LEARNING OBJECTIVESAfter 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.

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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 PROJECTS1. 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.

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ASSIGNMENTSSmall Group Assignments1. 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.

2. 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 Assignments1. 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.

2. 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-Share1. 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

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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.

2. 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 TOPICSYou 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?

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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

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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.

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MARKETING SPOTLIGHT—Dell

Discussion Questions:

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

a. Dell information about its customers.

b. Its production process.

c. JIT inventory practices.

2) Where is Dell vulnerable?

a. Changes in usage of computers.

b. Changes in technology that makes the personal computer obsolete.

c. A lapse of marketing research caused by corporate changes or financial setbacks.

3) What should it watch out for?

a. Corporate complacency due to success.

b. The effectiveness of its marketing research in identifying emerging trends.

c. 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?

a. Accept your competencies, accept your limitations, and capitalize on your strengths.

b. 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?

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

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Figure 5.1(a) Traditional Organization versus Modern Customer-Orientated Company organization

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Successful marketing companies invert the chart.

A) With the rise of digital technologies like the Internet, today’s increasingly informed consumers expect companies to do more than connect with them, more than satisfy them, and even more than delight them.

Customer Perceived ValueA) Customers tend to be value-maximizers.

B) Customers estimate which offer will deliver the most perceived value and act on it.

Figure 5.2 Determinants of customer-delivered value.

C) Customer perceived value (CPV) is the difference between the prospective customer’s evaluation of all the benefits and all the costs of an offering and the perceived alternatives.

Review Key Definition here: customer perceived value

D) Total customer value is the perceived monetary value of the bundle of economic, functional, and psychological benefits customers expect from a given market offering.

Review Key Definition here: total customer value

E) Total customer cost is the bundle of costs customers expect to incur in evaluating, obtaining, using, and disposing of the given market offering, including monetary, time, energy, and psychic costs.

Review Key Definition here: total customer cost

F) Customer perceived value is thus based on the difference between what the customer gets and what he or she gives for different possible choices.

Applying Value Concepts A) The customer adds up values from the four sources for Caterpillar—product, services,

personnel, and image and compares them to Komatsu.

B) The buyer evaluates these elements together with the monetary cost to form a total customer cost.

C) The buyer will choose whichever source he thinks delivers the highest perceived customer value.

Choices and Implications

Buyers operate under various constraints and occasionally make choices that give more weight to their personal benefit than to the company’s benefit.

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Figure 5.1(b) Determinants of Customer Delivered Value

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A) In the above example, suppose the customer chooses to buy the Komatsu tractor, there are three possibilities:

1) The buyer might be under orders to buy at the lowest price.

2) The buyer will retire before the company realized that the Komatsu tractor is more expensive to operate.

3) The buyer enjoys a long-term friendship with the Komatsu salesperson.

B) Customer perceived value is a useful framework that applies to many situations and yields rich insights. Its implications are:

1) First, the seller must assess the total customer value and total customer cost associated with each competitor’s offer.

2) Second, the seller who is at a customer perceived value disadvantage has two alternatives:

a. To increase total customer value (by strengthening or augmenting the offer’s product, services, personnel, and image benefits).

b. To decrease total customer cost (by reducing price, simplifying the ordering, and delivery process, or absorbing some buyer risk by offering a warranty.

Delivering High Customer Value A) Loyalty is defined as “a deeply held commitment to rebuy or repatronize a preferred

product or service in the future despite situational influences and marketing efforts having the potential to cause switching behavior.”

B) The key to generating high customer loyalty is to deliver high customer value.

C) The value proposition consists of the whole cluster of benefits the company promises to deliver, it is more than the core positioning of the offering.

D) Whether the promise is kept depends on the company’s ability to manage its value-delivery system.

E) The value-delivery system includes all the experiences the customer will have on the way to obtaining and using the offering.

Review Key Definitions here: value proposition and value-delivery system

F) Whether customers will actually receive, the promised value proposition will depend upon the marketer’s ability to influence various core business processes.

Total Customer SatisfactionWhether the buyer is satisfied after the purchase depends on the offer’s performance in relation to the buyer’s expectations.

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B) Satisfaction is a person’s feeling of pleasure or disappointment resulting from comparing a product’s perceived performance (or outcome) in relation to his or her expectations.

C) A company must operate on the philosophy that it is trying to deliver a high level of customer satisfaction subject to delivering acceptable levels of satisfaction to the other stakeholders, given its total resources.

Customer ExpectationsA) How do buyers form their expectations?

1) From past buying experiences.

2) Friends and associates advice.

3) Marketers’ and competitors’ information and promises.

A customer’s decision to be loyal or to defect is the sum of many small encounters with the company.

Companies need to create a “branded customer experience.”

Measuring Satisfaction A) Many companies are systematically measuring customer satisfaction and the factors

shaping it.

B) A company would be wise to measure customer satisfaction regularly because one key to customer retention is customer satisfaction.

C) The link between customer satisfaction and customer loyalty, however, is not proportional.

D) A number of methods exist to measure customer satisfaction.

1) Periodic surveys can track customer satisfaction directly.

2) Companies can monitor the customer loss rate and contact customers who have stopped buying and learn why this happened.

3) Companies can hire mystery shoppers to pose a potential buyers and report on strong and weak points experienced in buying the company’s and competitor’s products.

4) For customer satisfaction surveys, it is important that companies ask the right questions.

a. “Would you recommend this product or service to a friend”?

E) In addition to tracking customer value expectations and satisfaction, companies need to monitor their competitor’s performance in these areas as well.

F) For customer-centered companies, customer satisfaction is both a goal and a marketing tool.

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G) Companies that do achieve high customer satisfaction ratings make sure that the target market knows it.

H) American Customer Satisfaction Index (ACSI).

Product and Service QualitySatisfaction will also depend on product and service quality.

Quality is the totality of features and characteristics of a product or service that bear on its ability to satisfy stated or implied needs.

Review Key Definition here: quality

A) We can say that a seller has delivered quality whenever the seller’s product or service meets or exceeds the customers’ expectations.

B) Distinguish between conformance quality and performance quality.

C) Total quality is the key to value creation and customer satisfaction.

D) Marketing managers have two responsibilities in a quality-centered company.

1) First, they must participate in formulating strategies and policies to help the company win through total quality excellence.

2) Second, they must deliver marketing quality alongside production quality.

Total Quality Management

A) Total quality management (TQM) is an organization-wide approach to continuously improve the quality of all the organization’s processes, products, and services.

Review Key Definition here: total quality management

B) Product and service quality, customer satisfaction, and company profitability are intimately connected.

C) TQM ran into implementation problems as firms became overly focused on how they were doing business and not the why they were in business. Companies lost sight of consumer needs and wants.

D) Companies are now concentrating efforts on “return on quality” or ROQ.

E) ROQ advocates improving quality only on those dimensions that produce tangible customer benefits, lower costs, or increased sales.

F) Marketers play several roles in helping their companies define and deliver high-quality goods and services to target customers.

1) They bear the major responsibility for correctly identifying the customers’ needs and requirements.

2) They must communicate customer expectations properly to product designers.

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3) They must check that customers’ orders are filled correctly and on time.

4) They must make sure that customers have received proper instructions, training, and technical assistance in the use of the product.

5) They must stay in touch with customers after the sale to ensure that they are satisfied and remain satisfied.

6) They must gather customer ideas for product and service improvements and convey them to the appropriate departments.

MAXIMIZING CUSTOMER LIFETIME VALUEMarketing is the art of attracting and keeping profitable customers.

A) The 80/20 rule states that the top 20 percent of the customers may generate as much as 80 percent of the company’s profits.

B) Suggests amending the rule to read 20-80-30, to reflect the idea that the top 20 percent of customers generate 80 percent of the company’s profits, half of which are lost serving the bottom 30 percent of unprofitable customers.

1) The implication is that a company could improve its profits by “firing” its worst customers.

Customer Profitability

A) A profitable customer is a person, household, or company that over time yields a revenue stream that exceeds by an acceptable amount the company’s cost stream of attracting, selling, and servicing that customer.

B) Customer profitability can be assessed individually, by market segment, or by channel.

C) Most companies fail to measure individual customer profitability.

Customer Profitability Analysis

Figure 5.3 shows a profitability analysis.

A) Customer 1 is very profitable.

B) Customer 2 is mixed profitability.

C) Customer 3 is a losing customer.

1) What can the company do about customers 2 and 3?

a. It can raise the price of its less profitable products or eliminate them.

b. It can try to sell them its profit-making products.

c. It can encourage customer 3 to switch to competitors.

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D) Customer profitability analysis (CPA) is best conducted with the tools of an accounting technique called Activity-Based Costing (ABC).

1) Platinum customers (most profitable).

2) Gold customers (profitable).

3) Iron customers (low profitability but desirable).

4) Lead customers (unprofitable and undesirable).

Competitive Advantage Competitive advantage is a company’s ability to perform in one or more ways that

competitors cannot or will not match.

Review Key Definition here: competitive advantage

A) Michael Porter urged companies to build a sustainable competitive advantage.

B) Few competitive advantages are sustainable, at best they may be leverageable.

1) A leverageable advantage is one that a company can use as a springboard to new advantages.

2) Any competitive advantage must be seen by customers as a customer advantage.

Measuring Customer Lifetime Value Customer Lifetime Value (CLV) describes the net present value of the stream of future profits expected over the customer’s lifetime purchases.

Review Key Definition here: customer lifetime value

A) CLV calculations provide a formal quantitative framework for planning customer investment and helps marketers to adopt a long-term perspective.

Customer Equity Customer equity is the total of the discounted lifetime values of all of the firm’s customers.

Review Key Definition here: customer equity

A) Rust, Zeithaml, and Lemon distinguish three drivers of customer equity:

1) Value equity: Is the customer’s objective assessment of the utility of an offering based on perceptions of its benefits relative to its costs?

a. The sub-drivers of value equity are quality, price, and convenience.

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2) Brand equity: Is the customer’s subjective and intangible assessment of the brand, above and beyond its objectively perceived value?

a. The sub-drivers of brand equity are customer brand awareness, customer attitude toward the brand, and customer perception of brand ethics.

3) Relationship equity: Is the customer’s tendency to stick with the brand, above and beyond objective and subjective assessments of its worth?

a. Sub-drivers of relationship equity include loyalty programs, special recognition and treatment programs, community building programs, and knowledge-building programs.

B) This formulation integrates value management, brand management, and relationship management within a customer-centered focus.

C) Blattberg, Getz, and Thomas view customer equity as driven by three components:

1) Acquisition.

2) Is the function of the efficiency of add-on selling, the number of add-on selling offers given to existing.

a. Is affected by the number of prospects, probability of a prospect, and spending per prospect.

3) Retention.

a. Is influenced by the retention rate and retention spending level.

b. Add-on-selling customers and the response rate to new offers.

D) Marketing equity represents a promising approach to marketing management. Relational equity is the cumulative value of the firm’s network of customers, partners, suppliers, employees, and investors.

CULTIVATING CUSTOMER RELATIONSHIPSMaximizing customer value means cultivating long-term customer relationships.

A) Companies are moving to more precision marketing designed to build strong customer relationships.

B) Mass customization is the ability of a company to meet each customer’s requirements—to prepare on a mass basis individually designed products, services, programs, and communications.

Review Key Definition here: mass customization

Customer Relationship Management (CRM) Customer relationship management (CRM) is the process of managing detailed information about individual customers and carefully managing all customer “touch points” to maximize customer loyalty.

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Review Key Definition here: customer relationship management

A) A customer “touch point” is any occasion on which a customer encounters the brand and product—from actual experience to personal or mass communications to casual observation.

B) Customer relationship management enables companies to provide excellent real-time customer service through the effective use of individual account information.

C) Peppers and Rogers outlined a four-step framework for one-to-one marketing that can be adapted to CRM marketing:

1) Identify your prospects and customers.

2) Differentiate customers in terms of: (1) their needs and (2) their value to your company.

3) Interact with individual customers to improve your knowledge about individual needs and to build stronger relationships.

4) Customize products, services, and messages to each customer.

Table 5.1 lists the main differences between mass marketing and one-to-one marketing.

D) A key driver of shareholder value is the aggregate value of the customer base. Winning companies improve the value of their customer base by excelling at strategies such as:

1) Reducing the rate of customer defection.

2) Increasing the longevity of the customer relationship.

3) Enhancing the growth potential of each customer through “share-of-wallet, cross-selling, and up-selling.”

4) Making low-profit customers more profitable or terminating them.

5) Focusing disproportionate effort on high-value customers.

Attracting, Retaining, and Growing Customers A) Customers are becoming harder to please.

B) Companies seeking to expand profits and sales have to spend considerable time and resources searching for new customers.

1) Suspects are people or organizations that might conceivably have an interest in buying but many not have the means or real intention to buy.

2) Prospects—customers with the motivation, ability, and opportunity to make a purchase

3) Customer churn—high customer defection

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4) Two main ways to strengthen customer retention:

a. Erect high switching costs.

b. Deliver high customer satisfaction.

C) Most companies now recognize the importance of satisfying and retaining customers.

D) Satisfied customers constitute the company’s customer relationship capital.

1) Acquiring new customers cost five times more than the costs involved in satisfying and retaining current customers.

2) The average company loses 10 percent of its customers each year.

3) A 5 percent reduction in customer defection rate can increase profits by 25 percent to 85 percent depending on the industry.

4) Customer profit rate tends to increase over the life of the retained customer.

Figure 5.4 shows the main steps in the process of attracting and keeping customers.

E) The starting point is everyone who might conceivably buy the product or service (suspects).

1) Prospects.

2) First-time customers.

3) Repeat customers.

4) Clients—people whom the company treats very specially and knowledgeably.

5) Members.

6) Advocates—customers who enthusiastically recommend the company.

7) Partners.

F) Markets can be characterized by long-term buying dynamics and how easily customers can enter and leave.

1) Permanent capture markets—once a customer always a customer.

2) Simple retention markets—customers lost after each period.

3) Customer migration markets—customers can leave and come back.

Building Loyalty A) Five different levels of investment in customer-relationship building:

1) Basic marketing.

2) Reactive marketing.

3) Accountable marketing.

4) Proactive marketing.

5) Partnership marketing.

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Figure 5.5 shows the likely level of relationship marketing depends upon the number of customers and profit margin levels.

Table 5.2 highlights five imperatives of CRM and where technology fits in.

Reducing Customer Defection

A) Five main steps a company can take to reduce the defection rate:

1) The company must define and measure its retention rate.

2) The company must distinguish the cause of customer attrition and identify those that can be managed better.

3) The company needs to estimate how much profit it loses when it loses customers.

4) The company needs to figure out how much it would cost to reduce the defection rate.

5) Finally, listening to customers.

Forming Strong Customer BondsA) Berry and Parasuraman have identified three retention-building approaches:

1) Adding financial benefits.

2) Adding social benefits.

3) And adding structural ties.

Adding Financial BenefitsA) Two financial benefits companies can offer are:

1) Frequency programs—designed to provide rewards to customers who buy frequently and in substantial amounts; good way to build long-term loyalty with the 20 percent of the customers who contribute 80 percent of the profits.

2) Club marketing programs—limited to an affinity group or to those willing to pay a small fee. Limited membership clubs are more powerful long-term loyalty builders.

Adding Social BenefitsA) Company personnel work on cementing social bonds with customers by

individualizing and personalizing customer relationships.

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Adding Structural TiesA) The company may supply customers with special equipment or computer links that

help customers manage orders, payroll, and inventory.

B) The marketer’s aim should be to increase the consumer’s proclivity to repurchase.

1) Create long-term contracts.

2) Charge a lower price to consumers who buy larger supplies.

3) Turn the product into a long-term service.

CUSTOMER DATABASES AND DATABASE MARKETINGA) A customer database is an organized collection of comprehensive information about

individual customers or prospects that is current, accessible, and actionable, for such marketing purposes as lead generation, lead qualification, sale of a product or service, or maintenance of customer relationships.

Review Key Definition here: customer database

A) Database marketing is the process of building, maintaining, and using customer databases and other databases for the purpose of contacting, transacting, and building customer relationships.

Review Key Definition here: database marketing

Customer DatabasesA) Customer databases are not customer mailing lists.

1) A customer mailing list is simply a set of names, addresses, and telephone numbers.

a. Ideally, a customer database contains the consumer’s past purchases, demographics, income, family members, psychographics, mediagraphics, and other useful information.

2) A business database would contain business customers’ past purchases, past volumes, prices, and profits, buyer team members’ names, and other useful information.

Figure 5.6 displays a method for selectively gaining greater share of a customer’s business.

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Data Warehouses and DataminingA) Savvy companies are capturing information every time a customer comes into contact

with any of its departments.

1) These data are collected by the company’s contact center and organized into a data warehouse.

2) Through data mining, marketing statisticians can extract useful information about individuals, trends, and segments from the mass of data.

Using the DatabaseA) To identify prospects.

B) To decide which customers should receive a particular offer.

C) To deepen customer loyalty.

D) To reactivate customer purchases.

E) To avoid serious customer mistakes.

The Downside of Database Marketing and CRM A) Four problems can deter a firm from effectively using CRM.

1) Building and maintaining a customer database requires a large investment in computer hardware, database software, analytical programs, communication links, and skilled personnel.

2) The difficulty of getting everyone in the company to be customer orientated and to use the available information.

3) Not all customers want a relationship with the company.

4) That the assumptions behind CRM may not always hold true—i.e. it might not be the case that it costs less to serve the more loyal customers.

B) Businesses where the CLV is low, who have a high churn and where there is little or no contact between seller and ultimate buyer may not benefit from a CRM.

1) Four main perils of CRM:

a. Implementing CRM before creating a customer strategy.

b. Rolling out CRM before changing organization to match.

c. Assuming more CRM technology is better.

d. Stalking, not wooing customers.

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