12/12/2022

Session 14:

Relationship Marketing

Dr Simos Chari
IMT Dubai
MM-II

Session 14:
Competing for Success with Relationship
Marketing

Divided in 3 Parts:
A. Customer Value, Satisfaction
B. Customer Value Management
C. Cultivating Long Term Customer Relationships and
Customer Loyalty

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Learning Objectives

Ø To comprehend the key concepts of customer value &

satisfaction

Ø Premises of Customer Value Management

§ Customer Profitability analysis for identifying & retaining
profitable customers

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Customer Value & Satisfaction

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Customers

THINK
VALUE
FEEL To every target
consumer
ACT

Customer-oriented or Customer-centric Organizations

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Customer-Oriented Organization

§ Leadership
§ Processes
§ People

VALUE

MARKET INTELLIGENCE
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Customer Perceived Value (CPV)

“Perceived value is the customers' evaluation of the merits

of a product or service, and its ability to meet their needs
and expectations, especially in comparison with its peers.”

© Dr Simos Chari

Customer Perceived Value (CPV)

CPV
Economic

Evaluating

Functional Obtaining

Using

Psychological Disposing

TCB TCC

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Measuring CPV
APPROACH:
Please indicate the extent of your agreement or disagreement with each of the following
statements, by circling the appropriate number of the following scale (where 1 = strongly
disagree, 4 = neither disagree nor agree, and 7 = strongly agree:

1. Compared to alternative companies, the XXXXXX offers attractive product / service

costs
2. Compared to alternative companies, the XXXXXX charges me fairly for similar
products / services
3. Compared to alternative companies, the XXXXXX provides more free services
4. Compared to alternative companies, the XXXXXX provides good value-added services
for a reasonable price
5. Comparing what I pay to what I might get from other competitive companies, I think
the XXXXXX provides me with good value.
6. Compared to alternative companies, it is wise to choose the XXXXXX

© Dr Simos Chari

Customer Satisfaction (1)

“A person’s feelings of pleasure or disappointment that

result from comparing a product’s perceived performance to
(or outcome) to expectations”

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Customer Satisfaction (2)

EXPECTATIONS

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Customer Satisfaction: Outcomes

OUTCOMES OF SATISFACTION
100
Ø Customer loyalty
Loyalty (Retention) (%)

80 Ø Positive word-of-mouth
communications
60

Ø Higher revenues
40
Ø Increased return to shareholders
20

1 2 3 4 5
Very Dissatisfied Neither Satisfied Very
Dissatisfied Satisfied Satisfied
nor
Dissatisfied

Satisfaction Measure
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FIRM: Capturing Satisfaction

EXAMPLES:
Ø TOOL 1: NPS – Net promoter score (i.e., referrals)
§ Q: “how likely they are to recommend you to friends and colleagues” on a scale of 0-10.
§ Organize responses: Detractors (0-6), Passives (7-8), and Promoters (9-10).
§ NPS = % Detractors - % Promoters. This number can range from -100 to 100

Ø TOOL 2: Customer Satisfaction Score (CSAT)

§ Q: "how satisfied were you with your experience today at the XXX store" on a scale of 1–3,
1–5, or 1–10.

Ø TOOL 3: Customer Effort Score (CES)

§ Q: "how easy was to solve your problem with XXX store today" on a scale of 1–5.

Ø TOOL 4: Mystery shoppers

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Satisfaction & Complaining

Bill Gates:
“Your most unhappy
customers are your
greatest source of
learning…”

Source: Data from TARP Worldwide Inc., 2007

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Complaining: The Tip of the Iceberg

1% - 5% complain to
management

45% complain to a
frontline employee

50% encounter a problem

but do not complain

Source: Data from TARP Worldwide Inc., 2007

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Customer Complaints
54% - 70%
Buy again if resolved

5% Tell 5
Complain people
95%
25% If resolved quickly

Dissatisfied

95% Tell 11
people
Stop buying

LESSONS:
1. Provide customers the opportunity to give feedback
2. Recovery strategies in place
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Customer Value Management

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Customer Value Management (CVM)

CVM Activities
Ø Customer expansion - acquire new customers

Ø Increase customer retention

Ø Win back old customers

Ø Support (active) relationship termination

Ø Effectively allocate new resources

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Acquiring & Retaining

Acquiring: Retaining

v 10% customer loss per year (i.e., customer churn / defection)

v ‘Acquiring’ costs are 5 times more than ‘Retaining’
v 5% ↓ customer loss rate can ↑ £££ between 25-85%
v £££ ↑ over the life of retained customer

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Verhoef & Lemon (2013)

Figure: Mechanisms Through Which CVM Improves Business Performance

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Verhoef & Lemon (2013)

§ Analytical and fact-based decision making
within firms
§ A stronger focus on ROI of marketing
Accountable decisions.
Marketing § Less waste of marketing spending
§ Effective allocation of the marketing
budget

TOOL: CPA (Customer Profitability Analysis)

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80/20 Rule
Ø 80% of your profits come from 20% of your top customers
Ø The least profitable 10–20% can actually reduce profits between 50-200%
per account
Ø “Firing” non-profitable customers

Apply
Accountable
Marketing CPA

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Profitable Customer
“A customer that over time yields a revenue stream exceeding
by an acceptable amount the company’s cost stream for
attracting, selling, and serving that customer”

Most profitable
customers

Least profitable
customers

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CPA: Customer Profitability Analysis

STEPS:
1 & 2: Use Activity-based costing (ABC) to determine the cost attributable to
each customer (or segment)

3: Analyse the profitable versus the less profitable or unprofitable customers

(or segments)

4: Develop strategies to maximise profits from profitable customers and

reduce or eliminate less profitable or non-profitable customers (or
segments)

5: Review the impact of the new strategies on the performance of the

customer (or segments)

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CPA:
Step 1 & 2 - Activity Based Costing
Ø Cost of Goods Sold (COGS): the direct costs associated with producing
goods.
o Examples of COGS: direct labor costs, any costs of materials used
in producing or manufacturing a company's products, equipment
costs involved in production, utilities for the production facility,
and shipping costs.

Ø Indirect costs are costs used by multiple activities.

o Examples of Indirect Costs: accounting and legal expenses,
administrative salaries, office expenses, rent, telephone expenses,
marketing expenses, utilities etc

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CPA:
Step 1 & 2 - Activity Based Costing

Churn Rate (CR) & Retention Rate (RR)

CR is a measure of the RR measures the percentage

number of customers or of users who continue using
employees who leave a your product or service over
company during a given a given time period.
period.

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CPA:
Step 1 & 2 - Activity Based Costing

Churn Rate (CR) & Retention Rate (RR)

N of Customer Churned
CR = * 100 %
Total Customers

RR = 1 – CR * 100 %

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CPA: Step 3 - Analyse / Identify

Gross Profit = Revenue – COGS

Revenue – COGS
Gross Profit Margin = * 100
Revenue

Net Profit = Revenue – Total of all Expenses

Net Profit
Net Profit Margin = * 100
Total Revenue

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CPA: Step 3 – Analyse / Identify

Different Customer Types

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

COGS Indirect costs Clean Profit

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CPA: Step 4 – Develop Strategies

5 4 3 2 1
***** **** *** ** *

BEST WORST

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CPA: Step 4 – Develop Strategies

5
*****

BEST

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CPA: Step 4 – Develop Strategies

5 4 3

***** **** ***

BEST

2 1

** *

WORST

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Assignment

Customer Profitability Analysis

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Cultivating
Long-Term Relationships & Loyalty

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Learning Objectives
Ø Understand the importance of Relationship Marketing
(RM)

Ø Identify how organizations can cultivate l-t relationships

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“Relationship Marketing is a philosophy of doing business, a

strategic orientation, that focuses on keeping current
customers and improving relationships with them, to improve
performance”

Firing

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FUNDAMENTALS:
Relationship Marketing (RM)
Ø Necessity of RM
§ Shift to service economies
§ Increase in use of marketing channels
§ Aging population & shift of purchasing power

Ø RM exhibits strong effects on performance

§ Through WOM and loyalty

Ø RM can produce relationship equity

§ In combination with brands and offerings, it turn can lead to SCA

Ø Customer relationship management (CRM): an IT application of RM

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Building Relationships & Equity

Two Main Steps:

1. Strong foundation that supports relationship building and

maintenance

2. Implement relationship marketing and loyalty programs

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Step 1:
Developing a Strong Relationship Foundation

Ø Design a Process to:

§ Customer problems & Complaints
§ Conflict resolution

§ Service failures

Ø Boundary-Spanning Personnel:
§ Dedicate RM investments to selecting, training boundary-spanning
employees
§ Motivating boundary-spanning employees
§ Empower skillful employees

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Step 2:
Implement Targeted RM & Loyalty Programs

Ø Social RM programs:
§ Use social engagements (e.g., events) to convey the customer’s
special status

Ø Structural RM programs:
§ Provide investments that customers might not make themselves
(e.g., electronic order processing interfaces)

Ø Financial RM programs:
§ Provide economic benefits (e.g., special discounts, giveaways, free
shipping, or extended payment terms)

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Step 2:
Implement Targeted RM & Loyalty Programs

Ø Target RM programs toward customers with high relationship

orientations

Ø Get customers to act on their feelings in ways that produce the

most benefits for the firm

Ø RM investments should be targeted and adapted according to the

relationship stage

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Application Tool:
Customer Relationship Management (CRM)

“CRM concerns practices, strategies and technologies that

companies use to manage and analyze customer
interactions and data throughout the customer lifecycle,
with the goal of improving relationships with customers,
assisting in customer retention and driving sales growth”

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Application Tool: CRM

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RM: Effectiveness
Commitment: the desire to maintain in a Trust: Confidence in an exchange
valued relationship partner’s reliability and integrity

Customer-Focused
Relationship Mediator

• Commitment
• Trust
• Relationship satisfaction
• Relationship quality

Relationship Satisfaction: affective or Relationship Quality: overall level of

emotional state toward a relationship relationship closeness and strength

Source: Palmatier et al (2006) © Dr Simos Chari

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Application Tool: CRM

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RM: Effectiveness
Customer-Focused
Antecedents
Customer-Focused
Relationship benefits Outcomes

Dependence on seller Expectation of continuity

Seller-Focused Word of mouth

Customer-Focused
Antecedents
Relationship Mediator
Relationship investment Customer loyalty
• Commitment
Seller expertise • Trust Seller-Focused
• Relationship satisfaction Outcomes
Dyadic Antecedents • Relationship quality
Seller objective performance
Communication
Dyadic Outcomes
Similarity
Cooperation
Relationship duration

Interaction frequency

Conflict

Source: Palmatier et al (2006) © Dr Simos Chari

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RM: Effectiveness
Customer-Focused
Antecedents
Customer-Focused
Relationship benefits Outcomes

Dependence on seller Expectation of continuity

Seller-Focused Word of mouth

Antecedents
Relationship investment
Seller expertise
Dyadic Antecedents
Communication
Similarity
Relationship duration
Customer-Focused
Relationship Mediator
Customer loyalty
• Commitment
• Trust Seller-Focused
• Relationship satisfaction Outcomes
• Relationship quality
Seller objective performance
Dyadic Outcomes
Cooperation

Interaction frequency

Conflict

Source: Palmatier et al (2006) © Dr Simos Chari

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LOYALTY:
Customer Development Process
Suspects

Prospects Disqualified

First-time Repeat
Clients Members
customers customers

Inactive or
Advocates
Ex-customers

© Dr Simos Chari
LOYALT Y
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Customer Loyalty

Attitude-Based Loyalty:
“A deeply held commitment to rebuy or re-patronize a
preferred product or service in the future despite situational
influences and marketing efforts having the potential to cause
switching behavior”

Behavioral Loyalty:
“An ongoing propensity to buy the brand, usually as one of
several”

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Customer Loyalty

Attitude-Based Loyalty
(strong positive feelings)
TRUE
Behavioral Loyalty Loyalty
(repeat purchases)

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Building Customer Loyalty

A total approach with customer in the centre:
Ø RM Strategy and a CRM system
Ø Superior customer experience / service

Ø Communicate & Feedback

Ø Add value with schemes

Ø Hire and train employees

Ø Incorporate technology

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Reading
Kotler and Keller (2015): Chapter 5

Further Reading:
§ Palmatier, R. W., Dant, R. P., Grewal, D., & Evans, K. R. (2006). Factors influencing
the effectiveness of relationship marketing: A meta-analysis. Journal of
marketing, 70(4), 136-153.
§ Verhoef, Peter C., and Katherine N. Lemon. "Successful customer value
management: Key lessons and emerging trends." European Management
Journal 31.1 (2013): 1-15.
§ Watson, G. F., Beck, J. T., Henderson, C. M., & Palmatier, R. W. (2015). Building,
measuring, and profiting from customer loyalty. Journal of the Academy of
Marketing Science, 43(6), 790-825.

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Customer Profitability Segments

Company’s most profitable customers, typically heavy users of the
Platinum product, not overly price sensitive, willing to invest in and try new
Tier offerings, and committed customers of the firm

Profitability levels are not as high, perhaps because customers

Gold want price discounts that limit margins or are simply not as loyal.
Tier May be heavy users who minimize risk by working with multiple
vendors.
Essential customers that provide the volume needed to utilize the
Iron
firm'’ capacity but their spending levels, loyalty, and profitability
Tier are not substantial enough for special treatment

Customers who are costing the firm money. They demand more
Lead attention than they are due given their spending and profitability
Tier and are sometimes problem customers—complaining about the
firm to others and tying up firm resources.

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