Chapter 2:
Relationship Marketing and the
Concept of Customer Value
Overview
Topics discussed:

The Link between CRM and Database Marketing, and the Importance of Customer
Value

Satisfaction-Loyalty-Profit Chain
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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
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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
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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
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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
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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
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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
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Satisfaction-Loyalty-Profit Chain

Satisfaction-Loyalty-Profit Chain
 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
Customer
Retention /
Revenue /
Satisfaction
Loyalty
Profit
Employee
Performance
Source: Strengthening the satisfaction-profit chain”, Eugene W Anderson, Vikas Mittal. Journal of Service Research, Nov 2000. Vol 3, Iss.2, p 107
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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
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Link between Satisfaction and Retention
Source: “Strengthening the satisfaction-profit chain”, Eugene W Anderson, Vikas Mittal. Journal of Service Research, Nov 2000. Vol 3, Iss.2, p 114
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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
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Link between Satisfaction and Retention (3)
Source: “Why satisfied customers defect”, Jones, Thomas O, Sasser, W Earl Jr. Harvard Business Review. Boston: Nov/Dec 1995. Vol. 73, Iss. 6
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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
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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
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Lifetime Duration-Profitability Association (2)
High
Lifetime
Profit
Low
Low
High
Loyalty
 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
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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
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