Chapter 2:

Relationship Marketing and the

Concept of Customer Value
Overview

Topics discussed:

 CRM and the customer-value based approach

 How value is perceived by customers

 The Satisfaction-Loyalty-Profit Chain (SPC) and its role in profitably managing

customers

 Different concepts of value that can be derived from customers

V. Kumar and W. Reinartz – Customer Relationship Management 2

CRM

 Capture customer data and interact with the

customer simultaneously

 Develop specific strategies for interaction with each customer

 Better relationships with profitable customers

 Locating and enticing new customers that will be profitable

 Finding appropriate strategies to deal with unprofitable customers, including termination

of relationships

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Link Between CRM and Customer Value

 Customer Value:
 The economic value of the customer relationship to the firm

 CRM:
 Practice of analyzing and utilizing marketing databases and leveraging communication
technologies to determine corporate practices and methods that will maximize the
lifetime value of each individual customer to the firm

 Adoption of CRM with customer value at its core strategy helps us define CRM from a
customer value perspective

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Benefits of customer value-based approach in
Marketing Decisions

 Decrease in Costs

 Maximization in revenues

 Improvement in Profits and ROI

 Acquisition and Retention of Profitable Customers

 Reactivation of Dormant Customers

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Alignment of Value to customer and Value to firm

 Only by creating Value for customer, Value for firms can be generated
 Firms must be able to maximize value they deliver to customers while generating enough
value to achieve positive ROIs
 Strategically implemented CRM is key component to meet this challenge

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Value to the Customer

 Heart of Business, esp. in Marketing and CRM

 Highly heterogeneous across customers as well as within individuals

Perceived customer
value

Perceived benefits Perceived costs

 Core function of CRM is influencing customer´s perceived value

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From Value for Customers to Value from
Customers: The Satisfaction-Loyalty-Profit Chain

 Satisfaction-Loyalty-Profit Chain

 Increased customer satisfaction will lead to greater customer retention, which is often
used as a proxy for customer loyalty, which then is expected to lead to greater
profitability

Product
Performance
Customer Retention / Revenue /
Service
Performance Satisfaction Loyalty Profit
Employee
Performance

Value for the customer Value from the customer

Source: “Strengthening the satisfaction-profit chain”, Adapted from: Eugene W Anderson, Vikas Mittal. Journal of Service Research,
Nov 2000. Vol 3, Iss.2, p. 107.

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Direct Link between
Customer Satisfaction and Profits

 Direct link suggests, that as customers experience greater satisfaction with a firm’s offering,
profits rise
 Positive correlation between customer satisfaction and ROA
 Improving customer satisfaction comes at a cost and once the cost of enhancing
satisfaction is factored in, offering “excessive satisfaction” doesn’t pay
 Marginal gains in satisfaction decrease, while the marginal expenses to achieve the growth
in satisfaction increase
 There is an optimum satisfaction level for any firm, beyond which increasing satisfaction
does not pay

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Link between Satisfaction and Retention

Source: “Strengthening the satisfaction-profit chain”, Eugene W Anderson, Vikas Mittal. Journal of Service Research, Nov 2000. Vol 3, Iss.2, p 114

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Link between Satisfaction and Retention (2)

 Link between satisfaction and retention is asymmetric:

 Dissatisfaction has a greater impact on retention than satisfaction

 Even if the level of satisfaction is high, retention is not guaranteed

 If customers are dissatisfied, other products become more enticing

 The link is nonlinear in that the impact of satisfaction on retention is greater at the extremes

 The flat part of the curve in the middle has also been called the “zone of indifference”

 Factors like the aggressiveness of competition, degree of switching cost, and the level of
perceived risk influence the shape of the curve and the position of the elbows

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Link between Satisfaction and Retention (3)

Source: “Why satisfied customers defect”, Jones, Thomas O, Sasser, W Earl Jr. Harvard Business Review. Boston: Nov/Dec 1995. Vol. 73, Iss. 6

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Link between Loyalty and Profits

 Reichheld’s hypotheses
 Long term customers spend more per period over time
 Cost less to serve per period over time
 Have greater propensity to generate word-of-mouth
 Pay a premium price when compared to that paid by short-term customers
 Does not hold true in a non-contractual relationship
 Revenue stream must be balanced by the cost of constantly sustaining the relationship
and by fending off competitive attacks

 Efforts at increasing customer satisfaction and retention not only consume a firm’s
resources but are subject to diminishing returns

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Lifetime Duration-Profitability Association

 Reinartz and Kumar: Across the different firms,

 There is a segment of customers that is loyal but not very profitable
(due to excessive resource allocation)
 There is a segment that generates very high profits although it has only a short tenure
 Since these short-term customers can be very profitable, it is clear that loyalty is not
the only path to profitability

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Lifetime Duration-Profitability Association (2)

High
Lifetime
Profit

Low

Low High
Loyalty

 Overall trend shows a direct correlation between loyalty and profitability

 Outliers on the graph who generate high profits while not

having high loyalty will outperform those customers who have a
high level of loyalty but who are not very profitable

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Extending the Concept of Customer Value (1/2)

 Customer Lifetime Value (CLV)

 „the present value of future profits generated from a customer over his or her life of
business with the firm“1
 Loyal customers usually – but not necessarily – exhibit a higher CLV
 Gupta, Lehmann & Stuart confirm positive link between CLV and firm value
 Kumar at. all show that optimizing resource allocation based on CLV can increase
revenues by a factor of 10

 Customer Influencer Value (CIV)

 well established in research and management in the form of word of mouth
 stems from customers´ intrinsic motivation → free for companies
 companies can profit from high CIV, as well as the CIV can be zero or negative
 measuring CIV has become much easier, but it is challenging to include all various
forms

1Kumar et al., 2010, p. 299

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Extending the Concept of Customer Value (2/2)

 Customer Referral Value (CRV)

 similar to CIV, but instead of being intrinsical motivated, referrals are extrinsically
motivated by the company
 in contrast to CIV, CRV can not be negative

 Customer Knowledge Value (CKV)

 value of the information customer provides company with
 helps to produce personalized and innovative offerings based on customers´
preferences (generated from feedback and complaints instead of market and consumer
research)
 customers can also be integrated in the value creation process through co-creation
 CKV can increase innovation success rates as well as improve existing offerings

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Summary

 For long-term success companies must offer value to customers as well as extract value
from them

 Customers’ value perception of an offering is a consequence of the offering’s attributes

 Perceptions of benefits, costs, and value are heterogeneous and volatile – across and
within individuals
 Attributes are not perceived individually but in composite. The whole is different from
the sum of its parts
 Attributes have different characteristics – they may be objective or perceived, their
effect on value perception may be direct or indirect and immediate or delayed

 While companies should satisfy customers it has been shown that a customer-value based
approach to the SPC chain is essential

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Summary

 Strategic CRM plays a key role in profitably managing customers by reconciling both ends
of the figure below:
 Offering value to customers, thereby creating satisfaction and, in turn, loyalty
 while managing individual customers to extract value from them
 and aligning investment into the relationship and profit from the relationship

 Value comes in multiple shapes and forms – CLV, CKV, CIV, and CRV

 Various links within the SPC are almost always nonlinear, asymmetric, and segment and
industry specific

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