1 Strategic CRM: Loyalty, Satisfaction and Customer SelectionSkander Esseghaier | Koc University

2 Why is customer satisfaction such a critical objective of CRM?Strategic CRM? Why should we care about developing relationships with our customers ? Why is customer loyalty so critical? Why is customer satisfaction such a critical objective of CRM? How should we select those customers with whom we should develop and nurture a relationship?

3 The Loyalty Effect

4 How Much Profit a Loyal Customer Generates Over Time?Auto Service Industry New customers  initially they typically come for wheel alignment or oil change But if they like the service and the value, they move to more expensive items like engine tune-ups, tires For one auto-service company that was studied by Bain & Co., the expected profit from a fourth year customer is more than triple the profit that the same customer generates in the first year Retailing As customer familiarize themselves with the store assortment, they buy more and more Source: Frederick Reichheld (1996), The Loyalty Effect, HBS Press.

5 You typically don’t make recoup your acquisition cost in the first yearBut as time goes, you get more and more $ from a loyal customer over time Auto Service Industry New customers  initially they typically come for wheel alignment or oil change But if they like the service and the value, they move to more expensive items like engine tune-ups, tires For one auto-service company that was studied by Bain & Co., the expected profit from a fourth year customer is more than triple the profit that the same customer generates in the first year Retailing As customer familiarize themselves with the store assortment, they buy more and more Acquisition cost in the credit card industry: companies spend an average of $50 to recruit a customer and set up the new account -- Response rate to solicitations is 2%-3%: mail 30,000 solicitations to get 1000 applications (and even less new customers) -- Credit evaluation cost, card issuance cost, cost of entering account data in the data processing system Increased purchases: But if the customer stays a second year, the economics greatly improves. As they become accustomed to using the credit card and are satisfied with the service it provides, customers use it more and balances grow. In the second year – and the years after – they purchase even more, which turn profits up. Reduced cost: e.g. catalog sales  new customer orders took twice the time of old customers orders New customers didn’t know which item were kept in stock Credit evaluation took extra time, New customers typically ordered at peak times Price premium: Companies with long-time customers can often charge more for their products or services. Many people will pay more to stay in an hotel they know or to go to a doctor they trust than to take a chance with a less expensive competitor. Companies with loyal customers can charge a premium for the customer’s confidence in the business - New customers are more price sensitive (discounts, trial) Referral: long time customers provide the company with free advertising; they do a lot of talking and drum up a lot of business -- Intuit: its Quicken software is the most successful personal finance mgmt software  2 salespeople only -- Refereed customers are more loyal and more profitable Source: Reichheld and Sasser (1990), “Zero Defections: Quality Comes to Service,” HBR, Sep-Oct.

6 What is Loyalty? Can consumers be viewed as loyalif they buy the same product over some period of time? Behavioral “loyalty” could be spurious It could be based on convenience and/or switching costs Behavioral “loyalty” could be Misleading If consumers are multibrand loyal Loyalty should be viewed psychologically rather than behaviorally

7 Thereby causing repetitive same-brand or same brand-set purchasingLoyalty is a deeply held commitment to rebuy or repatronize a preferred product consistently in the future Thereby causing repetitive same-brand or same brand-set purchasing Despite situational influences and marketing effort having the potential to cause switching behavior

8 The Two Sides of Customer LoyaltyTrue Loyalty Latent Loyalty High Attitudinal Loyalty Repurchase intentions and intentions to recommend product to others X No Loyalty Spurious Loyalty Low Low High Behavioral Loyalty Repeat purchase frequency, repeat purchase probability, share of category requirements, relative volume of purchasing, share of category wallet

9 The Satisfaction-Profit Cycle

10 Customer Satisfaction is the key for LoyaltySatisfied Customers are behaviorally loyal: they migrate to competitors at a rate of 5% Dissatisfied Customers stop buying: they migrate at a rate of 40% Satisfied Customers are attitudinally loyal: they do refer others and tell 3 others about their good experiences Dissatisfied Customers don’t complain to the company… (96% never report it) … But do complain to others !!! they tell 11 others about the problems

11 Drivers of Customer SatisfactionPerceived Performance Product’s & Firm’s Buyer’s Expectations are based on: Customer’s past buying experiences Opinions of friends & associates Marketer/ Competitor information & promises

12 Levels of Customer SatisfactionPerceived Performance Exceeds Expectations – Customer is Delighted Perceived Performance Product’s & Firm’s Perceived Product Performance Meets Customer Expectations – Customer is Satisfied Perceived Performance Below Expectations – Customer is Dissatisfied

13 Measurement of Customer SatisfactionHow do you define and measure customer satisfaction? Is it a transaction-based evaluation? An immediate post-purchase evaluative judgment or affective reaction? Or is it an overall evaluation? Based on the total consumption with a good or service over time; Developed cumulatively over all the experiences a consumer has with a firm

14 Measurement of Customer SatisfactionBoth in practice and in academic research, customer satisfaction has been measured at both levels: At the transaction level as in trailer or event-triggered survey At the overall level As in the American Customer Satisfaction Index (ACSI) Or as in the Turkiye Musteri Memnuniyeti Endeksi (TMME)

15 Martha Stewart Living Omnimedia, Inc. 2002 ImClone ScandalSource: Mizik N., “Assessing the Total Financial Performance Impact,” MSI # 15

16 University of Michigan Satisfaction Index The question then has to be asked, is there really a relationship between satisfaction and business results. The answer is that, of course there is a positive relationship between customer satisfaction and profits. There is overwhelming scientific evidence to support this relationship. In fact, if we were to use University of Michigan’s Customer Satisfaction Index to drive our investment strategy, we would find that were we to invest in the firms in the top half in terms of customer satisfaction we would make far more money than if we invested in the bottom half. So if satisfaction is positively associated with business results, then what is going on?

17 American Customer Satisfaction IndexThe question then has to be asked, is there really a relationship between satisfaction and business results. The answer is that, of course there is a positive relationship between customer satisfaction and profits. There is overwhelming scientific evidence to support this relationship. In fact, if we were to use University of Michigan’s Customer Satisfaction Index to drive our investment strategy, we would find that were we to invest in the firms in the top half in terms of customer satisfaction we would make far more money than if we invested in the bottom half. So if satisfaction is positively associated with business results, then what is going on?

18 American Customer Satisfaction IndexThe question then has to be asked, is there really a relationship between satisfaction and business results. The answer is that, of course there is a positive relationship between customer satisfaction and profits. There is overwhelming scientific evidence to support this relationship. In fact, if we were to use University of Michigan’s Customer Satisfaction Index to drive our investment strategy, we would find that were we to invest in the firms in the top half in terms of customer satisfaction we would make far more money than if we invested in the bottom half. So if satisfaction is positively associated with business results, then what is going on?

19 The question then has to be asked, is there really a relationship between satisfaction and business results. The answer is that, of course there is a positive relationship between customer satisfaction and profits. There is overwhelming scientific evidence to support this relationship. In fact, if we were to use University of Michigan’s Customer Satisfaction Index to drive our investment strategy, we would find that were we to invest in the firms in the top half in terms of customer satisfaction we would make far more money than if we invested in the bottom half. So if satisfaction is positively associated with business results, then what is going on?

20 American Customer Satisfaction IndexThe question then has to be asked, is there really a relationship between satisfaction and business results. The answer is that, of course there is a positive relationship between customer satisfaction and profits. There is overwhelming scientific evidence to support this relationship. In fact, if we were to use University of Michigan’s Customer Satisfaction Index to drive our investment strategy, we would find that were we to invest in the firms in the top half in terms of customer satisfaction we would make far more money than if we invested in the bottom half. So if satisfaction is positively associated with business results, then what is going on?

21 Customer Satisfaction is the key for LoyaltySatisfied Customers pay less attention to marketing for competing brands help create satisfied employees

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24 The “Satisfaction Mirror”Higher Customer Satisfaction Lower Costs Better Results Comfort Providing Feedback More Repeat Purchases Employee Higher Productivity Easier Recovery from Errors Improved Quality of Service Familiarity with Customer’s Wants and Needs The Customer’s View The Employee’s View Source: Heskett, James L., W. Earl Sasser, Jr., and Leonard A. Schlesinger (1997), The Service Profit Chain: How Leading Companies Link Profit and Growth to Loyalty, Satisfaction and Value, Free Press: New York, NY, p. 101.

25 The Service-Profit ChainEmployee Satisfaction Customer Customer Loyalty Revenue Growth & Profits This idea has been codified into a business model by professors at Harvard Business School into what they labeled the Service-Profit Chain. At its core, the Service Profit Chain is a virtuous circle where employee satisfaction leads to customer satisfaction. This in turn leads to customer loyalty … in particular, customer retention. This leads to increases in revenue and profits, which ultimately means that employees get rewarded, and so the cycle continues. Few of us would argue with the reasonableness of this model. After all, we can all think of situations where an employee of a company has dissatisfied us, so the link between employee satisfaction and customer satisfaction seems intuitive. And all of us have stopped using a product because we have been dissatisfied with its performance, so this link is logical as well. And finally, the relationship between keeping more customers and growing revenues and profits seems like a no-brainer. The Cycle of Good Service

26 Profit Chain at Sears “A 5 point improvement in employee attitudes will drive a 1.3 point improvement in customer satisfaction, which in turn will drive a 0.5% improvement in revenue.” The Employee-Customer Profit Chain at Sears 4% customer satisfaction $200 million in revenue $250 million in market cap

27 Customer Satisfaction and Market ValueTop versus Bottom 50% of Firms in Customer Satisfaction The question then has to be asked, is there really a relationship between satisfaction and business results. The answer is that, of course there is a positive relationship between customer satisfaction and profits. There is overwhelming scientific evidence to support this relationship. In fact, if we were to use University of Michigan’s Customer Satisfaction Index to drive our investment strategy, we would find that were we to invest in the firms in the top half in terms of customer satisfaction we would make far more money than if we invested in the bottom half. So if satisfaction is positively associated with business results, then what is going on? Source: National Quality Research Center, University of Michigan Business School

28 Relationship between Satisfaction & Profits ? … What is Wrong Here ?Federated Department Stores Wal-Mart Southwest Airlines The Allstate Corporation Colgate-Palmolive Hotel Industry Unfortunately, we can look at a number of firms in a variety of industries and find a complete breakdown between customer satisfaction and profits. When looking at satisfaction as measured by the University of Michigan’s Customer Satisfaction Index and firms’ reported profits, we see that for some firms satisfaction goes up while profits go down, and vice versa. The results would seem to indicate that the best action these firm could take would be to dissatisfy their customers. Results like these have caused some to openly challenge the value of satisfaction as a business strategy. Satisfaction Rating Net Income Sources: National Quality Research Center, University of Michigan Business School; Annual Reports; Hotel & Motel Management (vol. 210, ; vol. 212, ; vol. 212, ; vol. 214, ); The American Hotel & Lodging Association (1999 AH&LA Lodging Industry Profile and 2000 AH&LA Lodging Industry Profile).

29 Satisfaction data is not analyzed properlyPerceived Performance Exceeds Expectations – Delighted Perceived Performance Product’s & Firm’s Perceived Product Performance Meets Customer Expectations – Mere Satisfaction Perceived Performance Below Expectations – Dissatisfaction

30 “Mere Satisfaction” Is Not Enough: Impact of Dissatisfaction and DelightZone of Pain Zone of Mere Satisfaction Zone of Delight Input – Performance Output – Satisfaction Dissatisfied Merely Satisfied Delighted Most programs designed to improve customer satisfaction fail because managers don’t understand the nature of the impact of customer satisfaction on financial performance. Consequently, achieving profitability through improved satisfaction has frequently been as much a matter of luck as of science. What most managers fail to appreciate is that there are thresholds of satisfaction beyond which little benefit is obtained. As a company reaches customers’ minimally acceptable satisfaction level, it becomes a viable alternative for customers’ consideration. In short, the company is providing the bare necessities and is therefore “in the game.” Once at that point, however, there is a discontinuity in the relationship between satisfaction and customer behavior. We refer to this transition point as moving from the “Zone of Pain” to the “Zone of Mere Satisfaction.” But the vast majority of firms do not have a groundswell of dissatisfied customers. A company could not survive if this was the case, unless it strategy is pure price leadership and customers are willing to tradeoff satisfaction for price. Instead, most businesses have customers who would classify themselves as “satisfied” with their overall experience with the business. It is in this Zone of Mere Satisfaction that the relationship between changes in customer satisfaction and customer behavior appears to break down. As a result, improvement efforts that result in only small improvements in satisfaction levels tend to be unprofitable. Not experiencing pain, however, is not the highest level of satisfaction. No one would describe their true love as “adequately meeting my minimum requirements.” Going beyond mere satisfaction involves more than eliminating problems. It involves the concept of customer delight. It is here that generating satisfaction really pays dividends. In such cases, customers will remain loyal, will help attract other customers and will increase their spending levels. This is what we call the Customer Delight Principle.

31 Drivers of Satisfaction versus DelightSatisfaction is a threshold experience Thresholds are driven by consumers expectations Satisfaction-Maintaining versus Delight-Creating attributes The primary reason that satisfaction is a threshold experience has to do with the underlying components of satisfaction. A company’s performance on the various attributes that make up a customer’s overall experience can be thought of as falling into two general categories: Satisfaction-Maintaining and Delight-Creating. Input – Performance Satisfaction Low High Delight-Creating Attributes Satisfaction-Maintaining Attributes

32 Drivers of Dissatisfaction versus DelightCan solve problems in one call/visit Clearly communicates the required information Have confidence in advice given by advisor Makes you feel like a valued customer The problem for managers is this – what causes customers to be dissatisfied seldom causes customers to be delighted when fixed. For example, if a bank “bounces” a customer’s checks when there is sufficient money the account, s/he will most definitely be dissatisfied. Correctly processing checks, however, regardless of the number of checks correctly processed will not create delight. Similarly, if your accountant doesn’t have a sense of humor, you probably aren’t going to be dissatisfied, but it certainly can enhance the relationship. Provides right amount of information & assistance -1.5 -1.0 -0.5 0.5 1.0 1.5 What causes customers to be dissatisfied seldom causes customers to be delighted when fixed

33 The Input is your ProductA product is a solution that you offer to your target customers … in order to satisfy one or more of their needs A product is more than just a “tangible good”… it is an experience … it includes a combination of tangibles and intangibles dimensions (goods and services)

34 Three “Levels” of a ProductCore: what is the buyer really buying? “In the factory, we make cosmetics; in the store we sell hope” - Revlon Actual: combination of attributes and features that turn the core benefit & value into an actual product, a solution to your customers’ need Augmented: additional attributes, features (often on the service dimension) and benefits that enhance the experience with the actual product

35 “Satisfaction-Maintaining” versus “Delight-Creating” attributesAttribute from Actual Product Level Performance vis-a-vis of Customers’ Expectation? Falls Short Meets or Exceeds Driver of Driver of Dissatisfaction Mere Satisfaction Attributes from Augmented Product Level Performance vis-a-vis of Customers’ Expectation? Falls Short or Meets Exceeds No Impact on Driver of Dissatisfaction Delight

36 Customers Satisfaction ProgramsConverting “dissatisfied customers” to “satisfied customers” Converting “satisfied customers” to “delighted customers” Different programs are required We need to create two sets of programs – One dealing with the drivers of dissatisfaction; and – One dealing with the drivers of delight

37 Putting it in Practice

38 Customer Focus at Harrah’sSource:

39 Wachovia Bank Source: “Wachovia Takes Customer Engagement to the Bank,” Gallup Management Journal, July 8, 2004

40 Service Quality and Shareholder Value

41 Brand Preference Satisfaction and Loyalty

42 Satisfaction and brand preference work together to create customer loyaltySource: Timothy L. Keiningham, Lerzan Aksoy, Tiffany Perkins-Munn, and Terry G. Vavra (2005), “The Brand-Customer Connection,” Marketing Management, vol. 14, no. 4 (July/August),

43 Satisfaction & Brand PreferenceStronger Brand Satisfaction Low High Share-of-Wallet Weaker Brand There is a growing realization among managers and researchers that both satisfaction and brand issues must be linked to customer behavior to accurately predict purchasing behavior. Furthermore, we know from previous research that a brand’s relative position within a consumer’s evoked set of competitors impacts purchase satisfaction and ultimately, behavioral loyalty. From our own research we know that customer satisfaction systematically modifies the form and strength of the relationship between brand preference and share-of-wallet. In essence, the whole is greater than the sum of its parts. Therefore, it is impossible to understand the drivers of loyalty without integrating both brand and satisfaction information. Brand preference moderates the relationship between satisfaction and share-of-wallet

44 Satisfaction & Brand PreferenceLow High Share-of-Wallet Satisfaction Effect Brand Effect Interaction Effect (Brand x Satisfaction) There is a growing realization among managers and researchers that both satisfaction and brand issues must be linked to customer behavior to accurately predict purchasing behavior. Furthermore, we know from previous research that a brand’s relative position within a consumer’s evoked set of competitors impacts purchase satisfaction and ultimately, behavioral loyalty. From our own research we know that customer satisfaction systematically modifies the form and strength of the relationship between brand preference and share-of-wallet. In essence, the whole is greater than the sum of its parts. Therefore, it is impossible to understand the drivers of loyalty without integrating both brand and satisfaction information.

45 Customer Loyalty & Brand Management go Hand-in-HandSource: Timothy L. Keiningham, Lerzan Aksoy, Tiffany Perkins-Munn, and Terry G. Vavra (2005), “The Brand-Customer Connection,” Marketing Management, vol. 14, no. 4 (July/August),