(hapter 2 Building (ustomer Satisíaction Value and Retention

Customer Value
o Customer Value or Customer Delivered Value is the difference between Total
Customer Value and Total Customer Cost. Customer Value = Product Value +
Service Value + Personnel Value + Ìmage Value
o Total Customer Value is the bundle of benefits that the customers expect from a
given product or service.
o Total Customer Cost is the bundle of costs customers expect to incur in evaluating,
obtaining, using and disposing of the product or service. Total Customer Cost =
Monetary Cost + Time Cost + Energy Cost + Psychic Cost
o Customers make their purchases based on Customer Delivered Value or on the
basis of value-price ratio. Value ÷ price ratio = Total Customer Value / Total
Customer Cost
o Seller who is at a delivered value disadvantage has two alternatives:
o Ìncrease Total Customer Value: strengthen product, service, personnel and image
o Decrease Total Customer Cost: reduce price, simplify ordering and processing
process, absorb buyers risk by offering warranty etc.
Customer Satisfaction
o Customer Satisfaction is a person's feelings of pleasure or disappointment
resulting from comparing a product's perceived performance (or outcome) in
relation to his or her expectations
o Customer Satisfaction is a function of perceived performance and expectations of
the customer.
o A company must develop a competitively superior value proposition and a superior
value delivery system.
o Ìt often happens that customers are dissatisfied because of a wide gap between
Brand value and Customer value. So it is recommended that marketers pay as much
attention to building brands as in influencing company's core processes.
o The goal of a company should be to maximize customer satisfaction, subject to
delivering acceptable levels of returns to the other stakeholders within constraints of
its resources.
Four methods of tracking customer satisfaction:
1. Feedback and Suggestion Forms
2. Customer Surveys
3. Ghost shopping
4. Analyze lost customers
Nature of High Performance Businesses
Stakeholders ÷ A company should strive to perform above the minimum expectations of
all of it's
stakeholders, including the employees, customers, suppliers so that this dynamic
relationship ultimately
leads to higher profits and hence stockholder satisfaction.
Processes ÷ The trick lies in overcoming the problems posed by departmental
organization. The successful companies are those which achieve excellent capabilities
managing core business process through cross ÷ functional teams.
Core processes here could be new-prod development, customer attraction, order
fulfillment, etc
Resources ÷ The major businesses are nowadays trying to own and nurture only their
respective core resources and competences, while out sourcing the rest of the
Companies are paying increasing focus on their core competences and distinctive
capabilities. One should go in for outsourcing, if through outsourcing,
1. better quality can be obtained
2. lower costs are incurred
3. Ìf resources are less critical
Core competence has 3 characteristics
1. Difficult for competitors to imitate
2. Source of competitive advantage if it makes significant contribution to perceived
customer benefits
3. Potential breadth of application to a wide variety of markets
Set strategies to satisfy key stakeholders Stakeholders
By improving critical biz processes Processes
And aligning resources and organization Resources and Organisation
Organization and Organizational Culture ÷
According to the article Built to Last, there are 3 commonalities amongst the visionary
companies ÷
1. They all held a core value system from which they did not deviate
2. They expressed their purpose in enlightened terms
3. They have developed a vision for their future and they strive towards it. They
communicated it to their employees and embrace a higher purpose beyond
making money
Senior mgmt must encourage fresh ideas from 3 grps wrt strategy making
a. Employees with youthful perspectives
b. employees away from headquarters
c. employees new to the industry
Delivering Customer value and satisfaction
Here are two important concepts from the customer value point of view ÷
Value chain ÷ Michael Porter defined 9 processes as vital to a value building network of
a company, viz.
Primary Activities: Ìnbound logistics, Operations, Outbound logistics, Marketing Sales
and Service.
Support Activities: Ìnfrastructure, HRD, Technology development, Procurement.
A firm's task is to examine all costs and performance of these processes and try and
improve them for better value-creation. Also a firm's success depends upon how each
these processes is coordinated to seamlessly perform the following core business
processes ÷
- New ÷ product realization
- Ìnventory management
- Customer acquisition and retention
- Order-to-remittance
- Customer service
Value delivery network ÷ A firm needs to partner with its suppliers, distributors and
customers to gain significant competitive advantages by creating a superior
Attracting and Retaining customers
Customer Acquisition ÷ This process is accomplished in 3 steps viz.
Lead generation ÷ to generate leads, the company develops ads and places them in
that will reach new prospects; its sales person participate in trade shows where they
find new leads and so on. All this produces a list of suspects.
Lead qualification ÷ the next task is to qualify which of the suspects are really good
prospects, and this is done by interviewing them, checking for there financials, and so
The prospects may be graded as hot warm and cool. The sales people first contact the
prospects and work on account conversion, which involves making presentations,
answering objections and negotiating final terms.
Computing cost of lost customers ÷
Too many companies suffer from high customer churn namely they gain new customer
only to lose many of them. Today companies must pay closer attention to their customer
defection rate (the rate at which they lose customer).
The steps involved here are
1. A company must define and measure retention rate
2. The company must distinguish the causes of customer attrition and identify those
that can be managed better. Not much can be done for customer who leave the
region or go out of business but much can be done about the customer who leaves
because of poor service shoddy products or high prices. The company needs to
examine the percentages of customer who defect for these reasons.
3. Third, the company needs to estimate how much profit it loses when it loses
customer. Ìn case of an individual customer the lost profit is equal to the
customers lifetime value that is the present value of the profit stream that the
company would have realized if the customer had not defected prematurely.
4. Fourth the company needs to figure out how much it would cost to reduce the
defection rate. As long as the cost is less than the lost profit the company should
spend the amount to reduce the defection rate.
The key to customer retention is customer satisfaction. A highly satisfied customer:
stays loyal longer
buys more as the company introduces new products or upgrades existing products
talk favorably about the company and its products
Pays less attention to competing brand s and advertising and is less sensitive to
Offers product or service ideas to the company
Ìmportance of retaining customers ÷ The following statistics are helpful to this end
1. Acquiring new customers costs 5 times more than retaining old ones
2. A 5% reduction in customer defection can increase profits by 25% to 85%
3. Customer profit rates tend to increase over the lifetime of the customer.
The two ways of retaining a customer would be ÷
1. To erect high switching costs customers are less inclined to switch to another
supplier when this would involve high capital costs, high search costs, or loss of
loyal customer discounts.
2. Deliver high customer satisfaction
Relationship marketing ÷
The task of creating strong customer loyalty is called Relationship Marketing.
The steps in customer development process is
Suspects -> Prospects -> First-time customers -> repeat customers -> Clients ->
-> Advocates -> Partners.
There might be defections from any of these levels, in which case, relationship
works on customer win-back strategies.
There are 5 different types of levels of investment in customer relationship marketing ÷
1. Basic marketing : the sales person simply sells the product
2. Reactive marketing: the salesperson sells the product and encourages the
customer to call if he or she has questions comments or complaints.
3. Accountable marketing: the salesperson phones the customer a short time after the
sales to check whether the product is meeting the expectation.
4. Proactive marketing: the company salesperson contacts the customer from time to
time with suggestion about the improved product uses or helpful new products.
5. Partnership marketing: the company works continuously with the customer to
discover ways to perform better.
There are also certain marketing tools which can be used for added customer
1. Adding financial benefits - through frequency marketing programs and club
marketing programs. Club membership programs to bond the customer closer to
the company can be open to everyone who purchases the product or service, such
as frequent flier or frequent diner club, or it can be limited to the affinity group.
2. Adding social benefits ÷ developing more social bonds with the customer; help
make brand communities; etc.
3. Adding structural ties ÷ Supplying customers with special equipment or computer
linkages to help them manage their payrolls, inventory, etc. better.
Customer profitability the ultimate test
Ultimately, marketing is the art of attracting and retaining profitable customers. The well
known 20-80 rule says that the top 20% of the customers may generate as much as
of the company's profits. The largest customers who are yielding the most profit. The
largest customers demand considerable service and receive the deepest discounts. The
smallest customers pay full price and receive minimal service, but the costs of
with small customers reduce their profitability. The mid size customers receive good
service and pay nearly full price and are often the most profitable.
A company should not pursue and satisfy all customers.
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
Ìmplementing Total Quality Management
TQM is an organization wide approach to continuously improving the organizations
processes, products and services.
Ìmportant prizes in different countries to recognize best quality practices
Japan ÷ Deming Prize (named after Q Edwards Deming), 1951. Deming's work
the basis of many TQM practices
US ÷ Malcolm Baldridge National Quality Award (in honour of the late secretary of
commerce), mid 1980s
Europe ÷ European Quality Award (established by the European Foundation for
Quality Management), 1993
There is an intimate connection between the quality delivered by a company and the
corresponding customer satisfaction and company profitability. This is because higher
levels of quality support higher prices while delivering high satisfaction at lower costs.
Quality is the totality of features and characteristics of a product or service that bear on
its ability to satisfy stated or implied needs.
A company that satisfies most of its customers' needs most of the time is called a
Conformance quality is satisfied if all the units deliver the expected quality.
Performance quality, however, is different in that it is based upon the grade.
Eg. A Mercedes and Hyundai may both deliver Conformance Quality, but Mercedes can
be said to deliver higher Performance quality.
The main responsibilities of a Marketing Manager are ÷
1. They must participate in formulating strategies and policies designed to give
company total quality.
2. They must deliver marketing quality aside production quality.
Ìn implementing TQM, a marketer's job could subsume the following ÷
1. Ìdentifying customer's needs
2. Communicate these requirements to the product designers
3. Ensure that customer's orders are filled on time and correctly
4. Ensure customer is trained enough to use the product well
5. Ensure after sales service and satisfaction
6. Get improvement suggestions from the customers, convey them to respective depts.

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