Topic Developing

11
1. 2. 3. 4.

Customer Relationship

LEARNING OUTCOMES
By the end of this topic, you should be able to: Define customer relationship management; Review the role of quality in developing customer relationship; Illustrate the importance of value in developing customer relationship; and Discuss how to maintain customer satisfaction.

X INTROdUCTION
Developing a solid marketing mix that effectively satisfies customers needs and wants has become difficult in todays rapidly changing business environment. The simple fact is that good situation and SWOT Analysis, along with effective segmentation and differentiation, may not be enough to guarantee success, given the rapid pace of change. In times past, developing the right marketing strategy was really more about creating a large number of transactions with customers, or market share, than about finding better ways to solve customers problems and satisfy their needs. In todays economy, the best marketing strategy is one that provides the level of quality, value, and satisfaction necessary to retain customers over the long term. Developing long-term customer relationships with customers is perhaps the best way to insulate a firm from the rapid pace of change in todays environment.

196

TOPIC 11 DEVELOPING CUSTOMER RELATIONSHIP

11.1

CUSTOMER RELATIONShIp MANAGEMENT

SELf-ChECk 11.1
What is customer relationship management?

Customer Relationship Management (CRM) is the holistic process of identifying, attracting, differentiating and retaining customers. It means integrating a firms entire supply chain to create value at every step, either through increased benefits or lowered costs, as shown in Table 11.1.
Table 11.1: Strategic Shifts from Acquiring Customers to Maintaining Clients Acquiring Customers Customers are customers. Mass marketing. Acquire new customers. Discreet transactions. Increase market share. Differentiation based on groups. Segmentation based on homogeneous needs. Short-term strategic focus. Standardised products. Lowest cost provider. One-way mass communication. Competition Maintaining Clients Customers are clients. One-to-one marketing. Build relationship with current customers. Continuous transactions. Increase share of customers. Differentiation based on individual customers. Segmentation based on heterogeneous needs. Long-term strategic focus. Mass customisation. Value-based pricing strategy. Two-way individualised communications. Collaboration.

Source: Ferrell, O. C., Hartline, M. D., & Lucas, G. H. (2002). Marketing strategy (2nd ed.). Mason, Ohio, USA: South-Western, A Division of Thomson Learning

The aim of customer relationship management (CRM) is to produce high customer equity. Customer equity is the total of the discounted lifetime values of all of the firms customers. Clearly, the more loyal the customers, the higher the customer equity. Rust, Zeithmal, and Lemon distinguish three drivers of customer equity, namely value equity, brand equity and relationship equity.

TOPIC 11 DEVELOPING CUSTOMER RELATIONSHIP

197

(a) Value equity is the customers objective assessment of the utility of an offering, based on perceptions of its benefits relative to its costs. The subdrivers of value equity are quality, price, and convenience. Each industry has to define the specific factors underlying each sub-drivers in order to find programmes to improve the value equity. (b) Brand equity is the customers subjective and intangible assessment of the brand, above and beyond its objectively perceived value. The subdrivers of brand equity are customer brand awareness, customer attitude towards the brand, and customer perception of brand ethics. Companies use advertising, public relations, and other communication tools to affect these sub-drivers. Brand equity is more important than other drivers of customer equity, in which products are less differentiated and have more emotional impact. (c) Relationship equity is the customers tendency to stay loyal to the brand, above and beyond objective and subjective assessment of its worth. Subdrivers of relationship equity include loyalty programmes, and knowledgebuilding programmes. Relationship equity is especially important where personal relationships count for a lot and where customers tend to continue with suppliers out of habit or inertia. Figure 11.1 shows the main steps in the process of attracting and keeping customers. The starting point is everyone who might conceivably buy the product or service (suspects). From these the company determines the most likely prospects, which it hopes to convert to first-time customers, and then into repeat customers, and then into clients; people whom the company acknowledge and give special treatment. The next challenge is to turn clients into members by starting a membership programme that offers benefits to customers who join. Then, the members become advocates, customers who enthusiastically recommend the company and its products and services to others. The ultimate challenge is to turn advocates into partners.

198

TOPIC 11 DEVELOPING CUSTOMER RELATIONSHIP

Figure 11.1: The customer relationship process Source: Kotler, P. (2003). Marketing management (11th ed.). Upper Saddle, New Jersrey, USA: Prentice-Hall, Inc.

TOPIC 11 DEVELOPING CUSTOMER RELATIONSHIP

199

CRM involves a number of stakeholders, as stated next. (a) Employees Firms must manage relationships with their employees if they are to have any hope of fully serving customers needs. (b) Supply Chain Partners Virtually all firms buy and sell products upstream and/or downstream in the supply chain. (c) Lateral Partners Relationships with other stakeholders must also be managed effectively. (d) Customers The end users of a product, whether businesses or individual customers.

SELf-ChECk 11.2
Why is Customer Relationship Management very important to a company and who are the people involved?

ACTIvITy 11.1
Browse through the following website, http://www.onlinewbc.gov/docs/market/mk_sales_rltshpmkt.html to know more about customer relationship marketing.

11.1.1 Increasing Share of Customers

Increasing share of customers involves abandoning the old notions of acquiring new customers and increasing transactions to focus more on fully serving the needs of current customers. Focusing on share of customers requires understanding that all customers have different needs, and therefore, not all customers have equal value to a firm. Some customers; those that require considerable handholding or who frequently return products are simply too expensive to keep, given the low level of profits they generate.

11.1.2 One-to-one Marketing and Mass Customisation

One-to-one marketing and mass customisation can be prohibitively expensive to deliver. To make customised marketing mixes viable, there are three critical issues to be considered, as explained in the following paragraphs.

200

TOPIC 11 DEVELOPING CUSTOMER RELATIONSHIP

(a) The delivery of the marketing mix (product, pricing, distribution and promotion) must be automated to a degree that makes it cost efficient; (b) The second critical issue in mass customisation is the notion of personalisation. This term is used to describe the idea of giving customers choices, not only in terms of product configuration, but also in terms of the entire marketing mix; and (c) To grow in todays business environment, a firm must build its relationship capital; the ability to build and maintain relationships with customers, suppliers, and partners. To build relationship capital, a firm must be able to fulfill the needs of its customers better than its competitors. It must be able to fulfill those needs with high-quality goods and services, offer products that are value for the money and achieve a high level of customer satisfaction.

11.2

ThE ROLE Of QUALITy IN dEvELOpING CUSTOMER RELATIONShIp

SELf-ChECk 11.3
Why is Customer Relationship Management very important to a company and who are the people involved? Quality refers to a perceived degree of superiority regarding a firms goods and services in the eyes of the customers. Quality applies to many different aspects of a firms total product offering, namely the following. (a) Core Product The core product is the firms justifications for existence the benefits desired by customers. Customers expect the core product to be of high quality to meet their needs. (b) Customer Services Customer services involve activities that add value to the core product. (c) Symbolic Attributes Customers also focus on symbolic attributes, such as image, style, prestige and brand. Table 11.2 highlights the components of the total product offering.

TOPIC 11 DEVELOPING CUSTOMER RELATIONSHIP

201

Table 11.2: Components of the Total Product Offering

Example Sprint PCS Wireless Phone Chevrolet Silverado Pickup

Core Product Communication Transportation Hauling/towing

Customer Services Rate plans Free long distance

Symbolic Attributes Leather slipcase Changeable faceplates

Financing Like a rock Service Work and fun department Build your own Financing Delivery Availability Installation Financing Mid-Manhattan location Restaurants/room service Executive lounge John Deere green Nothing rides like a Deere Security Because a lot is riding on your tires Extraordinary hospitality The first Grand Hotel Art-Deco style

John Deere Lawn Grass cutting Tractor Michelin Tires Waldorf Astoria New York City Tires Safety Bed/room

Source: Ferrell, O. C., Hartline, M. D., & Lucas, G. H. (2002). Marketing strategy (2nd ed.). Mason, Ohio, USA: South-Western, A Division of Thomson Learning

Delivering superior quality on a daily basis is one of the most difficult things for an organisation. Most businesses struggle with improving the quality of service, either as a core product or as customer services that add value to a core product. Research has determined that businesses can improve the quality of their services by considering the following factors. (a) Understanding Customers Expectation, Needs and Wants Improving service quality is the starting point for effective customer relationship management. Delivery of superior quality begins with a solid understanding of customers expectations. Managers must stay in touch with customers by conducting research, to better identify their needs and wants. (b) Translating Customer Research into Specification for Quality Firms that can successfully convert customer information into quality specifications can ensure that the voice of the customers is heard. Managers must be committed to giving customers what they want and expect. (c) Delivering on Specifications The ability of managers and employees to deliver quality that is consistent with established specifications is an issue. Successfully achieving specifications depends mostly on the training and motivation of the firms employees.

202

TOPIC 11 DEVELOPING CUSTOMER RELATIONSHIP

(d) Promising only What can be Delivered Communications with customers must be honest and realistic, with respect to the degree of quality that can be delivered. Improving quality has been the hallmark of a successful marketing strategy for many years.

ACTIvITy 11.2
How can an organisation improve on the quality of the services provided to their customers? To test your understanding, answer the following exercise.

EXERCISE 11.1
Complete the following exercise by circling the correct answers. 1. Which of the following is not an important stakeholder in customer relationship management? 2. A. Employees B. Upstream supply chain partners C. Downstream supply chain partners D. Lateral partners E. Stockholders

When a firm begins to charge high fees for additional services to non-profitable customers, it has determined that the of those customers is too low to warrant added efforts at maintaining a relationship with them. A. lifetime value B. relational Value C. 80/20 value D. market share E. relational share

TOPIC 11 DEVELOPING CUSTOMER RELATIONSHIP

203

3.

Many experts argue that capital, or the ability to build and maintain relationships with customers, suppliers, and partners, is more important than tangible assets and/or equipment. A. customer B. relationship C. one-to-none D. clientele E. market

4. Which aspect of product quality are customers most likely to take for granted? 5. A. Customer services B. Symbolic attributes C. Relationship quality D. Core product E. Intangible quality

Why do most businesses struggle with improving the quality of customer services? A. Service quality is people-driven. B. Service quality is not as important as symbolic quality. C. Most businesses do a very poor job of understanding customers needs. D. Most businesses have a hard enough time maintaining the quality of their core product, so customer services do not get much attention. E. Customers do not know what they want in terms of good service.

204

TOPIC 11 DEVELOPING CUSTOMER RELATIONSHIP

11.3

CREATING vALUE TO dEvELOp CUSTOMER RELATIONShIp

SELf-ChECk 11.4
What is the importance of value in developing customer relationship?

11.3.1

Importance of the value

An aspect of developing and maintaining solid relationship is to create good value to customers. Value is useful because: It includes the concept of quality; It takes into account every marketing mix element; and It can be used to explicitly consider customer perceptions of the marketing mix in the strategy development process. Value means different things to different people: Some equate good value with high product quality; Others see value as nothing more than a low price; and The most common definition relates customer benefits to costs. Our premise is that customers will buy from the firm that they see as offering the highest perceived value, as shown in Figure 11.2. Customer Perceived Value (CPV) is the difference between the prospective customers evaluation of all the benefits and all the costs of an offering and the perceived alternatives. Total customer value is the perceived monetary value of the bundle of economic, functional, and psychological benefits customers expect from a given market offering. Total customer cost is the bundle of costs customers expects to incur in evaluating, obtaining, using and disposing of a given market offering.

TOPIC 11 DEVELOPING CUSTOMER RELATIONSHIP

205

Customer delivered value

Total customer value Product value Services value Personnel value Images value

Total customer cost Monetary cost Time cost Energy cost Psyhic cost

Figure 11.2: Determinants of customer-delivered value Source: Ferrell, O. C., Hartline, M. D., & Lucas, G. H. (2002). Marketing strategy (2nd ed.). Mason, Ohio, USA: South-Western, A Division of Thomson Learning

11.3.2

Customer Benefits

(a) Customer benefits can include anything that a customer receives in his or her dealings with a firm, as shown in Table 11.3. (i) The benefits from the quality of the firms core products, include all of the features possessed by its programmes; (ii) The benefits from customer services include installation, delivery, training, or layaway programmes. The quality of customer service depends on how reliable and responsive the firm is to customer request, and on employee characteristics, such as friendliness and empathy; and (iii) The benefits from experiences include business customers interactions with salespeople.

206

TOPIC 11 DEVELOPING CUSTOMER RELATIONSHIP

Table 11.3: Components of Customer Benefits and Customer Cost Customer Benefits Core Product Quality Product feature Brand name Styling and design Durability Ease of use Image Reputation Warranties and guarantees Customer Service Quality Reliability Responsiveness Timeliness Friendliness of employees Experience-based Quality Retail atmosphere and decor Advertising and publicity Entertainment benefits Customer Costs Minetary Cost (a) Transaction Costs Retail or wholesale price Delivery charges Installation charges Sales tax Usage tax Registration fees Licensing fees Additional fees of charges (b) Life cycle Costs Maintenance costs Repair cost Replacement cost

Non-monetary Costs Time Effort Risk Safety and security Opportunity costs.

Source: Ferrell, O. C., Hartline, M. D., & Lucas, G. H. (2002). Marketing strategy. (2nd ed.). Mason, Ohio, USA: South-Western, A Division of Thomson Learning

(b) Customer costs, which include monetary and non-monetary costs, are also highlighted in Table 11.3. Monetary and non-monetary customer costs include anything that the customer must give up to obtain the benefits provided by the firms. The monetary cost of the product comes in two forms; transactional cost and life cycle cost. (i) Transactional cost includes the immediate financial outlay or commitment that must be made to purchase the product; and (ii) Life cycle cost includes any additional costs that customers will incur over the life cycle of the product. Non-monetary cost is the time and effort customers expend to find and purchase goods and services. (i) To reduce time and effort, the firm must increase product availability; and (ii) They must make it more convenient for customers to purchase the firms products.

TOPIC 11 DEVELOPING CUSTOMER RELATIONSHIP

207

Risk, another non-monetary cost, can be reduced by offering good basic warranties or extended warranties for an additional charge. Opportunity cost, the final non-monetary cost, is harder for the firm to control. Some firms attempt to reduce opportunity cost by: (i) Promoting their products as being the best or by promising good service after the sale; and (ii) Considering all competitors, including total budget competitors, that offer customer alternatives for spending their money. By altering each element of the marketing mix, the firm can enhance value by increasing core product, customer service, or experienced-based quality and/or by reducing monetary or non-monetary cost. The marketing manager must understand the different value requirement of each target market and adapt the marketing mix accordingly. From a strategic perspective, it is to remember that all four marketing mix elements are important to delivering value.

SELf-ChECk 11.5
What are the differences between transactional cost and life cycle cost?

11.4

MAINTAINING CUSTOMER SATISfACTION

SELf-ChECk 11.6
Do you know what it takes to maintain customer satisfaction?

To maintain and manage customer satisfaction form a strategic point of view, managers must understand the differences between satisfaction, value and quality. They must also make customer satisfaction measurement, a long-term and continuous commitment.

11.4.1

Satisfaction versus Quality versus value

Customer satisfaction is defined as the degree to which a product meets or exceeds the customers expectation. Customers can have expectations about any part of the product offering, including quality and value.

208

TOPIC 11 DEVELOPING CUSTOMER RELATIONSHIP

Quality is a concept in which customers judge the product on an attribute-byattribute basis. (Consider a meal at a restaurant. The quality of that meal stems from specific attributes. The quality of the food, drink, atmosphere and the service are all important. We could even go as far as to judge the quality of the ingredients in the food.) Value includes other aspects than quality, for example, price, time, effort, and opportunity costs. In this case, even the best meal in a great restaurant can be viewed as a having poor value if the price is too high in terms of monetary and/ or non-monetary costs. When a customer considers satisfaction, he or she will typically respond based on his or her expectation of the item in question. If the quality of the food is not what the customer expected, then the customer will be dissatisfied with the food. Similarly, if the value of the meal is not what the customer expected, the customer will be dissatisfied with the value. Note that these are independent judgments. It is entirely possible for a customer to be satisfied with the quality of the meal, but dissatisfied with the value. The opposite is also true. However, most customers do not make independent judgments about satisfaction. Instead, customers think of satisfaction based on the totality of their experience, without overtly considering issues like quality and value. We are not saying that customers do not judge quality or value. Rather, we are saying that customers think of satisfaction in more abstract terms than they do quality or value. This happens because of customers expectations, hence their satisfaction can be based on any number of factors; even factors that have nothing to do with quality or value. Continuing with our restaurant example, it is entirely possible for a customer to receive the absolute best quality and value, yet still be dissatisfied with the experience. The weather, other customers, a bad date, and being in a bad mood are just a few examples of non-quality and non-value factors that can affect customers expectations and cloud their judgments of satisfactions.

11.4.2

Important Considerations in Maintaining Customer Satisfaction

From a strategic point of view, there are three important considerations in maintaining customer satisfaction. Understand What Can Go Wrong An endless number of things can and will go wrong in fulfilling customers needs and wants. The best strategies will not work when things are simply uncontrollable.

TOPIC 11 DEVELOPING CUSTOMER RELATIONSHIP

209

Focus on Issues that are Controllable Managers must focus on issues that can control the marketing mix. Core product quality, customer service, atmosphere, experiences, pricing, convenience, distribution and promotion must all be managed. Make Customer Satisfaction Measurement an On-going Priority Know what customers want, need and expect. A programme to measure customer satisfaction is the cornerstone of customer relationship management.

SELf-ChECk 11.7
What is the difference between quality and value?

11.4.3 Tracking Customer Satisfaction

SELf-ChECk 11.8
Do you know what are the methods that are used to track customer satisfaction? Firms which are serious about customer relationship management have adopted robust means of tracking satisfaction that are based on actual customer behaviours. (a) Lifetime Value of a Satisfaction (LTV) This refers to the net present value of the revenue stream, generated by a specific customer over a period of time. LTV recognises that some customers are worth more than others. Companies can better leverage their customer satisfaction programmes by focusing on valuable customers. (b) Average Order Value (AOV) This refers to a customers purchase dollars divided by the number of orders over a period of time. The AOV will increase over time as customer satisfaction increases and customers become more loyal. (c) Customer Acquisition/Retention Costs It is typically less expensive to retain current customers than to acquire new customers. As long as this holds true, a company is better off keeping its current customers satisfied.

210

TOPIC 11 DEVELOPING CUSTOMER RELATIONSHIP

(d) Customer Retention Rate This refers to the percentage of customers who are repeat purchasers. A declining retention rate is a cause for concern. (e) Referrals Dollars that are generated from customers referred to the firm by current customers. A declining referral rate is a cause for concern. (f) Viral Marketing An electronic form of word-of-mouth communication. The number of Internet newsgroups and chat rooms where customers praise and complain about companies is staggering. Companies can track customer satisfaction by closely monitoring this on-line commentary. Although the customer-centred firms seek to create high customer satisfaction, that is not its main goal. If a company increases customer satisfaction by lowering its price or increasing its services, the result may be lower profits. The company might be able to increase its profitability through other means than increasing satisfaction (for example, manufacturing processes or investing more in R&D). Also, the company has many stakeholders, including employees, dealers, suppliers and stockholders. Spending more to increase customer satisfaction might divert funds from increasing the satisfaction of other partners. Ultimately, the company must operate on the philosophy that it is trying to deliver a high level of customer satisfaction. Therefore, the company is subject to delivering acceptable levels of satisfaction for the other stakeholders, given its total resources. Table 11.4 illustrates the tools for tracking and measuring customer satisfaction.

TOPIC 11 DEVELOPING CUSTOMER RELATIONSHIP

211

Table 11.4: Tools for Tracking and Measuring Customer Satisfaction Complaint and Suggestion System A customer-centered organisation makes it easy for customers to register suggestions and complaints. Some customer-centered companies like P&G, General Electric, and Whirlpool, establish hotlines with toll-free numbers. Companies are also using Web and E-mail for quick, twoway communication. Studies show that though customers are dissatisfied with one out of every four purchases, less than 5 percent will complain. Most customers will buy less or switch suppliers. Responsive companies measure customer satisfaction directly by conducting periodic surveys. While collecting customer satisfaction data, it is also useful to ask additional questions to measure repurchase intentions and to measure the likelihood or willingness to recommend the company brands to others. Companies can hire people to pose as potential buyers, to report on strong and weak points experienced in buying the companys and competitors products. These mystery shoppers can even test how the companys sales personnel handle various situations. Managers themselves should leave their offices from time to time, and enter company and competitor sales situations, in which they are unknown, and experience the situation firsthand. A variant of this is for managers to phone their own company with questions and complaints to see how the calls are handled. Companies should contact customers who have stopped buying and have switched to another supplier, to identify the reason(s) behind it. Not only is it important to conduct exit interviews when customers first stop shopping; it is also necessary to monitor the customer loss rate.

Customer Satisfaction Survey

Ghost Shopping

Lost Customer Analysis

Source: Ferrell, O. C., Hartline, M. D., & Lucas, G. H. (2002). Marketing strategy (2nd ed.). Mason, Ohio, USA: South-Western, A Division of Thomson Learning

11.4.4

The focus Group

Firms also have another research method at their disposal, which is the focus group. (i) Focus groups are being used more often in the measurement of customer satisfaction; (ii) Focus group allows the firm to fully explore the subtleties of satisfaction; and

212

TOPIC 11 DEVELOPING CUSTOMER RELATIONSHIP

(iii) By better understanding the roots of customer satisfaction, marketers should be better able to develop marketing strategies that can meet customers needs.

ACTIvITy 11.3
If your company is currently promoting a new line of shampoos and conditioners, who are the individuals you would select to be part of your focus group?

EXERCISE 11.2
Tick True or False in the appropriate boxes. Statements Quality refers to the degree of superiority of a firms goods or services. Transactional cost includes any additional costs that customers will incur over the life cycle of the product. Customer services involve activities that add value to the core products. Non-monetary cost is the time and effort customers expend to find and purchase goods and services. Focus groups are being used more often in the measurement of customer relationship. Customer satisfaction is defined as the degree to which a product meets or exceeds the customers expectations about the product. Customer Relationship Management (CRM) is the holistic process of identifying, attracting, differentiating and retaining customers. True False

TOPIC 11 DEVELOPING CUSTOMER RELATIONSHIP

213

To test your understanding, answer the following exercise.

EXERCISE 11.3
Complete the following exercise by circling the correct answers. 1. 2. Time, effort, risks and opportunity cost are all examples of: A. non-monetary costs. B. monetary cost. C. experiential cost. D. intangible cost. E. perceived cost.

may be defined as a customers subjective evaluation of the ratio between a products benefits and the costs of acquiring it. A. Satisfaction B. Justice C. Value D. Quality E. Fairness

3. 4.

Which of the following is the most narrowly defined concept in terms of understanding customer expectations? A. Value B. Quality C. Satisfaction D. Relationship quality E. Opportunity cost

The net present value of the revenue stream generated by a specific customer over a period of time, is referred to as the: A. average order value. B. lifetime retention value. C. lifetime value of a customer. D. viral marketing rate. E. lifetime metric value.

214

TOPIC 11 DEVELOPING CUSTOMER RELATIONSHIP

5.

With respect to value, which statement is false? A. Value includes the concept of quality, but is broader in scope. B. Value takes into account every marketing mix elements. C. Value can be used to explicitly consider customer perceptions of marketing mix variables. D. Value can be used to organise the internal aspects of marketing strategy. E. Value is easy to define because it means the same thing to everyone.

SUMMARy
This topic highlights the importance of customer relationship to the firms. Customer relationship management involves all the stakeholders (employees, supply chain partners, lateral partners and customers). When it comes to developing and maintaining customer relationships, quality is a double-edged sword. If the quality of goods or services is bad, the organisation obviously has little chance of satisfying customers or maintaining relationships with them. The second important aspect of developing and maintaining solid relationships is to create good value for customers. As a guiding principle of marketing strategy, value is quite useful because it includes the concept of quality but is broader in scope, takes into account every marketing mix elements, and can be used to explicitly consider customer perceptions of the marketing mix in the strategy development process. How is customer satisfaction different from value and quality? The answer is not obvious, as the definition of each term closely overlaps the other. Customer satisfaction is typically defined as the degree to which a product meets or exceeds the customers expectations. Satisfaction is typically judged by customers within the context of the total experience, not just with respect to quality and value. Customer satisfaction can also include any number of factors that have nothing to do with quality or value.

TOPIC 11 DEVELOPING CUSTOMER RELATIONSHIP

215

Brand equity Customer benefits Customer costs Customer perceived value (CPV) Customer relationship management (CRM) Customer satisfaction Focus group

Monetary cost Opportunity cost Quality Relationship equity Total customer value Value Value equity