Rule

TUE CUSTOM t ALWAYS RIG

Customer lifetime value: To keep customers coming back, Stew Leonard's has created the "Disneyland of dairy stores." Rule #1: The customer is always right. Rule #2: If the customer is ever wrong, reread Rule #1.

satisfied, and completely satisfied. Even a slight drop from complete satisfaction can create an enormous drop in loyalty. Thus, the aim of customer relationship management is to create not just customer satisfaction, but customer delight.23

Companies are realizing that losing a customer means losing more than a single sale. It means losing the entire stream of purchases that the customer would make over a lifetime of patronage. For example, here is a dramatic illustration of customer lifetime value:

A Stew Leonard, who operates a highly profitable four-store supermarket chain in the northeastern United States, says that he sees $50,000 flying out of his store every time he sees a sulking customer. Why? Because his average customer spends about $100 a week, shops 50 weeks a year, and remains in the area for about 10 years. If this customer has an unhappy experience and switches to another supermarket, Stew Leonard's has lost $50,000 in revenue. The loss can be much greater if the disappointed customer shares the bad experience with other customers and causes them to defect. To keep customers coming back, Stew Leonard's has created what the New York Times has dubbed the "Disneyland of Dairy Stores," complete with costumed characters, scheduled entertainment, a petting zoo, and animatronics throughout the store. From its humble beginnings as a small dairy store in 1969, Stew Leonard's has grown at an amazing pace. It's built 29 additions onto the original store, which now serves more than 300,000 customers each week. This legion of loyal shoppers is largely a result of the store's passionate approach to customer service. Rule #1: at Stew Leonard's—The customer is always right. Rule #2: If the customer is ever wrong, reread rule #1!24

Stew Leonard is not alone in assessing customer lifetime value. Lexus, for example, estimates that a single satisfied and loyal customer is worth more than $600,000 in lifetime sales.25 Thus, working to retain and grow customers makes good economic sense. In fact, a company can lose money on a specific transaction but still benefit greatly from a long-term relationship. This means that companies must aim high in building customer relationships. Customer delight creates an emotional relationship with a brand, not just a rational preference. And that relationship keeps customers coming back.

L.L.Bean, a catalog retailer of outdoor apparel and gear that regularly rates among the top five U.S. brands in the Brand Keys Customer Loyalty Engagement Index, was founded on a philosophy of customer satisfaction and long-term customer relationships. Founder L.L.Bean posted the following notice on the wall of his first store: "NOTICE: I do not consider a sale complete until goods are worn out and customer still satisfied." The company still preaches the following "golden rule": "Sell good merchandise, treat your customers like a human beings, and they'll always come back for more."26

Customer lifetime value

The value of the entire stream of purchases that the customer would make over a lifetime of patronage.

Growing Share of Customer

Beyond simply retaining good customers to capture customer lifetime value, good customer Share of customer relationship management can help marketers to increase their share of customer—the share

The portion of the customer's purchasing they get of the customer's purchasing in their product categories. Thus, banks want to increase that a company gets in its product "share of wallet." Supermarkets and restaurants want to get more "share of stomach." Car categories. companies want to increase "share of garage," and airlines want greater "share of travel."

To increase share of customer, firms can offer greater variety to current customers. Or they can create programs to cross-sell and up-sell in order to market more products and

Customer equity

The total combined customer lifetime values of all of the company's customers.

Consumer Value Ads

To increase customer lifetime value and customer equity, Cadillac is cool again. It's highly successful ad campaigns target a younger generation of consumer.

services to existing customers. For example, Amazon.com is highly skilled at leveraging relationships with its 66 million customers to increase its share of each customer's purchases. Originally an online bookseller, Amazon.com now offers customers music, videos, gifts, toys, consumer electronics, office products, home improvement items, lawn and garden products, apparel and accessories, jewelry, tools, and even groceries. In addition, based on each customer's purchase history, the company recommends related products that might be of interest. This recommendation system may influence up to 30 percent of all sales.27 In these ways, Amazon.com captures a greater share of each customer's spending budget.

Building Customer Equity

We can now see the importance of not just acquiring customers, but of keeping and growing them as well. One marketing consultant puts it this way: "The only value your company will ever create is the value that comes from customers—the ones you have now and the ones you will have in the future. Without customers, you don't have a business."28 Customer relationship management takes a long-term view. Companies want not only to create profitable customers, but to "own" them for life, earn a greater share of their purchases, and capture their customer lifetime value.

What Is Customer Equity?

The ultimate aim of customer relationship management is to produce high customer equity.29 Customer equity is the total combined customer lifetime values of all of the company's current and potential customers. Clearly, the more loyal the firm's profitable customers, the higher the firm's customer equity. Customer equity may be a better measure of a firm's performance than current sales or market share. Whereas sales and market share reflect the past, customer equity suggests the future. Consider Cadillac, the venerable luxury-car unit of General Motors:

In the 1970s and 1980s, Cadillac had some of the most loyal customers in the industry. To an entire generation of car buyers, the name "Cadillac" defined American luxury. Cadillac's share of the luxury car market reached a whopping 51 percent in 1976. Based on market share and sales, the brand's future looked rosy. However, measures of customer equity would have painted a bleaker picture. Cadillac customers were getting older (average age 60) and average customer lifetime value was falling. Many Cadillac buyers were on their last car. Thus, although Cadillac's market share was good, its customer equity was not. Compare this with Germany's BMW. Its more youthful and vigorous image didn't win BMW the early market share war. However, it did win BMW younger customers with higher customer lifetime values. The result: In the years that followed, BMW's market share and profits soared while Cadillac's fortunes eroded badly. Thus, market share is not the answer. We should care not just about current sales but also about future sales. Customer lifetime value and customer equity are the name of the game. A Recognizing this, in recent years, Cadillac has attempted to make the Caddy cool again by targeting a younger generation of consumers with new high-performance models and more vibrant advertising. The average consumer aspiring to own a Cadillac is now about 36 years old.30

Building the Right Relationships with the Right Customers

Companies should manage customer equity carefully. They should view customers as assets that need to be managed and maximized. But not all customers, not even all loyal customers, are good investments. Surprisingly, some loyal customers can be unprofitable, and

To increase customer lifetime value and customer equity, Cadillac is cool again. It's highly successful ad campaigns target a younger generation of consumer.

some disloyal customers can be profitable. Which customers should the company acquire and retain?

The company can classify customers according to their potential profitability and manage its relationships with them accordingly. Figure 1.5 classifies customers into one of four relationship groups, according to their profitability and projected loyalty.31 Each group requires a different relationship management strategy. "Strangers" show low potential profitability and little projected loyalty. There is little fit between the company's offerings and their needs. The relationship management strategy for these customers is simple: Don't invest anything in them.

"Butterflies" are potentially profitable but not loyal. There is a good fit between the company's offerings and their needs. However, like real butterflies, we can enjoy them for only a short while and then they're gone. An example is stock market investors who trade shares often and in large amounts but who enjoy hunting out the best deals without building a regular relationship with any single brokerage company. Efforts to convert butterflies into loyal customers are rarely successful. Instead, the company should enjoy the butterflies for the moment. It should use promotional blitzes to attract them, create satisfying and profitable transactions with them, and then cease investing in them until the next time around.

"True friends" are both profitable and loyal. There is a strong fit between their needs and the company's offerings. The firm wants to make continuous relationship investments to delight these customers and nurture, retain, and grow them. It wants to turn true friends into "true believers," who come back regularly and tell others about their good experiences with the company.

"Barnacles" are highly loyal but not very profitable. There is a limited fit between their needs and the company's offerings. An example is smaller bank customers who bank regularly but do not generate enough returns to cover the costs of maintaining their accounts. Like barnacles on the hull of a ship, they create drag. Barnacles are perhaps the most problematic customers. The company might be able to improve their profitability by selling them more, raising their fees, or reducing service to them. However, if they cannot be made profitable, they should be "fired."

The point here is an important one: Different types of customers require different relationship management strategies. The goal is to build the right relationships with the right customers.

#FIGURE I 1.5 Customer Relationship Groups

Source: Reprinted by permission of Harvard Business Review. Adapted from "Mismanagement of Customer Loyalty" by Werner Relnartz and V. Kumar, July 2002, p. 93. Copyright © by the president and fellows of Harvard College; all rights reserved.

Mismanagement Customer Loyalty

Author I Marketing doesn't take Comment | p|ace ¡n a vacuum [\l0w that we've discussed the five steps in the marketing process, let's examine how the ever-changing marketplace affects both consumers and the marketers who serve them. We'll look more deeply into these and other marketing environment factors in Chapter 3.

Internet

A vast public web of computer networks that connects users of all types all around the world to each other and to an amazingly large Information repository.

The Changing Marketing

Landscape (pp 49-54)

Every day, dramatic changes are occurring in the marketplace. Richard Love of Hewlett-Packard observes, "The pace of change is so rapid that the ability to change has now become a competitive advantage." Yogi Berra, the legendary catcher and manager of the New York Yankees baseball team, summed it up more simply when he said, "The future ain't what it used to be." As the marketplace changes, so must those who serve it.

In this section, we examine the major trends and forces that are changing the marketing landscape and challenging marketing strategy. We look at four major developments: the digital age, rapid globalization, the call for more ethics and social responsibility, and the growth of not-for-profit marketing.

The Digital Age

The recent technology boom has created a digital age. The explosive growth in computer, communications, information, and other digital technologies has had a major impact on the ways companies bring value to their customers. Now, more than ever before, we are all connected to each other and to information anywhere in the world. Where it once took days or weeks to receive news about important world events, we now learn about them as they are occurring through live satellite broadcasts and news Web sites. Where it once took weeks to correspond with others in distant places, they are now only moments away by cell phone, e-mail, or Web cam.

The digital age has provided marketers with exciting new ways to learn about and track customers and to create products and services tailored to individual customer needs. It's helping marketers to communicate with customers in large groups or one-to-one. Through Web videoconferencing, marketing researchers at a company's headquarters in New York can look in on focus groups in Chicago or Paris without ever stepping onto a plane. With only a few clicks of a mouse button, a direct marketer can tap into online data services to learn anything from what car you drive to what you read to what flavor of ice cream you prefer. Or, using today's powerful computers, marketers can create their own detailed customer databases and use them to target individual customers with offers designed to meet their specific needs.

Digital technology has also brought a new wave of communication, advertising, and relationship building tools—ranging from online advertising, video sharing tools, cell phones, and video games to Web widgets and online social networks. The digital shift means that marketers can no longer expect consumers to always seek them out. Nor can they always control conversations about their brands. The new digital world makes it easy for consumers to take marketing content that once lived only in advertising or on a brand Web site with them wherever they go and to share it with friends. More than just add-ons to traditional marketing channels, the new digital media must be fully integrated into the marketer's customer-relationship-building efforts. Says one marketer, "We're [now] building a network of experiences."32

Perhaps the most dramatic new digital technology is the Internet. The number of Internet users worldwide now stands at more than 1.2 billion and will reach an estimated 3.4 billion by 2015. Today's typical Internet users spend 47 percent of their time online looking at online content—watching video, reading the news, or getting the lowdown on friends and celebrities on MySpace or Facebook. They spend another 33 percent of their online time communicating with each other, 15 percent shopping, and 5 percent googling or using other search engines. Computers and the Internet have become an indispensable part of our lives.33

What do we value most? Judging by how we spend our time, our computers. Most people spend more time with their computers than with their spouse or significant other. More than 80 percent report that they grow more dependent on their computer every year. Computers are also a growing source of stress. The average consumer experiences frustrating computer problems twice a month and wastes 12 hours a month due to computer problems. Eleven percent say they'd be willing to implant a device in their brains that would allow them to access the Internet. Twenty-four percent say the Internet can serve as a substitute for a significant other. Ten percent say the Web brings them close to God.

Four Store Supermarket

Web 2.0—a "second coming" of the Internet—offers a fast-growing set of new Web technologies for connecting with customers. Here, Dunkin' Donuts, a chain of donut shops, offers a popular YouTube space where people can share their "that's why America runs on Dunkin'" stories and videos.

Web 2.0—a "second coming" of the Internet—offers a fast-growing set of new Web technologies for connecting with customers. Here, Dunkin' Donuts, a chain of donut shops, offers a popular YouTube space where people can share their "that's why America runs on Dunkin'" stories and videos.

Internet usage surged in the 1990s with the development of the user-friendly World Wide Web. During the overheated Web frenzy of the late 1990s, dot-coms popped up everywhere. The frenzy cooled during the "dot-com meltdown" of 2000, when many poorly conceived e-tailers and other Web start-ups went out of business. A Today, a new version of the Internet has emerged—a "second coming" of the Web often referred to as Web 2.0. Web 2.0 involves a more reasoned and balanced approach to marketing online. It also offers a fast-growing set of new Web technologies for connecting with customers, such as Weblogs (blogs) and vlogs (video-based blogs), social-networking sites, and video-sharing sites. The interactive, community-building nature of these new technologies makes them ideal for relating with consumers.34

Online marketing is now the fastest-growing form of marketing. These days, it's hard to find a company that doesn't use the Web in a significant way. In addition to the "click-only" dot-coms, most traditional "brick-and-mortar" companies have now become "click-and-mortar" companies. They have ventured online to attract new customers and build stronger relationships with existing ones. Today, more than 65 percent of American online users use the Internet to shop.35 Business-to-business online commerce is also booming. It seems that almost every business has set up shop on the Web.

Thus, the technology boom is providing exciting new opportunities for marketers. We will explore the impact of the new digital marketing technologies in future chapters, especially Chapter 17.

Rapid Globalization

As they are redefining their relationships with customers and partners, marketers are also taking a fresh look at the ways in which they relate with the broader world around them. In an increasingly smaller world, many marketers are now connected globally with their customers and marketing partners.

Today, almost every company, large or small, is touched in some way by global competition. A neighborhood florist buys its flowers from Mexican nurseries, and a large U.S. electronics manufacturer competes in its home markets with giant Korean rivals. A fledgling Internet retailer finds itself receiving orders from all over the world at the same time that an American consumer-goods producer introduces new products into emerging markets abroad.

American firms have been challenged at home by the skillful marketing of European and Asian multinationals. Companies such as Toyota, Nokia, Nestlé, Sony, and Samsung have often outperformed their U.S. competitors in American markets. Similarly, U.S. companies in a wide range of industries have developed truly global operations, making and selling their products worldwide. AQuintessentially American McDonald's now serves 52 million customers daily in 31,600 restaurants worldwide—some 65 percent of its revenues come from outside the United States. Similarly, Nike markets in more than 160 countries, with non-U.S. sales accounting for 53 percent of its worldwide sales. Even MTV

U.S. companies in a wide range of industries have developed truly global operations. Quintessentially American McDonald's captures 65 percent of its revenues from outside of the United States.

Networks has joined the elite of global brands—its 150 channels worldwide deliver localized versions of its pulse-thumping fare to 419 million homes in 164 countries around the globe. And it reaches millions more daily via the more than 5,000 mobile, console, and online games and virtual worlds that it shares on its more than 300 Web sites worldwide.36

Today, companies are not only trying to sell more of their locally produced goods in international markets, they also are buying more supplies and components abroad. For example, Isaac Mizrahi, one of America's top fashion designers, may choose cloth woven from Australian wool with designs printed in Italy. He will design a dress and e-mail the drawing to a Hong Kong agent, who will place the order with a Chinese factory. Finished dresses will be airfreighted to New York, where they will be redistributed to department and specialty stores around the country.

Thus, managers in countries around the world are increasingly taking a global, not just local, view of the company's industry, competitors, and opportunities. They are asking: What is global marketing? How does it differ from domestic marketing? How do global competitors and forces affect our business? To what extent should we "go global"? We will discuss the global marketplace in more detail in Chapter 19.

The Call for More Ethics and Social Responsibility

Marketers are reexamining their relationships with social values and responsibilities and with the very Earth that sustains us. As the worldwide consumerism and environmentalism movements mature, today's marketers are being called upon to take greater responsibility for the social and environmental impact of their actions. Corporate ethics and social responsibility have become hot topics for almost every business. And few companies can ignore the renewed and very demanding environmental movement. Every company action can affect customer relationships:37

There is an unwritten contract today between customers and the brands they buy. First, they expect companies to consistently deliver what they advertise. Second, they expect the companies they do business with to treat them with respect and to be honorable and forthright----Everything a company does affects the brand in the eyes of the customer.

For example, Celestial Seasonings, a tea company, incurred customers' wrath by ignoring its advertised corporate image of environmental stewardship when it poisoned prairie dogs on its property. By contrast, Google's decision to use solar energy for its server farms reinforces what Google stands for and strengthens the Google brand.

The social-responsibility and environmental movements will place even stricter demands on companies in the future. Some companies resist these movements, budging only when forced by legislation or organized consumer outcries. More forward-looking companies, however, readily accept their responsibilities to the world around them. They view socially responsible actions as an opportunity to do well by doing good. They seek ways to profit by serving the best long-run interests of their customers and communities.

Some companies—such as Patagonia, Ben & Jerry's, Honest Tea, Ethos Water, and others—are practicing "caring capitalism," setting themselves apart by being civic-minded and responsible. They are building social responsibility and action into their company value and mission statements. For example, when it comes to environmental responsibility, outdoor gear marketer Patagonia is "committed to the core." "Those of us who work here share a strong commitment to protecting undomesticated lands and waters," says the company's Web site. "We believe in using business to inspire solutions to the environmental crisis." Patagonia backs these words with actions. Each year it pledges at least 1 percent of its sales or 10 percent of its profits, whichever is greater, to the protection of the natural environment.38 We will revisit the topic of marketing and social responsibility in greater detail in Chapter 20.

The Growth of Not-for-Profit Marketing

In the past, marketing has been most widely applied in the for-profit business sector. In recent years, however, marketing also has become a major part of the strategies of many not-for-profit organizations, such as colleges, hospitals, museums, zoos, symphony orchestras, and even churches. Not-for-profits face stiff competition for support and membership. Sound marketing can help them to attract membership and support.39 Consider the marketing efforts of the American not-for-profit St. Jude Children's Research Hospital:

St. Jude is like no other pediatric research facility in the world. Its discoveries have profoundly changed how the world treats children with cancer and other catastrophic diseases. St. Jude houses some of the world's most gifted researchers, and doctors from across the world send their toughest cases there. At St. Jude, no one pays for treatment beyond what is covered by insurance, and those without insurance are never asked to pay. All of this comes at a very high cost, a voracious $1.2 million per day. So, to help fund its medical miracles, St. Jude aggressively markets its powerful mission—"Finding Cures. Saving Children."

Miracles Jude

Not-for-profit marketing: St. Jude aggressively markets its powerful mission—"Finding Cures. Saving Children." For example, it works with Stanford Financial and PGA TOUR Ambassador Vijay Singh to sponsor The Eagles for St. Jude program.

St. Jude's marketing efforts include everything from cutting-edge public relations and television commercials to online auctions, contests, and even merchandise licensing. St. Jude also co-sponsors innovative cause-related marketing programs with corporate partners such as Target, Williams-Sonoma, Domino's Pizza, CVS Pharmacy, Gymboree, and Stanford Financial Group. A For example, Stanford Financial, a network of financial-services firms with clients in more than 130 countries, sponsors The Eagles for St. Jude program, in which Stanford donates $1,000 for every eagle made on the PGA tour. St. Jude invites the golfing public to follow suit with its own donations. Last year alone,

Stanford Financial donated more than $1.7 million. Golfer Vijay Singh, PGA TOUR Ambassador for the program, was himself deeply touched by St. Jude's good works, donating $50,000 of his own money: "All the research, all the cures, all the misery that people face—but you get there and see the kids with their smiles," he says. "It's just overwhelming."

When St. Jude applies its sophisticated public relations efforts on behalf of its life-saving programs, the results can be spectacular. For example, during last year's annual Thanks and Giving campaign, some 50-75 million viewers watched a week's worth of segments on TV's Today show featuring St. Jude National Outreach Director Mario Thomas and patient families. A segment featuring a tour of the hospital coincided with the highest single day rating in the history of the popular long-running American TV show. Thomas also appeared on a variety of other American TV shows, and as a result, St. Jude enlisted a record 50 corporate sponsors and millions of individual donors heeded the call. Through such strong marketing, St Jude earns tens of millions of dollars each year in donations, of which 85 percent go directly to research and treating children.40

Government agencies have also shown an increased interest in marketing. For example, the U.S. military has a marketing plan to attract recruits to its different services, and various government agencies are now designing social marketing campaigns to encourage energy conservation and concern for the environment or to discourage smoking, excessive drinking, and drug use. Even the once-stodgy U.S. Postal Service has developed innovative marketing to sell commemorative stamps, promote its priority mail services, and lift its image as a contemporary and competitive organization. In all, the U.S. government is the nation's 29th largest advertiser, with an annual advertising budget of more than $1.2 billion.41

Author I Remember Figure 1.1 Comment | outlining the marketing process? Now, based on everything we've discussed in this chapter, we'll expand that figure to provide a road map for learning marketing throughout the rest of the text.

This expanded version of Figure 1.1 at the beginning of the chapter provides a good road map for the rest of the text. The underlying concept of the entire text is that marketing creates value for customers in order to capture value from customers in return.

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Responses

  • hal sackville-baggins
    Why st.jude hospital use TV commercial thats rational and emotional?
    8 years ago
  • bilba
    How stew leonard's practice customer service?
    8 years ago
  • mirren
    How stew leonard's builds long term customers?
    8 years ago

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