CHAPTER 5:- CREATING CUSTOMER VALUE,

SATISFACTION, AND LOYALTY

MARKETING DEBATE—Online Versus Off-Line Privacy
As more and more firms practice relationship marketing and develop customer databases,
privacy issues are emerging as an important topic. Consumers and public interest groups are
scrutinizing- and sometimes criticizing the privacy policies of firms. Concerns are also being
raised about potential theft of online credit card information or other potentially sensitive or
confidential financial information. Others maintain that the online privacy fears are unfounded
and that security issues are every bit as much a concern in the off-line world. They argue that
the opportunity to steal information exists virtually everywhere and that it is up to the
consumer to protect his or her interests.
Take a position: (1) Privacy is a bigger issue in the online world than the off-line world versus
privacy is no different online than off-line. (2) Consumers on the whole receive more benefit
than risk from marketers knowing their personal information.
(1) Pro: Privacy is a larger issue in the online world than the off-line world simply because the
information has a greater opportunity to be exposed to more people than off-line transactions.
The transmission of private information electronically travels through electronic channels each
of which presents opportunity for misdirection or computer “hacking” activities. In many of
these cases, the person, or firm transmitting this information, redirecting this information
receiving this information and storing this information is unknown to the consumer. In the off-
line world, the consumer has the opportunity to know the company, personnel, or firm
receiving this information and has the opportunity to accept or decline sharing their personal
information.
Con: Transmission of personal information in the off-line world still travels electronically, in
many cases. The act of paying with a credit card still involves the transmission of data
electronically at some point in the transaction. What differs is the fact that the consumer is
initially interfacing with a person (or firm). Although this does not mitigate the risks involved
to the consumer, it does present some concrete knowledge of the people, or firm involved in
the transaction.
(2) Pro: With an active CRM program in place by a firm, consumers can receive more benefit
than risks with the marketer knowing their personal information. A firm with an active CRM
program can and does allow the consumer to move through the Customer Development
Process (from suspects to partners) thus establishing strong ties to the firm and the reception of
increased specially designed promotional and service programs unavailable to the general
public. This is seen in frequent flyer discounts, member discount, special shopping days, and
advance notices of new products, promotions, and reminders for service opportunities (oil
change reminders, medical appointment reminders, and others). In today’s fast paced world,
consumers stand to benefit from such attention to detail.
Con: In current society, the dissemination of one’s personal information is scary and a concern
to the public in general as opportunities for misuse of this information abound. The public
does not like intrusions into their personal lives, unless invited. Consumers do not feel that the
benefits of this sharing of information outweigh the cost of the lost of privacy. The recent “Do
Not Call Registry” established to limit the telemarketing industry is an example of consumers
revolting in opposition.

MARKETING DISCUSSION
Consider the lifetime value of customers (CLV). Choose a business and show how you would
go about developing a quantitative formulation that captures the concept. How would
organizations change if they totally embraced the customer equity concept and maximized
CLV?

Suggested Response
A) CLV describes the net present value of the stream of future profits expected over the
customers’ lifetime purchases. Each student’s example will differ but the main tenets of each
report should include the following:
1) Add:
a) Profit from a sale (dollar or percent).
b) Number of sales per customer per year.
c) Average age of a customer.
d) Average expected lifespan of a customer.
2) Subtract:
a) Appropriate discount rate.
b) Costs of attracting one customer.
c) Selling one customer.
d) Servicing one customer.

B) Organizations would change by beginning to take a long-term perspective rather than a

short-term (quarter-to-quarter view). No longer viewing a customer as a “transaction” but
rather as a “lifetime value” solidifies and demonstrates the impact that a single consumer has
to a firm in a language they understand—dollars. Firms would begin to customize offerings
and messages to each customer, ensure that retention strategies are in place, differentiate
customers in terms of needs and value to the company, and build stronger relationships with
key customers. Because of a change in the loci of focus for the firm, strategies, and actions
based upon which would provide the best return on its marketing investments would be
implemented.
MARKETING SPOTLIGHT—Dell

Discussion Questions:
1)What have been the key success factors for Dell?
a. Dell information about its customers.
b. Its production process.
c. JIT inventory practices.
2)Where is Dell vulnerable?
a. Changes in usage of computers.
b. Changes in technology that makes the personal computer obsolete.
c. A lapse of marketing research caused by corporate changes or financial
setbacks.
3)What should it watch out for?
a. Corporate complacency due to success.
b. The effectiveness of its marketing research in identifying emerging trends.
c. The temptation to expand into other consumer products outside of its core
competencies.
4)What recommendations would you make to senior marketing executives going
forward?
a. Accept your competencies, accept your limitations, and capitalize on your
strengths.
b. Continue to believe that marketing research is the underlying foundation of
your product development processes and marketing successes.
5)What should they be sure to do with their marketing?
a. Continue to target their marketing to identify those segments of the total
market that are receptive to new and innovative products and ideas.
 DETAILED CHAPTER OUTLINE

Q1. What are customer value, satisfaction, and loyalty, and how can
companies deliver them?

ANSWER

Today, companies face their toughest competition ever. The cornerstone of a well-
conceived marketing orientation is strong customer relationships. Marketers must
connect with customers—informing, engaging, and energizing them in the process.

Customer Perceived Value

A) Customers tend to be value-maximizers.
B) Customers estimate which offer will deliver the most perceived value and act on it.
C) 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.
D) Total customer value is the perceived monetary value of the bundle of economic,
functional, and psychological benefits customers expect from a given market offering.
E) Total customer cost is the bundle of costs customers expect to incur in evaluating,
obtaining, using, and disposing of the given market offering, including monetary, time,
energy, and psychic costs.
F) Customer perceived value is thus based on the difference between what the customer
gets and what he or she gives for different possible choices

Applying Value Concepts

A) The customer adds up values from the four sources for Caterpillar—product, services,
personnel, and image and compares them to Komatsu.
B) The buyer evaluates these elements together with the monetary cost to form a total
customer cost.
C) The buyer will choose whichever source he thinks delivers the highest perceived
customer value.
Delivering High Customer Value
A) Loyalty is 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.”
B) The key to generating high customer loyalty is to deliver high customer value.
C) 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.
D) Whether the promise is kept depends on the company’s ability to manage its value-
delivery system.
E) The value-delivery system includes all the experiences the customer will have on the
way to obtaining and using the offering.
F) Whether customers will actually receive, the promised value proposition will depend
upon the marketer’s ability to influence various core business processes.

Customer Expectations
A) How do buyers form their expectations?
1) From past buying experiences.
2) Friends and associates advice.
3) Marketers’ and competitors’ information and promises.
A customer’s decision to be loyal or to defect is the sum of many small encounters with
the company.
Companies need to create a “branded customer experience.”

Product and Service Quality

Satisfaction will also depend on 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.
A) We can say that a seller has delivered quality whenever the seller’s product or
service meets or exceeds the customers’ expectations.
B) Distinguish between conformance quality and performance quality.
C) Total quality is the key to value creation and customer satisfaction.
D) Marketing managers have two responsibilities in a quality-centered company.
1) First, they must participate in formulating strategies and policies to help the
company win through total quality excellence.
Second, they must deliver marketing quality alongside production quality.
Q2. What is the lifetime value of customer?
ANSWER

Customer Lifetime Value (CLV) describes the net present value of the stream of future
profits expected over the customer’s lifetime purchases.
CLV calculations provide a formal quantitative framework for planning customer
investment and helps marketers to adopt a long-term perspective.

Q3. How can companies both attract and retain customers?

ANSWER

Attracting, Retaining, and Growing Customers

A) Customers are becoming harder to please.
B) Companies seeking to expand profits and sales have to spend considerable time and
resources searching for new customers.
1) Suspects are people or organizations that might conceivably have an interest in
buying but many not have the means or real intention to buy.
2) Prospects—customers with the motivation, ability, and opportunity to make a
purchase
3) Customer churn—high customer defection
4) Two main ways to strengthen customer retention:
a. Erect high switching costs.
b. Deliver high customer satisfaction.
C) Most companies now recognize the importance of satisfying and retaining customers.
D) Satisfied customers constitute the company’s customer relationship capital.
1) Acquiring new customers cost five times more than the costs involved in satisfying
and retaining current customers.
2) The average company loses 10 percent of its customers each year.
3) A 5 percent reduction in customer defection rate can increase profits by 25 percent
to 85 percent depending on the industry.
4) Customer profit rate tends to increase over the life of the retained customer.
 E) The starting point is everyone who might conceivably buy the product or service
(suspects).
1) Prospects.
2) First-time customers.
3) Repeat customers.
4) Clients—people whom the company treats very specially and knowledgeably.
5) Members.
6) Advocates—customers who enthusiastically recommend the company.
7) Partners.
F) Markets can be characterized by long-term buying dynamics and how easily customers
can enter and leave.
1) Permanent capture markets—once a customer always a customer.
2) Simple retention markets—customers lost after each period.
Customer migration markets—customers can leave and come back..

Q4. How can companies cultivate strong customer relationship?

ANSWER

Customer Relationship Management (CRM)

Customer relationship management (CRM) is the process of managing detailed
information about individual customers and carefully managing all customer “touch
points” to maximize customer loyalty.
A) A customer “touch point” is any occasion on which a customer encounters the brand
and product—from actual experience to personal or mass communications to casual
observation.
B) Customer relationship management enables companies to provide excellent real-time
customer service through the effective use of individual account information.
C) Peppers and Rogers outlined a four-step framework for one-to-one marketing that can
be adapted to CRM marketing:
1) Identify your prospects and customers.
2) Differentiate customers in terms of: (1) their needs and (2) their value to your
company.
3) Interact with individual customers to improve your knowledge about individual
needs and to build stronger relationships.
4) Customize products, services, and messages to each customer.
 D)A key driver of shareholder value is the aggregate value of the customer base. Winning
companies improve the value of their customer base by excelling at strategies such as:
1) Reducing the rate of customer defection.
2) Increasing the longevity of the customer relationship.
3) Enhancing the growth potential of each customer through “share-of-wallet, cross-
selling, and up-selling.”
4) Making low-profit customers more profitable or terminating them.
5) Focusing disproportionate effort on high-value customers.

Q5. How can companies deliver total quality?

ANSWER

Total Quality Management

A) Total quality management (TQM) is an organization-wide approach to continuously
improve the quality of all the organization’s processes, products, and services.
B) Product and service quality, customer satisfaction, and company profitability are
intimately connected.
C) TQM ran into implementation problems as firms became overly focused on how they
were doing business and not the why they were in business. Companies lost sight of
consumer needs and wants.
D) Companies are now concentrating efforts on “return on quality” or ROQ.
E) ROQ advocates improving quality only on those dimensions that produce tangible
customer benefits, lower costs, or increased sales.
F) Marketers play several roles in helping their companies define and deliver high-
quality goods and services to target customers.
1) They bear the major responsibility for correctly identifying the customers’ needs
and requirements.
2) They must communicate customer expectations properly to product designers.
3) They must check that customers’ orders are filled correctly and on time.
4) They must make sure that customers have received proper instructions, training,
and technical assistance in the use of the product.
5) They must stay in touch with customers after the sale to ensure that they are
satisfied and remain satisfied.
6) They must gather customer ideas for product and service improvements and
convey them to the appropriate departments.
Q6. What is database marketing?
ANSWER

)A A customer database is an organized collection of comprehensive information about

individual customers or prospects that is current, accessible, and actionable, for such
marketing purposes as lead generation, lead qualification, sale of a product or service,
or maintenance of customer relationships.
A) Database marketing is the process of building, maintaining, and using customer
databases and other databases for the purpose of contacting, transacting, and building
customer relationships.
Customer Databases
A) Customer databases are not customer mailing lists.
1) A customer mailing list is simply a set of names, addresses, and telephone
numbers.
a. Ideally, a customer database contains the consumer’s past purchases,
demographics, income, family members, psychographics, mediagraphics, and
other useful information.
2) A business database would contain business customers’ past purchases, past
volumes, prices, and profits, buyer team members’ names, and other useful
information.

Using the Database

A) To identify prospects.
B) To decide which customers should receive a particular offer.
C) To deepen customer loyalty.
D) To reactivate customer purchases.
E) To avoid serious customer mistakes.