Marketing Management
Sixteenth Edition
Chapter 19
Building Customer Loyalty
Learning Objectives
19.1 Explain how a company should balance its acquisition and retention
efforts.
19.2 Discuss how a company can manage customer satisfaction and loyalty.
19.3 Describe how companies manage customer relationships.
19.4 Discuss how a company should manage customer lifetime value.
Managing Customer Acquisition and
Retention
• The customer
acquisition funnel
– Awareness
– Appeal
– Ask
– Act
– Advocate
Figure 19.1 The 5-A Customer Acquisition Funnel
Balancing Customer Acquisition and Customer
Retention
• Need to attract new customers while at the same time, retain and cultivate
existing ones
– Estimate customer conversion rates and retention rates
– Satisfied customers are customer relationship capital
Managing Customer Satisfaction and Loyalty (1 of 4)
• Understanding customer satisfaction
– Satisfaction is a person’s feelings of pleasure or disappointment that result
from comparing the perceived performance (or outcome) of a product or
service with expectations
Managing Customer Satisfaction and Loyalty (2 of 4)
• Product and service quality as a driver of customer
satisfaction
– Quality
– Performance v s consistency
ersu
Managing Customer Satisfaction and Loyalty (3 of 4)
• Measuring customer satisfaction
– A highly satisfied customer:
▪ Stays loyal longer
▪ Buys more
▪ Talks favorably about the company
▪ Pays less attention to competing brands
▪ Is less sensitive to price
▪ Offers ideas to the company
▪ Costs less to serve than new customers
Managing Customer Satisfaction and Loyalty (4 of 4)
• Building customer loyalty
– Interact closely with customers
– Develop loyalty programs
– Build brand communities
Managing Customer Relationships
• Customer relationship management (CRM)
– The process of carefully managing detailed information about individual
customers and all customer touch points to maximize loyalty
Customization
• Make the company’s offering as personally relevant as
possible to as many customers as possible
– Permission marketing
Customer Empowerment
• Customer empowerment
– Customers chooses whether and how they want to
engage with company marketing
▪ Tangible value
Dealing With Customer Complaints
• Make it easy for customers to complain
– Set up a 24/7 hotline
– Reach out to dissatisfied customers
– Identify real source of dissatisfaction
before finding a solution
– Accept responsibility
– Resolve the complaint
The Concept of Customer Lifetime
Value (1 of 2)
• Customer lifetime value (CLV)
– The monetary equivalent of the value that customers will create for the
company during their tenure with the company
– aka customer equity
The Concept of Customer Lifetime
Value (2 of 2)
• Customer profitability analysis
– Activity-based costing
▪ Aims to identify the real costs associated with serving each customer—
the costs of products and services based on the resources they
consume
Customer Lifetime Value and Brand Equity
• Both types of equity matter:
– Customer equity focus:
▪ Bottom-line financial value
– Brand equity focus:
▪ Brand strategy
Building Customer Lifetime Value
• Improve customer service
• Engage customers
• Enhance the growth potential of each customer
• Manage unprofitable customers
• Reward the most profitable customer
Creating Customer Loyalty by Building Trust
• Three building blocks:
– Competence
– Honesty
– Benevolence
Measuring Customer Lifetime Value
• Customer lifetime value
– The net present value of the stream of future profits expected over the
customer’s lifetime purchases
• Consider:
– Monetary value
– Strategic value
Measuring Customer Lifetime Value
A coffee shop is a perfect starting example for CLV, as it is easy to
understand even if you don’t have an extensive business
background. Let’s say a local coffee chain with three locations has an
average sale of $4. The typical customer is a local worker who visits
two times per week, 50 weeks per year, over an average of five years.
CLV = $4 (average sale) x 100 (annual visits) x 5 (years) = $2,000
The Base CLV Model
$M
Contribution per period from active customers. Contribution = Sales Price –Variable Costs
$R
Retention Spending per period per active customer.
r
retention rate (fraction of current customers retained each period)
d
discount rate per period
Present Value of net profit calculation is extended up to infinity…
The Base CLV Model
•Net Margin per Netflix Customer = M - R = $50
•Retention rate = r = 80%
•Number of customers who joined Netflix in June 2014 = 100
Number of
Customers
Month
Total Net
Profit
June 2014
100
[M – R] * 100
July 2014
r * 100 = 80
r * 100 * [M – R]
August 2014
r * (r * 100) =
r2 * 100 * [M – R]
September
2014
r * (r * (r * 100))) =
r3 * 100 * [M – R]
Total Net
Profit
Present Value
of Total Net
Profit
The Base CLV Model
CLV =
[ $M – $R ]
Short-Term Margin
[(1+d)/(1+d–r)]
Long-Term Multiplier
CLV – Initial Margin
•Customer pays
before using the
service
▪e.g.
apartment
rental,
Netflix,
Hulu
CLV = [$M–$R]X[(1+d)/(1+d-r)]
•Customer pays
after using the
service
▪e.g.
credit card
CLV = [$M–$R]X[r/(1+d-r)]