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Chapter 1 - Creating Value for the Customer

The concept of marketing is relatively recent to organizations, and with few exceptions literature on the subject is barely fifty years old - but during that time period it has advanced and transformed itself significantly. It has changed from a simplistic focus on announcing the availability of a product to a discipline that has a strategic and operational impact on the entire organization.

(EN: Leaving it at that would imply that the changes may have come from within the marketing profession, which is not at all the case: marketing has changed because external factors have changed, chiefly the competitive landscape and societal behaviors and values. So in addition to being a young discipline that's struggling to sort things out, but it is also been doing so in a rapidly changing environment.)

The authors refer to Philip Kotler, who has been among the more prolific writers on the topic, and whose textbook on marketing management remains the most widely used in educating students in the profession. Kotler defines marketing as "analyzing, organizing, planning, and controlling the firms' customer-impinging resources, policies, and activities with a view to satisfying the needs and wants of chosen customer groups at a profit." This likely remains a good description of the profession, but the methods through which those objectives are pursued have changed dramatically.

This is the historical context in which the present interest in relationship marketing should be considered.

The Evolution of Relationship Marketing

During the 1950s, marketing's focus was in devising strategies that would match the firm's products to a body of customers. The customers were presumed to exist, and needed to be found, and were presumed to be interested, if only the acquisition process could be sufficiently convenient. The goal of marketing was therefore to minimize the expense to the firm of selling to customers by finding the most cost-efficient means of interacting with them.

The fundamental concepts of these frameworks are still applicable - e.g. we can still seek to understand a market by looking to the "four P" model, but we must understand that this and other models were devised in a specific period of time, during which there was unprecedented growth of population, increasing prosperity, and a demand for goods that outpaced the ability to produce them. Simply satisfying the "four P" model is not likely to win or retain customers in the present day marketplace where there are many options of similar products, equally convenient places, and equally low prices as your own. Given this, firms turn to the idiosyncratic relationship between the customer and a specific firm as something that can still be shown to be a sustainable difference.

The author gives a list of characteristics of relationship marketing:

The Fundamental Principles of Relationship Marketing

The most important principle of relationship marketing is the goal of maximizing the lifetime value of the customer. Specifically, this is the present value of the net profit of future sales to a specific customer. This runs contrary to the desire to press for immediate sales at the cost of future ones, and it also leads to the recognition that not all customers are equally profitable to serve - the firm must be effective in targeting the right customers and efficient in their actions to retain them.

Another significant factor is the broadening of marketing to recognize that there are multiple roles, and multiple firms, that have the ability to affect the customer experience in ways that will increase or decrease their loyalty to the firm. This is also a significant change, in that firms considered only the value delivered by the product, and did not consider that the customer's satisfaction with their interactions with other departments (telephone support) or vendors (the delivery service) impacts the customer's overall perception of the brand.

The third significant element is that relationship marketing must be cross-functional. Promotional messages may convince the customer to purchase, but their experience with the product, the salesperson, the support person, and everyone in the firm that they encounter contribute to an overall impression that leads them to want to purchase from the firm a second time. The marketing department, alone, cannot deliver the experience and ensure its promises are met.

Aside of these principles, it's likely that new metrics are needed to measure the success of relationship marketing. The leading metric of older paradigms was market share, with companies measuring the amount of sales (one-time instances) over a given period of time. In relationship marketing, metrics such as lifetime customer value and share-of-wallet are more significant.

The notion of a relationship with customers shifts companies that do not generally consider themselves to be services to reconsider. Even when purchasing "goods," the thing in the box is a means t an end: the customer seeks to derive benefits from acquiring and using the item, and their ability to do so is heavily influenced by their interaction with the manufacturer or retail who sold them the item.

A list of quick facts that support the notion that existing customers are more valuable than prospects:

At its simplest, customers pay for the benefits they receive, and firms are generally concerned with issues of product quality to ensure that the customer is satisfied. However, many fail to consider that the "payment" made by the customer is more than the purchase price, but involves the difficulty of obtaining it. It's generally recognized that having to travel to obtain a product is an inconvenience that makes the customer willing to pay more for a closer source, but thing such as having to be in an unpleasant store environment, receiving service from an unpleasant clerk, waiting on hold for customer support, and other experiences also factor into the "price" of obtaining the value.

The Expanded Marketing Mix

Traditionally, marketing has been concerned with the degree to which the products of a firm match the wants and needs of the customer, measuring their influence against that of their competition. This was generally charted against a list of factors, such as the 4P model, which the authors find to be oversimplified and not comprehensive, and instead considers people and processes.

People

Many firms acknowledge that people are important to their business, but "few go beyond lip service." In most firms, people are reduced to components in a system, organic machines that perform tasks according to rigid rules and procedures, and their interactions with customers reflect it. Conversely, firms with a positive culture find that they improve not only employee morale, but also customer service.

Every employee with whom a customer has contact impacts their perception of the brand, though differentiating between front-office and back-office overlooks that the front-office personnel rely upon the support of the back office, such that neglecting them will degrade customer service.

(EN: This seems very short and superficial, but likely oblique to topics the author would prefer to discuss. Nor does it seem to be considered elsewhere in the book.)

Process (in General)

Particularly in larger organizations, human behavior is governed by process, which has the benefit of control and coordination, but often to the detriment of taking the necessary action in a particular situation.

Aside of empowering people to sidestep or adapt ineffective (or counterproductive) processes, the processes themselves will need fundamental changes.

The market understanding process

Marketing strategies are built around a given perspective of the marketplace. The perspective of serving the mass market, and the processes derived from it, must be adjusted to consider the relationship between the firm and its customers, rather than the firm and its competitors in the market.

It is also advantageous for this perspective to permeate the organization, to enable production and procurement to be as closely connected to the customers as the sales department.

Specifically, it is no longer enough to consider the market in aggregate, or to rely on general population descriptors, but to focus on the needs of each customer as an individual, rather than a member of a group that is misconstrued to be homogeneous.

The innovation process

Companies will also need to be informed by their customer - to apply their knowledge to the creation of value for the customer, rather than an abstract notion of a quality product or an efficient process that often fails to consider the idiosyncratic reasons customers might seek it. The practice of imitating competitors and following industry trends should be abruptly discontinued.

In regard to technology, specifically, the question to answer is not how exploiting new technology can benefit the firm, but how it can benefit the customer.

This is also an area that needs to be cross-functional rather than the sole preserve of a particular department. Innovation can be applied to any process. Teams that are tasked with innovation should draw on the expertise and perspective of various departments, or at the very least consulted before the implementation of a change.

The supply chain process

The author speaks of the "supply chain" of delivering the product to the customer, which was often an afterthought that was managed for efficiency with little attention to quality. Today, the emphasis has shifted, recognizing that the experience of receiving the physical product is a significant factor in customers' experience.

In terms of the supply chain that delivers material to the manufacturing operation, careful coordination with vendors is necessary to just-in-time manufacturing, which is important not only for the efficiency of the organization, but also to meet volatile demand.

Ultimately, the firm's supply chain is merely an extension of the customer's supply chain - the manufacturer is one of the last stops between the customer and the raw materials - and the one which the customer will hold most accountable for any delay in delivery.

The Customer Relationship Management Process

Customer relationship management is a strategic approach to increase both the quantity and longevity of revenue by establishing a corps of customers who purchase regularly. While CRM leverages data to better predict and understand the customer's demand for product, it is not an information technology process: technology supports the process and should not substitute for or interfere with it. CRM methodologies were adopted largely from the B2B market, and as such it was ill-fitting and insufficiently adapted to serve the idiosyncrasies of the consumer marketplace. (EN: Which was probably important to stress when the book was written because CRM was the buzzword at that time and many companies adopted plug-and-play solutions that failed to achieve the desired results.)

As an example, the author considers the "decision making unit" of business operations, which includes multiple individuals in distinct roles (gatekeepers, influencers, users, buyers, and decision-makers) and CRM attempts to orchestrate the way in which vendors interact with people in these roles. Some of the principles of B2B apply to the consumer market, especially when you consider that household decision-making often involves negotiation between two parents over purchasing a product that a child will consume.

However, the term "customer relationship management" has often been used as a euphemism for "selling" without any substantive changes to process.

From Transactions to Relationships: The Role of Customer Value

The author provides a list of some differences between transactional and relationship marketing:

Most significantly, transactional marketing focuses on elements that are very easy for competitors to match, whereas relationship is based on highly idiosyncratic elements that are difficult for other firms to mimic or even to perceive.

Customers of every sort, in both the consumer and industrial markets, seek to acquire value through their purchasing behavior. In a broad sense, this means that the act of buying a product is in effect an attempt to solve a problem or achieve a goal. Whereas manufactures wish to define quality as relative to competing products, customers define it relative to the value they receive.

At its simplest, value is a ratio between the perception of benefits and the cost. Cost is not limited to the price, but also includes the complete lifecycle cost for acquisition, use, and disposal of a product, as well as the cost of perceived risks. Benefits also can be elaborated to consider not only the functional benefits delivered by the product, but from any benefit that is related to the product as well.

It's also worthwhile to consider that the benefits are from the perception of the customer - they are not necessarily the actual benefits, nor the benefits from the perception of the supplier. Moreover, delivery of the benefits is not perceived independently of cost, but in relation to it, as well as in comparison to all other costs of achieving the desired benefit, or the cost of failing to address a need.

The author defines two key elements in the value-creation process: the value the company can provide to its customers and the value it receives in return. Firms seek to maximizing the lifetime value of customers by managing this value exchange.

(EN: I'm reminded of the principle, but forget exactly who proposed it, that exchange is not zero-sum but effects a net gain for both parties. Each of them values what they get from the other more than what they must offer in return. Were it not so the exchange would not take place.)

Understanding customer value

The authors suggest that successful companies tend to base their marketing strategy on a "value proposition" that lists the reasons they expect a customer to buy their product - with specific emphasis on reasons unique to their brand.

The author presents Lanning and Michaels "value delivery sequence" a planning process that defines a series of steps that are organized into three phases:

A few examples are provided to illustrate how certain brands seek to provide a value that is superior in the eyes of a significant customer segment (some wish a product to be better at certain things, others want it to be cheaper, others want it to be more readily available, etc.) Where multiple suppliers attempt to serve the same needs and values, then competition exists - and creating a product that is unique in multiple ways decreases competition.

The 'One-to-One' World

As competition has increased, firms have sought to avoid competition by being more specific about the kinds of customers they wish to serve, defining ever more narrow segments. The notion of "one-to-one" takes this to its extreme, in which a firm targets each individual customer.

Given the advances in technology, this is no longer an extreme theoretical viewpoint, but an achievable goal, as the interactions of a single individual on a Web site enable us to observe and communicate to each user.

In spite of its name, and in spite of the technical ability, true "one to one" marketing was never realized and was likely never intended. Even the proponents of the approach still rely on traditional segmentation parameters and advocated treating customers as a member of a group to which their own profile matched. As such, a better moniker for the practice may be "dynamic segmentation."

One difficulty in employing this approach is the need for firms to understand the idiosyncratic needs of multiple market segments so that there is a meaningful difference in the value that the firm provides to each based on every combination of parameters. (EN: In my experience, some time ago, this was not done particularly well, or with much intent, and generally went no further than customizing cosmetic factors on a Web site.)

Another difficulty in one-to-one marketing is that it immediately eliminates the efficiency and economy of being able to address people in similar groups, requiring suppliers to be more flexible and responsive than is economically feasible.

Finally, it is based on the assumption that customers actually want their product to be differentiated according to someone else's perception of what they want. For some products, people want to have the same product as everyone else, and even when customization is available, the customer wishes to select their own options.

Value-creating relationships

Another significant objective of relationship marketing is to create customer value by virtue of the relationship, independent of the product. (EN: This seems similar to the retail model, where the patron becomes so comfortable with the retailer they will buy from them, even when the same product could be had from a different retailer.) The author separates business-to-business from business-to-customer relationships.

B2B relationships

Historically, companies would seek to have multiple suppliers as a method of risk mitigation (if one supplier was unable to provide a needed item or quantity at a given time, the firm could ask another with whom they already had a working relationship), as well as keeping vendors at arms length to prevent them from sharing the firm's "secrets" with other firms the vendor might service.

The trend presently is to reduce the supplier base, moving sometimes to a single source that can provide any needed item or service, and working more collaboratively and transparently to enable suppliers to provide better service, which in turn makes the customer's own supply chain more efficient and effective.

Considering the supply chain as a whole, the conventional approach is highly inefficient, requiring the duplication of operations on the buying and selling sides of a transaction, increasing the amount of communication and negotiation, and increasing the risk of misinterpretation or miscommunication

It's also noted that firms are often outsourcing activities they used to do themselves. There is no significant difference between an external payroll service and an internal payroll department, or a company-owned warehouse facility and a logistics service.

(EN: The author does not seem to note that there is significant danger to the brand if the relationship is not carefully managed, particularly where the supplier's activities directly impact the perception of the customer. That is, when the food on an airplane is horrible, customers perceive it as being the fault of the airline, not the company they hired to provide food service.)

The relationship between businesses in the same supply chain is driven by the value to the customer: outsourcing part of the operations to a vendor may enable a firm to provide the required service at a lower price, or it may enable the firm to engage a vendor to provide functions or a level of quality they cannot provide.

From a financial perspective, a supplier reduces the overhead costs of a business: the firm that outsources a function does not have to maintain staff, facilities, inventories, and the like. While they ultimately pay for these things in the price of the service that is provided, it reduces the fixed assets or sunk costs on its own books and enables it to absorb those costs on an as-needed basis.

The author speaks a bit about the integration of information systems that enable vendors and firms to more fluidly share information, even in real time, to facilitate their cooperation.

B2C relationships

Most marketing effort has been on generating demand for products in the final marketplace, by getting customers to recognize the value of the product or to have a positive impression of the brand's image.

This approach worked well for many years, but as competition intensified, products became less differentiated and consumers became less susceptible to advertising, making these "relatively crude" approaches less effective. In the present marketplace, customers tend to see through image marketing, and are aware of a portfolio of brands that provide the same functional benefits, and as such have less loyalty to a brand.

While loyalty to brand has decreased, loyalty to retailer has increased. Customers are loyalty to the store where they shop and the people with whom they interact in obtaining products and services. (EN: Prime examples being that customers will follow a stylist to a new salon, or listen to the same band after they switch recording companies.)

This does not preclude the manufacturer of branded products from establishing a relationship with customers. The authors consider disintermediation through online channels, direct-to-consumer selling from manufacturers, as a method of being more directly involved. (EN: This idea has since evaporated, since even online retail has consolidated through multi-brand retailers such as Amazon.) Also, computerizing customer information has allowed manufacturers to reach out to their customers directly, through targeted marketing.

(EN: The authors completely miss two important factors that keep customers loyal to brands. First, the concept of brand as identity still leads people to consume brands that support their self-image or the image they desire to have or project. Second, companies have public images, much like celebrities, and customers are attracted to a brand based on its image in the media - it is not quite a direct relationship, but a sense of connection to a group of people who demonstrate qualities of character that the consumer admires.)

The authors then chase after the topic of database marketing, which at the time seemed to have tremendous potential. (EN: This still remains a dream. It's changed names from "database marketing" to "data mining" to "big data", as firms recognize they have amassed enormous amounts of data and are still struggling to find a way to leverage it - and as such the potential remains untapped.)

Market Segmentation

Market segmentation had originally emerged in a haphazard way: firms segmented the market according to geographic areas (because that's how their organization was structured) or to specific product lines (because they were made in different facilities). In time, this was reconsidered to segment markets into groups of people who had similar demographic profiles and were therefore assumed to have similar needs and preferences.

In terms of defining a usable segment, firms look to three qualities:

The authors then consider some of the ways in which markets are segmented:

The authors strongly advice both B2B and B2C companies to figure value/benefit preferences into their segmentation schema, as this is most germane to relationship marketing.

The Relationship Management Chain

The author presents a diagram that represents four steps in the relationship management process, which will be discussed in greater detail throughout the book. For now, the four stages are:

These are "closely connected elements of a dynamic process" that will need to be considered and periodically reengineered as the nature of the markets change - which happens more fluidly and rapidly in the present age than in the past.

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