Topic 3 – Building Customer Satisfaction, Value and Retention

Kotler on Marketing “It is no longer enough to satisfy customers, you must delight them.”

In Topic 3, students would be looking at the following factors such as; What are customer value and satisfaction, and how can companies deliver them, What make a high performance business, How can companies both attract and retain customers, How can companies improve both customer and company profitability and How can companies deliver total quality?

Defining Customer Value & Satisfaction

Customers are value maximizes, within the bounds of search costs and limited knowledge, mobility and income. They form an expectation of value and act on it. Whether or not the offer lives up to the value expectation affects both satisfaction and repurchase probability.

Customer Perceived Value (CPV)

The difference between the prospective customer’s evaluation of all the benefits and all the costs of an offering and perceived alternatives

Total Customer Value

Is the perceived monetary value of the bundle of economic, functional, and psychological benefits customers expect from a given market offering?

Total Customer Cost

Is the bundle of costs customers expect to incur in evaluating, obtaining, using, and disposing of the given market offering? Total customer cost includes the buyer’s time, energy, and psychic costs. The buyer evaluates these elements together with the monetary cost to form Total Customer Cost.

Sellers must assess the Total Customer Value and the Total Customer Cost associated with each competitor’s offer in order to know how his or her offer rates in the buyers mind and Seller to increase Total Customer Value or to decrease Total Customer Cost.

Total Customer Satisfaction

A Buyers’ satisfaction after a purchase depends on the offer’s performance in relation to the buyer’s expectations. In general, Satisfaction is a person’s feelings of pleasure or disappointment resulting from comparing a product’s perceived performance (or outcome) in relation to his or her expectations. If the performance matches the expectation, the customer is satisfied. If the performance exceeds expectations, the customer is highly satisfied or delighted. A completely and highly satisfied customer is more likely to repurchase.

Customer Expectation

How do buyers form their expectation? Most customer form their expectation from past buying experience, friends, and associates’ advice and marketers and competitors’ information and promises. Some of today’s most successful companies are raising expectations and delivering performances to match. These companies are aiming for Total Customer Satisfaction.

Example: Xerox guarantees total satisfaction and will replace at its own expense any dissatisfied customer’s equipment within 3 years after purchase.

Delivering High Customer Value

How do companies deliver high customer value? The key to generating high customer loyalty is to deliver high customer value. A company must design a competitively superior value proposition aimed at a specific market segment, backed by a superior value delivery system. For customer centered companies, customer satisfaction is both a goal and a marketing tool. Companies that achieve high customer satisfaction ratings make sure that their target market knows it. (e.g. Dell Computers).

Measuring Satisfaction

How do companies measure satisfaction?

·         Complaints and Suggestion systems - (Customer centered organization makes it easy for customers to register suggestions and complaints).

·         Customer satisfaction surveys – (Companies carry out survey on product performance).

·         Ghost Shopping – (Companies hires people to pose as potential buyers with the aim of reporting the competitors strong and weak points experienced in the company’s and competitors’ products).

·         Lost Customer analysis – Companies contact customers who have defected to another supplier to check why this happened. 

Nature of High-Performance Business

A major challenge for high-performance companies is that of building and maintaining viable businesses in a rapidly changing market place.

·         Recognize the core elements of the business.

·         Maintaining a viable fit between.

o   stakeholders

o   Processes

o   Resources

o   organizational capabilities and culture

The High Performance Businesses

Stakeholders – Businesses must define its stakeholders and their needs (customers, employees, suppliers and distributors).

Processes – Focus on the need to manage core business processes such as new product development, customer attraction and retention and order fulfilment.

Resources – To carry out its business processes, a company needs resources (labor power, materials, machines, information, and energy). Many companies today outsource less critical resources if they can be obtained at a better quality or lower cost.

Organization & Organizational Culture – A company’s organization consist of its structures, policies, and corporate culture, all of which can become dysfunctional in a rapidly changing business environment.

To create customer satisfaction, companies must manage their value chain as well as the whole value delivery system in a customer centered way. A company’s goal is not only to get customers, but even more importantly to retain customers.

High performance companies are set up to create and deliver superior customer value and satisfaction. This involves:

·         Understanding customer value

·         Creating customer value

·         Delivering customer value

·         Capturing customer value

·         Sustaining customer value

To succeed a company needs to use the concepts of value chain and a value delivery network.

Value Chain

Michael Porter proposed the generic value chain is a useful tool for companies to determine ways to create more customer value.           Porter argues that there are nine relevant activities that create value and cost in organization classified under two broad activities, Primary & Support Activities.

Value Creating Activities - A firm has to look at costs and performances of its value creating activities as compared to other competitors’ cost and performances (benchmarks). A firm success depends not only on how well the various departments perform its work but also on how well the various departmental activities are coordinated.

Example :

The Credit department would check customer’s credit while customer waits. Salesperson gets frustrated. Products delivered by ship to save cost and customer waits and get more frustrated.

From the example when there is slowing down in one process it can affect others. Above is a clear example of departments slowing down the delivery of customer services. The solution to this problem is to place more emphasis on the smooth management of core business process.

The Market Sensing Process – All the activities involved in gathering market intelligence, disseminating it within the organization, and acting on the information.

The New Offering Realization Process – All the activities involved in researching, developing, and launching new high- quality offerings quickly and within budget.

The Customer Acquisition Process – All the activities involved in defining target markets and prospecting for new customers.

The Customer Relationship Management Process – All the activities involved in building deeper understanding, relationships, and offerings to individual customers.

The Fulfilment Management Process – All the activities involved in receiving and approving orders, shipping the goods on time, and collecting payment. 

Value Delivery Network

To be successful a firm also needs to look for competitive advantages beyond its own operations, into the value chains of its suppliers, distributors, and customers (Supply Chain). Many companies today have partnered with specific suppliers and distributors to create a superior value-delivery network. Levi Strauss the maker of blue jeans has a good example of an excellent Value Delivery Network. Interdependent on its suppliers as well as its intermediary.

Attracting and Retaining Customers

Relationship Marketing - Relationship marketing is concerned with attracting customers, retaining customers, and eventually ending up with a long term relationship between customer and company.

Frequent flyer program offered by Qantas Airlines and the Privilege Gold Card offered by some hotels are good example of firms attempting to maintain an ongoing relationship with their customers.

How do you attract customers?

Today’s customers are becoming harder to please. They are smarter, more price conscious, more demanding, less forgiving, and they are approached by many more competitors with equal or better offers. The challenge according to Jeffrey Gitomer, is not to produce satisfied customers; several competitors can do this. The challenge is to produce delighted and loyal customers.

Companies seeking to expand their profits and sales have to spend considerable time and resources searching for new customers. To generate leads, the company develops ads and places them in media that will reach new prospects; its salespeople in participate in trade shows where they might find new leads and so on. Salespeople come into play once you have attracted your prospects.

Computing the cost of lost customers

It is not enough to be skilful in attracting new customers; the company must keep them and increase their business. To many companies suffer from high customer defection through switching company to company. Many lose roughly 25 percent of their subscribers each year at an estimated cost of $2 billion to $4 billion. There are steps a company can take to reduce the defection rate. There are steps a company can take to reduce the defection rate;

·         Must define and measure its retention rate.

·         Must distinguish the causes of customer attrition and identify those that can be managed better.

·         The company need to estimate how much profit it loses when it loses customers.

·         The company needs to figure out how much it would cost to reduce the defection rate.

Nothing beats listening to customers.

CRM – Customer Relationship Management

Many companies are intent on developing stronger bonds with their customers. They do this by carefully managing detailed information about individual customer so as to maximize customers’ loyalty. Customer defection leads to less profit and more cost to the firm in trying to attract new customers.

Customer Retention - Key to customer retention is customer satisfaction.

Forming Strong Customer Bonds: The Basics

·         Adding Financial Benefits (e.g. Frequent Flyer)

·         Adding Social Benefits

·         Adding Structural ties

Measuring Profitability

·         Profitable customer

·         Customer Profitability Analysis

Increasing Company Profitability

·         Competitive Advantage (Ability of a company to perform in one or more ways that competitors cannot or will not match

Implementing Total Quality Management

Total Quality Management (TQM) – TQM is an organizations approach to continuously improving the quality of all the organization’s processes, product and services. Product and Service quality, customer satisfaction, and company profitability are intimately connected.

Higher level of customer satisfaction results in higher levels of customer satisfaction which support higher prices and often lower costs. A quality company is one that satisfies most of its customer’s needs most of the time. Total quality is the key to value creation and customer satisfaction.

Summary and Conclusion

·         Customers are value maximizers. They will buy from the firm that they perceived to offer the highest customer-delivered value.

·         High customer satisfaction leads to high customer loyalty.

·         Managing core business processes effectively means an effective marketing network.

·         Customers’ defection means less profit and more costs to the firm in attracting new prospects and new customers.

·         Quality is the totality of features and characteristics of a product or services that bears the ability to satisfy a customer stated or implied need.

·         Marketing managers two main responsibilities are; 1) formulate strategies and policies that will win through total excellence and 2) deliver marketing quality alongside production quality       

           

Source: Marketing Management 11th Edition, Philip Kotler (2003) Prentice Hall