Chapter 2 – Building Customer Satisfaction through Quality, Service and Value

Buyers will buy from the firm that they perceive to offer highest customer delivered value. Customer
delivered value is the difference between total customer value and total customer cost. TOTAL CUSTOMER
VALUE is the bundle of benefits customers expects form a given product or service. TOTAL CUSTOMER COST is
the bundle of costs customers expect to incur in evaluating, obtaining, and using the product or service.
Total customer value is composed of :
1. Product value
2. Services value
3. Personnel value
4. Image value
Total customer cost is composed of :
1. Monetary cost
2. Time cost
3. Energy cost
4. Psychic cost
Total customer value and total customer cost sums up to customer delivered value.
Whether the buyer is satisfied after purchase depends on the offer’s performance in relation to the buyer’s
expectations. 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. Hence, satisfaction is a
function of perceived performance and expectations. If the performance falls short of expectations, the
customer is dissatisfied. If the performance matches the expectations, the customer is satisfied. If the
performance exceeds expectations, the customer is highly satisfied or delighted.
Many companies are aiming for high satisfaction because customers who are just satisfied still find it
easy to switch when a better offer comes along. How do buyers form their expectations ? These expectations
are influenced by their past buying experience, friends’ and associates’ advice, and marketers’ and
competitors’ information and promises. If marketers raise expectations too high, the buyer is likely to be
disappointed. Some of today’s most successful companies are raising expectations and delivering
performances to match.
There are a variety of methods that companies can use to track customer satisfaction such as :
o Complaint and suggestion system
o Customer satisfaction surveys
o Ghost shopping
o Lost customer analysis
When customers rate their satisfaction with an element of the company’s performance – say delivery-
the company needs to recognize that customers vary in how they define good delivery. Yet if the company had
to spell out every element in detail, customers would face a huge questionnaire. The company must also
realize that two customers can report being “highly satisfied” for different reasons. Companies should also
note that managers and salespeople can manipulate their ratings on customer satisfaction.
Delivering customer value and satisfaction
Michael Porter of Harvard proposed the value chain as a tool for identifying ways to create more
customer value. The value chain identifies nine strategically relevant activities that create value and cost in a
specific business. These nine value creating activities consist of five primary activities and four support
activities.
The primary activities represent
1. the sequence of bring materials into the business (inbound logistics)
2. converting them into final products (operations)
3. shipping out final products (outbound logistics)
4. marketing them(marketing and sales)
5. servicing them (service)
The support activities
1. Procurement (purchasing of various inputs for each primary activity)
2. Technology development
3. Human resources management
4. Firm infrastructure (cover the cost of general management, planning, finance, accounting, legal and
government affairs that are borne by all the primary and support activities)
are handled in certain specialized departments but not only there.
The firm’s task is to examine its costs and performance in each value-creating activity and to look for
ways to improve it. The firm should estimate its competitors’ cost and performances as benchmarks against
which to compare its own costs and performances. The firm’s success depends not only on how well each
department performs its work but also on how well the various departmental activities are coordinated. The
solution is to place more emphasis on the smooth management of core business processes, most of which
involve cross-functional inputs and cooperation. The core business processes include :
o New-product realization process : All the activities involved in researching, developing and launching
new high-quality products quickly and within budget.
o Inventory management process : All the activities involved in developing and managing the inventory
levels of raw materials, semi-finished materials, and finished goods so that adequate supplies are available
and the costs of overstocks are low.
o Order-to remittance process : All the activities involved in receiving and approving orders, shipping the
goods on time, and collecting payments.
o Customer service process : All the activities involved in making it easy for customers to reach the right
parties within the company and receive quick and satisfactory service, answers and resolutions of problems.
To be successful, the firm also needs to look for competitive advantages beyond its own operations,
into the value chains of its suppliers, distributors, and customers. Faced with intense competition, many
companies today have partnered with specific suppliers and distributors to create a superior value-delivery
network. The winner is the company with the better network.
In addition to improving their relations with their partners in the supply chain, many companies are
intent on developing stronger bonds and loyalty with their ultimate customers. Today’s companies must pay
closer attention to their customer defection rate(rate at which they lose customers)and take steps to reduce
it. There are four steps to this process :
1. The company must define and measure its retention rate.
2. Distinguish the causes of customer attrition and identify those that can be managed better.
3. Estimate how much profit it loses when it loses customers.
4. Figure out how much it would cost to reduce the defection rate.
The cost of attracting a new customer is estimated to be five times the cost of keeping a current
customer happy. It requires a great deal of effort to induce satisfied customers to switch away from their
current suppliers. Unfortunately, most marketing theory and practice center on the art of attracting new
customers rather than retaining existing ones. The focus has been on pre-selling and selling rather than on
caring for the customer afterward.
There are 2 ways to strengthen customer retention. One is to erect high switching barriers. Customers
are less indicted to switch to another supplier when this would involve high capital costs, high search costs,
the loss of loyal customer discounts and so on. The better approach is to deliver high customer satisfaction.
The task of creating strong customer loyalty is called relationship marketing.
To understand customer relationship marketing, we must first examine the process involved in
attracting and keeping customers. The starting point is suspects, everyone who might conceivably buy the
product or service. The company looks hard at the suspects to determine who are the most likely prospects, –
 the people who have strong potential interest in the product and the ability to pay for it. Disqualified
prospects are those whom the company rejects because they have poor credit or would be unprofitable. The
company hopes to convert many of its qualified prospects into first-time customers, and to then convert
those satisfied first-time customers into repeat customers. Both first-time customers and repeat customers
may continue to buy from competitors as well. The company then acts to convert repeat customers
into clients – people who buy only from the company in the relevant product categories. The next challenge is
to turn clients into advocates, customers who praise the company and encourage others to buy from it. The
ultimate challenge is to turn advocates into partners, where the customer and the company work actively
together. The company’s challenge is to reactivate dissatisfied customers through customer win-back
strategies. It is often easier to retract ex-customers than to find new ones.
We need to distinguish five different levels of company investment in customer-relationship building.
o Basic marketing The salesperson simply sells the product
o Reactive marketing The salesperson sells the product and encourages the customer to call if he or she
has any questions, comments or complaints.
o Accountable marketing The salesperson phones the customer a short time after the sale to check
whether the product is meeting the customer’s expectations. The customer is also asked for any
product/service improvement suggestions and any specific disappointments. This information helps the
company continuously improve its performance.
o Proactive marketing The company salesperson contacts the customer from time to time with
suggestions about improved product uses or helpful new products.
o Partnership marketing The company works continuously with the customer to discover ways to effect
customer savings or to help the customer perform better
Most companies practice only basic marketing if their markets contain many customers and if their unit
profit margins are small. At the other extreme, in markets with few customers and high profit margins, most
sellers will move toward partnership marketing.
Berry and Parasuraman have distinguished three customer value-building approaches: adding
financial benefits, adding social benefits and adding structural ties.
Adding Financial Benefits
2 financial benefits that companies can offer are frequency marketing programs and club marketing programs.
Frequency marketing programs (FMPs) are designed to provide rewards to customers who buy frequently
and/or in substantial amounts. Frequency marketing is an acknowledgment of the fact that 20% of a
company’s customers might account for 80% of its customers. (Pareto) Typically the first company to
introduce an FMP gains the most benefit, especially if competitors are slow to respond. After competitors
respond, FMPs can become a financial burden to all the offering companies. One criticism of FMPs is that they
might diminish the company’s focus on delivering a superior level of customer service.
Many companies have created affinity groups, or clubs, among their customers to bond them closer to the
company. Club membership may be offered automatically upon purchase or promised purchase of a certain
amount, or by paying a fee.
Adding Social Benefits
Here company personnel work on increasing their social bonds with customers by individualizing and
personalizing their customer relationships. In essence, thoughtful companies turn their customers into clients.
Adding Structural Ties
The company may supply customers with special equipment or computer linkages that help customers
manage their orders, payroll, inventory, and so on.
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 says that the top 20% of the customers may
generate as much as 80% of the profits. William Sherden has suggested amending the rule to 80/20/30, to
reflect the idea that “the top 20% of customers generate 80% of the company’s profits, half of which is lost
 serving the bottom 30% of unprofitable customers”. The implication is that a company could improve its
profits by “firsting” its worst customers. Furthermore, it isn’t necessary the company’s largest customers who
are yielding the most profit. The mid-size customers receive good service and pay nearly full price and are
often the most profitable.
A profitable customer is a person, household, or company that over time yields a revenue stream that
exceeds by an acceptable amount the company’s cost of attracting, selling and servicing that customer.
Most companies fall to measure individual customer profitability. A useful type of profitability analysis is the
customer/product profitability analysis
C1 C2 C3
P1 + + + Highly
profitable
product
P2 + Profitable
product
P3 - - Losing product
P4 + - Mixed-bag
product
High-profit Mixed-bag Losing
customer customer customer
What can the company do about C2 and C3 ?
1. It can raise the price of its less-profitable products or eliminate them or
2. It can try to cross-sell its profit-making products to the unprofitable customers.
The company would benefit by encouraging its unprofitable customers to switch to their competitors.
Ultimately, the company’s profitability depends on the three elements: value creation ability, internal
operations and competitive advantage. Companies strive to build sustainable competitive advantages. Those
who succeed delivering high customer value and satisfaction leads to high repeat purchases and therefore
high company profitability.
One of the major values that customers expect from vendors is high product and service quality. If
companies want to stay in the race let alone be profitable, they have no choice but to adopt total quality
management: (TQM)- an organization-wide approach to continuously improving the quality of all
organization’s processes, products, and services. There is an intimate connection among product and service
quality, customer satisfaction and company profitability. Higher levels of quality result in higher levels of
customer satisfaction while supporting higher prices and lower costs. Therefore, quality improvement
programs (QIPs) normally increase profitability. But what exactly is quality. Quality is the improvement of
features and characteristics of a product or a service that bear on its ability to satisfy stated or implied needs.
A company that satisfies most of its customers’ needs most of the time is called a quality company. Marketing
managers have two responsibilities in a quality-centered company. First, they must participate in formulating
strategies and policies designed to help the company win through total quality excellence. Second, they must
deliver marketing quality alongside production quality. Marketers play several roles in helping their company
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 correctly to product designers.
3. They must make sure that the customers’ orders are filled correctly and on time.
4. They must check that customers have received proper instructions, training and technical assistance in
the use of the product.
5. They must stay in touch with the 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 company departments.
One implication of TQM is that marketing people must spend time and effort not only to improve
external marketing but also to improve internal marketing.