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Relationship Marketing

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Discussion on key aspects of relationship marketing. Delivered by Harryadin Mahardika at Universitas Indonesia

Discussion on key aspects of relationship marketing. Delivered by Harryadin Mahardika at Universitas Indonesia

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  • 1. Relationship Marketing Harryadin Mahardika, PhD
  • 2. Harryadin Mahardika  Pop Economist  FEUI & laporsuap.com  Research objective: – “to liberate and empower consumer...”  Current research: – Consumer empowerment – Consumer intervention/engineering – Mobile advertising  Contact: – harryadin.mahardika@ui.ac.id / harryadin@gmail.com – @HarrySastro 2
  • 3. Relationship marketing?
  • 4. Relationship marketing?
  • 5. Relationship marketing?
  • 6. How do we create customers? – Identifying customer needs – Designing goods and services that meet those needs – Communicate Information about those goods and services to prospective buyers – Making the goods or services available at times and places that meet customers’ needs – Pricing goods and services to reflect costs, competition, and customers’ ability to buy – Providing for the necessary service and follow-up
  • 7. How do we create VALUE?  Identify the needs in the marketplace  Find out which needs the organization can profitably serve  Design goods and services that meet those needs  Developing a marketing mix that will convert potential customers into actual customers  Providing for the necessary service and follow-up after the service
  • 8. Relationship Marketing = follow up, follow up, follow up
  • 9. “4 Eras” of Marketing
  • 10. From transaction-based marketing to relationship marketing…  Transaction–based marketing (Simple exchanges)  Relationship marketing – Lifetime value of a customer – Converting new customers to advocates
  • 11. From transaction-based marketing to relationship marketing…
  • 12. Transaction vs. Relationship Marketing
  • 13. Three Levels of Relationship Marketing Characteristic Level 1 Level 2 Level 3 Primary bond Financial Social Structural Degree of customization Low Medium Medium to high Potential for sustained competitive advantage Low Moderate High
  • 14. Building long term relationship is important…. But,  We need to determine which consumers we want this relationship with!! – Target Market – ―Costly‖ Consumers: • Difficult to attain • Difficult to retain
  • 15. Customer Relationship Management (CRM) The combination of strategies and tools that drive relationship programs, re-orientating the entire organization to a concentrated focus on satisfying customers
  • 16. Strategies for Building Customer Relationships  Affinity Programs – a marketing effort sponsored by an organization that solicits responses from individuals who share common interests and activities – Example: Credit Card ILUNI FEUI
  • 17. Strategies for Building Customer Relationships  Frequency Marketing – frequent-buyer or user marketing programs that reward customers with cash, rebates, merchandise, or other premiums – Examples: Garuda Frequent Flyer, Matahari Club Card
  • 18. Strategies for Building Customer Relationships  Database Marketing – software that analyzes marketing information, then identifies and targets messages toward specific groups of potential customers. – Examples: Telco operator (Telkomsel, Satelindo, etc)
  • 19. Strategies for Building B2B Relationships  Strategic alliance – a partnership formed to create a competitive advantage – These more formal long-term partnership arrangements improved each partner supply-chain relationships and enhance flexibility – Example: SkyTeam (Garuda with other airlines e.g. Etihad)
  • 20. Strategies for Building B2B Relationships  Electronic Data Interchange (EDI) – involves computer-to-computer exchanges of invoices, orders, and other business documents.  Vendor Managed Inventory (VMI) – is an inventory-management system in which the seller–based on existing agreement with a buyer– determines how much of a product is needed.
  • 21. Strategies for Building B2B Relationships  Database Marketing – software that analyzes marketing information, then identifies and targets messages toward specific groups of potential customers
  • 22. Evaluating Relationships  Lifetime Value (LTV) – Refers to the net present value of the potential revenue stream for any particular customer over a # of years – Starts with current purchase activity then extrapolates to include potential additions from cross-selling, upgrades, total ownership, etc.
  • 23. The Value of Customer Retention  On average, it is more costly acquire a new customer rather than retain an existing one.  Customer retention ensure higher profit margin.  Voluntary spending to maintain relationship.
  • 24. Relationship Lifecycle Customer relationship lifecycle Baines, et al, 2011, p. 568
  • 25. LEVEL OF RELATIONSHIP
  • 26. Five Different Levels of Relationships (I)  Basic. The company salesperson sells the product, but does not follow up in any way.  Reactive. The salesperson sells the product and encourages the customer to call whenever he or she has any questions or problems.  Accountable. The salesperson calls to the customer a short time after the sale to check whether the product is meeting customer expectation.
  • 27. Five Different Levels of Relationships (II)  Proactive. The salesperson or other in the company phone the customer from time to time with suggestions about improved product use or helpful new product.  Partnership. The company works continuously with the customer and with other customers to discover ways to deliver better value
  • 28. Case for discussion  Perusahaan Listrik Negara (PLN) CEO acknowledges the importance of relationship marketing to improve the quality of their services. a. b. Does it necessary for PLN to adopt relationship marketing? If yes, until which level of relationship?
  • 29. THE RELATIONSHIP MARKETING SOLUTION
  • 30. The Marketing Challenge: The Relationship Marketing Solution        Time Horizon. Market Segmentation. Product or Service Design. Market Research. Marketing Communications. Customer Service. Pricing.
  • 31. Time Horizon    The time horizon available for marketers to achieve results in many companies has shrunk: investors and financial managers have dramatically reduce the time frame available for building revenue. Marketing which remain focused on transaction rather than relationship is time consuming. The marketer will have two roles:  To identify the customer base with which the firm is to maintain and deepen relationship;  To champion the changes needed within the company for this to happen.
  • 32. Market Segmentation    Marketers need to accept the fact that market segmentation no longer exist the way they were taught: there are no more market segments, just individual customers. In B2B marketing this approach is well known. In B2C marketers have focused more on segmentbased marketing principles. Increasing competition push companies to differentiate products or services, but this strategy become more and more expensive.
  • 33. Fragmentation
  • 34. Product or Service Design   Customers are not equal – they want different things in different amount at different time - and the profit derived from each will vary. The key challenge for the marketer is to identify the core strategic value that will be derived to the customer and the elements that customer can change.
  • 35. Value Proposition Elements VALUE PERCEPTIONS QUALITY PERCEPTIONS BEFORE SALES SERVICE DURING SALES SERVICE FUNCTION PACKAGING GUARANTEES INTANGIBLES AFTER SALES SERVICE DESIGN PRODUCT ORGANISATION PRICE DELIVERY FEATURES OTHER USER RECOMMENDATION AVAILABILITY WARRANTIES ADVICE ADD ONS FINANCE CORPORATE IMAGE REPUTATION SERVICES
  • 36. Long Tail
  • 37. Market Research   Market research can take more time than the marketer has available. Current research findings may actually be dealing with yesterday's issues. Now marketers need to devise knowledge systems to learn more about individual customer so that firms can create the value each customer wants.
  • 38. Marketing Communications    Previously, marketers relied on broadcasting their message (one way communication). No longer. Today the marketer has opportunity to communicate with individual customer according to the media each prefer. The challenge for the marketer is to apply technology to facilitate this relevant, timely, personalized and customized communication.
  • 39. Narrowcasting
  • 40. Customer Service   The old adage is that the customer is always right: make customers happy when they complain, engage then positively, offer restitution. When customer complain, it is a signal of a broken process somewhere in the business.
  • 41. Pricing    Customers want to participate in decisions regarding the value they receive and the price they pay. Give them a standard offering and they will expect to pay a single price. Offer them options in the product and they will want some more than others, and will pay more for these.
  • 42. Group Exercise  Think about pricing strategy that can be used to build relationship with consumer, in each of the following product category: – – – – – Automotives Clothing retailer Online store Restaurant Airlines
  • 43. LOYALTY AND CUSTOMER VALUE
  • 44. Behavioral brand loyalty  Measured by proportion of purchase Undivided loyalty AAAAAAAAAA Occasional switcher AAABAAACAA Switched loyalty AAAAAABBBB Divided loyalty AAABBBAABB Indifference ABCDADCDBD 44
  • 45. Loyalty Ladders Partners Members Members Advocates Advocates Clients Clients Customers Relationship Marketing Partners Repeat Cust Traditional Marketing 1st Time Cust Prospects Payne et al 1995 Prospects Suspects Kotler 1997 Baines, et al 2011
  • 46. Types of Loyalty  Some of the more general types of loyalty Source: Baines, et al (2011, p. 573)
  • 47. How Much Are Customers Worth? Acquired Customer Base Year Value US$ millions Acquirer Thousands of Customers Per Customer Value US$ Powerco 1998 9 NGC 16 533 WEL Energy 1999 37 NGC 68 547 ETSA 2000 96 AGL 734 131 TransAlta NZ 2000 259 NGC 513 505 Powercor 2001 174 Origin 582 299 Enron Direct 2001 22 Centrica 160 140 New Power 2002 8 Centrica 215 38 Citipower 2002 75 Origin 272 276 Pulse 2002 451 AGL 1400 322 Contact Energy 2004 322 Origin Energy 608 530 Atlantic Energy 2004 19 Scottish & Southern 300 63 Centrica 2004 18981 Market capitalisation 45000 422 Origin Energy 2004 999 Market capitalisation 2000 499 Contact Energy 2004 332 Market capitalisation 608 546
  • 48. Utility Customer Lifetime Value Customer Lifetime Value Gradient represents customer profitability Length of Relationship (Months) Customer Loyalty
  • 49. Dimensions of Relationship Profitability Relationship Revenue new price carriers relationship structure Relationship Costs Source: Storbacka & Lehtinen 2001 - dimensions for relationshp profitability $ relationship strength Relationship Longevity
  • 50. CUSTOMER VALUATION
  • 51. Customers as Assets ―Intangible assets are hard to see and even harder to fix a precise value for. But a widening consensus is growing that the importance of (intangible) assets – from brand names and customer lists … – means that investors need to know more about them.‖ - New York Times -
  • 52. Valuing High Growth Businesses  Traditional finance approach – P/E ratio  Marketing approach – Customer Lifetime Value (CLV)
  • 53. Relationship Lifecycle Customer relationship lifecycle Baines, et al, 2011, p. 568
  • 54. Customer Lifetime Value Customer Equity – total of discounted lifetime values of all the firm’s customers  Value – customers’ assessment of utility  Brand – customers’ assessment of image  Relationship – customers’ willingness to stay with brand
  • 55. How much are you, as a customer, worth over your university lifetime?  Rp8,000,000 at Kantin FE over your years in univ, not Rp10,000 per visit  Rp1,000,000 at the 21 Cineplex Margocity during your years in univ, not Rp25,000 per visit  Rp5,600,000 on KRL tickets during your years in univ, not Rp3,500 per trip  Rp4,000,000 on Ojek over your years in univ, not Rp5,000 per trip
  • 56. Customer Lifetime Value CLV r m 1  m r : Contribution margin  r i : Retention rate •  i The percentage of total customers minus customers who end their relationship with a company in a given period : Discount rate, • • The cost of capital used to discount future revenue from a customer. The current interest rate is sometimes used as a simple (but incorrect) proxy for discount rate.
  • 57. Customer Lifetime Value  Lifetime value of a customer mtr LV t 0 (1 Margin Multiple t i)  Lifetime value with constant margins LV r m 1 i r t r 1 Retention Rate (r ) 60% 70% 80% 90% 10% 1.20 1.75 2.67 4.50 i r Discount Rate (i) 12% 14% 1.15 1.11 1.67 1.59 2.50 2.35 4.09 3.75 57 16% 1.07 1.52 2.22 3.46
  • 58. Infinite CLV r m 1 i r
  • 59. Finite • m is the gross profit for year N • i is the discount rate • r is the retention rate N
  • 60. Exercise 1  Calculate customers lifetime value for UI Ojek Association: – – – – – Ojek’s margin per-trip: Rp4,000 Trip: 100 trips per-student per-year Retention rate 80% Discount rate 10% Period 4 years (S1)
  • 61. CLV for 4 years Year 1 CLV Year 2 Year 3 Year 4 400,000 290,900 211,600 153,900 Total value = Rp1,056,400
  • 62. Exercise 2  Post-paid cellular mobile phone subscription: – Monthly payment: Rp250,000 – COGS: Rp150,000 – Retention rate 50% – Discount rate 10%  Calculate the CLV
  • 63. Finite CLV r m 1 CLV = 100,000 x (0.5/(1-0.4)) = 100,000 x 0.83333 = Rp 83,334 i r
  • 64. Exercise 3 Sehat Sentosa Gym  Sehat Sentosa Gym requested your consulting services in order to make an investment decision that could boost their revenue.
  • 65. Sehat Sentosa Gym  Calculate the gym’s CLV for the next 5 years.  Here is some information about the Gym’s customer value: – Annual membership fee is $300 – The average member spends $100 a year at the gym—café, nutrition, drinks, snacks, etc - 40% of which is COGS – 80% rejoins in the following year – Discount rate is 10%
  • 66. CLV for 5 years Year 1 Revenue COGS Gross Profit Probability of being active Actual Profit Present Value of Profit Year 2 Year 3 Year 4 Year 5
  • 67. One year profit per customer is $360 One Year Revenue $400 COGS $40 Gross Profit $360 How many years should we consider? The norm is 5 years since any time longer, the assumptions could change
  • 68. We can calculate the value looking into the future Year 1 Year 2 Year 3 Year 4 Year 5 Revenue $400 $400 $400 $400 $400 COGS $40 $40 $40 $40 $40 Gross Profit $360 $360 $360 $360 $360 Total customer value: $360 * 5= $1800 Two problems • Profits earned in 5 years are less valuable than profits today • Customers may not be around in 5 years
  • 69. Only 80% of customers return next year (retention rate) Year 1 Year 2 Year 3 Year 4 Year 5 Revenue $400 $400 $400 $400 $400 COGS $40 $40 $40 $40 $40 Gross Profit $360 $360 $360 $360 $360 Probability of being active 100% 80% 64% 51% 41%
  • 70. Only 80% of customers return next year Year 1 Year 2 Year 3 Year 4 Year 5 Revenue $400 $400 $400 $400 $400 COGS $40 $40 $40 $40 $40 Gross Profit $360 $360 $360 $360 $360 Probability of being active 100% 80% 64% 51% 41% Actual Profit $360 $288 $230 $184 $147
  • 71. The club discounts future cash flow at 10% per year Year 1 Year 2 Year 3 Year 4 Year 5 Revenue $400 $400 $400 $400 $400 COGS $40 $40 $40 $40 $40 Gross Profit $360 $360 $360 $360 $360 Probability of being active 100% 80% 64% 51% 41% Actual Profit $360 $288 $230 $184 $147 Present Value of Profit $360 $262 $190 $138 $101 Total value = $1051
  • 72. Managerial question  Sehat Sentosa Gym currently faces two options to boost revenue – Option 1 is to invest $500,000 on membership reward to increase retention rate by 10% (from 80% to 88%) – Option 2 is to invest the same amount in the facility and increase annual fee by 10% Which option should the gym choose?
  • 73. Instead of 80% Consider 88% Option 1 – higher retention rate Year 1 Year 2 Year 3 Year 4 Year 5 Revenue $400 $400 $400 $400 $400 COGS $40 $40 $40 $40 $40 Gross Profit $360 $360 $360 $360 $360 Probability of being active 100% 88% 77% 68% 60% Actual Profit $360 $317 $279 $245 $216 Present Value of Profit $360 $288 $230 $184 $147 Total value = $1210 Increase = 15 %