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

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 %