Customer Satisfaction
Profit Chain
Prof. Markus Christen
INSEAD Singapore
May/June 2007
Customer Satisfaction Is Decreasing
American Customer Satisfaction Index (ASCI)
Based on annual poll of more than 50.000 consumes,
measuring overall satisfaction with products and services.
90
S c he dule d
A irline s
90
H o us e ho ld
A pplia nc e s
90
C o m m e rc ia l
B a nk s
P a rc e l D e liv e ry
90
90
P erso nal
C o mputers
90
85
85
85
85
85
85
80
80
80
80
80
80
75
75
75
75
75
75
70
70
70
70
70
70
65
65
65
65
65
65
-8.4%
-3.5%
60
1994 1996 1998 2000 2002 2004 1994 1996 1998 2000 2002
60
-2.7%
60
1994 1996 1998 2000 2002
-2.5%
60
1994 1996 1998 2000 2002
-9.0%
60
1994 1996 1998 2000 2002
P ublishing/
N ewspapers
-12.5%
60
1994 1996 1998 2000 2002
Source: http://www.theacsi.org, University of Michigan
Session 8 - 2
Market Driving Strategies - May/June 2007
© Prof. Markus Christen
CRM Investments
Approximate
WorldwideCRM
CRM
Investments
Investments
Approximate Worldwide
(applications,
hardware and
services)
andservices)
hardware,
(applications,
47.5
Spendings in $billion
40.0
50%
40
34.6
40%
29.7
30
25.9
23.7
30%
20.0
20
20%
13.5
10
10%
0%
0
1999
2000
2001
2002
2003
2004
Mean estimates as of 2002 and 2003 across various providers
CRM outsourcing services not included
Sources: IDC, Aberdeen, Gartner, Forrester
Session 8 - 3
60%
Year-to-Year Growth
50
Market Driving Strategies - May/June 2007
© Prof. Markus Christen
2005
2006
Spendings
Year-to-Year Growth %
Starbucks: Delivering Customer Service
 Why successful
• Tight alignment between target market (sophisticated, affluent coffee lover,
coffee drinking life style) and highly differentiated value proposition
– Drinking coffee as self-indulgent ritual: Best coffee
– Tendency to linger, in search of a sanctuary: Physical environment
– Friendly people, social interactions: Service Philosophy
 Impact of growth strategy
• Retail expansion: Ubiquity of stores makes Starbucks less “special”
• Customer acquisition: New customers with different service needs
– Routine
– Pass through
– Convenience
• Product innovation: Increased production complexity leads to longer lines
Session 8 - 4
Market Driving Strategies - May/June 2007
© Prof. Markus Christen
Starbucks: Delivering Customer Service
 Consequence
• Conflicts between customer segments affects service quality
– Longer lines, more mistakes, less time to interact and socialize
– Grumpy customers, grumpy employees
• Difficult to keep customer satisfaction very high with a larger and more
diverse customer base
What are the appropriate metrics to manage
different customers or customer segments?
Customer acquisition and retention?
Session 8 - 5
Market Driving Strategies - May/June 2007
© Prof. Markus Christen
Satisfaction-Profit-Chain (SPC)
Product
Performance
Service
Performance
Customer
Satisfaction
Retention /
Loyalty
Employee
Performance
Session 8 - 6
Market Driving Strategies - May/June 2007
© Prof. Markus Christen
Revenue /
Profit
Satisfaction and Customer Behavior
Correlations for 418 customers
of European paper wholesaler
Customer Repurchase
Satisfaction
Intentions
t
t
0.42
-
Number of Orders t
-0.08
0.12
Number of Orders t+1
-0.07
0.11
Purchase Volume (ton) t
0.04
0.06
Purchase Volume (ton) t+1
0.05
0.06
Customer Profitability t
-0.05
0.10
Customer Profitability t+1
-0.05
0.09
Repurchase Intentions t
Source: Söderlund, Vilgon & Gunnarsson 2001, European Journal of Marketing
Session 8 - 7
Market Driving Strategies - May/June 2007
© Prof. Markus Christen
Customer Satisfaction and Loyalty
Repurchase Intent (%)
100
80
60
Zone of indifference
40
20
sa
tis
f ie
d
at
is
f ie
d
-V
4
er
y
-S
-N
eu
tra
l
3
-D
is
sa
t is
fie
d
2
1
5
-V
er
y
di
ss
at
is
f ie
d
0
Customer Satisfaction
Source: Jones & Sasser, HBR, Nov/Dec. 1995
Session 8 - 8
Market Driving Strategies - May/June 2007
© Prof. Markus Christen
Satisfaction and Performance
Estimated impact of a one-unit change in customer satisfaction (ACSI)
on the market value of equity
(millions of dollars)
600
400
200
0
-200
-400
-600
-800
Session 8 - 9
NonDurable
Mfgr
Durable
Mfgr
Utilities
Retail
Financial
Services
Source: Ittner and Larcker, Journal of Accounting Research
Market Driving Strategies - May/June 2007
© Prof. Markus Christen
More Satisfaction Is Not Always Better
-Cost,
-Revenues,
-Profits
Associated
Cost
Associated
Revenues
Product/Service
Improvements
Optimal
Level
Session 8 - 10
Market Driving Strategies - May/June 2007
© Prof. Markus Christen
Associated
Profits
Loyalty and Performance
 Why are loyal customers more profitable?
•
•
•
•
They buy more (revenues)
They are less costly to serve (cost)
They pay higher prices
They generate more Word-of-mouth
Price Premium
Referrals
Reduced
Operating Costs
Increased
Purchases
Base Profits
1
2
Cost of Acquisition
3
4
5
6
Years
Source: F. Reichheld & T.A. Teal (1996), The Loyalty Effect.
Session 8 - 11
Market Driving Strategies - May/June 2007
© Prof. Markus Christen
Loyalty and Performance
Butterflies
True friends
Strangers
Barnacles
Source: Reinartz and Kumar (2002), HBR, July.
Session 8 - 12
Market Driving Strategies - May/June 2007
© Prof. Markus Christen
Loyalty and Performance
Do Profits Increase over Time?
20000.00
Short life, low
revenue
(Segment 4)
18000.00
($) Segment Profit
16000.00
Short life, high
revenue
(Segment 3)
14000.00
12000.00
10000.00
8000.00
6000.00
4000.00
2000.00
0.00
-2000.00
1
3
5
7
9
11
13
15
17
19
21
Month
Session 8 - 13
Market Driving Strategies - May/June 2007
© Prof. Markus Christen
23
25
27
29
31
33
35
The Relationship Continuum
Transactional
Orientation
Procurement
Orientation
Relational
Orientation
(Commodity)
(Deliver value added
products and services)
(Partnership)
Discrete transactions
 Adversarial relationship
 Focus on price
 Multisourcing to exert power
 Global sourcing

Repeat transactions
 Reduction in suppliers
 Integrative negotiations (not
only price)
 Goal of cost reduction and
quality improvement through
coordination
 More cooperative
relationships with the goal of
pie expansion

Both parties focus on
generating value for
end-user
 Buyer focuses on core
competence; strategically
outsources remaining
activities
 Highly collaborative deep,
relationships with select
suppliers (typically sole-source
relationships)

 Very high competitive
 Achieve competitive
pressure
advantage
Session 8 - 14
Market Driving Strategies - May/June 2007
© Prof. Markus Christen
Calculating Current Customer Value
Revenues
(A)
-direct cost
= Gross margin
(B)
-cost-to-serve
(marketing, sales, terms and conditions, support, returns, etc.)
= Contribution margin
(C)
-fixed cost
= Operating margin (EBITDA)
All on a per-customer basis!
Does not include intangibles (word-of-mouth, reference effects)
Session 8 - 17
Market Driving Strategies - May/June 2007
© Prof. Markus Christen
Key Metric: Customer Value
Tangible value metrics
Non-tangible value metrics
Current value
Current value
 Revenues
 Reference value
 Gross margin
 Referral value
 Cost-to-serve
 Cooperation value (e.g., shared
intelligence)
 Contribution margin
 Share-of-wallet
Potential value
 Size-of-wallet
Potential value
 Future value
 Lifetime value
Session 8 - 18
Market Driving Strategies - May/June 2007
© Prof. Markus Christen
Customer Value Concentration
Brazilian Grocery Store
100%
90%
A+ / A
80%
B
70%
C
% Venda
D
60%
50%
40%
30%
20%
10%
0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
% Clientes
% R$
Session 8 - 19
% R$ TV
Market Driving Strategies - May/June 2007
© Prof. Markus Christen
90%
100%
Customer Value Concentration
US Pharmaceutical Firm
1.2
% of contribution
1
0.8
0.6
0.4
0.2
% of doctors
Session 8 - 20
Market Driving Strategies - May/June 2007
© Prof. Markus Christen
100
95
90
85
80
75
70
65
60
55
50
45
40
35
30
25
20
15
10
5
0
0
Customer Value Analysis
 Objective: The result of the analysis should allow to evaluate the following:
• Value level
– Average value over all customers
• Value disparity
– Difference Highest – Lowest value
– Ratio of 90th percentile /10th percentile (if > 15 then high disparity)
• Value concentration (heterogeneity)
– 80/20 rule (80% of contribution come from x% of customers)
– Gini Coefficient (> 80% = high concentration)
 All analyses to be done
• Across all customers
• On segment level (geography, business line, etc)
Session 8 - 21
Market Driving Strategies - May/June 2007
© Prof. Markus Christen
Putting It All Together
Sales Satisfaction Model for
Loyal Volvo Customers
Stated
Sales
Loyalty
8.76
Personnel
8.99
Models
8.50
0.314
Insurance
0.410
0.023
0.087
Information
8.48
0.035
Stated Sales
Satisfaction
8.73
0.168
Profit New
Car
0.115
0.094
0.492
Delivery
8.68
Session 8 - 24
-0.055
0.072
Car
Satisfaction
9.26
Market Driving Strategies - May/June 2007
© Prof. Markus Christen
Financing
Volvo
Card
Workshop
Loyalty
Source: Johnson and Gustafsson
Jossey-Bass, 2000
Customer Focus
Session 8 - 25
Market Driving Strategies - May/June 2007
© Prof. Markus Christen
Summary
 S-P chain is a powerful concept for guiding customer-level
actions
• Its all about optimal satisfaction and optimal retention levels
• Need for careful application to own environment
– Necessitates “correct” measures and operationalizations
– Forces to explore causal linkages
– Sheds light on correct metrics
Session 8 - 26
Market Driving Strategies - May/June 2007
© Prof. Markus Christen
Summary
 Looking at value to and from customers
• Provides focus: target only potentially profitable customers
• Think about what drives customer value (to the firm)
• Enables resource allocation that is fair from a customer perspective and
makes business sense economically
 CRM is the strategic process of selecting the customers a firm
can most profitably serve and shaping the interactions between a
company and these customers.
 Ultimate goal: Improve marketing decision-making and resource
allocation
Session 8 - 27
Market Driving Strategies - May/June 2007
© Prof. Markus Christen
Rule 10: Customer Value
Not all happy customers
are loyal customers and
not all loyal customers
are worth keeping:
Measure & manage
customer profitability
Session 8 - 28
Market Driving Strategies - May/June 2007
© Prof. Markus Christen