Creating Customer Value

CREATING CUSTOMER VALUE
1
At the end of this module, the learning
outcomes are:
• Understanding customer value
• How organizations enhance customer value
• Importance of strategic planning
2
Suggested Readings
• Marketing Management
By
Kotler, 16th edition, Chapter 7 and 19
3
When you buy
•The Seller
•Offers you points
•Loyalty card
•Discount on other products
Why Marketers offer this?
4
Think again
•Pepsi
•Costs around Rs 35/ in retail shop
•Costs over Rs 100/ in a Multiplex Movie hall
•Why do you buy?
5
HDFC Offers an Assortment of
Services to Satisfy its Customers
Organizational Charts
.
5-7
Determinants of
Customer Perceived Value(CPV)
Total customer benefit Total customer cost
Product benefit Monetary cost
Services benefit Time cost
Personal benefit Energy cost
Image benefit Psychological cost
5-8
Determinants of
Customer Perceived Value(CPV)
Therefore
•CPV= Total Customer Benefit-Total Customer
Cost
9
Determinants of
Customer Perceived Value
Amazon versus Local Grocer
•Who is gaining market share
•Amazon
•Why
•Is able to increase TCB
•Decrease TCC
10
Determinants of
Customer Perceived Value
Amazon versus Grocer
•Amazon
•Increasing range of products
•FMCG
•Shorten delivery time
•Amazon Prime
•Future use of Drones
11
Steps in a Customer Value Analysis
• Identify major attributes and benefits that
customers value
• Assess the qualitative importance of
different attributes and benefits
• Assess the company’s and competitor’s
performances on the different customer
values against rated importance
• Examine ratings of specific segments
• Monitor customer values over time
12
What is Loyalty?
Loyalty is a deeply held commitment to re-
buy or re-patronize a preferred product or
service in the future despite situational
influences and marketing efforts having the
potential to cause switching behavior.
5-13
Building relationships
Importance of Loyalty
Marketing Guru
•https://www.youtube.com/watch?v=vu6ye7ilD
oY
14
Amway
•Rewards customer for loyalty
•Customers buy products
•Use them
•Recommend to others
•Rewards them for selling
•In China, traditional housewives earned huge
incomes by selling Amway products.
15
Why Customer Loyalty
•Studies have shown that if you lose one existing
customer, you have to get at least five new
customers to make the profit?
16
The Value Proposition
The whole cluster of

benefits the
company promises
to deliver
5-17
Value proposition
•Whole cluster of benefits the company
promises to deliver
18
Value delivery
•Includes all experiences the customer will have
on the way to obtain and using the offering.
19
Delivering Superior Value
Customer Value Management (CVM)
Tata Steel
• through a cross-functional joint team of the
company and the customer
• has succeeded in
• delivering superior customer value
• Maruti
• Hyundai
• Hero
• Bajaj
• Samsung
21
Customer Value Management (CVM)
Tata Steel
• Maruti
• Customer
• How to cut costs of supplying steel to Maruti
• Studied purchase, storage procedures of
Maruti.
• Inventory cost of Maruti came down.
22
• A team lead by a customer account
management scrutinized the important
activities in the customer’s value chain of
operations including how steel is received,
stored, and deployed, and where it gets
rejected.
• It also looked into various problems the
customer faced with Tata Steel, including
technical and commercial issues.
23
• Data generated were translated into ideas for
improvement and the shortlisted ideas were
classified into three categories,
• namely, ideas that could be taken up for immediate
implementation without incurring significant costs;
• operational improvement ideas that would require
more time and minor investments, but would yield
significant value;
• and ideas that would require significant sustained
collaboration and a longer implementation time.
24
CLV Defined
Customer Lifetime Value
•CLV is defined as the present value of all net
payments during the complete life of the
customer with the organization.
•To evaluate CLV, all future revenues and

costs must be assessed. Simply putting, CLV
is the present value of all future purchases by
the customer minus the costs to be incurred
by the company.
Customer Lifetime Value (CLV)
FEDERAL EXPRESS
• A customer of Federal Express
• 20 person Office
• Spends Rs 20000 per month with Federal
Express
• Assume 10-year average lifetime for a
customer.
• Value of one customer to Federal Express is
20000*12*10 = Rs 2400000/.
26
FEDERAL EXPRESS CUSTOMERS
• If this happy creates at least one more customer via
word of mouth.
• Total amount is 2400,000*2=Rs 4800,000/.
• Value of this company’s business for Federal Express
was about Rs 4800,000/
• Federal Express handles 40 customers each day.
• Total business handled = Rs 4800,000*40= Rs 192000000/
• Rs 19 crores.
27
FEDERAL EXPRESS
• If Federal Express retains 40 customers for 10
years period then total business accrued is Rs
19 crores.
• Relationship Marketing attempts this by

retaining profitable customers.
28
Smokers in India
•More than 12 Crore smokers.
•5 Crore Cigarette smokers.
•ITC is the largest player
29
Lifetime value
ITC – Classic Cigarette
• An average consumer spends Rs. 2000/ month
• Yearly Rs. 24000/-
• If he stays customer for 30 years
• Likely revenue
• 24000 x 30 = 7.2 lacs per customer
• Lifetime value of Customer is Rs. 7.2 lacs
30
Lifetime value
ITC – Classic Cigarette
• Classic has 10 lac customers
• Total potential revenue earned is
Rs. 7.2 lacs x 10 lacs = 72000 crores
• If Classic customers stay loyal, ITC will earn a potential sale of
Rs 72000 crores
• Retaining and maintaining loyalty critical.
• Plus profits from references.
31
Importance of lifetime value
• Importance of retaining customers
• Loss of potential sales and profits when
customers defect
• Strategic importance of retaining customers.
• If you retain customers for the entire lifetime,
you have done an excellent job.
32
Customer Loyalty
Harley Davidson
•https://www.youtube.com/watch?v=omxm2vS
7Png
33
Customer Relationship
Management
Developing loyalty programs
Harley Davidson
• Harley Owners Group( H O G)
• One million members
• Free one-year H.O.G membership
34
Management
Harley Davidson
• H.O.G
• Includes magazine called Hog Tales
• Touring handbook
• Emergency road service
• Specially designed insurance program
• Theft reward service
• Discount hotel rates
• Rent Harleys on vacation
• Extensive web chapters on H.O.G
35
The 80 / 20 Rule
• 20% of the Customers give 80% of the Business
• All Customers cannot be treated similarly
• Two Tier system

– 20% Customers get one set of treatment
– 80% Customers get another set of treatment
36
The 80 / 20 Rule
% number % value
•20 80 A
•30 15 B
•50 5 C
37
The Reality
• Studies indicate
– Not every customers wants to build Relationship
with your company
– Some customers purchase decision influenced by
price
– Leave you for a lower price
– No loyalty
38
The Reality
• Studies also indicate
– Customers look for suppliers whom they can trust
– Reliable products
– Employees remember and recognize them
– If cultivated, could stay for lifetime.
39
The Ground Realities
Studies over years provide
• Diverse results
In one study:
• 10% of customers contributing 30 to 50% of
sales
• 60% of customers contributing 90% of sales
40
In another study:
• 20% of Customers account for 180% of profit
in some studies
41
Number Profit
•20 180
•80 -80
•100 100
42
• What does this mean?
– Most customers unprofitable
43
Customer Analysis
Customer Profitability Analysis

• % Customers % Value
Category
• A 20 80
B 30 15
C 50 5
ABC Analysis of customers.
• 20 80 A 20 180
• 80 20 B 80 -80 Loss making
• 100 100 C 100 100
• 180/20 rule
• 80/20
45
The Introspection
• Does it make sense to make relationships with
all customers?
• Does it cost less to serve loyal customers?
• Do loyal customers pay higher prices for the
same bundle of goods?
• Do loyal customers market the company i.e.
Do they generate word of mouth?
46
What is Emerging
• Organizations need not build relationships
with all customers
• Not practical nor profitable to meet all
customer expectations.
• May have to “fire” some customers
• Loyalty is not all about Profitability
• Need to relook at your CRM practices
• It may be a loss making proposition
47
What is Emerging
Airtel
•Customer base came down in some years back.
•However profits have gone up.
•How do you explain?
•Getting rid of low-profit/loss making
customers.
•Focus on more profitable customers
48
What is Emerging
• Some customers are more profitable than
others
• Investments across all groups will not yield
same returns
• Different segments require varying
commitment of organization resources
• Focus on more profitable customers
49
The Value delivery process
Traditional view
• Produce first
• Marketing involved in the second half
• Does not work now
• why
• Consumers have choices
50
Modern view
• Marketing must be involved in the beginning
of the planning
• Companies see themselves as part of the
value delivery process
51
The 150–20 Rule
5-52
Framework for CRM
Identify prospects and customers
Differentiate customers by needs

and value to company
Interact to improve knowledge
Customize for each customer
5-53
CRM Strategies
Reduce
Reduce the
the rate
rate of
of defection
defection
Increase
Increase longevity
longevity
Enhance
Enhance “share
“share of
of wallet”
wallet”
Terminate
Terminate low-profit
low-profit customers
customers
Focus
Focus more
more effort
effort on
on high-profit
high-profit
customers
customers
5-54
Management
Attracting and retaining customers
• Reducing defection
• Retention dynamics
55
Management
Reducing defection
Three steps
• Define and measure its retention rate
• Distinguish the causes of customer attrition
and identify those that can be managed better
• Compare the lost profit equal to the CLV from
a lost customer to the costs to reduce the
defection rate.
56
The Marketing Funnel
The Marketing funnel
• identifies the percentage of the potential target
market at each stage in the decision process,
• from merely aware to highly loyal.
• Consumers must move through each stage
before becoming loyal customers.
• Some marketers extend the funnel to include
loyal customers who are brand advocates or
even partners with the firm.
58
Measuring Satisfaction
• Periodic surveys
• Customer loss rate
• Mystery shoppers
• Monitor competitive performance
• 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.
60
A highly satisfied customer generally
•stays loyal longer, buys more as the company
introduces new and upgraded products,
•talks favorably to others about the company and its
products,
•pays less attention to competing brands and is less
sensitive to price,
•offers product or service ideas to the company, and
costs less to serve than new customers because
transactions can become routine.
61
Customer-Product Profitability
Analysis
Customer-Product Profitability
Analysis
• Customers are arrayed along the columns and products along the rows.
Each cell contains a symbol representing the profitability of selling that
product to that customer. Customer 1 is very profitable; he buys two
profit-making products (P1 and P2).
• Customer 2 yields mixed profitability; he buys one profitable product (P1)
and one unprofitable product (P3).
• Customer 3 is a losing customer because he buys one profitable product
(P1) and two unprofitable products (P3 and P4).
• What can the company do about customers 2 and 3?
• (1) It can raise the price of its less profitable products or eliminate them,
or
• (2) it can try to sell customers 2 and 3 its profit-making products.
Unprofitable customers who defect should not concern the company. In
fact, the company should encourage them to switch to competitors.
63
Customer Reviews and
Recommendations
• The strongest influence on consumer choice
remains “recommended by relative/friend”.
• With increasing mistrust of some companies and
their advertising, online customer ratings and
reviews and recommendations from consumers
are playing an important role.
• Bloggers who review products or services, online
retailers who add their own recommendations have
also become important.
Customer Reviews and
Recommendations
• Frequency programs (FPs) are designed to reward customers
who buy frequently and in substantial amounts.
• They can help build long-term loyalty with high CLV
customers, creating cross-selling opportunities in the process.
Pioneered by the airlines, hotels, and credit card companies,
FPs now exist in many other industries.
• Most supermarket chains offer price club cards that grant
discounts on certain items. The company may supply
customers with special equipment or computer links that help
them manage orders, payroll, and inventory.
• Customers are less inclined to switch to another supplier
when it means high capital costs, high search costs, or the
loss of loyal-customer discounts. 65
Loyalty Programs
IndianOil’s Xtrapower and Bharat Petroleum
Corporation’s SmartFleet
•are smart card–based solutions that provide
prepaid and credit facilities to fleet owners and
companies, enabling cashless purchase of fuel
and lubricants from designated petrol retail
outlets.
66
Loyalty Programs
IndianOil’s Xtrapower and Bharat Petroleum
Corporation’s SmartFleet
•Fleet owners, upon registration with the company, are issued
vehicle-specific cards for vehicles.
•This feature not only provides enhanced security but also
enables the tracking of vehicle’ movement while refueling.
•Xtrapower offers personal accident insurance cover as an added
incentive. In addition, the fleet owner can redeem the reward
points accumulated in the card either for gifts from the
Xtrapower catalog or for fuel and lubricants from IndianOil.
67
Loyalty Programs
Database Key Concepts
• Customer database • Business database
• Database • Data warehouse
marketing • Data mining
• Mailing list
• Marketers must know their customers.
• And in order to know the customer, the
company must collect information and store it
in a database from which to conduct database
marketing.
70
• A customer database is an organized
collection of comprehensive information
about individual customers or prospects that
is current, accessible, and actionable for lead
generation, lead qualification, sale of a
product or service, or maintenance of
customer relationships.
71
• Database marketing is the process of building,
maintaining, and using customer databases
and other databases (products, suppliers,
resellers) to contact, transact, and build
customer relationships.
72
• A customer mailing list is simply a set of
names, addresses, and telephone numbers. a
business database contains
• business customers’ past purchases; past
volumes, prices, and profits;
• buyer team member names (and ages,
birthdays, hobbies, and favorite foods); status
of current contracts;
73
• an estimate of the supplier’s share of the
customer’s business;
• competitive suppliers; assessment of
competitive strengths and weaknesses in
selling and servicing the account;
• and relevant customer buying practices,
patterns, and policies.
74
• These data are collected by the company’s
contact center and organized into a data
warehouse where marketers can capture, query,
and analyze them to draw inferences about an
individual customer’s needs and responses.
• Through data mining, marketing statisticians can
extract from the mass of data useful information
about individuals, trends, and segments.
75
Using the Database
• To identify prospects
• To target offers
• To deepen loyalty
• To reactivate customers
• To avoid mistakes
The Customer
Development Process
Suspects
Prospects Disqualified
First-time Repeat
customers customers Clients Members
Partners
Ex-customers
5-77
Management
Retention dynamics
Clients
• People to whom the company gives very
special and knowledgeable treatment
Members
• Starting a membership program that offers
benefits to customers.
78
Management
Retention dynamics
Advocates
• Recommend company to others
Partners
• Jointly work together
79
Management
Retention dynamics
• Acquiring new customers can cost five times more than
satisfying and retaining customers
• The average company loses 10% of its customers each
year.
• A 5% increase in the defection rate can increase profits
from 25% to 85% depending on the industry.
• The customer profit rate over life of the retained
customer due to increased purchases, referrals and
price premiums and reduced operating costs to services.
80
Management
Building Loyalty
• Interacting with customers
• Developing loyalty programs
• Personalized marketing
• Create institutional ties
81
Management
Interacting with customers
John Deere
• 98% retention rate of customers
82
Management
Personalized marketing
• Use of technology
Dell Computers
• personalization
83
Management
Create institutional ties
• Can help customers to outsource
• Customers avoid high search costs
• Dell computers
84
Management
Customer Database and Database Marketing
Customer Database
• Customer mailing list just consists of names,
addresses and telephone numbers.
• A database contains more information
accumulated through customer transactions,
registration and customer contact.
85
Management
Data Warehouse
• Where marketer can capture, query and
analyze it to draw inferences about an
individual customer’s needs and responses.
Data mining
• Use of statistical techniques marketing
statisticians can extract useful information
about individuals, trends and segments.
86
Value creation
Three phases
• Choosing the value
• Providing the value
• Communicating the value
87
Choosing the value
• Use of STP concepts
– Segmentation
– Target Market
– Positioning
88
Providing the value
• Identify
– Product
– Prices
– Distribution
89
Communicating the value
• Use promotional methods
– Advertising
– Direct marketing
– Sales force
90
Nike Creates Value
91
Value creation
Three phases
• Choosing the value
• Providing the value
• Communicating the value
92
Three key issues
• Value exploration
• Value creation
• Value delivery
93
Value exploration
Understanding the relationship between three
spaces
• Customer cognitive space
• Company’s competence space
• Collaborator’s resource space
94
Value creation
• Identifying new customer benefits
• Consumer insights are critical
95
EASYJET
• Low-cost carrier
• European carrier
• Quite successful
• ‘fly to Scotland for a pair of jeans.’
• Competitor to full-price carriers like British
Airways, Lufthansa
• How 3Vs were used?
96
Value delivery
• Delivering value
• Substantial investments in infrastructure and
capabilities
• Proficiency in
– Customer relationship management
– Internal resource management
– Business partnership management
97
Value exploration-who to serve

• Traditional carriers targeted everyone
• Mainly business travelers
• Travel mostly on company expenses
EasyJet
• Target those customers who pay from their own
pocket,
• Predominantly entrepreneurs, small business owners
98
EasyJet
• Target those customers who pay from their own
pocket
• Predominantly entrepreneurs, small business owners
• Large segment in Europe
• Were unhappy with offerings of full-price
carriers
Two strategic segments identified
99
Valued-customer-what to offer?
• Major differences between two segments
Business segment
– Demanding
– Freebies such as newspaper, meals
– Want seamless connections
– Less waiting
100
Valued-customer-what to offer?
Small business travel
• Willing to forgo these services
• Lower prices
• EasyJet’s value proposition answers four
issues
101
Which attributes should be reduced to below industry

standards?
• Have the offering been overdesigned?
• What can be reduced
• Flexibility in flight changes and seat selection
• Non-refundable fares
• Seat on first-come, first-served basis
• Incentive for passengers to board earlier
102
Which attributes should be increased to above

industry standards?
• Lower prices
• Punctuality
• Younger fleet of aircraft
103
Value curve
• Compare the value proposition of various
players in the industry
• Full-price carriers are superior on every
dimension
• Which attributes are most important to air
travelers?
• Reach safely
• Low prices a concern
104
Why
• Low price means low quality
• Young fleet is the answer
• Punctuality concern
• Refund for delay beyond four hours
• Along with low prices it asks its to compare with full
price carriers
• Offer superior proposition on the absolute necessary
dimension
105
Value delivery-how to deliver?

• How to deliver valued proposition
• Easy Jet delivers lower price at a profit
• 20 to 25% lower
• Not using travel agents
• Encouraging bookings on internet
• not participating in large scale CRS
• No paper tickets
106
Value delivery-how to deliver?

• Streamlined operations
• Fast turnaround
• Greater utilization
• single type of aircraft (Boeing 737)
• Reduces spare parts inventory
• Increases bargaining power with vendors
• Lower pilot training costs
• Elimination of business class means more seats can
be accommodated
107
FIVE PRINCIPLES OF EASYJET VALUE DELIVERY
1. Avoid fixed costs wherever possible
No secretarial staff
2. Cover fixed costs quickly
Aircrafts remain in air for 11 hours
3. Eliminate variable costs wherever possible
Avoid use of travel agents
4. Keep variable costs low
Avoid landing at major ports
5. Convert fixed costs into revenue generators
Sell food items in aircraft
108
Role of Strategic Planning
Successful marketing requires to have
capabilities such as
• Understanding customer value
• Creating customer value
• Delivering customer value
• Capturing customer value
• Sustaining customer value
109

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CREATING CUSTOMER VALUE

Total customer benefit Total customer cost

Product benefit Monetary cost

Services benefit Time cost

Personal benefit Energy cost

Image benefit Psychological cost

The whole cluster of

•To evaluate CLV, all future revenues and

• Relationship Marketing attempts this by

• All Customers cannot be treated similarly

• Two Tier system

Customer Profitability Analysis

Identify prospects and customers

Differentiate customers by needs

Interact to improve knowledge

Customize for each customer

Value exploration-who to serve

Which attributes should be reduced to below industry

Which attributes should be increased to above

Value delivery-how to deliver?

Value delivery-how to deliver?

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