... Can send strong signals to the customer. 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 make phone calls to possible new prospects; and so on. Reducing defection: Too many companies suffer from high customer churn or defection. To reduce the defection rate, the company must:

1. Define and measure its retention rate. For a magazine, subscription renewal rate is a good measure of retention. 2. Distinguish the causes of customer attrition and identify those that can be managed better. 3. Compare the lost profit equal to the CLV from a lost customer to the costs to reduce the defection rate. Retention dynamics: Figure shows the main steps in the process of attracting and retaining customers. The starting point is everyone who might conceivably buy the product or service. These potentials are people or organizations that might conceivably have an interest in buying the companys product or service but may not have the means or intention to buy. The next task is to identify which potentials are really good prospects- people with the motivation, ability, and opportunity to make a purchase. Marketing efforts can then concentrate on converting the prospects into first-time customers, and then into repeat customers, and then into clients- people to whom the company gives very special and knowledgeable treatment. The next challenge is to turn clients into members by starting a membership program that offers benefits to customers who join, and then turning members into advocates, customers who enthusiastically recommend the company and its products and services to others. The ultimate challenge is to run the advocates in to partners. Unfortunately, most marketing theory and practice centers on the art of attracting new customers, rather than on retaining and cultivating existing ones. Here are some interesting facts that bear on customer retention. Acquiring new customers can cost five times more than satisfying an retaining current customers. The average company losses 10% of its customers each year. A 5% reduction in the customer defection rate can increase profits by 25% to 85%, depending on the industry. The customer profit rate tends to increase over the life of the retained customer due to increased purchase referrals. Building loyalty: Creating a strong, tight connection to customers is the dream of any marketer and often the key to long-term marketing success. The following sections explain four important types of marketing activities that companies are using to improve loyalty and retention. Interacting with customers: Listening to customers is crucial to CRM. Some companies have created an ongoing mechanism that keeps senior managers permanently plugged in to frontline customer feedback. It is also important to be a customer advocate and, as much as possible, take the customers side on issues, understanding their point of view.

Developing loyalty programs: Two customers loyalty programs that companies can offer are frequency programs (FPs) and club marketing programs. FPs is designed to provide rewards to 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. Club marketing programs can be open to everyone who purchases a product or service, or it can be limited to an affinity group or to those willing to pay a small fee. Personalizing marketing: Company personnel can create strong bonds with customers by individualizing and personalizing relationships. In essence, thoughtful companies turn their customers into clients. Creating institutional ties: The company may supply customers with special equipment or computer links that help customers manage orders, payroll, and inventory. The customers are less inclined to switch to another supplier when this would involve high capital costs, high search costs, or the loss of loyal-customer discounts. Win- Backs: Regardless of the nature of the category or how hard companies may try, some customers inevitably become inactive or drop out. The challenge is to reactivate dissatisfied customers through win-back strategies. The key is to analyze the causes of customer defection through exit interviewers and lost-customer surveys and win back only those who have strong profit potential.

Customer Databases and Customer Marketing

Marketers must know their customers. The company must collect the data and store in a database from which to conduct database marketing. Database marketing is a process of building, maintaining, and using customer databases and other databases 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. Data Warehouses and Data mining Companies have great deal of information about their customers, including not only addresses and telephone numbers, but also transactions and enhanced data on age, family size,

income, and other demographic information. These data is collected by the companys contact center and organized into a DATA WAREHOUSE. DATA MINING: marketing statisticians can extract useful information about individuals, trends, and segments from the mass of data. In General, companies can use their databases in 5 ways. 1) To identify prospects: Many companies generate sales leads by advertising their product or service. Then from the response feature the company builds its database to identify the best prospects. 2) To decide which customer should get a particular offer: Companies 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 type. 3) To deepen the customer loyalty: By customer preferences and sending the gifts, discounts to the customer, companies bring interest and enthusiasm. 4) To reactivate customer purchases: Companies can install automatic mailing programs. The database can help the company make attractive or timely offers. 5) To avoid serious customer mistakes: Mistakes are made by not using the customer database well. The Downside of Database Marketing and CRM (customer relationship marketing): There are four problems that prevent the firm from effectively using CRM. 1. The first is that building and maintaining a customer database requires a large investment in computer hardware, database software, analytical programs, communication links and skilled personnel. 2. The second problem is difficulty of getting everyone in the company to be customer oriented and to use the available information. 3. The third problem is that not all the customers want a relationship with the company, and they may resent knowing that the company has collected that much personnel information about them. 4. A fourth problem is that assumptions behind CRM may not always hold true.

DEALING WITH COMPETITION

Building strong brands require a keen understanding of competitors and competition grows more intense every year. New Competition is coming from all directions. One good way to start to deal with competition is through creatively designed and well executed marketing programs. Competitive forces: Michael Potter has identified five forces that determine the intrinsic long run attractiveness of a market or market segment:

 Industry competitors Potential entrants Substitutes Buyers Suppliers The threats these forces pose are as follows: 1. Threat of intense segment rivalry: A segment is unattractive if it already contains numerous, strong, aggressive competitors and even more if it is stable or declining. If plant capacity must be added in large increments, if fixed costs or exit barriers are high or if competitors have high stakes in staying in the segment then it will lead to frequent price wars, advertising battles, and new product introductions and hence will make it expensive to compete. 2. Threat of new entrants: The most attractive segment is one in which entry barriers are high and exit barriers are low. When both entry and exit barriers are high profit potential is high and when both are low the returns are stable and low. The worst case is when entry barriers are low and exit barriers are high. 3. Threats of substitute products: A segment is unattractive when there are actual or potential substitutes for the product. Substitutes place a limit on prices and profits. 4. Threats of buyers growing bargaining power: A segment is unattractive if buyers possess strong or growing bargaining power. Buyers bargaining power grows when they become more concentrated or organized. A better defense consists of developing superior offers that strong buyers cannot refuse. 5. Threats of suppliers growing bargaining power: A segment is unattractive if the companys suppliers are able to raise prices or reduce quantity supplied. The best defences are to build win-win relationships with suppliers or use multiple supply sources. Identifying Competitors: It would seem a simple task for a company to identify its competitors but however the range of the companys actual and potential competitors can be much broader than the obvious. And a companys more likely to be hurt by emerging competitors or new technologies than by current competitors. We can examine competition from both industry and a market point of view. An industry is a group of firms that offers a product or a class of products that are close substitutes for one another. Marketers classify industries according to number of sellers; degree of product differentiation; presence or absence of entry, mobility and exit barriers; cost structure; degree of vertical integration; and degree of Globalization. Using the market approach, we define competitors as companies that satisfy the same customer need. The market concept of competition reveals a broader set of actual and

potential competitors than competition defined in just product category terms. Profiling a companys direct and indirect competitors by mapping the buyers steps in obtaining in using the product highlights both the opportunities and challenges a company faces. Analyzing competitors: Once a company identifies its primary competitors, it must ascertain their strategies, objectives, strengths and weaknesses. Strategies: A group of firm following the same strategy in a given target market is called a strategic group. Objectives: Once a company has identified its main competitors and their strategies, it must ask: What is each competitor seeking in the marketplace? What drives each competitors behaviour? Competitors strive to maximize profits, sales growth, market share, cash flow, technological leadership, service leadership or a mix of these. Strengths and Weaknesses: A company needs to gather information about each competitors strengths and weaknesses. In general, a company should monitor three variables when analyzing competitors: 1. Share of market: The competitors share of the target market. 2. Share of mind: The percentage of customers who named the competitor in responding to the statement, Name the first company that comes to mind in this industry. 3. Share of heart: The percentage of customers who named the competitor in responding to the statement, Name the company from which you would prefer to buy the product. Companies that make steady gains in mind share and heart share will inevitably make gains in market share and profitability. Selecting Competitors: After the company has conducted customer value analysis and examined its competitors carefully, it can focus its attack on one of the following classes of competitors: Strong versus weak: Most companies aim their shots at weak competitors, because this requires fewer resources per share point gained. Close versus distant: Most companies compete with competitors that resemble them the most. Good versus Bad: Every industry contains good and bad competitors. Good competitors play by the industrys rules; they set prices in reasonable relationship to cause; and they favor a healthy industry. Bad competitors try to buy share rather than earn it; they take larger risks, they invest in overcapacity; and they upset industrial equilibrium.

Selecting Customers: As a part of the competitive analysis, firms must evaluate its customers base and think about which customer its willing to lose and which it wants to retain. One way to divide up the customer base is in terms of whether a customer is valuable and vulnerable.

Competitive strategies for market leaders:

We can again further insight by classifying firms by the roles they play in the target market leader, challenger, follower or Nicher. Many industries contain one firm that is the acknowledged market leader. This firm has the largest market share in the relevant product market and usually leads the other firms in price changes, new product introductions, distribution coverage, and promotional intensity. Expanding the total market: New customers: Every product class has the potential to attract buyers who are unaware of the product or resisting it because of the price or lack of certain features. More usage: Marketer can try to increase the amount, level, or frequency of consumption. Increase in frequency of consumption requires either 1) Identifying additional opportunities to use the brand in the same basic way 2) Identifying completely new and different ways to use the brand. Consumers may see the product as useful in certain places and at certain times, especially if it has strong associations to particular usage situations or user types. Defending market Share Position defense: It involves building superior brand power, and making the brand almost impregnable. Nescafe, for example, has defined its position against several attacking brands using this strategy. Flank defense: This strategy effectively bracketed wolf Schmidt and protected Smirnoffs flanks. Preemptive defense: A more aggressive maneuver is to attack before the enemy starts its offence. A company can launch a preemptive defense in several ways.
Counteroffensive Defense: When attacked, most market leaders will respond with a counter attack. In a counter offensive, the leader can meet the attacker frontally or hit its flank. Mobile defense: In mobile defense the leader stretches its domain over new territories that can serve as future centers for defense and offense through market broadening and market diversification. Market broadening shifts focus from the current product to the under-lying generic need. Market diversification involves shifting into unrelated industries. Contraction defense: Large companies sometimes must recognize that they can no longer defend all their territory. The best course of action then appears to be planned contraction.

Expanding Market Share:

The possibility of provoking antitrust action: Jealous competitors are likely to cry monopoly if a dominant firm makes further inroads. This raise in risk would diminish the attractiveness of pushing market share again too far. Economic cost: The cost of gaining further market share might exceed the value. The holdout customers may dislike the company, be loyal to competitive suppliers, have unique needs, or prefer dealing with smaller suppliers. Pursuing wrong marketing activities: Companies that attempt to increase market share by cutting prices more deeply than competitors typically dont achieve significant gains, because enough rivals meet the price cuts and others offer other values so buyers dont switch. The effect of increased market share on actual and perceived quality

Too many customers can put a strain on the firms resources, hurting product value and service delivery. America online experienced growing pains when its customer base expanded, resulting in system outages and access problems.

Other Competitive Strategies:

Firms that occupy second third and lower ranks in the industry are called runner-up or trailing firms. Eg: PepsiCo, Ford, Avis etc. They can attack the market either being market challengers or as market followers. Market-challenger strategies: Challengers set high aspirations, leveraging their resources while the market leader always runs the business as usual. Whom to attack? 1. Market leader: High risk but potentially high pay-off if the leader is not serving the market properly. It has a benefit of distancing the firm from other challengers. Other strategy is to out innovate the leader across the whole segment. 2. Firms of its own size that are not doing well and are underfinanced: These firms have aging products, are charging excessive prices, or are not satisfying customer in other ways. 3. Small local and regional firms: Several banks grew to their present size by gobbling up smaller regional banks. Eg: Tapal tea of Pakistan. General attack strategies: 5 types 1. Frontal Attack: Attacker matches its opponents product, advertising, price and distribution. A modified frontal attack such as cutting price can work if the market leader doesnt retaliate and if the competitor convinces the market that his product is similar to that of the leaders.

Eg: Amul kool and Amul masti dahi are equal in quality and lesser in price compared to high-priced branded products. 2. Flank attack: Directed in two strategic dimensions. a) Geographical attack where in the challenger attacks the spot areas in which the opponent is under performing. Eg: LG introduced the product colour television called SAMPOORNA in rural areas and challenged the other market leaders. b) Serving uncovered market needs. Eg: Woodland has challenged other leading brands like Bata and Liberty shoes by introducing robust, comfortable and durable outdoor shoes. 3. Encirclement attack: It means an attempt to capture a wide slice of an opponents territory through a blitz. That means launching a grand offensive on several fronts. Eg: Sun Microsystems licensed its Java software which began to appear in wide range of gadgets as the consumer electronic products began to go digital 4. Bypass attack: It is the most indirect strategy and offers 3 lines of approach a) Diversifying into unrelated products b) Diversifying into new geographical markets c) Leapfrogging into new technologies to supplant existing products Eg: Pepsi has used bypass strategy against coke by introducing Aquafina bottled water in 1997 before Coke launched its Dasani brand. In technological leapfrogging the challenger patiently researches and develops new technology and launches an attack. Eg: Google used technological leapfrogging to overtake Yahoo! And become the market leader in search. 5. Guerilla Warfare: It consists of wagging small, intermittent attacks to harass and demoralize the opponent and eventually secure permanent footholds. This type of challenger uses both conventional and non-conventional methods like price cuts, promotional offers and occasional legal action. It includes more preparation. Market-follower strategies: Market followers usually come along and copy or improve the already existing product. It may not take over the market of the leader but definitely makes profits as it doesnt involve any innovation cost. A market follower is often a major target to the challengers and hence the follower must always keep the manufacturing cost low and the product and services high. The follower must define a growth path and the strategies include i. Counterfeiter: The counterfeiter duplicates the leaders product and packages and sells it through duplicate dealers. Eg: Apple, Rolex, Music firms etc.

Cloner: The cloner emulates the leaders products, name and packaging with slight variations. iii. Imitator: The imitator copies some things from the leader but maintains differentiation in terms of packaging, pricing or location. Eg: Dominos home delivery idea was taken to Spain by Fort Lauderdale whose Tele Pizza service now operates in almost thousand stores in Europe and Latin America. iv. Adapter: The adapter takes the leaders products and adapts or improves them. The adapter may choose to sell to different markets. A follower should always aim to be in the top two positions or else followership is often not a rewarding path. Market-Nicher strategies: It means to be a leader in small market by targeting smaller markets or sub-segments of the market which are of no interest to the leaders or the larger firms. Sometimes larger firms may also use niche strategies for some of their business units. Niche markets tend to offer high value at premium prices to the customer with a low manufacturing cost. Reasons for high profits in ninching is that the manufacturer knows the demands of the customer very well and thereby satisfies the customer much better than any other larger markets. Hence the nicher provides a premium pricing for the products and attains large profit margins compared to the mass markets. As the niche markets are at constant threats, the company should develop multiple ninching strategies i.e., developing strength in two or more products. New firms entering the market should initially aim at niche rather than the mass market. Eg: Irish company Digicel aimed at the lower income groups and took forward the idea of providing telephone services at low cost. ii.

Balancing customer and competitor orientations:

Competitor-Centered Companies: Positive aspects include The company trains its marketers to be alert and watch for the weaknesses in its competitors and its own position. The company develops a fighter orientation. Negative aspects include The company determines its moves based on its competitor rather than it being innovative. The company doesnt concentrate on its own goals. It depends on the competitor so much. Customer-Centered Companies:

They identify new opportunities and promise to deliver long-run profits. They concentrate much on the customer needs and try to meet the demand. Eg: Amazon.com is the best example of a customer-centered company.