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Customer Relationship Management

Lesson 04 – Serial No. 3 of Session Plan

Types of Customers and


Customer Value: Values Drive
Value – Lesson 04
Customer Relationship Management by
Alok Kumar, Chhabi Sinha and Rakesh
Sharma
Chapter 2

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Chapter Objectives
• To reiterate the importance of customer
segmentation in CRM.
• To suggest more relevant new sub-bases of
segmentation
• To highlight the meaning and types of customer
value as relevant for any company practising
CRM
• To underline the importance of customer-value
management and elucidate how simple
techniques like customer lifetime value can
improve the profitability of the customer.

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Customer Segmentation Re-
examined

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Customer Segmentation Re-
examined – (1/3)
• Pareto principle bears testimony to the fact
that not all customers are equal and
therefore not all of them should be treated
equal.
• Two strong keywords with the concept of
CRM relate to ‘selectivity’ and
‘partnership.’ #

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Customer Segmentation Re-
examined – (2/3)
• Selectivity types of customers typically hinge on
the loyalty attribute and their link to profitability is
through their length of relationship or their
purchase intent or whether they recommend to
others. Customer segmentation of this type is
behavioral and is most critical in CRM. The
usual geographic, demographic or
psychographic segmentation come useful at the
second or third level of sub-segmentation.

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Customer Segmentation Re-
examined – (3/3)
• Behavioral segmentation is usually in
terms of loyalty, frequency of use etc.
• Another important segmentation in the
context of CRM is the number and choice
of communication channels.
• A related segmentation is nature and
frequency of communication expected by
the customer.

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Types of Customers and Their
Relationship Styles

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Types of Customers and Their
Relationship Styles – (1/2)
• According to Jones and Sasser,
customers behave in four different ways:
1.Apostles (= one sent to preach the gospel)
2.Terrorists/Defectors (defector = one who leaves a
country or organisation for another one)
3.Mercenaries (= hired for money; actuated by the
hope of reward; too strongly influenced by the desire
of gain; one who is hired)
4.Hostages (= one kept in the hand of enemy as a
pledge)

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Types of Customers and Their
Relationship Styles – (2/2)
High
Mercenaries:
Apostles:
Happy and contended
Highly contended, loyal
customers who are not
customers whose contact
loyal To the company and
with potential customers
tend to shop around and
Satisfaction

is more valuable than


compare. On a lookout
any salesman.
for better opportunity.

Terrorists/Defectors:
Customers who are disappointed Hostages:
in their business relation Disgruntled customers. Due to
with the company and tell certain exit barriers, unable to
everybody about their bad change their service provider
experience. Leave the services though dissatisfied
without informing, virtually lost.
Low
Low Loyalty High
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Types of Relationships With Mercenaries,
Apostles, Defectors and Hostages – (1/2)
• (1/4) Price-centred relationships – hinge on the
delivery of the ‘best deal’ in the marketplace.
Mercenaries fall in this type of relationship
• (2/4) Need-centred relationships – offer
personalisation of channels, interfaces and
service processes. Need-centred relationship is
expected by an Apostle in favourable
circumstances and by a Defector in case of a
service failure.

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Types of Relationships With Mercenaries,
Apostles, Defectors and Hostages – (2/2)
• (3/4) Value-centred relationships – depend on
intensive and extensive collaboration. A
collaborative value-centred relationship is a
series of dialogue and interaction between an
enterprise and a customer over an extended
period of time. Value-centred relationship is
reserved for Apostles.
• (4/4) Product-centred relationships – focus on
delivery of customised products, services and
solutions. Product-centred relationships are
usually appropriate either for Apostles with a
strong value proposition or for Hostages.
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Loyalty as a Basis for
Segmentation

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Linking Profitability and Loyalty –
(1/3)
• High profitability and short term customers
(Butterflies)
• Low Profitability and short term customers
(Strangers)
• Long term customers and low profitability
(Barnacles) (= a companion not easily shaken
off)
• High profitability and long term customers
(True friends)
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Linking Profitability and Loyalty –
(2/3)
• Butterflies:
– Good fit between company’s offerings and
customer’s needs
– High profit potential
• Strangers
– Little fit between company’s offering and
customer’s needs
– Lowest profit potential

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Linking Profitability and Loyalty –
(3/3)
• Barnacles:
– Limited fit between company’s offerings and
customer’s needs. Yet, they don’t want to
leave. – Perhaps, a drag to the firm
– Low profit potential
• True friends:
– Good fit between company’s offering and
customer’s needs.
– Highest profit potential
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Customer Value: Concept and
Characteristics

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Customer Value: Concept and
Characteristics – (1/5)
• An effective CRM strategy starts with
segmentation based on what different
customer groups value and what will make
them loyal.
• Customer value is the customer’s
perception of what outcome he expects in
a specific situation with the help of a
product or service offering in order to
achieve a desired purpose or goal.

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Customer Value: Concept and
Characteristics – (2/5)
• Five new approaches to customer value
have been identified. These are:
– The total value of their relationship with your
company
– The potential value of their relationship
– The profitability of their relationship
– The insights they can provide to your
company
– The influence they can wield over other
customers
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Customer Value: Concept and
Characteristics – (3/5)
• There are a few fundamental lessons that
must be remembered in connection with
customer value:
– (1/8) Value is customer-defined
– (2/8) Customers differ in who they are, what
outcomes (value-in-use) they seek, and
therefore, what value they place on different
benefits of an offering.
– (3/8) Value is opaque
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Customer Value: Concept and
Characteristics – (4/5)
– (4/8) Value is contextual. Context has three
dimensions:
• The end user
• The end-use situation, and
• the environment.
– (5/8) Value is multidimensional
– (6/8) Value is a trade-off at the hand of a
customer: Trade-off between total benefits he
gets and the cost he incurs

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Customer Value: Concept and
Characteristics – (5/5)
– (7/8) Value is relative - customers evaluate
value relative to available alternatives,
particularly the next-best alternative. (BASE –
best available substitute or equivalent)
– (8/8) Value is a mindset – the organisation
should have a mindset that everything it does
should revolve around its customers, not its
products. #

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Types of Customer Value – (1/2)
• Jagdish Sheth and Banwari Mittal have
suggested three roles of a customer, viz.:
user, payer and buyer.
– Customers as users seek performance, social
and emotional value.
– Customers as payers want price value, credit
and financing values.
– Customers as buyers desire service value,
convenience and personalisation value.
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Types of Customer Value – (2/2)
• Customers derive value from three
sources:
– Economic
– Functional and
– Psychological
• The relative importance of these three
types of values varies across products as
well as the life cycle of the same product.

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Economic Value – (1/2)
• Economic value is generally the focus in B2B markets. A
fundamental source of value is the economic benefit a
customer derives from using the product over its lifetime.
There are four noteworthy points:
– First, the company is communicating a tangible measure of
benefit in terms of savings.
– Second, economic benefit, in general, is evaluated by comparing
the total life cycle costs of the products, not just the initial
purchase price
– Third, the most convenient time frame on which to compare the
these benefits is the life of the new product.
– Fourth, economic benefit is always comparative.

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Economic Value – (2/2)
• However, economic value is not the only
benefit on which products are purchased.
Other factors are:
– Compatibility
– Complexity
– Observability
– Risk – (financial, social and so on)
– Divisibility (can customers try a small
portion?)

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Functional Value
• It is defined by those aspects of a product
that provide measurable functional or
utilitarian benefits to customers. That is
value is provided by performance feature
of a product.
• Rupee value of a feature is usually difficult
to show, but researchers using conjoint
analysis techniques can learn preferences
of customers for various features.

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Psychological Value
• Psychological value focuses on intangible
benefits of a product as against the tangible
benefits of the other two. For example, brand
names, associations, images etc.
• As markets mature and tangible differences
among competing brands become negligible,
psychological benefits become the chief
differentiator. Even technology intensive
companies have come to know the importance
of psychological value their customers desire.
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Other Various Value Definitions –
(1/3)
• Customers’ definition of value:
– Low price
– Whatever I want in a product or service
– The quality I get for the price I pay
– What I get for what I give.
• Philip Kotler has defined value as:
– Product value
– Service value
– Personnel value
– Image value

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Other Various Value Definitions –
(2/3)
• Barnes has given the following values:
– (1/9) Choice based value: that is, available
choices to customers in terms of:
• How they deal with the company
• How they pay
• How they want them to be shipped
• How they receive information
– (2/9) Employee based value
– (3/9) Information value
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Other Various Value Definitions –
(3/3)
• Barnes has given the following values:
– (4/9) Association value
– (5/9) Relationship value (as a supplier)
– (6/9) Customer unique value
– (7/9) Experience value
– (8/9) Product-for-price value
– (9/9) Access or convenience value #

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