Customer relationship management is perhaps the most important concept of modern marketing. In the broadest sense, customer relationship management is the overall process of building and maintaining profitable customer relationships by delivering superior customer value and satisfaction. It deals with all aspects of acquiring, engaging, and growing customers.

Relationship Building Blocks: Customer Value and Satisfaction

The key to building lasting customer relationships is to create superior customer value and satisfaction. Satisfied customers are more likely to be loyal customers and give the company a larger share of their business.

Attracting and retaining customers can be a difficult task. Customers often face a bewildering array of products and services from which to choose. A customer buys from the firm that offers the highest customer-perceived value—the customer’s evaluation of the difference between all the benefits and all the costs of a market offering relative to those of competing offers. Importantly, customers often do not judge values and costs “accurately” or “objectively.” They act on perceived value.

To some consumers, value might mean sensible products at affordable prices. To other consumers, however, value might mean paying more to get more. For example, a Steinway ­piano—any Steinway piano—costs a lot. But to those who own one, a Steinway is a great value:13

A Steinway grand piano typically runs anywhere from $61,000 to as high as several hundred thousand dollars. The most popular model sells for about $87,000. But ask anyone who owns a Steinway grand piano, and they’ll tell you that, when it comes to Steinway, price is nothing; the Steinway experience is everything. Steinway makes very high-quality pianos—handcrafting each Steinway from more than 12,000 individual parts requires up to one full year. But, more importantly, owners get the Steinway mystique. The Steinway name evokes images of classical concert stages and the celebrities and performers who’ve owned and played Steinway pianos across more than 160 years. But Steinways aren’t just for world-class pianists and the wealthy. Ninety-nine percent of all Steinway buyers are amateurs who perform only in their dens.

So is a Steinway piano worth its premium price compared with less expensive pianos? To many consumers, the answer is no. But to Steinway customers, whatever a Steinway costs, it’s a small price to pay for the value of owning one. As one Steinway user puts it, “A pianist without a Steinway, for me, is the same as a singer without a voice.” Says another, “My friendship with the Steinway piano is one of the most important and beautiful things in my life.” Who can put a price on such feelings?

Customer satisfaction depends on the product’s perceived performance relative to a buyer’s expectations. If the product’s performance falls short of expectations, the customer is dissatisfied. If performance matches expectations, the customer is satisfied. If performance exceeds expectations, the customer is highly satisfied or delighted.

Outstanding marketing companies go out of their way to keep important customers satisfied. Most studies show that higher levels of customer satisfaction lead to greater customer loyalty, which in turn results in better company performance. Companies aim to delight customers by promising only what they can deliver and then delivering more than they promise. Delighted customers not only make repeat purchases but also become willing marketing partners and “customer evangelists” who spread the word about their good experiences to others.

For companies interested in delighting customers, exceptional value and service become part of the overall company culture. For example, L.L.Bean—the iconic American outdoor apparel and equipment retailer—was founded on the principle that keeping customers satisfied is the key to building lasting relationships.14

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Year after year, L.L.Bean lands in the top 10 of virtually every list of top service companies, including J.D. Power’s most recent list of “customer service champions.” The customer-service culture runs deep at L.L.Bean. More than 100 years ago, Leon Leonwood Bean founded the company on a philosophy of complete customer satisfaction, expressed in the following guarantee: “I do not consider a sale complete until [the] goods are worn out and the customer [is] still satisfied.” To this day, customers can return any item, no questions asked, even decades after purchase.

The company’s customer-service philosophy is perhaps best summed up in founder L.L.’s answer to the question “What is a customer?” His answer still forms the backbone of the company’s values: “A customer is the most important person ever in this company—in person or by mail. A customer is not dependent on us, we are dependent on him. A customer is not an interruption of our work, he is the purpose of it. We are not doing a favor by serving him, he is doing us a favor by giving us the opportunity to do so. A customer is not someone to argue or match wits with. Nobody ever won an argument with a customer. A customer is a person who brings us his wants. It is our job to handle them profitably to him and to ourselves.” Adds former L.L.Bean CEO Leon Gorman: “A lot of people have fancy things to say about customer service, but it’s just a day-in, day-out, ongoing, never-ending, persevering, compassionate kind of activity.”

Other companies that have become legendary for customer delight and their service heroics include Zappos.com, Amazon.com, Chick-fil-A, Nordstrom department stores, and JetBlue Airways. However, a company doesn’t need to have over-the-top service to create customer delight. For example, no-frills grocery chain ALDI has highly satisfied customers, even though they have to bag their own groceries and can’t use credit cards. ALDI’s everyday very low pricing on good-quality products delights customers and keeps them coming back. Thus, customer satisfaction comes not just from service heroics but from how well a company delivers on its basic value proposition and helps customers solve their buying problems. “Most customers don’t want to be ‘wowed,’” says one marketing consultant. “They [just] want an effortless experience.”15

Although a customer-centered firm seeks to deliver high customer satisfaction relative to competitors, it does not attempt to maximize customer satisfaction. A company can always increase customer satisfaction by lowering its prices or increasing its services. But this may result in lower profits. Thus, the purpose of marketing is to generate customer value profitably. This requires a very delicate balance: The marketer must continue to generate more customer value and satisfaction but not “give away the house.”

Customer Relationship Levels and Tools

Companies can build customer relationships at many levels, depending on the nature of the target market. At one extreme, a company with many low-margin customers may seek to develop basic relationships with them. For example, P&G’s Tide detergent does not phone or call on all of its consumers to get to know them personally. Instead, Tide creates engagement and relationships through product experiences, brand-building advertising, websites, and social media. At the other extreme, in markets with few customers and high margins, sellers want to create full partnerships with key customers. For example, P&G sales representatives work closely with Walmart, Kroger, and other large retailers that sell Tide. In between these two extremes, other levels of customer relationships are appropriate.

Beyond offering consistently high value and satisfaction, marketers can use specific marketing tools to develop stronger bonds with customers. For example, many companies offer frequency marketing programs that reward customers who buy frequently or in large amounts. Airlines offer frequent-flier programs, hotels give room upgrades to frequent guests, and supermarkets give patronage discounts to “very important customers.”

These days almost every brand has a loyalty rewards program. Such programs can enhance and strengthen a customer’s brand ­experience. For example, JetBlue’s TrueBlue loyalty program offers the usual frequent-flier points and rewards but adds some nice enhancements such as no blackout dates and family sharing. More important, the TrueBlue program personalizes the customer experience. Each TrueBlue member has customized web and mobile pages, complete with a dashboard that shows available points, JetBlue activity history, connections with JetBlue rewards partners, and trip- and flight-planning links. The personalized pages not only make it easy for TrueBlue members to manage their points and rewards, they are also a handy one-stop trip-planning tool, all geared to an individual member’s profile. As one member describes it: “Once you’re an official TrueBlue member, go hog wild filling out your profile. Upload that stunning selfie with the blue filter as your member picture, pick your favorite JetBlue ­destinations, even create an ultimate dream itinerary to the Blue Ridge Mountains and add it to your TrueBlue Wishlist.” JetBlue’s pledge to members: “TrueBlue. For your loyalty, we give you ours.”16

Significant changes are occurring in the nature of customer–brand relationships. Today’s digital technologies—the internet and the surge in online, mobile, and social ­media—have profoundly changed the ways that people on the planet relate to one another. In turn, these events have had a huge impact on how companies and brands connect with customers and how customers connect with and influence each other’s brand behaviors.

The digital age has spawned a dazzling set of new customer relationship-building tools, from websites, online ads and videos, mobile ads and apps, and blogs to online communities and the major social media, such as Twitter, Facebook, YouTube, Snapchat, and Instagram.

Yesterday’s companies focused mostly on mass marketing to broad segments of customers at arm’s length. By contrast, today’s companies are using online, mobile, and social media to refine their targeting and to engage customers more deeply and interactively. The old marketing involved marketing brands to consumers. The new ­marketing is ­customer-engagement marketing—fostering direct and continuous customer ­involvement in shaping brand conversations, brand experiences, and brand community. Customer-engagement marketing goes beyond just selling a brand to consumers. Its goal is to make the brand a meaningful part of consumers’ conversations and lives.

The burgeoning internet and social media have given a huge boost to customer-engagement marketing. Today’s consumers are better informed, more connected, and more empowered than ever before. Newly empowered consumers have more information about brands, and they have a wealth of digital platforms for airing and sharing their brand views with others. Thus, marketers are now embracing not only customer relationship management but also customer-managed relationships, in which customers connect with companies and with each other to help forge and share their own brand experiences.

Greater consumer empowerment means that companies can no longer rely on marketing by intrusion. Instead, they must practice marketing by attraction—creating market offerings and messages that engage consumers rather than interrupt them. Hence, most marketers now combine their mass-media marketing efforts with a rich mix of online, mobile, and social media marketing that promotes brand–consumer engagement, brand conversations, and brand advocacy among customers.

For example, companies post their latest ads and videos on social media sites, hoping they’ll go viral. They maintain an extensive presence on Twitter, YouTube, Facebook, Google+, Pinterest, Instagram, Snapchat, Vine, and other social media to create brand buzz. They launch their own blogs, mobile apps, online microsites, and consumer-generated review systems, all with the aim of engaging customers on a more personal, interactive level.

Take Twitter, for example. Organizations ranging from Dell, JetBlue, and Dunkin’ Donuts to the Chicago Bulls, NASCAR, and the Los Angeles Fire Department have created Twitter pages and promotions. They use tweets to start conversations with and between Twitter’s more than 307 million active users, address customer service issues, research customer reactions, and drive traffic to relevant articles, web and mobile marketing sites, contests, videos, and other brand activities.

Similarly, almost every company has something going on Facebook these days. Starbucks has more than 36 million Facebook “fans”; Coca-Cola has more than 96 million. And every major marketer has a YouTube channel where the brand and its fans post current ads and other entertaining or informative videos. Instagram, LinkedIn, Pinterest, Snapchat, Vine—all have exploded onto the marketing scene, giving brands more ways to engage and interact with customers. Skilled use of social media can get consumers involved with a brand, talking about it, and advocating it to others.

The key to engagement marketing is to find ways to enter targeted consumers’ conversations with engaging and relevant brand messages. Simply posting a humorous video, creating a social media page, or hosting a blog isn’t enough. And not all customers want to engage deeply or regularly with every brand. Successful engagement marketing means making relevant and genuine contributions to targeted consumers’ lives and interactions. Consider T-shirt and apparel maker Life is good:17

For starters, Life is good has an authentic, engagement-worthy sense of purpose: spreading the power of optimism. The brand is about helping people to open up, create relationships, and connect with other people. The company’s infectious philosophy is best represented by the “Life is good” slogan itself and by Jake—the familiar beret-wearing, happy-go-lucky stick figure who quickly became a pop-culture icon. Life is good backs its optimism philosophy with good deeds, donating 10 percent of its net profits each year to help kids in need.

Online and social media have become a perfect fit for sharing the Life is good message. Today, the brand fosters a thriving community of Optimists, with more than 2.6 million Facebook fans, 304,000 Twitter followers, 33,000 followers on Instagram, and an active YouTube channel. But the strongest engagement platform is the brand’s own website, Lifeisgood.com, one of the most active customer-engagement sites found anywhere online. The site’s “Live It” section gives brand fans a breath of “fresh share.” It’s a place where they share photos, videos, and stories showing the brand’s role in their trials, triumphs, and optimism. To Life is good, true engagement is about deep meaningful relationships that go beyond the products it is selling. Says Life is good CEO Bert Jacobs: “You can’t build a brand on your own; we have entered a world where customers co-author your story.”

One form of customer-engagement marketing is ­consumer-generated marketing, by which consumers themselves play role in shaping their own brand experiences and those of others. This might happen through uninvited consumer-to-consumer exchanges in blogs, video-sharing sites, social media, and other digital forums. But increasingly, companies themselves are inviting consumers to play a more active role in shaping products and brand content.

Some companies ask consumers for new product and service ideas. For example, the LEGO Ideas website invites customers to submit and vote on ideas for new LEGO building sets. And at the My Starbucks Idea site, Starbucks collects ideas from customers on new products, store changes, and just about anything else that might make their Starbucks experience better. “You know better than anyone else what you want from Starbucks,” says the company at the website. “So tell us. What’s your Starbucks idea? Revolutionary or ­simple—we want to hear it.” The site invites customers to share their ideas, vote on and discuss the ideas of others, and see which ideas Starbucks has implemented.18

Other companies invite customers to play an active role in shaping ads and brand content. For example, for 10 full years, PepsiCo’s Doritos brand held a “Crash the Super Bowl” contest that invited 30-second ads from consumers and ran the best ones during the game. The contest attracted thousands of entries from around the world, and the hugely popular consumer-generated ads routinely finished in the top five of the USA Today’s AdMeter rankings. Based on the success of the “Crash the Super Bowl” contest, Doritos now runs new campaigns that create fun fan-made ads and other content throughout the year.19

Many brands incorporate user-generated social media content into their own traditional marketing and social media campaigns. For example, Mountain Dew stirred up and employed user-generated content to create buzz around a limited-time reintroduction of its iconic Baja Blast flavor. It began with a discreet Rogue Wave social media campaign in which it posted tantalizing hints on Facebook, Snapchat, Instagram, and Twitter about bringing Baja Blast back. For example, on Snapchat, the brand showed quick clips of bottles. Mountain Dew fans responded with a flood of tweets and other social media chatter. “We started with discreet posts, but it didn’t take long for Dew Nation to call us out and beg for the rumors to be true,” says Mountain Dew’s digital brand manager. “Some of our fans even created collages of all the images featuring Baja over the last few days to confirm to other members of Dew Nation that Baja was coming back.” Mountain Dew then created ads on social media and men’s lifestyle websites incorporating consumers’ tweets. The result: Online chatter about Baja Blast shot up 170 percent.20

Despite the successes, however, harnessing consumer-generated content can be a time-consuming and costly process, and companies may find it difficult to mine even a little gold from all the content submitted. Moreover, because consumers have so much control over social media content, inviting their input can sometimes backfire. For example, McDonald’s famously launched a Twitter campaign using the hashtag #McDStories, hoping that it would inspire heartwarming stories about Happy Meals. Instead, the effort was hijacked by Twitter users, who turned the hashtag into a “bashtag” by posting less-than-appetizing messages about their bad experiences with the fast-food chain. McDonald’s pulled the campaign within only two hours, but the hashtag was still churning weeks, even months later.21

As consumers become more connected and empowered, and as the boom in digital and social media technologies continues, consumer brand engagement—whether invited by marketers or not—will be an increasingly important marketing force. Through a profusion of consumer-generated videos, shared reviews, blogs, mobile apps, and websites, consumers are playing a growing role in shaping their own and other consumers’ brand experiences. Engaged consumers are now having a say in everything from product design, usage, and packaging to brand messaging, pricing, and distribution. Brands must embrace this new consumer empowerment and master the new digital and social media relationship tools or risk being left behind.

When it comes to creating customer value and building strong customer relationships, today’s marketers know that they can’t go it alone. They must work closely with a variety of marketing partners. In addition to being good at customer relationship management, marketers must also be good at partner relationship management—working closely with others inside and outside the company to jointly engage and bring more value to customers.

Traditionally, marketers have been charged with understanding customers and representing customer needs to different company departments. However, in today’s more connected world, every functional area in the organization can interact with customers. The new thinking is that—no matter what your job is in a company—you must understand marketing and be customer focused. Rather than letting each department go its own way, firms must link all departments in the cause of creating customer value.

Marketers must also partner with suppliers, channel partners, and others outside the company. Marketing channels consist of distributors, retailers, and others who connect the company to its buyers. The supply chain describes a longer channel, stretching from raw materials to components to final products that are carried to final buyers. Through supply chain management, companies today are strengthening their connections with partners all along the supply chain. They know that their fortunes rest on more than just how well they perform. Success at delivering customer value rests on how well their entire supply chain performs against competitors’ supply chains.

Good customer relationship management creates customer satisfaction. In turn, satisfied customers remain loyal and talk favorably to others about the company and its products. Studies show big differences in the loyalty between satisfied and dissatisfied customers. Even slight dissatisfaction can create an enormous drop in loyalty. Thus, the aim of customer relationship management is to create not only customer satisfaction but also customer delight.

Keeping customers loyal makes good economic sense. Loyal customers spend more and stay around longer. Research also shows that it’s five times cheaper to keep an old customer than acquire a new one. Conversely, customer defections can be costly. Losing a customer means losing more than a single sale. It means losing the entire stream of purchases that the customer would make over a lifetime of patronage. For example, here is a classic illustration of customer lifetime value:22

Stew Leonard, who operates a highly profitable four-store supermarket in Connecticut and New York, once said that he saw $50,000 flying out of his store every time he saw a sulking customer. Why? Because his average customer spent about $100 a week, shopped 50 weeks a year, and remained in the area for about 10 years. If this customer had an unhappy experience and switched to another supermarket, Stew Leonard’s lost $50,000 in lifetime revenue. The loss could be much greater if the disappointed customer shared the bad experience with other customers and caused them to defect.

To keep customers coming back, Stew Leonard’s has created what has been called the “Disneyland of Dairy Stores,” complete with costumed characters, scheduled entertainment, a petting zoo, and animatronics throughout the store. From its humble beginnings as a small dairy store in 1969, Stew Leonard’s has grown at an amazing pace. It’s built 30 additions onto the original store, which now serves more than 300,000 customers each week. This legion of loyal shoppers is largely a result of the store’s passionate approach to customer service. “Rule #1: The customer is always right. Rule #2: If the customer is ever wrong, reread rule #1.”

Stew Leonard is not alone in assessing customer lifetime value. Lexus, for example, estimates that a single satisfied and loyal customer is worth more than $600,000 in lifetime sales, and the estimated lifetime value of a Starbucks customer is more than $14,000.23 In fact, a company can lose money on a specific transaction but still benefit greatly from a long-term relationship. This means that companies must aim high in building customer relationships. Customer delight creates an emotional relationship with a brand, not just a rational preference. And that relationship keeps customers coming back.

Beyond simply retaining good customers to capture customer lifetime value, good customer relationship management can help marketers increase their share of customer—the share they get of the customer’s purchasing in their product categories. Thus, banks want to increase “share of wallet.” Supermarkets and restaurants want to get more “share of stomach.” Car companies want to increase “share of garage,” and airlines want greater “share of travel.”

To increase share of customer, firms can offer greater variety to current customers. Or they can create programs to cross-sell and up-sell to market more products and services to existing customers. For example, Amazon is highly skilled at leveraging relationships with its 304 million customers worldwide to increase its share of each customer’s spending budget:24

Once they log onto Amazon.com, customers often buy more than they intend, and Amazon does all it can to help make that happen. The online giant continues to broaden its merchandise assortment, creating an ideal spot for one-stop shopping. And based on each customer’s purchase and search history, the company recommends related products that might be of interest. This recommendation system influences perhaps a third of all sales. Amazon’s ingenious Amazon Prime two-day shipping program has also helped boost its share of customers’ wallets. For an annual fee of $99, Prime members receive delivery of all their purchases within two days, whether it’s a single paperback book or a 60-inch HDTV. According to one analyst, the ingenious Amazon Prime program “converts casual shoppers, who gorge on the gratification of having purchases reliably appear two days after the order, into Amazon addicts.” As a result, Amazon’s 54 million U.S. Prime customers now account for more than half of its U.S. sales. On average, a Prime customer spends 1.8 times more than a non-Prime customer.

We can now see the importance of not only acquiring customers but also keeping and growing them. The value of a company comes from the value of its current and future customers. Customer relationship management takes a long-term view. Companies want to not only create profitable customers but also “own” them for life, earn a greater share of their purchases, and capture their customer lifetime value.

What Is Customer Equity?

The ultimate aim of customer relationship management is to produce high customer equity.25 Customer equity is the total combined customer lifetime values of all of the company’s current and potential customers. As such, it’s a measure of the future value of the company’s customer base. Clearly, the more loyal the firm’s profitable customers, the higher its customer equity. Customer equity may be a better measure of a firm’s performance than current sales or market share. Whereas sales and market share reflect the past, customer equity suggests the future. Consider Cadillac:26

In the 1970s and 1980s, Cadillac had some of the most loyal customers in the industry. To an entire generation of car buyers, the name Cadillac defined “The Standard of the World.” Cadillac’s share of the luxury car market reached a whopping 51 percent in 1976, and based on market share and sales, the brand’s future looked rosy. However, measures of customer equity would have painted a bleaker picture. Cadillac customers were getting older (average age 60), and average customer lifetime value was falling. Many Cadillac buyers were on their last cars. Thus, although Cadillac’s market share was good, its customer equity was not.

Compare this with BMW. Its more youthful and vigorous image didn’t win BMW the early market share war. However, it did win BMW younger customers (average age about 40) with higher customer lifetime values. The result: In the years that followed, BMW’s market share and profits soared while Cadillac’s fortunes eroded badly. BMW overtook Cadillac in the 1980s. In recent years, Cadillac has struggled to make the Caddy cool again with edgier, high-performance designs that target a younger generation of consumers. More recently, the brand has billed itself as “The New Standard of the World” with marketing pitches based on “power, performance, and design,” attributes that position it more effectively against the likes of BMW and Audi. Recent ads feature young achievers and invite consumers to “Dare Greatly” and “Drive the world forward.” However, for the past decade, Cadillac’s share of the luxury car market has stagnated. The moral: Marketers should care not just about current sales and market share. Customer lifetime value and customer equity are the name of the game.

Building the Right Relationships with the Right Customers

Companies should manage customer equity carefully. They should view customers as assets that need to be managed and maximized. But not all customers, not even all loyal customers, are good investments. Surprisingly, some loyal customers can be unprofitable, and some disloyal customers can be profitable. Which customers should the company acquire and retain?

The company can classify customers according to their potential profitability and manage its relationships with them accordingly. Figure 1.5 classifies customers into one of four relationship groups, according to their profitability and projected loyalty.27 Each group requires a different relationship management strategy. Strangers show low potential profitability and little projected loyalty. There is little fit between the company’s offerings and their needs. The relationship management strategy for these customers is simple: Don’t invest anything in them; make money on every transaction.

Figure 1.5

Customer Relationship Groups

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Butterflies are potentially profitable but not loyal. There is a good fit between the company’s offerings and their needs. However, like real butterflies, we can enjoy them for only a short while and then they’re gone. An example is stock market investors who trade shares often and in large amounts but who enjoy hunting out the best deals without building a regular relationship with any single brokerage company. Efforts to convert butterflies into loyal customers are rarely successful. Instead, the company should enjoy the butterflies for the moment. It should create satisfying and profitable transactions with them, capturing as much of their business as possible in the short time during which they buy from the company. Then it should move on and cease investing in them until the next time around.

True friends are both profitable and loyal. There is a strong fit between their needs and the company’s offerings. The firm wants to make continuous relationship investments to delight these customers and engage, nurture, retain, and grow them. It wants to turn true friends into true believers, who come back regularly and tell others about their good experiences with the company.

Barnacles are highly loyal but not very profitable. There is a limited fit between their needs and the company’s offerings. An example is smaller bank customers who bank regularly but do not generate enough returns to cover the costs of maintaining their accounts. Like barnacles on the hull of a ship, they create drag. Barnacles are perhaps the most problematic customers. The company might be able to improve their profitability by selling them more, raising their fees, or reducing service to them. However, if they cannot be made profitable, they should be “fired.”

The point here is an important one: Different types of customers require different engagement and relationship management strategies. The goal is to build the right relationships with the right customers.