Discussion2

Week 2, "Customer Satisfaction, Loyalty, Empowerment, and Management" was derived from Principles of Marketing, which was adapted by the Saylor Foundation under a Creative Commons Attribution-

NonCommercial-ShareAlike 3.0 Unported license without attribution as requested by the work's original creator or licensee. © 2015, The Saylor Foundation.

1

Week 2 Customer Satisfaction, Loyalty,

Empowerment, and Management The marketing concept, described in Week 1, "What Is Marketing?" reminds us that the customer

should be at the center of a firm's activities and that the company that thrives is the one that

serves customers' needs better than the competition. Yet, often it is the customer who is most

adept at serving the customer's needs. Consumers being able to take control of the marketing

activities aimed at them is what customer empowerment is about.

Today, technology is making it more possible for the customer to do exactly that. In a survey, the

chief marketing officers of 250 top companies were asked about the key factors that influence the

performance of their companies. The officers' response? A company's ability to interact and

respond to its customers as well as empower them (Ramani & Kumar, 2008).

Research shows that customer empowerment is a function of three things: creating feedback

channels that are easy and widely available, asking for and encouraging feedback about products,

and enabling customers to participate in the design of products.

You might think that a company as large as JCPenney would be unable to give customers the

ability to create their own types of shopping experiences—that standardizing the products and

services they receive would be necessary. But JCPenney is an excellent example of how a firm can

use the Internet and other technology to engage its customers and provide them with more

control over the products and marketing communications they receive.

This week, we focus on those ubiquitous feedback channels, as well as strategies to solicit and

encourage feedback. In Week 4, "Market Segmenting, Targeting, and Positioning," we will discuss

how customers can participate in the design of products, or offerings. This week, we will also

tackle customer relationship management (CRM), as well as some of the ethical and legal issues

affecting customers.

2

2.1 Customers and Customer Communities

L E A R N I N G O B J E C T I V E S

1. Define customer. 2. Understand strategies involving online and personal forms of influencer marketing. 3. Relate influencer marketing to other forms of social communities and marketing strategies.

The American Marketing Association defines customers as "the actual or prospective purchaser of

products or services" (AMA, 2015). This definition implies that a customer does not necessarily

have to have conducted an exchange with the company, but could be a person in a potential pool

of customers who may have a need or an interest in the product but have not yet acknowledged

that need and taken steps to fill it. This is a little more specific that the term consumer, which is

anyone who has the resources to buy anything. The terms are not interchangeable even though

they appear similar.

When do you go from consumer to customer? As soon as you acknowledge you have a need and

you want to fill that need, and you have the resources to fill the need. You may need a vacation,

but it doesn't turn into a want until you decide to take a vacation and actively pursue steps to

make it happen. This begins the buying process, which we will discuss in greater detail in Week 3.

Part of that process is seeking information about the product or service you are considering.

If you decide you want a curved high definition television, where do you go to learn about which is

best? Like many buyers, you probably turn to the Internet and visit sites such as Epinions.com or

ConsumerSearch.com. You may visit the manufacturer's website. Do you want to learn about the

products of a specific retailer? Do you check out the stores or remember that you had a good

experience with that store the last time you bought a television? Do you ask family and friends for

their opinions and share their experiences?

The point is that consumers talk. They talk to each other face to face, and they post their thoughts

and opinions online. Word of mouth, or the passing of information and opinions verbally, has a

powerful influence on purchasing decisions. You rely on word of mouth prior to registering for

classes. You want to know from other students which professors are best and how hard their

classes are. If you have no one to ask, you can look at online sites such as ratemyprofessors.com.

Buzz refers to the amount of word of mouth going on in a market. However, in addition to

traditional word of mouth, buzz includes blogs, articles, and other information about an offering.

3

Companies try to create buzz about their products by sending press releases, holding events,

offering free samples, writing blogs, or releasing podcasts. Some marketing managers spend time

"trolling" the web looking for postings about their products. If a negative posting appears to be a

legitimate complaint, then the marketing manager can take action to fix the customer's problem,

and future complaints can be avoided. The company can also assign someone to respond to

negative posts so that the opinions online become more balanced. Some companies,

unfortunately, practice the unethical strategy of planting their own favorable reviews of their

products to look like the opinions of real customers.

The point is that companies can adopt strategies to ethically participate in the customer

conversations to truly understand their customers, how their value proposition is being received,

what they can change, or what else they can offer to their customers. Some of these strategies are

discussed next.

Influencer Panels A marketing strategy being used increasingly often is influencer marketing, or targeting

people known to influence others so that they will use their influence in the marketer's favor.

These influencers are the lead users we will discuss in Week 5 on designing offerings. If you spend

some time on Procter & Gamble's (P&G) Crest toothpaste website, you might be given a chance to

complete a survey. (Someone who is very interested in dental care is more likely to take the

survey.)

The survey asks if you talk about dental care products, if you research such products, and if you

influence others. These questions and questions like them are used to identify influencers. P&G

then provides influencers with product samples and opportunities to participate in market

research. The idea is that new offerings should be cocreated with influencers because they are

more likely to be both lead users, early adopters of new offerings, and influence other people's

decisions to buy them.

That was the idea behind JCPenney's Ambrielle lingerie community. JCPenney executive Laura

Carros and other JCPenney employees on the Ambrielle marketing team devised a strategy of

identifying women who would be willing to join a special community. A community, in the

marketing sense, is a social group that centers its attention on a particular brand or product

category. Another term for a community is a social network. The social network for Ambrielle

lingerie is illustrated in Figure 2.1, "A Social Network."

4

Figure 2.1 A Social Network

Each circle represents a person in the social network, and the arrows represent the ties between

them. You can see that some are JCPenney customers as represented by the arrows between the

company (the star) and the individuals. Others are not, but are in contact with JCPenney

customers.

Some communities are organized by companies. For example, the Harley Owners Group (HOG), a

club for Harley motorcycle owners, was organized by Harley-Davidson. But many communities

spring up naturally, without any help from a marketer. A local arts community is an example. In

the case of Ambrielle, JCPenney created and manages the group; in the case of HOG, Harley-

Davidson manages the group in conjunction with its members.

Another difference between the Ambrielle community and HOG is that the Ambrielle community

is only composed of influencers. By contrast, anyone who owns a Harley can be a member of

HOG. Ambrielle influencers provide feedback about products to JCPenney and take an active role

5

in designing the company's offerings. In other words, the influencers participate regularly in

marketing research activities. Another term for this type of community is an influencer panel.

Organizing and Managing Influencer Panels Table 2.1, "Characteristics Used to Qualify the Members of Influencer Panels," lists the

characteristics used to qualify members of an influencer panel. Note that there are multiple types

of influencers represented in the Ambrielle community. Because JCPenney has also gathered

lifestyle, demographic, and psychographic information about them, the firm has a fairly complete

picture of each member. This information is invaluable because JCPenney can use the knowledge

to segment the group more precisely. Thus, when the company test-markets communications or

offerings with the group, it can gain a better understanding of how well those efforts will work

with different types of consumers.

Table 2.1 Characteristics Used to Qualify the Members of Influencer Panels

Characteristic Definition

Active Influencer

Willing to tell others, but more important, others listen and act on the influencer's opinion.

Interested Has a greater intrinsic interest in the product category than the average user.

Heavy User Actually uses or consumes the offering regularly, preferably more than the average user.

Loyal

Sticks to one brand when it works. Note, however, that this category could include someone who isn't loyal because the right offering meeting his or her needs hasn't yet been created.

Lead User

Willing to try new products and offer feedback. In some instances, it's possible to modify an offering to suit an individual consumer; when it is, you want lead users to suggest the modifications so you can see how and why they do so.

An influencer panel does not necessarily become a community. If the communication that occurs

is only between the marketer and the individual members of the panel, no community forms. The

members must communicate with one another for a community to exist.

As a marketing professional, how do you find influencers? They have to be actively recruited. As

you learned earlier, P&G surveys people looking at its websites. If you answer the survey

questions in a way that shows you meet the criteria listed in Table 2.1, "Characteristics Used to

Qualify the Members of Influencer Panels," you might be asked to join a P&G panel. Another

method is to ask a customer whose complaint you have just resolved to take a survey. After all,

someone who has taken the time to complain might also be motivated to participate on a panel.

Still another recruiting method is to send random surveys to households to identify people who

would be good panel participants.

6

Once you create an influencer panel, you have to activate it. After all, influencers do not want to

be singled out only to be ignored. However, marketing professionals should be able to answer the

following three questions before they activate a panel:

1. What do we want from the influencer panel? Usually, companies want feedback on

new offerings and new marketing communications, as well as active word-of-mouth

promotions. Panelists need to know when you are merely testing a new offering vs.

introducing it to the marketplace. You don't want word of mouth about a new product that

isn't yet ready to be sold.

2. How much are the panel members willing to do? Companies want to keep their

panelists actively engaged, which requires asking how often they want to participate on the

panel, as well as giving them the right to "opt out" of a particular activity if they must. In

some instances, you may put out a general call for help, such as posting a notice on an

online bulletin board that you need volunteers to test a product. Or, you might just simply

send influencers product samples, ask them to try them, and respond to a questionnaire. In

addition, the processes by which they engage have to be easy to complete. For example,

asking a lot of information up front makes the sign-up process more difficult. If all you

need is an e-mail address, just ask for the e-mail address. Any additional information can

be gathered later.

3. What's in it for the panel members? What do they get out of participating? They of

course get to try free, new products that might improve their lives—or will one day improve

their lives if a company heeds their advice. For many influencers, the product category is

one that was already important to them. The chance to try a product before anyone else

does and provide feedback to a manufacturer who has singled them out for their opinion

might be all these people want.

Social Networking Sites and Other Social Media As we have indicated, communities spring up naturally. Online, social networking sites such

as Facebook and MySpace are used to create communities. Everyone you are friends with on sites

such as these are people that you already know. The sites are simply the communication medium.

What is interesting is that Facebook and other social networking sites often can't tell the

difference between close friends and acquaintances. From a marketing perspective, since each tie

or relationship is treated the same, social networking sites provide interesting ways to reach

people. One, perhaps not so interesting way, is as a broadcast medium for advertising. A company

targets consumers by placing ads on a person's site based on what Facebook knows about the

person—just as ads are placed on a radio or television station and matched to certain audiences.

7

The social network sites receive revenue from these ads, which allows them to provide the service

free to users.

The more interesting way is by consumers sending other consumers links and other information.

For example, when a marketer creates a Facebook page for an offering such as a movie, a

community can form around the movie. Then if you join the group that loves the movie, Facebook

notifies all of your friends that you are promoting the movie. A community such as this might not

be as enduring as the Ambrielle or HOG groups, but it serves its purpose—at least until the movie

is old news and newer movies come out and get attention. When you become a "fan" of something

like a movie, you are part of the buzz.

Marketers are looking at many ways to use Facebook and other social networking sites to create

buzz. Facebook has a "gift-giving" application that allows people to give "gifts" to each other. The

gifts are really just icons (pictures) within Facebook. Enter GiveReal, an online service that allows

people to give one another real gifts online. GiveReal developed a promotion with Bombay

Sapphire, a leading premium gin, and Facebook. The promotion allows Facebook users to give

their friends electronic coupons (downloadable to a credit card) for mixed drinks that use Bombay

Sapphire. These coupons can then be redeemed at restaurants and bars that accept credit cards

(Marketing Weekly News, 2009).

One result of social networking is viral marketing, or the spread of the company's message (like

a computer virus) through the community. Some companies have enhanced the viral marketing of

their offerings with interactive websites that might feature, say, a game built around an offering.

Consumers then e-mail their friends with links to the game or website. Examples include the viral

campaign by Nine Inch Nails for its concept album, Year Zero. An online alternate reality game

was created involving characters and situations drawn from the music on the album. The album

and game were so popular that HBO considered creating a series around the dark, futuristic tale

told on the album.

Blogs are one form of online communication that helps spread viral marketing messages. Some

blogs are written by corporate marketing officers who "spin" the information. But blogs can be

written by anyone. Blogs can serve as a "voice" for a community. For example, the chief executive

of the National Thoroughbred Horseracing Association (the NASCAR of horseracing) writes a

blog for the organization that is posted on its website. However, anyone can leave a comment on

the blog. Blogs have become much more like dialogue in a town hall meeting than a one-way

marketing message.

8

Figure 2.2

Ashton Kutcher was the first person to

have over a million followers on Twitter.

Source: Photo by Andrew Mager. (2008). Wikimedia Commons. Used under the terms of the Creative Commons Attribution-ShareAlike 2.0 Generic license.

Twitter is another application that facilitates viral marketing by enabling people to "follow"

someone. When an organization or a person posts something on Twitter, the post—called a

"tweet"—is sent as a text message to all followers of that organization or person. Ashton Kutcher

made headlines by being the first person to collect a million followers. However, the first

company to generate a million dollars in revenue through Twitter is probably Dell. Dell uses

Twitter to communicate special deals via its tweets—offers that are extremely limited. Followers

can then contact the company to place their orders for the products. Dell estimated that in 2009,

it would earn more than $3 million through Twitter (Abell, 2009).

Social media is a catchall phrase for the online channels of communication that build

communities. Social media includes social networking sites, blogs, podcasts, wikis, vlogs (video

blogs), and other Internet-based applications that enable consumers to contribute content. Social

media spending for marketing purposes doubled in 2008 and continued to rise in 2009 despite

the poor economy. In fact, Forester, a respected research company, predicts spending to top over

$16.2 billion in 2019. This represents a 10-fold increase from 2009 levels when social media

spending was only $1.6 billion (Beal, 2009).

9

2 . 1 K E Y T A K E A W A Y

Customer communities form around social networks, which marketers can use to both promote offerings and gather market information. Companies create influencer panels that provide insight into effective offerings and provide word of mouth. Customers can speak to one another and to companies through a variety of communication channels known as social networking sites.

2.2 Loyalty Management

L E A R N I N G O B J E C T I V E S

1. Understand the value of customer loyalty. 2. Distinguish attitudinal loyalty from behavioral loyalty. 3. Describe the components of a successful loyalty program. It's 8 p.m. and you're starving. You open the refrigerator and find a leftover chicken breast, half

an onion, and some ketchup. But what can you do with these ingredients? You could search online

for recipes that contain them, or post a question about what to do with them at a website such as

Kraft.com.

Companies like Kraft build websites in order to create the types of communities we discussed

earlier. If you posted your question at Kraft.com, you might have an experience like one woman

did—in 24 hours, 853 people viewed the question, and she had 22 answers to choose from.

Another question had 3,341 viewers over 10 days. Why has Kraft's web marketing team worked so

hard to create an environment in which people can do this?

One important reason is loyalty. Kraft wants loyal customers—customers who buy Kraft products

instead of other brands, who recommend its products to their friends, and are willing to pay a

little more to get Kraft quality. Early research on loyalty showed that loyal customers were less

expensive to market to, more willing to pay a premium for a particular brand, more willing to try

new products under the brand name, more likely to recommend the brand to their friends, and

more willing to overlook a problem related to the brand (Reicheld & Teal, 2001). That said, more

research shows that the benefits that come from loyal customers are not automatic, and that it

takes careful management for those benefits to be sustained (Reinartz & Kumar, 2003).

Loyalty has two dimensions. One dimension of loyalty is behavioral loyalty, meaning that the

customer buys the product regularly and does not respond to competitors' offerings. The second

10

dimension is attitudinal loyalty, which is the degree to which the customer prefers or likes the

brand.

Behavioral Loyalty Most marketers would be happy with behavioral loyalty because it does, after all, result in sales.

Yet behavioral loyalty doesn't mean that the customer is immune to your competitors' offerings.

Nor does it mean the customer is willing to pay more for your brand. For example, a

businessperson might regularly book trips on American Airlines because it flies to the one or two

destinations the traveler has to visit regularly. But a lower price on another airline or one

scheduled at a more convenient time might persuade the flier to switch to another carrier.

Habitual purchases are a form of behavioral loyalty. Comparison shopping takes time and effort,

so buyers are often willing to forego looking for substitute products. Habitual purchases are

commonly made for low-involvement offerings. You might regularly purchase a Coke at a drive-

thru restaurant near your house rather than take the time, energy, and gasoline to look for a Coke

that's cheaper.

Marketers engage in many activities to both encourage and discourage behavioral loyalty. Loyalty

programs, such as an airline offering travelers frequent-flier miles, can encourage behavioral

loyalty. But coupons and other special price promotions can break behavioral loyalty patterns.

We'll discuss loyalty programs in more detail later.

Attitudinal Loyalty As we explained, attitudinal loyalty refers to how much someone likes a brand and is willing to act

on that preference. Keep in mind, however, that a person's willingness to act on a preference

doesn't necessarily mean he or she will purchase your product: If you sell Ferraris, and the

potential customer is unemployed, he or she might be unable to afford one.

Cause-related marketing, which we will discuss in Week 7, "Integrated Marketing

Communications," can foster attitudinal loyalty among a company's community of customer.

Companies that engage in cause-related marketing choose causes that are important to the

customer communities in which they operate. American Airlines sponsors the Susan G. Komen

Foundation, an organization that is working to cure breast cancer. KitchenAid sponsors Cook for

the Cure, which also benefits the foundation. Both companies support breast cancer awareness

because the cause is important to their female customers.

11

Figure 2.3

American Airlines is a Lifetime Promise Partner, a program designed to support breast cancer

awareness and the Susan G. Komen Foundation. The company has painted Komen's signature

pink ribbon on planes as a way to support the foundation. Companies support charities that are

important to the communities in which they operate.

Source: Photo by Maarten Visser. (2001). Wikimedia Commons. Used under the terms of the Creative Commons Attribution-ShareAlike 2.0 Generic license.

Note, however, that cause-related marketing should be sincere. You can probably quickly tell

when a person or organization is insincere. So can your customers. Sincerity also breeds trust. For

example, when Eunice Azzani volunteered for the San Francisco AIDS Foundation, she did so

because the cause was important to her and Korn/Ferry International, the executive search firm

for which she is a managing director. While working for the cause, Azzani met executives with

Mervyn's, Wells Fargo, and other major corporations who later engaged her company to conduct

executive searches. They knew they could trust her to do high-quality work and that she was

sincere about her place in the community (Van Yoder, 2008).

Of course, there are many other methods of building attitudinal loyalty. As we mentioned,

advertising can create feelings for a brand, as can sponsoring a sports team or cultural event. In

the next section, we discuss loyalty programs, one way that companies try to manage both

affective and behavioral dimensions of loyalty.

12

Loyalty Programs Loyalty programs are marketing efforts that reward a person or organization for frequent

purchases and the consumption of offerings. For example, Lone Star Park's Star Player Rewards

program awards members points for each dollar they spend at the track. The more points they

earn, the better the prize is for which they can redeem their points.

The data a firm collects from a loyalty program can be very useful in terms of designing and

improving the company's offerings, especially when merged into a comprehensive customer

relationship management program, which we will discuss later. When members initially sign up

for a loyalty program, they provide a great deal of demographic information to the organization.

Their behavior can then be tracked as well. For example, Lone Star Park can determine who sits

in what section of the track by what tickets members purchase, as well as where they purchase

their refreshments or place their bets. The track can also determine members' preferences for

food and drink products or services such as betting clerks and betting machines. When the track

has nonracing events, such as a concert, the events can be promoted to members. Depending on

how the members respond, additional offers can be made, or not made, to them.

Lone Star Park could also team up to create an offering with American Airlines. For example, the

track and the airline could compare customer lists and determine which Star Player members are

also members of American's AAdvantage frequent-flier program. These individuals could then be

offered discounts on trips to Louisville, Kentucky, where the Kentucky Derby is held. Such an

offer is called cross-promotion marketing. A cross-promotion can be used to introduce new

marketing members to a community; in this case, Lone Star Park would be introducing American

Airlines to the horse racing community. The cross-promotion creates credibility for the new

member, just as you are more likely to accept a recommendation from a friend.

The Positive Effects of Loyalty Programs

When loyalty programs work, they result in one or more of the four effects of loyalty: the blocker

effect, the spreader effect, the accelerator effect, and the longevity effect. We'll start by describing

the longevity effect.

13

Figure 2.4 The Positive Effects of Loyalty Programs

The Longevity Effect

The longevity effect is lengthening the lifetime value of a customer. One result of a good loyalty

program is that your buyers remain your customers for longer. Because a loyalty company has

better information about its customers, it can create offerings that are more valuable to them and

keep them coming back. Consider a loyalty program aimed at customers as they progress through

their life stages. A grocery store might send diaper coupons to the mother of a new baby and then,

five years later, send the mother coupons for items she can put in her child's school lunches.

Loyalty programs also affect the longevity of customers by increasing their switching

costs. Switching costs are the costs associated with moving to a new supplier. For example, if

you are a member of a frequent-flier program, you might put up with some inconveniences rather

than switching to another airline. So, if you are a member of American's AAdvantage program,

14

you might continue to fly American even though it canceled one of your flights, made you sit on a

plane on the ground for two hours, and caused you to miss an important meeting. Rather than

starting over with a different program, you might be inclined to continue to book your flights on

American so you can take a free trip to Europe sooner.

The Blocker Effect

The blocker effect is related to switching costs. The blocker effect works this way: The personal

value equation of a loyalty program member is enhanced because he or she doesn't need to spend

any time and effort shopping around. And because there is no shopping around, there is no need

for the member to be perceptive to competitors' marketing communications. In other words, the

member of the program "blocks" them out. Furthermore, the member is less deal-prone, or

willing to succumb to a special offer or lower price from a competitor.

The blocker effect can be a function of switching costs—the costs of shopping around as well as

the hassles of having to start a new program over. However, the effect can also be a function

of relevance. Because the loyalty marketer has both information on whom the buyer is and data

on what the buyer has already responded to, more relevant communications can be created and

aimed at the buyer. In addition, because belonging to the program has value, any communication

related to the program are already more relevant to the buyer.

The Spreader Effect

The spreader effect refers to the fact that members of a loyalty program are more likely to try

related products offered by the marketer. For example, an American Airlines AAdvantage

member who also joins the company's Admiral's Club airport lounge creates additional revenue

for the airline, as a does the member's purchase of a family vacation through American's Vacation

services.

The spreader effect becomes even more pronounced when a cross-promotion is added to the mix.

Earlier, we mentioned Lone Star Park might team with American to offer a trip package to the

Kentucky Derby. Another example is Citibank offering you AAdvantage miles if you get a Citibank

Visa card through American's AAdvantage program. Cross-promotions such as these encourage

loyalty program members to try even more products from more producers.

The Accelerator Effect

When rats running in a maze get closer to the cheese, they speed up. Like rats in a maze,

consumers speed up, or accelerate, purchases when they are about to reach a higher award level

15

in a loyalty program, called the accelerator effect of a loyalty program. In American's

AAdvantage program, for example, a member gets "Platinum" status after flying 60 flights or

50,000 miles. Platinum members get special awards, such as more frequent upgrades to first

class, boarding ahead of everyone else, not having to pay for luggage and other fees, and double

mileage toward free flights. Someone who has 50 flights and just needs 10 more to become

Platinum will start to fly American more frequently until the Platinum level is reached. Then,

American hopes that the other effects (blocker, spreader, etc.) will occur.

Companies can capitalize on the accelerator effect by making it easy for members to track their

progress and notifying them when they are close to reaching subsequent levels. American helps its

Advantage fliers track their progress by sending them monthly updates on their levels. Couple

such a notification with a special offer, and a company is likely to see even greater acceleration.

The accelerator effect can also be used with promotions that create short-term, loyal behavior.

Pepsi created a promotion with Amazon in which purchasers could accumulate points toward free

music downloads. The promotion, launched with a Justin Timberlake Super Bowl ad, was a

knock-off of Coca-Cola's MyCokeRewards.com. Although they weren't formal loyalty programs,

both promotions led to an accelerator effect as customers got close to the award levels they

needed to redeem prizes.

Criteria for Successful Loyalty Programs

Just having a loyalty program is no guarantee of success, though. Eight studies of more than a

dozen grocery-store loyalty programs in the United States and Europe showed that five programs

had no impact on the loyalty of customers, two increased sales but not profits, two had mixed

results, and five had positive results (Tanner Jr. & Morris, 2009). There are, however, several

characteristics of loyalty programs that can make them effective, each of which is discussed next.

Good Performance by a Company

The first characteristic of an effective loyalty program is performance. No loyalty program can

overcome a company's poor performance. Even the most loyal buyer can put up with subpar

performance for only so long.

Responsiveness by a Company

Responsiveness is how well a company can take customer information (such as complaints) and

alter what it does to satisfy the customer. Loyal customers are more willing to complete surveys

and participate in market research, but they expect companies to use the information wisely. For

example, when customers complain, they expect their problems to be fixed and the company to

16

use the information so that the same problems don't reoccur. Likewise, the members of influencer

panels expect to be listened to. If you ignore their input, you are likely to alienate them, causing

them to switch to other brands.

A company's responsiveness—or lack thereof—also becomes evident to buyers when they spot a

better offer. Precisely at that moment, they realize that the company that created the better offer

was more responsive and worked harder to meet their needs.

Shared Identity Among Participants

Loyal customers are like sports fans—they wear their "team's" colors. That's why loyalty programs

have names that sound prestigious, such as American's "Executive Platinum" program. Loyal

customers also want to be recognized for their loyalty. Hampton Inn, which is part of the Hilton

family of hotels, is one company that could do a better of job of recognizing its customers—

literally. One of the authors of this text stays regularly at the same Hampton Inn, only to be

greeted every time on arrival with the question, "Is this your first stay with us?" The author is not

only a regular guest at that hotel but a member of Hilton Honors, the hotel's loyalty program. But

apparently the Hampton Inn's reservation system doesn't provide that information to its front

desk clerks. If you fail to recognize customers who are loyal, you are essentially telling them that

their business isn't that important to you.

Clear Benefits

What are the benefits of being loyal? A loyalty program should make those benefits clear. For

example, many airlines have a special boarding lane for members. Travelers who are not

members can easily see the special treatment members receive. If the elements of scarcity and

status can be created by a loyalty program, the benefits of belonging to it will be obvious to

customers.

Community Development

Finally, marketers who can put loyal customers together with other loyal customers are likely to

build a community around the common experience of consumption. At Lone Star Park or

American Airlines, common consumption is obvious—people are actually together. Building a

community in which people don't actually consume goods and services together can be a bit more

difficult, but recall that Kraft has done so with its online presence. Members of Kraft.com still

share their experiences, their recipes, their questions, and their answers, thereby creating a sense

of "we're in this together." Some of the postings might be related directly to Kraft products,

whereas others might only be indirectly related. Nonetheless, they all provide Kraft with insight

17

into what its customers are thinking. Meanwhile, its customers become more loyal as they

participate on the website.

Keep in mind that a loyalty program isn't necessary to create loyalty. Lexus doesn't have a formal

loyalty program. Yet studies show that Lexus owners are the most loyal luxury car buyers. Over

half of all Lexus owners buy another Lexus. (The brand's slogan is "Once a Lexus buyer, always a

Lexus buyer.") By contrast, Mercedes-Benz has a loyalty program, but only 40 percent of its

buyers purchase another Mercedes (Ireson, 2008).

A company can also offer its customers loyalty benefits that are not a part of a formal loyalty

program. For example, Mercedes-Benz gives loyal buyers an opportunity to suggest new features

via a contest, for which there is no prize other than the recognition the winner gets because his

idea was selected. And like many other car manufacturers, Mercedes offers owners special trade-

in deals. The challenge with loyalty promotions that lie outside loyalty programs is collecting the

information marketers need to target customers.

2 . 2 K E Y T A K E A W A Y

Customer loyalty is both behavioral and attitudinal. Habitual purchases are a form of behavioral loyalty. Cause-related marketing can foster attitudinal loyalty among a company's community of customers, as can loyalty programs. Loyalty programs can have four positive effects: they can increase the longevity, or lifetime value, of customers; block competitors' marketing efforts; encourage customers to buy related offerings; and accelerate their purchases. Loyalty programs don't automatically create loyalty among customers, though. Loyalty is created when a company performs well, responds to its customers, identifies its loyal customers, makes the benefits of its loyalty program transparent (obvious), and when the firm builds a community among its customers.

2.3 Customer Satisfaction

L E A R N I N G O B J E C T I V E S

1. Understand satisfaction and satisfaction strategies. 2. Design a customer satisfaction measurement system. 3. Describe complaint management strategies.

Customer Satisfaction Defined What comes to mind when you hear someone say, "A satisfied customer"? Perhaps it is an image

of someone smiling with the pride of knowing he or she got a good deal. Or perhaps it is the

childlike look of happiness someone exhibits after purchasing a new pair of shoes that are just the

18

right color. Whatever your picture of a satisfied customer is, customer satisfaction is typically

defined as the feeling that a person experiences when an offering meets his or her expectations.

When an offering meets the customer's expectations, the customer is satisfied. When an offer

exceeds customer's expectations, the customer is delighted.

Improving customer satisfaction is a goal sought by many businesses. In fact, some companies

evaluate their salespeople based on how well they satisfy their customers; in other words, not only

must the salespeople hit their sales targets, they have to do so in ways that satisfy customers.

Teradata is one company that pays its salespeople bonuses if they meet their customer

satisfaction goals.

Customer satisfaction scores have been relatively stable for the past few years as illustrated

in Table 2.2, "Industry-Average Customer Satisfaction Scores, 2000–2008." You might think that

if increasing the satisfaction of customers were, indeed, the goal of businesses, the scores should

show a steady increase. Why don't they? Maybe it's because just satisfying your customers is

a minimal level of performance. Clearly customer satisfaction is important. However, it isn't a

good predictor of a customer's future purchases or brand loyalty. For example, one study of

customer satisfaction examined car buyers. Although the buyers rated their satisfaction levels

with their purchases 90 percent or higher, only 40 percent of them purchased the same brand of

car the next time around (Lambert-Pandraud, Laurent, & Lapersonne, 2005).

Table 2.2 Industry-Average Customer Satisfaction Scores, 2000–2008

2000 2001 2002 2003 2004 2005 2006 2007 2008

Appliances 85 82 82 81 82 80 81 82 80

Computers 72 74 71 71 72 74 77 75 74

Electronics 83 81 81 84 82 81 80 83 83

Cars 80 80 80 80 79 80 81 82 82

Keep in mind, though, that satisfaction scores are a function of what the customer expected as

well as what the company delivered. So the flat scores in Table 2.2, "Industry-Average Customer

Satisfaction Scores, 2000–2008,"reflect rising customer expectations as well as improved

products. In other words, the better products get, the more it takes to satisfy consumers.

There is also a downside to continuously spending more to satisfy your customers. Research

shows that firms that do so can experience higher sales revenues. However, after the additional

spending costs are factored in, the net profits that result are sometimes marginal or even

negative. Nonetheless, satisfaction is not unimportant. A company's performance on key factors is

19

critical both in terms of the loyalty and satisfaction it generates among its customers (Souki &

Filho, 2008).

Customer Satisfaction Strategies So what or how much should you do to improve the satisfaction of your customer? If customer

satisfaction can be defined as the feeling a person experiences when an offering meets his or her

expectations, then there are two critical ways to improve customer satisfaction. The first is to

establish appropriate expectations in the minds of customers. The second is to deliver on those

expectations.

We know that dissatisfied customers are likely to tell many more friends about their negative

experiences than satisfied customers are about good experiences. Why? Because there's more

drama in unmet expectations. A story about met expectations—telling a friend about a night out

that was average, for example—is boring. Jan Carlson, a former Scandinavian Airlines executive,

was famous for promoting the concept of "delighted" customers. Carlson's idea was that

delighting customers by overexceeding their expectations should result in both repeat business

and positive word of mouth for a firm. The fact that stories about plain old satisfaction are boring

is also why influencer communities, such as JCPenney's Ambrielle community, are so important.

Influencers have new offerings to talk about, which are interesting topics, and other buyers want

to know their opinions.

Establishing appropriate expectations in the minds of customers is a function of the prepurchase

communications the seller has with them. If you set the expectations too low, people won't buy

your offering. But if you set the expectations too high, you run the risk that your buyers will be

dissatisfied. A common saying in business is "under promise and over deliver." In other words, set

consumers' expectations a bit low, and then exceed those expectations in order to create delighted

customers who are enthusiastic about your product. A seller hopes that enthusiastic customers

will tell their friends about the seller's offering, spreading lots of positive word of mouth about it.

One customer satisfaction strategy that grew out of Carlson's idea of delighting customers is to

empower customer-facing personnel. Customer-facing personnel are employees that meet and

interact with customers. In a hotel, this might include desk clerks, housekeepers, the bellmen, and

other staff. Empowering these employees to drop what they're doing in order to do something

special for a customer, for example, can certainly delight customers. In some organizations,

employees are even given a budget for such activities.

20

Ritz-Carlton employees each have an annual budget that can be spent on customer service

activities, such as paying for dry cleaning if a customer spills red wine on a dress in the hotel's

restaurant. Sewell Cadillac in Texas is famous for how its employees serve its customers. An

employee will even pick up a customer up on a Sunday if a Sewell-purchased car breaks down.

Other dealers might delegate such a service to another company, but at Sewell, the same

salesperson who sold the car might be the person who handles such a task. To Sewell, customer

service is too important to trust to another company—a company that perhaps won't feel the same

sense of urgency to keep car buyers as satisfied as Sewell does.

Empowerment is more than simply a budget and a job description—frontline employees also need

customer skills. Companies like Ritz-Carlton and Sewell spend time and effort to ensure that

employees with customer contact responsibilities are trained and prepared to handle small and

large challenges with equal aplomb.

Another customer satisfaction strategy involves offering customers warranties and guarantees.

Warranties serve as an agreement that the product will perform as promised or some form of

restitution will be made to the customer. Customers who are risk-averse find warranties

reassuring.

One form of dissatisfaction is post-purchase dissonance, which we will describe in Week 3,

"Consumer Behavior: How People Make Buying Decisions." It is also called buyer's remorse.

Post-purchase dissonance is more likely to occur when an expensive product is purchased, the

buyer purchases it infrequently and has little experience with it, and there is a perception that it is

a high-risk purchase. Many marketers address post-purchase dissonance by providing their

customers with reassuring communications. For example, a boat dealer might send a buyer a

letter that expresses the dealer's commitment to service the boat and that also reminds the buyer

of all the terrific reasons he or she purchased it. Alternatively, the dealer could have the

salesperson who sold the boat telephone the buyer to answer any questions he or she might have

after owning and operating the boat for a couple of weeks.

Measuring Customer Satisfaction To measure customer satisfaction, you need to able to understanding what creates it. Just asking

customers, "Are you satisfied?" won't tell you much. Yet many companies often measure the

satisfaction of their customers on the basis of only a few questions: "How satisfied were you

today?" "Would you recommend us to your friends?" and "Do you intend to visit us again?"

21

Effective customer satisfaction measures have several components. The two general components

are the customer's expectations and whether the organization performed well enough to meet

them. A third component is the degree of satisfaction, or to put it in terms we've used to describe

exceptional performance, is the customer delighted?

To figure out if a customer's expectations were met and he or she is delighted, more detail is

usually required. Companies might break the offering into major components and ask how

satisfied customers were with each. For example, a restaurant might ask the following:

• Were you greeted promptly by a host? By your server at your table?

• Was your order taken promptly?

• How long did you wait for your food?

• Was the food served at the appropriate temperature?

These questions assume that each aspect of the service is equally important to the customer.

However, some surveys ask customers to rate how important they are. Other surveys simply

"weight," or score, questions so that aspects that are known to be more important to customers

have a greater impact on the overall satisfaction score. For example, a restaurant might find that

prompt service, good taste, and large portions are the only three factors that usually determine

customers' overall satisfaction. In that case, the survey can be shortened considerably. At the

same time, however, space should be left on the survey so customers can add any additional

information that could yield important insight. This information can be used to find out if there

are customer service problems that a firm wasn't aware of or if the preferences of consumers in

general are changing.

You will still find customer satisfaction survey cards that just ask, "How satisfied were you

today?" "Would you recommend us to your friends?" and "Do you intend to visit us again?" The

information obtained from these surveys can still be useful if it's paired with a more

comprehensive measurement program. For instance, a sample of customers could be given the

opportunity to provide more detailed information via another survey, and the two surveys could

be compared. Such a comparison can help the company pinpoint aspects that need improvement.

In addition, the company has given every customer an opportunity to provide input, which is an

important part of any empowerment strategy.

22

Complaint Management Strategies When buyers want to complain about products or companies, they have many ways to do so. They

can complain to the companies they're upset with, tell their friends, or broadcast their concerns

on the Internet. People who use every Internet site possible to bash a company are called verbal

terrorists. The term was coined by Paul Greenberg, a marketing analyst who authored the wildly

popular book CRM at the Speed of Light.

Should companies worry about verbal terrorists? Perhaps. A study indicates that customer

satisfaction scores could be less important to a firm's success or failure than the number of

complaints it gets (Lou & Homberg, 2008). To measure the tradeoff between the two, customer

satisfaction guru Fred Reicheld devised something called the net promoter score. The net

promoter score is the number of recommenders an offering has minus the number of complainers

(Reicheld, 2006). The more positive the score, the better the company's performance. According

to another study, a company with fewer complaints is also more likely to have better financial

performance.

Studies also show that if a company can resolve a customer's complaint well, then the customer's

attitude toward the company is improved, possibly even beyond the level of his or her original

satisfaction. Some experts have argued, perhaps jokingly, that if this is the case, a good strategy

might be to make customers mad and then do a good job of resolving their problems. Practically

speaking, though, the best practice is to perform at or beyond customer expectations so fewer

complaints will be received in the first place.

Customers will complain, though, no matter how hard firms try to meet or exceed their

expectations. Sometimes, the complaint is in the form of a suggestion and simply reflects an

opportunity to improve the experience. In other instances, the complaint represents a service or

product failure.

When a complaint is made, the process for responding to it is as important as the outcome. And

consumers judge companies as much for whether their response processes seem fair as whether

they got what they wanted. For that reason, some companies create customer service departments

with specially trained personnel who can react to complaints. Other companies invest heavily in

preparing all customer-facing personnel to respond to complaints. Still other companies

outsource their customer service. When the service is technical, marketers sometimes outsource

the resolution of complaints to companies that specialize in providing technical service. Computer

help lines are an example. Technical-support companies often service the computer help lines of

multiple manufacturers. A company that outsources its service nonetheless has to make sure that

23

customer complaints are handled as diligently as possible. Otherwise, customers will be left with a

poor impression.

Handling the Complaint Process A good customer complaint-handling process involves the steps listed below. Note that one step is

to acknowledge the customer's feelings. A customer who is angry or upset due to a failure does not

want to be patronized or have his or her problems taken lightly. The situation is important to the

customer and should be important to the person listening and responding to the complaint.

• Listen carefully to the complaint

• Acknowledge the customer's feelings

• Determine the root cause of the problem

• Offer a solution

• Gain agreement on the solution and communicate the process of resolution

• Follow up, if appropriate

• Record the complaint and resolution

Note that the complaint-resolution process involves communicating that process and gaining

agreement on a solution, even if the customer sometimes might not like the outcome. He or she

still needs to know what to expect.

Finally, the complaint process includes recording the complaint. We stated earlier that a firm's

best strategy is to perform at or beyond the customer's expectations so as to minimize the number

of complaints it receives in the first place. Analyzing your company's complaints can help you

identify weak points in a service process or design flaws in a product, as well as potential

miscommunications that are raising customers' expectations unreasonably. To conduct this

analysis, however, you need a complete record of the complaints made.

A complaint record should reflect the main reason an offering failed. Typically, the failure can be

attributed to one (or more) of the following four gaps (Levy & Weitz, 2009):

1. The communication gap. Overstating the offering's performance level, thereby creating

unrealistic expectations on the part of customers.

2. The knowledge gap. Not understanding the customer's expectations or needs, which then

leads a company to create a product that disappoints the customer.

24

3. The standards gap. Setting performance standards that are too low despite what is known

about the customers' requirements.

4. The delivery gap. Failing to meet the performance standards established for an offering.

You can attribute the complaints your company receives to one of the four gaps and then use the

information to figure out what must be done to fix the problem, assuming you have one. If the

problem is overstating the performance, then perhaps your firm's marketing promotions

materials should be reviewed. If it appears that the offering is simply not meeting the needs of

your customers, then more work should be done to identify exactly what they are. If your firm is

aware of the needs of its customers but there is a gap between their requirements and the

standards set for your firm's performance, then standards should be reviewed. Finally, your

company's processes should be examined to ensure that standards are being met.

When the Smokey Bones chain of barbecue restaurants (owned by Darden Restaurants) noticed

falling profits, managers cut costs by eliminating some menu items. Unfortunately, these were the

items that made the chain unique; once they were gone, there was nothing distinctive about the

chain's offerings. When customers complained, servers replied, "Yes, a lot of people have

complained that those products are no longer available." But apparently, there was no process or

way to get those complaints to register with the company's management. As a result, the company

didn't realize why it was losing customers, and its profits continued to spiral downward. Many

locations were closed and the company filed for bankruptcy.

Keep in mind that the complaint-handling process itself is subject to complaints. As we

mentioned, customers want a process that's fair, even if the outcome isn't what they hoped for.

Consequently, monitoring your firm's customer satisfaction levels also means you must monitor

how satisfied customers are with how their complaints were handled.

2 . 3 K E Y T A K E A W A Y

Measuring customer satisfaction is an important element of customer empowerment. But satisfaction alone is a minimal level of acceptable performance. It means that the customer's expectations were met. Getting positive word of mouth requires exceeding those expectations. To minimize the number of complaints, a company needs an effective process of both handling complaints and understanding their causes so any problems can be corrected. Because the complaint process itself is subject to complaints, monitoring your firm's customer satisfaction levels also means you must monitor how satisfied customers are with your company's complaint-handling system.

25

2.4 Customer Relationship Management

L E A R N I N G O B J E C T I V E S

1. Define customer relationship management. 2. Identify and describe three levels of customers. 3. Calculate customer lifetime value. 4. Describe best practices for CRM implementation. 5. Identify CRM metrics. Peter Drucker, management guru of the mid-twentieth century, said, "The purpose of a business

is to create customers." What he didn't say is it is even more important to retain those customers.

As most businesses experience, it is easier and cheaper to keep a customer than to continually

have to replace an existing customer by finding a new one and convince him or her that the

product meets his or her personal value equation. That means companies need to develop

strategies for creating, maintaining, and expanding profitable customers.

Customer relationship management (CRM) is not just customer service, although that is certainly

a part of it. CRM includes the systemic collection and analysis of customer data and the strategies

employed to use that data to understand, recruit, and retain satisfied (or delighted) customers.

Sometimes the term is used to describe the software used in a CRM program, but a true CRM

program is much more than software; it is a systematic effort to keep and retain customers. The

software helps compile the data.

The goal of CRM is to increase a customer's lifetime value (LTV) to the company, or the

aggregate total of all the exchanges between the company and the customer over the customer's

lifetime. To calculate LTV, take the revenue you earn from a customer, subtract the money spent

on filling his or her needs, and adjust all of the payments for time value of money. Suppose you

spend $100 every time you buy a pair of running shoes. You are an avid runner, so you purchase

two pairs of shoes each year. You expect to run the rest of your life, but practically, let's look at it

for the next 10 years. Therefore, the revenue you will generate for the shoe company is $2,000.

Now, suppose the shoe company spent $35 in customer acquisition costs to get your first

purchase of its shoes. That means you have a LTV of $1,165 to the shoe company. This doesn't

even account for price increases or buying up to higher-priced shoe models. It does get more

complicated in that the LTV is adjusted to account for the time value of money, but we'll keep it

simple.

26

Why is LTV important? Marketers use this information in a number of ways. First, it identifies

their most valuable customers (MVCs), that group of regular and loyal purchasers who do

not make up the majority of the company's customers, but the customers who produce the most

profit per customer. MVCs are the customers that should receive the company's highest level of

customer service and communication. MVCs are most often the ones that sign up and participate

in loyalty programs discussed earlier. Most companies probably have at least two other categories

of customers, and some of these customer groups may not be worth the marketing expenses.

Let's take our shoe example again. Suppose the cost of producing and distributing the running

shoe was $50. Add in the $35 acquisition cost, and certain customers who only buy once are

worth only worth $15 LTV. That is a big difference from the $1,165 noted above. Yet, the bulk of a

company's customers will most likely be the largest percentage of customers, so they can't be

ignored. Figure 2.5 illustrates the most typical profile of customer groups in consumer markets.

Figure 2.5 Levels of Customers Based on Profitability

Although initial and one-time transactions make up the bulk

of a company's customers, they represent the least profitable

per customer, and they must be constantly replaced

with new customers.

In other words, not all customers are created equal. To treat all customers equally might be too

expensive for a company, or at least much less profitable. Identifying customer groups in terms of

their long-term profit potential is greatly aided by CRM software technology, which allows

companies to capture relevant information about customers, track customer purchases, and all

customer communications.

Level 1 MVCs

Level 2 Repeat customers

Level 3 Initial and one-time

transactions

27

A second question that can be answered using LTV is how much should the company spend in

customer support. With our running shoe example, if the company hears from a one-time

purchaser of its running shoe either because he or she needs clarification, has a complaint, or

wants to return the product, that cost needs to be subtracted from the already low LTV of $15.

When computers first appeared in the marketplace, customer service was a major issue for

technology companies because they were essentially creating primary or new demand for a new

product category. There was a lot consumers didn't know about computers. The cost of the

computers was relatively high, so customer service costs were already factored in. But, as the cost

of the computers decreased, competition increased, and brand loyalty to certain manufacturers

eroded, the profit margin on a computer sale decreased. Something had to give. The computer

companies changed their customer service model.

For MVCs, it is likely that the computer company offered one-on-one training and made it easier

to access phone support technicians and the like. For non-MVCs, help took the form of websites

with endless clicking to find the information needed, and that assumes customers could frame

their concerns in the form of a question. The company's goal is to solve all issues with automated

phone and web-assisted systems. And, if a person rarely buys a computer, customer service for an

old model could disappear completely.

A third benefit of CRM is the company's ability to know how to best serve each customer group.

Indeed, as relationships are built, so also is the company's knowledge of customer needs and

wants. This translates into the modification of offerings or development of new offerings to serve

specific needs of specific customer groups, and likely a higher LTV calculation.

A fourth benefit is cost savings from ensuring the right product reaches the right consumers at the

right time. Additionally, relationships with customers allows the company to cross-sell other

products, have a means to quickly offer sales promotions, seek consumer input, and reduce

overall marketing communication costs. CRM reduces the need for costly advertising because you

know your customers and how to reach them.

Unfortunately, there is no one best model of a good CRM program. It is highly dependent on the

company's management philosophy, the industry, financial, and human resources, price

structure, and the product or service itself. However, we can identify best practices in CRM that

companies with productive customer relationships follow.

Business Week provides a useful list of best practices to implement a CRM program (Thompson,

2015).

28

First, involve top management in the design of a CRM program. As Bill Brendler of Brendler and

Associates says, "If they don't lead the charge, CRM won't happen (Thompson, 2015). Second,

restructure employee compensation to reinforce CRM priorities. If a company wants MVCs, it has

to empower all employees with incentives to perform in a customer-centric manner. Cisco

Systems, for example, rewards employees on whether the company hits its customer satisfaction

targets (Thompson, 2015). Third, manage cultural change and people issues carefully. The

company implementing CRM will face a whole new set of rules and responsibilities. Involve as

many affected employees in the design and implementation process, Brendler says (Thompson,

2015). Fourth, concentrate on customer lifetime value. This is how customer groups are identified

and CRM strategies designed to serve each group. Fifth, bulldoze paths, don't pave them. The

CRM technology is very powerful, and may be too powerful for many companies to quickly adopt

and find useful. This may cause errors in the acquisition and analysis of CRM data or cultivating

the wrong information that ultimately may be more damaging than no CRM program. Technology

is the means to an end, it is not the end itself. But a CRM program has to start somewhere and if

resources require a small effort, then get that up and running; you can always add components to

CRM (Thompson, 2015). Sixth, push the project. Identify a project leader who has enough clout

with employees to be the change agent, and continue to be the change agent as the CRM program

takes shape, encounters problems, and needs modifications. Lastly, provide training and support

and prepare for continuous improvement. Successful CRM is an ongoing process requiring the

right people and the right training. CRM is also organic; it will grow and change over time as the

company reaps the results of successful customer relationships (Thompson, 2015).

How does a company know if its CRM program is successful? In general, there are three

categories of metrics to consider. The first are the traditional business performance metric such as

number of retained customers, renewal rates, or the amount of new revenue from current

customers. The second category is user adoption metrics such as number of visits and time spent

on websites, completeness of customer provided information. The third category is customer

perception metrics such as customer satisfaction rates.

2 . 4 K E Y T A K E A W A Y

Customer relationship management (CRM) is a process for creating, maintaining, and expanding profitable customer relationships. CRM programs differ depending on many factors both inside and outside the company, but all CRM programs divide customers into levels and focus most of their attention on the company's most valuable customers (MVCs). CRM is high data driven, but the data is only one piece of the CRM puzzle. The other pieces include the analysis of the data and the strategies the company develops in response to that analysis. The goal of CRM is to increase a customer's lifetime value (LTV) by offering superior products and services as identified by the customers.

29

2.5 Ethics, Laws, and Customer Empowerment

L E A R N I N G O B J E C T I V E S

1. Apply general ethical principles and concepts to online marketing. 2. Explain the laws that regulate online and other types of marketing.

While we are discussing customers, now is a good time to introduce the concept of marketing

ethics and laws government marketing practices. Ethics has become even more relevant than

truth in advertising now that we have customer communities that are virtually unedited.

You are about to graduate and move to another city to start a new job. Your employer is paying for

your moving expenses, so you go online to see what people have to say about the different moving

companies. One company has particularly good reviews, so you hire it. Yet what actually happens

is vastly different—and a complete disaster. Little surprise, then, when you later discover that the

company actually paid people to post those positive reviews!

Unfortunately, such an experience has happened so often that the Federal Trade Commission

(FTC) is now considering rewriting rules regarding endorsements and whether companies need to

announce their sponsorships of messages.

Once upon a time, before the days of the Internet, any form of selling under another guise or a

phony front was called sugging (a word created from the first letters of selling under the guise,

or SUG). The term was primarily applied to a practice in which a salesperson would pretend to be

doing marketing research by interviewing a consumer, and then turn the consumer's answers into

reasons to buy. Some companies have hired young, good-looking, outgoing men and women to

hang out in bars and surreptitiously promote a particular brand of alcohol or cigarettes. Sugging

seems to be a good term to apply to fake reviews, as well.

Truly, in no other marketplace should the term caveat emptor apply as strongly as it does on the

Internet. Caveat emptor means, "let the buyer beware," or "it's your own fault if you buy it and it

doesn't work!" Product reviews can be posted by anyone—even by a company or its competitors.

So how do you know which ones to trust? Often, you don't. Yet many of us do trust them. One

study found that over 60 percent of buyers look for online reviews for their most important

purchases, including over 45 percent of senior citizens (Neff, 2007).

30

While sugging isn't illegal, it isn't fair. Not only is the content potentially misrepresented, but the

source certainly is. As you already know, a marketer cannot make promises about an offering's

capabilities unless those capabilities are true. Sugging is similar—it involves misrepresenting or

lying about the source of the information in an effort to gain an unfair advantage.

The consequences of being caught while sugging can be high. Even if the information posted was

actually an accurate depiction of the offering's capabilities and benefits, consumers will be less

likely to believe it—or any of the other the company's marketing communications, for that matter.

The loss of trust makes building any kind of lasting relationship with a buyer extremely difficult.

Legal Requirements

So far, there are no regulations regarding sugging, although that may change if the FTC decides a

crackdown is needed. There are, however, regulations affecting how one uses e-mail to sell.

Specifically, the CAN-SPAM Act prohibits the use of e-mail, faxes, and other technology to

randomly push a message to a potential consumer. Spam is a term for unwanted commercial e-

mail similar to junk mail. Using e-mail and other forms of technology to sell is legal if the seller

and the buyer have a preexisting relationship or if the buyer has given his or her permission.

Permission marketing is a term that was created to suggest that marketers should always ask for

permission to sell or to offer buyers marketing messages. The idea was that when permission is

granted, the buyer is willing to listen. Now, however, anything "free" online requires that you sign

up and give "permission," not just to get the freebie but also all kinds of future spam and

annoying messages. You might also inadvertently give a seller permission or allow it to sell your

name and contact information. When you sign up for contests or agree to the seller's privacy

statement when you order something online, you may have given the seller permission to resell

your contact information to one of its "partners."

Because of trust issues and the overuse of permission marketing, many consumers

create dump accounts, or e-mail addresses they use whenever they need to register for

something online. The dump account is used only for this purpose, so that all spam goes to that

account and not the person's personal account. Many consumers find it easier to use dump

accounts rather than read every privacy policy and try to remember which vendors won't sell the

e-mail addresses to their "partners" for marketing purposes. Therefore, when you are a marketing

manager, don't expect all the e-mail addresses you collect from a free offer to be valid.

31

Figure 2.6

Attendees to the LinuxWorld trade show agree when they buy their tickets to allow the

exhibitors to send them e-mail, postal mail, and marketing messages through a variety of

channels. Some companies use preshow e-mails to get attendees to visit their booths.

Postshow e-mails might be part of a follow-up campaign.

Source: Photo by Arnold Reinhold. (2006). Wikimedia Commons. Used under the terms of the Creative Commons Attribution-ShareAlike 3.0 Unported license.

In the B2B world, when attendees sign up for a trade show, they often give the show's exhibitors

permission to send them e-mails and other information. Most sellers won't send marketing

communication to fax machines because they are often shared by a number of people, and there is

no guarantee that the intended person will receive the fax. Using e-mail, however, is acceptable

because the buyer gave permission.

Privacy Laws

US privacy laws apply to both Internet marketing and other forms of commerce. The laws limit

the amount and type of information a company can collect about a consumer and also specify how

that information can be used or shared. In the EU, the types of data a company can collect are

fewer, and the sharing of information is far more restricted. For example, a company cannot share

information about customers in one division with another division. (Sending out unsolicited e-

mails to potential buyers is also restricted in Europe.)

The Gramm-Leach-Bliley Act of 1999 requires financial institutions to provide written notice

of their privacy policies. Privacy policies are statements regarding how a company will use and

protect a consumer's private data. The law was broadened in 2003 to apply to a wider array of

companies and consumer information.

32

The FTC requires a company to follow its policy or face severe penalties, even if the company is

not required by the Gramm-Leach-Bliley Act to have a privacy policy. So, if you own a bookstore

and you have a privacy policy, even though the law doesn't require you to have one, you have to

follow the FTC's rules. And if you decide to change your privacy policy (for example, you decide to

sell your customer list to Amazon), you have to notify your customers of the new policy.

What kind of data do companies want on you? (Refer to Week 3, "Consumer Behavior: How

People Make Buying Decisions," and Week 4, "Market Segmenting, Targeting, and Positioning.")

They want to know where you live so they can apply data to know you better and create marketing

messages more likely to persuade you to buy something. They want to know how much you make

to see if you can afford a higher-priced product. They want to know about the other things you

buy, because that will likely affect what you buy in the future. If you own a boat, for example,

you're more likely to buy fishing gear in the future. If you buy fishing gear, you're more likely to

buy clothes from Columbia. And so on. The more they know, the more they can create offers

tailored to fit your lifestyle and to entice you to buy.

Figure 2.7

Your university may know a lot about you, including your health history, your financial

situation, and even the car you drive—not just the make and model, but the specific car. The

Gramm-Leach-Bliley Act requires your school to protect that data so your privacy is protected.

Source: Wikimedia Commons.

Some organizations also have data, such as your social security number, that criminals could use

to steal your identity. For example, think about how much information your university has on

you. It not only has your social security number, but your university may also have your financial

information (through financial aid), your health information (through the campus health center),

and your vehicle information (through parking fees). Protecting that information so you aren't

harmed is a huge responsibility for the university.

33

Privacy policies and privacy laws apply to both business customers and individual consumers. As

we will discuss in Week 6, "Using Marketing Channels to Create Value for Customers," many

business buyers require vendors to sign nondisclosure agreements (NDAs) that specify what

information is proprietary, or owned by the customer, and how, if at all, the seller can use that

information. NDAs are not an online tool specifically but are often used in the normal course of

business.

What about the offering itself? When you buy something online, you don't get to see it first, so

how do you know it is what the seller says it is, and what can you do if it isn't?

The Uniform Commercial Code (UCC) is a group of laws that govern commercial practices in

the United States. The UCC defines many aspects of sales, such as when a sale actually takes place

and what warranties buyers can expect.

Warranties and Promises

A warranty is a promise by the seller that an offering will perform as the seller said it would. The

UCC makes a distinction between two types of warranties. The first is an expressed warranty,

which is an oral or written statement by the seller regarding how the product should perform and

the remedies available to the consumer in the event the offering fails.

An implied warranty is an obligation for the seller to provide an offering of at least average

quality, beyond any written statements. For example, when you buy a new car, there is an implied

warranty that it will run as promised after you drive it off the lot. You also have the right to expect

average quality for any characteristic of a product that you buy online, except for those

characteristics specifically described in the online material. If you were able to inspect the product

before you bought it, such as looking at it in a store, the implied warranty only applies to those

aspects you couldn't inspect or observe in the store.

Where the law gets tricky is when it comes to other forms of writing. Marketing messages,

whether written in a brochure or advertisement or stated by a salesperson, are considered implied

warranties. Any written statement about what the offering does has to be true, or it violates the

UCC's definition of an implied warranty (and is therefore punishable by law).

Keep in mind that a salesperson can create an implied warranty in an e-mail or during an online

chat session if he or she makes a promise. Even if the salesperson says something that contradicts

a company's written material elsewhere, the consumer has the right to believe what the

salesperson says. As such, the salesperson's promise is legally binding.

34

Protecting Your Company As a marketer, you have an obligation to protect your company from consumers who might not

have honest intentions. For example, have you noticed how you sometimes have to reproduce a

strange-looking set of letters or words before you are allowed to make a purchase when buying

something online? That simple step prevents automatic ordering by bots. A bot, which is short

for robot, is a kind of program that performs automatic functions online. One of those functions

could be to purchase products, such as tickets to a highly desirable sporting event, which the

buyer can then resell at a higher price. Or a bot could be used to obtain many units of a freebie

that someone can then resell. Bots can be used for many illicit purposes; a good marketer

anticipates their uses and creates barriers to prevent being taken advantage of.

A legal tool to help protect your company is the Digital Millennium Copyright Act. This act is

designed to prevent copyrighted material from being pirated online. While prominent cases

involve downloading music, your marketing information is also included. When you find a good

way to market your offerings online, a competitor can't just steal your communications and insert

its name. You are protected by this act.

What is very difficult to protect against is phishing, or soliciting personal information in order to

steal an identity and use it to generate cash fraudulently. However, you may find it reassuring to

your customers to remind them of your privacy policies and your customer contact practices. For

example, a bank may remind its customers that it will never ask for a social security number by e-

mail. Making sure your customer contact policies protect your customers can also help protect

them against phishing from someone pretending to be you or your company.

2 . 5 K E Y T A K E A W A Y

Sugging is selling under any phony type of front. It includes posting fake reviews about products online. Sugging damages a seller's trust among buyers and should never be done. US laws govern how products can be marketed, both those that are sold electronically and through more traditional channels. Companies must have permission before they can send you spam, and they have to tell you how they will gather and use your personal information. Warranties—expressed and implied—are binding no matter how companies deliver them. Good marketers anticipate less-than-honest activities by individuals and take steps to prevent them. Bots are online robots that some people use to take advantage of marketers.

W E E K 3 P R E V I E W

Week 3 continues with our focus on the customer. Next week, we are going to uncover how consumers think when making purchase decisions—or decisions not to purchase. This is called consumer behavior. We will be looking at the process we use in our heads (and sometimes on a napkin) to outline our criteria for a purchase decision, how we seek information, and how we evaluate our criteria. We will discover that some of our thought processes are rational and some are very irrational. Also explored during Week 3 are

35

the things that go on inside consumers' minds as they process the information and move through the stages of the buying process. These can be social or psychological. Since we are all consumers, you should enjoy this material and gain greater insight into your own buying decisions.

Week 2 References Overview Ramani, G., & Kumar V. (2008). Interaction orientation and firm performance. Journal of Marketing, 72 (1), 27–41.

Section 2.1 Abell, J. C. (2009, June 12). Dude—Dell's making money off Twitter. Wired. Retrieved August 24, 2009, from http://www.wired.com/epicenter/2009/06/dude-%E2%80%94- dells-making-money-off-twitter American Marketing Association (AMA). Dictionary. Retrieved January 29, 2015, from marketing- dictionary.org. Beal, A. (2009, April 24). Forrester predicts huge growth for social media marketing. Retrieved August 26, 2009, from http://www.marketingpilgrim.com/2009/04/forrester-social-media-growth.html Marketing Weekly News. (2009). Give real; Leading online gifting service Givereal.com partners with Bombay Sapphire to serve up the perfect summer cocktail through the web. 225.

Section 2.2 Ireson, N. (2008, September 3). Lexus first in owner loyalty survey, Saab last. Retrieved July 13, 2009, from http://www.motorauthority.com/jd-power-lexus-first-in-luxury-owner-loyalty-saab-last.html Reicheld, F., & Teal, T. (2001). The Loyalty Effect: The Hidden Force Behind Growth, Profits and Lasting Value. Boston: Harvard Business Press. Reinartz, W. J., & Kumar, V. (2003). The impact of customer relationship characteristics on profitable lifetime duration. Journal of Marketing, 67(1), 77–96.

Tanner Jr., J. F., & Morris, D. (2009, March). Customer empowerment. BPT Partners, LLC. Van Yoder, S. (2008). Cause-related marketing. Retrieved October 10, 2008, from http://www.streetdirectory.com/travel_guide/5529/marketing/cause_related_marketing.html

Section 2.3 Lambert-Pandraud, R., Laurent, G., & Lapersonne, E. (2005). Repeat purchasing of new automobiles by older consumers: Empirical evidence and interpretations. Journal of Marketing, 69(2), 97–106.

Levy, M., & Weitz, B. (2009). Retailing management (7th ed.). Burr Ridge, IL: McGraw-Hill. Lou, X., & Homburg, C. (2008). Satisfaction, complaint, and the stock value gap. Journal of Marketing, 72(3), 29–43. Reicheld, F. (2006). The ultimate question: Driving good profits and true growth. Boston: Harvard Business Press.

36

Souki, G., & Filho, C. G. (2008). Perceived quality, satisfaction and customer loyalty: An empirical study in the mobile phones sector in Brazil. International Journal of Internet and Enterprise Management, 5(4), 298–314.

Section 2.4 Thompson, B. (2015, January 21). Best principles to practice for effective CRM. Businessweek.com. Retrieved January 21, 2015, from http://www.businessweek.com/adsections/care/relationship/crm_effective.htm Section 2.5 Neff, J. (2007). Spate of recalls boost potency of user reviews. Advertising Age, 78(43) 3–4.