BUS 620 Week 1 assignment

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Chapter 2

Value Creation and Customer Satisfaction

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Learning Outcomes

By the end of this chapter, you should:

Understand the founda�ons of customers’ percep�ons of product quality and value and their rela�onship to customer sa�sfac�on. Appreciate how total quality management and con�nuous quality improvement processes can be applied to enhance customer sa�sfac�on. Compare and contrast the product supply system with the value delivery system. Know the elements of the value chain and the general principles of applying value chain analysis. Understand how customer rela�onship management and customer profitability analysis can be used to build customer loyalty. Recognize the role of customer life�me value in shaping the development of marke�ng strategy and plans.

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Ch. 2 Introduction This chapter examines how the marke�ng management process creates value for customers and explores the interrela�onship between different concep�ons of value and customer sa�sfac�on. We begin by developing an understanding of value that is focused on the buyer, not the product being sold. It is a customer-driven measure that is derived from percep�ons of product quality and price. Essen�al to understanding this perspec�ve is the importance of maintaining a marke�ng orienta�on with the organiza�on. We then move on to develop our concep�on of how customer sa�sfac�on is rooted in buyers’ prior expecta�ons of product value. The principles of total quality management, con�nuous quality improvement, and value chain analysis are introduced as poten�ally important drivers in crea�ng and delivering consistently high levels of customer sa�sfac�on. The concluding sec�ons of Chapter 2 examine how the tools of customer rela�onship management and customer profitability analysis can be applied to maximize the financial value of customer loyalty.

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We typically associate outstanding customer service with small, local retail businesses . . . places where we recognize faces and o�en know the names of service providers. Heroic plumbers coming out at 2 a.m. to stop the basement from flooding. A den�st coming in to his office on a Sunday to a�end to an abscessed incisor. The auto mechanic who loaned an out-of-town family his car so that they could con�nue on their vaca�on while he rebuilt the failing transmission on their 1997 Dodge Caravan.

Stories of great customer sa�sfac�on experiences are less o�en told about large, seemingly impersonal or distant businesses such as Internet service providers, wireless carriers, and airlines. When you do hear these stories, however, they are o�en about individual employees who have gone out of their way to help a customer, o�en in ways indirectly related to their company’s core business. Consider the case of a lost toy—a raggedy, but much loved, stuffed hedgehog. "Hiram" was accidently le� behind by a Texas family on vaca�on at a 4,000-room hotel complex in Las Vegas. More specifically, le� ensnared in a tangle of bed sheets by 4½-year-old Tinya.

When Tinya’s mom called the hotel a�er returning to Houston, they assured her they would try to find Hiram . . . and they did. Though now thoroughly clean, Hiram had not survived the rigors of ins�tu�onal laundering unscathed. However, when he arrived home via FedEx three days later, only the mom no�ced or cared about the careful repairs that someone had made.

We don’t know how many people were involved in the search, rescue, and repair of Hiram.

We don’t know, but we’re pre�y sure that Tinya was delighted by the reunion with her favorite hedgehog. And we definitely know that her mom was a sa�sfied customer, even though her vaca�on was over and she had to return to work. Incidentally, we also know . . . though the hotel didn’t .  . . that mom owns one of the largest independent conference and conven�on planning firms in Texas.

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This adver�sement from the "Fair Trade" Just Coffee Coopera�ve illustrates that consumers are concerned with the social implica�ons of their purchases as well as the product-specific a�ributes.

Just Coffee Coopera�ve

2.1 Marketing Orientation and Customer Value As noted in the previous chapter, the marke�ng concept is a customer-oriented business philosophy that stresses customer sa�sfac�on as the key to achieving organiza�onal goals. The transla�on of the marke�ng concept from philosophy to actual business prac�ces requires the establishment of a marke�ng orienta�on within the firm. Crea�ng and maintaining a marke�ng orienta�on requires sustained focus on the elements of that external environment that make the greatest impact on the company’s ability to sa�sfy its customers. First and foremost are the customers themselves. Successful firms understand their customers’ preferences and are able to effec�vely adapt to market shi�s. In fact, a thorough understanding of the target market will enable the business to an�cipate some changes in buyer preference.

The second dimension of the external environment that needs to be studied and monitored is the compe��on. The marke�ng mix offered by compe�tors seldom remains sta�c. They are also in the process of refining and reshaping their marke�ng efforts, exploring new opportuni�es, and trying to find be�er ways to sa�sfy their prospec�ve buyers. They are in business to sa�sfy some of the same target markets that your firm is pursuing, and they are not likely to be any less earnest in their efforts. As obvious as this may seem, far too many marke�ng managers develop elaborate plans without any considera�on for how their compe�tors’ strategies are evolving and how they will respond to your price change, new adver�sing campaign, or shi� in distribu�on strategy. In the same way that marke�ng managers some�mes become myopic by focusing on the product rather than the customer, they can also develop blinders—failing to pay a�en�on to shi�s in marketplace dynamics and compe��ve behavior.

In addi�on to being focused on the customer and the compe�tors, the development of a compe��vely successful marke�ng orienta�on also requires organiza�onal discipline. It requires that all of the func�ons and resources of the organiza�on be aligned and integrated with the primary corporate objec�ve of customer sa�sfac�on. This is not always readily accepted within organiza�ons. The percep�on that the objec�ves of other func�onal areas within the firm should be subordinated to marke�ng is frequently met with resistance. For example, produc�on managers may feel that they have been hired to improve the efficiency of the produc�on processes first and foremost. Improvements in the quality of the product, if any, will have to be a consequence of those goals. However, be�er-built products that don’t reflect the preferences of the target market simply won’t sell, no ma�er how well they have been designed.

Crea�ng a Marke�ng Orienta�on

Consider the example of a Dave Ingraham, a young entrepreneur who has just graduated from an MBA program and wants to open a small café in the northeastern college town where he lives. He is a�racted to the college market because he believes he understands the prospec�ve customers and senses an unmet market opportunity near campus. Star�ng from a marke�ng orienta�on rather than a product focus, he will need to analyze those characteris�cs of the environment that will impact his ability to sa�sfy this target market. Before thinking about interior designs, promo�onal schemes and loca�on decisions, Dave needs to be sure that he understands the preferences, behavioral tendencies, and key trends in this compe��ve market.

One emerging trend in this age segment of the market is the resurgence of interest in making coffee at home. Specifically, there has been very significant growth in the popularity and sales of single-serve pod brewing systems. These single-pod brewers offer college students an easy-to-use, cost-effec�ve alterna�ve to running out to the local coffee shop. This may work against Dave’s ini�al marke�ng plan and require changes to the basis on which the café environment appeals to college students.

Another trend in the market that warrants Dave’s a�en�on is college students’ growing concern over safe environmental and ethical prac�ces. Though evident in many markets, every coffee-related business needs to be par�cularly sensi�ve to these issues due to the growth of the "fair-trade" movement in coffee-producing countries.

What types of changes would you make to the typical café to overcome or even capitalize on these two specific trends in coffee consump�on and sales?

A working marke�ng orienta�on requires more than simply tracking trends in the product markets where you compete. For example, Dave read an ar�cle in a business magazine that said sales of premium-priced, high-quality coffee by fast- food chains has experienced very high rates of growth in recent years. Should this be considered good news? Not necessarily. Na�onal trends are not indica�ve of local condi�ons. College students may be substan�ally more price- sensi�ve than the average coffee buyer. Fast-food chains are prospec�ve compe�tors with business models that are vastly different from what Dave has ini�ally planned to do.

All efforts to understand the compe��ve environment need to be viewed within the specific context of your target market. In this instance, the age, income levels, family status, and other demographic characteris�cs of the target market make these consumers atypical coffee buyers in some ways. For a retail business, the unique quali�es of the local market also limit the value of making comparisons to na�onal trends. The number, loca�on, and business model of compe�tors within the market boundaries of this proposed café define the compe��ve landscape. Na�onal pa�erns of compe��on may be meaningless. Fostering a working, useful marke�ng orienta�on always requires a narrow focus on those factors within the specific environment that directly impact the firm’s ability to sa�sfy its customers.

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Consumers try to maximize the value of their purchase by iden�fying the best quality at the lowest price rela�ve to their product-specific needs.

Associated Press

Local consumer trends o�en fail to keep pace with changes at the regional or na�onal level. In fact, local cultures can some�mes push consump�on pa�erns in the opposite direc�on of that observed at the na�onal level. Can you think of any examples of this phenomenon in your town or city?

Building Customer Value and Satisfaction

Value is a term that can carry very different connota�ons depending on the circumstances. In marke�ng, it is important to recognize that it is not synonymous with product quality. The be�er-built product may be of very high quality, but it provides li�le value to consumers if they derive no sa�sfac�on from its ownership or use. Value is, first and foremost, always specific to the buyer—not the seller and not the product.

This point can be reinforced by looking at the difference between a product- and a market-oriented view of value crea�on. A product orienta�on will emphasize excellence in engineering and manufacturing to produce a product that is superior to the available alterna�ves on the market based on the designer’s understanding of how product quality should be assessed. Incremental "improvements" to the product are subject to financial analysis with rela�vely li�le regard for buyers’ preferences. The underlying mentality is that we are compe�ng in an economic market where people are pre�y much all the same and products are undifferen�ated commodi�es. Although there may be product markets where one or both of these assump�ons are valid, they are quite rare. The role of marke�ng in this scheme is simply to sell whatever the company produces. Marke�ng managers are tasked with finding the best market for the product that has been produced and making the sale.

The market-oriented model to crea�ng value begins with the focus on the target customer. The prospec�ve buyers’ wants and needs provide the ini�al blueprint for the design of the product. Ul�mately, it will be the buyers’ percep�ons of product quality that determine value and their experience with the product that determines customer sa�sfac�on. Marke�ng is involved in the overall process far earlier than in the alterna�ve product-driven model. Through the market research func�on, marke�ng managers are tasked with iden�fying the target market and determining what these customers want from the products they buy. Similarly, the job of understanding how consumers perceive the array of compe��ve brands in this category also resides in the marke�ng department.

Based on this analysis of the two alterna�ves, it is apparent that value is not simply product quality, though it has something to do with quality. It is also evident that its meaning resides with the buyer more than the seller—that is, the true value of a product is based on the buyer’s subjec�ve evalua�on, not the seller’s es�ma�on. From a marketer’s perspec�ve, value is understood as a measure of the bundle of benefits a buyer gets from the product rela�ve to the perceived costs of acquiring the product. Insofar as product quality can be defined by the purchaser’s percep�on of the sum of the benefits he or she receives from the product, value can be expressed as a conceptual equa�on of the form:

Value = {Sum of Benefits / Perceived Cost to Acquire}

Or alterna�vely as:

Value = {Product Quality / Price}

In each formula�on, value is subjec�vely defined as a func�on of the buyer’s es�ma�on of the bundle of benefits received from the product rela�ve to the price paid to acquire them. Consider, for example, how consumers assign value when shopping for a laptop computer. Different benefits are conveyed by specific a�ributes of the product. These include processor performance characteris�cs, viewing screen size and resolu�on, memory (RAM), graphics, hard drive capacity, modem speed, ba�ery life, warranty, and other features. A buyer’s evalua�on of the sum total of benefits he or she will derive from this bundle of a�ributes, rela�ve to the cost to purchase, is the perceived value of the product. Consequently, marke�ng managers can enhance the outcome of the value equa�on either by decreasing the price or increasing the aggregate quality of the product offering.

Like value, customer sa�sfac�on is based on a subjec�ve appraisal on the part of the consumer. It is an experience-based assessment of whether a product or service meets or surpasses his or her expecta�ons. By defini�on, a customer is sa�sfied only when the benefits derived from a purchase meet or exceed his or her prior expecta�ons of product value. How customers perceive the value of a brand depends on their appraisal of the whole bundle of benefits derived from purchasing and using the product.

Think About It

"Value is, first and foremost, always specific to the buyer—not the seller and not the product." Although this statement can be verified by closely examining any product market, it is more readily evident in some markets than others. Consider the markets for an�que toy trains, imported brands of beer, and streak-free varie�es of glass cleaner.

Which provides the best evidence to support the proposi�on that value is specific to the buyer?

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A customer’s sense of sa�sfac�on from the purchase will depend on his or her pre-sale expecta�ons and post-sale percep�ons of product value.

Corbis News/Corbis

In general, what types of product markets most clearly illustrate the truth of this proposi�on? Why?

Perceived Value as the Expected Bundle of Benefits

Since both value and sa�sfac�on are rooted in subjec�ve percep�ons, they can be significantly influenced by a number of non-product factors. Ul�mately, however, the importance of each of these factors rests on the buyer’s expecta�ons. Posi�ve indica�ons of customer sa�sfac�on and perceived product value are signs that the purchase has met or exceeded prepurchase expecta�ons.

At this point it is essen�al to recall that consumers are responding to the bundle of benefits that products provide—not simply to the tangible characteris�cs of goods being sold. Consider snowboards. Do buyers really value owning composite metal bindings a�ached to highly polished ver�cal strips of wood that have been laminated together? Or do they value the fun and excitement that can be derived from the product’s use? No one wants lumbar spinal surgery or term life insurance or 5 mm drill bits. But many consumers want relief from chronic back pain, peace of mind that their children will be cared for in the event of their death, or a 5 mm hole somewhere.

When evalua�ng goods and services, consumers consider those features that are of greatest importance and assign the greatest significance or weight to them. A product as simple as toothpaste may be perceived very differently by different groups or segments of the market. Each market segment may recognize that the poten�al benefits from using toothpaste include figh�ng cavi�es, whitening teeth, and freshening breath. However, young, unmarried consumers may place a higher weight on the aesthe�c benefits, while the parent of five children may assign greater importance to figh�ng cavi�es. Both groups may value all three of these benefits, but not in the same way. These differences form the basis for crea�ng benefit segments within product categories. Understanding which product benefits your target market values most is an essen�al first step to differen�a�ng your brand from compe�tors’ brands in ways that will provide differen�al compe��ve advantages. Superior quality and performance on key product benefits defines one class of factors that directly impact customer sa�sfac�on. These factors are some�mes called value drivers because they enhance the value of a product or service in the eyes of the consumer. These can be tangible characteris�cs, readily discernable from our five senses, such as color, size, weight, and taste. However, they can also be rooted in very subjec�ve impressions related to brand image, product performance, or other intangible characteris�cs that are separate and dis�nct from the physical proper�es of the product. Abstract quali�es such as luxury, reliability, beauty, style, and strength cannot be directly observed but are o�en pivotal in buyers’ decision making.

Product Pricing as a Value Driver

A second class of factors that directly impact customer sa�sfac�on can be deduced easily from the two conceptual equa�ons introduced previously. Price is a fundamental element to buyers’ assessment of value and central to the determina�on of their sa�sfac�on with the products they purchase. There is a wide range of price-related value drivers to be considered when developing marke�ng plans. The three general categories of pricing considera�ons that directly impact buyers’ percep�ons of value are reference prices, psychological pricing, and performance value.

Making comparisons across alterna�ves is a basic and essen�al skill. Shoppers o�en compare one brand’s price to a reference price that they maintain in their minds for that product category. This is the approximate price or price level that people expect to pay for a given product. This price level provides an important internal basis for shaping expecta�ons of value. Marke�ng managers can adapt pricing strategy to suit their target market’s prevailing reference price for their product. However, the marke�ng mix can also be used to influence buyers’ percep�ons of an appropriate or acceptable price.

Psychological pricing prac�ces are centered on understanding the ways in which products create innate or intrinsic sa�sfac�on for the buyer. Strategies that stress the mental and emo�onal value of the bundle of benefits realized from buying a product are commonly used throughout all sectors of the economy—not simply retail consumer markets. Many of these techniques and applica�ons are specifically aimed at shaping prospec�ve buyers’ reference prices. Sellers o�en a�empt to alter buyers’ frames of reference by promo�ng discounts from manufacturers’ suggested retail prices. In this instance, the manufacturer’s suggested retail price (MSRP) serves as an anchor-point for consumers’ percep�ons of brand quality, and the discounted price elevates their subsequent percep�on of overall value.

Alterna�vely, marketers may establish pricing strategies that are exclusive to specific distributors or channels of distribu�on, thereby establishing different reference prices in parallel markets. Or the seller may try to improve consumers’ percep�ons of value with promo�onal messages encouraging them to compare their own brand only to more expensive, premium-priced alterna�ves. The way in which prices are communicated and the order in which they are encountered are among the many other ways that sellers can shape buyers’ percep�ons of value.

Consider the way in which new cars are typically sold. The MSRP is o�en displayed in an invoice format on the car’s window. This "s�cker price" may be the first price informa�on shoppers encounter. It provides a reference price for the sake of comparison. Subsequent conversa�ons and nego�a�ons with a salesperson typically start from this s�cker price and move downward. However, a good salesperson will work to keep the MSRP in the buyer’s mind because it is intended to anchor his or her percep�ons of product quality. Consequently, a car with a $24,950 list price becomes a be�er value as the cost is nego�ated downward, but the percep�on of the vehicle’s quality remains �ed to the higher price. An essen�al psychological element of this process is the price–quality correla�on.

The price–quality correla�on is at the heart of a long list of psychological pricing techniques that work independent of the category’s reference price. These include introductory price dealing, bundling, price lining, and pres�ge pricing. In the absence of reliable

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informa�on to the contrary, consumers tend to believe that higher-priced products provide a higher level of quality. Since value is a func�on of product quality and price (Value = {Product Quality / Price}), the implica�ons of a posi�ve price-quality correla�on for customer sa�sfac�on are substan�al. The detailed inves�ga�on of this and other pricing topics is provided in chapter 10.

In contrast to psychological value, performance value refers to the func�onal ability of the product to deliver tangible benefits to the buyer. From the buyer’s perspec�ve, it is an assessment of how well a product does what the product has promised to do. Within the context of industrial product sales, this is some�mes referred to as the monetary value of the product because it represents either cost savings or revenue improvements resul�ng from the purchase. In both consumer and industrial markets, the performance of a product can have mul�ple dimensions. If a customer is purchasing so�ware to track inventory at his retail shop, the product probably has rela�vely li�le pres�ge or psychological value associated with its use. However, dimensions such as accuracy, flexibility, ease-of-use, reliability, capability, and speed are likely to be important considera�ons.

The impact of performance value pricing on customer sa�sfac�on is readily evident in most transac�ons between buyers and sellers. When buyers are inclined to be more ra�onal than emo�onal in their evalua�on of alterna�ve brands, it is the performance value of the alterna�ves that determines brand choice. In this case, the buyer’s percep�on of a brand’s performance rela�ve to a compe�tor’s brand is typically a primary determinant of perceived product quality and therefore value for money. Strong, consistent, and reliable product performance over �me is an essen�al ingredient in building customer sa�sfac�on and brand loyalty in most markets.

Think About It

The price of a product is intended to communicate much more informa�on than simply the cost of making a purchase.

Thinking back on some of the larger purchases you have made, how might the seller’s pricing strategy have impacted your percep�on of the product and its value?

What elements of pricing strategy can make something seem like a good deal?

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2.2 Total Quality Management and Total Customer Satisfaction Total customer sa�sfac�on (TCS) is an integral part of a broader set of management prac�ces called total quality management (TQM). The essence of TQM is that quality is every employee’s responsibility. Every level of opera�ons and all processes should be designed to ensure that uncompromising quality is the norm at every stage from product incep�on through the final sale. By defini�on, every job within the firm provides added value to the processes and products of the organiza�on.

Within the TQM paradigm, managers have several types of responsibili�es. As supervisors of other employees, management is tasked with ensuring that everyone’s work is making a posi�ve contribu�on to the quality of the final product. Managers at all levels are responsible for aligning company resources and processes to maintain and enhance product quality. And managers also have unique responsibility for the pursuit of con�nuous quality improvement.

Con�nuous quality improvement (CQI) requires that managers within the organiza�on remain vigilant, constantly searching for new ways to improve opera�ons and processes. One way to systema�cally seek opportuni�es for quality improvements is through benchmarking. Benchmarking is the process of evalua�ng your organiza�on’s processes and performance against the best standards within your own or other industries. CQI metrics or standards of measurement are usually related to a combina�on of product/service quality, �me, and costs. The objec�ve of benchmarking is to improve your firm’s opera�ons by modeling your own prac�ces a�er the best exemplars throughout the world.

TCS is a strategic, integrated management philosophy based on the concept of achieving ever higher levels of customer sa�sfac�on. It is, essen�ally, a special case of the larger set of principles defined by TQM. It is also wholly consistent with the tenets of the marke�ng concept insofar as the objec�ve is to sa�sfy the consumer be�er than the compe��on. Obviously, total customer sa�sfac�on (or 100 percent) would provide a substan�al compe��ve advantage.

These are the eight principles of TCS for marke�ng managers:

1. Be customer focused. 2. Involve and empower all employees. 3. Focus on process-oriented thinking. 4. View processes within an integrated system. 5. Think strategically and systema�cally. 6. Pursue CQI. 7. Make decisions based on evidence. 8. Maintain communica�on throughout all levels of the organiza�on.

As with all applica�ons of TQM, TCS programs in large organiza�ons rely on a team approach to achieving goals. Many teams are formed temporarily to solve specific problems or complete customer sa�sfac�on improvement projects. Other teams are a permanent part of the organiza�onal structure. Many of these are cross-func�onal groups, working to align the TCS efforts of the firm by integra�ng, coordina�ng, and improving processes of the whole organiza�on. Cross- func�onal teams are preferred as a means of improving decision making, par�cipa�on, and communica�on across levels of the corpora�on.

The ul�mate aim of the TCS philosophy is to foster environments, opera�ons, and management processes that will maximize customer sa�sfac�on. The essen�al feature of the TCS model is the reliable delivery of the highest possible product value to the customer within the constraints established by costs and pricing. To sustain the highest possible levels of customer sa�sfac�on and enhance the firm’s differen�al advantage in the marketplace, the pursuit of CQI opportuni�es is impera�ve.

There are several alterna�ve models for iden�fying new ways to improve exis�ng customer sa�sfac�on levels. Although each u�lizes slightly different metrics of customer sa�sfac�on and data analysis procedures, the CQI steps used to improve customer sa�sfac�on within specific processes generally conform to the following sequence:

1. Develop a thorough understanding of the contribu�ons of the specific process to TCS. Iden�fy poten�al opportuni�es for process improvements. 2. Evaluate the alterna�ves by tracing the poten�al value added from process improvements for each. Select the op�on based on the greatest poten�al for

addressing an area of company performance that is not currently mee�ng customers’ expecta�ons. 3. Analyze the selected alterna�ve. Inves�gate the underlying causes of subop�mal performance for this process. Clearly define and delineate the root

causes of the underlying problem. 4. Brainstorm and engage in preliminary research to generate alterna�ves to improve the target process. 5. Conduct a more thorough inves�ga�on of the feasibility of this op�on before selec�ng it as the best alterna�ve. 6. Evaluate the level of projected improvement in the TCS model rela�ve to the incremental costs and revenue implica�ons of implementa�on. 7. If viable, develop a detailed plan of implementa�on and seek formal approval. 8. Ini�ate the process improvement. Measure actual performance metrics against customer sa�sfac�on expecta�ons and cost projec�ons.

Processes such as these are designed to improve customer sa�sfac�on by enhancing the value of the goods and services provided. The sec�on that follows examines alterna�ve perspec�ves on the process of conveying value from sellers to buyers.

Pu�ng It All Together

TCS has applica�ons in contexts ranging from the largest and most complex manufacturing organiza�ons to the smallest and simplest service providers. Consider a business as ordinary as your local supermarket. The highly compe��ve nature of the retail grocery trade in large urban markets makes it difficult to clearly

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differen�ate one store from another in terms of pricing, product selec�on, or even atmosphere. However, the shopper’s experience in the checkout line is o�en quite different from one retailer to the next, and this difference can contribute either posi�vely or nega�vely to brand differen�a�on. How might the principles of TCS and CQI be applied to this process?

Start by examining the contribu�ons of this specific process to TCS and iden�fy opportuni�es for process improvements. The checkout line is o�en both the first and last point of contact with customers. If shoppers confront long, noisy lines when first entering the store, it will adversely impact their psychological disposi�on toward shopping for the balance of their visit. Specific improvements in the process aimed at reducing average line length and wait �mes would improve the shopper’s ini�al impression of the store and definitely enhance customer sa�sfac�on at the end of the process.

The next steps require genera�ng alterna�ve improvements to the process and conduc�ng an evalua�on of the alterna�ves on costs, revenues, and customer sa�sfac�on levels. There are many different types of supermarket shoppers, different order sizes, and different service requirements. One of the challenges facing management is to iden�fy cost-effec�ve opportuni�es to improve service for different segments of the market. As a manager, you might consider several alterna�ves to changing the checkout process, including the addi�on of more cashiers, baggers, and checkout lines for large-order customers; providing curbside carryout service for seniors; or installing automated self-checkout lines for convenience- and �me-sensi�ve shoppers. Keep in mind that not all customers are equally profitable for the store and not all shoppers derive their sa�sfac�on from the same elements of the process. For example, some thrive on personal, social interac�on, while others view the experience simply as comple�ng a necessary func�on and want to get out of the store as quickly as possible.

So, evalua�ng each of the process alterna�ves on costs, revenues, and enhancements to customer sa�sfac�on is not a simple task—not even for something as ordinary as the local supermarket.

In reality, the applica�on of the TCS paradigm to this specific problem would be a complex undertaking. The ini�al step of understanding how the checkout process contributes to customer sa�sfac�on levels for different segments of the target market is challenging. Transla�ng this knowledge into discrete, segment- specific, process-driven alterna�ves focused on delivering measurable results at specific cost rates is also a formidable task. However, this type of analysis is absolutely essen�al in an industry noted for razor-thin profit margins. There will always be new opportuni�es for process improvements. The challenge for marke�ng managers is to find cost-effec�ve and efficient process enhancements to improve customer sa�sfac�on within the most profitable segments of the market.

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The product supply system is focused on the development, crea�on, and distribu�on of manufactured goods.

The value delivery system needs to choose, provide, and communicate its value proposi�on to customers.

2.3 The Value Delivery Process As we established in the preceding chapter, marke�ng management is composed of processes for crea�ng, communica�ng, and delivering value to customers. In this sec�on, we’ll contrast the two compe�ng views on how best to deliver value. The tradi�onal view of the product supply system rests on a sequence that begins when the firm creates something of value and ends when it is sold to the customer. A more contemporary understanding of delivering value starts with the development of a value proposi�on and emphasizes the need to create value based on customers’ preferences before engaging the delivery processes.

Product Supply System

Tradi�onal views on delivering value to customers have focused primarily on the crea�on and distribu�on of manufactured goods. Some�mes referred to as the product supply system, an implicit assump�on of this model, as illustrated in Figure 2.1, is that the firm will find markets for what it produces.

Figure 2.1: The product supply system

Lanning, 2000

This approach is, in effect, the embodiment of marke�ng myopia. It is the consequence of first focusing on the product and its manufacture rather than on the wants and needs of the customer. The strategy is to sell what you can make rather than making what you can sell. This is some�mes referred to as the ready-fire- aim firing squad mentality.

Value Delivery System

Businesses began to recognize the high costs of this fallacy in the 1980s as globaliza�on and the accelera�ng growth of interna�onal trade introduced many new compe�tors to domes�c product markets. With increasing brand alterna�ves available in many markets, buyers gravitated toward those op�ons that best suited their preferences. To protect market share and systema�cally develop new concepts for exis�ng markets, managers realized the need to begin the product development process by examining customer needs first.

Consistent with this new perspec�ve, Michael J. Lanning first introduced the value delivery system model, as shown in Figure 2.2, in the late 1980s. In contrast to the way that previous views suffered from marke�ng myopia, this new alterna�ve was the embodiment of the marke�ng concept. The emphasis on providing greater customer sa�sfac�on as a compe��ve strategy was captured by the idea of superior value proposi�ons.

A value proposi�on can best be understood as the promise that the seller is making to the buyer. It consists of the bundle of product benefits that the marketer promises the consumer will receive for the price paid. As a strategy planning tool, a formal statement of the value proposi�on will specify the reasons that a target customer should buy one brand over another, and it should explicitly iden�fy how this brand delivers greater value for a given target market than others.

Figure 2.2: The value delivery system

Lanning, 2000

The three-stage value delivery system model provides the means to build customer sa�sfac�on and brand loyalty by focusing first on understanding the needs of the target market. The ac�ons involved at each stage of the model are:

Stage 1: Choose a value proposi�on by iden�fying the target market and determining how the brand will be posi�oned rela�ve to compe�tors.

Stage 2: Provide this value proposi�on by crea�ng the bundle of benefits (goods and services) that fulfills the promise you are making to prospec�ve buyers. Pricing and distribu�on are usually significant parts of keeping this promise.

Step 3: Communicate this value proposi�on through targeted promo�onal ac�vi�es, including adver�sing and personal selling. The concept of a unique selling proposi�on (USP) communicates the promise that if you buy this brand, you can expect these benefits. It is truly a unique proposi�on only if no other brand can validly make this claim.

The value delivery process modeled above can be very effec�ve in crea�ng sa�sfied, loyal customers. However, it is important to note that firms can lose sales and customer loyalty very rapidly if they fail to deliver on the promises of the value proposi�on. And, it is a ma�er of human nature that buyers will almost always remember disappoin�ng experiences far longer and more vividly than posi�ve ones.

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Think About It

The product delivery system and value delivery system require very different views of what marke�ng management is intended to accomplish.

How would a book publisher’s final products differ under one process model rather than the other? In what ways might they be similar?

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From fashion design to distribu�on, the crea�on and the value of a product are constantly measured with the customers' needs and what the customers think it is fiscally worth. How would a company adver�se a specific product for a par�cular target customer? What does the company have to know about their customer?

A value chain involves five primary func�ons that must be coordinated to create product value and to sa�sfy customers.

Maintaining sufficient inventory is essen�al to mee�ng customers’ demands.

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2.4 The Value Chain and Core Competencies The same compe��ve forces that led Lanning to develop the value delivery system model in the 1980s spurred Michael Porter to introduce value chain analysis during that same period. As illustrated in Figure 2.3, a value chain is defined as a succession of ac�vi�es and processes, usually defined for specific SBUs, that converts inputs into outputs of greater value. Porter’s value chain model iden�fies five primary strategic ac�vi�es: inbound logis�cs, opera�ons, outbound logis�cs, marke�ng and sales, and services. The purpose behind dissec�ng the workings of an SBU into a set of discrete ac�vi�es in this way is to seek opportuni�es to improve product quality, buyer sa�sfac�on, and, consequently, compe��ve advantages.

Concept of the Value Chain

Figure 2.3: Value chain

Five primary strategic ac�vi�es provide the components in the value chain that directly impact customer sa�sfac�on. Inbound logis�cs is the term used to describe all of the processes involved in bringing raw materials and unfinished goods into the company for conversion into final products. This includes receiving, warehousing, and inventory control processes. Raw materials include all forms of inputs into the firm’s opera�ons, including human resources and various forms of intellectual property.

Opera�ons encompasses all of the ac�vi�es within the SBU that transform and convert the inputs delivered by the inbound logis�cs systems into final products. These, in turn, are shipped out and distributed via the outbound logis�cs systems. Marke�ng’s role in outbound logis�cs is usually limited to elements of the place variable within the marke�ng mix, including warehousing and transporta�on.

Marke�ng and sales includes many of the elements related to the pricing and promo�on components of the marke�ng mix, such as adver�sing, personal selling, and sales promo�on. The fi�h ac�vity, services, are typically used to describe the ways in which the organiza�on a�ends to customers’ needs a�er the ini�al product sale has been completed, such as repair services and customer support.

In addi�on to the five primary ac�vi�es, Porter’s value chain model also specifies four essen�al support ac�vi�es: procurement, technology development, human resource management, and firm infrastructure. The infrastructure refers to a range of suppor�ng management ac�vi�es that are

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typically housed in specialized departments. These include finance, accoun�ng, legal services, and quality control.

To create product value and customer sa�sfac�on, organiza�ons must manage their value chain and value delivery system for each SBU in a customer-centered way. This is essen�al to a�rac�ng new buyers and retaining current customers as well. As we will see in sec�on 2.6, the financial gains realized over the life�me of an established, loyal customer far exceed the projected average life�me value of a newly acquired customer.

As goods and/or services move through each stage of the chain, they increase in value. Of par�cular importance to understanding the significance of this sequence is that there are both summa�ve and synergis�c effects at work. The synergy is reflected in the fact the total value added across the whole span of ac�vi�es and processes is greater than the sum of all ac�vi�es and processes. Nonetheless, each individual ac�vity in the chain must create value for the customer in excess of the associated costs of execu�ng that ac�vity.

Value Chain Analysis

To maximize customer sa�sfac�on in accordance with the prescrip�ons of TQM and TCS, organiza�ons need to be engaged in the process of CQI. The value chain provides a conceptual model to aid managers in organizing the search for new ways to improve opera�ons and processes. This requires breaking down the system into its component parts to look for opportuni�es and examining the value chain as a whole, integrated system of value delivery.

The ini�al task in value chain analysis is to evaluate how each of the processes and ac�vi�es differen�ally contributes added value to the customer’s experience with the product and the organiza�on. In most cases, the five general ac�vi�es iden�fied by the model are broken down into the underlying component processes. When isolated as unique processes, they can be evaluated with respect to both effec�veness and cost. At this level of analysis, compe�tors’ performance and costs can be es�mated to provide specific targets or benchmarks in accord with CQI principles.

The func�onal interrela�onships between ac�vi�es also make contribu�ons to the value chain and, consequently, to customer sa�sfac�on. To assess the value contributed by the effec�ve coordina�on across ac�vi�es, the same type of analysis can be extended to the inves�ga�on of linkages between ac�vi�es. Simply maximizing the efficiency and performance of units in isola�on seldom maximizes the performance of the whole. Improvements in the costs or performance of how the overall system is managed and coordinated can yield substan�al differen�al advantages for the firm.

Core Competencies

Within a few years a�er the publica�on of Lanning’s work on value delivery systems and Porter’s development of value chain analysis, Prahalad and Hamel introduced the concept of core competencies (1990). A core competency can be described as "a narrowly defined field or task at which a company excels. A firm’s core competencies are difficult for its compe�tors to mimic, allowing the company to differen�ate itself. Most core competencies will be applicable to a wide range of business ac�vi�es, transcending product and market borders" (Investopedia Financial Dic�onary, 2011). It represents the unique set of acquired skills and knowledge behind the firm’s product lines. It is, in simplest terms, what a given organiza�on does best.

It is essen�al to note that although core competencies are not products, they lead to the development of successful products. They are processes and ac�vi�es— ways of doing things—that provide the organiza�on with differen�al advantages rela�ve to its compe�tors. According to Prahalad and Hamel (1990), there are three qualifying tests for iden�fying a core competence:

It should not be easy for compe�tors to imitate. It should have applica�ons to many products and markets. It should make a significant, posi�ve contribu�on to the consumer’s experience of the product’s benefits.

Core competencies are typically developed within those ac�vi�es that are most essen�al to the organiza�on’s success. Consequently, they are invariably related to those processes that directly enhance the value consumers receive from the products being sold. It is important to recognize that the specific skill sets that cons�tute core competencies within an organiza�on are constantly evolving. They are forever in a state of flux, changing and adap�ng in response to changes in the market environment.

Think About It

Core competencies are those value-crea�ng capabili�es within your organiza�on that promote growth and long-term profitability. They are the important things that you do be�er than your compe�tors. Iden�fy the core competencies of the following companies: Hewle�-Packard, Coca-Cola, and Holiday Inn.

Think of other successful firms across a range of industries. Can you iden�fy their core competencies?

The ul�mate u�lity of TQM, TCS, value chain management, and the development of unique core competencies lies in sa�sfying the customers’ needs. The value chain needs to be understood and managed as a whole, integrated system of related ac�vi�es. Only by op�mizing the value chain and leveraging core competencies can an organiza�on reliably provide sustainable compe��ve advantages in accord with the primary precept of the marke�ng concept: customer sa�sfac�on as the key to achieving organiza�onal goals. Consistently and reliably providing superior customer sa�sfac�on is at the core of retaining current customers and winning new ones.

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2.5 Attracting, Retaining, and Growing Customers Our ini�al defini�on of marke�ng management iden�fied two sets of ac�vi�es. First, it referred to a set of processes that create, communicate, and provide value to customers. So far, this chapter has inves�gated those ac�vi�es within the broader context of delivering superior customer sa�sfac�on. The second half of the defini�on specifies that marke�ng management is the means by which the company manages customer rela�onships for the benefit of the organiza�on and its stakeholders. The end objec�ve of marke�ng management, therefore, is to a�ract, acquire, and retain customers for the ongoing financial benefit of the firm by providing greater value to buyers than compe�tors and crea�ng sa�sfied customers.

Business organiza�ons devote substan�al resources to the process of a�rac�ng new customers because it is typically essen�al to the growth and survival of the organiza�on. Companies that are primarily dependent on business-to-business (B2B) sales rely on fewer and larger customers than those in retail markets. B2B firms rely on genera�ng, qualifying, and pursuing new leads from a rela�vely limited pool of poten�al buyers. Their primary emphasis is o�en on personal selling more than impersonal media promo�ons. Business-to-consumer (B2C) companies are usually in pursuit of larger numbers of prospec�ve buyers, each of whom individually represents a smaller part of the customer base for the business. Consequently, mass media promo�ons are frequently a key element of the firm’s efforts to a�ract new buyers.

Customer Relationship Management

Despite the substan�al differences in marke�ng approaches for B2B and B2C companies, both face the same types of challenges in compe��ve markets. Marke�ng managers need to focus on three primary tasks to a�ract new customers: accurately iden�fying customer needs, crea�ng high-value products to meet those needs, and delivering corresponding product value messages to the target market. The detailed inves�ga�on of each of these processes supplies the core content for the remaining chapters of this text. At this point, however, it is worthwhile to note one fundamental principle related to acquiring new customers: Not all customers are equally valuable. In fact, there are usually some prospec�ve buyers that companies should prefer to avoid. One approach to understanding this counterintui�ve concept is customer rela�onship management (CRM).

CRM is a comprehensive strategy and process for acquiring, retaining, and partnering with selec�ve customers to create superior value for the company and the customer. It involves the integra�on of marke�ng, sales, customer service, and the supply chain func�ons of the organiza�on to achieve greater efficiencies and effec�veness in delivering customer value (Parva�yar and Sheth, 2001).

CRM emerged in the 1990s as companies recognized the growing poten�al for integra�ng customer knowledge and informa�on into readily accessible and usable databases. As desktop so�ware applica�ons have grown increasingly powerful, the integra�on of marke�ng, sales, and customer service opera�ons within organiza�ons has improved. With the exponen�al growth of e-commerce and electronic social media, the importance of these new ways to reach target audiences has also increased the focus on CRM as a marke�ng management tool.

The primary objec�ve behind any CRM system is the crea�on of a robust knowledge base about customer behavior that provides reliable informa�on for the development and execu�on of strategies that benefit both the company and its customers. In short, the aim is to improve the efficiency and produc�vity of marke�ng processes.

In prac�ce, the term customer rela�onship management is subject to several interpreta�ons. In its simplest form, it can refer to using marke�ng databases to improve the efficiency of promo�onal tac�cs such as direct marke�ng, mass media adver�sing, and sales promo�ons. In strategic terms, it is o�en used to refer to all marke�ng efforts to establish, maintain, and enhance rela�onships with customers and other supply chain partners. In its broadest sense, it can refer to "all marke�ng ac�vi�es directed toward establishing, developing, and maintaining successful rela�onships" (Dwyer and Oh, 1987).

Profitable and successful applica�ons of CRM in industry share two cri�cal features. They emphasize the value of taking a long-term view of rela�onships, and they recognize that not all customers are equally profitable for an organiza�on. This property is rou�nely referred to as customer selec�vity.

The fact that not all customers or prospec�ve customers are equally profitable for a company is simply an empirical truth, not a ma�er of strategy or planning. The cri�cal issue for managers is understanding the most profitable way to respond to this reality. Companies must manage their limited resources selec�vely by targe�ng their marke�ng efforts to reach the most profitable segments of the market. The a�rac�veness of one customer or market segment may hinge on any number factors. These include loca�on, market accessibility, price sensi�vity, demographics, or other factors that may be directly or indirectly related to the prospec�ve value of the buyer to the company.

Customer Retention and Loyalty

Customer reten�on can refer to both the ac�vi�es that an organiza�on undertakes to reduce the loss of customers and the rate at which an organiza�on is successful at keeping its customers over a period of �me. There are substan�al benefits to keeping loyal customers and maintaining high customer reten�on rates.

The value of loyal customers within most business contexts is substan�al. Loyal buyers represent a reliable stream of revenue that was established from the ini�al investment of marke�ng resources. The loss of a loyal customer represents both the loss of income and forfeiture of the investment. In addi�on, the establishment of an enduring, mutually beneficial rela�onship with a customer deprives compe�tors of that same opportunity.

Consistent with the principle of customer selec�vity, it is important to recognize that selec�ng the right target customers in the first place will have a posi�ve impact on customer sa�sfac�on. This, in turn, improves reten�on, the prospect of building loyalty and hence profitability.

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Rela�vely expensive purchases typically require the evalua�on and approval of more than one decision maker. Marketers must be aware of this when crea�ng their marke�ng plans and address it accordingly.

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Loyalty = f (customer sa�sfac�on + market selec�on)

Buyers who are hard to please or who constantly switch will come and go independently of how hard a firm works to win their loyalty. However, this inevitable loss of some difficult customers is in sharp contrast to the prac�ce of customer churning.

The rate at which businesses lose customers is referred to as the customer a�ri�on, turnover, or churn rate. For most companies, it is clearly understood that the objec�ve is to minimize a�ri�on for the reasons cited above. However, some companies inten�onally engage in customer churning—a prac�ce designed to maximize profitability from the ini�al customer sale without regard to building long-term loyalty. In some instances, this is a legi�mate business strategy based on the nature of the product or service being sold. In other cases, however, it reflects the weakness of an organiza�on that is simply unable to sa�sfy consumers be�er than alterna�ve providers can. Unable to remedy the problem, these firms will try to offset poor product value by aggressively marke�ng to replace the �de of lost first-�me customers with new ones each quarter. This is some�mes referred to as the "leaky-bucket model," since the company is fran�cally trying to add new buyers to the top of the pail faster than it is losing them through the hole at the bo�om.

The new investments and expenditures required to find and win new customers guarantees that they will ini�ally be less profitable to the firm than the exis�ng, loyal base of consumers. As a general rule of thumb, it is considered five �mes more to costly to a�ract new customers than to retain current ones. In fact, a 5 percent improvement in customer reten�on rates can yield as much as a 25 to 85 percent increase in profitability (Dwyer and Oh, 1987).

The specifics of systema�c models for retaining customers differ substan�ally from one context to the next. Just as efforts to improve customer sa�sfac�on must be uniquely tailored to the target market, reten�on programs must be suited to the characteris�cs of the loyal customer. The planning of most reten�on programs, however, follows four basic steps:

1. Create specific profiles of loyal buyer segments. 2. Determine the financial value of each loyal customer type. 3. Determine the root causes for defec�on within and between segments. 4. Develop and implement correc�ve ac�on plans.

Some proac�ve reten�on plans are designed to reduce an�cipated a�ri�on rates by providing incen�ves to loyal customers. These might include customer reward or membership programs (awarding air miles or cash-back bonuses), special prices on the bundling of goods and services, or cross-promo�ons with other related products.

Efforts to be�er understand the true financial value of loyal customers have led to the use of metrics that measure the profitability associated with each customer over the life�me of his or her associa�on with a specific brand or company. F. Robert Dwyer introduced some of the earliest applica�ons of customer life�me value calcula�ons to the marke�ng literature in the late 1980s. Though extensively developed in studies of catalog marke�ng, it has become commonly used to support marke�ng decision making in a wide range of contexts.

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2.6 Maximizing Customer Lifetime Value Knowing the financial value of each loyal customer type has several poten�al uses. It may determine how much should be spent to retain loyal customers. It also enables managers to determine how much can reasonably be invested to acquire different types of new customers based on the past behavior of different loyal- buyer segments. Similarly, it can direct strategy choices in terms of targe�ng specific segments. And knowing the value of different groups of buyers enables marke�ng managers to apply a return on investment (ROI) standard to the evalua�on of targeted marke�ng programs and campaigns.

Two techniques to calculate the financial value of customer rela�onships are used extensively in both B2B and B2C markets: customer profitability analysis and customer life�me value.

Customer Profitability Analysis

Customer profitability analysis (CPA) is a methodology for analyzing the profitability of a company’s current customers. This is most commonly done using internal data from ac�vity-based accoun�ng records. The procedure ini�ally es�mates all revenue coming from the customer, less associated costs. The costs should be developed to include not only the primary costs of producing and distribu�ng the product, but also secondary marke�ng costs such as traveling to meet with the customer. Most CPA models assign each buyer to one of several levels or customer �ers based on net profitability.

One predictable result of customer profitability analysis is that it will reveal that a small number of customers account for most of the company’s profits. This is consistent with the Pareto principle or 80–20 rule. This common rule of thumb states that 80 percent of your profits will come from 20 percent of your clients. The significance of the Pareto Principle is that it should remind marke�ng managers to focus the bulk of their �me and energy on the 20 percent of customers who ma�er most.

Customer Lifetime Value

In contrast to customer profitability analysis, which provides a snapshot of the current situa�on, customer life�me value (CLV) analysis evaluates the future profitability of a customer. Though the determina�on of net profit relies on the same assessment of revenue and costs, the technique requires forecasts of future cash flows and profitability. The CLV for a specific customer is defined as the net present value of projected profits over the expected customer life�me. Although a powerful financial technique, its value is necessarily limited by the accuracy of the forecasts.

In prac�ce, many companies place a great deal of emphasis on CLV calcula�ons because they require managers to explicitly recognize the importance of building customer loyalty by offering superior value and reliably delivering customer sa�sfac�on over the long term. The reliance on net present value calcula�ons also reinforces the concept that rela�onships with customers are vital long-term assets of the firm.

Once an organiza�on has acquired experience using CLV analysis over an extended period of �me, several other advantages to using this technique may become evident. Close examina�on of the factors contribu�ng to loyal buyers’ net present value (NPV) will provide a be�er understanding of how various purchase-specific factors make differen�al contribu�ons to profitability over �me. For a given segment or class of buyers, these factors would include purchase size, frequency, and recency of purchase. Sensi�vity analysis can provide addi�onal insights into how changes in pricing strategy or other elements of the marke�ng mix may impact long-term profitability. CLV analysis on a segment-by-segment basis will also enable managers to make decisions about the rela�ve a�rac�veness and importance of appealing to some groups of buyers over others. The development of sophis�cated customer databases has been instrumental in enabling marketers to analyze vast quan��es of informa�on about the rela�onships between marke�ng ac�vi�es and buyers’ behavior.

Customer Databases and Database Marketing

Customer databases are organized collec�ons of qualita�ve and quan�ta�ve customer-related informa�on that have been compiled to improve marke�ng performance. Informa�on about both customers and prospec�ve buyers is rou�nely collected and submi�ed to databases for a number of sales-related purposes.

Database marke�ng is the general term that has been used to describe any systema�c approach to the collec�on and processing of consumer and company data. Increasingly, however, marke�ng-oriented organiza�ons are also integra�ng other types of informa�on with customer databases, including marke�ng mix informa�on, general environmental observa�ons, compe�tor data, and informa�on about partners in the company’s value chain. At the strategic level, marke�ng managers use these data to evaluate target market strategies, and sales data can be used to analyze the efficiency and effec�veness of alterna�ve configura�ons of the marke�ng mix. Historical data pa�erns can be analyzed to examine the impact of alterna�ve pricing policies, different promo�onal mixes, changes in product design, and the like. Sta�s�cal modeling can be used to examine how sales and profits are impacted by simultaneous changes in mul�ple variables.

Compe�tor, product, supplier, and a range of other marke�ng-related databases are also cri�cally important to the effec�ve management of marke�ng efforts. The informa�on in these types of databases can be accessed to support customer service ac�vi�es, generate sales leads, or iden�fy opportuni�es for cross-selling addi�onal products to exis�ng customers. Increasingly, the availability of more customer-specific data has also enabled companies to provide more specialized offerings to individual customers. In fact, virtually all facets of customer rela�onship management can be facilitated and enhanced by the ready availability of informa�on that well-designed database systems can provide.

Database marke�ng has demonstrated the poten�al to increase the cost effec�veness of marke�ng strategies by improving managers’ understanding of markets and specific market segments. The opportunity to develop ini�a�ves targeted at the individual consumer level has been facilitated by amassing huge databases describing personal purchase histories and detailed demographic informa�on. Marketers have also leveraged access to large commercially available databases to be�er understand the preferences of current and prospec�ve consumers. However, the ready availability of so much individual, person-specific informa�on has raised ethical and legal concerns related to personal privacy rights.

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The Coke bo�le has evolved throughout the years. This image offers a visual of the successful and unsuccessful product designs. Which bo�le shape seems to have withstood the test of �me?

Corbis Wire/Corbis

Ch. 2 Conclusion This chapter has presented several perspec�ves on value crea�on and customer sa�sfac�on. Marke�ng managers must remember that crea�ng product value that sa�sfies the needs of customers is both a primary goal of the firm and the principal means of achieving the organiza�on’s growth and profitability objec�ves. This marke�ng concept perspec�ve can some�mes be lost in the process of iden�fying and implemen�ng the strategies and methodologies required to enhance the compe��veness of the company. It’s important to remember that customer sa�sfac�on is not simply compa�ble with the goals of the firm; it is essen�al to achieving them.

The short vigne�e at the start of this chapter illustrates several important truths about customer service. Excellent customer service should be consistent. Although it’s a cliché, it is true that you should treat every customer as your most important customer. Strategies geared toward alloca�ng the best levels of service to the most important customers are risky at best. This is par�cularly true in the age of social media, where the influence wielded by a buyer may be wildly out of propor�on to his or her poten�al value as an individual customer. In a digital/mobile age, you can’t be sure whether a given customer is one of those important ones.

Great customer service is personal. It is o�en about doing small things well and building posi�ve rela�onships. Your customers want to know that you care enough to treat them as individuals. It can be a powerful marke�ng tool when done well and a huge disincen�ve to future sales when done poorly. A good customer service experience might be the one thing that keeps actual customers (e.g., Tinya’s mom) coming back, but it is o�en the thing that turns a prospec�ve customer (e.g., Tinya) into an actual customer at some point down the road.

Finally, great customer service is everyone’s job—another truism, but worth remembering nonetheless. Every individual within the company that has any direct or indirect interac�on with a customer is responsible for maintaining the highest possible levels of customer service. It means going the extra mile for your customers. This is what makes a posi�ve, long-las�ng impression, and there is no subs�tute for it. It can’t be faked; it has to reflect the company’s genuine concern for its customers.

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Ch. 2 Learning Resources

Key Ideas

Cri�cal Thinking Ques�ons

1. Is a marke�ng orienta�on absolutely essen�al to the success of every type of business? If you feel there are some excep�ons, explain when this customer-focused perspec�ve is not necessary to succeed.

2. Knowing that value is about the rela�onship between product quality and price has implica�ons for understanding how to improve buyers’ percep�ons of value. Using office furniture as an example, explain how a manufacturer could shape customers’ percep�ons of value by altering the terms of the product quality/price rela�onship.

3. Products and services are best understood within the context of marke�ng management as bundles of benefits. Why? Explain how your family den�st and the services that he or she provides can be understood in this way.

4. The value drivers for products and services include both tangible and intangible characteris�cs. Which types of characteris�cs are predominant in the provision of services? If you hire a CPA to prepare your taxes, what are the tangible and intangible a�ributes of the service you have purchased? Which kinds of products are easier to differen�ate based on tangible features rather intangible ones?

5. Some companies are well known for specific core competencies. In fact, they are o�en cited as examples of excellence in specific marke�ng func�ons and used to develop TQM/TCS benchmarks. For example, Lands’ End and L.L.Bean are recognized as leaders in direct marke�ng prac�ces. Coca-Cola and Procter & Gamble are regarded as experts in adver�sing consumer packaged goods. FedEx is a leader in transporta�on innova�ons. Can you think of any companies that exhibit outstanding performance in one or more core competencies? What are the unique strengths of Disney? Ne�lix? Walmart? AT&T? Apple? Maytag?

6. Review the eight basic CQI steps for improving customer sa�sfac�on. Apply these to a process that you are familiar with from where you work, shop, or go to school. What benefits do you see in following an organized, systema�c path of analysis? What problems, if any, do you encounter in applying the model?

7. Value chain analysis includes two types of processes: breaking down the value delivery system into its component parts and examining the whole chain as an integrated delivery system. What types of opportuni�es to enhance customer sa�sfac�on are you likely to miss if you rely on only one rather than both?

8. Customer loyalty can be lost as a consequence of one bad interac�on with a company. Can you give examples (hypothe�cal or actual) to illustrate the types of customer experiences that may result in the loss of a loyal customer? Are there examples of how a buyer might become loyal to a seller a�er only one posi�ve interac�on? Which type of experience is probably more likely? Why?

9. Each year the Na�onal Ins�tute of Standards and Technology (NIST) recognizes both private- and public-sector organiza�ons that exhibit performance excellence with the Malcolm Baldrige Na�onal Quality Award (h�p://www.nist.gov/baldrige (h�p://www.nist.gov/baldrige) ). The stated objec�ve of the program is to improve the compe��veness and performance of U.S. organiza�ons. Review the Baldrige Program’s website with par�cular a�en�on to the success stories behind each of the recipients. How do the criteria used to determine award winners correspond to the value related concepts presented in this chapter?

10. The brand manager for Widgets, Inc., is frustrated by the failure of prospec�ve customers to understand just how good his widgets really are. Which models and techniques from this chapter would be useful in helping him isolate the source of the problem?

Key Terms

Click on each key term to see the defini�on.

added value (h�p://content.thuzelearning.com/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12

Refers to the addi�on of product features and benefits that exceed the typical buyer’s expecta�ons.

benchmarking (h�p://content.thuzelearning.com/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12

The procedures for evalua�ng an organiza�on’s processes and performance against the best standards within the same or different industries. Sta�s�cal tools are used extensively to objec�vely measure performance.

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business-to-business (B2B) (h�p://content.thuzelearning.com/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12

Sales and related transac�ons between businesses (e.g., manufacturer-to-wholesaler or wholesaler-to-retailer sales).

business-to-consumer (B2C) (h�p://content.thuzelearning.com/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12

Sales and related transac�ons between business and consumers (e.g., retailer-to-consumer sales).

con�nuous quality improvement (CQI): (h�p://content.thuzelearning.com/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12

A system or set or processes intended to improve the quality of goods and services provided to consumers.

core competencies (h�p://content.thuzelearning.com/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12

Specific ac�vi�es or skill sets at which a firm excels.

customer churning (h�p://content.thuzelearning.com/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12

This term can describe the loss of customers over �me for any reason. It is o�en used specifically to refer to tac�cs intended to maximize profitability from an ini�al sale without the inten�on to build a long-term rela�onship or customer loyalty.

customer databases (h�p://content.thuzelearning.com/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12

Organized collec�ons of qualita�ve and quan�ta�ve customer-related informa�on that have been compiled for the purpose of improving marke�ng performance.

customer life�me value (CLV) (h�p://content.thuzelearning.com/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12

A methodology for evalua�ng the future, long-term profitability of a customer from projec�ons of future cash flows and customer-specific forecasts of profitability.

customer profitability analysis (CPA) (h�p://content.thuzelearning.com/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12

A methodology for analyzing the profitability of a company’s current customers from the analysis of internal accoun�ng data.

customer rela�onship management (CRM) (h�p://content.thuzelearning.com/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12

A systema�c strategy that addresses both the ini�al acquisi�on and the reten�on of customers. It requires the coordina�on and integra�on of all business ac�vi�es and processes to provide superior value to customers. It also emphasizes the role of marke�ng in communica�ng with consumers to build long-term rela�onships and maintain customer loyalty.

customer reten�on (h�p://content.thuzelearning.com/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12

A term that can refer to both the ac�vi�es that a company uses to reduce the loss of customers and the rate at which an organiza�on is successful at keeping its customers.

customer sa�sfac�on (h�p://content.thuzelearning.com/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12

A buyer’s subjec�ve, experience-based assessment of whether a product meets his or her expecta�ons.

customer selec�vity (h�p://content.thuzelearning.com/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12

The ability of an organiza�on to recognize that not all customers are equally profitable and the capacity to profitably use this knowledge to manage resources to reach the most profitable segments.

database marke�ng (h�p://content.thuzelearning.com/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12

A general term used to describe any systema�c approach to the collec�on, processing, and use of consumer and company data.

expecta�ons (h�p://content.thuzelearning.com/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12

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The customer’s subjec�ve feelings, an�cipa�ng the bundle of benefits that a product will deliver.

inbound logis�cs (h�p://content.thuzelearning.com/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12

All of the processes involved in bringing raw materials and unfinished goods into the company for conversion into final products.

loyal customers (h�p://content.thuzelearning.com/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12

Buyers whose purchase history demonstrates a commitment to one brand through a series of repeated purchases over �me. Customer loyalty is typically rooted in sustaining high levels of customer sa�sfac�on.

marke�ng and sales (h�p://content.thuzelearning.com/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12

The fourth element of the value chain, which includes product pricing and promo�on ac�vi�es (e.g., adver�sing, personal selling, and sales promo�on).

marke�ng orienta�on (h�p://content.thuzelearning.com/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12

An emphasis on sa�sfying customer wants and needs as the basis for making business decisions. This is in contrast to a product orienta�on, which develops goods and services based on the company’s resources and skills rather than customer preferences.

monetary value (h�p://content.thuzelearning.com/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12

A term used in industrial product sales to indicate either cost savings or revenue improvements resul�ng from the purchase of a product.

opera�ons (h�p://content.thuzelearning.com/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12

All of the ac�vi�es that transform the inputs delivered by the inbound logis�cs systems into final products.

outbound logis�cs (h�p://content.thuzelearning.com/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12

The ac�vi�es involved in shipping out and distribu�ng final products (e.g., warehousing and transporta�on).

Pareto principle (h�p://content.thuzelearning.com/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12

A common rule of thumb that states that 80 percent of your profits or sales will come from 20 percent of your clients.

performance value (h�p://content.thuzelearning.com/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12

A subjec�ve assessment of how well a product does what the buyer expects it to do.

price–quality correla�on (h�p://content.thuzelearning.com/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12

The tendency for buyers to associate be�er product quality with higher prices.

product quality (h�p://content.thuzelearning.com/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12

The buyer’s percep�on of the sum of the benefits he or she receives from the product.

product supply system (h�p://content.thuzelearning.com/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12

An orienta�on to delivering products to the market that emphasizes manufacturing and distribu�on with less regard for consumer product preferences. This product-focused approach to marke�ng can be simply defined as selling what you can make rather than making what you can sell.

psychological pricing: (h�p://content.thuzelearning.com/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12

A class of price-se�ng tac�cs that are based on understanding how products create intrinsic sa�sfac�on for the buyer.

reference price (h�p://content.thuzelearning.com/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12

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The approximate price or price level that buyers expect to pay for a given product.

sensi�vity analysis (h�p://content.thuzelearning.com/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12

A collec�on of analy�cal techniques that tests target variables (e.g., profitability) to assess how sensi�ve or responsive they are to changes in other variables (e.g., prices.)

service (h�p://content.thuzelearning.com/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12

The fi�h element of the value chain, this comprises the ac�ons undertaken by the organiza�on to sa�sfy customers’ needs a�er the ini�al product sale has been completed (e.g., repair services and customer support).

total customer sa�sfac�on (TCS) (h�p://content.thuzelearning.com/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12

A management philosophy based on the principles of TQM. The focus of TCS is the crea�on of processes for achieving the highest possible levels of customer sa�sfac�on.

total quality management (TQM) (h�p://content.thuzelearning.com/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12

A comprehensive management philosophy centered on crea�ng processes for con�nuous improvement of product quality.

value (h�p://content.thuzelearning.com/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12

The total package or bundle of benefits that a customer receives from the purchase and use of a product rela�ve to the perceived costs of buying it.

value chain analysis (h�p://content.thuzelearning.com/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12

A systema�c approach to understanding the sequence or chain of business ac�vi�es that converts inputs into outputs of greater value. The end goal of this analysis is to iden�fy opportuni�es to enhance the compe��ve posi�on of the firm.

value delivery system (h�p://content.thuzelearning.com/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12

In contrast to the product supply system, the means of providing value to the market is rooted in first understanding the needs of consumers. This consumer- focused approach to marke�ng emphasizes customer sa�sfac�on as its primary goal.

value drivers (h�p://content.thuzelearning.com/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12

The benefits most valued by the target; tangible or intangible characteris�cs that enhance the value of a product or service.

value proposi�ons (h�p://content.thuzelearning.com/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12.1/sec�ons/front_ma�er/books/AUBUS620.12

Overt commitments or promises made by the seller to provide the buyer with a specific level of value or bundle of product benefits.

Web Resources

This ar�cle from the Database Marke�ng Ins�tute provides step-by-step direc�ons and illustra�ons for calcula�ng customer life�me value. h�p://www.dbmarke�ng.com/ar�cles/Art251a.htm (h�p://www.dbmarke�ng.com/ar�cles/Art251a.htm)

The Penn State University Agricultural Extension Service provides several interes�ng ar�cle in its Value-Added Marke�ng Series. Though most of the ar�cles specifically relate to agricultural markets, the principles demonstrated are applicable across a wide range of business enterprises. h�p://extension.psu.edu/farm-business/value-added-marke�ng-series (h�p://extension.psu.edu/farm-business/value-added-marke�ng-series)

This ar�cle produced by the Chally Group provides a prac�cal illustra�on of how the principles of TQM can be applied to a firm’s sales management func�ons to increase produc�vity and profitability. h�p://www.psycheselling.com/TQSM-ExecBrief_email.pdf (h�p://www.psycheselling.com/TQSM-ExecBrief_email.pdf)

This site provides informa�on on a wide range of CRM topics from the informa�on industry’s perspec�ve. The sec�on specific to marke�ng includes advice on effec�ve sales management, campaign strategy, email marke�ng, Internet marke�ng, and customer life cycle management. h�p://searchcrm.techtarget.com/defini�on/CRM (h�p://searchcrm.techtarget.com/defini�on/CRM)