Chapter 5: Creating Customer Value, Satisfaction, and Loyalty

LEARNING OBJECTIVES

After reading this chapter, students should:

Know what are customer value, satisfaction, and loyalty, and how can companies deliver them

Know what is the lifetime value of customers

Know how companies can both attract and retain customers

Know how companies can cultivate strong customer relationships

Know how companies can deliver total quality

Know what is database marketing

CHAPTER 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 value and total customer cost.

A buyer’s satisfaction is a function of the product’s perceived performance and the buyers’ expectations. Recognizing that high satisfaction leads to high customer loyalty, many companies today are aiming for TCS—total customer satisfaction. For such companies, customer satisfaction is both a goal and a marketing tool.

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. Today’s companies have no choice but to implement total quality management programs if they are to remain solvent and profitable.

Marketing managers have two responsibilities in a quality-centered company. First, they must participate in formulating strategies and policies designed to help the company win through total quality excellence. Second, they must deliver marketing quality alongside production quality.

Companies are also becoming skilled in Customer Relationship Management (CRM) that focuses on meeting the individual needs of valued customers. The skill requires building a customer database and doing data mining to detect trends, segments, and individual needs.

OPENING THOUGHT

Although most students understand the concept of “buying,” some will have difficulty in understanding the differences between total customer value and total customer cost. It will be beneficial for long-term understanding and retention to cover what the definition is and what it is not. Secondly, the distinction between satisfaction and total customer satisfaction for the consumer might be challenging for some students. Some students may have a hard time understanding the distinction between perception and expectation. Finally, it might be necessary to reemphasize the concepts of Customer Relationship Management (CRM), customer databases, and database mining often in the lecture. Students may confuse the concept of mailing lists with databases. However, most of the students today are proficient in Internet usage and can cite examples of relationship marketing from their own favorite Internet sites such as Amazon.com.

TEACHING STRATEGY AND CLASS ORGANIZATION

PROJECTS

1.At this point in the semester-long marketing plan project, students should have completed their value proposition for the fictional product, defined how they will deliver satisfaction and maintain customer loyalty.

2.Have students (in groups or individually) select a local firm in their community, or a local division of a national firm, and seek permission to interview their corporate executives on their corporation’s definition of customer satisfaction, loyalty, and what their particular firm does to foster such customer relations. This project can be combined with the project on marketing research and as such, students can create questionnaires suitable for mailing to these executives. The students can then present these findings to the class in a group or by individual presentations. This could be a full-semester project or limited to a few weeks of the semester.

3.Sonic PDA Marketing Plan Sonic has decided to focus on total customer satisfaction, because studies have shown that customers who are “completely satisfied” with the product or service are much more likely to buy more from the company than customers who report they are “satisfied.” You have been asked by Jane Melody to:

  • Recommend how Sonic should measure total customer satisfaction.

Review the possible ways to gain customer satisfaction information and write the recommended approach in a marketing plan or into the Positioning section of Marketing Plan Pro.

ASSIGNMENTS

Small Group Assignments

  1. In small groups (five students suggested as the maximum), have the students make appointments with local insurance agents, financial planners, or other service professionals in their area to discuss the agent and his company’s philosophy on customer value, satisfaction, and loyalty. There are some specific questions to ask: How does your company (and you individually) define customer satisfaction? How do you go about delivering value to your clients? How do you (and your company) calculate the lifetime value of a client? Students should prepare a report to be presented either to the class or as written group paper.
  1. Key manufacturers and others must be concerned with how customers view products (customer satisfaction perceptions) being disseminated throughout the “electronic world” via the Internet. No longer can one discount the “power of the mouse” for affecting potential customers. In small groups, students are to select a particular firm or product and are to research what is being said on the Internet regarding this company/product. What affects/effects does this type of dissemination of consumer opinions via the Internet have on the company’s marketing strategies? What can the company do to stem the tide of such comments? How does a company defend itself against blatantly untrue consumer opinions?

Individual Assignments

  1. Customer relations management is a current business “buzz word.” Students can be directed to do an Internet research project from named marketing/business journals on the subject of customer relations management (the chapter’s endnotes can provide a good source of leads for the students). Each student can be directed to research, read, and compile a report on their findings from a minimum of five articles from five different marketing (and business magazines such as Fortune). The student’s report is to comment on how these articles compare, complement, or contrast the material contained in this chapter.
  1. Students who regularly shop at one of the main Internet sites (eBay, Amazon.com, Land’s End.com, etc.) experience some customer bonding with the provider. Ask students to comment on their experiences with these providers in terms of: Does the customization aspect of the provider encourage you to shop more, or is the customization aspect of the provider more of an intrusion or hindrance? Does the customization provided concern you as to the level of personal information collected by the company? Do you feel that some of your “right to privacy” is being compromised for the sake of developing “bonds”?

Think-Pair-Share

  1. Key retailers emphasize service, customer satisfaction, and loyalty. Retailers such as Nordstrom, Saturn, Lexus, Infiniti, and others have a reputation for outstanding customer service and satisfaction. In small groups, have the students visit these key retailers (and other retailers pertinent to your trading area) and write down their observations regarding what service quality clues they experienced during their in-store visits. Secondly, these same students are to visit other contrasting retailers and are to look for similar signs and clues to quality service. In a prepared report, students should note what elements of customer satisfaction was and was not present at each level of service provider. Taking the position then of a “shopper,” students should comment on which retailer would most likely retain customers and why.
  1. The research firm J.D. Powers and Associates lists eight categories of products for consumers to research before purchasing the product or service. Breaking up the class into eight groups, have the students research the top performers for each category and be able to share their findings as to what characteristics, policies, procedures, and vision these top rated companies have in common. Is there a “common” link among all of the winners? Are there differences? In terms of the material contained in this chapter, how would you explain these similarities and differences?

MARKETING TODAY—CLASS DISCUSSION TOPICS

You and your class colleagues have decided to start a business upon graduation. Your expertise is in marketing so you have decided to start a marketing consultant firm. As one of your basic underlying competitive distinctions, you have decided upon “exceptional service is our minimum” as your tag line. Now you must define “exceptional service” and translate that tag line into specifics.

Using each of the major headings contained in this chapter, detail how you plan to communicate “exceptional service.”

For example, answer the following questions:

1)Define your customer’s perceived value of your service.

2)Apply the value concept.

3)Deliver high customer value.

4)Define total customer satisfaction for your firm.

5)Define customer expectations for your firm (after all you have said that “exceptional service is our minimum” so now define what the customers’ expectations will be after reading this statement on your business cards).

6)How are you going to measure satisfaction?

7)What is product and service quality—your definition or your customer’s definition?

8)Are/is your firm going to use ROQ as a measure?

9)How will you define customer profitability?

10)What will be your measure of the customer’s lifetime value for your firm?

11)How will you cultivate customer relationships and customer relation management?

12)How will you retain and grow customers?

13)How will you build customer loyalty, reduce customer defections, and build strong customer bonds?

END-OF-CHAPTER SUPPORT

MARKETING DEBATE—Online Versus Off-Line Privacy

As more and more firms practice relationship marketing and develop customer databases, privacy issues are emerging as an important topic. Consumers and public interest groups are scrutinizing- and sometimes criticizing the privacy policies of firms. Concerns are also being raised about potential theft of online credit card information or other potentially sensitive or confidential financial information. Others maintain that the online privacy fears are unfounded and that security issues are every bit as much a concern in the off-line world. They argue that the opportunity to steal information exists virtually everywhere and that it is up to the consumer to protect his or her interests.

Take a position:(1) Privacy is a bigger issue in the online world than the off-line world versus privacy is no different online than off-line. (2) Consumers on the whole receive more benefit than risk from marketers knowing their personal information.

(1) Pro: Privacy is a larger issue in the online world than the off-line world simply because the information has a greater opportunity to be exposed to more people than off-line transactions. The transmission of private information electronically travels through electronic channels each of which presents opportunity for misdirection or computer “hacking” activities. In many of these cases, the person, or firm transmitting this information, redirecting this information receiving this information and storing this information is unknown to the consumer. In the off-line world, the consumer has the opportunity to know the company, personnel, or firm receiving this information and has the opportunity to accept or decline sharing their personal information.

Con: Transmission of personal information in the off-line world still travels electronically, in many cases. The act of paying with a credit card still involves the transmission of data electronically at some point in the transaction. What differs is the fact that the consumer is initially interfacing with a person (or firm). Although this does not mitigate the risks involved to the consumer, it does present some concrete knowledge of the people, or firm involved in the transaction.

(2) Pro: With an active CRM program in place by a firm, consumers can receive more benefit than risks with the marketer knowing their personal information. A firm with an active CRM program can and does allow the consumer to move through the Customer Development Process (from suspects to partners) thus establishing strong ties to the firm and the reception of increased specially designed promotional and service programs unavailable to the general public. This is seen in frequent flyer discounts, member discount, special shopping days, and advance notices of new products, promotions, and reminders for service opportunities (oil change reminders, medical appointment reminders, and others). In today’s fast paced world, consumers stand to benefit from such attention to detail.

Con: In current society, the dissemination of one’s personal information is scary and a concern to the public in general as opportunities for misuse of this information abound. The public does not like intrusions into their personal lives, unless invited. Consumers do not feel that the benefits of this sharing of information outweigh the cost of the lost of privacy. The recent “Do Not Call Registry” established to limit the telemarketing industry is an example of consumers revolting in opposition.

MARKETING DISCUSSION

Consider the lifetime value of customers (CLV). Choose a business and show how you would go about developing a quantitative formulation that captures the concept. How would organizations change if they totally embraced the customer equity concept and maximized CLV?

Suggested Response

A) CLV describes the net present value of the stream of future profits expected over the customers’ lifetime purchases. Each student’s example will differ but the main tenets of each report should include the following:

1)Add:

a)Profit from a sale (dollar or percent).

b)Number of sales per customer per year.

c)Average age of a customer.

d)Average expected lifespan of a customer.

2)Subtract:

a)Appropriate discount rate.

b)Costs of attracting one customer.

c)Selling one customer.

d)Servicing one customer.

B) Organizations would change by beginning to take a long-term perspective rather than a short-term (quarter-to-quarter view). No longer viewing a customer as a “transaction” but rather as a “lifetime value” solidifies and demonstrates the impact that a single consumer has to a firm in a language they understand—dollars. Firms would begin to customize offerings and messages to each customer, ensure that retention strategies are in place, differentiate customers in terms of needs and value to the company, and build stronger relationships with key customers. Because of a change in the loci of focus for the firm, strategies, and actions based upon which would provide the best return on its marketing investments would be implemented.

MARKETING SPOTLIGHT—Dell

Discussion Questions:

1)What have been the key success factors for Dell?

  1. Dell information about its customers.
  2. Its production process.
  3. JIT inventory practices.

2)Where is Dell vulnerable?

  1. Changes in usage of computers.
  2. Changes in technology that makes the personal computer obsolete.
  3. A lapse of marketing research caused by corporate changes or financial setbacks.

3)What should it watch out for?

  1. Corporate complacency due to success.
  2. The effectiveness of its marketing research in identifying emerging trends.
  3. The temptation to expand into other consumer products outside of its core competencies.

4)What recommendations would you make to senior marketing executives going forward?

  1. Accept your competencies, accept your limitations, and capitalize on your strengths.
  2. Continue to believe that marketing research is the underlying foundation of your product development processes and marketing successes.

5)What should they be sure to do with their marketing?

  1. Continue to target their marketing to identify those segments of the total market that are receptive to new and innovative products and ideas.

DETAILED CHAPTER OUTLINE

Today, companies face their toughest competition ever. The cornerstone of a well-conceived marketing orientation is strong customer relationships. Marketers must connect with customers—informing, engaging, and energizing them in the process.

BUILDING CUSTOMER VALUE, SATISFACTION, AND LOYALTY

Managers who believe the customer is the company’s only true “profit center” consider the traditional organizational chart obsolete.

Successful marketing companies invert the chart.