Creating Long term Loyalty Relationships

Building Customer Value, Satisfaction, and Loyalty

Creating loyal customers is at the heart of every business. As marketing experts Don Peppers and Martha Rogers say

The only value your company will ever create is the value that comes from customers—the ones you have now and the ones you will have in the future. Businesses succeed by getting, keeping, and growing customers. Customers are the only reason you build factories, hire employees, schedule meetings, lay fiber-optic lines, or engage in any business activity. Without customers, you don’t have a business.

Managers who believe the customer is the company’s only true “profit center” consider the traditional organization chart —a pyramid with the president at the top, management in the middle, and frontline people and customers at the bottom—obsolete

Successful marketing companies invert the chart. At the top are customers; next in importance are frontline people who meet, serve, and satisfy customers; under them are the middle managers, whose job is to support the frontline people so they can serve customers well; and at the base is top management, whose job is to hire and support good middle managers. We have added customers along the sides of to indicate that managers at every level must be personally involved in knowing,meeting, and serving customers

Some companies have been founded with the customer-on-top business model, and customer advocacy has been their strategy—and competitive advantage—all along. With the rise of digital technologies such as the Internet, increasingly informed consumers today 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.

When Office Depot added customer reviews to its Web site in 2008, revenue and sales conversion increased significantly. The company also incorporated reviewrelated terms to its paid search advertising campaign.As a result of these efforts,Web site revenue and the number of new buyers visiting the site both increased by more than 150 percent.

 

Customer Perceived Value

Consumers are better educated and informed than ever, and they have the tools to verify companies’ claims and seek out superior alternatives

Dell rode to success by offering low-priced computers, logistical efficiency, and after-sales service. The firm’s maniacal focus on low costs has been a key ingredient in its success. When the company shifted its customer-service call centers to India and the Philippines to cut costs, however, understaffing frequently led to 30-minute waits for customers. Almost half the calls required at least one transfer. To discourage customer calls, Dell even removed its toll-free service number from its Web site. With customer satisfaction slipping, and competitors matching its product quality and prices and offering improved service, Dell’s market share and stock price both declined sharply. Dell ended up hiring more North American call center employees. “The team was managing cost instead of managing service and quality,” Michael Dell confesses

 

How then do customers ultimately make choices? They tend to be value maximizers, within the bounds of search costs and limited knowledge, mobility, and income. Customers estimate

which offer they believe—for whatever reason—will deliver the most perceived value and act on it. Whether the offer lives up to expectation affects customer satisfaction and the probability that the customer will purchase the product again. In one 2008 survey asking U.S. consumers “Does [Brand X] give good value for what you pay?” the highest scoring brands included Craftsman tools, Discovery Channel,History Channel, Google, and Rubbermaid

Customer-perceived value (CPV) is the difference between the prospective customer’s evaluation of all the benefits and all the costs of an offering and the perceived alternatives. 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 customer gets and costs he or she assumes for different choices. The marketer can increase the value of the customer offering by raising economic, functional, or emotional benefits and/or reducing one or more costs. The customer choosing between two value offerings, V1 and V2, will favor V1 if the ratio V1:V2 is larger than one, favor V2 if the ratio is smaller than one, and be indifferent if the ratio equals one.

 

APPLYING VALUE CONCEPTS

Suppose the buyer for a large construction company wants to buy a tractor for residential construction from either Caterpillar or Komatsu. He wants the tractor to deliver certain levels of reliability, durability, performance, and resale value. The competing salespeople carefully describe their respective offers. The buyer decides Caterpillar has greater product benefits based on his perceptions of those attributes. He also perceives differences in the accompanying services—delivery, training, and maintenance—and decides Caterpillar provides better service as well as more knowledgeable and responsive staff. Finally, he places higher value on Caterpillar’s corporate image and reputation. He adds up all the economic, functional, and psychological benefits from these four sources—product, services, personnel, and image—and perceives Caterpillar as delivering greater customer benefits.

Does he buy the Caterpillar tractor? Not necessarily. He also examines his total cost of transacting with Caterpillar versus Komatsu, which consists of more than money. As Adam Smith observed over two centuries ago in The Wealth of Nations,“The real price of anything is the toil and trouble of acquiring it.” Total customer cost also includes the buyer’s time, energy, and psychological costs expended in product acquisition, usage, maintenance, ownership, and disposal. The buyer evaluates these elements together with the monetary cost to form a total customer cost. Then he considers whether Caterpillar’s total customer cost is too high compared to total customer benefits. If it is, he might choose Komatsu. The buyer will choose whichever source delivers the highest perceived value.

Now let’s use this decision-making theory to help Caterpillar succeed in selling to this buyer. Caterpillar can improve its offer in three ways. First, it can increase total customer benefit by improving economic, functional, and psychological benefits of its product, services, people, and/or image. Second, it can reduce the buyer’s nonmonetary costs by reducing the time, energy, and psychological investment. Third, it can reduce its product’s monetary cost to the buyer.

Suppose Caterpillar concludes the buyer sees its offer as worth $20,000. Further, suppose Caterpillar’s cost of producing the tractor is $14,000. This means Caterpillar’s offer generates $6,000 over its cost, so the firm needs to charge between $14,000 and $20,000. If it charges less than $14,000, it won’t cover its costs; if it charges more, it will price itself out of the market

Caterpillar’s price will determine how much value it delivers to the buyer and how much flows to Caterpillar. If it charges $19,000, it is creating $1,000 of customer perceived value and keeping $5,000 for itself. The lower Caterpillar sets its price, the higher the customer perceived value and, therefore, the higher the customer’s incentive to purchase. To win the sale, the firm must offer more customer perceived value than Komatsu does. Caterpillar is well aware of the importance of taking a broad view of customer value.

considerations in heavy industrial equipment. The firm also makes it easy for customers to find the right product by providing a full line of construction equipment and a wide range of financial terms. Caterpillar maintains the largest number of independent construction-equipment dealers in the industry. These dealers all carry a complete line of Caterpillar products and are typically better trained and perform more reliably than competitors’ dealers. Caterpillar has also built a worldwide parts and service system second to none in the industry. Customers recognize all the value Caterpillar creates in its offerings, allowing the firm to command a premium price 10 percent to 20 percent higher than competitors. Caterpillar’s biggest challenges are a reenergized Komatsu, which has made a strong push in China, and some supply chain issues in introducing new products.

Very often, managers conduct a customer value analysis to reveal the company’s strengths and weaknesses relative to those of various competitors. The steps in this analysis are :

1.	Identify the major attributes and benefits customers value. Customers are asked what attributes, benefits, and performance levels they look for in choosing a product and vendors. Attributes and benefits should be defined broadly to encompass all the inputs to customers’ decisions.
2.	Assess the quantitative importance of the different attributes and benefits. Customers are asked to rate the importance of different attributes and benefits. If their ratings diverge too much, the marketer should cluster them into different segments
3.	Assess the company’s and competitors’ performances on the different customer values against their rated importance. Customers describe where they see the company’s and competitors’ performances on each attribute and benefit.
4.	Examine how customers in a specific segment rate the company’s performance against a specific major competitor on an individual attribute or benefit basis. If the company’s offer exceeds the competitor’s offer on all important attributes and benefits, the company can charge a higher price (thereby earning higher profits), or it can charge the same price and gain more market share.
5.	Monitor customer values over time. The company must periodically redo its studies of customer values and competitors’ standings as the economy, technology, and features change

CHOICE PROCESSES AND IMPLICATIONS 

Some marketers might argue the process we have described is too rational. Suppose the customer chooses the Komatsu tractor. How can we explain this choice? Here are three possibilities.

1.	The buyer might be under orders to buy at the lowest price. The Caterpillar salesperson’s task is then to convince the buyer’s manager that buying on price alone will result in lower longterm profits and customer value.
2.	The buyer will retire before the company realizes the Komatsu tractor is more expensive to operate. The buyer will look good in the short run; he is maximizing personal benefit. The Caterpillar salesperson’s task is to convince other people in the customer company that Caterpillar delivers greater customer value.
3.	The buyer enjoys a long-term friendship with the Komatsu salesperson. In this case, Caterpillar’s salesperson needs to show the buyer that the Komatsu tractor will draw complaints from the tractor operators when they discover its high fuel cost and need for frequent repairs