5.4 Developing and Managing Customer Relationships in:

Svend Hollensen, Marc Oliver Opresnik

Marketing, page 420 - 445

A Relationship Perspective

1. Edition 2010, ISBN print: 978-3-8006-3722-5, ISBN online: 978-3-8006-4870-2,

Bibliographic information
5.4 Developing and Managing Customer Relationships 407 5.4 Developing and Managing Customer Relationships Generally speaking, marketing is all about creating value for customers. Although many companies emphasise they are committed to creation value for their customers, few organisations in fact understand their customers well enough. Customer relationships may be regarded as long-term customer commitment or loyalty, which results from the fact that customers are satisfied not only by the company’s products and services, but also by how they are treated by the company and its employees and are made to feel as a result of their contact and association with the company. Enduring customer relationships represent a company’s most valuable assets, which will pay dividends well into the future. By knowing how much equity really resides in customer relationships, a company can have an excellent understanding of how these relationships will pay returns to shareholders in the future through their contribution to a stream of revenue on which the company can rely. The measurement of concepts such as service quality, customer satisfaction, and customer relationship equity has to be tied straight to strategy. Many companies have established a corporate strategy of ‘relationship marketing’ on the premise that they will achieve success through the creation and enhancement of customer relationships. This chapter is structured as illustrated in Figure 5.17. Figure 5.17 shows the forces (section 5.4.1, 5.4.2 and 5.4.3) determining the subsequent strategies CRM (section 5.4.4)• One-to-one marketing (section 5.4.5) and• Global Account Man. (GAM) (section 5.4.6)• It is imperative to emphasise that all three management concepts are part of the same relationship marketing paradigm. Section 5.4.7 displays how to create long-term customer value and how to measure Customer Lifetime Value (CLV). Finally, section 5.4.8 concludes rethinking marketing and re-stating the importance of a relationship perspective to marketing in the 21st century. 5.4.1 Loyalty Consumers and businesses define loyalty in many different ways. Often longevity of customer patronage and repeat buying are used by businesses as proxies for loyalty. Simply put, loyalty can be described as the percentage of total spending in the product or service category. There are, evidently, certain degrees of loyalty. Some customers are more loyal than others, and customers are extremely loyal to some companies and less loyal to others. Some customers may be loyal to more than one company or brand within a product or service category. What are the main components of loyalty? Time, continuity, and duration of the connection are indicators of loyalty, but, these alone cannot lead a company to conclude that a customer is loyal. A consumer may support a business for many years without really Kapitel_5.indd 407 03.08.2010 12:56:33 Uhr 5. Implementation and Controlling in the Marketing Planning Process408 being loyal. Some bank customers, for instance, may deal with a bank for many years; however, an in-depth analysis of their financial services buying behaviour may show that they have recently purchased products from other financial institutions. Many customers possibly will be reluctant consumers, feeling themselves locked into a relationship that they would actually like to change. Unauthentic loyalty illustrates a situation where customers appear to be loyal because they continue to do business with the company, but these patterns of buying behaviour cover the reality. That reality is often defined by negative attitudes and feelings of disappointment because customers, despite the fact that they continue to buy, wish they could move their business elsewhere. Certainly, such customers are not loyal. 5.4.1 Customer loyalty 5.4.4 Customer relationship management 5.4.5 One-to-one marketing 5.4.3 Customer perception of value 5.4.6 Global Account Management 5.4.7 Creating longterm customer value 5.4.2 Satisfaction of customers and employees 5.4.8 Rethinking marketing Figure 5.17: Structure of Chapter 5.4 Kapitel_5.indd 408 03.08.2010 12:56:33 Uhr 5.4 Developing and Managing Customer Relationships 409 In this context, an important aspect of loyalty is share of wallet. When a marketer assesses a customer’s loyalty, it is imperative that the share of the customer’s overall business for the company’s products and services is considered. Customers spread business around, evaluating a set of alternatives, when engaged in buying processes with hotels, airlines, and retailers. This gives rise to the situational loyalty, a sense of loyalty within limits. For example, a customer may be loyal to a certain restaurant in one market or for one occasion and another restaurant at a different time or place. The ‘share of wallet’ measure of customer loyalty is valid only in situations where spreading business around is feasible. Obviously, if a consumer gives all electricity business to the local power company, it is not applicable to talk about spreading business. Where a competitive marketplace operates, and products and services are bought regularly and frequently, the customer’s share of wallet represents a practical indicator of loyalty. In other cases, where the range of products and services is much less homogeneous or comparable, the calculation of share of wallet as an indicator of loyalty is much less constructive. This is the case in retail clothing and situations where products and services are bough very infrequently. Many companies are not in a position to make even rough estimates of the share of a customer’s wallet. They do not know what total amount the customer spends with their firm and have no method of knowing what he or she is spending elsewhere (Hollensen, 2006). Another measure of loyalty is the willingness of the customer to recommend the company to friends, family members, and associates. Customers who are satisfied to the point of being prepared to refer others to the company are explicitly demonstrating their loyalty. Naturally, satisfied customers will be more inclined to tell others about their experiences and to recommend the business. Loyal customers want to see the business thrive to the point where they feel a sense of ownership toward the company. They feel secure making a recommendation because they know that a friend or family member will not be disappointed. Indisputable customer loyalty cannot exist in the absence of an emotional connection. It is this substantiation of emotion that transforms repeat buying behaviour into a relationship. Until the customer feels some sense of connection or closeness to a service provider or other organisation, then the association between the customer and the company is not taking on the characteristics of a relationship. Although customers may practically not describe their connection to the company as relationship, they will admit to feeling a certain closeness or attachment to a company, that they have a certain comfort and trust level in dealing with them. Customers express their loyalty to a firm or a brand by making repeat purchases, buying additional products from the company, and recommending the firm to others. Longevity cannot be misapprehended as loyalty. There are many companies that customers have dealt with for many years, not because of an emotional connection or sense of loyalty, but because of convenience, price, or inertia. By definition, these customers are not legitimately loyal. Their business is, in fact, defenceless because their continued patronage is predicated not on any emotional connection that would bond the customer with the company in a meaningful sense, but on negative incentives or barriers to exiting, or on the absence of a viable or attractive alternative (Hollensen, 2006). The key to building lasting customer relationships is to create superior customer value and satisfaction. We shall discuss these relationship building blocks in the subsequent sections. Kapitel_5.indd 409 03.08.2010 12:56:34 Uhr 5. Implementation and Controlling in the Marketing Planning Process410 5.4.2 Satisfaction of Customers and Employees The length of time a customer has been doing business with a firm is solely one indicator of loyalty. Loyalty is strongly related to the concept of a relationship. Those individuals to whom a customer feels the closest connection are also those to whom he or she is the most loyal. Unadulterated loyalty stems not from some false bond that makes it difficult for one of the parties to the relationship to leave. The foundation of loyalty is in continued customer satisfaction; it is an emotional, attitudinal connection, not merely a behavioural one. To increase loyalty, an organisation must increase each customer’s level of satisfaction and sustain that level of satisfaction over time. To raise satisfaction, the company needs to add value to what it offers to the customer. Adding value leaves customers feeling that they got more than they paid for or even expected. It does not necessarily connote lowering prices or providing more tangible product for the money. Customers enter into purchase situations with definite expectations. Whether buying a car, a stereo, or a vacation, attending the symphony, or donating to a charity, customers have ideas about how they want to feel when they complete the interaction and while they are using or experiencing the product or service. They have expectations for the purchase situation and for the performance and consumption of the product or service. To be satisfied, the purchaser must have both sets of expectations met. Achieving the highest possible level of customer satisfaction is the ultimate goal of marketing. When customers are completely and lastingly satisfied with how they have been handled during the purchase and how the product or service has performed, they are much more likely to return to make additional purchases and to recommend the company’s products to their friends and family members. Furthermore, they are also less likely to defect to the competition. Sustained customer satisfaction over time leads to customer relationships that increase the long-term profitability of the company. Marketing is not about single transactions and making the sale but about satisfying the customer repeatedly. When customers are satisfied, additional sales will almost automatically follow. The concept of service as a component of the offer to the customer may be viewed from a number of diverse perspectives. The essence of what is offered may itself be a service, in that it is an intangible. Air travel is a service, as are hotel accommodation and a haircut. The elements of the offer include repairs, delivery, installation, and warranty, and represent aspects of service that are quite inseparable from the core product or service. However, these are not the aspects of service that a customer refers to when stating that he or she is no longer going to deal with a company because its ‘service’ is inappropriate. The customer here is usually referring to the level of service that he or she experiences dealing with the company and its personnel, either face to face or on the telephone. This deals with how the customer is handled and treated, how he or she interacts with staff, and what the experience with service provision has been. The customer is talking about the speed of service, the receptiveness and attentiveness of employees, and the convenience experienced. In this representation, customer satisfaction is seen to be a function of the value created for the customer through the quality of service provided by a firm and its employees. That satisfaction is seen as a key contributor to customer retention and, by expansion, profitability. Content employees are more likely to provide superior levels of service; they stay longer with the company and have a greater sense of commitment to the company and its cli- Kapitel_5.indd 410 03.08.2010 12:56:34 Uhr 5.4 Developing and Managing Customer Relationships 411 ents. Subsequently, the concept of employee retention is as important as customer retention and is a major contributor to it. Just as treating customers well leads to employee satisfaction, treating employees well leads to employee satisfaction. Thus, marketing and human resources congregate (Hollensen, 2006). When a company provides value for its employees, it improves the value that will ultimately be delivered to its customers. Employees want many of the same things from their jobs that customers want from businesses. Satisfaction, respect, quality, and value are all important in the workplace. Employees who feel satisfied with their jobs and with their employer are more likely to want that employer to succeed and will work harder to guarantee success. This frequently translates into better relations among employees and between employees and management. Evidently, satisfied employees are more likely to deliver higher-quality service both within the company and to external customers than those who are not satisfied in their jobs. For this reason, companies who wish to deliver superior service and enlarged satisfaction among customers must first focus on the quality of service being delivered within the firm. This quality of service determines the satisfaction and loyalty of the employee. To improve contentment among employees, companies must improve the value the employee receives by working for the company. In organisations where service to the customer is important – which practically is the case in all companies – one of the important marketing judgments made by management is the decision to hire: not only those who work with customers or develop the marketing programs and advertising campaigns, but all of the employees in a company are accountable for the marketing of that company. The way in which employees are taken care of and the level of employee satisfaction that results have an impact on customer satisfaction, retention, referral rates and overall profitability. 5.4.3 Customer Perception of Value Many companies attempt to add value, but if the customer does not perceive that he or she is getting value, a company’s efforts will not pay off in the shape of increased levels of customer satisfaction. In addition, different things are valued by various customers and in different contexts. Because each customer brings a unique background, value system and level of expectations to the interaction with a firm, each one’s notion of value and what adds value is also unique. Value is a connected with customer choice and loyalty. Buyers who are considering a purchase in a particular product or service category will examine their options and develop a ‘consideration set’ consisting of all the brands or models that they will consider purchasing. The customer will purchase the product or service that he or she perceives to deliver the greatest value. This assessment of value in the products or services being considered, and the post-purchase evaluation of value received, may take place at a very subjective or even subconscious level. The customer will probably not weigh each element of the product or service offer and calculate which offers the best value or whether value has been received. The client possibly will not even use the term value, but may simply decide to buy one product or another. However, the customer is making an implicit determination of value whenever he or she faces the inevitable trade-off that characterizes a purchase situation or a decision whether to stay with a supplier. It will be Kapitel_5.indd 411 03.08.2010 12:56:34 Uhr 5. Implementation and Controlling in the Marketing Planning Process412 a judgment call and the customer will weigh anticipated benefits against current and anticipated costs. Attracting and retaining customers can be a difficult and challenging task. Customers often face a bewildering array of products and services from which to choose. A customer ultimately buys from the firm that offers the highest customer perceived value – the customer’s evaluation of the difference between all the benefits and all the costs of a marketing offer relative to those of competing offers (Kotler and Armstrong, 2009). In this context, the concept of give versus get goes far beyond the basics of money and core product or service. The costs that the customer might give in the exchange situation with a firm include money, time, energy or effort, and psychological costs. The value proposition focuses the attention of the firm on what it can offer the customer that would be valued and contribute to amplified customer satisfaction. Companies must have a holistic view of their value proposition: that it is literally everything that the company offers. Conversely, the value proposition may be viewed as the compilation of tools that the company can use to create or add value for existing or prospective customers. For example, online retailers create value for their customers in many different ways. They do so not only by providing a variety of products for sale, but also by making it convenient for customers to buy from them. They also create value by offering different delivery and payment options, allowing customers to track the progress of their orders online, offering book reviews, virtual dressing rooms, and joint shopping trips with a friend. When examining the value proposition, the marketer must look at the entire offering a firm provides or is capable of providing to its consumers. This offering exceeds the core product or service. It has the potential to meet higher-order needs of customers and to create value at a level much higher than product features, price discounts, and support services. However, many companies stop at this level, for various reasons. Some do not observe any long-term benefit in trying to meet their customers’ higher-order needs. Others detect the benefit but are reluctant to spend the money in the short term. Some firms simply fail to recognize all of the needs that a consumer brings to the purchase situation and the opportunities that are presented. Different segments of customers perceive value in different ways. Customers combine various elements of the value proposition to facilitate the definition of value from their perspective. As a result, what is considered valuable or an important element of the value proposition by one customer is not necessarily considered valuable by another. Value may be created in different ways, and it is critical that marketers really understand what forms of value are considered most important by the segments of the market in which the firm is interested. In fact, an extremely beneficial way in which to segments markets is on the basis of the forms of value that contribute to satisfaction for the various segments. However, it is crucial, that marketers and others understand how the customer defines value. In an attempt to break away from the narrow interpretation of value as a function of what is received for the price paid, four sources of value can be identified (Hollensen, 2006): Process• : optimizing business processes and viewing time as a valuable customer resource. People• : employees are empowered and able to respond to the customer. Kapitel_5.indd 412 03.08.2010 12:56:34 Uhr 5.4 Developing and Managing Customer Relationships 413 Product/service/technology• : competitive features and benefits of products and services, lowering productivity interruptions. Support• : being there when the customer needs assistance. As examined, different customer segments value different combinations of things in assessing the attractiveness of a service offering. In addition, customer will place different weights on various components of value in certain circumstances, buying principally on low price in some situations and paying more in different circumstances to buy from a company that offers superior service or makes it easier for the customer to buy. Consequently, buying behaviour is increasingly difficult to monitor and assess given the diversity and dynamics embedded. Much of what may be considered to be impediments to value creation stems from the fact that customers view value in many different ways. Accordingly, these customers are described as hybrid consumers. Within customer value the goal should not be to increase customer loyalty across the board, but rather to acquire, retain, and develop the most important customers. The first step is to recognize the costs to acquire and maintain customers and the value created by improvements in customer interactions. The marketer can then create metrics such as customer lifetime value and customer-level ROI that will help to identify the most valuable customers. Rather than focusing solely on customer retention or market share, the more valuable approach is to track the share of high-value customers and analyse trends such as movement between service tiers. By developing metrics aligned with their customer value growth objectives, companies can successfully analyse market trends and the effect of their initiatives on the bottom line (see Table 5.2). Not these But these Market share Share of key customers • Customer acquisition rate • Customer retention/turnover rate/tenure • Uptake of target programs • Number of customers Customer-level ROI • Customer lifetime value (CLV) • Intensity of relationship • Number of accounts per customer • Product mix • Share of wallet • Spending from repeat/loyal customers • Number of employees Employee training costs • Employee retention • Employee satisfaction index • Staffing levels/mix for campaign and customer contact management • Direct costs Cost per acquisition • Campaign efficiency • Channel usage and channel migration • Cost of campaign/customer service by channel • Source: Adapted from Hollensen, 2006, modified Table 5.2: Customer-centric metrics for creating value Kapitel_5.indd 413 03.08.2010 12:56:34 Uhr 5. Implementation and Controlling in the Marketing Planning Process414 5.4.4 Customer Relationship Management (CRM) Customer relationship management (CRM) is a business strategy designed to optimise profitability, revenue, and customer satisfaction by focusing on highly defined and precise customer groups. According to Kotler and Armstrong (2009) it is arguably the most important concept of modern marketing. CRM is accomplished by organizing the company around customer segments, encouraging and tracking customer interaction with the company, fostering customer-satisfying behaviours, and linking all processes of the company from its customers through its suppliers. Until recently, CRM has been defined narrowly as a customer data management activity. By this definition, it involves managing detailed information about individual customers and carefully managing consumer ‘touch points’ in order to maximize customer loyalty. However, a company using a CRM system must view its customers comprehensively, understanding that they interact, either directly or indirectly, with all components of the internal business system from suppliers and manufacturers to wholesalers and retailers. On the surface, CRM may appear to be a rather simplistic customer service strategy. But while customer service is part of the CRM process, it is only a small part of a totally integrated, holistic approach to building customer relationships. In the context of marketing as an integrated management approach, CRM must be defined as the overall process of building and maintaining profitable customer relationships by delivering superior customer value and satisfaction. CRM is often described as a closed-looped system that builds relationships with consumers. To initiate the CRM cycle, a company must first establish and maintain customer relationships within the organisation. This may simply necessitate learning who the customers are or where they are located, or it may require more complex information on the products and services they are using. For example, a bank may find it very beneficial to determine all the services a customer is using, such as loans, savings accounts, investment instruments, and so forth. Once the company identifies its customers and its popular products and services, it then determines the level of interaction each customer has with the company. Based on its knowledge of the customer and his or her interaction with the company, the enterprise can then obtain and capture all relevant information about the customer, including measures of satisfaction, response to targeted promotions, changes in account activity, and even movement of assets. Technology plays a major role in any CRM system. It is used not only to enhance the collection of customer data, as will be discussed later in this chapter, but also to store and integrate customer data throughout the organisation. Customer data are the actual direct responses that are obtained from customers through investigation or asking direct questions. Data mining is an analytical process that compiles personal, pertinent, actionable data about the purchase habits of a firm’s current and potential customers. Fundamentally, data mining transforms customer data into customer information, which consists of data that have been interpreted and to which storyline meaning has been attached. The data are subjected to a pattern-building procedure that profiles customers on variables such as profitability and risk. Customers may be categorized as highly profitable, unprofita- Kapitel_5.indd 414 03.08.2010 12:56:34 Uhr 5.4 Developing and Managing Customer Relationships 415 ble, high risk, or low risk, and these categories may depend on the customer’s affiliation with the business (Hollensen, 2006). Implementing a Customer Relationship Management System Companies that implement a CRM system adhere to a customer-centric focus which is an internal management philosophy similar to the marketing concept discussed in Chapter 1. Under this philosophy, the firm customizes its product and service offering based on data generated through interactions between the customer and the company. This philosophy transcends all functional areas of the business (production, operations, accounting, etc.) producing an internal system where all decisions and actions of the company are a direct result of customer information. A customer-centric company builds its system on what satisfies and retains valuable customers, while learning those factors that build long-lasting relationships with them. A customer-centric company and its representatives learn persistently from customers about ways to enhance its product and service offerings. Learning in a CRM environment is in general an informal process of collecting customer information through customer comments and feedback on product or ser vice performance. Dell Computer, for example, learned from its customers that they were experiencing difficulties unpacking its computers. The packaging was so strong that the customers were damaging the computers while removing them from the box. Dell responded with a simpler, more efficient packaging design that allowed customers to disassemble the packaging material in one easy procedure (Hollensen, 2006). The success of CRM – building lasing and profitable relationships – can be directly measured by the effectiveness of the interaction between the customer and the firm. In fact, what further differentiates CRM from other strategic initiatives, such as one-to-one marketing and market development, is the organisation’s ability to establish and manage interactions with its current customer base. The more empowerment a company provides its representatives, the more likely the interaction will conclude in a way that satisfies the customer. CRM is a company-wide procedure that focuses on learning, managing customer knowledge, and empowerment. It differs from one-to-one marketing in a very important way: one-to-one marketing is an individualized marketing method that utilizes customer information to build a long-term, personalized and profitable relationship with each customer. CRM is broad and systemic, whereas one-to-one marketing is focused and individualized. In the next section, some more aspects of ‘one-to-one’ marketing will be dealt with. Example 40: British Airways promotes its Club World loyalty scheme with its long haul business class trying to evoke perceptions of relaxation with the flexibility to sleep, work or relax in order to arrive refreshed and ready for the day ahead Kapitel_5.indd 415 03.08.2010 12:56:34 Uhr 5. Implementation and Controlling in the Marketing Planning Process416 5.4.5 One-to-One Marketing As already described in Chapter 3.2.6 one-to-one marketing is a key goal of a current trend in marketing that focuses on understanding customers as individuals instead of as part of a group. To do so, contemporary marketers are making their communications increasingly customer-specific. Most business today use a mass-marketing approach designed to increase their market share by selling their products to the greatest number of individuals. For many businesses, however, it is more advantageous to use one-to-one marketing to increase share of customer – in other words, to sell more products to each customer. One-to-one marketing is an individualized marketing method that employs customer information to build long-term, personalized, and profitable relationships with each customer. The goal is to reduce costs through customer retention and increase revenue through customer loyalty. As one-to-one marketing takes hold, it is no longer sufficient to understand customers and prospects by aggregate profiles. The one-to-one future requires that marketers fully value their customers and collaborate with them, rather than use them as targets. In fact, many early one-to-one marketing efforts fail because marketers bombard customers with irrelevant, one-to-one communications before making an effort to understand them. The primary challenge of one-to-one marketing is to combine the customer information gleaned from database technology with compelling marketing communications. Fundamentally, one-to-one marketing is no more than the relationship cultivated by a salesperson with the customer. A successful salesperson builds a relationship over time, constantly considers and reflects about what the customer needs and wants, and is mindful of the trends and patterns in the customer’s purchase history. A good salesperson often knows what the customer needs even before the customer actually knows. The salesperson may as well inform, educate, and instruct the customer about new products, technology, or applications in anticipation of the customer’s future needs or requirements. This kind of considerate attention is the basis of one-to-one marketing. Database technology provides the tools marketers need to form a relationship with their customers. Additionally, today’s databases are capable of storing information about a company’s customers, their purchasing history, and their preferences and then presenting it in a meaningful format that marketers can use to analyze and anticipate customer needs and wants. Today’s customers demand supplementary choices; they seek to buy exactly what meets their needs and expect individualized attention. Technology now makes it possible for companies to interact with these customers in new ways, by allowing companies to create databases that pull data from, and feed information to, those interactions. Companies are using technology that makes it possible to tailor products, service, and communications to meet those expectations. Several forces have helped shape this new one-to-one focus on customers. They include the following (Hollensen, 2006): A more diverse society:• a more diverse society has ruled that the traditional transaction approach to marketing no longer fits. Consumers do not want to be treated like the masses. Instead, they want to be treated as the individuals they are, with their Kapitel_5.indd 416 03.08.2010 12:56:35 Uhr 5.4 Developing and Managing Customer Relationships 417 own unique sets of needs and wants. By its personalized nature, one-to-one marketing can fulfil this desire. More demanding and time-poor consumers:• more direct and personal marketing efforts will continue to grow to meet the needs of consumers who no longer have the time to spend shopping and making purchase decisions. With the personal and targeted nature of one-to-one marketing, consumers can spend less time making purchase decisions and more time doing the things that are imperative. Decline of brand loyalty:• consumers will be loyal only to those companies and brands that have earned their loyalty and reinforced it at every purchase occasion. One-toone marketing techniques focus on finding a firm’s best customers, rewarding them for their loyalty, and thanking them for their business. Explosion of new media alternatives:• mass-media approaches will decline in importance as advances in market research and database technology allow marketers to collect detailed information on their customers, not just the approximation offered by demographics but the specific names and addresses. One-to-one marketing will increase in importance and offer marketers a more cost-effective avenue to reach customers. Marketing accountability:• the demand for accountability will drive the growth of oneto-one marketing and justify its continued existence. One-to-One Marketing and the Internet Undeniably, one of the most important trends in the field of one-to-one marketing is the emergence of one-to-one marketing over the Internet. While marketers have tremendously adopted the Internet and World Wide Web as a new channel for promotions and commerce, several marketers are capitalizing on the Web’s full set of interactive marketing capabilities. Particularly, Internet companies are learning more about their customers and using this information to fine-tune their marketing efforts and build relationships with each customer on a more individual level. One advantage of online one-to-one marketing is the ability to provide personalized promotional messages to each customer visiting a company’s website. Past customer transaction history, click stream data, and survey responses are used to classify buying patterns and interests. Based on information known about the customer visiting its site, such as colour and brand preferences, geographic location, and past customer transaction data, the marketer can develop a targeted and personalized on-line promotion or custom catalogue. To fund the new mobile marketing technology, mobile operators are looking for ways to enlarge mobile data service revenue. Many operators believe advertising revenue is the most excellent option. Therefore, information technology research firms are working to improve mobile marketing technology. In the future, mobile marketing will be increasingly able to target messages based on both individual customer profiles and customer location. Although, mobile marketing is not this sophisticated yet sophisticated marketers are aware that the advantages of mobile marketing – will – include interactivity, personalization, location awareness, and always being with the user. One-to-one e-mail marketing should be strictly permission based. That is, consumers should ‘opt-in’ or give their permission to receive e-mail messages from a marketer. and other online booksellers ask customers to provide them with addi- Kapitel_5.indd 417 03.08.2010 12:56:35 Uhr 5. Implementation and Controlling in the Marketing Planning Process418 tional information about their likes and dislikes so that they can receive future book recommendations. But customers can indicate that they do not wish to receive recommendations (Hollensen, 2006). 5.4.6 Global Account Management (GAM) As a relatively new marketing phenomenon for supplier organisations, global account management (GAM) is an organisational form in a multinational/global supplier organisation used to coordinate and manage worldwide activities of servicing a customer centrally by a managed team. The development of a GAM relationship has a number of attributes that appeal to a global customer organisation: 1. uniformity in the application of policies throughout the world 2. coordination of marketing activities to increase sales volume 3. effective utilization of marketing strategies and programs in multiple locations 4. efficiency of management, in that there is a central contact of key accounts 5. establishment of a control mechanism relative to key accounts, to diminish the probability of account turnover 6. improvement in the two-way flow of communications with key accounts, thereby increasing the knowledge base to improve the quality of goods/services to these global clients 7. use as a means to pre-empt local/global competitors from securing business from these crucial customers. The coordination issues of the short-run contracting also call for evaluation. In this situation, if a supplier is reactive in their relational behaviour and forms a unilaterally dependent GAM relationship initiated and forced by the customer organisations, the suppler is motivated to adopt a defensive GAM strategy. The reactive short-run motivations to accept a GAM program in spite of coordination issues are (Hollensen, 2003): pressure from key accounts to improve global consistency• – global customers may compel the supplier to institute GAM to maintain their global ‘preferred’ supplier status pressure to ‘standardize’ pricing on a global basis• – global customers may attempt to use GAM as a means to reduce prices globally through the guise of inferring that there should be equity/commonality of pricing throughout the global network of customer organisations as a reaction to losing key customer sales in select foreign markets• – due to the disproportion of selling and marketing activities globally (i.e., loss of sales in a foreign market to local suppliers), any departure from a high level of service or account attention to a global customer may stimulate the centralization of the management of key accounts the loss of key accounts due to major competitors utilizing the GAM organisational • strategy – the focal organisation may feel obliged to form a GAM team to match or counteract the strategy of key competitors Kapitel_5.indd 418 03.08.2010 12:56:35 Uhr 5.4 Developing and Managing Customer Relationships 419 A more positive attitude of the supplier is shown when a more proactive strategic reason for forming a GAM relationship can be employed in spite of the high customer demands for supplier adaptation. The apparent long-run benefits are: development of relational contracting with large, global customer• – the cooperation between customer and supplier into long-term global relationships has a number of positive outcomes that provide the foundation for the formation of GAM teams (Millman, 1999) increasing the long-term dependency of the customer on the supplying organisation• – if the supplier becomes the preferred source for products worldwide, it is more complicated for the customer to switch suppliers in one location; therefore, there is a propensity for the customer to become dependent on the supplier, shifting power in the relationship; development of synergistic strategies between the global customer and supplier• – through the formation of the supplier-customer coalition, unique strategies can be implemented that are difficult for ‘outside’ competitors to copy due to the implied knowledge developed in the relationship development of a strategic ‘fit’ between the supplier and customer• – to increase the effectiveness of the supplying organisation, the supplier’s strategies can be developed to be consistent with those of the key global account (e.g. providing the effectiveness of coordinated and/or integrated strategies between the two organisations) utilization of successful programs throughout the world• – the GAM strategy allows the best strategies to be employed with the key account throughout the world, thereby increasing their impacts and reducing the cost of developing new programs for each country/region development of a network to increase global effectiveness and efficiency• – due to the relationship between supplier and customer, economies of scale as well as of scope can be employed through the GAM strategy. The Power-Balance in GAM: The Supplier-Customer Fit The key strategic questions facing the supplier company are whether to create global accounts at all and, if the decisions is made to do so, which relationships should be chosen. In selecting the accurate customers to designate as global accounts, the two most important criteria are the balance of the power in the relationship and the potential for strategic synergies. A professional buyer looking for standard worldwide pricing is, naturally, looking for the lowest price to be applied everywhere. In most companies, the purchasing function is considerably more globally coordinated than the sales function, since it shows superior return to scale than the more execution-sensitive function of managing customer relationships. Therefore it is astonishing, that so many global account relationships favour the customer at the expense of the supplier. One key determinant of the balance of power in global account negotiations is the degree of internationalization of both the supplier and the buyer. In case of customer’s ‘low’ international co-ordination in Figure 5.19 it may be difficult to talk about a global account (customer) at all. Accordingly, the potential is also low or non-existent. In the ‘Price Squeeze’ area, the supplier with low internationalization has access to a global player with an extensive network, which results in a ‘medium poten- Kapitel_5.indd 419 03.08.2010 12:56:35 Uhr 5. Implementation and Controlling in the Marketing Planning Process420 tial’; but, as the supplier is ‘under-globalized’ in relation to the customer, the supplier will be in a rather exposed position. The supplier can finish up servicing agreements in countries with no actual presence. In the ‘Price Squeeze’ area, suppliers will not constantly face demand for low prices. Many visionary customers will choose to build a win-win relationship with their suppliers rather than squeeze them on price in the short-term. Furthermore, some suppliers are adept at increasing their power over their customers in other ways. They may try offsetting the central buying power of the clients by negotiating contracts locally. Many local decision-makers of large GAMs prefer high-quality local service of the supplier instead of very low prices. As shown in Figure 5.18 the ‘Global Fit’ box is generally the alternative with the best potential. When the two sides are well matched in their internationalization, a GAM relationship can work extremely well (Hollensen, 2006). Potential Risks of Entering GAM Relationships While the potential benefits associated with accepting a GAM relationship seem to be obvious to the supplier, entering such a strategic arrangement is uncertain and should be prepared with significant due diligence. The operational risks should be understood prior to adopting a GAM supply strategy. The issues/problems associated with the operational risks can be classified into five categories (Harvey et al., 2003): Suppliers’ international coordination low high Country-by-country Relationship (non-existent potential) Hollow agreement (low potential) Price squeeze (medium potential) Global fit (High potential) low high Source: Adapted from Hollensen, 2006, modified C us to m er ’s in te rn at io na l c oo rd in at io n Figure 5.18: The Supplier-customer balance Kapitel_5.indd 420 03.08.2010 12:56:35 Uhr 5.4 Developing and Managing Customer Relationships 421 Motivational issues/problems:• the motivation for adopting the GAM supply strategy may have negative implications for the supplier. The specific motivational issues refer to: customer information, customer panels, GAM revenue/profit measures, and incentives and compensation for the GAM team. In an effort to illustrate some of the problems associated with a reactive rationale, a number of potential consequences can be hypothesized. First, if the basic orientation to GAM is instituted as a defensive measure to keep an existing global customer, the management’s support of the GAM relationship/strategy will be conditional. If the GAM strategy does not involve (1) an internal champion, (2) extensive support by top management, or (3) key functional heads, the probability of the GAM supply strategy being effective over time is minimal. Second, if the GAM strategy is implemented with a short-run, reactive perspective, the supplier may become strategically ‘trapped’ into an organisational solution that is not consistent with other strategies or structural considerations in the company. The dependency on the global customer may accentuate the path dependency of the supplier, given the ‘derived’ growth in sales volume/profit due to the GAM strategy. Structural issues/problems:• there are a number of potential structural issues inherent to a GAM relationship, such as customer demands for: resources coordination in being serviced; single point of contact; and consistency in service quality and performance. The most critical, related problem is that the GAM solution can be perceived by the regional field operating managers as eviscerating their authority with the global customer, both at the national level and at the regional level. In particular, the supranational nature of the GAM team can blur the lines of authority as well as undermine the operating personnel’s social capital with local representatives of the global account. This problem of overlapping authority is compounded by the fact that the local operating managers are frequently required to execute the policies/strategies formulated by the GAM team that may nonetheless conflict with the established local practices. Therefore, to many experienced managers, the GAM structural design resembles a virtual matrix organisation, with its nightmares of parallel reporting that are experienced by local and regional operating managers. Relational richness:• another structural problem associated with GAM is that ‘not all relationships with key customers are created equal’ (i.e. there are different levels of relational richness in a GAM relationship). The concept of relational richness (i.e. how close the strategic intent/fit is of two potential GAM members) reflects the variation in the global customer’s demands placed upon the supplier. It dictates, to a certain degree, the operating format of the policies/procedures for the supplier GAM team. Therefore, not all GAM relationships should be assumed to operate at the same level of supplier trust and commitment. As the demand for the level of commitment and support to global customers can vary extensively, the interface at the boundary of the supplier organisation needs to reflect the expected difference in ‘service level’. Personnel and team issues/problems:• the personnel and issues influencing the supplier GAM use include: the global account manager, the GAM support staff, the personnel evaluation policy, and the reporting processes. The GAM team composition’s entails a number of interrelated problems that could translate into operating impediments for the supplier. First, the neglect of the team composition issue could present an initial barrier to the team’s effectiveness, as far as who should be placed on the team. The appropriate functional representation of the team is essential to (1) gaining acceptance in the organisation, (2) smooth reporting processes, and (3) providing the Kapitel_5.indd 421 03.08.2010 12:56:35 Uhr 5. Implementation and Controlling in the Marketing Planning Process422 GAM team with the expertise to be able to address cross-functional issues that will be salient when servicing a customer globally. Also, the team’s leadership and the selection of the appropriate members from the various functional areas present a set of problems. A specific related problem that needs sensible addressing is the degree of heterogeneity of team membership. On one hand, the need for broad representation both functionally and relative to global background/experience could cause ‘too’ much heterogeneity on the team, reducing the team’s effectiveness. On the other hand, to assemble a team of global expertise, it may be necessary to integrate a wide range of experiences and national orientation. The heterogeneity issue may necessitate the movement of international managers to organisation headquarters so that they can be GAM team members. Conflict issues/problem within/between organisations:• there are a number of potential conflict issues within the supplier organisation that is pursuing the GAM strategy. The issues are those that drive the demand for GAM, including: price uniformity; terms-of-trade uniformity; and service in markets in which the company has no customer operations. If the conflict issues are not addressed in a timely fashion, they may expand into conflict areas. Several of these conflict areas have already been mentioned, but there are others that could impact the functioning of the GAM relationship. The first conflict area originates from regional operating managers who see the GAM strategy as an intrusion into their sphere of authority. The conflict over who has the authority to make decisions concerning the global customer is heightened due to the need for the local operating manager to execute the GAM team’s strategy. In this case, the operating manager in the foreign marketplace has the responsibility, but not the authority, to countermand or modify the strategy dictated by the GAM team. The second conflict area encompasses varying perceptions of ‘fit’ with the global customer organisation; the perception gap can create a great deal of conflict and pressure in the GAM relationship. Issues/problems of increased cost and potential for depressed profits: • as with any addition to the organisation/management of an organisational layer, there is a potential for increased costs. This is particularly germane when considering the implementation of a GAM strategy, in that the GAM team in effect duplicates costs of existing functional personnel, both at the supplier headquarters and local market level. The overlay of another group or team of managers both improves the functioning of the GAM relationship and increases the supplier costs, particularly in the initial stages of the GAM program’s implementation. Specifically, significant costs will also be incurred in the development of the infrastructure to support the GAM team. This operating platform must be endowed with adequate resources dedicated to ensuring quality service to global customers. In many cases, if not most, this infrastructure will not only separate, but also stand apart from, the existing support mechanisms in the local markets. In addition, providing the GAM team (i.e. global account manager and the support staff) with the ability to effectively communicate not only with the global customer organisation but also with the operating units in its own organisation will increase the costs at the headquarters level. There can also be implicit costs associated with the implementation of a GAM strategy, such as the costs related to: (1) increased length of time to make decisions, (2) resolving conflicts with the local operating units, (3) coordination of communications between operating units and the GAM team prior to communicating with the global Kapitel_5.indd 422 03.08.2010 12:56:35 Uhr 5.4 Developing and Managing Customer Relationships 423 customer, and (4) resolving additional myriad time-consuming issues relative to embarking on a new organisational strategy. Step-by-Step Implementation Plan for a GAM Team Once the GAM selection process has been established and the team members are assembled, the overt mission and goals of the GAM team strategy concerning managing the GAM relationship can be established (see figure 5.19). There is a perceptible paradox in selecting team members prior to the development of the team’s mission and goals. But in reality, the team members must be a part of the initial charge of the team; therefore, it is suggested that the team be assembled first. Each global customer will have detailed requirements and expectations about handling of their business on a global basis. A team member’s input on customizing the team ef fort is predominantly significant when the GAM team member has tacit knowledge of the account or has worked with the global customer prior to the formation of the GAM team. Moreover, the goals of the GAM team should be plain, in order to permit the team’s performance to be measured and allow it to adapt to changes in the GAM relationship (i.e. relational richness) over the stages of the relationship. Particularly, the goals of the Source: Adapted from Harvey et. al., 2003 Establishment of GAM mission/goals/selection of team Assessment of GAM global customer: GAM goals/expectations Determination of strategic “Fit between supplier/customer goals” Development of GAM infrastructure to support GAM relationship Development of GAM intra/interorganization operating strategies Monitor/Auditing of GAM global effectiveness Feedback Figure 5.19: Step-by-Step GAM Operational Plan Kapitel_5.indd 423 03.08.2010 12:56:35 Uhr 5. Implementation and Controlling in the Marketing Planning Process424 GAM team need to mirror the team’s varying requirements – which vary due to differences in operating procedures relative to the functional units, since these units need to ‘execute’ the GAM strategy at the local level. This coordination of activities between the GAM and the functional unit levels is one of the most important concerns of the supplier. Without this collaboration, the effectiveness and, in due course, the success of the GAM program will be put at risk. Developing an operating strategy explicitly related to nurturing coordination between the two organisations in the GAM program is an essential step in implementation of the GAM strategy. However, managing between organisations is one of the more difficult tasks in the global marketplace. Most commonly, executives are trained to manage within their organisations, but with many GAM relationships, more and more of the key managers’ time will be directed at obtaining the cooperation/coordination with managers in external organisations. Besides the inter-organisational management format the standard operating procedures for implementing the GAM strategy with valuable global customers must as well be established in the supplier organisation. Without the procedures clearly delineating the role of the GAM team and its mission, the support of operating managers for the GAM program will be minimal. The probability of conflict over authority and responsibility is too great to be left to the change that functional managers will bargain with the global customer in their markets. The final stage of the GAM implementation/operating process is to introduce an ongoing monitoring process to assess the impact of the GAM program. This control process would have to extract information from key managers in the global customer organisation in order to validate the impact of the GAM supplier team. The central issue related to the GAM control system is whether one system is effective when two organisations with different cultures are involved in a relationship spanning multiple national cultures (Hollensen, 2006). As noted earlier, if the GAM relationship has no rationale other than sales, then the negotiations will focus on price and the globalization of the relationship will result in pressure for volume discounts. The enlargement of the relationship to include strategic development projects – such as new product development – is the only way to make global accounts pay for suppliers. Today, most global account managers are recruited from the sales organisation, from positions as regional sales manager or national sales manager in a small country. However, this approach is erroneous because a global account is very different from a portfolio of regional or national accounts. Although many regional account managers make fine global account managers, they have to study new skills to make the transition – internal coordination, taking a long-term perspective, nurturing the account not milking it, understanding of the SCM (Supply Chain Management), and so on. Therefore some companies have good experience with appointing senior linemanagement as Global Account Managers (Arnold et al., 2001). 5.4.7 Creating Long-Term Customer Value Sophisticated customer relationship management creates customer delight. In turn, delighted customers remain loyal and talk favourably to others about the company and its products. Thus, the aim of customer relationship management is to create not just customer satisfaction, but customer delight (Reichheld, 2003). Companies are realising that Kapitel_5.indd 424 03.08.2010 12:56:36 Uhr 5.4 Developing and Managing Customer Relationships 425 losing a customer means losing more than a single sale. It implies losing the customer lifetime value (CLV) which is the entire stream of purchases that the customer would make over a lifetime patronage. Customer lifetime value (CLV) projects the future value of the consumer over a period of years. One of the central assumptions in any lifetime value calculation is that marketing to repeat customers is more beneficial than marketing to first-time buyers. It costs more to find a new customer in terms of promotion and gaining trust than to sell more to a customer who is already loyal. Customer lifetime value has a number of uses: 1. it shows marketers how much they can spend to acquire a new customer 2. it provides a level of profitable spending to retain a customer 3. it provides a basis for targeting new customers who look like a company’s most profitable customers. Lifetime value analysis allows a marketer to make out its most valuable customers and profit from them over the long term by building relationships. The increasing importance of the customer-centric approach to marketing is evident in the abundant customer relationship management initiatives prevalent today, such as one-to-one marketing and database marketing. Most of these initiatives aim to increase the length of the customer life cycle as well as the value of the transaction between the firm and the customer during each stage of the life cycle. More and more companies are focusing on fostering customer relations for long lifetime of customers with the firm and subsequently for higher profitability and growth. As a result, marketing activities and performance evaluations are increasingly being organized around relationships with customers rather than products. This has resulted in a entirely different paradigm for making and evaluating marketing decisions. The focus on relationship management makes it extremely important to understand CLV because CLV models are a systematic way to understand and evaluate a firm’s relationship with its customers (Hollensen, 2006). CLV models have a variety of uses in all kinds of business organisations. Particular use of such models, however, will depend upon the type of products and customers a company has. Firms having few and identifiable customers might benefit from models that measure the lifetime value of individual customers whereas firms having large number of customers with small sales to each customer might benefit from models that help segment customer base on the basis of lifetime value. CLV models can be exceptionally useful in helping the firms make strategic as well as tactical decisions – that is, strategic decisions in terms of identifying who its customers are and their characteristic and which customers to go after in due course, and tactical decisions in terms of short-term resource allocations among marketing variables and the focus of marketing activities. In addition, CLV models facilitate quantify the relationship of the organisation with its customers and consequently allow the firm to make more informed decisions in a structured framework. In addition, they also help a firm to know who its profitable customers are, and customer profitability provides a metric for the allocation of marketing resources to consumers and market segments. Marketing efforts are best directed at the most beneficial consumers. Kapitel_5.indd 425 03.08.2010 12:56:36 Uhr 5. Implementation and Controlling in the Marketing Planning Process426 The coming of the Internet has increased the importance of CLV models. Many companies on the Internet do not have highly valued physical assets. Such companies can be valued correctly only when the value of their intangible assets is taken into account. Since the value of their customer base is the most essential intangible asset that these companies have, understanding the lifetime value of the customers of the company gives a more precise picture of the potential in such a company. The age of mass marketing is being replaced by an era of targeted marketing. Acquaintance of CLV enables organisations to develop customer-specific marketing programs leading to an increase in efficiency and effectiveness of such strategies. The Internet is undoubtedly a major instrument of such targeted marketing; the direct marketing concepts of CLV can be extended to be useful in interactive scenarios. Figure 5.20 shows the process for measuring customer lifetime value. Transferring the process steps of Figure 5.20 into mathematical formula (Hollensen, 2006): CLV = (RR – RC) * Y – AC (for a single customer) P = CLV * C P = [(RR – RC) * Y – AC] * C CLV = Customer lifetime value = ‘Profits’ for a single customer Y = Lifespan of a customer or number of transactions RC = Recurring costs AC = Acquisition costs P = Total profits C = Number of customers Problems in Calculation Customer Lifetime Value The calculation of the CLV (see Figure 5.20) is not straightforward. Most of these problems, however, can be successfully solved if two main issues are taken into consideration: 1. Recurring revenues (RR) 2. Recurring costs (RC) 3. Net margin 4. Lifespan of a customer (Y) 5. Cumulate Margin 6. Acquisition costs (AC) 7. Customer lifetime value (CLV) – x – Source: Adapted from Hollensen, 2006, modified Figure 5.20: Seven-step process to measure customer lifetime value Kapitel_5.indd 426 03.08.2010 12:56:36 Uhr 5.4 Developing and Managing Customer Relationships 427 the company applying this method has to define clearly from the beginning the pur-• pose of using CLV analysis and the anticipated benefits the problems raised by the CLV analysis are frequently industry and company spe-• cific, as a result the company has to select the most appropriate way to apply this concept in its particular situation. Defining a Customer The first challenge is to characterize the customer unit. Is it an individual, an account, a household or a business address? A second challenge is linking customer information into a single customer record when they leave and return multiples times during their lifetime. The answer to these questions is industry specific. The business organisation has to identify the characteristics of its customer relationship, and, on this basis, to define the customer unit and the customer lifetime cycle. Customer lifetime value for a company is the net profit or loss to the firm from a customer over the entire life of transactions of that customer with the organisation. Hence the lifetime value of a customer for a firm is the net of the revenues obtained from that customer over the lifetime of transactions with that customer minus the cost of attracting, selling, and servicing that customer, taking into account the time value of money. In the context of new customers, it is important to consider the acquisition costs when assessing the CLV. For example, a company spends a million Euros to attract customers. If only a few customers actually make a purchase worth a few Euros each in the first period, then the costs incurred in the first period are acquisition costs, and ignoring this in the CLV models would give a positive lifetime value to each customer even though they may never make a purchase after their first purchase. In mathematical terms, CLV consists in taking into account the total financial contribution, i.e. revenues minus costs, over the entire life of a customer’s business relationship with a company. Despite its simplicity, the measurement of CLV requires great care. All cash flows involved in the process have to be identified and measured on a very detailed level, and allocated precisely to each customer or type of customer. Figure 5.20 represents a concise seven-step approach to measuring CLV (Hollensen, 2006). Evaluating Costs The measurement of cost to the customer level poses the greatest challenge to customer lifetime value measurements. While revenue can typically be collected by customer from the appropriate billing system, cost information is aggregated into general ledger departments and accounts and requires a good deal of analysis and disaggregation before it can meaningfully be attached to individual customers or customer segments. The indirect costs are especially difficult to be divided and allocated. In solving these problems, three key costing principles should be applied. customer costs must be related to the revenues they generate• not all costs within the organisation should be attributed down to a customer level• it should be made absolutely clear who can influence different types of cost and • revenues. Kapitel_5.indd 427 03.08.2010 12:56:36 Uhr 5. Implementation and Controlling in the Marketing Planning Process428 Evaluating the Duration of Customer Loyalty The duration of customer business relationships is complicated to measure in the current economic environment, characterized by unpredictability and rapid change. Many companies are using as the main predictive tool the analysis of historical data about the past behaviour of their customers, identifying specific segments and extrapolating the behaviour of these segments into the future. This method can be used successfully only in relatively stable market environments because it assumes that customers will repeat their past behaviour in the future• market conditions will not change significantly• The method is, however, rather useless in dynamic, fast-changing environments, such as the high-technology industries. In such sectors, customers’ needs and perceptions change fast, competition is intense and market conditions fluctuate widely. It is therefore important to connect these predictions with the external market environment. Many CLV/profitability models neglect the external environment of the firm, and concentrate only on the relation between the organisation and its customers. It is, however, dangerous for marketers to overlook that this relation does not take place in a marketing void. Market conditions might, and indeed do, change over time, impacting on organisations’ policies and on customer needs and perceptions. The duration and intensity of customers’ loyalty is determined and influenced by customer satisfaction. It can be supposed that as long as a company’s offer satisfies a customer’s need, that consumer will be loyal to the company. The measurement of customer satisfaction can therefore provide a platform for calculating, predicting and increasing customer profitability. CLV is, therefore, much more than the simple forward projection of current spending levels. Ideally, an organisation would like to be able to calculate the long-term profitability of a customer, the customer equity. Customer equity can be described as the combined discounted customer lifetime values of all of the company’s current and potential customers. Obviously, the more loyal the firm’s profitable customers, the higher the organisation’s customer equity. However, few firms capture the costs associated with serving a customer, and fewer still are able to associate specific costs with specific customers. In the absence of cost information, it makes sense to focus on the potential value of the customer in terms of the revenue that he or she can generate directly or influence (Hollensen, 2006). 5.4.8 Rethinking Marketing Never before have consumers expected to interact so deeply with companies, and each other in the form of social networks and communities, to shape the products and services they use. In order to be competitive in this increasingly interactive environment, companies must shift their focus from solely driving transactions to maximizing customer lifetime value and long-term customer relationships. They must organize to put cultivating relationships ahead of building products and brands as companies can interact directly with customers today (Rust et. al., 2010). The key difference between a traditional and a customer-cultivating company is that one is organized to push products and bands whereas the other is designed to serve customers. Consequently, Rust et al. (2010) suggest reinventing the marketing department as Kapitel_5.indd 428 03.08.2010 12:56:36 Uhr 5.4 Developing and Managing Customer Relationships 429 a ‘customer department’ with a new type of leader – a chief customer officer. The socalled customer managers are less interested in selling than in maximizing the value of the customer relationship over the long term. Within this philosophy marketing becomes more than a function as all of company’s activities are focused on the customer and the market in order to fulfil consumer’s needs and wants better than the competition. For example in the research and development process, the customer can be integrated into the design process in order to ensure that product decisions reflect real-customer needs. Nokia Asia is a company that created a customer-focused innovation called Nokia Beta Labs, a virtual developer community that brings users and developer teams together to virtually prototype new features and products. In the framework of a holistic and integrative approach to marketing today’s marketers have to work closely with a variety of marketing partners when it comes to creating customer lifetime value and building strong customer relationships. In addition to being just excellent at customer relationship management, marketers must also be skilled at partner relationship management, which implies working closely with partners in other company departments and outside the organisation to jointly bring greater value to customers (Kotler and Armstrong, 2009): Partners inside the company • Traditionally, marketers have been charged with understanding consumers and representing customer needs to different company departments. The old perception was – and surprisingly still is in numerous organisations – that marketing is done only by marketing, sales, and customer support people. However, in today’s increasingly connected world, marketing no longer has sole ownership of customer interactions. Every functional area can interact with customers. The new and holistic approach is that every employee must be customer focused. David Packard, co-founder of Hewlett- Packard, wisely said, ‘Marketing is far too important to be left only to the marketing department’ (Kotler, 1999, p. 20). It is of paramount importance, that organisations are linking all departments in the cause of creating customer value. Rather than assigning merely sales and marketing people to customers, they should form cross-functional teams. Marketing partners outside the company • Changes are also occurring in how marketers connect with their suppliers, channel partners, and even competitors. Most enterprises today are networked companies, relying heavily on partnerships with other firms. In this respect, supply chain management enables companies to strengthen their connections with partners all along the supply chain. Success at building customer relationships also rests on how well the entire supply chain and, more generally, value net is managed. Companies adapting this integrative approach do not just treat suppliers as vendors and distributors as customers. They treat both as partners in delivering customer value. Beyond managing the supply chain, today’s firms must also discover that they need strategic partners and alliances. Strategic alliances are booming across almost all industries and services. As Jim Kelly, former CEO at UPS, put it, ‘The old adage’ ‘If you can’t beat ‘em, join ‘em, ‘is being replaced by ‘Join ‘em and you can’t be beat’ (Valdmanis, 1999). As outlined throughout the book, we suggest that transactional marketing and relational marketing can indeed coexist and that RM should not be considered simply as a replacement for TM strategies but as another – more integrative – perspective in marketing and the marketing management process. It is instrumental in making companies Kapitel_5.indd 429 03.08.2010 12:56:36 Uhr 5. Implementation and Controlling in the Marketing Planning Process430 focussing less on product profitability as a one-dimensional driver but more on customer relationships, customer lifetime value and customer equity. Essentially, this is what an integrative marketing management really implies, namely to direct each and every activity towards the customer, making formerly product-focused companies fully customer-centric. The RM concept of lifetime value focuses the company on long-term health rather than on short-term earnings which are often at the expense of future and sustainable performance. Putting it all together, RM can help imbue companies to rethink marketing and develop a more inclusive approach directing all departments, functions and staff towards the customer. Although this requires organisational transformation and a change in mindset, we suggest it to be an inevitable competitive way to serve customers and ensure a sustainable growth of companies in the 21st century. Summary This chapter first looks at the factors determining the shape of the CRM strategy: Customer Loyalty – Customer Satisfaction – Customer Perception – Customer loyalty is a subjective concept. Sometimes longevity of customer patronage and repeat buying are used as proxies for loyalty. Customer satisfaction is seen to be a function of the value created for the customer through the quality of service provided by the firm and its employees. Satisfied employees are more likely to provide superior levels of service. When a firm provides value for its employees it improves the value that will ultimately be delivered to its customers. Different segments of customer perceive value in different ways. Customers combine various elements of the firm’s value proposition in order to define the value from their perspective. CRM is a company-wide process that focuses on learning, managing customer knowledge, and empowerment. It differs from one-to-one marketing in a very important way: One-toone marketing is an individualized marketing method that utilizes customer information to build a long-term, personalized and profitable relationship with each customer. CRM is broad and systemic, whereas one-to-one marketing is focused and individualized. As a relatively new marketing phenomenon for supplier organisations, GAM is an organisational form in a multinational/global supplier organisation used to coordinate and manage worldwide activities of servicing a customer centrally by a managed team. Customer lifetime value (CLV) projects the future value of the customer over a period of years. One of the basic assumptions in any lifetime value calculation is that marketing to repeat customers is more profitable than marketing to first-time buyers. It costs more to find a new customer in terms of promotion and gaining trust than to sell more to a customer who is already loyal. Customer lifetime value has a number of uses: (1) It shows marketers how much they can spend to acquire a new customer, (2) it provides a level of profitable spending to retain a customer, and (3) it provides a basis for targeting new customers who look like a company’s most profitable customers. Lifetime value analysis allows a marketer to identify its most valuable customers and profit from them over the long term by building relationships. In mathematical terms, CLV consists in taking into account the total financial contribution, i.e. revenues minus costs, over the entire life of a customer’s business relationship with a company. Despite its simplicity, the measurement of CLV requires great care. All cash flows involved in the process have to be identified and measured on a very detailed level, and allocated precisely to each customer or type of customer. Kapitel_5.indd 430 03.08.2010 12:56:36 Uhr 5.4 Developing and Managing Customer Relationships 431 Questions for discussion 1. Which factors would encourage long-term relationships with customers 2. Is it possible to identify market factors, which would suggest that a Relationship Marketing (RM) approach is not appropriate? 3. What are the arguments for spending money to keep existing customers loyal (customer retention)? 4. Why is it important to consider Customer Lifetime Value (CLTV)? 5. How can a firm increase its CLTV? 6. Argue for and against the statement that ‘the customer is always right’. 7. What are the supplier’s and buyer’s motives for entering GAM? 8. Describe the different stages in GAM. 9. What are the most important for supplier to consider in establishing and developing cross-cultural GAM-relationships? Kapitel_5.indd 431 03.08.2010 12:56:36 Uhr 5. Implementation and Controlling in the Marketing Planning Process432 Case 5 Alfred Ritter GmbH The German chocolate maker of Ritter Sport is considering new customers in – international markets Alfred Ritter GmbH & Co. KG ( was incorporated in 1912 as Alfred Ritter Schokolade- und Zuckerwarenfabrik. Today it is a private owned company and one of Germany’s leading chocolate manufacturers. The company is number one in the German market for 100-gram-chocolate bars. In 2009 it had a market share of 10 percent of the total chocolate confectionery market. Alfred Ritter’s square chocolate bars are well known: about 95 out of 100 Germans recognize the Ritter Sport brand. Ritter has a strong position in other European markets, including Denmark, Italy, Austria and the Netherlands. Ritter Sport chocolate bars are also available in 60 countries around the world. The grandchildren of company founder Alfred Ritter own and control the family enterprise. Operating from its base in Swabian Waldenbuch, Ritter Sport has become one of the most successful European chocolate manufacturers since its inception in 1932. In Germany the company has a significant market share and enjoys an impressive 98 % brand awareness. Known worldwide for its trademark square chocolate bars (designed to fit perfectly into the pocket of a sports jacket), Ritter Sport had a workforce of 800 employees and a turnover of € 274 million in 2009. More than 50 % of the production is now exported. As an early pioneer of recyclable polypropylene packaging, Ritter Sport has established a reputation as a trailblazer of environmentally friendly business practices. The 1912 Origin The Ritter company was the offspring of a sweet liaison that had nothing to do with business. On July 4, 1912, Alfred Ritter, a master candy maker, and Clara Göttle, a woman with a sweet smile who owned a candy store in Bad Cannstadt, a small German town near Stuttgart, got married. Shortly after, the newlyweds launched their own business, which was named Alfred Ritter Schokolade- und Zuckerwarenfabrik (Alfred Ritter chocolate and candy factory). In a rented space in a house in Bad Cannstadt, where the couple took up their first residence, they established a small candy production facility that was more a workshop than a factory. However, the name reflected the high ambitions of the Ritters. Their Kapitel_5.indd 432 03.08.2010 12:56:37 Uhr

Chapter Preview



Marketing – A Relationship Perspective

Moderne Grundlange zum Marketing

Das Lehrbuch behandelt eines der wichtigsten und aktuellsten Themenfelder des modernen Marketings. Der Ansatz verbindet dabei den klassischen Ansatz der strategischen Marketingplanung und seiner Instrumente mit dem neuen Ansatz des Relationship Marketing. Der ganzheitliche Ansatz des Buches umfasst dabei die aktuellen Marketing-Grundlagen, Praxisbeispiele sowie anwendungsorientierte Fallstudien und eignet sich somit ideal sowohl für Manager und Entscheidungsträger im Marketing-Bereich, Studenten in Bachelor- und Materstudiengängen sowie Dozenten und Trainer.