Chapter

Building Long-
Term Customer
Relationships

Copyright © 2016 Pearson Education, Ltd. 4-1

Learning Objectives
1. How can companies deliver customer
value, satisfaction, and loyalty?
2. What is the lifetime value of customers,
and how can marketers maximize it?
3. How can companies attract and retain the
right customers and cultivate strong
customer relationships and communities?

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 Building Customer Value,
Satisfaction, and Loyalty
• Customer-perceived value (CPV)

– The difference between the prospective

customer’s evaluation of all the benefits and
costs of an offering and the perceived
alternatives

– Total customer benefit vs. total customer cost

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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.
 Figure 4.1
Determinants of CPV

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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 in order 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.
 Building Customer Value,
Satisfaction, and Loyalty
• Customer-perceived value (CPV)

– Loyalty

– Value proposition

– Value delivery system

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Consumers have varying degrees of loyalty to specific

brands, stores, and companies. Loyalty has been defined
as “a deeply held commitment to rebuy or repatronize 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, Volvo’s core
positioning has been “safety,” but the buyer is promised
more than just a safe 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 to obtaining and using the
offering.
 Building Customer Value,
Satisfaction, and Loyalty
• Total customer satisfaction
– A person’s feelings of pleasure or
disappointment that result from comparing a
product or service’s perceived performance
(or outcome) to expectations

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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.
 Building Customer Value,
Satisfaction, and Loyalty
• Monitoring satisfaction
– Many companies are systematically
measuring how well they treat customers,
identifying the factors shaping satisfaction,
and changing operations and marketing as a
result

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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.
 Building Customer Value,
Satisfaction, and Loyalty
• Product and service quality
– Quality is the totality of features and
characteristics of a product or service that
bear on its ability to satisfy stated or implied
needs
– Conformance quality vs. performance quality

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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 Lexus
provides higher performance quality than a Hyundai:
the Lexus rides more smoothly, accelerates faster, and
runs problem-free longer. Yet both a Lexus and a Hyundai
deliver the same conformance quality if all the units
deliver their promised quality.
 Maximizing
Customer Lifetime Value
• Customer profitabillity analysis
– Activity-based costing (ABC)

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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.
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.
 Figure 4.2
Customer-Product Profitability Analysis

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A useful type of profitability analysis is shown in Figure

4.2. Customers are arrayed along 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; she 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.
 Maximizing
Customer Lifetime Value
• Customer lifetime value (CLV)
– The net present value of the stream of future
profits expected over the customer’s lifetime
purchases

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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 and 20 percent,
depending on cost of capital and risk attitudes).
 Maximizing
Customer Lifetime Value

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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. Columbia’s Don Lehmann and Harvard’s
Sunil Gupta illustrate their approach by calculating the
CLV of 100 customers over a 10-year period (see Table
4.1). In this example, the firm acquires 100 customers
with an acquisition cost per customer of $40. Therefore,
in year 0, it spends $4,000. Some of these customers
defect each year. The present value of the profits from
this cohort of customers over 10 years is $13,286.52. The
net CLV (after deducting acquisition costs) is $9,286.52,
or $92.87 per customer.
 Cultivating Customer
Relationships
• Customer relationship management
(CRM)
– The process of carefully managing detailed
information about individual customers and all
customer “touch points” to maximize loyalty
– Touch points

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Companies are using information about customers to

enact precision marketing designed to build strong and
profitable long-term relationships. CRM is important
because a major driver of company profitability is the
aggregate value of the company’s customer base. A
touch point 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 touch points include reservations, check-
in and checkout, frequent-stay programs, room service,
business services, exercise facilities, and restaurants.
 CRM
• Personalizing marketing

• Permission marketing

• Customer empowerment

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Personalizing marketing is about making sure the brand

and its marketing are as 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.
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.
 Attracting and Retaining
Customers
• Reducing customer churn/defection

ü Define and measure retention rate

ü Distinguish customer attrition causes
ü Compare lost CLV to reducing defection rate

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It is not enough to attract new customers; the company

must also keep them and increase their business. 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. As long as the
cost to discourage defection is lower than the lost profit,
spend the money to try to retain the customer.
 Attracting and Retaining
Customers
• The marketing funnel

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Figure 4.3 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. By calculating
conversion rates —the percentage of customers at one
stage who move to the next—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 new
customers but to retain and cultivate existing ones.
 Attracting and Retaining
Customers
• Managing the customer base
Reduce
customer
defection
Focus on Increase
high-profit customer
customers longevity

Terminate Share of wallet

low-profit &
customers cross/upselling

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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,” crossselling, and up-
selling; make low-profit customers more profitable or
terminate them; and treat high-profit customers in a
special way.
 Building Loyalty
Interact closely with customers

Develop loyalty programs

Create institutional ties

Create value with brand communities

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Companies should strive to build loyalty for strong,

enduring connections with customers.

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 in to
frontline customer feedback.

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. Club membership programs
attract and keep those customers responsible for the
largest portion of business.

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.

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 around the brand. A
strong brand community results in a more loyal,
 Brand Communities
• Sense of connection to
brand
• Shared rituals, stories,
and traditions that convey
meaning
• Shared responsibility to
the community members

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Three characteristics identify brand communities (listed

on slide). Brand communities come in many different
forms. Some arise organically from brand users, such as
the Atlanta MGB riders club, while others are company-
sponsored and facilitated, such as the Harley Owners
Group (H.O.G.). Online, marketers can tap into social
media such as Facebook, Twitter, and blogs or create
their own online community.
 Win-Backs
• Some customers inevitably become
inactive or drop
– Challenge is to reactivate them through win-
back strategies
– Often easier to reattract ex-customers than to
find new ones

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Exit interviews and lost-customer surveys can uncover

sources of dissatisfaction and help win back only those
with strong profit potential.