Customer Value, Satisfaction, and Creating Long-term Loyalty Relationship
With the rise of digital technologies, increasingly informed consumers expect companies to do more than connect with them, more than satisfy them, and even more than delight them. They expect companies to listen and respond to them. Even the best-run companies must be careful not to take customers for granted. Consumers are better educated and better informed than ever, and they have the tools to verify companies’ claims and seek out superior value alternatives.
Customer-perceived value (CPV) is the ratio between the prospective customer’s evaluation Of all the benefits and costs of an offering and the perceived alternatives. In other words, customer perceived value is the ratio between total customer benefits and total customer cost. Total customer benefit is the perceived monetary value of the bundle of economic, functional, and psychological benefits customers expect from a given market offering because of the product’ service, people, and image. Total customer cost is the perceived bundle of costs customers expect to incur in evaluating, obtaining, using, and disposing of the given market offering’ including monetary, time, energy, and psychological costs.
Customer-perceived value is thus based on the difference between benefits the customers get and the cost they assume for different choices. The marketer can increase the value of the offering by rising economic, functional, and emotional benefits and/or reducing one or more costs.
customer-perceived value is a useful framework that applies to many situations and yields rich insights. It suggests that the seller must assess the total customer benefit and total customer cost associated with each competitor’s offer to know how its own offer rates in the buyer’s mind. It also implies that the seller at a disadvantage has two alternatives: increase total customer benefit or decrease total customer cost.
Consumers have varying degrees of loyalty to specific brands, stores, and companies. Loyalty has been defined as “a deeply held commitment to rebuy or patronize a preferred product or service in the future despite situational influences and marketing efforts having the potential to cause switching behavior.” The value proposition consists of the whole cluster of benefits the company promises to deliver; it is more than the core positioning of the offering. For example, Maruti Suzuki’s core positioning has been “economy” but the buyer is promised more than just an economical car; other benefits include good performance, design, and safety for the environment. The value proposition is thus a promise about the experience customers can expect from the company’s market offering and their relationship with the supplier. Whether the promise is kept depends on the company’s ability to manage its value delivery system. The value delivery system includes all the experiences the customer will have on the way while obtaining and using the offering.
Total Customer Satisfaction
In marketing, customer satisfaction is the comparison between customer expectation and product performance. In other words, satisfaction is a person’s feelings of pleasure or disappointment that result from comparing a product or service’s perceived performance (or outcome) to expectations. If the performance or experience falls short of expectations, the customer is dissatisfied. If it matches expectations, the customer is satisfied. If it exceeds expectations, the customer is highly satisfied or delighted. Customer assessments of product or service performance depend on many factors, including the type of loyalty relationship the customer has with the brand.
Although the customer-centered company seeks to create high customer satisfaction. that is not its ultimate goal. Increasing customer satisfaction by lowering the price or increasing services may result in lower profits. The company might be able to increase its profitability by means other than increased satisfaction (for example, by improving manufacturing processes). The company also has many stakeholders, including employees, dealers, suppliers, and stockholders Spending more to increase customer satisfaction might divert funds from increasing the satisfaction of other “partners”. Ultimately, the company must try to deliver a high level of customer satisfaction subject to also delivering acceptable levels to other stakeholders, given its total resources.
To satisfy customers, marketers must understand how customers form their expectations. Expectations result from past buying experiences, friends’ and relation’s advice, public information, advertising, and publicity. If a company raises expectations too high, the customer is likely to be dissatisfied. If it sets expectations too low, it will not attract enough buyers.
Many companies are systematically measuring how well they treat customers, identifying the factors shaping satisfaction, and changing operations and marketing as a result. A highly satisfied customer generally stays loyal longer, buys more as the company introduces new and upgraded products, talks favorably to others about the company and its products, pays less attention to competing brands and is less sensitive to price, offers product or service ideas to the company, and costs less to serve than new customers because transactions can become routine.
The link between customer satisfaction and customer loyalty is not proportional, however. Suppose customer satisfaction is rated on a scale from 1 to 5. At a very low level of satisfaction (level 1), customers are likely to abandon the company and even bad-mouth it. At levels 2 to 4, customers are fairly satisfied but still find it easy to switch to better offers. At level 5, the customer is very likely to repurchase and even spread good word of mouth about the company High satisfaction or delight creates an emotional bond with the brand or company, not just a rational preference.
Customers define good performance differently. Good delivery could mean early delivery, on-time delivery, or order completeness, and two customers can report being “highly satisfied” for different reasons. One may be easily satisfied most of the time, and the other might be hard to please but was pleased on this occasion. It is also important to know how satisfied customers are with competitors in order to assess “share of wallet” or how much of the customer’s spending the company’s brand enjoys: The more highly the consumer ranks the company’s brand in terms of satisfaction and loyalty, the more the customer is likely to spend on the brand.
Companies use a variety of methods to measure customer satisfaction. According to Kotler and Keller (2016), some companies think they’re getting a sense of customer satisfaction by tallying complaints, but studies show that while customers are dissatisfied with their purchases about 25 percent of the time, only about 5 percent complain. The other 95 percent either feel complaining is not worth the effort or don’t know how or to whom to complain. They just stop buying. Of the customers who complain, 54 percent to 70 percent will do business with the organization again if their complaint is resolved. The figure goes up to a staggering 95 percent if the customer feels the complaint was resolved quickly. Customers whose complaints are satisfactorily resolved tell an average of five people about the good treatment they received. The average dissatisfied customer, however, grips 11 people.
Product and Service Quality
Satisfaction will also depend on product and service quality. What exactly is quality? Various experts have defined it as “fitness for use, conformance to requirements,” and “freedom from variation.” According to the American Society for Quality’s definition, “Quality is the totality of features and characteristics of a product or service that bear on its ability to satisfy stated or implied needs.” The seller has delivered quality whenever its product or service meets or exceeds the customers’ expectations. It’s important to distinguish between conformance quality and performance quality (or grade). A Toyota provides higher performance quality than a Maruti Suzuki: The Toyota rides more smoothly, accelerates faster, and runs problem-free longer. Yet both a Toyota and a Maruti-Suzuki deliver the same conformance quality if all the units deliver their promised quality.
Product and service quality, customer satisfaction, and company profitably are interrelated. higher levels of quality result in higher levels of customer satisfaction which support higher prices.
Studies have shown a high correlation between relative product quality and company profitability. According to Kotler and Keller (2016), marketing plays an especially important role in helping companies deliver high-quality goods to target customers by (1) correctly identifying customers’ needs and requirements; (2) communicating customer expectations properly to product designers; (3) making sure that customers’ orders are filled correctly and on time; (4) checking that customers have received proper instructions, training, and technical assistance for product usage; (5) staying in touch after the sale to ensure customers are and remain satisfied; and (6) gathering customer ideas for improvements and conveying them to the appropriate departments. When marketers do all this, they make substantial contributions to total quality management and customer satisfaction as well as to customer and company profitability.
Maximizing Customer Lifetime Value
Ultimately, marketing is the art of attracting and keeping profitable customers. Yet every company loses money on some of its customers. The well-known 80-20 rule states that 80 percent or more of the company’s profits come from the top 20 percent of its customers. Some cases may be more extreme— the most profitable 20 percent of customers (on a per capita basis) may contribute as much as 150 percent to 300 percent of profitability. The least profitable 10 percent to 20 percent, on the other hand, can actually reduce profits between 50 percent and 200 percent per account, with the middle 60 percent to 70 percent breaking even. The implication is that a company could improve its profits by “firing” its worst customers. (Kotler & Keller: 2016)
Companies need to concern themselves with return on customer (ROC) and how efficiently they create value from the customers and prospects available.
It’s not always the company’s largest customers who yield the most profit. The smallest customers pay full price and receive minimal service, but the costs of transacting with them can reduce their profitability. Midsize customers who receive good service and pay nearly full price are often the most profitable.
A profitable customer is a person, household, or company that over time yields a revenue stream exceeding by an acceptable amount the company’s cost stream for attracting, selling, and serving that customer. Note the emphasis is on the lifetime stream of revenue and cost, not the profit from a particular transaction. Marketers can assess customer profitability individually, by market segment, or by channel. Many companies measure customer satisfaction, but few measure individual customer profitability.
A useful type of profitability analysis is shown in the figure below. Customers are arrayed along with the columns and products along the rows. Each cell contains a symbol representing the profitability, positive or negative, of selling that product to that customer. Customer 1 is very profitable; he buys two profit-making products. Customer 2 yields mixed profitability; s/he buys one profitable product and one unprofitable product. Customer 3 is a losing customer because he buys one profitable product and two unprofitable products. What can the company do about customers 2 and 3? (1) It can raise the price of its less profitable products or eliminate them, or (2) it can try to sell customers 2 and 3 its profit-making products. In fact, the company should encourage them to switch to competitors.
Customer profitability analysis is best conducted with the tools of an accounting technique called activity-based costing (ABC). The company estimates all revenue coming from the customer, less all costs (including the direct and indirect costs of serving each customer). Companies that fail to measure their costs correctly are also not measuring their profit correctly and are likely to misallocate their marketing effort.
Measuring Customer Lifetime Value
The case for maximizing long-term customer profitability is captured in the concept of customer lifetime value. Customer lifetime value (CLV) describes the net present value of the stream of future profits expected over the customer’s lifetime purchases. The company must subtract from its expected revenues the expected costs of attracting, selling, and servicing the account of that customer, applying the appropriate discount rate (say, between 10 percent and 20 percent, depending on the cost of capital and risk attitudes). Lifetime value calculations for a product or service can add up to tens of thousands of dollars or even run to six figures.
CLV calculations provide a formal quantitative framework for planning customer investment and help marketers adopt a long-term perspective. Many methods exist to measure CLV
Cultivating Customer Relationships
Companies are using information about customers to enact precision marketing designed to build strong and profitable long-term relationships. Customer relationship management (CRM) is the process of carefully managing detailed information about individual customers and all customer “touchpoints” to maximize loyalty. CRM is important because a major driver of company profitability is the aggregate value of the company’s customer base. A touchpoint is any occasion when a customer encounters the brand and product—from actual experience to personal or mass communications to casual observation. For a hotel, the touchpoints include reservations, check-in and check-out, frequent-stay programs, room service, business services, exercise facilities, and restaurants.
CRM enables companies to provide excellent real-time customer service through the effective use of individual account information. Based on what ‘they know about each valued customer, they can customize market offerings, services, programs, messages, and media. Personalizing marketing is about making sure the brand and its marketing areas are personally relevant as possible to as many customers as possible—a challenge, given that no two customers are identical.
To adapt to customers’ increased desire for personalization, marketers have embraced concepts such as permission marketing, the practice of marketing to consumers only after gaining their expressed permission. According to Seth Godin, a pioneer in the technique, marketers develop stronger consumer relationships by sending messages only when consumers express a willingness to become more engaged with the brand. “Participatory marketing” may be a more appropriate concept than permission marketing because marketers and consumers need to work together to find out how the firm can best satisfy consumers.
Although much has been made of the newly empowered consumer —in charge, setting the direction of the brand, and playing a much bigger role in how it is marketed—it’s still true that only some consumers want to get involved with some of the brands they use and, even then, only some of the time. Consumers have lives, jobs, families, hobbies, goals, and commitments, and many things matter more to them than the brands they purchase and consume. Understanding how to best market a brand given such diversity in customer interests is crucially important.
Attracting and Retaining Customers
Companies seeking to expand profits and sales must invest time and resources in searching for new customers. To generate leads, they advertise in media that will reach new prospects, send direct mail and e-mails to possible new prospects, send their salespeople to participate in trade shows where they might find new leads, purchase names from list brokers, and so on.
Different acquisition methods yield customers with varying CVs. One study showed that customers acquired through the offer of a 35 percent discount had about one-half the long-term value of customers acquired without any discount. Many of these customers were more interested in the offer than in the product itself. Similarly, many local businesses have launched “daily deal” campaigns to attract new customers. Unfortunately, these campaigns have sometimes turned out to be unprofitable in the long run because coupon users were not easily converted into Loyal customers.
It is not enough to attract new customers; the company must also keep them and increase their business. Too many companies suffer from high customer churn or defection. To reduce the defection rate, the company must first define and measure its retention rate, distinguish the causes of customer attrition and identify those that can be managed better, and compare the lost customer’s CLV to the costs of reducing the defection rate. If the cost to discourage defection is lower than the lost profit, spend the money to try to retain the customer.
The figure below shows the main steps in attracting and retaining customers in terms Of a funnel. The marketing funnel identifies the percentage of the potential target market at each stage in the decision process, from merely aware to highly loyal. Some marketers extend the funnel to include loyal customers who are brand advocates or even partners with the firm. calculating conversion rates the percentage of customers at one stage who move to the funnel allows marketers to identify any bottleneck stage or barrier to building a loyal customer franchise. The funnel also emphasizes how important it is not just to attract customers but to retain and cultivate existing ones.
Customer profitability analysis and the marketing funnel help marketers decide how to manage groups of customers that vary in loyalty, profitability, risk, and other factors. Winning companies know how to reduce the rate of customer defection; increase the longevity of the customer relationship; enhance the growth of each customer through “share of wallet, ” cross-selling, and up-selling; make low-profit customers more profitable or terminate them, and treat high-profit customers in a special way.
Companies should strive to build loyalty for strong, enduring connections with customers. One set of researchers sees retention-building activities as adding financial benefits, social benefits, or structural ties. Next, we describe four marketing activities that improve loyalty and retention.
- Interact closely with customers: Listening to customers is crucial to customer relationship management. Some companies have created an ongoing mechanism that keeps their marketers permanently plugged into frontline customer feedback. It is also important to be a customer advocate and, as much as possible, take the customers’ side and understand their point of view.
- Develop loyalty programs: Frequency programs (FPS) are designed to reward customers who buy frequently and in substantial amounts. They can help build long-term loyalty with high CLV customers, creating cross-selling opportunities in the process. Pioneered by the airlines, hotels, and credit card companies, FPS now exists in many other industries. Typically, the first company to introduce an FP in an industry gains the most benefit, especially if competitors are slow to respond. After competitors react, FPS can become a financial burden to all the offering companies, but some companies are more efficient and creative in managing them. FPS can also produce a psychological boost and a feeling of being special and elite that customers value.
- Club membership programs: Attract and keep those customers responsible for the largest portion of the business. Clubs can be open to everyone who purchases a product or service or limited to an affinity group or those willing to pay a small fee. Although open clubs are good for building a database or snagging customers from competitors, limited membership is a more powerful long-term loyalty builder. Fees and membership conditions prevent those with only a fleeting interest in a company’s products from joining.
- Create institutional ties: The company may supply business customers with special equipment or services that help them manage orders, payroll, and inventory. Customers are less inclined to switch to another supplier when it means high capital costs, high search costs, or the loss of loyal-customer discounts. A good example is Milliken & Company, which provides proprietary software, marketing research, sales training, and sales lead to loyal customers.
- Create value with brand communities: Thanks in part to the Internet, companies are collaborating with consumers to create value through communities built around brands. A brand community is a specialized community of consumers and employees whose identification and activities focus on the brand. A strong brand community results in a more loyal, committed customer base and can be a constant source of inspiration and feedback for product improvements or innovations.
Three characteristics identify brand communities: (1) a sense of connection to the brand, company, product, or community members; (2) shared rituals, stories, and traditions that help convey meaning; and (3) shared responsibility or duty to the community and individual members. Brand communities come in many different forms. Some arise organically from brand users, while others are company-sponsored and facilitated. Online, marketers can tap into social media such as Facebook, Twitter, and blogs or create their own online community. Members can recommend products, share reviews, create lists of recommendations and favorites, or socialize together online.
Regardless of how hard companies may try, some customers inevitably become inactive or drop out. The challenge is to reactivate them through win-back strategies. It’s often easier to reattract ex-customers (because the company knows their names and histories) than to find new ones. Exit interviews and lost-customer surveys can uncover sources of dissatisfaction and help win back only those with strong profit potential.
When will consumers choose to engage with a brand? According to Philip Kotler, a follow-up analysis of the IBM 2010 CEO Study revealed the following about customer pragmatism: “… most do not engage with companies via social media simply to feel connected… To successfully exploit the potential of social media, companies need to design experiences that deliver value in return for customers’ time, attention, endorsement, and data.” That “tangible value” includes discounts coupons, and information to facilitate the purchase. The IBM analysts also note that many businesses overlook social media’s most potent capabilities for capturing customer insights’ monitoring the brand, conducting research, and soliciting new-product ideas.