Capturing Customer Value
The first four steps in the marketing process involve building customer relationships by creating and delivering superior customer value. The final step involves capturing value in return in the form of current and future sales, market share, and profits. By creating superior customer value, the firm creates highly satisfied customers who stay loyal and buy more. This, in turn, means greater long-run returns for the firm. Here, we discuss the outcomes of creating customer value: customer loyalty and retention, the share of market and share of customer, and customer equity.
Creating Customer Loyalty and Retention
Good customer relationship management creates customer delight. In turn, delighted customers remain loyal and talk favorably to others about the company and its products. Studies show big differences in the loyalty of customers who are less satisfied, somewhat satisfied, and completely satisfied. Even a slight drop from complete satisfaction can create an enormous drop in loyalty. Thus, the aim of customer relationship management is to create not only customer satisfaction but also customer delight.
The recent economic recession put strong pressure on customer loyalty. It created a new consumer frugality that will last well into the future. One recent study found that, even in an improved economy, 55 percent of consumers say they would rather get the best price than the best brand. Nearly two-thirds say they will now shop at a different store with lower prices even if it’s less convenient. It’s five times cheaper to keep an old customer than acquire a new one. Thus, companies today must shape their value propositions even more carefully and treat their profitable customers well.
Losing a customer means losing more than a single sale. It means losing the entire stream of purchases that the customer would make over a lifetime of patronage. For example, here is a dramatic illustration of customer lifetime value:
Customer lifetime value
The value of the entire stream of purchases that the customer would make over a lifetime of patronage.
Growing Share of Customer
Beyond simply retaining good customers to capture customer lifetime value, good customer relationship management can help marketers increase their share of the customer the share they get of the customer ’s purchasing in their product categories. Thus, banks want to increase “share of wallet.” Supermarkets and restaurants want to get more “share of stomach.” Car companies want to increase the “share of the garage,” and airlines want greater “share of travel.”
To increase the share of customers, firms can offer a greater variety to current customers. Or they can create programs to cross-sell and up-sell to market more products and services to existing customers. For example, Amazon.com is highly skilled at leveraging relationships with its 88 million customers to increase its share of each customer ’s purchases. Originally an online bookseller, Amazon.com now offers customers music, videos, gifts, toys, consumer electronics, office products, home improvement items, lawn and garden products, apparel and accessories, jewelry, tools, and even groceries. In addition, based on each customer ’s purchase history, previous product searches, and other data, the company recommends related products that might be of interest. This recommendation system influences up to 30 percent of all sales. In these ways, Amazon.com captures a greater share of each customer ’s spending budget.
Share of customer
The portion of the customer’s purchasing that a company gets in its product categories.
Building Customer Equity
We can now see the importance of not only acquiring customers but also keeping and growing them. One marketing consultant puts it this way: “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. Without customers, you don’t have a business. Customer relationship management takes a long-term view. Companies want not only to create profitable customers but also “own” them for life, earn a greater share of their purchases, and capture their customer lifetime value.
What Is Customer Equity?
The ultimate aim of customer relationship management is to produce high customer equity. Customer equity is the total combined customer lifetime values of all of the company’s current and potential customers. As such, it’s a measure of the future value of the company’s customer base. Clearly, the more loyal the firm’s profitable customers, the higher its customer equity. Customer equity may be a better measure of a firm’s performance than current sales or market share. Whereas sales and market share reflect the past, customer equity suggests the future. Consider Cadillac:
The total combined customer lifetime values of all of the company’s customers.
Building the Right Relationships with the Right Customers
Companies should manage customer equity carefully. They should view customers as assets that must be managed and maximized. But not all customers, not even all loyal customers, are good investments. Surprisingly, some loyal customers can be unprofitable, and some disloyal customers can be profitable. Which customers should the company acquire and retain?
The company can classify customers according to their potential profitability and manage its relationships with them accordingly. One classification scheme defines four relationship groups based on potential profitability and projected loyalty: strangers, butterflies, true friends, and barnacles. Each group requires a different relationship management strategy. For example, “strangers” show low potential profitability and little projected loyalty. There is a little fit between the company’s offerings and its needs. The relationship management strategy for these customers is simple: Don’t invest anything in them.
“Butterflies” are potentially profitable but not loyal. There is a good fit between the company’s offerings and their needs. However, like real butterflies, we can enjoy them for only a short while and then they’re gone. An example is stock market investors who trade shares often and in large amounts but who enjoy hunting out the best deals without building a regular relationship with any single brokerage company. Efforts to convert butterflies into loyal customers are rarely successful. Instead, the company should enjoy the butterflies for the moment. It should create satisfying and profitable transactions with them, capturing as much of their business as possible in the short time during which they buy from the company. Then it should cease investing in them until the next time around.
“True friends” are both profitable and loyal. There is a strong fit between their needs and the company’s offerings. The firm wants to make continuous relationship investments to delight these customers and nurture, retain, and grow them. It wants to turn true friends into “true believers,” those who come back regularly and tell others about their good experiences with the company.
“Barnacles” are highly loyal but not very profitable. There is a limited fit between their needs and the company’s offerings. An example is smaller bank customers who bank regularly but do not generate enough returns to cover the costs of maintaining their accounts. Like barnacles on the hull of a ship, they create drag. Barnacles are perhaps the most problematic customers. The company might be able to improve its profitability by selling them more, raising their fees, or reducing service to them. However, if they cannot be made profitable, they should be “fired.”
The point here is an important one: Different types of customers require different relationship management strategies. The goal is to build the right relationships with the right customers.
This post contains the content of the book Principles of Marketing