Chapter One

Customer Focus,
Customer
Performance, and
Profit Impact

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 The only thing that is constant is change.

 Companies sense the direction of change.

 Position themselves in the change .

 Must have a strong external market orientation.

2
 Building a Customer-Focused
Organization

In this section we will look at how customer-

focused organizations not only outperform their
competition over the long term by consistently
delivering higher levels of customer satisfaction,
they also realize higher profits over the short run.

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 Underwhelming Customers

Little or no customer focus translates into an unfocused competitive

position and minimal customer satisfaction.
The result is a vicious circle of poor performance.
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 Top Performers Produce
Higher Investor Returns

Apple, Southwest Airlines, and Clorox would be a part of the top performers in
the graph above.
Their average stock price index started at 100 and 10 years later was 300.
Poor performers started at 100 and 10 years later were still at 100.

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 Customer-Focused
Organization

• Senior Mgmt
Leadership
• Employee Customer
Training
• Customer
Involvement
• Customer
Experiences
• Customer Solutions
• Customer Complaints

• Customer
Satisfaction
• Customer Retention
• Customer Loyalty

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What is market orientation?
 Market orientation is more than customer orientation.

 It includes an obsession with respect to customers and

competitors and working across functions to create the
best possible customer solution.

 A business with a strong market orientation will maintain

an ongoing knowledge of customers and competitors and
have a cross-functional team approach to continuously
improve the business solution it brings to the market.

 A business with a weak market orientation will be out of

touch with customers and competitors and not work as
an integrated team across functions. 7
Strong market orientation
 Not just adopting market-based management
philosophy.

 Restructuring an organization around markets

rather than products or factories.

 Creating an employee culture that is responsive to

customers and changing market conditions.

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Strong Market Orientation
 A strong market orientation is consistent with a
strong customer focus and competitor awareness.

 The orientation enables business the opportunity to

discover unmet customer needs and create value-
added customer solutions.

 This, in turn, allows these businesses to obtain more

price premiums for their products/services while also
more easily attracting new customers and retaining
existing customers.

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Market Orientation
 All members ..

 Sensitive to customers’ needs ,are aware of

competitors moves

 Work well across organizational boundaries

toward a timely market-based solution.

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 Market Orientation

Short-run Benefits:
 Outperform competition in

 customer satisfaction

 profitability

 creation of customer value and shareholder

value

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Characteristics of
Market-Oriented Businesses
 Customer Focus

 Competitor Orientation

 Team Approach

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Market Orientation, Customer Satisfaction,
and Profitability
CRM

Businesses with a
strong customer focus
strive to achieve
high levels of customer
Business satisfaction and
customer
Profitability loyalty.

Customer
Satisfaction and Successful customer
relationship
Retention marketing translates
into higher levels of
customer and business
profitability
Market Orientation

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Customer satisfaction and customer
retention important drivers to profitability
 Higher levels of customer satisfaction generally mean
higher levels of customer retention.

 Because it costs more to get a new customer than to

retain one, and retained customers generally buy more
than new customers, profits tend to increase with
higher levels of customer retention.

 Thus, measures of customer satisfaction and

retention become important market metrics for
businesses with a strong market orientation.
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CSI
 Customer satisfaction is a forward-looking indicator
of business success that measures how well
customers will respond to the company in the future .

 Other measures of market performance ,such as

sales and market share ,are backward looking
measures of success .

 They tell how well the firm has done in the past,
but not how well it will do in the future.

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Benchmarking Customer Satisfaction
American Customer Satisfaction Index - University of Michigan (
www.theACSI.org)

ACSI studies have shown that Customer Satisfaction is a leading indicator of

company financial performance. The ACSI database reports all companies by
industry.
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Measurement of
customer satisfaction
 CSI –Customer satisfaction index

 Customers’ ratings of their overall satisfaction on a six-point

scale that ranges from very dissatisfied to very satisfied.
 Very dissatisfied (0)
 Moderately dissatisfied (20)
 Somewhat dissatisfied (40)
 Somewhat satisfied (60)
 Moderately satisfied (80)
 Very satisfied (100)

 CSI=AVERAGE OF THE SCORES (compare this score with

the performance goal & the scores of the competitors).
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18
 Customer Satisfaction
A Key Performance Metric
Very
Satisfied
100

Satisfied
80

Somewhat
Satisfied
60
Somewhat
Dissatisfied
40
Dissatisfied
20

Very Dissatisfied
0

To determine the CSI for a sampling of customers, simply compute the

average of the customers’ satisfaction ratings. Customer satisfaction is
a forecast of future revenues and profits.
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Copyright Roger J. Best,
 Customer Satisfaction Index

Customer
CSI Score
percentage

Very satisfied 25% 100

Satisfied 35% 80
Somewhat satisfied 20% 60
Somewhat dissatisfied 15% 40
Dissatisfied 3% 20

Very dissatisfied 2% 0

 CSI= (100*0.25) + (80*0.35) + (60*0.20) +

(40*0.15) + (20*0.03) + (0*0.02)
= 25 + 28 + 12 + 6 + 0.6 + 0
= 71.6

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 Customer Satisfaction –
Wide-Angle View

De-averaging CSI provides a wide-angle view of customer

satisfaction and allows managers to see more completely the
opportunities for improvement. 21
 De-averaging CSI is critical to
understanding customer profitability

“Very satisfied” customers not only buy more, they often

buy higher-margin products and services, which results
in a higher percent margin on total sales.

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Copyright Roger J. Best,
Profitability of Satisfied Customers

When we chart customer profitability against

customer satisfaction, we see that the “very
satisfied” customers are the ones who drive
profitability.
Copyright Roger J. Best,
Satisfied customers crucial to
a business’s net profits
 Satisfied customers typically buy more, pay their bills on
time, and require less of a business’s marketing
resources.

 They also tend to purchase additional products and

services that are often sold at higher margins and
require very little incremental marketing and sales
expenses.

 Satisfied customers are really the underlying driver

of a business’s profits.

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Danger of dissatisfied customers
 Average measures of customer satisfaction mask the
percentage of dissatisfied customers that are
generally the greatest source of lost customers and
cause of poor customer retention.

 In addition, it is equally important to track the

percentage of very satisfied customers, as these
customers often produce the highest customer
revenues and margins.

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Customer Dissatisfaction
Studies show that of 100 dissatisfied customers:

 4 will complain to the business

 91 will exit as customers

 100 will tend to tell 8-10 people about the

dissatisfaction

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 Customer Dissatisfaction and Exit

4% complain 75% retained 3

100 25% exit 1
Dissatisfied
Customers
96%
do not complain 5% retained 5
95% exit 91
100

Encourage dissatisfied customers to complain!

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Dissatisfied customers often do not complain, but they do walk and they do
talk.

Each year, the business above loses 22,400 customers

who are dissatisfied, but do not complain.
Copyright Roger J. Best,
The Ultimate Objective
 Attract

 Satisfy

 Retain

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Customer Retention
 Determinants of Retention:
 Customer Satisfaction

 Alternatives

 Costs of Switching

 The more alternatives and lower the cost of switching

for the consumer, the more important satisfaction will
be to retention.

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 Estimating Customer Retention
How likely are you to buy this product or
brand again on your next purchase?

To estimate retention rates, businesses can use a customer survey

as outlined above. 31
Copyright Roger J. Best,
 Customer Retention Index (CRI)
Customer
CRI Score
percentage

Definitely will repurchase 25% 100

Plan to repurchase 35% 80
Probably will repurchase 20% 60
Probably will not repurchase 15% 40
Will not repurchase 3% 20

Definitely will not repurchase 2% 0

 CRI= (100*0.25) + (80*0.35) + (60*0.20) +

(40*0.15) + (20*0.03) + (0*0.02)
= 25 + 28 + 12 + 6 + 0.6 + 0
= 71.6

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Net Promoter Score (NPS)
 NPS is a particularly simple measure of the satisfaction/
loyalty of current customers.

 Based on their answers to the single question of how likely

they are to recommend the company or brand to a friend
or colleague (on a ten-point scale), customers are divided
into several categories:

 Promoters: Customers who are willing to recommend

the company to others (who gave the company a rating
of “9” or “10”).
 Passives: Satisfied but unenthusiastic customers
(ratings of “7” or “8”).
 Detractors: Customers who are unwilling to
recommend the company to others (ratings of “0” to
“6”).
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Net Promoter Score (NPS)
 High NPSs generally mean that a company is doing a good
job of securing its customers’ loyalty and active
evangelism. Low and negative NPSs are important early
warning signals for the firm.

 Because the metric is simple and easy to understand, it

provides a stable measure companies use to motivate
employees and monitor progress.

 Net Promoter Score = Percentage of Promoters (%) -

Percentage of Detractors (%)

 For example, if a survey of a company’s customers reports

that there were 20% promoters, 70% passives, and 10%
detractors, the company would have an NPS of 20 − 10
=10.
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Customer Life Expectancy and
Retention

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Average Customer Life and Retention

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The lifetime value of a customer
 Value of the entire stream of purchases a
customer makes over a lifetime of patronage.

 Estimates of the lifetime value of a customer for several

well-known products are:

 Coca Cola…………….Average price $1.25 and lifetime value of

$6,000

 Chevy Cavalier………Average price $15,000 and lifetime value

$276,000

 Gateway Computer… Average price $2,000 and lifetime value

$25,000

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 Customer Lifetime Value
The average credit card customer for this company has a
customer life of 5 years. It costs the company $51 to acquire a
new customer and by year 5 they produce $55 in customer profit.

The lifetime value using a 10% discount rate is $111.70, the

net present value of the customer cash flow over 5 years.
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39
 Customer Lifetime Value
Example: PRESENT VALUE TABLE

Period (N) Cash Flow DR=8 % DR=10 %

0 -35 1.000 1.000

1 20 0.926 0.909

2 25 0.857 0.826

3 35 0.794 0.751

4 50 0.735 0.683

5 60 0.681 0.621

NPV 10% discount = (-35 * 1) + (20 * 0.909) + (25 * 0.826) + (35 * 0.751) + (50 * 0.683) + (60 * 0.621)
= -35 +18.18 +20.65 +26.285 +34.15 +37.26
= 101.525

NPV 8% discount = (-35 * 1) + (20 * 0.926) + (25 * 0.857) + (35 * 0.794) + (50 * 0.735) + (60 * 0.681)
= -35 + 18.52 + 21.425 + 27.79 + 36.75 + 40.86
= 110.345
 Customer Loyalty &
Customer Profitability

 Loyal Customers – High performance in all five aspects of customer loyalty

 Repeat Customers – Great customers that buy often but score lower on purchase amount,
product preference, and customer recommendation.

 Captive Customers – Have a long customer history and average purchase amount but would
leave if they could, as they are dissatisfied captive customers.

 New Customers – Score low on all aspects of customer loyalty as they do not yet have the
customer history to assess their customer loyalty.

 Unprofitable Customers – Score low on all aspects of customer loyalty.

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Copyright oger J. Best,
 Loyal customers play an important role in
company profitability.

How would management of customer loyalty

improve profits?

42
Copyright Roger J. Best,
 Customer Lifetime Value
and Customer Loyalty

Customer Loyalty Scores and Customer Lifetime Value are

closely correlated. 43
 Customer Lifetime Value
Of Win-Back Customers
The return of a former customer is a lost opportunity that
has reappeared— a second chance to develop a loyal
customer.

The “second lifetime value” of a win-back customer has a net

present value almost 3x higher than the average lifetime value
of an entirely new customer.
Copyright Roger J. Best,
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