Module 6

MODULE 6
CUSTOMER RELATIONSHIPS AND LOYALTY 1.1.
“If the marketer does a good job of identifying consumer needs, developing appropriate
products, and pricing, distributing, and promoting them effectively, these goods will sell very

easily.”
– Philip Kotler
MEASURING CLV (CUSTOMER LIFETIME VALUE)

)
Formula 1 components

• Pt = price paid by a consumer at time t
• Ct = direct cost of servicing the customer at time t
• i = discount rate or cost of capital for the firm
• Rt = probability of customer repeat buying or being “alive” at time t

• AC = acquisition cost

• T = time horizon for estimating CLV

• A key decision is what time horizon to use for estimating CLV. Typically, 3 to 5
years is reasonable. With this information and estimates of other variables, we can
calculate CLV spreadsheet analysis.

ACTION AT HARRAH’S – CASE FOR CALCULATING CLV

• Harrah’s Entertainment → different direction from the big players in the Las Vegas
gaming industry, who build bigger and more opulent casinos

• 1997 → Harrah’s launched a pioneering Loyalty program by pulling all customer
data into a Data w/h, ran sophisticated analyses to better understand the value of
the investments the casino made in its customers

• Harrah’s has more than 40M active members in its Total Rewards loyalty program,
a system which it has fine-tuned to achieve near real-time analysis: As customers
interact with slot machines, check into casinos, or buy meals, they receive reward
offers – food vouchers or other credits, for instance – based on Predictive Analyses

• Harrah’s spends approx. $100M a year in IT
• The co. has now identified 100s of highly specific customer segments, and by

targeting offers to each of them, it can almost 2x its share of customer gaming
budgets and generate $6.4 B annually (80% of its gaming revenue)

CUSTOMER ATTRACTION & RETENTION
• Cos. seeking to expand profits and Sales must invest time and resources searching
for new customers
• Different acquisition methods yield customers with varying CLVs
• Promotional campaigns that reinforce the Brand Value, even if targeted to the
already loyal, may be more likely to attract higher-value new customers
• Not enough to attract new customers; keep them to increase their business
• Too many companies suffer from high Customer churn or defection
• Defection may be due to → unmet needs and expectations; poor product/service
quality and high complexity, and billing errors
• To reduce defection, some steps cos may take –
• Define and measure their retention rates
• Distinguish the causes of customer attrition & identify those that can be managed
better
• Compare the lost customer’s CLV to the costs of reducing the defection rate

• Retention Dynamics – The Marketing Funnel identifies the %age of the potential
target market at each stage in the decision process, from merely aware to highly
loyal & consumers move through each stage before becoming loyal customers

• The funnel also emphasizes how important it is not just to attract new customers
but to retain and cultivate existing ones

• Satisfied customers ➔ Company’s Customer Relationship Capital
• Some Data points:
Þ Acquiring new customers can cost 5 times more than satisfying and retaining

current ones
Þ The average company loses 10% of its customers each year
Þ A 5% reduction in the Customer Defection Rate can increase profits by 25% to

85%, depending on Industry
Þ Profit Rate tends to increase over the life of the retained customer due to Increased

purchases, Referrals, Price Premiums, and Reduced Operating costs to service

CULTIVATING CUSTOMER RELATIONSHIPS (CRM)

• Cos use customer information to enact precision marketing designed to build strong
long-term relationships

• Overall, the idea is that cos must adjust to shifts in the nature and strength of their
customer relationships

• CRM systems enable stronger customer relationships
• Customer Relationship Management (CRM) is the process of carefully managing

detailed information about individual customers and all “customer touch points” to
maximize loyalty; proprietary systems or offthe-shelf platforms; Salesforce
• A ‘customer touch point’ is any occasion when a customer encounters the brand
and product – from actual experience to personal or mass communications to casual
observation
• CRM is important because a major driver of company profitability is the aggregate
value of the company’s customer base
• CVM (Customer Value Management) ~ related concept ~ co’s optimization of the
value of its customer base; focuses on the analysis of individual data on prospects
and customers to develop marketing strategies to acquire and retain customers and
drive customer behavior

MARKETING INSIGHT – THE BEHAVIORAL TARGETING CONTROVERSY
• Emergence of behavioral targeting is allowing cos to track online behavior of
target customers and find the best match between ads and prospects
• The Wall Street Journal reviewed 1,000 top websites to find that 75% included
code from social networks such as Facebook’s “like” & Twitter’s “tweet” buttons
• Another WSJ study showed that roughly 25% of the time a user logged into one of
70 popular websites, the user’s real name and email address or other personal
details, i.e., username, were passed onto third party companies
• Proponents maintain that it also brings consumers more relevant ads
• Supporters also maintain that many consumers would be less concerned if they
knew exactly how tracking worked
• Proponents and supporters further argue that practices conform with the online ad
industry’s self-regulation norms, ensuring anonymity by not giving firms access to
“personal identifiable information”

MARKETING EXCELLENCE IN ACTION – AUDI

• August Horch founded Audi in 1909
• Accomplishments in the Austrian Alpine runs between 1911 & 1914 helped Horch

to successfully make the brand internationally well-known
• 1932 → The co’s famous 4-ring emblem was created when Audi merged with

previously independent cos Horch, Dampf-Kraft-Wagen, & Wanderer to form
Auto Union
• Co renamed Audi in 1985 by Volkswagen – holding co. of Audi since mid1960s

• 1971 – advertising slogan created – “Vorsprung durch Technik” ~ “progress
through Technology” → remains the main catchphrase

• Problem → US customers complained of a mysterious acceleration in their cars
and also the image of Audi was not sophisticated enough for a manufacturer of
premium and luxury cars

• Action → The co’s management decided on an extreme Repositioning strategy
with a famous commercial to put the brand transformation in practice in 1986 →
An Audi 100 quattro, a 4WD, drove up a snow-covered ski-jump, apparently all by
itself → Won a Gold Lion at Cannes & in 1997 → voted the best German
advertising of all times by a professional jury

• Audi also sponsors major teams like – FC Bayern München since 2002
• In addition, Audi offers a variety of innovative products that meet the customer’s

increasing demand for SUVs and luxury cars on the one hand & alternative driving
systems & compact cars on the other

CHALLENGES STILL REMAIN FOR AUDI

• Avg Selling price is still lower than an average BMW or a Mercedes-Benz

• New entrants in the growing market for environmentally sustainable cars

• Tesla, as well as other German competitors will test Audi’s Innovativeness further

MARKETING EXCELLENCE IN ACTION – HARLEY DAVIDSON

• A U.S. brand synonymous ~ Beautiful motorbikes

• Sought after brand – not only in the US but also globally

• What explains its wide global acceptance, & the strong sense of brand loyalty among
Harley-Davidson motorbike owners?

• Dealers, ranging from the CEO to the Sales staff, maintain personalized relationships
with the customers through face-to-face & social media contact

• Knowing customers as individuals and conducting ongoing research to keep up with
changing expectations and experiences helps define customers’ needs better

• Current customers have told the co’s management to keep the Identity, Look, and
Sound of the motorcycles as they are Unique

• When customers’ views are heard and accepted → customers develop greater brand
loyalty, creating an extraordinary customer experience that is unique and valuable

• Co also sponsors the H.O.G., the Harley Owners Group and riding club; New Harley
owners enjoy free 1st year H.O.G. membership and various discounts and benefits upon
renewals

• To remain competitive → the co has started to enlarge its customer base & successfully
connect with new, younger riders by way of social media applications, i.e., Facebook
& Twitter

• Further the co strives to make in-person connections with potential riders at music
festivals by using dynamometers to create an interactive experience – Jump Start,
which allows novice or non-riders an opportunity to feel what it’s like to ride a Harley

• 2008 → Harley became the leading manufacturer of motorcycles to sell to customers
younger than 34 years without changing the products too drastically or lowering its
prices