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Chapter 2: Customer retention and

business profits

CHAPTER OVERVIEW
This chapter focuses on the need for companies to provide customer value in order to
satisfy customers and through this satisfaction, retain them. The key idea in this
chapter is that companies do not need to satisfy every customer by that they must
focus on satisfying and retaining profitable customers – thereby gaining business
value.
Customers act upon the expectations they form about a company’s product and these
expectations affect their satisfaction and repurchase behaviour. As such, companies
must find a balance between setting expectations that are too high (so that they cannot
fulfil them) and too low (that competitor products appear more attractive), and must
monitor customer satisfaction with their own and competitors’ products.
Relationships are seen as being central to retaining customers. However, not every
purchase requires the formation of a relationship and some individuals are not highly
oriented towards forming them. Understanding the level of relationship that will offer
customer value and business value (retaining profitable customers) enables the
company to identify which customers should be retained and the strategies that will
retain them.
In keeping with the theme of relationships, this chapter also focuses on the use of
‘people’ and ‘processes’ that aid in the delivery of customer value.

CHAPTER OBJECTIVES

1. Define customer value, customer satisfaction and customer retention.


2. Explain why relationships matter in marketing.
3. Explain how marketing organisations retain customers by engendering trust,
commitment and totally satisfying them through delivering superior value.
4. Explain the importance of customer orientation in people and processes, including the
place of internal marketing and employee retention.
5. Discuss the implementation of quality marketing.

CHAPTER OUTLINE

Marketing is a people business. It increasingly involves ‘addressibility’, or knowing


the individual customer’s address and purchase history. Interactions between business
and customers are a central and important feature of marketing. The view is espoused
that marketing management must look beyond single transactions and consider how
the marketing organisation offers superior value over a period of time – hence

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emphasis upon relationships. Relationships are discussed from the perspective of
relationships with all key stakeholders – employees, customers, and other businesses.

Customer value and satisfaction


Customers form expectations of value and act upon them. Expectations are drawn
from past experience, marketing stimuli and influencers such as family and friends.
The expectations customer have – the value they expect – affects their satisfaction and
repurchase behaviour.
Customer value

Customers buy from the company that they perceive offers the highest customer
value. Customer value is based on what the consumer expects to get from
different purchase outcomes.
Customer satisfaction

Customer satisfaction with a purchase depends on the product’s performance


relative to a buyer’s expectations.
Influences of customer satisfaction include how well they thought the product or
service performed. This may be difficult as some products (wine) and services
(financial planning) are difficult to evaluate. Satisfaction judgments can be
influenced by the following:
• Customer past buying experiences.
• Information and promises made by marketing organisations and their
competitors.
• What consumers think is fair value based on the price they paid.
While dissatisfied customers are more likely to switch, satisfaction alone isn’t
enough to ensure repurchase. A study of the automobile industry in the U.S
found that 85-90% of customers report that they are satisfied, but only 30-40% re-
bought from the previous model.
Customer centred company: ‘A company that focuses on customer
developments in designing its marketing strategies’ (p. 43). The aim of these
companies is to add more value to the core product.
To achieve this marketers must track customer satisfaction. However, as
these measures are only meaningful in a competitive context, marketers must
also monitor their own and competitor’s satisfaction performance.
Returning to the central theme of this text, that company success depends upon
customer and business value, it is reiterated that the purpose of marketing is to
generate customer value profitably and that marketing organisations must deliver
a high level of customer satisfaction while at the same time delivering at least
acceptable levels of satisfaction to the firm’s stakeholders.

Retaining Customers
Relationships are central to retaining customers. However, it is argued that the
relationship between customer satisfaction and loyalty varies greatly across industries
and competitive situations. While attracting new customers has been the focus of

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many marketing theories, retaining customers is also a key activity and is of greater
concern as markets become more competitive. ‘The reality is that a firm’s first line of
defence lies in customer retention – the best approach is to deliver high customer
satisfaction and value that result in strong customer loyalty and well-developed
business relationships’ (p. 48).
Customer satisfaction and customer loyalty

Figure 2.1, p. 48, shows the relationship between customer satisfaction and
customer loyalty in five different markets. Not surprisingly as satisfaction
increases so does loyalty. This is especially so in highly competitive markets
such as computers and automobiles.
There is a great deal of difference between the loyalty of satisfied customers and
completely satisfied customers. Even a slight drop from complete satisfaction can
create an enormous drop in loyalty. Therefore high or low levels of customer
satisfaction levels have long-term implications for retention.
Relationships in marketing

The importance of customer retention has lead to an interest in what has come to
be called relationship marketing, proactively creating, developing and
maintaining committed, interactive and profitable exchanges with selected
customers (p. 49). The aim is of relationship marketing is to build loyalty with
key customers.
Not every customer wants a relationship with an organisation, however.
Shoppers conducing routine purchases and/or buying on impulse may not be
interested to form a relationship with an organisation that markets these goods.
Customer relationship management

Customer relationship management is the overall process of building and


maintaining profitable customer relationships by delivering superior customer
value and satisfaction. This practice has evolved from customer database
management.

Relationships defined: Marketing has become a concerned with retaining those


customers who are most profitable to the marketer – termed key customers
(consumer markets) and key accounts (business markets).
As stated earlier, relational orientations differ among customers. For those with
high relational orientations, trust and commitment are likely to be mediators for
effective relationships. This is, however, not necessary true for those with low
relational orientations.
A key idea is that understanding the relational orientations of customers will
enable organisations to determine the extent to which they need to utilize
relationship building practices.

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The notion of relationship levels

The level of relationship a company seeks is influenced by how best the company
can satisfy and retain customers and maximise business value. Levels of
relationships appear to be differentiated by the degree to which the customer is
relied upon to maintain the relationship. The different levels of relationship are
identified as:
• Basic: sell product with no follow up.
• Reactive: sells product and encourages customer to call if problems
occur.
• Accountable: salesperson actively follows up the sale and solicits
feedback about the product performance and possible improvements.
• Proactive: customer is kept informed of product updates/improvements
or new products that may fulfil needs of customer.
• Partnership: Company works closely with customer to discover ways
to deliver better value.
When to use what type of relationships strategy is identified in Figure 2.4. The
marketer can use specific tools to facilitate relationship building – financial
benefits, social benefits, and structural ties.
Financial benefits: these are benefits aimed at offering some form of
‘discount’ (real or in-kind) and include activities such as frequent flyer,
frequent buyer and club marketing programs. The limitation of these
activities is that competitors can easily copy them.
Social benefits: these are activities aimed at identifying individual customer
needs and preferences. Examples are such things as referring to guests by
name, providing specific features that suit the customers’ preferences.
Structural ties: these are ‘structures’ that help to bind the customer to that
company and include such things as specialised equipment, computer
linkages and ordering systems.

Retention and customer profitability


A marketing organisation should not try to pursue and satisfy every customer. Nor
should companies try to satisfy every customer whim. Knowing which customers
provide the greatest business value, in terms of profit and (the potential for) long-term
commitment, is the key to identifying which customers the company should retain and
the strategies used to retain them. Thus, the concept of customer lifetime value
becomes important.
Customer lifetime value: ‘The amount by which revenues from a given customer over
time will exceed the company’s costs of attracting, selling to and servicing that
customer’ (p. 53).
Customer lifetime value in repertoire and subscriber markets

In some markets (such as the arts) lead consumers are not retained through the
marketing effort of the organisation, but rather the subscribers themselves. It is

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argued that there is a difference between subscriber and repertoire markets in this
regard. The subscriber is contractually obligated to stay with the marketing
solution provider, as there are often penalties for ‘churns’ during the contract
period. In non-subscriber (repertoire) markets revenues drive the lifetime value of
a customer rather than loyalty – customers with high revenue are always
preferable, regardless of lifetime. A solution may be to institute penalty fees to
reduce churning in repertoire markets.

Customer orientation in people and processes


Internal marketing is also a key component of customer retention of profitable
customers. In this section the concept of value is extended to employees and
employees who themselves offer customer value (through effective interactions with
customers) are also worth retaining. The integration of all those who contribute to
customer value is a key theme in this section.
Internal marketing

Internal marketing refers to ‘one part of a marketing organisation marketing its


capabilities to another part of the organisation’ (p. 56). Internal marketing
programs deal with orienting employees to customers so that they can provide
customer value. Including and providing opportunities for personal and
professional growth are part of internal marketing. Concern with internal
marketing and its impact upon business success is illustrated in Marketing
Highlight 2.3.
Service quality is a group effort: Internal marketing seeks to ensure that there
is a common purpose among those who work together. A clearly formulated
mission statement and/or statement of values assist in the communication of a
common purpose as do the following:
• Newsletters
• Face-to-face transactions
• Testing external communications with employees before
committing to them
• Training and retraining on teamwork
• Agreed performance indicators with agreed review dates and
compensation/reward arrangements
• Clearly defined decision-making responsibility and scope.
Two key areas of focus are service delivery and service quality.
Service delivery: this refers to ‘when customers and representatives of an organisation
interact with one another’ (p. 58).
Retaining valuable employees

As stated previously, it is important to retain valuable employees and emphasis is


placed upon reward systems to do so. These reward systems can include
monetary or in-kind (i.e. meals or discount vouchers) reward, opportunities for
personnel and career growth, and official recognition through employee of the
month and certificates of appreciation.

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Processes in delivering customer value

So far ‘people’ have been emphasised, but ‘processes’ are equally important to
the delivery of customer value. Processes aimed at delivering customer values
may include use of the value chain, benchmarking and service blueprinting.
Value chain: this is a ‘major tool identifying ways to create more customer
value’ (p. 58). Using this tool, the company can undertake benchmarking
and service blueprinting to asses itself against competitors and/or world
leaders in specific areas.
Benchmarking: this refers to ‘ the comparison of a company’s
performance and processes with its competitors and with best practice
companies using specific measures such as scrap levels, power costs,
process waste, order-processing cycle times and productivity measures’
(p. 58).
Service blueprinting: this ‘includes the customer’s actions in the flow
diagram of the service delivery operation’ (p. 59).
To ensure effective integration (a key concept) and smooth management of core
business processes, companies may include assessment of the following:
• Product development process
• Inventory management process
• Order-to-payment process
• Customer service process
Mastering these core business processes gives the company a successful
competitive edge.

Value delivery networks

To gain a competitive advantage an individual company needs to look beyond its


own value chain and into the value chains of suppliers. These are called
customer value delivery networks.
Customer value delivery networks: this refers to ‘marketing channels in
which each channel member adds value for the customer’ (p. 60).
It is argued that technology can assist with streamlining operations, augmenting
products and improving reliability in the service delivery process. Companies like
Wal-Mart and Zara’s use ‘just in time’ inventory and close relationships with
suppliers to reduce costs and provide better quality products.

Implementing total quality marketing


‘Higher levels of quality result in greater customer satisfaction, while at the same time
supporting higher prices’ (p. 61). The definition used here is broader than the usual
‘fitness for use’ definitions used. This broader definition has implications for the ideas
contained in the text. A marketing organisation that satisfies most of its customers’
needs most of the time is a quality organisation.

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Quality in this context refers to ‘the totality of features and characteristics of a product
or service that bear on its ability to satisfy stated or implied needs’ (p 61).
Total quality management

TQM has been used in various ways over the last 30 years. Returning to the
theme of this chapter, total quality is the key to creating customer value and
satisfaction.
Customer retention and total quality

The notion of quality extends to marketing programs. The marketer must


constantly uphold the standard of ‘giving the customer the best solution’ and
integration of all activities is the key to doing so.

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