CHAPTER 14 CUSTOMER
RELATIONSHIP MANAGEMENT
Better relationship with
customers
Increase in long term sales
Increase in profits
It is important for a marketing manager to understand what kind of relationship the customer wishes to have
with the company and its brands → different buyer-seller relationships:
A. The relationship between the two is at distance because the seller has done
little to try to understand the buyer’s motivations and needs. The salesperson
has used his/her creativity or personality to make the sale, not an
understanding of the customer.
B. Customer orientation, the company spends money on marketing research,
segments are appropriate and the marketing strategy in line with the value
proposition that represent what the target segment wants.
(A+B) For the seller, the sale is the end of the process: for the buyer, it is the
beginning. In today’s competitive environment, where long-term relationships are
critical to marketing and general business success, it takes more than the execution of
the marketing concept to satisfy customers over a long period of time.
C. The buyer and the seller have become interdependent. Each party to the relationship depends on the
other in some way.
Transaction buyers: interested only in the purchase at hand. They be not be interested in a long-term
relationship at all, or the seller in the market may not have done a good job of showing the customer the
benefits of such a relationship.
Relationship customers: customers who see the befits of interdependency between the buyer and the seller.
Both kind of customer can be loyal, but the nature of the loyalty is different.
Customer acquisition: ways marketing is normally used to obtain customers
Customer relationship management CRM: development of programs that match the kind of relationship
the customer wants with the company, whether it is relational or transactional.
The economics of loyalty
Lifetime customer value LCV: present value of a stream of revenue that can be produced by a customer.
When you lose a customer for life, you are losing the stream of income that passenger would have produced
over his lifetime.
What looks like a small difference in retention rates is greatly magnified over a long period of time. Retained
customers are much more profitable than switchers. Loyal customers are more profitable because they
stimulate revenue growth (buy more + buy more often), they are less expensive to serve, they refer new
customers to the company and they are often willing to pay a premium price.
Acquisition cost: incremental cost involved in obtaining any new customer. It represents an initial loss on
any customer, the cost can be quite high.
Base profit: profit margin a company earns from an average customer. The longer a customer is retained, the
longer the base profit is earned.
Revenue growth → retained customer have been found to increase their purchase quantities over time. The
revenue growth can happen by increasing the “share-of-wallet” or the % of total spending of a customer in a
category that goes to a specific manufacturer → a loyal customer would provide a high share-of-wallet to a
company in relation to its competitors who provide a similar offering.
Operating costs → existing customers cost less to serve than new customers
Referrals: good customers talk with friends about your company. Additional business comes from favorable
word-of-mouth by satisfied customers.
Price premium: loyal customers are often more price-insensitive than customers who need a price
inducement to switch or to become a new customer.
Framework for customer relationship management
Customer relationship management CRM model:
1. Constructing a customer database
2. Analyzing the database
3. Based in the analysis, selecting customers to target
4. Targeting the selected customers
5. Developing relationship programs with the customers in the target group(s)
6. Considering privacy issues
7. Measuring the impact of the CRM program
1: creating the database
Customer database → Customer information file CIF: repository of information about the customer and
serves as a basis for identifying and targeting both current and potential customers.
The idea is to assess the value of each customer in the CIF to the firm and then develop relationship
programs that will be customized both in content and intensity, depending on that value.
Areas of content:
 Basic customer descriptors: customer and firm demographics, contact names, addresses…
 Purchase history: this info should be as detailed as possible, including products ought, channels
utilized, and prices paid.
 Contact history: any recordable contact that person has had through customer service
 Response information: how customers have responded to prior direct-marketing activities,
promotional offers or other traceable activity
 Value of the customer: estimate of the monetary value of the customer to the firm
The dimension that is difficult to show is time. It is hard to see spot
trends in terms of which customers are becoming better and those whose
relationship with the firm is becoming worse.
You can conceptualize the CIF using a 2x2 matrix, defined with the kind
of interaction the company has with the customer (direct vs indirect) and
the frequency of that interaction (high vs low).
As a result, many companies have to create programs or events to collect
as much customer information as they can. Some of this comes through
loyalty or frequent shopper programs.
Another challenge to creating databases is tracking behavior.
2: analyzing the database
Data mining: analyzing a customer information file for the best prospects to target.
By means of statics and software, segments, purchasing patterns, trends are found.
When estimating LCV, you take the purchasing information, and together with information about profit
margins on each product purchased, projects the profit implications of each customer or row in the CIF.
Customer’s cumulative profitability to the present time:
Customer profitability= ∑𝑡 ∑𝑗(𝑃𝑗 − 𝐶𝑗) − ∑𝑘 𝑀𝐶𝑘 − 𝐴𝐶
The formula computes the total profits
t= the number of past and current time periods measured
generated by a customer by taking the total
j= the number of products purchased in a time period
margin generated by the customer (P-C) in
k= the number of marketing tools used in a time period
each time period from all products and services
P= price
purchased, subtracting off the traceable
C= cost
marketing costs attributable to each customer,
MC= cost or marketing tool
summing off all time periods in the database,
AC= cost of acquisition for the customer
and then subtracting the initial acquisition
costs.
Profits can be increased by:
 ↑P and ↑j by cross-selling (purchasing more products) and/or upselling (purchasing more expensive
products)
 ↓MC over time as the customer loyalty is better established
 ↑t
 ↓AC → identify new and cheaper ways to acquire customers through new media vehicles
A margin multiple can be used to multiply the current margin generated by each customer to estimate the
LCV → r/(1+i-r) where r: retention (loyalty) rate and i: discount or cost of capital rate used by the company.
3: customer selection
The customer profitability analysis can be used to separate the customers who will provide long-term value
for the firm from those who are likely to be unprofitable.
80-20 rule: 80% of the company’s profits are provided by 20% of its customers.
A major benefit of the LCV and profitability analyses previously described is to permit the marketing
manager to make informed decisions about:
1. Which customers to keep
2. For those kept, how much money to spend on keeping them
Descriptive statics of a profitability analysis: number of services provided, maximum profitability, minimum
profitability, mean profitability, median profitability.
Criteria to select which customers to keep or fire:
 Current profitability
 Future profitability LCV → based on assumptions → difficult to be validated
 Similarity of the customer’s profile to other customers who are currently profitable
It is important to attempt to make unprofitable customers profitable before firing them, either by looking for
way to increase revenue growth or by looking for ways to decrease the costs-to-serve.
4: customer targeting for retention
Once the customers that you wish to target have been selected, conventional direct marketing approaches are
then used to keep them → one-to-one marketing: special promotions, prices, perks, products and other offers
made through telemarketing, direct mail and personal sales calls.
5: relationship marketing programs
Programs specifically designed for retaining customers.
Customer satisfaction
One of the requirements of customer retention is satisfaction. Satisfied customers are much more likely to
repurchase and become good customers than dissatisfied customers. There is a positive relationship among
satisfaction, loyalty and profitability.
Many companies around the world are investing substantial sums in measuring customer satisfaction and
exploring its impact on their business.
→ Expectation confirmation/disconfirmation
model: a basic customer satisfaction model that
presumes that levels of customer satisfaction with a
product or service are determined by how well the
product performs compared to what the customer
expects. The expectation is formed from a variety of
sources of information, including adv, word-ofmouth and past experience with the product or
product category. If the product meets or exceeds
expectations, the customer is satisfied to different degrees. Any performance below expectations results in a
dissatisfied customer.
Satisfaction can be measured using a scale to compare satisfaction, along a number of product dimensions,
with competition and expectations. Most companies track these satisfaction measures over time and relative
to competition in order to determine trends in different market segments or product areas. More companies
are using customer satisfaction data in calculating senior executive bonuses.
Customer satisfaction for companies and industries can be seen by examining “previous year % change”,
there are notable shifts in these satisfaction scores based on a company investment in customer service,
communications and word-of-mouth activities.
Customer satisfaction surveys for products and services sold via the Web can be conducted quickly and
easily.
A large amount of evidence indicates that merely satisfying customers in not enough to keep them loyal. The
largest differences in loyalty between completely satisfied and merely satisfied customers have been found in
the most highly competitive industries.
The importance of looking at the most and least satisfied customers has recently been proposed as being an
important predictor of firm performance → Net promoter: based on customers’ responses on a 0 to 10
rating scale, customer are grouped into one of three groups:
 Promoters 9-10
 Passively satisfied 7-8
 Detractors 0-6
The % of detractors in then subtracted from the % of promoters to obtain the net promoter score. It provides
insights into how to get more promoters and fewer detractors. These insights can then be provided to
marketers for follow-up action.
The relationship between satisfaction and loyalty is complex. There are four types of customers based on
their levels of satisfaction and loyalty:
 Loyalist/Apostle: completely satisfied, high loyalty, supportive of the company. They help you get
new customers through referrals.
 Defector/Terrorist: dissatisfied, in the middle, switch to competitors, they spread negative word-ofmouth
 Mercenary: high satisfaction but high switching rates as well, low commitment. Price-and
promotion-sensitive, they rarely stay with you long enough for them to be profitable
 Hostage: stuck with you, they are highly loyal because there may not be a viable alternative.
Customer service
Customer service: service that supplements or complements the main product or service purchased, it is an
important component of customer satisfaction, especially in the service industry where the level of customer
service delivered is equivalent to product quality.
Traditionally, a company would develop a product and then give it to a separate customer service
department. Much of the information gleaned from service interactions with customers was not getting back
to the marketing department. Nowadays, companies are interested in managing the customer’s interaction
with the company at any number of different interaction points and using the feedback to improve products
and processes. The points of contact between buyer and seller are not all equal in importance. Those that are
critical to the relationship are called moments of truth. It is important for you to understand which customer
contacts are sufficiently critical to the long-term relationship to be considered moments of truth for your
business.
Customer service is way to differentiate your product
→ differentiation effort
 Core product: basic attributes of the product or service
 Expected product: core product plus any expectations
about the product or service held by the target segment
It is difficult to achieve differentiation based in product
features and attribute. Simply meeting expectations is
insufficient for maintaining buyer loyalty over an extended
period of time. To differentiate you need to reach a third level
 Augmented product: go beyond expectations by
offering levels of customer service that competitors
cannot match.
Augmented
product
Expected
product
Core product
Useful customer principles:
 Service is the backbone of any business. If you do not satisfy the customer the first time, you may
not get a second chance.
 Great service is measured by customer satisfaction. Profits will follow if your costumers are highly
satisfied
 Compensation plans determine behavior. Your compensation scheme should reward your workers
for delivering high levels of service.
 Sales and service departments are complementary. Great service gives the sales department more to
sell.
 The hours your service department is open sends signals about your dedication to customer
satisfaction. You should be open when you customer needs you.
Ways to demonstrate excellence:
 Provide service guarantees: it offers the customer some assurance plus it reinforces the brand image
at the same time.
 Service recovery: how you reach in situations where the product or service does not perform up to
expectations. Effective service recovery demands significant training and the right people to do the
job. The people dealing with the situation must be compassionate and good listeners, as well as
effective problem solvers. Turning around a potential disaster can be a tremendous boost to loyalty.
We based customer service has improved substantially with the advent of live chat and other similar
services.
Loyalty programs
Loyalty programs (or frequency marketing): programs that encourage repeat purchasing through s formal
program enrollment process and the distribution of benefits.
Ex: frequent-flyer programs where miles are accumulated and then exchanged for free travel or
merchandises.
Technology is changing the wat these programs can operate, ex: co-branded Visa or MasterCard.
Problems of loyalty programs:
 Making the reward to high → the programs should be cost-effective
 Ubiquity: there are so many programs that customers are rebelling against carrying all the cards. You
should target your best customers with these programs and provide a compelling reason for joining
 What kind of loyal customers are you actually getting → loyalty ≠ repeated purchase
 Lack of inspiration: many programs are simply copies of other programs. To be successful, it should
have a differential advantage over competitors’ programs.
 Lack of communication with customers: loyalty/frequency programs need to have a significant
communication component to retain customer satisfaction
 Insufficient analysis of database → data must be mined for better market segmentation, targeting and
new product development
Loyalty programs seem to work better under certain conditions:
 The program supports and is consistent with the brand’s value proposition


The program adds value to the product or service
Lifetime customer value is high
Mass customization
Mass customization: marketing process whereby a company takes a product or service that is widely
marketed and develops a system for customizing it to each customer’s specifications.
It imparts a feeling that the product was made especially for the customer, an important component of a
buyer-seller relationship. Because services can be and often are tailored to each customer, most of the
attention to mass customization has been in manufacturing sector, where a combination of information and
flexible manufacturing technologies has enabled companies to personalize their products for customer.
Community building
A challenge for marketing managers is to create in their customers a sense of affinity for their companies or
brands. They seek to create not just a set of customers who purchase their products, but a community of
customer who share info between themselves and the company about their experience with the product and
service. Successful communities on the internet offer participants:
 A forum of exchange of common interests
 A sense of place with codes of behavior
 The development of congenital and stimulating dialogues leading to relationships based on trust
 Encouragement for active participation by more than an exclusive few
From the customer’s perspective, the concept of customer service does not necessarily imply marketing. It
may simply be the need to communicate with the company, to personalize it.
6: privacy issues
Because of the importance of detailed customer information to an effective CRM strategy, the issue of
privacy becomes important, particularly in online communities.
7: metrics
Traditional metrics for measuring the effectiveness of marketing programs:
 Market share
 Sales volume
 ROI
and similar aggregate measures
The whole concept of CRM is based on the idea of one-to-one customer relationship. While aggregate
metrics are important and should always be collected, CRM demands that customer-level measures be takes
as well → CRM-oriented metrics
 Acquisition rate
 Survival rate
 Probability of a customer being active or purchasing in a given time frame
 Lifetime duration
 Win-back rate
 Share of category requirements
 Size of wallet
 Share of wallet