DELIVERING

CUSTOMER VALUE

Chapter 3

Satisfaction and Loyalty

Learning Outcomes
At the end of the lesson, you should be able to:
•Understand the concepts of customer satisfaction
•Understand how to manage customer satisfaction
•Explain the importance of understanding customers loyalty
•Explain the strategies to enhance customer loyalty
Customer Satisfaction is the
Prerequisites for Loyalty
Customer Satisfaction
• Loyalty behavior is the RESULT or OUTCOME of very
high satisfaction.
• What has to be worked on and improved is
SATISFACTION.
• As customers become more satisfied, they start to take
on some loyalty attitudes.
• In managing a loyalty program, it makes most sense to
consider loyalty attitudes to be part of customer
satisfaction.
 Customer Satisfaction
• Customer satisfaction - depends on the product's actual
performance relative to a buyer's expectations.
• Customer satisfaction is the positive feelings customers have
about a business when that business meets the needs and
wants of that customer
• Expectation-disconfirmation model –
• Negative disconfirmation - expectations are underperformed
(dissatisfied).
• Simple disconfirmation - expectation has been met, they are
satisfied.
• Positive disconfirmation - when exceed expectation, customer
might be surprised or delighted.
Customer Expectations
• How do buyers form their expectations?
• From 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.
• However, if the company sets expectations too low, it will
not attract enough buyers (although it will satisfy those who
do buy).
• Some of today’s most successful companies are raising
expectations and delivering performances to match.

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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 - Customers tend to be
value-maximizers within the bounds of search costs and
limited knowledge, mobility, and income.
• Customer-perceived value (CPV) is the difference between
the customer’s evaluation of all the benefits and all the
costs of an offering and the perceived alternatives.

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 Customer Perceived Value
• Total customer benefit - perceived
bundle of economic, functional, &
psychological benefits customers
expect from a given market offering
because of the product, service,
people, and image.
• Total customer cost - 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.

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Customer Delivered Value
• Total customer value is the bundle of benefits customer expect
from a given product or service.
• Product value: generated by the basic attributes i.e., product
quality, packaging, design, functions, price along with advantages
and benefits.
• Service value: generated by support services offered along with
the product, before, during & after sales.
• Personnel value: generated by efficient salespersons who use
profession selling skills to serve & satisfy customers.
• Image value: generated by ownership and use of reputed brand
though brand equity - buying & using specific brand provides the
customer with an enhanced personal value.
Customer Delivered Value
• Total customer cost is the bundle of costs customer expects to incur
in evaluating, obtaining, suing, and deposing of the product or
service.
• Money cost: price of the product that customer buys and achieves
desired utility.
• Time cost: time spent for searching, evaluating, buying & other
decision processes related to product. High involvement product has
high time cost than low involvement product.
• Energy cost: degree of physical effort used by the customer for
searching, evaluating, buying desired product and also taking them
to their house.
• Psychic cost: cost related to frustration and dissatisfaction of the
customer with the product and service. It can occur during various
stages of the buying process.
Total Customer Satisfaction
•The Customer Satisfaction Model from Noriaki Kano - Kano
Model - a business framework of customer satisfaction that
classifies customer preferences into three categories.
•It helps to analyze the customer experience of a product (or
service), ultimately allows the company to develop a product or
service that will delight your customers
•The Kano model assumes three different attribute types – basic,
performance, and delight – that collectively constitute the
customer experience of a product.
KANO Model
• Three attributes are mapped in a coordinate system with
“Customer Satisfaction” up the y-axis and “Degree of
Achievement” (Product function) along the x-axis.
• (1) Threshold (Basic) attributes - basic features that
customers expect a product or service to have. Often taken
for granted so customers rarely consciously look for them.
• Examples of basic attributes are:
• When you book into a hotel, you'd expect hot water and a
bed with clean linen as an absolute minimum.
KANO Model
• (2) Performance (satisfier) attributes - not absolutely
necessary, but they increase a customer's enjoyment of the
product or service.
• Companies tend to compete on these attributes,
differentiating their product by spending more (or less)
than their competitors on certain performance attributes.
• Examples of performance attributes are:
• You'd be pleased to discover that your hotel room had free
superfast broadband and an HD TV, when you'd normally
expect to find paid-for wi-fi and a standard TV.
KANO Model
• (3) Excitement (Delighter) attributes - represent the
unexpected – the surprise elements that can boost your
product's competitive edge.
• Company delight the customer by over-delivering or
doing something out of the ordinary.
• Examples of delight attributes:
• In your hotel room, that might be finding the
complimentary Belgian chocolates that the evening turn-
down service has left on the bed.
KANO Model
• When dealing with delight attributes there’s not a
linear relationship between customer satisfaction and
the degree of achievement.
• When a delight attribute isn’t there the customer
experience isn’t affected negatively because – delight
attributes are never expected by the customer.
• However, when a customer is faced with a delight
attribute it completely takes them by surprise, often
resulting in over-excitement with the product/service,
making it an effective engine for word-of-mouth.
KANO Model
• In conclusion - The Kano model addresses the three
types of requirements:
• Satisfying basic needs: Allows a company to get
into the market.
• Satisfying performance needs: Allows a company
to remain in the market.
• Satisfying excitement needs: Allows a company to
excel, to be world class.
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.
• Wise firms measure customer satisfaction regularly, because
it is one key to customer retention.
• The link between customer satisfaction and customer
loyalty is not proportional.
• The company needs to recognize that customers vary in how
they define good performance.

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19
Monitoring Satisfaction
• Periodic surveys can track customer satisfaction directly.
• Companies can monitor their customer loss rate and
contact those who have stopped buying or who have
switched to another supplier to find out why.
• Companies can hire mystery shoppers to pose as potential
buyers and report on strong and weak points experienced in
buying the company’s and competitors’ products.
• Companies need to monitor their competitors’
performance too.

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20
Creating Loyal Customers
Quote by Peppers and Rogers:
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.

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21
Creating Loyal Customers
Satisfaction-Profit Chain
Creating Loyal Customers
Customer Loyalty
•CL – Behavioral loyalty & attitudinal loyalty.
•(1) Behavioral loyalty
•Refer to customer purchase behavior. Loyalty is continue
patronage & buying. The share of customer spending is the most
important.
•(2) Attitudinal loyalty
•Refer to components of attitude such as beliefs, feeling &
purchasing intention. Customers who have a stronger preference
for, involvement in or commitment to a supplier are the more
loyal in attitudinal terms.
 Creating Loyal Customers

Example:
A person who shops at the same place regularly is
“behaviorally” loyal, while a person who tells others how
great a product is, or simply feels really positive about the
brand him or herself internally, is “attitudinally” loyal. 
Dimensions of Customer Loyalty
Two-Dimensional Model of Customer Loyalty – combined
both attitudinal strength & repeat purchase behaviour
 Dimensions of Customer Loyalty
No Loyalty
This category refers to clients who exhibit no or low levels of commitment
and a low number of re-purchases. Customers of this category are very hard to
switch to “truly loyal” customers and a business’s revenue potential from this
category is relatively limited.

Spurious Loyalty
Also called “inertia” loyalty - customers with high levels of repeat patronage
despite their low level of commitment to the firm. For example, a woman
might continue to go to a specific hair salon although not particularly reasons.
Such customers are likely to switch & indifference.
 Dimensions of Customer Loyalty
Latent Loyalty
When strong relative attitude is not accompanied by repeat buying.
Evidence some weaknesses in the company’s strategy i.e., weak
distribution where product not available when & where customers want.

True Loyalty
Combining high levels of both repeat purchase and commitment. Loyal
customers will overcome obstacles & suffer sacrifices to purchase its
products or services. As suggested in marketing theory, when it comes
to truly loyal customers, small changes in a product’s price may only
affect the quantity of their purchases but not their actual choice of
brand.
 ZĞƉĞĂƚ WĂƚƌŽŶĂŐĞ
, /' , >K t

Loyalty Latent Loyalty

 high repeat patronage  strong preference for/
 less motivated for attitude towards a
alternatives brand
, /' ,  more resistant to other  do not purchase
brands repeatedly
ZĞůĂƚŝǀ ĞƚƚŝƚƵĚĞ

 more likely to pass on  due to situational or

positive word-of-mouth environmental
constraints
Spurious Loyalty No Loyalty
 frequently purchases a  see few differences
brand between brands
>K t  sees no differentiation  low repeat purchase
between brands
 Repeat purchase as a
habit
Satisfaction & Loyalty
Customer Satisfaction & Loyalty
•Satisfaction is positively associated with behavioral loyalty, in
turn positively associated with profitability,
•However, the satisfaction level has to pass a certain threshold if
it is to have impact on customer loyalty.
•To be LOYAL, customers not only satisfied, BUT DELIGHTED with
the product & services.
•Apostle model developed at Harvard Business School that
provides a differentiated view of customer loyalty against
satisfaction levels - customers can be placed in any of the four
categories.
 Satisfaction & Loyalty

Apostle Model -
Satisfaction & Loyalty
With respect to customer satisfaction there might be several
types of customers:

•(1) Apostles — completely satisfied customers who keep

purchasing - "staying and supportive”. Experiences exceed their
expectations and who provide very positive word of mouth
about the company to others.
•(2) Mercenaries—very satisfied customers but who have no
real loyalty to the company and may defect. Satisfaction does
not guarantee future use.
•Ex: I'm satisfied with the car I drive, but I would like to try
different brand of car
 Satisfaction & Loyalty
•Defectors/Terrorist— Low to medium loyalty; low to
medium satisfaction: Leaving or having left with unhappy’.
These group creates a bad damage to the businesses(blogs).
Ex: those customer’s complaints that never solved, will
spread negative word-of-mouth

•Hostages—unhappy customers who stay with the company

because of no choice (or other reasons). Some contracts lock
customers for a year or for a specific period of time.
Satisfaction & Loyalty
The Wheel of Loyalty
• Wheel of loyalty is a relationship marking model that is used
in order to increase number of loyal customers and keep
them.
• It is cheaper and more profitable to maintain an exciting
customer rather than invest time and money for gaining a
new one - building the loyalty is one of important task
• The model requires most of the workforce effort. It can be
enabled through membership programs and CRM (customer
relationship management) systems.
• The Wheel of loyalty is a spinning model where one tasks
moves to other and create a circle. It is identified as three
main strategies:
The Wheel of Loyalty
(1) Build a foundation for Loyalty-
•To identifies the market that the business is targeting. To be
selective in choosing of the client group that is more likely to
become loyal customers.
•Use the efficient division on tiers of customers: platinum, gold,
iron and lead. Platinum are the customers with the best
relationship with the market gold middle, iron is the biggest
quantity of customer base & lead customers that give lowest
revenue and require the same level of service.
•Deliver service at the highest quality. It is identified that the
quality of the loyal customers is more imported than quantity.
The Wheel of Loyalty
(2) Create Loyalty Bonds
•To create the options and activities to built & deepen the
relationship between business and the customers.
•That strategy includes the giving the loyalty rewards to
clients, such as nonfinancial and financial.
(3) Reduce Churn Drivers
•The firm needs to identify and reduce the factors that result
in “churn” - the loss of existing customers and the need to
replace them with new ones.
•To make the problem solving of behavior churn
Developing Loyalty Bond
(1) Building Foundation for Loyalty
•Having the right portfolio of customer segments, attracting the
right customers, tiering the service, and delivering high levels
of satisfaction are a solid foundation for creating customer
loyalty.
•Rust, Zeithaml, & Lemon (2000) developed “customer
pyramid” - divide and label their customers into four tiers:
Platinum, Gold, Iron and Lead (Illustration 1).
•A tool that enables the firm to utilize differences in customer
profitability to manage for increased customer profitability
Effective Tiering of Service
The Customer Pyramid
Customer Pyramid
1. Platinum tier. The most profitable customers
•These people are very loyal; frequency of their purchase is high,
as well as the quantity of bought products.
•They are not sensitive to the price and are willing to try the
company’s new products.
2. Gold tier. A step lower on profitability vs Platinum.
•These customers purchase regularly, but they are much more
sensible to the price and are inclined to purchase goods with
fewer margins - more likely to wait for the company to reduce
prices.
•These consumers are loyal but like to purchase these products
from different suppliers.
Customer Pyramid
3. Iron tier. Not so loyal customers
•Do not spend much and they are not very profitable for the
company.
•Observed statistically, most consumers belong to this tier, &
profit from the company’s standpoint is that they cover
significant part of the company’s fixed costs.
4. Lead tier. Customers may cause losses
•Their CLV is negative. These customers are often problematic
because they do not only cause losses, but they spread bad
rumors about the company.
•Very often, it is worthier to eliminate such consumers than try
to satisfy their needs.
Customer Pyramid
Implications
•To divide customers according to the tiers, it is necessary to
have exact info on incomes and costs for every customer
individually.
•Incomes are measures by filing every transaction with the
customer, filing the goods they purchase, how much and where
- to calculate the exact income being realized.
•Cost calculation can represent the challenge, before all, for the
allocation of fixed costs.
Customer Pyramid
Implications
•There are three kinds of costs, which can be connected to
every customer:
•1. Product costs in production;
•2. Service costs (marketing, sales, administration, etc that
connect with the products);
•3. Fixed costs connected with customers (storing, logistics,
service teams, etc.)
•Rank the customers contributed higher incomes (CLV) against
the costs – into different tiers in customer pyramid
Developing Loyalty Bond
(2) Building Bonds
•However, firms can do more to “bond” closely with their
customers.
•Specific strategies include:
• deepening the relationship thro cross-selling & bundling.
• creating loyalty rewards
•When customers are loyal - it is the loyalty program that will
attract them to spend money.
Developing Loyalty Bond
Deepening the Relationship
•Firms can deepen the relationship through bundling and/or
cross-selling services.
•For example, banks like to sell as many financial products to
an account or household as possible.
•Once a family has its current account, credit card, savings
account, safe deposit box, car loan, mortgage, etc. with the
same bank, the relationship is so deep that switching becomes
a major hassle.
•Therefore, customers are not likely to switch unless they are
very dissatisfied with the bank.
Developing Loyalty Bond
• Some other example for Bundling:
• In the fast-food industry, McD, KFC, "value meals" are
heavily sold at special discounts (Bundling). 
• Maxis, Digi, Celcom - Malaysia’s Telcom companies offering
for contract usually bundles their devices with a Value Plan
with line+devices.

• Example: Computer package complete with a monitor,

mouse, keyboard, and preloaded software for a single price.
Alternatively, one could select and buy each component of
the system separately.
Developing Loyalty Bond
Loyalty Rewards – Financial & nonfinancial
•Well designed loyalty programs increases the share of wallet.
•Financial rewards are customer incentives that have a
financial value - discounts on purchases; loyalty program
rewards such as frequent flier miles.
•Recent research suggest that financial rewards strengthen
the customers’ perception of the value proposition and lead to
increased revenues due to fewer defections and higher usage
levels.
Developing Loyalty Bond
• Nonfinancial rewards (also called “soft benefits”) provide
benefits that cannot be translated directly into monetary
terms.
• Important intangible rewards include special recognition
and appreciation.
• Some airlines provide benefits such as priority upgrading,
access to airport lounges to its frequent flyers, even when
they are only flying in economy class.
• In hotels - getting priority for reservations, early check-in,
late check-out, & appreciation makes customer 'stay more
pleasant and makes them want to come back.
Developing Loyalty Bond
(3) Reduce customer defect (churn) – increase retention
•Conduct customer survey frequently
•Encourage customer complaints
•Solve customer problem immediately
•Focus on customer retention - Customer retention drives
profitability—and that translates to sustainable growth for
business
•Increasing customer retention by just 5% leads to a 25% to 95%
increase in profit.
Define CRM
• CRM is a complex process which is based on a good
knowledge of habits and needs of customers so that company
can match offers to customers’ needs.

• CRM – core business strategy that integrates internal (value

delivery) processes & external networks (supply chain) – to
create & deliver value to targeted customers at a profit.
• CRM – grounded on high quality customer-data & enabled by
info technology – access to customer-related data allows
selling, marketing & service functions to be aware of each
other’s interaction with customers.
Application of CRM
• Constant collection of info of customer’s behavior - company
can match offers to customers’ needs.
• Some primary reasons why companies adjust their business
processes to customers' needs:
• Retention of existing customers
• Attracting new customers
• Encourage customers to deepen cooperation with the
company
• Informing customers about portfolio of products, services
and communication channels, with aim of increasing
profits or prevent losses.
Application of CRM
• CRM builds sustainable long-term customer
relationships that create value for the company as well
as for the customer.
• That is, CRM helps companies acquire new customers,
retain existing profitable customers, and grow the
relationships with existing customers.
• The customers are the core of a successful enterprise,
and the success of the enterprise depends on
effectively managing relationships with them, which
CRM allows them to perform.
Strategic Capabilities in CRM
Implementation
• Realization of CRM required the following 4 main strategic
capabilities (supports)

1) Technology
• the technology that support CRM such as integration of
customer’s various touch points with the company.
• Technology also help to create customizaton by knowing
what to offer and how to appeal to individual customer.
Strategic Capabilities in CRM
Implementation
2) People
• the skills, abilities, and attitudes of the people who
manage CRM.
• Empowerment enables employees to take more control
of their responsibility in serving customers.
• Training and development provides sufficient
knowledge and expertise for employees to perform
their jobs.
Strategic Capabilities in CRM
Implementation
3) Process
• the processes company uses to access and interact with
their customers in the pursuit of new value and mutual
satisfaction.
• Service delivery process
4) Knowledge & insight
• Customer database management
• the approach used by the company to add value to
customer data so that they acquire the knowledge and
insight needed to deepen he relationships that matter.
Thank you