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Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Chapter Sixteen

Customer Retentionand Maximization

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THE CUSTOMER RELATIONSHIP CONTINUUMCustomer Relationships can be found at any level

Always-A-ShareCustomer

Lost-For-GoodCustomers

Lowest LevelRelationship

Highest LevelRelationship

THE KEY FACTOR:SWITCHING COSTS

The Direct and Indirect costs a buyer will haveto pay to go to another supplier

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LOST-FOR-GOOD ALWAYS-A-SHARE

Customers are tied to a system. Switching costs may include:

• Specific investments• Cancellation penalties• Setup costs for a new supplier•Retraining•Finding/Evaluating a new supplier

Customers can allocatetheir purchases toseveral vendors . Aperiod of no purchasescan be followed by anumber of purchases.Doesn’t want to rely on a single vendor.Suppliers are largelyinterchangeable

DEFINING THE EXTREMES OF CUSTOMER NATURE

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PAYOFFS FROMLONG TERM CUSTOMER RELATIONSHIPS

• GROWS ADDITIONAL BUSINESS OPPORTUNITIES for new products or increased purchases

• PREMIUM PRICES result from giving first-rate service and product quality

• REDUCED SELLING COSTS from tighter coordination of production and logistics

• ADDITIONAL REVENUES POSSIBLE from customers’ referrals and joint sales calls with customers

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TWO REASONS COMPANIES STAYIN A BUSINESS RELATIONSHIP

REASON 1. THEY HAVE TO

No alternatives, binding actions

such as contracts, product ties

REASON 2. THEY WANT TO

Relationship is satisfying because of cooperation and

meeting financial objectives

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TIES THAT BUILD RELATIONSHIPS

• SUPERIOR PERFORMANCE at a good price (value)

• SOCIAL RELATIONSHIPS created by frequent interaction

• TECHNICAL DEPENDENCIES brought about by reliance on a supplier’s products or support

• FORMAL AGREEMENTS involving investments or contracts

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SOURCES OF COMPETITIVE ADVANTAGE

1. Superior performance

2. Quality products and support as defined by the customer

3. Distinctive and reliable service

TO BUILD CUSTOMER LOYALTY,DEVELOP A COMPETITIVE ADVANTAGE BY PROVIDING

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RelationshipTermination

Costs

RelationshipBenefits

Shared Values

Communication

OpportunisticBehavior Uncertainty

FunctionalConflict

Cooperation

PropensityTo leave

Acquiescence

RelationshipCommitment

Trust

+

+

+

+

+

- -

-

+

+

+

+

THE IMPACT OF TRUST AND COMMITMENT ON BUSINESS RELATIONSHIPS

+

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A TOOL FOR CUSTOMER RETENTION:CUSTOMER SATISFACTION SURVEYS

REQUIREMENTS FOR A USEFUL SURVEY:

1. CHOOSE MAIL OR TELEPHONE TO DO THE SURVEY

2. DETERMINE THE KIND OF INFORMATION YOU NEED

•Ascertain satisfaction with overall relationship

•Measure specific aspects of the relationship

•The unspoken concerns of customers

•Determine what will get measured regarding customer expectations (The TERRA model works well)

•Having meaningful and measurable ratings and scores

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Process 5

(etc.)

Attribute 1

Attribute 2

Attribute 3

Suggest

change for improvement

Process 4

(Technical Support)

Attribute 1

Attribute 2

Attribute 3

Suggest

change for improvement

Process 3

(Service manuals

Attribute 1

Attribute 2

Attribute 3

Suggest

change for improvement

Process 2

(Parts reps)

Attribute 1

Attribute 2

Attribute 3

Suggest

change for improvement

Process 1

(Parts handling)

Attribute 1

Attribute 2

Attribute 3

Suggest

change for improvement

Loyalty questions• Willingness to recommend• Repurchase intentions

General overallSatisfaction question

2

1

3

4

4-QUESTION SATISFACTION SURVEY

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MEASURING SATISFACTIONAFTER THE SURVEYS

MANAGEMENT QUESTIONS

1. WHAT DO THE SURVEYS TELL US?

2. HOW DO WE USE THE INFORMATION WE HAVE?

3. HOW RELIABLE IS THE INFORMATION?

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SATISFACTION SURVEYS:GUIDELINES FOR USE

1. LOOK AT OVERALL SCORES

2. COMPARE SCORES TO PREVIOUS MEASURES, PREFERABLY OVER SEVERAL YEARS

3. ARE TRENDS UP, DOWN, STABLE?

4. HOW MANY FACETS OF SATISFACTION DO WE MEASURE?

5. HOW MANY ATTRIBUTES FOR EACH FACET SHOULD WE MEASURE

6. WHAT IS OUR RELATIONSHIP FACET PERFORMANCE SCORE (RFPSCORE)?

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DETERMINING THE RFP SCORE

OVERALL SATISFACTION = f(sales reps. report cards, warranty claims, product lit., tech support, etc.)

OVERALL SATISFACTION =

3.2 + .82 (RFPwarranty)

+ .53 (RFPrep) + .06 (RFPlit)

+ .12 (RFPtech support) + e

THE REGRESSION COEFFICIENTS SHOW RELATIVE IMPORTANCE OF EACH FACET. 0.82 FOR WARRANTY CLAIMS IS MOST IMPORTANT FOR OVERALL SATISFACTION, FOLLOWED BY SALES REP PERFORMANCE

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STRONG STATISTICAL MODELOF CUSTOMER SATISFACTION

WarrantyService RFP Score

SatisfactionScore

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WEAK STATISTICAL MODELOF CUSTOMER SATISFACTION

TechnicalSupport RFP Score

SatisfactionScore