“All relationships are valuable… but some are more valuable than others.”
Ford and McDowell (1999)
SME owners say that their competitive advantage is being more customer centric than their larger counterparts (O’Donnell et al., 2002). Customer centricity or customer orientation is an “organization-wide emphasis on evaluating and addressing customer needs”. Knowing what the customer wants based on the his needs is crucial in order to achieve a competitive edge and outwit the larger competitors who have an advantage based on the size of their asset base (Appiah-Adu & Singh, 1998).
This chapter will focus on creating customer value and customer relationships. We will describe why companies want customer relations and customer loyalty and several ways to achieve this.
First though we need to define a customer. This may seem simple but buying products or services is often done by more than one person. This is most clear in a business-to-business (B2B) setting. Here we see people using the product, people deciding on the product to use and people paying for the product. Also, some people can service the product, others clean the product and still others dissemble and throw away the product once it has been used. Who is the customer? Only the person paying or all people involved? In B2B situations we talk about buying units; all people involved in the buying process. In consumer situations the same approach may be taken: all people involved in the buying process of a consumer product are customers. All these people’s needs have to be taken into account when selling a product or service. So a customer is anyone involved in the buying process of a product or service.
In the previous chapter different groups of customers were described using segmentation. Each customer segment should be measured and reached with the company’s offering. This offering has to fulfill the customer’s needs in order to make a chance of being a considered for a possible purchase. Businesses not only have to know the customer’s needs but will also have to be able to translate this value into so-called customer benefits and find ways to meet the customer’s choice context (Kotler, Jain & Maisincee, 2002).
Any person involved in the buying process can be viewed as a customer but more interestingly is the answer to the question “why?”. Why did that person buy the product of service? The most elementary answer to this question would be to say that the benefits of the exchange outweigh the costs for the customer. More fundamentally, the answer can be found in analyzing values customers seek after and companies must focus on delivering solutions for the sought-after values. The value disciplines (Treacy & Wiersema, 1993) companies compete on are:
- Performance value; the customer is looking for superior functionality. Products or services must be state-of-the-art and the best on the market.
- Price value; the customer is in search of the best value-for-money. A product of service must have a low cost compared to alternative offers in the market. Not only products or services with a low purchase price but also products with low usage costs can fulfill those needs.
- Relational value; the customer wants tailor-made solutions for the needs he/she wants to fulfill.
In translating these values into customer benefits a company has the option to either create a solutions-based offering (e.g. the water tap is leaking and the plumber comes to fix it; the buyer gets a solution to the problem), an input-based offering (e.g. the kitchen needs to be renovated and the customer makes a sketch; the buyer plays an important role in designing and building the offering), a customized offering (e.g. a new car is produced based on the preferences of the driver; the buyer gets a – seemingly – tailor-made offering) or an experience (e.g. going on a holiday; the buyer is actually part of the offering).
Coffee at Starbucks
In the 1990s Joseph Pine and James Gilmore wrote a book on what they called the experience economy. In it they describe how our economy has moved from an economy offering commodities to one in which experiences are more important, and profitable. In a video that can be found on Internet Pine explains the concept of an experience using the example of coffee:
“Coffee, at its core, is what? Right? It’s beans; right? It’s coffee beans. You know how much coffee is worth, when treated as a commodity, as a bean? Two or three cents per cup — that’s what coffee is worth. But grind it, roast it, package it, put it on a grocery store shelf, and now it’ll cost five, 10, 15 cents, when you treat it as a good. Take that same good, and perform the service of actually brewing it for a customer, in a corner diner, in a bodega, a kiosk somewhere, you get 50 cents, maybe a buck per cup of coffee. But surround the brewing of that coffee with the ambiance of a Starbucks, with the authentic cedar that goes inside of there, and now, because of that authentic experience, you can charge two, three, four, five dollars for a cup of coffee.”
Another example of an experience – baking a birthday cake – can be found on YouTube:
Intuitively we would agree with SME-owners (and scholars) who might argue that retaining a customer is better (i.e. cheaper) than attracting a new one. A customer relationship is seen as “a process of bounded interactive exchange episodes between groups of actors involved in it”. Each episode is a complete exchange, from a clear starting point – for instance a search for information – to a definitive ending point – paying for the product or service. As soon as a customer engages in multiple exchanges, this is called a relationship (Mandják & Durrieu, 2000).
Through offering value the customer gets satisfied and will not need to change suppliers for other reasons than variety seeking or risk reduction (i.e. not becoming dependent on just one supplier). To develop a customer relationship companies need to gather information about their potential customers, segment customers and create value by differentiating their offering compared to others. Next the SME should manage their customers for profitability. The first two steps have been discussed earlier, the final step, managing the customer profitability is new. With this we mean that customers can also be grouped into profit segments. Reinartz and Kumar (2002) distinguish between customer profitability and customer loyalty: not all profitable customers are loyal customers and also loyalty does not equal profitability.
Figure 2.1 – four types of customers (source: Reinartz & Kumar (2002)
In their view customers that fall into the category high-profit/ short-term stay, the so-called butterflies, should be treated carefully for as long as they are active customers. These customers are not loyal and seek “transactional satisfaction”, the best deal, so don’t spend time and effort to get them back once they are gone. The complete opposite are customers who are less profitable, or even loss-makers, but who stay (too) long. These customers are called barnacles; just like barnacles that stick to a ship’s hull, they weigh heavy and slow down the vessel. The first thing to find out is if the barnacle-customers do not have enough buying power and should be “fired” or if they can actually spend more than they do and need to be persuaded to buy more.
The “true friend” is the long-term customer who is also highly profitable. True friends need to be managed without overdoing the extra attention given; too much can be seen as overkill. A fourth type of customer is the stranger, i.e. the short-term customer who is not profitable. This is a customer who is not interested in a relationship and can be neglected.
Talking about customer relationships often implies companies are in search of customer loyalty. If customers return to a business time and time again this looks as if the customer is loyal. Customer loyalty can be defined as “the customer’s preference to purchase a product, service or from an organization consistently when the need arises to purchase” (McMullan & Gilmore, 2008). A loyal customer is one who will rebuy or re-patronize a preferred offering in the future despite situational influences and marketing efforts that have the potential to cause switching behaviour (Oliver, 1999). Customers can be loyal for several reasons: switching costs may be too high, the customer has invested time and money in the offering (sunk costs) or the customer experiences no other alternative (McMullan & Gilmore, 2008).
Business owners want loyal customers for several reasons. Often mentioned reasons are that business owners think it costs them less to serve loyal customers, loyal customers will pay higher prices than other customers, loyal customers will promote the company (at no cost), and they also believe that it costs more to find a new customer than to get repeat business from an existing one (Dowling & Uncles, 1997; Reinartz & Kumar, 2002)
These reasons have been questioned though. Loyal customers will want something in return, they want to be recognized as loyal customers and therefore be seen as “part of the family”, additional time and effort must be invested in them. Also, ask yourself if loyal customers – any customers actually – would like it if they found out that they pay for the low prices of other customers. Also, not all customers will feel the need to recommend their favourite company to others – why would they? – and last but not least, loyal customers know the prices of your company and will try to get discounts based on familiarity with the firm. Sometimes a business might actually thrive on once only customers. Just think of people who go on a holiday and visit a place only once.
If a company does want to make customers loyal the company must create trust and be a faithful representative of customer interests. A company must be honest and be consistently delivering superior customer experience (Reichheld, 2003; Urban, 2005). If the actual outcome of the transaction is better than the expected outcome customers become committed and that is the beginning of customer loyalty. In order to measure loyalty Reichheld (2000) found that it is enough to ask one question, and one question only. By subtracting the number of customers that give the company a low grade from the number of customers giving the company a high grade, the net promoter score can be found. This is the number you “need to grow” according to the author. The question? “On a scale from one to ten, how likely is it that you would recommend our company to a friend or a colleague?” Customers giving you a six or lower are not loyal, customers giving a nine or a ten are (sevens or eights just don’t care).
In order to set up a system to track customers and build a relationship, a company needs to capture the names, addresses, and also purchase behaviour of their customers. There needs to be an incentive to share this information, for instance by offering discounts or better service to customers. Of course the company needs to be able to analyse and interpret the data too. Therefore it is not really useful to set up a customer relationship management (CRM) system when the products sold are commodity products with a low profit margin, nor for products that are sold infrequently and at unpredictable times (Hughes, 2000).
Using the information from the CRM-system companies can set up loyalty programs such as discount vouchers, free products or services, in-house magazines or newsletters, et cetera. The most important thing to remember though is to customers what to hear a company saying “we recognize and value your patronage” (Kumar & Shah, 2004).
Customers are the most important people for the company: they pay for the offerings and make sure the company is viable in the long run. By offering a value for which the expected outcome exceeds the costs for the customer, a company creates customer satisfaction and customer commitment. This will lead to customer loyalty.
For the average SME customer orientation is the main source of competitive advantage. Although not all products or services are equally in need of customer loyalty, understanding the needs of the customers and responding to these needs is of the utmost importance. Most SMEs cannot create a competitive advantage based on offering products of services at the lowest costs or based on being the product leader in a certain market.
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