Kotler Mm15e Inppt 05

Marketing Management
Fifteenth Edition
Chapter 5
Creating
Long-Term
Loyalty
Relationships
Copyright © 2016, 2012, 2009 Pearson Education, Inc. All Rights Reserved
Learning Objectives
5.1 What are customer value, satisfaction,
and loyalty, and how can companies
deliver them?
5.2 What is the lifetime value of customers,
and how can marketers maximize it?
5.3 How can companies attract and retain
the right customers and cultivate strong
customer relationships and communities?
5.4 How do customers’ new capabilities
affect the way companies conduct their
marketing?
Building Customer Value,
Satisfaction, and Loyalty (1 of 6)
Figure 5.1 Traditional Organization versus Modern Customer-Oriented
Company Organization
• With the rise of digital technologies, increasingly informed consumers expect companies
to do more than connect with them, more than satisfy them, and even more than delight
them. They expect companies to listen and respond to them.
• When Office Depot added customer reviews to its Web site, revenue and sales conversion increased significantly.
• The company also incorporated review-related terms in its paid search advertising campaign.
• As a result of these efforts, Web site revenue and the number of new buyers visiting the site both increased by more than
150 percent.
Building Customer Value, Satisfaction,
and Loyalty (2 of 6)
•How customers make choices? They are value
maximizers …
•Customer-Perceived Value (CPV)

– The difference between the prospective customer’s
evaluation of all the benefits and costs of an offering and
the perceived alternatives
– Total customer benefit vs. total customer cost
Figure 5.2 Determinants of CPV
Customer Value Analysis
1. Identify the major attributes and benefits that customers value
2. Assess the quantitative importance of the different attributes
and benefits
3. Assess the company’s and competitors’ performances on the
different customer values against their rated importance
4. Examine how customers in a specific segment rate the
company’s performance against a specific major competitor on
an individual attribute or benefit basis
5. Monitor customer values over time
• Customer-Perceived Value (CPV)
– Choice processes
 Some marketers might argue the process we have described is too rational.
The customer can choose the competitor because they are ordered to buy the
lowest price or because they have a long-term relationship with them.
– Loyalty
 a deeply held commitment to rebuy a preferred product or service in the future
despite situational influences and marketing efforts having the potential to
cause switching behavior.
– Value Proposition
 The value proposition consists of the whole cluster of benefits the company
promises to deliver; it is more than the core positioning of the offering.
Volvo’s value proposition
Positioning = Safety
other benefits include good performance, design, and safety for the environment
•Total customer satisfaction
– A person’s feelings of pleasure or disappointment that
result from comparing a product or service’s perceived
performance (or outcome) to expectations
But how do customers form expectations?
Customer satisfaction
Consumers often form more favorable perceptions of a

product with a brand they already feel positive about.
Research has also shown an The negative effect on customer

asymmetric effect of product satisfaction of failing to meet
expectations is disproportionally
performance and stronger than the positive effect
expectations on satisfaction: of exceeding expectations.
Customer satisfaction
• A highly satisfied customer generally:

– Stays loyal longer
– Buys more as the company introduces new and upgraded products
– Talks favorably to others about the company and its products
– Pays less attention to competing brands and is less sensitive to price
– Offers product or service ideas to the company
– Costs less to serve than new customers because transactions can become routine.
• Monitoring satisfaction: many companies are
systematically measuring how well they treat
customers, identifying the factors shaping satisfaction,
and changing operations and marketing as a result
– Periodic surveys, customer loss rate, mystery shoppers
•Product and service quality
– Quality is the totality of features and characteristics of a
product or service that bear on its ability to satisfy stated
or implied needs
– Conformance quality (Lexus and Hyundai) vs.
performance quality (Lexus > Hyundai)
– Impact of quality
 Higher quality  Higher satisfaction  Higher
prices
Maximizing Customer Lifetime
Value (1 of 4)
•Customer profitability analysis
– A profitable customer is a person, household, or company that over time
yields a revenue stream exceeding by an acceptable amount the
company’s cost stream for attracting, selling, and serving that customer.
– Activity-Based Costing (ABC)
 Revenues coming from the customer – all the costs

– Taking phone calls from the customer
– Traveling to visit the customer
– Paying for entertainment and gifts
– indirect costs like clerical costs, office expenses, supplies…
Figure 5.3 Customer-Product
Profitability Analysis
Value (2 of 4)
•Customer Lifetime Value (CLV)
– The net present value of the stream of future profits
expected over the customer’s lifetime purchases
Value (3 of 4)
Table 5.3 A Hypothetical Example to Illustrate CLV Calculations
Blank Year Year Year Year Year Year Year Year Year Year Year
0 1 2 3 4 5 6 7 8 9 10
Number of 100 90 80 72 60 48 34 23 12 6 2
customers
Revenue Blank 100 110 120 125 130 135 140 142 143 145
per
customer
Variable Blank 70 72 75 76 78 79 80 81 82 83
cost per
customer
Margin per Blank 30 38 45 49 52 56 60 61 61 62
customer
Acquisition 40 Blank Blank Blank Blank Blank Blank Blan Blan Blan Blank
Cost per k k k
Customer
Total Cost -4,000 2,700 3,040 3,240 2,940 2,496 1,904 1,38 732 366 124
or Profit 0
Attracting and Retaining Customers
• Companies seeking to expand profits and sales must invest time and
resources searching for new customers.
• To generate leads, they advertise in media that will reach new
prospects, send direct mail and e-mails to possible new prospects,
send their salespeople to participate in trade shows where they might
find new leads, purchase names from list brokers, and so on.
• Different acquisition methods yield customers with varying CLVs.
• One study showed that customers acquired through the offer of a 35
percent discount had about one-half the long-term value of customers
acquired without any discount. Many of these customers were more
interested in the offer than in the product itself.
Attracting and Retaining
Customers (1 of 3)
• Reducing defection/customer churn
‒ Define and measure retention rate
‒ For a magazine, subscription renewal rate is a good measure of retention. For
a college, it could be first- to second-year retention rate or class graduation
rate
‒ Distinguish/identify customer attrition causes

‒ Not much can be done about customers who leave the region or go out of
business, but poor service, shoddy products, and high prices can all be
addressed.
‒ Compare lost CLV to reducing defection rate

‒ As long as the cost to discourage defection is lower than the lost profit, spend
the money to try to retain the customer.
Customers (2 of 3)
• Retention dynamics/marketing funnel
Figure 5.4 The Marketing Funnel
Customer Retention
• Acquiring new customers can cost five times more than satisfying and retaining current
ones. It requires a great deal of effort to induce satisfied customers to switch from their
current suppliers.
• The average company loses 10 percent of its customers each year.
• A 5 percent reduction in the customer defection rate can increase profits by 25 percent
to 85 percent, depending on the industry.
• Profit rate tends to increase over the life of the retained customer due to increased
purchases, referrals, price premiums, and reduced operating costs to service.
Customers (3 of 3)
• Managing the customer base
– Reduce customer defection
 Selecting and training employees to be knowledgeable and friendly increases
the likelihood that customers’ shopping questions will be answered
satisfactorily.
– Focus on high-profit customers
 Thoughtful gestures such as birthday greetings, small gifts, or invitations to
special sports or arts events can send them a strong positive signal.
– Increase customer longevity
 Nearly 65 percent of new Honda purchases replace an older Honda. Drivers
cited Honda’s reputation for creating safe vehicles with high resale value
Attracting and Retaining Customers (3 of 3)
– Terminate low-profit customers
– Cross/upselling
Building Loyalty
• Interact closely with customers (listening to them)
• Develop loyalty programs
• Create institutional ties (electronic systems to manage
inventory, orders and payroll for business customers)
Brand Communities
• A specialized community of consumers and employees
whose identification and activities focus around the brand
https://www.youtube.com/watch?v=Sgh0rATP60o&list=PLwc1jOvPei-SkWe2WFCycgruf
_B49844w&index=1
Brand Communities
• A strong brand community results in a more loyal, committed customer
base. The more “connected” a member of the community was, the
greater the likelihood he or she would spend more.
• A brand community can be a constant source of inspiration and

feedback for product improvements or innovations.
Cultivating Customer Relationships
• Customer relationship management (CRM)
– The process of carefully managing detailed information
about individual customers and all customer “touch
points” to maximize loyalty
CRM
• Personalizing/permission
marketing
• Customer empowerment
• Customer reviews/
recommendations
• Customer complaints
Personalized Marketing
• “Know Me” program
– For any one passenger booked on a flight, BA would know his or her current
seating location, previous flights and meal choices, prior complaint history, and
so on.
– BA also distributed 2,000 iPads among crew members and ground staff to allow
them to access the database as well as receive personal recognition messages
about passengers on any one flight.
Personalized Marketing
• BMW offers 500 side-mirror combinations, 1,300 front bumper combinations, and 9,000
center-console combinations and provides new buyers a video link to watch their car
being “born” while waiting for delivery
Customer Empowerment
held a contest to asked amateur filmmakers to submit 30-

let consumers second short films that demonstrated how
name its next the iconic sneaker brand inspired them
flavor
Dealing with customer complaints
Set up Set up a seven-day, 24-hour toll-free hotline (by phone, fax, or e-mail) to receive and
act on complaints— make it easy for the customer.
Contact Contact the complaining customer as quickly as possible. The slower the company is to
respond, the more dissatisfaction may grow and lead to negative word of mouth.
Accept Accept responsibility for the customer’s disappointment; don’t blame the customer.
Use Use customer service people who are friendly and empathic.
Resolve Resolve the complaint swiftly and to the customer’s satisfaction. Some complaining
customers are not looking for compensation so much as a sign that the company cares.

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Marketing Management

•Customer-Perceived Value (CPV)

But how do customers form expectations?

Consumers often form more favorable perceptions of a

Research has also shown an The negative effect on customer

• A highly satisfied customer generally:

– Periodic surveys, customer loss rate, mystery shoppers

– Activity-Based Costing (ABC)

 Revenues coming from the customer – all the costs

‒ Distinguish/identify customer attrition causes

‒ Compare lost CLV to reducing defection rate

• The average company loses 10 percent of its customers each year.

• A brand community can be a constant source of inspiration and

held a contest to asked amateur filmmakers to submit 30-

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