Customer Value, Satisfaction, and Retention

Customer value
• is the ratio between customers’ perceived benefits (economic,
functional, and psychological) and the resources (monetary, time,
effort, psychological) they use to obtain those benefits.

Customer satisfaction
• refers to customers’ perceptions of the performance of the product or
service in relation to their expectations.
Customer Value, Satisfaction, and Retention

Customer Retention:
Customer retention involves turning individual consumer transactions into long-term customer
relationships by making it in the best interests of customers to stay with the company rather than
switch to another firm.
It is more expensive to win new customers than to retain existing ones, for several reasons:
• 1. Loyal customers buy more products and constitute a ready-made market for new models of
existing products as well as new ones, and also represent an opportunity for cross-selling. Long term
customers are more likely to purchase ancillary products and high-margin supplemental products
• 2. Long-term customers who are thoroughly familiar with the company’s products are an important
asset when new products and services are developed and tested.
• 3. Loyal customers are less price-sensitive and pay less attention to competitors’ advertising. Thus,
they make it harder for competitors to enter markets.
• 4. Servicing existing customers, who are familiar with the firm’s offerings and processes, is cheaper.
It is expensive to “train” new customers and get them acquainted with a seller’s processes and
policies. The cost of acquisition occurs only at the beginning of a relationship, so the longer the
relationship, the lower the amortized cost.
Customer Value, Satisfaction, and Retention

Customer Retention:
• 5. Loyal customers spread positive word-of-mouth and refer other
customers.
• 6. Marketing efforts aimed at attracting new customers are
expensive; indeed, in saturated markets, it may be impossible to find
new customers. Low customer turnover is correlated with higher
profits.
• 7. Increased customer retention and loyalty make the employees’
jobs easier and more satisfying. In turn, happy employees feed back
into higher customer satisfaction by providing good service and
customer support systems.
Customer Value, Satisfaction, and Retention

Emotional Bonds versus Transaction-Based Relationships

Researchers have identified two interrelated forms of customer engagement
with marketers:
• Emotional bonds represent a customer’s high level of personal commitment
and attachment to the company.
• Transactional bonds are the mechanics and structures that facilitate exchanges
between consumers and sellers
• The objective of discerning customers’ emotional and transactional motives
when buying from a company is to understand the drivers of customer
satisfaction, which lead to customer retention and long-term relationships.
• As consumers buy more and more online, it has become important to
understand what makes them satisfied during electronic transactions. Studies
have identified the following determinants of customer satisfaction with online
websites and merchants
Customer Value, Satisfaction, and Retention

Emotional Bonds versus Transaction-Based Relationships

• 1. Adaptation: The merchant’s purchase recommendations match one’s needs;
one is enabled to order products that are tailor-made; personalized
advertisements and promotions; feeling like a unique and valued customer
• 2. Interactivity: Ability to view merchandise offerings from different perspectives;
search tool that enables one to quickly locate products; having tools that make
comparisons easy; useful information
• 3. Nurturing: Receiving reminders about making purchases; providing relevant
information for one’s purchases; acknowledgment of appreciating one’s business;
making an effort to increase business with the customer; cultivating a
relationship with the customer.
• 4. Commitment: Delivering goods on time; responding to problems encountered;
customer friendly return policies; taking good care of customers.
• 5. Network: Customers sharing experiences about their product purchases on the
merchant’s website; useful network for sharing experiences; shoppers benefit
from the community of prospects and customers sponsored by the merchant.
Customer Value, Satisfaction, and Retention

Emotional Bonds versus Transaction-Based Relationships

• 6. Assortment: Merchant provides “one-stop shopping” for most online purchases; site
satisfies shopping needs; merchant carries wide assortment and selection of products.
• 7. Transaction ease: Merchant’s website can be navigated intuitively; a first-time buyer
is able to make a purchase without much help; site is user-friendly and enables quick
transactions.
• 8. Engagement: The merchant’s site design is attractive; enjoyable shopping at the site;
feel that the site is inviting; feel comfortable shopping at the site.
• 9. Loyalty: Seldom consider switching to another merchant; usually click on the
merchant’s site whenever needing to make a purchase; like to navigate the site; one’s
favorite merchant to do business with.
• 10. Inertia: Unless becoming very dissatisfied, changing to a new merchant would not
be worth the bother; finding it difficult to stop shopping at the site; feeling that the cost
in time, money, and effort to change merchants is high.
• 11. Trust: Counting on the merchant to complete purchase transactions successfully;
trusting the site’s performance; feeling that the merchant is reliable and honest.
Customer Value, Satisfaction, and Retention

Customer Loyalty and Satisfaction

• Customers who are highly satisfied or delighted keep purchasing the

same products and brands, provide positive and encouraging word-of-
mouth to others, and often become “customers for life.”

• In contrast, those who are less satisfied or feel neutral either switch
to a competitor immediately, or wait until another marketer offers
them a somewhat lower price and then switch
Customer Value, Satisfaction, and Retention
Customer Loyalty and Satisfaction

1. The Loyalists
• are completely satisfied customers who keep purchasing. The apostles are loyal customers whose
experiences with the company exceeded their expectations and who provide very positive word-of-mouth
about the company to others. Companies should strive to create apostles and design strategies to do so.
2. The Defectors
• feel neutral or merely satisfied with the company and are likely to switch to another company that offers
them a lower price. Companies must raise defectors’ satisfaction levels and turn them into loyalists.
3. The Terrorists
• are customers who have had negative experiences with the company and spread negative word-of-mouth.
Companies must take measures to get rid of terrorists.
4. The Hostages
• are unhappy customers who stay with the company because of a monopolistic environment or low prices;
they are difficult and costly to deal with because of their frequent complaints. Companies should fire
hostages, possibly by denying their frequent complaints.
• 5. The Mercenaries are very satisfied customers who have no real loyalty to the company and may defect
because of a lower price elsewhere or on impulse, defying the satisfaction–loyalty rationale. Companies
should study these customers and find ways to strengthen the bond between satisfaction and loyalty
Customer Value, Satisfaction, and Retention

Customer Loyalty and Profitability

Classifying customers according to profitability involves tracking the revenues
obtained from individual customers and then categorizing them into tiers. For
example, a merchant might use a “customer pyramid” where customers are grouped
into four tiers:
• 1. The Platinum Tier includes heavy users who are not price-sensitive and are willing
to try new offerings.
• 2. The Gold Tier consists of customers who are heavy users but not as profitable
because they are more price-sensitive than those in the higher tier, ask for more
discounts, and are likely to buy from several providers.
• 3. The Iron Tier consists of customers whose spending volume and profitability do
not merit special treatment from the company.
• 4. The Lead Tier includes customers who actually cost the company money because
they claim more attention than is merited by their spending, tie up company
resources, and spread negative word-of-mouth
Customer Value, Satisfaction, and Retention

Measures of Customer Retention

Companies must develop measures to assess their customer retention strategies, and researchers
have recommended the following retention measurement methods:
1. Customer Valuation:
Value customers and categorize them according to their financial and strategic worth so that the
company can decide where to invest for deeper relationships and determine which relationships
should be served differently or even terminated.
2. Retention Rates:
The percentage of customers at the beginning of the year who are still customers by the end of the
year. According to studies, an increase in retention rate from 80% to 90% is associated with a
doubling of the average life of a customer relationship from 5 to 10 years. Companies can use this
ratio to make comparisons between products, between market segments, and over time.
3. Analyzing Defections:
Look for the root causes, not mere symptoms. This involves probing for details when talking to
former customers, an analysis of customers’ complaints, and benchmarking against competitors’
defection rates.
Customer Value, Satisfaction, and Retention

Internal Marketing
• Internal marketing consists of marketing the organization to its
personnel. Behavioral and motivational experts agree that employees
will “go the extra mile” to try and retain customers only if they are
treated like valued “internal customers” by their employers.
Consumer Behavior Is Interdisciplinary
Consumer behavior stems from four disciplines.
• Psychology is the study of the human mind and the mental factors that
affect behavior (i.e., needs, personality traits, perception, learned
experiences, and attitudes).
• Sociology is the study of the development, structure, functioning, and
problems of human society (the most prominent social groups are family,
peers, and social class).
• Anthropology compares human societies’ culture and development (e.g.,
cultural values and subcultures).
• Communication is the process of imparting or exchanging information
personally or through media channels and using persuasive strategies.
Consumer Behavior Is Interdisciplinary

Consumer Decision-Making
• The input stage of consumer decision-making includes two influencing factors: the
firm’s marketing efforts (i.e., the product, its price and promotion, and where it is sold)
and sociocultural influences (i.e., family, friends, neighbors, social class, and cultural
and subcultural entities). This stage also includes the methods by which information
from firms and sociocultural sources is transmitted to consumers.
• The process stage focuses on how consumers make decisions. The psychological factors
(i.e., motivation, perception, learning, personality, and attitudes) affect how the
external inputs from the input stage influence the consumer’s recognition of a need,
pre-purchase search for information, and evaluation of alternatives. The experience
gained through evaluation of alternatives, in turn, becomes a part of the consumer’s
psychological factors through the process of learning.
• The output stage consists of two post-decision activities: purchase behavior and post-
purchase evaluation.
Segmentation, Targeting and
Positioning
Chapter 2
 Market Segmentation and Effective Targeting
Identifiable
• Marketers divide consumers into separate segments on the basis of
common or shared needs by using demographics, lifestyles, and other
factors named “bases for segmentation.”
• Some segmentation factors, such as demographics (e.g., age, gender,
ethnicity), are easy to identify, and others can be determined through
questioning (e.g., education, income, occupation, marital status).
• Other features, such as the product benefits buyers seek and customers’
lifestyles, are difficult to identify and measure.
Market Segmentation and Effective Targeting
• Sizeable

• Stable and Growing

• Reachable
Bases for Segmentation
• A segmentation strategy begins by dividing the market for a product
into groups that are relatively homogeneous and share characteristics
that are different from those of other groups. Generally, such
characteristics can be classified into two types: behavioral and
cognitive.
• Behavioral data is evidence-based; it can be determined from direct
questioning (or observation), categorized using objective and
measurable criteria, such as demographics, and consists of:
Bases for Segmentation

• 1. Consumer-intrinsic factors, such as a person’s age, gender, marital

status, income, and education.
• 2. Consumption-based factors, such as the quantity of product purchased,
frequency of leisure activities, or frequency of buying a given product.
• Cognitive factors are abstracts that “reside” in the consumer’s mind, can
be determined only through psychological and attitudinal questioning,
and generally have no single, universal definitions, and consist of:
• 1. Consumer-intrinsic factors, such as personality traits, cultural values,
and attitudes towards politics and social issues.
• 2. Consumption-specific attitudes and preferences, such as the benefits
sought in products and attitudes regarding shopping.
Demographics

• Demographic segmentation divides consumers according to age, gender, ethnicity,

income and wealth, occupation, marital status, household type and size, and
geographical location
• All segmentation plans include demographic data for the following reasons:
• 1. Demographics are the easiest and most logical way to classify people and can be
measured more precisely than the other segmentation bases.
• 2. Demographics offer the most cost-effective way to locate and reach specific
segments, because most of the secondary data compiled about any population
consists of demographics (e.g., U.S. Census Bureau, audience profiles of various
media).
• 3. Using demographics, marketers can identify new segments created by shifts in
populations’ age, income, and location.
• 4. Demographics determine many consumption behaviors, attitudes, and media
exposure patterns. For example, many products are gender-specific, and music
preferences are very closely related to one’s age.
Age

• Product needs often vary with consumers’ age, and age is a key factor in
marketing many products and services. For instance, younger investors—
in their mid-20s to mid-40s—are often advised to invest aggressively and
in growth stocks, whereas people who are older and closer to retirement
should be much more cautious, keep a significant portion of their assets in
bonds (which provide stable and safe income), and avoid risky, long-term
investments
• Age also influences our buying priorities. For example, as a young student,
would you say that your opinions regarding what is a “luxury” product are
the same as those of your parents or grandparents? The most likely
answer is no: your parents, and especially grandparents, would probably
criticize your purchases of upscale sneakers, designer shirts and handbags,
jeans from Abercrombie & Fitch, and many other things you buy as
“ridiculously expensive.”
Gender

• Many products and services are inherently designed for either males
or females, but sex roles have blurred, and gender is no longer an
accurate way to distinguish among consumers in some product
categories.
Families and Households
• Many families pass through similar phases in their formation, growth,
and dissolution. At each phase, the family unit needs different
products and services. For example, brides are generally happy and
spending consumers.
• Young, single people, for example, need basic furniture for their first
apartment, whereas their parents, finally free of child rearing, often
refurnish their homes with more elaborate pieces
Social Class

• Income is an important variable for distinguishing between market

segments, because it indicates an ability or inability to pay for a product
model or brand. Income is often combined with other demographic
variables to define target markets more accurately
• Education, occupation, and income are closely correlated; high-level
occupations that produce high incomes usually require advanced
education and are more prestigious than occupations requiring less
education
• Social class is a hierarchy in which individuals in the same class generally
have the same degree of status, whereas members of other classes have
either higher or lower status. Studies have shown that consumers in
different social classes vary in terms of values, product preferences, and
buying habits
Ethnicity

• Marketers segment some populations on the basis of cultural heritage

and ethnicity because members of the same culture tend to share the
same values, beliefs, and customs. In the United States, African
Americans, Hispanic Americans, and Asian Americans are important
subcultural market segments