Lecture_6_Managing_Customer_Relationships

Managing Customer RelationshipsIntroductionF ocusing simply on new customers is akin to looking for a needle in a haystack. Once found, it is thrown back to look for it again. Larry Rosenberg (2001) suggests;‘It’s not worth the time and effort to get customers if you don’t keep them’The fixation with growth strategies is what has persuaded most companies thinking, in that their primary marketing efforts have been focused on attracting a stream of customers. The front end function of customer getting commands a substantial proportion of marketing expenditure, top management attention and talented marketing personnel and so not surprisingly continues to be a primary marketing function. The back end function of customer retaining has been generally neglec ted but requires more attention on two counts’1 Effectiveness In most cases marketing can succeed in building a loyal following ofrepeat buyers rather than wooing new recruits. This activity can ensure a defensibleand growing market share. Bain and Company (1999) found customer retention hasa more powerful effect on profits than market share or scale economies both ofwhich are normally associated with competitive advantage. Their research clearlyshowed that companies who could improve customer retention by 5% could boostprofits by between 25-85%.2 Efficiency It is estimated that the average company spends 6 times more toget a new customer than it does to hold onto a current one. As customer retentiongoes up, marketing costs come down. Moreover, loyal customers frequently bringnew business at no cost to the firmHowever, i n today’s competitive arena companies can no longer simply plan for future sales based on marketing’s traditional understanding of customer needs and on meeting those needs by controlling a limited range of critical activities that are usually associated with marketing. To match the needs of the consumer to that of the organisation in creating value for both requires all key decision makers within the firm to play their part via cross-functional co-ordination.In reality cross functional decisions are NOT easy to accomplish. Marketing cannot control everything. Marketing resources tend to be allocated to those activities it can control such as advertising, selling, sales promotion, while decisions that affect marketing in helping to satisfy customers, such as, product development, pricing, processes and services are often taken by other parts of the organisation. Not surprising, delivery of a marketing strategy that seeks to build customer relations through the creation of value is hard and largely outside the traditional scope of marketing resource decisions. This presents a real challenge for the organisation as the quality of its external relationships depends to a great extent on the quality of relationships within its internal environment.The Relationship Challenge ReviewedThe traditional marketing process of matching an organisations external and internal environmentsand developing products and services which create value for its customers – hence develop relationships – neglects quality improvements and customer service activities.Role of Quality Quality as a management concept is concerned with matching a firm’s offer to customer requirements and expectations. Effective quality management ensures all the firms departments align their decisions to ensure customer satisfaction, but to ensure total quality means extending this approach beyond the firm to embrace all the relationships the firm has with its suppliers, intermediaries through to its customers. (ie Value Network Sequence)The traditional role of quality was production orientated towards conformance of specifications (ie internal quality) but this has been superseded by the concept of Total Quality Management where concepts of quality are defined by customers or customer perceived quality. Best practice in quality management has moved from final inspection of products to assessing the critical internal processes to ensure the product or service is produced to a consistent standard each time, every time and with no defects.In manufacturing for example, the emphasis has moved away from inspecting production outputs to monitoring the variation in routine activities and making adjustments in real time while goods are still being processed. This approach has led to companies drastically reducing the variation in output quality and to eliminate waste. Such practices can apply to all cross functions within companies and as such provides a better way of meeting customer requirements at least cost. That said, quality in a customer eye may take many forms. While quality management seeks to meet customer requirements consistently, this is only tenuously linked to customer expectations and the changing dynamics of value exchange. For many marketers, they still see quality as the responsibility of manufacturing or engineering and as such, marketing does not involve itself in quality. However, for CRM to operate effectively, marketing must take the responsibility for monitoring and inspecting customers’ perceptions of quality and to actively involve itself in the quality process.Role of Customer Service Customer satisfaction has been stated as being critical to maintaining relationships, and so we recognise the importance of customer service via the definition provided below;‘The on-going process of managing the buyer/seller relationship in ensuring customer satisfaction’Ballantyne et al (2002) Unfortunately, all too often, customer service has been viewed simply as customer care which hasled to the creation of customer care departments whose responsibility has been to resolve complaints. Customer service is not simply a department responsibility in the same way that quality is not simply a production responsibility. The ways in which service is delivered and maintained, cuts across functional boundaries and requires a deeper understanding of what drives customer satisfaction.For example, customer service includes all activities involved in accepting, processing and delivering customer orders. It takes responsibility for all communications with customers, all shipping arrangements, deliveries to the control and repair of goods; which makes the role of customer service very wide ranging.Customers invariably have differing requirements and characteristics and as such a firms service processes need to be flexible enough to allow for a degree of tailoring such that they can respond quickly to changing customer requirements. The relationship here focuses on building bonds with customers and other stakeholder groups. The improved service can add additional value in improving long term relationships.Integrating Marketing, Quality and Customer ServiceOrganisations can no longer confine marketing, quality and customer service management inputs to creating and delivering customer value to discrete departments such as marketing, logistics or complaint handling. Companies need to address these 3 approaches in the same way a customer sees them – as part of a seamless offering. All departments must take on-board these interactive roles. The concept of interaction in a relationship context being that value is created and shared through interaction. As such, interaction starts with any action that generates response. While somewhat simplistic, it nevertheless provides the basis from which we can examine the value delivery process that brings quality, customer service and marketing together.Interaction in a service context is when customers and suppliers interact. How good the interacti on is in terms of satisfying customer needs is often called, ‘moments of truth’ – ie did all the systems and processes within the organisation work well in providing a worthwhile experience for the customer or at the point of contact did it all fall down (ie moment of truth). In service industries customer value is created, delivered and consumed simultaneously and as a consequence the value creation process partly parallels the value delivery process. In manufacturing and distribution on the other-hand one follows the other.The Customer Value Chain This simply is a means for determining what a customer actually does with a product or service. For example, a bank account may serve a number of customer functions – to pay bills, as a savings account or as an investment. Marketing needs to identify what the customer’s priorities are when using the product or service before it seeks to determine how to improve it. Aligning the company’s value chain therefore to the customer’s value chain should provide for sustainable value.Internal Quality Problems When organisations fail to manage work flows and processes laterally across their own value chain, costs rise and quality falls. Think of departments within an organisation as internal customers whose needs require satisfying in the same way as any external customer. Failure to match the value outputs of one department to another leads to an internal quality gap. It’s no good creating real value in one department, if another department in the work flow process lets the organisation down. Think of your own class lessons, followed by enrolment procedures to borrowing books from the library to gaining access to the sports facilities. From your perspective, did they all work effectively in meeting your needs (customer value chain)?To be effective managers need to be alert to these cross functional organisational linkages and attempt (collaboratively) to remove any blockages, if they are to reduce the cost of achieving customer perceived value. Blockages in cross functional activities are best dealt with by looking at the internal variables of job design (who does what), environmental settings (where is it done) to process flow (how is done) as well as dealing with any people issues.How to Overcome the Problems? Let’s not forget every work activity an organisation carries out in producing goods and services is part of a process and every process links with other processes through a series of inputs and outputs. One possible starting point to resolving quality problems is to research customer complaints by tracing the sequence of connected activities‘upstream’ back to their original source of input. Each activity within each department involved should be reviewed in terms of whether they are adding value for the customer or merely adding cost for the organisation. Techniques often used in service operations can be used here to check out such problems, such as, ‘flow charting’ and ‘blue printing’ and ‘fishbone techniques’.Flow Charting Lyn Shostack (1985) first introduced the technique of flow charting or service blueprinting as a means of describing all the activities and processes involved in delivering the product or service to the customer. There are several key steps to this technique as shown over,Step 1 - All activities and interactions in the process sequence are recorded so end to end connections between departments are clearly definedStep 2 - Potential fail (waiting) points in the sequence are then identified for special attentionStep 3 - Quality standards or values for production / service performance are setfor these critical fail points in the processStep 4 - Finally, encounter points in the process are noted as to where and when the customers’ and suppliers interactBy mapping all the activities in the process sequence the cross functional roles of the different departments becomes much clearer as does the values being generated and the potential fail points at which most problems occur ( see blueprinting mapping of a restaurant service ).Fishbone Technique This is another diagnostic tool that companies can use to improve service delivery systems. The fishbone technique below demonstrates all thepossible cause and effect relationships in a simple but non-linear diagram. The various fish bones are used as a way of structuring ideas as to the causes of a problemDiagramResearch / Monitoring of QualityCustomer satisfaction is a popular measure of service quality but too often it is used as window dressing. Satisfaction surveys need to be supported by staff attitude surveys, mystery shoppers, risk feedback systems and reviews of internal quality performance standards. However, to be effective such measures need to be monitored and acted upon by interdepartmental review teams to ensure cross functional problems are all addressed.Customer Service Tracking Studies To conduct this type of survey effectively, the first step is to develop a list of service attributes the customer deems important to them. However, because customer requirements are a moving target, periodic research surveys will be required to track changes in the customer service requirements.Staff Attitude Survey Obtaining the views of employees as to the levels of customer service and potential defects can be highly revealing especially when there is a gap between their perception and the customer perception of quality.Mystery Shopper Also called ‘silent shopper’ this survey technique seeks to replicate the shopping experience of a typical customer. Skilled market researchers take on the role of a shopper and report on their shopping experience. This really helps companies to understand what it is the shopper sees and explain their encounter with the companyRisk Point Analysis Risk or fail point analysis is useful for identifying the points in the value delivery system which are prone to failQuality Gaps Hooley (1993) defined quality as being concerned with providing superior value benefits in the opinion of the customer – such that the pursuit of quality is the pursuit of greater customer satisfaction. In this respect quality is the match between what the customer expects and what they experience (or perceive they experience). Any mismatch between the two is a quality gap. In effect quality is whatever the customer says it is in that as far as service quality is concerned perceptions are reality.What Defines Quality see notesCustomer Keeping StrategiesThere are 3 main customer keeping strategies as shown below;1 Customer portfolio analysis2 Customer retaining marketing mix3 Reorganisation for customer retention1 Customer portfolio analysisThis involves understanding the purchasing history of a products or company’s customers. For each product there is a customer portfolio ie a combination of customer types that generate sales and resulting profits.How’s this done?By determining meaningful customer classifications based on market research of actual purchasing patterns. For example, Kodak monitors 6 camera customer categories. These are;1Existing / repeat customers2New customers An optimal customer portfolio consists of a 3Brand switchers balance of new and repeat customers/ 4Trial users buyers yielding target sales and profits 5Upgrade purchasers6Trade-in purchasersThe portfolio segment can be measured in terms of;∙Number of purchases∙Demographic profiles∙Psychographic profiles∙Contribution to sales and profitsFor example, assume that a company discovers through marketing research what its 4 customer categories contributed in actual sales for the year 2011 as shown below.Customer category Actual sales 2011 Target sales 2012New customers 25% 25%Repeat customers 40% 45%Switchers 15% 20%Last time purchasers 20% 10%100% 100%In order to raise profits, management may need to attract a different customer mix for 2012. This can be achieved by aiming specific marketing efforts towards the customer segment targeted for expansion, while monitoring the categories on a quarterly basis.How to obtain an optimal portfolio of customers? Three factors need to be considered here;i)Products vary according to how readily product differences can be perceived by thecustomer. Once a product is selected and tried on the objective basis of superiorbenefits/value it is relatively easy to keep them (eg consider for example repeatpurchases of industrial products, consumer electronics, foreign cars). However, whenproducts are experienced largely on a subjective basis (eg cosmetics, shampoo, clothesand wine) brand switching occurs more from the consumers need for variety than fromproduct differentiation.ii)Product life-cycles may affect the balance of a customer portfolio. For example, having too large a proportion of repeat purchasing in a rapid growth stage of a market mayindicate insufficient attention to customer getting, whereas generating a largeproportion of new buyers in the maturity stage may signify an underdeveloped keepingfunctioniii)The relative costs and benefits of attracting and retaining customers must be compared.This requires the calculation of costs involved in winning new customers and holdingonto new ones compared to the benefits, in terms of revenues contributed by each ofthese groups.2 Customer Retention Marketing MixSome companies concede there should be two marketing mixes, one for customer getting, the second for customer keeping. For retention or customer keeping, several key elements have been proposed by Rosenberg et al (1999),∙Product extras∙Reinforcing promotions∙Sales-force connections∙Specialised distribution∙Post purchase communicationProduct Extras To keep customers means giving then more than the basic product that attracted them. Product extras, is about creating a total product service system. It means;a)Presenting the customer with related product benefits provided by other items in theproduct line. For example;∙Heinz offer meal preparation ideas around its range of products∙Heuga carpets provide technical advice/service on how to create and lay floor designs with less wastage∙McDonald doesn’t just sell burgers but complete meals at different times of the day (eg breakfast, lunch and snack)In all these cases the customer gets involved in the system rather than focusing solely onthe basic product, which may be subject to intense competitionb)Build into the offer preventative maintenance. For example;The black box or autopsy approach to understanding product failure is a discreditedsystem in terms of aviation quality safety systems. British air companies particularlyBritish Airways operate a sophisticated in-flight checking system for measuring theperformance of thousands of activities carried out by an aircraft while in operation. Thisapproach seeks to identify possible product failure with the operation of the aircraftfrom a safety but also efficiency aspectOften a crisis with a customer occurs when the product or service breaks down. Inanticipation the product extra approach is to offer ‘easy to remedy features’ in order tokeep a dissatisfied customer on-side. For example, Sony provides demagnetizerattachments for their DVDs for cleaning the machine heads which leads to better visionand sound. Service contracts are offered by many domestic appliance manufacturerssuch as Bosch, Hoover and Hotpoint to ensure customer snow where and how to gethassle free repairs to their appliances.Reinforcing Promotions Product promotions always work better when aimed at existing customers, mainly because a rapport already exists between the supplier and the customer and so the benefits to be obtained are more readily accepted and reinforced through communications via ∙Advancing the customers knowledge and loyalty on products already purchased∙Introducing customers to the firms other products, especially through crosssampling/sellingLists of actual customers today are more readily obtainable because of CRM. In industrial markets this has always been the case, but in consumer markets the use of credit card receipts, warranty and guarantee cards, loyalty schemes and market research surveys has also made it possible to build up customer lists and profiles like never before.Sales-force Connections Sales people can often play the decisive role in the customer retention function. Sales people who lack preparation or knowledge about the product or service often try to sell a product rat her than solve the customer’s problem, and as such, don’t keep customers for long.The problem lies here with seeking short term sales results at the expense of tomorrow’s goals. Several methods for improving the sales force connections include∙Selection, training and motivation∙Key account management∙Technical support teamsSpecialised Distribution To make products available to the buyer means distribution systems generally focus on where the ultimate transaction takes place. However, in considering getting and retaining customers as separate functions, the possibility exists for arranging distribution along these two lines.In many cases both roles are played by one distribution unit, especially a retail outlet. However, even in a single location, the layout of facilities can separately handle both attracting and retaining customers. For example, bank branches can locate various functions in specific physical areas – a designated counter for opening new accounts and services and automated teller centre for existing customers. In industrial marketing having dealer support to foster repeat purchase is vital for a manufacturer’s distribution strategy. Although not uncommon for manufacturers to have exclusive or selective distribution networks for their products, in these circumstances the task is to develop the distribution network so you products/brands become the dominant offer. As is often the case, retailers, wholesalers and distributors invariably carry competing brands. For example, James Halstead Flooring Manchester, helped to develop the distribution network for its flooring products and so in part claimed exclusivity or at least dominance for its products in most of the network by,a)Placing all direct orders through the local distributorb)Offering discounts to local distributors for handling large orders placed direct with themanufacturerc)Offering stocking terms above those of the industry to ensure stocks were availablelocally (but orders had to be of a minimum size).d)Offered daily deliveries to distribution to ensure they were never out of stockPost Purchase Communication We should expect some customers to have problems with our products following purchase. If the firm does not have any means of discovering and correcting these product defects, the customer may simply become a defector (ie does not repeat their purchase). The front line for customer complaints and enquiries should be the customer relations department. This function can be assigned to those already dealing with customers or can be given to a separate department.All customers should be encouraged to initiate contact whenever the need arises – to clarify instructions, request further information, point out a problem or seek a remedy. Information hot lines, using 0800, free call numbers, response cards, or service desks can facilitate this process.3 Reorganisation for Customer RetentionLack of organisation co-ordination and control frequently contributes to loss of customers. The problem often talks two forms;a)Lack of sensitivity to customer turnover ratesb)Insufficient linkage between the marketing function and the operation functions Because customer turnover is an accepted fact of life it often goes unmeasured. Marketing should set acceptable target rates for evaluating marketing performance.Management needs to assign executive accountability for customer keeping to an individual or department. It also needs to improve co-ordination between marketing and operations by;∙getting operations to accept customers as the arbiters of product quality and service∙use marketing to help operations re-evaluate quality and service standards∙get marketing to provide better forecasts of product / service requirements so operations can produce the product on time.For example J Halstead Flooring organised its sales order office so that orders received were grouped by product class, colour and design. Production forecasts were based on actual orders received over the last 3 months including a weighting for the same period last year. In addition itbecame a policy to involve production and distribution in the sales order office as part of their normal training programme.ConclusionTo achieve better sales and profits most companies should be doing more to cultivate business from existing customers. Nevertheless, it is often a balance between customer retaining and customer getting that companies need to obtain. In achieving this balance companies need to rethink their market analysis, planning systems, selection/recruitment and remuneration systems and their marketing and/ or operation activities.In the rush for growth, consumer markets in particular have tended to ignore their need to continually satisfy existing customers in favour of attracting new customers. I n today’s competitive environment it’s time for companies to review their strategies and distinguish between customer getting and customer retaining. This new process calls on customer relationship marketing to aid management value the potential of existing customers and find new ways for keeping them on-board and coming back.。