© 2006 by Nelson, a division of Thomson Canada Limited7-104/20/23

Slides developed by:Slides developed by:

Peter YannopoulosPeter Yannopoulos

Chapter 7Chapter 7

Strategic Networks and Customer Relationship Management

© 2006 by Nelson, a division of Thomson Canada Limited7-2

Strategic Networks

Cooperative and collaborative actions intendedto establish, maintain, and enhance mutuallyadvantageous long-term relationships withimportant industry stakeholders, such ascustomers, suppliers, distributors, competitors,and other organizations

© 2006 by Nelson, a division of Thomson Canada Limited7-3

Reasons for Forming Strategic Networks

Learn new skills

Defend against

powerfulentrants

Expand intonew markets

Rapid technological

advances

Strategic Strategic NetworksNetworks

Share risks

© 2006 by Nelson, a division of Thomson Canada Limited7-4

Types of Strategic Networks

Distributors

SuppliersCompetitors

Customers

Types of Types of Strategic Strategic NetworksNetworks

© 2006 by Nelson, a division of Thomson Canada Limited7-5

Reasons Strategic Networks Fail

Weak support from top managementUnclear strategiesPoor partner selectionClashing corporate values and goalsDifferent ownership, structure, and

management valuesDifferences in size and resources of

partners

© 2006 by Nelson, a division of Thomson Canada Limited7-6

Transaction Marketing Versus Relationship Marketing

Transaction Marketing

Focus on one-time transactions

Customers are marketing’sresponsibilityEmphasis on short termProduct-centric - emphasis onproduct featuresSporadic customer contactLittle knowledge of mostvaluable customersLittle emphasis on customerservice, etc.

Transaction Marketing

Focus on one-time transactions

Customers are marketing’sresponsibilityEmphasis on short termProduct-centric - emphasis onproduct featuresSporadic customer contactLittle knowledge of mostvaluable customersLittle emphasis on customerservice, etc.

Relationship Marketing

Focus on long-term relationships

Customers is the responsibilityof all functionsEmphasis on long term Customer-centric – emphasis

oncustomer valueFrequent customer contactKnow most valuable customersA lot of emphasis on customerservice, etc.

Relationship Marketing

Focus on long-term relationships

Customers is the responsibilityof all functionsEmphasis on long term Customer-centric – emphasis

oncustomer valueFrequent customer contactKnow most valuable customersA lot of emphasis on customerservice, etc.

© 2006 by Nelson, a division of Thomson Canada Limited7-7

The Four Ps of Customer Value

Performance

ProcessesPeople

Product

The Four Ps The Four Ps of Customerof Customer

ValueValue

© 2006 by Nelson, a division of Thomson Canada Limited7-8

Customer Value, Satisfaction, Retention, and Performance

Product Product Process Process Performance Performance People People

Customer Value Customer Satisfaction

Customer Retention

Customer Value Customer Satisfaction

Customer Retention

Increased revenue

Increased revenue

Lower Costs Lower Costs

Performance Profitability Market share Image

Performance Profitability Market share Image

© 2006 by Nelson, a division of Thomson Canada Limited7-9

Customer Value Equation

Perceived customer value

Perceived customer value

Perceived benefits –Perceived life cycle costsPerceived benefits –Perceived life cycle costs

=

© 2006 by Nelson, a division of Thomson Canada Limited7-10

Value formoney

Features

Convenience

Performance

Quality

Perceived Perceived BenefitsBenefits

Perceived Benefits

© 2006 by Nelson, a division of Thomson Canada Limited7-11

Perceived Life Cycle Costs

Maintenancecosts

Financingcosts

Operatingcosts

Purchase price Set up

costs

Perceived Perceived Life Cycle Life Cycle

CostsCosts

Disposalcosts

© 2006 by Nelson, a division of Thomson Canada Limited7-12

Customer Value Analysis

Customer Value Importance Firm A Firm B Firm CAttributes Weights Rating WxR Rating WxR Rating WxR

Handling 25 9 225 7 175 8 200Traction 20 9 180 8 160 7 140Rolling resistance 15 8 120 7 105 9 135Noise levels 15 7 105 8 120 6 90Resistance to puncture 10 7 70 8 80 7 70Treadwear rate 10 8 80 9 90 7 70Appearance 5 7 35 8 40 8 40Total 100 815 770 745

Performance score: 815 770 745Relative performance: 1.00 0.94 0.91

© 2006 by Nelson, a division of Thomson Canada Limited7-13

An Example of the Number of Customers Who Would Switch

Total number of customers 400,000

Number of dissatisfied customers (10%) 40,000

Number of dissatisfied customers who

do not complain (.96 × 40,000) 38,400

Number of customers who would switch (.92 × 38,400) 36,800

© 2006 by Nelson, a division of Thomson Canada Limited7-14

The Strategic Satisfaction Matrix

Satisfaction With

Performance

High

Importance

Possible Overkill Competitive Advantage Maintain or reduce Maintain or improve investment or change performance target market

Low priority Competitive VulnerabilityDo not waste resources Focus improvements here

Low

Low High

© 2006 by Nelson, a division of Thomson Canada Limited7-15

Customer Net Worth Example

Assume:

Customer lives in an area for 5 years

A supermarket earns from the customer $500, $700, $900, $1,000, and $1,200

Discount rate = 5 %

© 2006 by Nelson, a division of Thomson Canada Limited7-16

Year Earnings

1st year $500

2nd year $700

3rd year $900

4th year $1000

5th year $1200

Earnings1 Earnings2 Earnings3 Earnings4 Earnings5

Net worth = ------------ + ------------ + -------------- + ------------ + -----------

(1 + k)1 (1 + k)2 (1 + k)3 (1 + k)4 (1 + k)5

$500 $700 $900 $1000 $1200

= ------------ + ------------ + ------------ + ------------ + -----------

(1 + 5)1 (1 + 5)2 (1 + 5)3 (1 + 5)4 (1 + 5)5

= $3,651

Calculation of a Customer’s Net Worth

© 2006 by Nelson, a division of Thomson Canada Limited7-17

Customer Retention and Profitability

Higher customer retention is positively related with higher profitability

Higher customer retention is positively related with higher profitability

Increasing customer retention by 5% increases profits between 25% and 85%

Increasing customer retention by 5% increases profits between 25% and 85%

For example…For example…

© 2006 by Nelson, a division of Thomson Canada Limited7-18

Customer Share

Customer share focuses on increasing the amount obtained from an individual customer

Customer share focuses on increasing the amount obtained from an individual customer

© 2006 by Nelson, a division of Thomson Canada Limited7-19

PartneringPrograms

LoyaltyPrograms

Mass Customization

Major Major CustomerCustomer

Relationship Relationship ProgramsPrograms

Major Customer Relationship Programs

© 2006 by Nelson, a division of Thomson Canada Limited7-20

Mass Customization

Is aimed at satisfying each customer’s needs individually in a cost effective way

Is aimed at satisfying each customer’s needs individually in a cost effective way

It often involves a learning relationship where the producer learns about the customer needs

It often involves a learning relationship where the producer learns about the customer needs

© 2006 by Nelson, a division of Thomson Canada Limited7-21

Purpose of Loyalty Programs

Intended to retain customers and enhance customer loyalty through special incentives that can increasecustomer value

Intended to retain customers and enhance customer loyalty through special incentives that can increasecustomer value

© 2006 by Nelson, a division of Thomson Canada Limited7-22

Partnering Programs

Collaborative relationships between companies to better meet end-user needs

Collaborative relationships between companies to better meet end-user needs

Co-branding

Affinity partnering programs

© 2006 by Nelson, a division of Thomson Canada Limited7-23

Data Mining

The process of discovering useful knowledge from data stored in corporate databases

The process of discovering useful knowledge from data stored in corporate databases

© 2006 by Nelson, a division of Thomson Canada Limited7-24

Most Profitable Uses of Data Mining

Cross-selling

Customerretention

Customeracquisition Most Most

Profitable Profitable Uses of Uses of

Data MiningData Mining

© 2006 by Nelson, a division of Thomson Canada Limited7-25

Data Warehouses

A type of data architecture that involves a single site containing data from different sources and organized in a way that facilitates decision making

A type of data architecture that involves a single site containing data from different sources and organized in a way that facilitates decision making

© 2006 by Nelson, a division of Thomson Canada Limited7-26

Increasing the Effectiveness of Customer Relationship Programs

Commitment from top managementTarget the right customersCommunicate with customersEstablish common bonding with

customersEstablish a customer retention cultureRetain employeesMonitor customer relationship program

performance