All posts by larissageitenbeek

“The Right Customers”


In today’s session, we saw the importance of focusing on the right customer. In the article of Reinartz, Werner and Kumar, you can read three claims about customer loyalty which the authors then contradict:

1. It costs less to serve loyal customers
* While in fact customers know their value to the company and often exploit it to get premium service or price discounts… They expect something in return for their loyalty!
2. Loyal customers pay higher prices for the same bundle of goods
* While Kumar shows us that customers regularly guarantee greater frequency of purchase in return for lower prices: a loyal customer is in fact more price sensitive than an occasional one…
3. Loyal customers market the company
* This only is true for certain kind of customers. Most companies measure loyalty purely on the basis of purchasing behavior: but they might buy a product due to inertia or convenience…

The third point points out the fact that a company should indicate what kind of customer a specific person is.
“The Right Customers” (Harvard business essentials) article stresses that not all customers are of equal economic value to a company. What one group creates in profits is frittered away in trying to serve another. Differences in profitability are a function of several factors: total revenues, profit margin on those revenues, the duration of the customer relationship, and the cost of acquiring, serving and retaining particular customers.

A problem is compounded when marketers spend more money trying to retain low-value customers: they confuse loyalty with profitability. So they spend too much money on activities aimed at retaining customers who contribute little to company profits. The economic value of an individual customer is the present value of the stream of cash flow generated by that individual minus the initial cost of acquiring that customer. The customer equity is the difference between the revenues a customer produces minus the costs of acquisition, retaining and developing that customer. The acquisition costs might be high, but if the company then retains the customer over many years, it might be rewarded. But some customers will generate a negative cash flow for a long time or even forever. This underscores the disparity of economic value among customers and the importance of knowing which ones provide the greatest and least value.

A company’s customer base is likely to follow a normal distribution around an average customer value. I used the article to show to a company what it can do to improve:

1. Stop doing business with people who persistently generate losses
* At some point, you must face the fact that some of the customers will not become profitable.  First investigate the customer’s situation. If the problem is financial incapacity (so a small size of the wallet according to Kumar), drop the customer.
But if the problem is that you are not getting enough share of the wallet, you need to make the relationship worthwhile:

2. Develop an economically sound plan for moving modestly profitable customers into the high-profit sector.
* Once you understand what customers want and are willing to pay for, you can create an offer they will find more attractive, perhaps by redesigning your current product or service. Another approach to work with marginally profitable customers is to work the cost side of the customer equity equation: find less costly ways to acquire and serve these customers.

3. Create a plan for retaining customers in the profitable sectors and developing their economic value even further
* You have to use some of the cash saves by eliminating uneconomic customers to cement and expand your relationship with profitable ones; they are the jewels in the crown.
Some further tips about the last improvement point (3):

Retention
1.) Quantify Defection
Estimate the rate of customer defection = turnover. (so count the number of customer defections (so customer you lose) over a period of time)
2.) Locate the epicenter of Defection
3.) Learn from Defectors and the Dissatisfied (so obtain feedback to help you when making choices about e.g. pricing, product, delivery etc).
4.) Neutralize the causes of Defection: this means eliminate reasons for customers to look elsewhere:
* Do not disappoint (keep it consistent and at expectations)
* Keep price reasonable
* Maintain a dialogue with customers (reward feedback)
* Keep looking for ways to surprise and delight your customers

Development
Development means: expand the amount of profitable business you can conduct with current customers = expand your share of the wallet.
1) What customer information would you need to have before addressing new parts of the value chain?
2) How are customers currently handling those links, and through whom? Are they satisfied, or are they open to alternatives?
3) Do we currently have the competencies to serve those links? If not, would acquiring them be feasible and worth the costs?

So “The Right Customers” article also expresses some mismanagement of customer loyalty: a lot of managers are focusing on the wrong customers because they confuse loyalty with profitability. Using this article, a company will focus only on the right customer in the future!

 

Demand Driven Supply Chains


As we learned in session 6, the definition of a supply chain is: “A set of entities involved in design of new products, procuring raw materials, transforming them into products, and delivering them to the end customer.” So in fact it is the entire process of the design of a product, the manufacturing of a product and the delivery of the manufactured product to the customer.

The marketing value systems involve all activities that create and deliver value to the end customer. Some activities are internal to the firm, some are undertaken by others.

The traditional retail model consists of a few steps:

1. Standardized products are manufactured in a central place
2. After production the goods are shipped to warehouse or distribution center
3. The goods are distributed to retail shops
4. Consumers go to the shop and buy the product
5. Consumers store the product or use the product directly

In the E-business, the role of the consumer starts earlier. As we learned throughout this course, the customer can get active in the value creation process e.g. creation of his/her own product. Apart from that, the customer is able to order the products online. So, in fact, the E-business intervenes between the traditional flow of goods. In case companies expand their traditional retail model through selling their products on the internet, we call them brick and click. Website/webshops with no history as an existing company are called pure clicks. Benefits of such a system are immediate access, channel integration, personalized distribution and huge assortments. There can be differences in the distribution after the online order e.g. domino’s delivers the products from the near closest retailer whereas beren eetcafe delivers it from one central place.

To illustrate the importance of a demand driven supply chain, we found an example of a company which stresses why it is important to shift to such a new supply chain (“Procter & Gamble: Building a Smarter Supply Chain” 2002). Procter & Gamble realized that to remain profitable, consumer products manufacturers must find ways to optimize the performance of their supply chains. They realized they needed a consumer-driven supply network to stay ahead in the consumer packaged goods industry.

Continue reading Demand Driven Supply Chains

A lot of choice does not have to be a problem for the customer…


At the end of week 3 of the seminar Consumer Channel Dynamics, we all know that more and more customers are involved in the value creation of a product. Consumers have more options than ever before. This variety of choices gives the consumer a better chance of finding something that fits its needs, personalities etc. But, as in any case, there are possible advantages but also some downsides. In the book ‘The Paradox of Choice: why more is less’ of Barry Schwartz (see the blog of Dimitris) you can read that the choices can be overwhelming. While reading all blogs, I discovered that the fact of ‘more choice for the customer’ is an issue frequently talked about. Will a lot of choice make a customer happy or will it confuse or frustrate a customer?

According to Barry Schwarts, the latter is the case. But, as I was searching on the internet for some more arguments pro or against the more choices, I found an article of Femke Kools which describes a research of Benedict Dellaert and Stefan Stremersch. This article shows that more choices do not have to be a problem for the customer. You can read the article through the following link:

http://www.unimaas.nl/researchmagazine/default.asp?id=115&thema=2&template=thema.html&taal=nl

As it is written in Dutch, I will further describe the main conclusions.

Except for mass products, companies nowadays also offer customized products. Pants, shoes, computers: as a consumer you can indicate your preference for every component and the company will make the product exactly as you want. This does not have to be a more expensive production method, so mass customization offers advantages to both consumers and companies. A possible downside is that the customer gets confused about the many choices and is not able to get the product he/she wants. Prof. Benedict Dellaert investigated with prof. Stefan Stremersch what the limits of mass customization are. The most important question of the research was: If you decide to offer mass customization, how do you make it as attractive as possible for the consumer?  Variation is possible in the number of choices you offer. It turned out that consumers can handle the choices well.  “It does not influence the difficulty which consumers experience. Other factors will”, according to Delleart. The mass customization process gets more easy if you see one price at the end of the choice process. If the customer sees a price for every component it chooses, he/she thinks the process is more difficult.  A possible reason for this according to the investigators: the customer thinks he/she has to do something with all the extra information. People which are familiar with the product are less affected by this issue.
There is also variation possible in the number of options offered. According to Delleart, also the number of options offered has not an effect on the experienced difficulty. What does turned out, is that it is attractive for the consumer if the options stay close to the mean.  Very often is the mean already shown in the list of choices. If you want to deviate, you actively have to choose another option. “People are most satisfied about the process and the product if they have the option to upgrade.  So manufacturers can better set the default at a basis level than at a more advanced level. This also reduces the chance that the customer buys a more advanced product than needed.

Although this article is written in 2005, I still find it interesting to also read something about the contradiction to the fact that more choices will confuse the customer. I hope you will do too!

Larissa Geitenbeek