3_Hard_Building Customer Loyalty

• Explains how a company should balance its acquisition and retention efforts when building Customer Loyalty

Customer Acquisition Funnel: Five Phases (5 A's)

• Awareness: Customers become aware of an offering (advertising, word of mouth, in-store experience, or past knowledge).
• Appeal: Customers take a closer look at offerings that seem relevant, filtering out many options.
• Ask: Customers seek more details and compare options (talking to friends, reading reviews, or contacting the company).
• Act: Customers decide to buy, including purchase, usage experience, and follow-up interactions.
• Advocate: Satisfied customers repurchase and recommend the offering, becoming promoters and driving new awareness.

Conversion Rates

• By measuring the percentage of customers moving through each phase, companies can spot bottlenecks and decide where to invest more.
• Focus investment to increase awareness, improving appeal, enhance loyalty and advocacy.

High Cost of Acquisition

• Acquiring new customers can be more expensive than satisfying and retaining existing ones.
• Be wary of "Deal-Driven” Customers: Those attracted mainly by discounts tend to be less loyal.
• Balance promotional efforts with strategies to build genuine loyalty.

Retention to Boost Profitability

• Reducing defection rate by as little as 5% can increase profits by 25% to 85% in certain industries.
• Retained customers contribute through repeat purchases, referrals, price premiums, and lower operating costs.

Causes of Defection

• Within the Company's Control: Poor service, shoddy products, high prices, billing errors can be addressed with improved operations, product quality, or better pricing strategies.
• Outside the Company's Control: Relocation or other uncontrollable reasons. Focus on areas you can change.
• Evaluate Trade-Offs & Use Win-Back Strategies: Spend on retention if it's cheaper than the lost profit potential.

Satisfaction and Loyalty

• Satisfaction arises when a product's perceived performance matches or exceeds expectations. Dissatisfaction results if performance falls short of expectations.
• Satisfied customers are more likely to become loyal and recommend your brand.
• Sources of expectation are: Past buying experiences, Advice from friends/family, Company marketing and promises, and Competitors' communications.

Over/Under Promising

• Overly high promises risk disappointing customers if actual performance doesn't match.
• Low promises might keep satisfaction high among the few who buy, but they won't attract enough customers.
• Ideal Strategy: Raise expectations and deliver the performance to match (example, Kia's long warranties, Amazon's consistent fulfillment)

Performance and Consistency of Product and Service Quality

• Quality is the totality of features/characteristics that satisfy stated or implied customer needs.
• Performance is the overall functionality, reliability, and excellence of the offering (example, Lexus vs Hyundai).
• Consistency is the the degree to which each unit or experience delivers the same level of performance over time.
• High quality leads to higher satisfaction leading to potential for premium pricing and loyalty generating greater profits.
• Cutting corners may lead to short-term gains but runs the risk damaging long-term satisfaction and loyalty.

Measuring Customer Satisfaction

• Helps identify problem areas and pinpoint unmet needs.
• Ways to measure periodic surveys for customer satisfaction, Competitor Comparisons of satisfied customers and Mystery Shoppers.
• American Customer Satisfaction Index (ACSI): A national measure of consumer perceptions across firms, industries, and sectors.

Building Customer Loyalty

• Interact Closely with Customers to stay attuned to evolving customer preferences.
• Develop Loyalty Programs to encourage repeat business.
• Build Brand Communities of customers and employees whose activities and loyalty revolve around the brand

Practical Considerations for Retention

• Costs of Defection: Lost future revenue, negative word of mouth, and higher acquisition costs to replace lost customers.
• Exit interviews/surveys with defectors can reveal hidden problems.
• Win-Back Strategies: Reactivating past customers can be easier.

Managing Customer Relationships

• CRM: Customer relationship management carefully tracks individual-level data to maximize loyalty.
• CRM involves collecting and organizing detailed data about each customer to customize offerings and maintain relevant communication.
• Benefits of CRM: Personalized Marketing, Real-Time Service and Data Analytics.

Value and Customization

• Customer value management focuses on optimizing the value of the entire customer base to retain customers.
• Customization is adapting both physical products and service experiences to fit individual preferences to increase loyalty.
• Challenges of customization include: Customers not wanting an ongoing relatationship, Over-personalization, and Permission Marketing.
• Empower Customers by involving customers directly in product naming, design, or content creation

Limitations

• Some customers only engage for tangible value.
• Not everyone wants to be deeply involved with the brand.

Influencing Decisions

• Word of Mouth: Recommendations from consumers increasingly shape purchase decisions.
• Online reviews can significantly impact sales.
• Ensure Quality and Integrity of Reviews by monitoring to prevent fraud reviews.
• Handle Customer Complaints with Quick, effective complaint resolution to recover possible customer loss.

Practices for Customer Complaints

• Easy Complaint Channels and Rapid Response.
• Accept Responsibility, Resolve Fairly and watch for abuse.

Customer Lifetime Value

• Customer Lifetime Value (CLV) is the monetary equivalent of the value a customer creates for a company over the relationship.
• Focusing on high-value customers is essential for shareholder value.

Guidelines

• Not all customers are equally profitable.
• 80/20 Rule: 80% of a company's profits come from its top 20% of customers.
• Identify Profitability Across Segments: Analyze with Activity-Based Costing (ABC):Assign real costs to customer activities (e.g., phone support, gifts).

Brand Equity Focus

• Customer Equity Focus: Emphasizing the lifetime revenue from customers
• Brand Equity Focus: Emphasizing brand awareness, image, loyalty.
• Brand equity can drive value and CLV links to financial outcomes.

Building CLV

• Enhance Customer Service by training employees to handle problems.
• Increase Customer Engagement and keep them involved with brand.
• Grow Each Customer Potential via cross-selling.

Manage Unprofitable Customers

• Encourage more quantity purchase or increase price fee or screen out the customer or redirect to competitors.
• Reward the Most Profitable Customers with special treatments, perks, or invitations (elite tiers, special lounges, etc.).
• Elevate Customer Touch Points to build loyalty and amplify lifetime value.

Building Trust

• Three Building Blocks of Trust: Competence, Honesty, and Benevolence.
• Measuring CLV using Net Present Value (NPV) Approach: Sum the expected future profit streams from a customer and discount them by a suitable rate.

Factoring CLV

• Revenues per customer over time.
• Costs (e.g., marketing, servicing, returns).
• Probability of Repeat Purchases or longevity (customer churn vs. loyalty).
• Discount Rate (reflecting cost of capital and risk).