Chapter 2: Relationship Marketing and the Concept of Customer Value

Chapter 2:

Relationship Marketing and the

Concept of Customer Value

Overview

Topics discussed:

 The Link between CRM and Database Marketing, and the Importance of Customer

Value

Link Between CRM and Database Marketing

 Database Marketing

 Identify and analyze customer population  Group based on similarities

 Recommend separate marketing campaigns for different groups  CRM

 Applies database marketing techniques at customer level  Develops strong company-to-customer relationships

CRM

 Capture customer data and interact with the customer simultaneously

 Develop specific strategies for interaction with each customer  Better relationships with profitable customers

 Locating and enticing new customers that will be profitable

 Finding appropriate strategies to deal with unprofitable customers, including termination of relationships

Link Between CRM and Customer Value

 Customer Value:

 The economic value of the customer relationship to the firm

 CRM:

 Practice of analyzing and utilizing marketing databases and leveraging communication

technologies to determine corporate practices and methods that will maximize the

lifetime value of each individual customer to the firm

 Adoption of CRM with customer value at its core strategy helps us define CRM from a

Benefits of customer value-based approach in

Marketing Decisions

 Decrease in Costs

 Maximization in revenues

 Improvement in Profits and ROI

 Acquisition and Retention of Profitable Customers  Reactivation of Dormant Customers

Conceptualizations of CRM

 Functional level: focuses on technology

 Sales force automation in the sales function

 Campaign management in the marketing function

 Customer facing front-end level: focuses on total customer experience  To build a single-view of customers across contact channels

 To distribute customer intelligence to all customer-facing functions

 Strategy level: focuses on customer satisfaction  Frees CRM from technology underpinnings

 Describes CRM as a process to implement customer centricity in the market and build shareholder value

Components of CRM from a Business Strategy

Perspective

 Strategic process

 Spans multiple organizational functions

 Continuous effort towards becoming customer-centric  Selection

 Resource allocation based on economic value of customer  Interactions

 Exchange of information and goods between customer and firm evolves as a function of past exchanges

 Customers

 End-users and intermediaries such as distributors and retailers

 Greater fine-tuning of segmentation strategies to eventually target individual customers with customized product offerings

 Optimizing current and future value of customer

Source: Strengthening the satisfaction-profit chain”, Eugene W Anderson, Vikas Mittal. Journal of Service Research, Nov 2000. Vol 3, Iss.2, p 107

Satisfaction-Loyalty-Profit Chain

 Satisfaction-Loyalty-Profit Chain

 Increased customer satisfaction will lead to greater customer retention, which is often

used as a proxy for customer loyalty, which then is expected to lead to greater profitability Product Performance Service Performance Employee Performance Customer Satisfaction Retention / Loyalty Revenue / Profit

Direct Link between

Customer Satisfaction and Profits

 Direct link suggests, that as customers experience greater satisfaction with a firm’s offering, profits rise

 Positive correlation between customer satisfaction and ROA

 Improving customer satisfaction comes at a cost and once the cost of enhancing satisfaction is factored in, offering “excessive satisfaction” doesn’t pay

 Marginal gains in satisfaction decrease, while the marginal expenses to achieve the growth in satisfaction increase

 There is an optimum satisfaction level for any firm, beyond which increasing satisfaction does not pay

Source: “Strengthening the satisfaction-profit chain”, Eugene W Anderson, Vikas Mittal. Journal of Service Research, Nov 2000. Vol 3, Iss.2, p 114

Link between Satisfaction and Retention (2)

 Link between satisfaction and retention is asymmetric:

 Dissatisfaction has a greater impact on retention than satisfaction  Even if the level of satisfaction is high, retention is not guaranteed  If customers are dissatisfied, other products become more enticing

 The link is nonlinear in that the impact of satisfaction on retention is greater at the extremes  The flat part of the curve in the middle has also been called the “zone of indifference”

 Factors like the aggressiveness of competition, degree of switching cost, and the level of perceived risk influence the shape of the curve and the position of the elbows

Source: “Why satisfied customers defect”, Jones, Thomas O, Sasser, W Earl Jr. Harvard Business Review. Boston: Nov/Dec 1995. Vol. 73, Iss. 6

Link between Loyalty and Profits

 Reichheld’s hypotheses

 Long term customers spend more per period over time  Cost less to serve per period over time

 Have greater propensity to generate word-of-mouth

 Pay a premium price when compared to that paid by short-term customers  Does not hold true in a non-contractual relationship

 Revenue stream must be balanced by the cost of constantly sustaining the relationship and by fending off competitive attacks

 Efforts at increasing customer satisfaction and retention not only consume a firm’s resources but are subject to diminishing returns

Lifetime Duration-Profitability Association

 Reinartz and Kumar: Across the different firms,

 There is a segment of customers that is loyal but not very profitable (due to excessive resource allocation)

 There is a segment that generates very high profits although it has only a short tenure  Since these short-term customers can be very profitable, it is clear that loyalty is not

Lifetime Duration-Profitability Association (2)

 Overall trend shows a direct correlation between loyalty and profitability  Outliers on the graph who generate high profits while not

having high loyalty will outperform those customers who have a high level of loyalty but who are not very profitable

High Low Lifetime Profit Low High Loyalty

Summary

 Rapid advances in technology allowed increase in customer database, which marketers use to target specific segments

 Marketing is increasingly focused on the individual customer and delivering products that meets customer’s needs

 Relationship marketing seeks to establish individual relationships and monitor them over time, delivering specifically targeted marketing campaigns.

 CRM marketers can generate more profit and increase customer satisfaction

 Various links in the PSC are almost always nonlinear, asymmetric, and certainly segment and industry specific