Customer Life Time Value:

Customer lifetime value has intuitive appeal as a marketing concept, because in theory it represents exactly how much each customer is worth in monetary terms, and therefore exactly how much a marketing department should be willing to spend to acquire each customer. In reality, it is difficult to make accurate calculations of customer lifetime value. The specific calculation depends on the nature of the customer relationship.

Customer relationships are often divided into two categories. In contractual or retention situations, customers who do not renew are considered "lost for good". Magazine subscriptions and car insurance are examples of customer retention situations. The other category is referred to as customer migrations situations. In customer migration situations, a customer who does not buy (in a given period or from a given catalog) is still considered a customer of the firm because she may very well buy at some point in the future. In customer retention situations, the firm knows when the relationship is over. One of the challenges for firms in customer migration situations is that the firm may not know when the relationship is over (as far as the customer is concerned).

Most models to calculate CLV apply to the contractual or customer retention situation.

These models make several simplifying assumptions and often involve the following inputs:

Churn rate The percentage of customers who end their relationship with a company in a given period. One minus the churn rate is the retention rate. Most models can be written using either churn rate or retention rate. If the model uses only one churn rate, the assumption is that the churn rate is constant across the life of the customer relationship.

Discount rate The cost of capital used to discount future revenue from a customer. Discounting is an advanced topic that is frequently ignored in customer lifetime value calculations. The current interest rate is sometimes used as a simple (but incorrect) proxy for discount rate.

Retention cost The amount of money a company has to spend in a given period to retain an existing customer. Retention costs include customer support, billing, promotional incentives, etc.

Period The unit of time into which a customer relationship is divided for analysis. A year is the most commonly used period. Customer lifetime value is a multi-period calculation, usually stretching 3-7 years into the future. In practice, analysis beyond this point is viewed as too speculative to be reliable. The number of periods used in the calculation is sometimes referred to as the model horizon.

Periodic Revenue The amount of revenue collected from a customer in the period.

Profit Margin Profit as a percentage of revenue. Depending on circumstances this may be reflected as a percentage of gross or net profit. For incremental marketing that does not incur any incremental overhead that would be allocated against profit, gross profit margins are acceptable.

Comfort Zones:

Tice has developed the concept of comfort zone in which people operate. Change of any type even if for the better, can be very uncomfortable. People become frozen into a particular situation and whilst it may not be the better situation available, the effort and uncertainty of changing can inhibit even a change for the better. Any movement away from the zone of comfort is it for better or worse is resisted.

In terms of relationship between customer relations and loyalty, the concept of comfort zones can be used to explain why customers stay loyal to an organization or product even if another is convenient. Customers tend to stick to what they know. This form of loyalty is termed as Comfort Loyalty.

Linked to the effect of comfort zones is the cost of customer of switching to no other supplier or product. In the case of everyday house hold goods (FMCG), there may be no cost. However, switching, say computer operating systems may require a purchase of new software, Changing to another make of a car may require building up a relationship with a new supplier and dealer and these costs can be perceived as too high. They may not be monetary at all, often they are time and effort consuming and costs the consumer never the less.

Types of Customer Loyalty:

1. Supplier Loyalty:

Many customers are not only loyal to a particular brand, but also loyal to particular supplier, a type of customer known as hostage i.e., somebody who has no choice but to be a customer of a particular brand or supplier. Such a situation could occur in a small village community where there is only a shop selling perhaps just one brand of bread. A customer who is without transport could be forced, if they really want bread beans, to be loyal to that one brand and that one supplier. The term introduced for this is PSEUDO-LOYALTY.

2. Supra-Loyalty:

Supra-loyalty is a term that can be applied to those who are extremely loyal to an organization, product or service. In the case of loyalty to an organization, that have normally build up a personal relationship with the organization over a period of time or in these of product/service, their identify themselves with it. It is as if they have internalized relationship and consider themselves almost part of the organization instead of being a customer.

3. De-loyalty:

A customer who makes a deliberate decision to move to another organization because he or she has been let down by an organization that they were previously loyal can be described as being DE-LOYAL. This is not same as disloyalty, which suggests that it is the customer who is doing something wrong. In the case of de-loyalty, it is the organization which has let the customer down. There is evidence that people are willing to forgive one mistake or one case of poor service. Customer loyalty can be retained even after a mistake provided that rectification (an apology) is speedily forthcoming. However, if a super-loyal customer becomes disenchanted, they may take their business else where, in effect becoming de-loyal. if they are very disappointed they may become ANTI-LOYAL, seek retribution against the organization.

4. Disloyalty:

It is a mute point as to whether a customer can actually be disloyal. Customers owe nothing, in terms of loyalty to suppliers. Many customers may feel that they are being disloyal if they go else where but feeling disloyal is not the same as being disloyal. The only obligation actually placed on the customer is to render payment for the product or service provided by payment of monetary and other terms.

Organizations, having a responsibility to their customers, can be disloyal too. Disloyalty is not providing a product or service deliberately to a previously loyal customer. An example of this would be an organization that treated a new customer better, deliberately or unintentionally than the existing customers. In this case, the organization would be being disloyal to relationship that had been built up. If the existing customer decides to go elsewhere, then they would be making a perfectly valid and proper decision. Disloyalty implies an act and not the customer is capable of such an act. The customer may be a – loyal, de-loyal or even anti-loyal but never disloyal.

Customer Loyalty

Definition of Loyalty:

Loyalty may be defined as “The biased behavioral response, expressed over time by some decision making unit with respect to one out of a set of processes resulting in brand commitment”.

Loyalty must be seen as “biased repeat purchase behavior” or repeat patronage accompanied by a favorable attitude. Loyalty can originate from factors extrinsic to the relationship such as the market structure in which the relationship exists, but also in intrinsic factors such as relationship strength and handling of critical episodes during the relationship.

Advantages for setting up Loyalty:

1. Building lasting relationships with customers by rewarding them for their patronage.

2. Gathering high profits through extended product usage and cross-selling

3. Gathering customer information

4. Decommodifying brands i.e., differentiating from crowds.

5. Defending market position

6. Planning against competitive activity.

Classification of customers with reference to Loyalty:

There are six classifications of customers in respect of loyalty:

1) Current loyal customers who will continue to use the product or service

2) Current customers who may switch to another brand

3) Occasional customers who would increase consumption of the brand if the incentives were right.

4) Occasional customers who would decrease consumption of the brand if competitor offered the right incentive.

5) Non-users who could become customers.

6) Non- users who could never become customers.

It is important to distinguish between loyalty to the generic product, the brand and particular supplier. Many people drink coffee as beverage. Those who drink considerable quantity of coffee can be described as having a product loyalty. Within the group, there will be some that buy just the cheapest coffee or drink whatever available. They are product loyal but not brand loyal. They are not disloyal as that implies that there has been a loyalty, but they have no loyalty at all to a particular brand. Those who have a particular brand loyalty, they always buy a particular brand or at least a brand from the same product.

Benefits of Customer satisfaction

Many companies adopt strategies to improve customer satisfaction with the perceived objectives of strengthening bonds and achieving customer loyalty. Great claims are made regarding higher satisfaction levels. It is suggested that customer satisfaction:

Ø Increases customer loyalty

Ø Reduces price elasticity

Ø Insulates market share from competitors

Ø Lowers transaction cost

Ø Reduces failure rates and cost of attracting new customers

Ø Improves the firm’s reputation in the market place

Frank (USA, 1867 - 1924) and Lillian (U.S.A, 1878 - 1912)

The ideas of Taylor were also strongly supported and developed by the famous husband and wife team of Frank and Lillian Gilbreth. They became interested in wasted motions in work. After meeting Taylor, they combined their ideas with Taylor's to put scientific management into effect. They made pioneering effort in the field of motion study and laid the entire foundation of our modern applications of job simplification, meaningful work standards and incentive wage plans. Mrs. Gilbreth had a unique background in psychology and management and the couple could embark on a quest for better work methods. Frank Gilbreth is regarded as the father of motion study. He is responsible for inculcating in the minds of managers the questioning frame of mind and the search for a better way of doing things.

Gilbreth's contributions to management thought are quite considerable. His main contributions are:

(a) The one best way of doing a job is the way which involves the fewest motions performed in an accessible area and in the most comfortable position. The best way can be found out by the elimination of inefficient and wasteful motions involved in the work.

(b) He emphasized that training should be given to workers from the very beginning so that they may achieve competence as early as possible.

(c) He suggested that each worker should be considered to occupy three positions –

(i) the job he held before promotion to his present position, (ii) his present position, and (iii) The next higher position. The part of a worker's time should be spent in teaching the man below him and learning from the man above him. This would help him qualify for promotion and help to provide a successor to his current job.

(d) Frank and Lillian Gilberth also gave a thought to the welfare of the individuals who work for the organization.

(e) Gilbreth also devised methods for avoiding wasteful and unproductive movements. He laid down how workers should stand, how his hands should move and so on.

Customer Satisfaction Process:

At the heart of any successful strategy to ‘manage’ customer satisfaction is the ability to “listen to the customer”. They suggest five categories of approach.

1. Customer satisfaction indices

2. Feedback

3. Market research

4. Front-line personnel

5. Strategic activities

1. Customer Satisfaction Indices:

Customer satisfaction indices are among the most popular methods of tracking or measuring customer satisfaction. Indeed, business of all sorts now divert consider energies into tracking customer satisfaction in this way.

2. Feedback:

Feedback in this context includes comments, complaints and questions ,It may be among the most effective means of establishing what the customer regards as a satisfactory level of performance and whether ‘dissatisfiers’ exist within the operation as it is based on actual performance rather than contrived situations.

3. Market Research:

In addition to research among customers and non-customers into potential ‘satisfiers’, ‘dissatisfiers’ and ‘customer expectations’, market research can be used as customer entrance (to establish drivers which bought the customer to the company) and customer exit (to establish those factors which cause the customer to go elsewhere).Again more valuable information may be achieved in the latter rather than the former as it is based on actual behavior rather than the perception.

4. Frontline Personnel:

Direct contact with staff can provide a good means of listening to the customer. As it is frequently suggested that many customers, rather than making a formal complaint to the company, will simply break the relationship. Frontline staff provides an opportunity for less formal sounding on complaints which might to otherwise not be heard. The crucial factor here is how this information is fed back into the decision-making process.

5. Strategic activities:

Actively involving in the customer in the company decision making may be means of pre-empting potential “dissatisfiers” and establishing potential “satisfiers”.

Customer Satisfaction

Oliver defines Customer satisfaction as follows “Satisfaction is the customer fulfillment response. It is a judgment that a product or service feature, or the product or service itself provides a pleasurable level of consumption related fulfillment.”

Satisfaction can be viewed as contentment. Satisfaction may also be associated with some sense of happiness. For those services that really surprise in the positive way, satisfaction may mean delight. And in some situations, where the removal of negative aspect leads to satisfaction, the consumer may associate a sense of relief with satisfaction.

Retention in competitive markets is generally believed to be a product of customer satisfaction. Satisfaction is a psychological process of evaluating perceived performance outcome based on predetermined expectations.

Satisfaction drivers:

Cumby and Barnes suggest that driver exist on five levels and, that these generally involve progressively more personal contact with the service supplier:

1. Core product or service
2. Support service and systems
3. Technical performance
4. Elements of customer interaction
5. Affective dimension of services

1. Core Product or service: this is the basic product or service provided by the company and probably provides the supplier with the least opportunity to differentiate or add value.

2. Support services and systems: These include the peripheral support services that enhance the provision of the core product or services. The customer may well receive an excellent core product or service from the supplier but are dissatisfied with the supplier because of inferior support service and systems.

3. Technical Performance: The level of “customer satisfaction model” deals with whether the service provider gets the core product or whether service and the support services and systems are in place but they do not get them right on every occasion.

4. Elements of customer interaction: This level relates to the way the service provider interacts with the customer either face-to –face or through technology based contact.

5. Affective dimensions of service: Beyond the basic interaction of the company are the messages, sometimes subtle and often unintentional, that companies send to their customers that leave them with positive or negative feelings towards them. A considerable amount of dissatisfaction has nothing to do with core products and services. Indeed the customer may be satisfied with more aspects of interaction. The problem may lie with “little things” that may not be noticed by the staff.

It is quite possible for the supplier to get things right on the first four levels and to dissatisfy the customer because of something that happens on the fifth level. This emphasize the importance of ‘critical episode’ in the exchange process

Henry Lawrence Gantt (USA, 1861 - 1819)

H.L Gantt was born in 1861. He graduated from John Hopkins College. For some time, he worked as a draftsman in an iron foundry.

In 1884, he qualified as a mechanical engineer at Stevens Institute.

In 1887, he joined the Midvale Steel Company. Soon, he became an assistant to F.W Taylor. He worked with Taylor from 1887 - 1919 at Midvale Steel Company. He did much consulting work on scientific selection of workers and the development of incentive bonus systems. He emphasized the need for developing a mutuality of interest between management and labour.

Gantt made four important contributions to the concepts of management:

1. Gantt chart to compare actual to planned performance. Gantt chart was a daily chart which graphically presented the process of work by showing machine operations, man hour performance, deliveries, effected and the work in arrears.

This chart was intended to facilitate day-to-day production planning.

2. Task-and-bonus plan for remunerating workers indicating a more humanitarian approach. This plan was aimed at providing extra wages for extra work besides guarantee of minimum wages. Under this system of wage payment, if a worker completes the work laid out for him, he is paid a definite bonus in addition to his daily minimum wages. On the other hand, if a worker does not complete his work, he is paid only his daily minimum wages. There was a provision for giving bonus to supervisors, if workers under him were able to earn such bonus by extra work.

3. Psychology of employee relations indicating management responsibility to teach and train workers. In his paper "Training Workmen in Habits of Industry and Cooperation", Gantt pleaded for a policy of preaching and teaching workmen to do their work in the process evolved through pre-thinking of management.

4. Gantt laid great emphasis on leadership. He considered management as leadership function. He laid stress on the importance of acceptable leadership as the primary element in the success of any business.