08 & 09 - Customer Lifetime Value & Customer Metrics

Question 1

What is Customer Satisfaction?

Answer 1

Customer judgment that supplier’s perceived performance is equal to expected performance

Question 2

In which 2 ways can Customer Satisfaction be measured?

Answer 2

1. Transaction-based: Post-choice evaluation of specific purchase
2. Cumulative: Overall evaluation based on all purchases and consumption experience

Question 3

What 2 kinds of metrics about customers exist?

Answer 3

1. Behavioral outcomes (observable): What customers do
2. Perceptual measures (unobservable): What customers think

Question 4

Key benefits of customer satisfaction for the firm …

(8 possible examples)

Answer 4

• Increases loyalty for current customers
• Reduces price elasticities (are willing to pay price premium)
• Insulates current customers from competitive efforts
• Lowers costs of future transactions
• Lowers costs of cross-selling
• Reduces failure costs
• Lowers costs of attracting new customers (acquisition)
• Overall enhances firm reputation

Question 5

What is customer loyalty?

Answer 5

Customer willingness to continue buying from a certain company

Question 6

Name 2 kinds of customer loyalty

Answer 6

1. Behavioral loyalty = Customer continuing to buy from same firm over time
2. Attitudinal loyalty = Deeply held commitment to repurchase from preferred company consistently in the future

Question 7

How is customer loyalty measured?

Answer 7

By retention rate

(= percentage of customers buying this period who will also buy next period)

Question 8

Effect of customer loyalty on firm profitability?

(6 aspects)

Answer 8

1. Acquisition costs: Gaining a customer is 6x harder than keeping an existing one
2. Base profit: The longer a customer is retained, the greater the sum of annual base profits
3. Revenue growth: Loyal customers increase spending over time, they know the product lines well and trust the firm
4. Operating costs: More familiar customers require less time answering questions and explaining purchase and product options
5. Referrals: Satisfied customers recommend to others which is a huge persuasion for others
6. Price premium: Loyal customers are less price conscious than others, less attracted by bargains and discounts that reduce margins

Question 9

CLV is a great decision-making tool.
What decisions can be made easier by CLV models?

Answer 9

• Decide which type of customer (customer segment) is more profitable to target
• Decide when to scale up or down marketing expenditures for particular customer
• Decide when to fire customer (even pay them to leave because they’re too expensive)
• Decide how much to spend to acquire new customer, retain existing customer, or cross-selling to existing customers

Question 10

Case Rosewood

What was the firms situation,
what was the problem &
what did they want to change?

Answer 10

• Established hotel chain of individual branded hotels (no corporate identification)
• Global reputation with their iconic luxury hotels
• Low rate of returning guests (40%) or ‘cross-staying’ in another Rosewood hotel (5%) -> low brand recognition & loyalty
• They thought about changes to increase those rates, f.e. through changing their branding strategy (from individual brands to corporate branding)

Question 11

Case Rosewood

What 2 approaches did they consider
for increasing re-visits and cross-visits?

Answer 11

1. Frequent-Stay-Program: Believed to double repeat visits but only a few luxury hotels adopted them (what is the real outcome?)
2. Corporate Brand Approach: Higher rate of visiting other hotels from the chain but goes with high expenses for building the corporate brand

Question 12

Case Rosewood

What did they do?

Answer 12

• Implement the corporate name into hotel names
• Ensure perfect service performance consistent over all hotels
• Internal branding initiative (some managers had trouble accepting the new corporate branding)

Question 13

Case Rosewood

What is the difference between corporate brand
and house of brands (chain of individual brands)?

Answer 13

Corporate brand:

• Names usually contain the corporate brand
• Reputation spill-over effect (positive and possibly negative)

House of brands:

• Individual brands are more flexible, especially with location based specifics (f.e. regional food)
• Exclusivity is important in luxury business (which we have here)
• Price differentiation is easier to implement
• Differentiation from competitors
• Might limit your market (low brand awareness)
• Higher costs (individual advertising)