Chapter Questions What are customer value, satisfaction and Topic 4 loyalty, and how can companies deliver Creating Customer Value What is the lifetime value of customers? Satisfaction and Loyalty How can companies both attract and retain customers? Traditional Organization Chart Complaint Escalation Pyramid NUMBERS Middle management One in five comp Middle Management le management Front-line people 25% of these c Frontline service Providers CUSTOMERS
1 Creating Customer Value, Satisfaction and Loyalty Topic 4 2 Chapter Questions • What are customer value, satisfaction, and loyalty, and how can companies deliver them? • What is the lifetime value of customers? • How can companies both attract and retain customers? 3 Traditional Organization Chart 44 Complaint Escalation Pyramid Complaint Escalation Pyramid Vice President Middle Management Frontline Service Providers One in two of these still dissatisfied complain 25% of complainants still dissatisfied One in five complain 25% of these customers still dissatisfied 40% Complain 100% of dissatisfied customers 1 Complaint 2 customers dissatisfied at middle management level 10 who complain to middle management 50 customers who remain dissatisfied after frontline effort 200 who complain To frontline 500 who are dissatisfied THE COMPLAINT PROCESS STATED IN PERCETAGES THE PYRAMID DESCRIBED IN NUMBERS
Customer-oriented Organization Chart Customer Perceived Value CUSTOMERS Total Customer Value Front-line people Total Customer Cost Middle managemer The Value Proposition Customer Satisfaction Custome Satisfaction The value proposition is the cluster of benefits the company promises to deliver Total perceived Exqeuallity"o Pe Needs a wants H
5 Customer-oriented Organization Chart 6 Customer Perceived Value Total Customer Value Total Customer Cost PV= 7 The Value Proposition • The value proposition is the cluster of benefits the company promises to deliver Expected Quality Expected Quality •Communication •Sales •Perceptions •Word of mouth •Past experience •Needs & wants •Communication •Sales •Perceptions •Word of mouth •Past experience •Needs & wants Customer Satisfaction Perceived quality of Competitors Perception Perception Result: What Result: What Process: How Process: How Customer Satisfaction Customer Satisfaction Total perceived Quality Experienced Quality Experienced Quality
The Customer Satisfaction-Loyalty Dissatisfied Customers'Repurchase Intentions under Various Conditions Relationship How Many of Your Unhappy Customers Will Buy Zone of Affection NoncoaplainantsF gs 口 Major Complaints 口 Minor Complaint Zone of indifference Complaints No Zone of Defection Complaints 64 Terrorist nor dissaia Satisfied VerA Percent of customers who will buy from you again The satisfaction Mirror CS and Employee satisfaction Customer Employee CRM ERM Customer Satisfaction. Employee Satisfaction Stronger Rab Customer Retention Employee Retention Customer Lifetime Employee Lifetime Key Customers Key Employees Treat customers like employees and employees like customers
9 The Customer Satisfaction-Loyalty Relationship 0 20 40 60 80 100 1 2 34 5 Loyalty (Retention) Very dissatisfied Dissatisfied Neither satisfied nor dissatisfied Satisfied Very Satisfied Satisfaction Near Apostle Zone of Defection Zone of Indifference Zone of Affection Terrorist Apostle Dissatisfied Customers’ Repurchase Intentions under Various Conditions Dissatisfied Customers’ Repurchase Intentions under Various Conditions How Many of Your Unhappy Customers Will Buy from You Again? 70% 46% 37% 82% 54% 19% 9% 95% Complaints Resolved Quickly Complaints Resolved Complaints Not Resolved Noncomplainants Percent of customers who will buy from you again Major Complaints Minor Complaints The Satisfaction “Mirror” The Satisfaction “Mirror” More Familiarity with Customer Needs and Ways of Meeting Them Greater Opportunity for Recovery from Errors Higher Employee Satisfaction Higher Productivity Improved Quality of Service More Repeat Purchases Stronger Tendency to Complain about Service Errors Higher Customer Satisfaction Lower Costs Better Results Customer Customer Employee 12 CS and Employee Satisfaction CRM • Customer Satisfaction • Customer Retention • Customer Lifetime Value • Key Customers ERM • Employee Satisfaction • Employee Retention • Employee Lifetime Value • Key Employees Treat customers like employees and employees like customers
Total Customer Satisfaction(TCS) Total Customer Expectation CS TCS Analyzing Exceed customer Survey firm's offe Solution expectation for the ke analysis Gap Model Measuring Satisfaction Periodic Surveys Service Customer Loss Rate COMPANY Service Delivery mmunications Customer-Driven o Customers Mystery Shoppers Service designs and Monitor competitive Company Perceptions Consumer Expectations Source: Valarie 4. Zeithaml& Mary Jo Bitmer (2005)
13 TCS TCS Max. customer delivered value Max. customer delivered value CS Survey CS Survey Solution for the key problems Solution for the key problems Improve the degree of CS Improve the degree of CS Total Customer Satisfaction (TCS) 14 Exceed customer expectation Exceed customer expectation Customer expectation analysis Customer expectation analysis Analyzing firm’s offer Analyzing firm’s offer Gap analysis Gap analysis Solution Solution Total Customer Expectation 15 Gap Model External Communications to Customers Service Delivery CUSTOMER COMPANY Expected Service Customer-Driven Service Designs and Standards Perceived Service Company Perceptions of Consumer Expectations Source: Valarie A. Zeithaml & Mary Jo Bitner (2005) 16 Measuring Satisfaction Periodic Surveys Periodic Surveys Customer Loss Rate Customer Loss Rate Mystery Shoppers Mystery Shoppers Monitor competitive performance Monitor competitive performance
Loyalty Four Stages of Brand Loyalty in Consumer Cognitive loyalty ception from brand attribute information that one brand is preferable to its alternatives A commitment to re-buy Affective loyalt developing a liking for the brand based on cumulatively satisfying usage occasions or re-patronize a product or service in the future commitment to repurchase the same brand Action loyalty Customer Loyalty Drives Profitability Customer Retention and growth Acquisition of customers can cost 5 times more 100% than retaining current customers The average company loses 10%of its customers each year A 5% reduction to the customer defection rate 三40% 40%35% can increase profits by 25% to 85% The customer profit rate increases over the life of a retained customer
17 Loyalty A commitment to re-buy or re-patronize a product or service in the future. 18 Four Stages of Brand Loyalty in a Consumer • Cognitive loyalty – perception from brand attribute information that one brand is preferable to its alternatives • Affective loyalty – developing a liking for the brand based on cumulatively satisfying usage occasions • Conative loyalty – commitment to repurchase the same brand • Action loyalty – consistent repurchase behavior 19 Customer Loyalty Drives Profitability and Growth A 5% increase in customer loyalty can produce profit increases from 25% to 85%. 25% 85% 75% 25% 50% 45% 45% 40% 35% 0% 20% 40% 60% 80% 100% Auto service chain Branch bank deposits Credit card Credit insurance Insurance brokege Industrial distribution Industrial laundry Office bldg. Management Percent Increase in Customer Value Software 20 Customer Retention • Acquisition of customers can cost 5 times more than retaining current customers. • The average company loses 10% of its customers each year. • A 5% reduction to the customer defection rate can increase profits by 25% to 85%. • The customer profit rate increases over the life of a retained customer
What Makes Loyal Customers More profitable? More Profitable Customers over Time Tend to spend more as relationship develops 日 Profit from price customers balances may grow premium may consolidate purchases to one supplier a Profit from references · Cost less to serve less need for information and assistance 口 Profit from reduced make fewer mistakes a Profit from increased Recommend new customers to firm act as unpaid sales people 口 Base Profit Trust leads to willingness to pay regular prices vs shopping for discounts Customer Profits Increase over Time Building Loyalty 350 artnershi 150一 Proactive Accountable Year 3 a Credit card Industrial laundry D Industrial distribution [Auto servicing Basic from Reichheld and sasser
21 What Makes Loyal Customers More Profitable? • Tend to spend more as relationship develops – customer’s balances may grow – may consolidate purchases to one supplier • Cost less to serve – less need for information and assistance – make fewer mistakes • Recommend new customers to firm – act as unpaid sales people • Trust leads to willingness to pay regular prices vs. shopping for discounts 22 More Profitable Customers over Time 1234567 Year Profit from price premium Profit from references Profit from reduced op. costs Profit from increased usage Base Profit Source: Reichheld and Sasser 23 Customer Profits Increase over Time Credit card Industrial laundry Industrial distribution Auto servicing 0 (Year 1=100) 50 250 300 350 – 100 150 200 Year 1 Year 2 Year 3 Year 4 Year 5 Based on data from Reichheld and Sasser 24 Building Loyalty Partnership Proactive Accountable Reactive Basic
The Wheel of Loyalty Customer Lifetime Value(CLv) 3. Reduce 1. Build a CLV describes the net present value of the Churn drivers r Loyalty stream of future profits expected over the customer's lifetime purchases Implement complaint Use effective tiering covery Customer Loyalty / Deliver quality CLV calculations provide a formal quantitative framework for planning customer investment and helps marketers P Build higher level bond / Deepen the to adopt a long-term perspective Estimating lifetime value Measuring Customer Equity by CLV Annual customer revenue: $500 revenues(application fee initial purchase) Less costs(marketing +credit check account set up Average number of loyal years: 20 Annual value(project for each year of relationship) revenues(annual fee sales service fees value of referrals Company profit margin: 10% Less costs(account management cost of sales write-offs Customer lifetime value: $1000 Determine anticipated customer relationship lifetime Select appropriate discount figure Customer Equity is total sum of NPVs of all current customers
25 The Wheel of Loyalty 1. Build a Foundation for Loyalty 2. Create Loyalty Bonds 3. Reduce Churn Drivers Customer Loyalty ¾Be selective in acquisition ¾Conduct churn diagnostic ¾Segment the market ¾Use effective tiering of service. ¾Deliver quality service. ¾Deepen the relationship ¾Give loyalty rewards ¾Build higher level bonds ¾Implement complaint handling & service recovery ¾Address key churn drivers ¾Increase switching costs Enabled through: ¾ Frontline staff ¾ Account managers ¾ Membership programs ¾ CRM Systems 26 Customer Lifetime Value (CLV) • CLV describes the net present value of the stream of future profits expected over the customer’s lifetime purchases. • CLV calculations provide a formal quantitative framework for planning customer investment and helps marketers to adopt a long-term perspective. 27 Estimating Lifetime Value • Annual customer revenue: $500 • Average number of loyal years: 20 • Company profit margin: 10% • Customer lifetime value: $1000 28 Measuring Customer Equity by CLV • Value at Acquisition – revenues (application fee + initial purchase) – Less costs (marketing +credit check + account set up) • Annual Value (project for each year of relationship) – revenues (annual fee + sales + service fees + value of referrals) – Less costs (account management + cost of sales + write-offs) • Net Present Value – Determine anticipated customer relationship lifetime – Select appropriate discount figure – Sum anticipated annual values (future profits) at chosen discount rate • Customer Equity is total sum of NPVs of all current customers
Maximizing Customer Lifetime Value Customer-Product Profitability Analysis Customers Customer Profitability C++ Highly profitable Profitable product Customer Lifetime Value High-profit Mixed-bag Losing IsDner Framework for CRM Customer-Development Process Identify prospects and customers Suspects Differentiate customers by needs Prospects) Disqualified and value to company First-time Repeat Clients Members Interact to improve knowledge customers Customize for each customer Partners Ex-customers
29 Maximizing Customer Lifetime Value Customer Profitability Customer Equity Lifetime Value 30 Customer-Product Profitability Analysis 31 Framework for CRM Identify prospects and customers Differentiate customers by needs and value to company Interact to improve knowledge Customize for each customer 32 Customer-Development Process Prospects Suspects Disqualified First-time customers Repeat customers Clients Members Partners Ex-customers
The Customer Pyramid Identifying and Selecting Target Segments Good Relationship Which segment sees high value in User characteristics costs less to maintain, and spreads itive word-of-mouth geographic location User behavio Iron company in time, effort and i when, where, how services used money, yet does not provide the quantity /value of purchase m the company want? Which frequency of use Lead segment is difficult to do business with? sensitivity to marketing variables Poor relationsh Customers Building Appropriate Customer Portfolio Forming Strong Customer Bonds Target customers whose needs match firms capabilities dd financial Focus on value of prospective customers within each segment, not just numbers benefits Avoid targeting customers who might abuse other customers Add social Add structural Create a mix of segments to reduce risks of benefits ties volatility during swings of economic cycles
33 The Customer Pyramid Lead Iron Gold Which segment sees high value in the company’s offer, spends more with the companies over time, costs less to maintain, and spreads positive word-of-mouth? Which segment costs the company in time, effort and money, yet does not provide the return the company want? Which segment is difficult to do business with? Platinum Good Relationship Customers Poor Relationship Customers 34 Identifying and Selecting Target Segments User characteristics ¾ demographics ¾ psychographics ¾ geographic location ¾ benefits sought User behavior ¾ when, where, how services used ¾ quantity/value of purchases ¾ frequency of use ¾ profitability of relationship ¾ sensitivity to marketing variables 35 Building Appropriate Customer Portfolio • Target customers whose needs match firm’s capabilities • Focus on value of prospective customers within each segment, not just numbers • Avoid targeting customers who might abuse: – Your employees, facilities – other customers • Create a mix of segments to reduce risks of volatility during swings of economic cycles 36 Forming Strong Customer Bonds Add financial benefits Add social benefits Add structural ties
How Customers see Relational Benefits in Service Industries CRM Strategies Confidence benefits less risk of something going wrong, less anxiety Reduce the rate of defection ability to trust provider know what to expect get firm's best service level Increase longevity Social benefits Enhance"share of wallet Special treatment benefits available to others higher priority with waits, faster service Focus more effort on Key Questions for CRM Strategies How should our value proposition change to increase customer How much customization or one-to-one marketing and service delivery is appropriate and profitable? What is the incremental profit potential of increasing share of wallet with current customers? How much does this vary by customer tier and/or segment? How much time and resource allocate to CRM right now? If we believe in CRM, why have we not taken steps in that direction before? What can we do today to develop customer elationship without spending on technology?
37 How Customers See Relational Benefits in Service Industries • Confidence benefits – less risk of something going wrong, less anxiety – ability to trust provider – know what to expect – get firm’s best service level • Social benefits – mutual recognition, known by name – friendship, enjoyment of social aspects • Special treatment benefits – better prices, discounts, special deals unavailable to others – extra services – higher priority with waits, faster service 38 CRM Strategies Reduce the rate of defection Reduce the rate of defection Increase longevity Increase longevity Enhance “share of wallet” Enhance “share of wallet” Terminate low-profit customers Terminate low-profit customers Focus more effort on high-profit customers Focus more effort on high-profit customers 39 Key Questions for CRM Strategies • How should our value proposition change to increase customer loyalty? • How much customization or one-to-one marketing and service delivery is appropriate and profitable? • What is the incremental profit potential of increasing share of wallet with current customers? How much does this vary by customer tier and/or segment? • How much time and resource can we allocate to CRM right now? • If we believe in CRM, why have we not taken steps in that direction before? What can we do today to develop customer relationship without spending on technology?