chapter 2: relationship marketing and the concept of customer value

Chapter 2:

Relationship Marketing and the

Concept of Customer Value

2V. Kumar and W. Reinartz – Customer Relationship Management

Overview

Topics discussed:

The Link between CRM and Database Marketing, and the Importance of Customer Value

Satisfaction-Loyalty-Profit Chain


Link Between CRM and Database Marketing

Database Marketing

Identify and analyze customer population

Group based on similarities

Recommend separate marketing campaigns for different groups

CRM

Applies database marketing techniques at customer level

Develops strong company-to-customer relationships


CRM

Capture customer data and interact with the

customer simultaneously

Develop specific strategies for interaction with each customer

Better relationships with profitable customers

Locating and enticing new customers that will be profitable

Finding appropriate strategies to deal with unprofitable customers, including termination of relationships


Link Between CRM and Customer Value

Customer Value:

The economic value of the customer relationship to the firm

CRM:

Practice of analyzing and utilizing marketing databases and leveraging communication

technologies to determine corporate practices and methods that will maximize the

lifetime value of each individual customer to the firm

Adoption of CRM with customer value at its core strategy helps us define CRM from a customer value perspective


Benefits of customer value-based approach in Marketing Decisions

Decrease in Costs

Maximization in revenues

Improvement in Profits and ROI

Acquisition and Retention of Profitable Customers

Reactivation of Dormant Customers


Conceptualizations of CRM

Functional level: focuses on technology Sales force automation in the sales function Campaign management in the marketing function

Customer facing front-end level: focuses on total customer experience To build a single-view of customers across contact channels To distribute customer intelligence to all customer-facing functions

Strategy level: focuses on customer satisfaction Frees CRM from technology underpinnings Describes CRM as a process to implement customer centricity in the

market and build shareholder value Knowledge about customers affects the entire organization


Components of CRM from a Business Strategy Perspective

Strategic process

Spans multiple organizational functions

Continuous effort towards becoming customer-centric

Selection

Resource allocation based on economic value of customer

Interactions

Exchange of information and goods between customer and firm evolves as a function of past exchanges

Customers End-users and intermediaries such as distributors and retailers Greater fine-tuning of segmentation strategies to eventually target individual customers

with customized product offerings Optimizing current and future value of customer

Maximizing customer equity by maximizing profits over a series of transactions


Source: Strengthening the satisfaction-profit chain”, Eugene W Anderson, Vikas Mittal. Journal of Service Research, Nov 2000. Vol 3, Iss.2, p 107



Increased customer satisfaction will lead to greater customer retention, which is often used as a proxy for customer loyalty, which then is expected to lead to greater profitability

Product Performance

Service Performance

EmployeePerformance

Customer

Satisfaction

Retention /

Loyalty

Revenue /

Profit


Direct Link between Customer Satisfaction and Profits

Direct link suggests, that as customers experience greater satisfaction with a firm’s offering,

profits rise

Positive correlation between customer satisfaction and ROA

Improving customer satisfaction comes at a cost and once the cost of enhancing satisfaction is factored in, offering “excessive satisfaction” doesn’t pay

Marginal gains in satisfaction decrease, while the marginal expenses to achieve the growth in satisfaction increase

There is an optimum satisfaction level for any firm, beyond which increasing satisfaction does not pay


Source: “Strengthening the satisfaction-profit chain”, Eugene W Anderson, Vikas Mittal. Journal of Service Research, Nov 2000. Vol 3, Iss.2, p 114

Link between Satisfaction and Retention


Link between Satisfaction and Retention (2)

Link between satisfaction and retention is asymmetric: Dissatisfaction has a greater impact on retention than satisfaction

Even if the level of satisfaction is high, retention is not guaranteed

If customers are dissatisfied, other products become more enticing

The link is nonlinear in that the impact of satisfaction on retention is greater at the extremes

The flat part of the curve in the middle has also been called the “zone of indifference”

Factors like the aggressiveness of competition, degree of switching cost, and the level of perceived risk influence the shape of the curve and the position of the elbows


Source: “Why satisfied customers defect”, Jones, Thomas O, Sasser, W Earl Jr. Harvard Business Review. Boston: Nov/Dec 1995. Vol. 73, Iss. 6

Link between Satisfaction and Retention (3)


Link between Loyalty and Profits

Reichheld’s hypotheses

Long term customers spend more per period over time

Cost less to serve per period over time

Have greater propensity to generate word-of-mouth

Pay a premium price when compared to that paid by short-term customers

Does not hold true in a non-contractual relationship

Revenue stream must be balanced by the cost of constantly sustaining the relationship

and by fending off competitive attacks

Efforts at increasing customer satisfaction and retention not only consume a firm’s

resources but are subject to diminishing returns


Lifetime Duration-Profitability Association

Reinartz and Kumar: Across the different firms,

There is a segment of customers that is loyal but not very profitable

(due to excessive resource allocation)

There is a segment that generates very high profits although it has only a short tenure

Since these short-term customers can be very profitable, it is clear that loyalty is not the

only path to profitability


Lifetime Duration-Profitability Association (2)

Overall trend shows a direct correlation between loyalty and profitability

Outliers on the graph who generate high profits while not having high loyalty will outperform those customers who have a high level of loyalty but who are not very profitable

High

Low

Lifetime Profit

Low HighLoyalty


Summary

Rapid advances in technology allowed increase in customer database, which marketers use to target specific segments

Marketing is increasingly focused on the individual customer and delivering products that meets customer’s needs

Relationship marketing seeks to establish individual relationships and monitor them over time, delivering specifically targeted marketing campaigns.

CRM marketers can generate more profit and increase customer satisfaction

Various links in the PSC are almost always nonlinear, asymmetric, and certainly segment and industry specific

chapter 2: relationship marketing and the concept of customer value

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