Building CustomerSatisfaction, Value,and Retention

In this chapter,we will address the following questions:

What are customer value and satisfaction, and how do leading companies produce anddeliver them?

What makes a high-performance business?

How can companies both attract and retain customers?

How can companies improve customer proﬁtability?

How can companies practice total quality management to create value and customersatisfaction?

Chapter 2

ow can companies go about winning customers and outperforming competitors?The answer lies in doing a better job of meeting and satisfying customer needs.Only customer-centered companies are adept at building customers, not just products.They are skilled in market engineering, not just product engineering.Too many companies think that it is the marketing or sales department’s job toprocure customers. In fact, marketing is only one factor in attracting and keeping cus-tomers. The best marketing department in the world cannot sell products that arepoorly made or fail to meet anyone’s need. The marketing department can be effec-tive only in companies whose departments and employees have designed and imple-mented a competitively superior customer value-delivery system.For example, people do not swarm to McDonald’s solely because they love thefood. People are actually ﬂocking to a ﬁne-tuned system that delivers a high standard of what McDonald’s calls QSCV—quality, service, cleanliness, and value. Thus,McDonald’s is effective because it works with its suppliers, franchise owners, employees,and others to deliver exceptionally high value to its customers.

This chapter describesand illustrates the philosophy of the customer-focused ﬁrm and value marketing.

DEFINING CUSTOMER VALUE AND SATISFACTION

Today’s customers face a vast array of product and brand choices, prices, and suppli-ers. How do they make their choices? We believe that customers estimate which offer will deliver the most value. Customers are value-maximizers, within the bounds of

Customerdeliveredvalue TotalcustomercostMonetarycost TimecostEnergycostPsychiccost TotalcustomervalueProductvalueServicesvaluePersonnelvalueImagevalue

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search costs and limited knowledge, mobility, and income. They form an expectationof value and act on it. Whether or not the offer lives up to the value expectation affectsboth satisfaction and repurchase probability.

Customer Value

Our premise is that customers will buy from the ﬁrm that they perceive offers the high-est customer delivered value.

Customer delivered value

is the difference between totalcustomer value and total customer cost.

Total customer value

is the bundle of beneﬁtsthat customers expect from a given product or service, as shown in Figure 2.1.

Totalcustomer cost

is the bundle of costs that customers expect to incur in evaluating,obtaining, using, and disposing of the product or service. As an example, suppose the buyer for a residential construction company wantsto buy a tractor from either Caterpillar or Komatsu. After evaluating the two tractors,he decides that Caterpillar has a higher product value, based on perceived reliability,durability, performance, and resale value. He also decides that Caterpillar’s personnelare more knowledgeable, and perceives that the company will provide better services,such as maintenance. Finally, he places higher value on Caterpillar’s corporate image.He adds all of the values from these four sources—

product, services, personnel,

and

image

—and perceives Caterpillar as offering more total customer value.The buyer also examines his total cost of transacting with Caterpillar versusKomatsu. In addition to the

monetary cost;

the total customer cost includes the buyer’s

time, energy,

and

psychic costs.

Then the buyer compares Caterpillar’s total customer cost to its total customer value and compares Komatsu’s total customer cost to its total cus-tomer value. In the end, the buyer will buy from the company that he perceives isoffering the highest delivered value. According to this theory of buyer decision making, Caterpillar can succeed in sell-ing to this buyer by improving its offer in three ways. First, it can increase total customer value by improving product, services, personnel, and/or image beneﬁts. Second, it canreduce the buyer’s nonmonetary costs by lessening the time, energy, and psychic costs.Third, it can reduce its product’s monetary cost to the buyer. If Caterpillar wants to winthe sale, it must offer more delivered value than Komatsu does. Delivered value can bemeasured as a difference or a ratio. If total customer value is $20,000 and total customer

Figure 2.1

Determinants of Customer Delivered Value

Deﬁning Customer Value and Satistaction

cost is $16,000, then the delivered value is $4,000 (measured as a difference), or 1.25(measured as a ratio). Ratios used to compare offers are often called

value-price ratios.

Some marketers might argue that this process is too rational, because buyers donot always choose the offer with the highest delivered value. Suppose the customerchose the Komatsu tractor. How can we explain this choice? Here are three possibilities:

The buyer might be under orders to buy at the lowest price, regardless of delivered value. To win this sale, Caterpillar must convince the buyer’s manager that buyingonly on price will result in lower long-term proﬁts.

The buyer will retire before the company realizes that the Komatsu tractor is moreexpensive to operate than the Caterpillar tractor. To win this sale, Caterpillar must convince other people in the construction company that its offer delivers greaterlong-term value.

The buyer enjoys a long-term friendship with the Komatsu salesperson. Here,Caterpillar must show the buyer that the Komatsu tractor will draw complaints from thetractor operators when they discover its high fuel cost and need for frequent repairs.

Still, delivered-value maximization is a useful framework that applies to many sit-uations and yields rich insights for marketers. Here are its implications: First, the sellermust assess the total customer value and total customer cost associated with each com-petitor’s offer to know how his or her own offer rates in the buyer’s mind. Second, theseller who is at a delivered-value disadvantage can either try to increase total customer value or try to decrease total customer cost.

Customer Satisfaction

Whether the buyer is satisﬁed after making a purchase depends on the offer’s perfor-mance in relation to the buyer’s expectations.

Satisfaction

is a person’s feelings of pleasure or disappointment resulting from comparing a product’s perceived perfor-mance (or outcome) in relation to his or her expectations. As this definition makes clear, satisfaction is a function of

perceived performance

and

expectations.

If the performance falls short of expectations, the customer is dissatis-fied. If performance matches expectations, the customer is satisfied; if it exceedsexpectations, the customer is highly satisﬁed or delighted.Many companies aim for high customer satisfaction, which creates an emotionalbond with the brand, not just a rational preference. The result is high customer loy-alty. The most successful companies go a step further, aiming for

total customer satisfaction.

Xerox’s senior management believes that a very satisfied or delighted customer is worth 10 times as much to the company as a satisfied customer. A very satisfied cus-tomer is likely to stay with Xerox many more years and buy more than a satisfied cus-tomer will. This is why Xerox guarantees “total satisfaction” and will replace, at itsexpense, any dissatisfied customer’s equipment within three years after purchase.Clearly, the key to generating high customer loyalty is to deliver high cus-tomer value. Michael Lanning, in

Delivering Profitable Value,

says a firm must developa competitively superior

value proposition

and a superior

value-delivery system.

A firm’s value proposition is much more than its positioning on a single attribute; it isa statement about the

resulting experience

customers will have from the offering andtheir relationship with the supplier. The brand must represent a promise about thetotal resulting experience that customers can expect. Whether the promise is kept depends upon the firm’s ability to manage its value-delivery system, including all of the communications and channel experiences that customers will have as they obtain the offering.