Group Discussion 4: Choose one of the listed industry categories, (1) name a specific company/brand (I expect you to find a different example from your group members’), then (2) hypothesize about how you might categorize customers by their different needs, and (3) how the company offers values/benefits to meet those needs for each categorized customers in the same way our sample toy company (refer to pp. 192-194) and pharmaceutical company (refer to pp. 204-206) did.

- - Automobiles (B2C)
  - Hotel (B2C)
  - Pet food (B2C)

Managing Customer
Experience and Relationships

A Strategic Framework

Third Edition

Don Peppers
Martha Rogers

Cover image: © Danil Melekhin/iStockphoto
Cover design: Wiley
Copyright © 2017 by Don Peppers and Martha Rogers, Ph.D. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form
or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as
permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior
written permission of the Publisher, or authorization through payment of the appropriate per-copy fee
to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax
(978) 646-8600, or on the Web at www.copyright.com. Requests to the Publisher for permission should
be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ
07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permissions.
Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts
in preparing this book, they make no representations or warranties with respect to the accuracy
or completeness of the contents of this book and specifically disclaim any implied warranties of
merchantability or fitness for a particular purpose. No warranty may be created or extended by
sales representatives or written sales materials. The advice and strategies contained herein may not be
suitable for your situation. You should consult with a professional where appropriate. Neither the
publisher nor author shall be liable for any loss of profit or any other commercial damages, including
but not limited to special, incidental, consequential, or other damages.
For general information on our other products and services or for technical support, please contact
our Customer Care Department within the United States at (800) 762-2974, outside the United States at
(317) 572-3993 or fax (317) 572-4002.
Wiley publishes in a variety of print and electronic formats and by print-on-demand. Some material

included with standard print versions of this book may not be included in e-books or in print-on-
demand. If this book refers to media such as a CD or DVD that is not included in the version you

purchased, you may download this material at http://booksupport.wiley.com. For more information
about Wiley products, visit www.wiley.com.
Library of Congress Cataloging-in-Publication Data:
Names: Peppers, Don, author. | Rogers, Martha, 1952– author.
Title: Managing customer experience and relationships : a strategic framework
/ Don Peppers, Martha Rogers.
Description: 3rd edition. | Hoboken, New Jersey : John Wiley & Sons, Inc.,
[2017] | Series: Wiley corporate F&A series | Includes index.
Identifiers: LCCN 2016023735 (print) | LCCN 2016036342 (ebook) | ISBN
978-1-119-23625-2 (cloth) | ISBN 978-1-119-23982-6 (pdf) | ISBN 978-1-119-23981-9
(epub) | 978-1-119-23983-3 (obook)
Subjects: LCSH: Customer relations—Management. | Consumers’ preferences. |
Relationship marketing. | Information storage and retrieval
systems—Marketing.
Classification: LCC HF5415.5 .P458 2017 (print) | LCC HF5415.5 (ebook) | DDC
658.8/12—dc23
LC record available at https://lccn.loc.gov/2016023735
Printed in the United States of America
10 9 8 7 6 5 4 3 2 1

v
Contents

Foreword by Phil Kotler xiii
Preface xvii
Acknowledgments xxi
About the Authors xxiii
Part I Principles of Managing Customer Experience and
Relationships 1

Chapter 1 Evolution of Relationships with Customers and Strategic

Customer Experiences 3
Roots of Customer Relationships and Experience 5
Traditional Marketing Redux 11
What Is a Relationship? Is That Different from Customer
Experience? 20
Who Is the Customer? 21
How to Think about Customer Experience 22
Return on Customer: Measuring the Efficiency with
Which Customers Create Value 25
The Technology Revolution and the Customer Revolution 28
Royal Bank of Canada’s 16 Million Loyal Customers 30
The ROI of Building Customer Relationships in Financial Services 34
Summary 38
Food for Thought 39
Glossary 39
Chapter 2 The Thinking behind Customer Relationships That Leads to
Good Experiences 43
Why Do Companies Work at Being “Customer-Centric”? 44
What Characterizes a Relationship? 46
Continuing Roles for Mass Media and Branding 46

vi Contents
Characteristics of a Genuine Business Relationship 47
Building Genuine Customer Connections: A Framework for
Understanding Customer Relationships (James G. Barnes) 50
Customer Loyalty: Is It an Attitude? Or a Behavior? 61
Loyalty Programs 63
Summary 66
Food for Thought 67
Glossary 67
Part II IDIC Implementation Process: A Model for Managing
Customer Relationships and Improving Customer
Experiences 71

Chapter 3 Customer Relationships: Basic Building Blocks of

IDIC and Trust 73
Trust and Relationships Happen in Unison 74
IDIC: Four Implementation Tasks for Creating and Managing
Customer Experiences and Relationships 79
How Does Trust Characterize a Learning Relationship? 82
The Speed of Trust (Stephen M. R. Covey) 82
The Trust Equation: Generating Customer Trust
(Charles H. Green) 85
Becoming More and More Trustable to Customers 92
The Age of Transparency (Dov Seidman) 96
Basic Principles of Twenty-First-Century Trustability 101
Do Things Right and Do the Right Thing 102
Be Proactive 103
The Man with the Folding Chair 106
Relationships Require Information, but Information Comes
Only with Trust 108
Scenario: Governments Develop Learning Relationships
with “Citizen-Customers” 111
Summary 116
Food for Thought 116
Glossary 117
Chapter 4 Identifying Customers 119
Individual Information Requires Customer Recognition 120
The Real Objective of Loyalty Programs and
Frequency Marketing Plans 124
What Does Identify Mean? 129

Contents vii

Customer Data Revolution 133
The Role of the “Internet of Things” and Smart Products
in Managing Relationships with Customers 138
Summary 139
Food for Thought 139
Glossary 140

Chapter 5 Differentiating Customers: Some Customers Are Worth

More Than Others 143
Customer Value Is a Future-Oriented Variable 145
Assessing a Customer’s Potential Value 158
Different Customers Have Different Values 159
Pareto Principle and Power-Law Distributions 160
Customer Referral Value 165
Is It Fair to “Fire” Unprofitable Customers? 170
Dealing with Tough Customers 171
Canada Post Customer Value Management Program: Using
Value to Differentiate Customer Relationships (Janet LeBlanc) 179
Summary 182
Food for Thought 183
Glossary 184
Chapter 6 Differentiating Customers by Their Needs 187
Definitions 188
Demographics Do Not Reveal Needs 191
Differentiating Customers by Need:
An Illustration 192
Scenario: Financial Services 193
Understanding Customer Behaviors and Needs 194
Needs May Not Be Rational, but Everybody Has Them 196
Why Doesn’t Every Company Already Differentiate Its
Customers by Needs? 197
Categorizing Customers by Their Needs 198
Understanding Needs 200
Community Knowledge 202
Using Needs Differentiation to Build
Customer Value 206
Scenario: Universities Differentiate Students’ Needs 208
Summary 212
Food for Thought 213
Glossary 213

viii Contents
Chapter 7 Interacting with Customers: Customer Collaboration Strategy 217
Dialogue Requirements 219
Implicit and Explicit Bargains 220
Do Consumers Really Want One-to-One Marketing? 222
Two-Way, Addressable Media: A Sampling 223
Technology of Interaction Requires Integrating across the
Entire Enterprise 226
Managing Customer Experiences by Taking the Customer’s
Perspective (Mounir Ariss) 229
Customer Dialogue: A Unique and Valuable Asset 234
Customizing Online Communication (Tom Spitale) 236
Not All Interactions Qualify as “Dialogue” 239
When the Best Contact Is No Contact (Bill Price and David Jaffe) 240
Contact Centers Take a New Approach to Customer
Interactions (Elizabeth Glagowski) 243
Cost Efficiency and Effectiveness of Customer Interaction 244
Complaining Customers: Hidden Assets? 245
Summary 248
Food for Thought 248
Glossary 249
Chapter 8 Customer Insight, Dialogue, and Social Media 253
The Dollars and Sense of Social Media 254
Listening to Customers 260
The Importance of Listening and Social Media (Becky Carroll) 261
Crowd Service: Customers Helping Other Customers
(Dr. Natalie L. Petouhoff) 267
Age of Transparency 277
As Interactions Multiply, Trust Becomes More Important 277
Influencing the Influencers 283
Summary 286
Food for Thought 286
Glossary 287
Chapter 9 Privacy and Customer Feedback 289
The Trust Advantage of Robust Data Stewardship (John Rose) 294
Individual Privacy and Data Protection (Larry A. Ponemon, Ph.D.) 303
Privacy in Europe Is a Different World 306
European Organization for Economic Cooperation and
Development Privacy Guidelines 307
Privacy Pledges Build Enterprise Trust 310

Contents ix

10 Points to Consider in Developing a Company’s
Privacy Pledge 313
Submitting Data Online 314
Universal ID 317
Summary 318
Food for Thought 318
Glossary 318

Chapter 10 The Payoff of IDIC: Using Mass Customization to Build

Learning Relationships 321
How Can Customization Be Profitable? 322
Demand Chain and Supply Chain 325
Technology Accelerates Mass Customization 331
Customization of Standardized Products and Services 333
Value Streams 337
Bentley Systems Creates Value Streams 338
A Quick Primer on Business Rules (Bruce Kasanoff) 342
Culture Rules 346
Summary 349
Food for Thought 350
Glossary 350

Part III Measuring and Managing to Build Customer Value 355
Chapter 11 Optimizing around the Customer: Measuring the Success of
Customer-Based Initiatives and the Customer-Centric
Organization 357
Customer Equity 364
What Is the Value Today of a Customer
You Don’t Yet Have? 373
Customer Loyalty and Customer Equity 376
Return on Customer 380
Return on Customer = Total Shareholder Return 384
Measuring, Analyzing, and Utilizing Return on Customer 389
Leading Indicators of LTV Change 393
Stats and the Single Customer 401
Maximize Long-Term Value and Hit Short-Term Targets 402
Summary 409
Food for Thought 410
Glossary 410

x Contents
Chapter 12 Using Customer Analytics to Build the Success of the

Customer-Strategy Enterprise 413
Verizon Wireless Uses Analytics to Predict and Reduce Churn 415
CRM in the Cloud 417
Customer Intelligence in the Era of Data-Driven Marketing
(Jim Goodnight) 424
Boosting Profits by Up-Selling in Firebrand
Real Estate Developers 431
Looking for the Right Time to Sell a Mortgage Loan 439
Summary 443
Food for Thought 444
Glossary 445
Chapter 13 Organizing and Managing the Profitable Customer-Strategy
Enterprise, Part 1 447
Customer Experience: What, Why, and How (Alan Pennington) 449
How Do We Fix Service? (Bill Price and David Jaffe) 460
Improving Customer Service at an Online Financial
Services Firm 464
Customers, Customer Service, and the Customer Experience
(Christopher J. Zane) 467
Relationship Governance 470
Understanding Customer Experience through Customer Journey
Mapping (Valerie Peck) 476
Customer Experience Capabilities and Competencies
Compared to Financial Performance (Jeff Gilleland) 502
Summary 507
Food for Thought 507
Glossary 508
Chapter 14 Organizing and Managing the Profitable Customer-Strategy
Enterprise, Part 2: Transitioning from Traditional Business to
Customer Centricity 513
Becoming a Customer-Strategy Organization (Marijo Puleo, Ph.D.) 514
Pilot Projects and Incremental Change 519
Picket Fence Strategy 521
Segment Management 523
Customer Portfolio Management 524
Transition across the Enterprise 525
Using Up Customers 528
Transformation from Product Centricity to Customer Centricity 531

Contents xi

Transition Process for Other Key Enterprise Areas 533
Managing Employees in the Customer-Strategy Enterprise 540
The Everyday Leader (Marilyn Carlson Nelson) 544
Summary 546
Food for Thought 547
Glossary 548
Chapter 15 Futureproofing the Customer-Centric Organization 553
Leadership Behavior of Customer Relationship Managers 554
Maintain and Increase the Trust of Customers 556
Reciprocity in Action 559
JetBlue Builds Trust into Its DNA 560
Summary 575
Food for Thought 576
Name Index 577
Term Index 585

xiii
Foreword
The View from Here

When I first started writing about marketing 45 years ago, the Industrial Age
was in its prime. Manufacturers churned out products on massive assembly
lines and stored them in huge warehouses, where they patiently waited for retailers
to order and shelve boxes and bottles so that customers could buy them. Market
leaders enjoyed great market shares from their carefully crafted mass-production,
mass-distribution, and mass-advertising campaigns.
What the Industrial Age taught us is that if an enterprise wanted to make money,

it needed to be efficient at large-scale manufacturing and distribution. The enter-
prise needed to manufacture millions of standard products and distribute them in

the same way to all of their customers. Mass producers relied on numerous interme-
diaries to finance, distribute, stock, and sell the goods to ever-expanding geographi-
cal markets. However, in the process, producers grew increasingly removed from

any direct contact with end users.
Producers tried to make up for what they didn’t know about end users by
using a barrage of marketing research methods, primarily customer panels, focus
groups, and large-scale customer surveys. The aim was not to learn about individual
customers but about large customer segments, such as “women ages 30 to 55.”
The exception occurred in business-to-business marketing, where each salesperson
knew each customer and prospect as an individual. Well-trained salespeople were
cognizant of each customer’s buying habits, preferences, and peculiarities. Even
here, however, much of this information was never codified. When a salesperson
retired or quit, the company lost a great deal of specific customer information. Only
more recently, with sales automation software and loyalty-building programs, have
business-to-business enterprises begun capturing detailed information about each
customer on the company’s mainframe computer.
As for the consumer market, interest in knowing consumers as individuals
lagged behind the business-to-business marketplace. The exception occurred with
direct mailers and catalog marketers who collected and analyzed data on individual

customers. Direct marketers purchased mailing lists and kept records of their trans-
actions with individual customers. The individual customer’s stream of transactions

xiv Foreword
provided clues as to other items that might interest that customer. For example, in
the case of consumer appliances, the company could at least know when a customer
might be ready to replace an older appliance with a new one if the price was right.
Getting Better at Consumer Marketing
With the passage of time, direct marketers became increasingly sophisticated. They
supplemented mail contact with the adroit use of the telephone and telemarketing.
The growing use of credit cards and customers’ willingness to give their credit card
numbers to merchants greatly stimulated direct marketing. The emergence of fax
machines further facilitated the exchange of information and the placing of orders.
Soon the Internet and e-mail provided the ultimate facilitation of direct marketing.
Customers could view products visually and verbally order them easily, receive
confirmation, and know when the goods would arrive. Now that experience is
enhanced by the way customers speak to one another. Even companies that don’t
really understand social networking realize they have to get on board. If 33 million
people are in a room, you have to visit that room.1
But whether a company was ready for customer relationship management depended
on more than conducting numerous transactions with individual customers. Companies
needed to build comprehensive customer databases. Companies had been maintaining
product databases, sales force databases, and dealer databases. Now they needed to
build, maintain, mine, and manage a customer database that could be used by company
personnel in sales, marketing, credit, accounting, and other company functions.
As customer database marketing grew, several different names came to describe

it, including individualized marketing, customer intimacy, technology-enabled mar-
keting, dialogue marketing, interactive marketing, permission marketing, and one-
to-one marketing.

Modern technology makes it possible for enterprises to learn more about indi-
vidual customers, remember those needs, and shape the company’s offerings, ser-
vices, messages, and interactions to each valued customer. The new technologies

make mass customization (otherwise an oxymoron) possible.
At the same time, technology is only a partial factor in helping companies do
genuine one-to-one marketing. The following quotes about customer relationship
marketing (CRM) make this point vividly:
CRM is not a software package. It’s not a database. It’s not a call center or a Web

site. It’s not a loyalty program, a customer service program, a customer acquisi-
tion program, or a win-back program. CRM is an entire philosophy.

—Steve Silver
1 Juliette Powell, 33 Million People in the Room (Upper Saddle River, NJ: Financial Times Press,
2009), pp. 8–9.

Foreword xv

A CRM program is typically 45 percent dependent on the right executive leader-
ship, 40 percent on project management implementation, and 15 percent on

technology.

—Edmund Thompson, Gartner Group
Whereas in the Industrial Age, companies focused on winning market share
and new customers, more of today’s companies are focusing on share of customer,
namely, increasing their business with each existing customer. These companies are
focusing on customer retention, customer loyalty, and customer satisfaction as the
important marketing tasks, and customer experience management and increasing
customer value as key management objectives.
CRM and its kindred customer-focused efforts are more than just an outgrowth
of direct marketing and the advent of new technology. This approach requires
new skills, systems, processes, and employee mind-sets. As the Interactive Age

progresses, mass marketing must give way to new principles for targeting, attract-
ing, winning, serving, and satisfying markets. As advertising costs have risen and

mass media has lost some effectiveness, mass marketing is now more costly and
more wasteful. Companies are better prepared to identify meaningful segments
and niches and address the individual customers within the targeted groups. They
are becoming aware, however, that many customers are uncomfortable about
their loss of privacy and the increase in solicitations by mail, phone, and e-mail.
Ultimately, companies will have to move from an “invasive” approach to prospects
and customers to a “permissions” approach. On the flip side, customers—now
in contact with millions of other customers—have never been more informed or
empowered.
The full potential of CRM is only beginning to be realized. Of course, every
company must offer great products and services. But now, rather than pursue all
types of customers at great expense only to lose many of them, the objective is to
focus only on those particular customers with current and long-term potential in
order to preserve and increase their value to the company.

Philip Kotler
S. C. Johnson Distinguished Professor of International Marketing,
Kellogg School of Management, Northwestern University

Philip Kotler is widely known as the father of modern marketing. His textbook Marketing

Management, coauthored with Kevin Keller, has become the foundational text for market-
ing courses around the globe. First published in 1976 by Prentice Hall, it is now in its 15th

edition.

xvii
Preface

n 1993 we published our first book, The One to One Future: Building Relation-
ships One Customer at a Time (New York: Currency/Doubleday). We had no way

of knowing how or when ubiquitous, cost-efficient interactivity would arrive, but

the march of technology was inevitable, and we felt strongly that genuinely interac-
tive media channels would become widely available sooner or later, in one form or

another. And when interactivity did arrive, we suggested, the nature of marketing
would have to change forever. At the time, marketing consisted primarily of crafting
outbound messages creative or noticeable enough to break through the clutter of
other one-way messages. These messages promoted standardized, mass-produced
products with unique selling propositions that appealed to the most commonly held
interests among the widest possible markets of consumers.

In sharp contrast to this model of marketing, we maintained that interactive tech-
nologies would compel businesses to try to build relationships with individual cus-
tomers, one customer at a time. To our minds, this new type of marketing—which we

dubbed “one-to-one marketing” or “1to1 marketing”—represented literally a different
dimension of competition. We predicted that in the one-to-one future, the battle for
market share would be supplemented by a battle for “share of customer”; product
management organizations would have to be altered to accommodate managing
individual customer relationships as well; and the decreasing returns of production
economics would be supplanted by increasing returns of relationship economics.
We did not know it at the time, but also in 1993, the first genuinely useful Web
browser, Mosaic, was introduced, and by the end of 1994, the World Wide Web had

begun making major inroads into business and academia. This meant that interactiv-
ity arrived even sooner than we had suspected it would, via a more robust, vibrant

technology than we anticipated. Over the next 10 years, our predictions about the
nature of marketing in an interactive world proved uncannily accurate, and we were
gratified at the popularity our little book enjoyed among the many marketers and
information technology professionals wrestling with the question of how, exactly,
to use this new capability for interacting with their customers on the Web. The
term one-to-one marketing was often used interchangeably with the easier-to-say
computer-industry acronym CRM, standing for “customer relationship management.”
Some think of CRM as a reference only to the software, but from our standpoint, the
1to1 rose smells as sweet by any other jargon.

xviii Preface
By the time the first edition of Managing Customer Relationships was written,
10 years later, many other academics, business consultants, and authorities had

become involved in analyzing, understanding, and profiting from the CRM revolu-
tion. Our goal with the first edition was to provide a comprehensive overview of the

background, methodology, and particulars of managing customer relationships for

competitive advantage. Although we significantly updated the material in the sec-
ond edition, and now again in this third edition, we believe the original approach

has in fact been confirmed. So we will begin with background and history, outline
the Identify-Differentiate-Interact-Customize (IDIC) framework, and then address
metrics, data management, customer management, and company organization.

Since our first edition of that first book came out, the steady march of technol-
ogy has continued to change the business environment, bringing us two particu-
larly important developments, each of which requires some treatment in this new

edition. One has to do with the increasing influence of social media—including
everything from blogging and microblogging to sharing and collaboration Web sites
such as Facebook, Twitter, LinkedIn, YouTube, Amazon, Instagram, and eBay. The
other has to do with the increasing proliferation of mobile devices and interactive
services for them, including not just broadband Wi-Fi at places like business hotels,

Starbucks, and McDonald’s, but smartphones that can surf the Web, keep your cal-
endar, deliver movies, and track your location, as well.

Over the past few years, there has also been a major change in the way busi-
nesses think about the process of value creation itself, given their new technological

capabilities to track and interact with customers, one at a time. Increasingly, compa-
nies are coming face-to-face with the question of how to optimize their businesses

around individual customers. When you think about it, this is the very central issue

when configuring a Web site, or when trying to design the work processes or script-
ing for a call center, or when outlining new procedures for sales reps or point-of-
sale operations. Each of these tasks involves optimizing around a customer, and

none of them can be completed adequately without answering the question, “What
is the right communication or offer for this customer, at this time?”
But a business can answer this kind of question accurately only by disregarding
its existing, product-based metrics and using customer-based metrics instead. This
is because the fundamental issue at stake is how to maximize the value a particular
customer creates for the enterprise, a task that contrasts sharply with the financial
objective of the old form of marketing (mass marketing), which was maximizing
the value that a particular product or brand created for the enterprise. So we have
considerably upgraded the financial issues we consider in the metrics discussion in
this edition of Managing Customer Experience and Relationships.
Among other things, we will suggest that a metric, Return on CustomerSM, is
sometimes more appropriate for gauging the degree to which a particular customer
or group of customers is generating value for a business. Return on investment (ROI)
measures the efficiency with which a business employs its capital to create value,
and Return on Customer (ROC) is designed to measure the efficiency with which it

Preface xix
employs its customers to create value. The ROC metric is simple to understand, in
principle, but it requires a sophisticated approach to comprehending and analyzing
customer lifetime values and customer equity. With the computer analytics available
today, however, this is no longer an insurmountable or even a particularly expensive
or difficult task. And this kind of customer-based financial metric will ensure that a
company properly uses customer value as the basis for executive decisions.1

In the years since the second edition of this book was released, we have contin-
ued to teach seminars and workshops at universities and in for-profit and nonprofit

organizations, and we have collaborated in depth with our own firm’s working
consultants in various Peppers & Rogers Group offices around the world, from
São Paulo to Dubai, and from London to Johannesburg. We have wrestled with
the serious, real-world business problems of taking a customer-centric approach to

business in different business categories, from telecom, financial services, and retail-
ing, to packaged goods, pharmaceuticals, and business to business. Over the years,

our experience in all these categories has reinforced our belief that the basic IDIC

model (identify, differentiate, interact, customize) for thinking about customer rela-
tionships is valid, practical, and useful, and that financial metrics based on customer

value make the most sense. And we have continued documenting these issues,
coauthoring a total of eight business trade books, in addition to this textbook.

The biggest change in this third edition, reflected in the title itself, is the addi-
tional consideration of the importance of the creation of better and more personal-
ized customer experiences. CX (customer experience) plays an increasingly greater

strategic role, and we’ve devoted much discussion to it, as well as to the idea of CX
journey mapping.
While we obviously know more about our own work than anyone else’s, and

this book draws heavily on our fairly extensive direct experience in the work envi-
ronment, we also continue to believe that a textbook like this should reflect some

of the excellent work done by others, which is substantial. So, as with the first two
editions, you will find much in this edition that is excerpted from others’ works or
written by others specifically for this textbook.
When it first appeared in 2004, Managing Customer Relationships was the first

book designed specifically to help the pedagogy of customer relationship manage-
ment, with an emphasis on customer strategies and building customer value. It is

because of the wonderful feedback we have had over the years with respect to its
usefulness for professors and students that we have undertaken this third edition.
And while we hope this revised work will continue to guide and teach our readers,
we also encourage our readers to continue to teach us. Our goal is not just to build
the most useful learning tool available on the subject but to continue improving it as
well. To that end, you may always contact us directly with suggestions, comments,
critiques, and ideas. Simply e-mail us at mr@mrogersphd.com.
1 Return on CustomerSM and ROCSM are trademarks of Peppers & Rogers Group.

xx Preface
How to Use This Book
Each chapter begins with an overview and closes with a summary (which is also
an explanation of how the chapter ties into the next chapter), Food for Thought (a
series of discussion questions), and a glossary. In addition, chapters include these
elements:
■ Glossary terms are printed in boldface the first time they appear in a chapter,
and their definitions are located at the end of that chapter. All of the glossary
terms are included in the index, for a broader reference of usage in the book.
■ Sidebars provide supplemental discussions and real-world examples of chapter
concepts and ideas. These are italicized in the Contents.
■ Contributed material is indicated by a shaded background, with contributor
names and affiliations appearing at the beginning of each contribution.
We anticipate that this book will be used in one of two ways: Some readers will
start at the beginning and read it through to the end. Others will keep it on hand
and use it as a reference book. For both readers, we have tried to make sure the
index is useful for searching by names of people and companies as well as terms,
acronyms, and concepts.
If you have suggestions about how readers can use this book, please share
those at mr@mrogersphd.com.

xxi
Acknowledgments

We started the research and planning for the first edition of this book in 2001.

Our goal was to provide a handbook/textbook for students of the customer-
centric movement to focus companies on customers and to build the value of an

enterprise by building the value of the customer base. We have made many friends
along the way and have had some interesting debates. We can only begin to scratch
the surface in naming those who have touched the current revision of this book and
helped to shape it into a tool we hope our readers will find useful.
We are honored to have contributed the royalties and proceeds from the sale
of this book to Duke University, where Martha has served as an adjunct professor.
Thanks to Dr. Julie Edell Britton, who team-taught the Managing Customer
Value course at Duke with Martha for many years, and to Rick Staelin, who has
always supported the work toward this textbook and the development of this field.

Additional thanks to all of the marketing faculty members at Duke, especially Chris-
tine Moorman, Wagner Kamakura, Carl Mela, and Dan Ariely, and all those who

have used and promoted the book and its topics.
The voices of the many contributors who have shared their viewpoints have
helped to make this book what it is; and you will see their names listed on the
contents pages and throughout the text. We thank each of you for taking the time to

participate in this project and to share your views and insights with students, profes-
sors, and other users of this book. And, as big as this book is, it is not big enough to

include formally all the great thinking and contributions of the many academicians

and practitioners who wrestle with deeper understanding of how to make compa-
nies more successful by serving customers better. We thank all of you, too, as well

as all those at dozens of universities who have used the first or second edition of the
book to teach courses, and all those who have used the book as a reference work
to try to make the world a better marketplace. Please keep us posted on your work!
This work has been greatly strengthened by the critiques from some of the most
knowledgeable minds in this field, who have taken the time to review the book

and share their insights and suggestions with us. This is an enormous undertak-
ing and a huge professional favor, and we owe great thanks to Becky Carroll, Jeff

Gilleland, Mary Jo Bitner, James Ward, Ray Burke, Anthony Davidson, Susan Geib,
Rashi Glazer, Jim Karrh, Neil Lichtman at NYU, Charlotte Mason, Janis McFaul, Ralph
Oliva, Phil Pfeifer, Marian Moore, David Reibstein, and Jag Sheth. Thanks to John

xxii Acknowledgments

Deighton, Jon Anton, Devavrat Purohit, and Preyas Desai for additional contribu-
tions, and we also appreciate the support and input from Mary Gros and Corinna

Gilbert. And thanks to Maureen Morrin and to Eric Greenberg at Rutgers, and to
John Westman, executive vice president of Novellus, Inc., and adjunct professor of
the Boston College Carroll School of Management.
Much of this work has been based on the experiences and learning we have
gleaned from our clients and the audiences we have been privileged to encounter
in our work with Peppers & Rogers Group. Dozens and dozens of the talented folks
who have been PRGers over the past years have contributed to our thinking—many
more than the ones whose citations appear within this book, and more than we
are able to list here. Our clients, our consulting partners and consultants, and our
analysts are the ones who demonstrate every day that building a customer-centric
company is difficult but doable and worthwhile financially. Special thanks go to
Hamit Hamutcu, Orkun Oguz, Caglar Gogus, Mounir Ariss, Ozan Bayulgen, Amine
Jabali, and Onder Oguzhan for their thinking and support. We also thank Tulay Idil,
Bengu Gun, and Aysegul Kuyumcu for research. And to Thomas Schmalzl, Annette
Webb, Mila D’Antonio, Elizabeth Glagowski, and Mike Dandrea of the 1to1 Media
team, our gratitude for a million things and for putting up with us generally. We
also appreciate the work Tom Lacki has done toward this book and our thinking, as
well as the work of Valerie Peck, Alan Pennington, and Deanna Lawrence. Special

additional thanks for ideas in the original edition that have survived to this ver-
sion to Elizabeth Stewart, Tom Shimko, Tom Niehaus, Abby Wheeler, Lisa Hayford-
Goodmaster, Lisa Regelman, and many other Peppers & Rogers Group alumni as

well as winners of the 1to1 Impact Awards and PRG/1to1 Customer Champions,
who are best in class at customer value building.

Plain and simple, we could not have gotten this book done without the lead-
ership and project management of Marji Chimes, the talented and intrepid leader

for years of 1to1 Media and an integral part of the success of Peppers & Rogers
Group, now a unit of Teletech, or the dedicated day-to-day help from Susan Tocco
and Lisa Troland. And the real secret sauce to finishing the many details has been
Amanda Rooker—a truly resourceful researcher and relentlessly encouraging and
gifted content editor, who has patiently and capably assisted in winding us through
the morass of secondary research and minutiae generated by a project of this scope.
Our editor at John Wiley & Sons, Sheck Cho, has been an enthusiastic supporter
of and guide for the project since day one. As always, thanks to our literary agent,
Rafe Sagalyn, for his insight and patience.

We thank the many professors and instructors who are teaching the first Cus-
tomer Strategy or CRM course at their schools and who have shared their course

syllabi. By so doing, they have helped us shape what we hope will be a useful book
for them, their students, and all our readers who need a ready reference as we all
continue the journey toward building stronger, more profitable, and more successful
organizations by focusing on growing the value of every customer.

xxiii
About the Authors

Don Peppers and Martha Rogers, Ph.D., are the founders of Peppers & Rogers
Group, a leading customer-centric management consulting firm with offices and
clients worldwide, and now a unit of TeleTech Holdings (TTEC). They have
developed many of the principles of the customer relationship management field.
They have been ranked by Satmetrix as the world’s #1 most influential authorities
on customer experience management. Peppers and Rogers were inducted into the
Direct Marketing Association Hall of Fame in 2013, and have received many other
accolades and awards.

Together, Peppers and Rogers have coauthored a legacy of international best-
sellers that have collectively sold well over a million copies in 18 languages. Peppers

and Rogers’s newest book, their ninth, is Extreme Trust: Turning Proactive Honesty
and Flawless Execution into Long-Term Profits, which debuted in a revised and
updated paperback in 2016. It suggests that social networks and rapidly increasing

transparency have combined to raise customer expectations regarding the trust-
worthiness of the companies and organizations they deal with. Rules to Break &

Laws to Follow, published in 2008, was named as the inaugural title to Microsoft’s
“Executive Leadership Series.” Among the other best-sellers authored by Peppers
and Rogers, their first—The One to One Future (1993)—was called “one of the two
or three most important business books ever written,” while BusinessWeek called it
the “bible of the customer strategy revolution,” and Tom Peters named it his choice
for “book of the year” in 1993. Enterprise One to One (1997) received a 5-star rating
from the Wall Street Journal. One to One B2B made the New York Times business
best-seller list within a month of its publication in 2001. Their 2005 book Return on

Customer was named one of the 15 “most important reads” of 2005 by Fast Com-
pany, and was cited again in 2007 on its list of the 25 “Best Books” in business.

Prior to founding Peppers & Rogers Group, Don Peppers served as the CEO
of a top-20 direct marketing agency, and his book Life’s a Pitch: Then You Buy

(1995) chronicles his exploits as a celebrated new-business rainmaker in the adver-
tising industry. He holds degrees in astronautical engineering from the Air Force

Academy and in public affairs from Princeton University’s Woodrow Wilson School.
Peppers also has a popular voice in the business media and is a top “INfluencer”
on LinkedIn, with well over a quarter million followers for his regular blog posts on
innovation, technology, trust, corporate culture, and customer experience.

xxiv About the Authors
Martha Rogers is the founder of Trustability Metrix, a firm designed to help

companies understand how to measure and improve their levels of trust by custom-
ers, employees, and business partners. After a career in advertising copywriting and

management, Rogers has taught at several universities, most recently as an adjunct
professor at the Fuqua School of Business at Duke University, where she co-directed

the Teradata Center for Customer Strategy. Rogers has been widely published in aca-
demic and trade journals, including Harvard Business Review, Journal of Advertising

Research, Journal of Public Policy and Marketing, and Journal of Applied Psychol-
ogy. She has been named International Sales and Marketing Executives’ Educator of

the Year. Rogers earned her Ph.D. at the University of Tennessee as a Bickel fellow.

1
Part I

Principles of Managing Customer
Experience and Relationships

The Learning Relationship works like this: If you’re my customer and I get you
to talk to me, and I remember what you tell me, then I get smarter and smarter
about you. I know something about you my competitors don’t know. So I can do
things for you my competitors can’t do, because they don’t know you as well as I
do. Before long, you can get something from me you can’t get anywhere else, for
any price. At the very least, you’d have to start all over somewhere else, but starting
over is more costly than staying with me, so long as you like me and trust me to
look out for your best interests.

3
Chapter 1

Evolution of Relationships
with Customers and Strategic
Customer Experiences

No company can succeed without customers. If you don’t have customers, you
don’t have a business. You have a hobby.

—Don Peppers and Martha Rogers

Think about it: By definition, customers are every company’s source of revenue.
No company will ever realize income from any other entity except the customers
it has now and the customers it will have in the future. Brands don’t pay money.
Products don’t. Sales regions don’t. Thus, in many ways, a firm’s most valuable

financial asset is its customer base, and, given our new and unfolding techno-
logical capabilities to recognize, measure, and manage relationships with each of

those customers individually, and to create and improve their experiences with
our companies, a forward-thinking firm must focus on deliberately preserving and
increasing the value of that customer base. Customer strategy is not a fleeting

assignment for the marketing department; rather, it is an ongoing business impera-
tive that requires the involvement of the entire enterprise. Organizations manage

their customer experiences and relationships effectively in order to remain com-
petitive. Technological advancements have enabled firms to manage customer

relationships more efficiently and to create better customer experience, but
technology has also empowered customers to inform themselves and one another
and to demand much more from the companies they do business with. The goal
of this book is not just to acquaint the reader with the techniques of managing
customer experiences and relationships. The more ambitious goal of this book is
to help the reader understand the essence of customer strategy and how to apply
it to the task of managing a successful enterprise in the twenty-first century.

4 Principles of Managing Customer Experience and Relationships
The dynamics of the customer-enterprise relationship have changed dramatically
over time. Customers have always been at the heart of an enterprise’s long-term
growth strategies, marketing and sales efforts, product development, labor and
resource allocation, and overall profitability directives. Historically, enterprises have
encouraged the active participation of a sampling of customers in the research and
development of their products and services. But until recently, enterprises have
been structured and managed around the products and services they create and
sell. Driven by assembly-line technology, mass media, and mass distribution, which

appeared at the beginning of the twentieth century, the Industrial Age was domi-
nated by businesses that sought to mass-produce products and to gain a competitive

advantage by manufacturing a product that was perceived by most customers as
better than its closest competitor. Product innovation, therefore, was the important
key to business success. To increase its overall market share, the twentieth-century
enterprise would use mass marketing and mass advertising to reach the greatest
number of potential customers.
As a result, most twentieth-century products and services eventually became
highly commoditized. Branding emerged to offset this perception of being like all
the other competitors; in fact, branding from its beginning was, in a way, an
expensive substitute for relationships companies could not have with their newly
blossomed masses of customers. Facilitated by lots and lots of mass-media
advertising, brands have helped add value through familiarity, image, and trust.
Historically, brands have played a critical role in helping customers distinguish
what they deem to be the best products and services. A primary enterprise goal has
been to improve brand awareness of products and services and to increase brand
preference and brand loyalty among consumers. For many consumers, a brand
name has traditionally testified to the trustworthiness or quality of a product or
service. Today, though, more and more, customers say they value brands, but their
opinions are based on their “relationship with the brand”—so brand reputation is
actually becoming one and the same with customers’ experience with the brand,
product, or company (including relationships).1

Indeed, consumers are often con-
tent as long as they can buy one brand of a consumer-packaged good that they

know and respect.

1Christof Binder and Dominique M. Hanssens, “Why Strong Customer Relationships
Trump Powerful Brands,” Harvard Business Review, April 14, 2015, available at https://hbr.
org/2015/04/why-strong-customer-relationships-trump-powerful-brands, reports research on
brand valuation of a company at the time of merger or acquisition. They discovered that
over a 10-year period from 2003 to 2013, “brand valuations declined by nearly half (from

18 percent to 10 percent [of total company value]) while customer relationship values dou-
bled (climbing from 9 percent to 18 percent). Acquirers have decisively moved from investing

into businesses with strong brands to businesses with strong customer relationships.” See
also Anita Chang Beattie, “Catching the Eye of the Chinese Shopper,” Advertising Age 83, no.
44 (2012), p. 20; and Masaaki Kotabe’s chapter, “Emerging Markets,” in Marketing in the 21st
Century: New World Marketing, ed. Bruce David Keillor (Westport, CT: Praeger, 2007).

Chapter 1: Evolution of Relationships with Customers and Strategic Customer Experiences 5

For many years, enterprises depended on gaining the competitive advantage
from the best brands. Brands have been untouchable, immutable, and infl exible
parts of the twentieth-century mass-marketing era. But in the interactive era
of the twenty-fi rst century, enterprises are instead strategizing how to gain
sustainable competitive advantage from “brands” that create the best customer
experience, based on the information they gather about customers.

twenty-fi rst century, fi rms are instead strategizing how to gain sustainable competi-
tive advantage from the information they gather about customers. As a result, enter-
prises are creating a two-way brand, one that thrives on customer information and

interaction. The two-way brand, or branded relationship, transforms itself based on

the ongoing dialogue between the enterprise and the customer. The branded rela-
tionship is “aware” of the customer (giving new meaning to the term brand aware-
ness ) and constantly changes to suit the needs of that particular individual. In current

discussions, the focus is on ways to redefi ne the “brand reputation” as more customer

oriented, using phrases such as “brand engagement with customer,” “brand relation-
ship with customer,” and the customer’s “brand experience.” Add to this the trans-
parency for brands and rampant ratings for products initiated by social media, and

it’s clear why companies are realizing that what customers say about them is more
important than what the companies say about themselves.
roots of Customer relationships and experience
Once you strip away all the activities that keep everybody busy every day, the goal

of every enterprise is simply to get, keep, and grow customers. This is true for non-
profi ts (where the “customers” may be donors or volunteers) as well as for-profi ts, for

small businesses as well as large, for public as well as private enterprises. It is true for
hospitals, governments, universities, and other institutions as well. What does it mean

for an enterprise to focus on its customers as the key to competitive advantage? Obvi-
ously, it does not mean giving up whatever product edge or operational effi ciencies

might have provided an advantage in the past. It does mean using new strategies,
nearly always requiring new technologies, to focus on growing the value of the
company by deliberately and strategically growing the value of the customer base.
What does it mean for an enterprise to focus on its customers as the key to
competitive advantage? It means creating new shareholder value by deliberately
preserving and growing the value of the customer base.

6 Principles of Managing Customer Experience and Relationships
To some executives, customer relationship management (CRM) is a
technology or software solution that helps track data and information about
customers to enable better customer service. Others think of CRM, or one-to-one,
as an elaborate marketing or customer service discipline. We even recently heard
CRM described as “personalized e-mail.”
To us, “managing customer experience and relationships” is what companies
do to optimize the value of each customer, and “managing customer experiences”
is what companies do because they understand the customer’s perspective and
what it is—and should be—like to be our customer. This book is about much
more than setting up a business Web site or redirecting some of the mass-media
budget into the call-center database or cloud analytics or social networking. It’s
about increasing the value of the company through specific customer strategies
(see Exhibit 1.1).

Companies determined to build successful and profitable customer relation-
ships understand that the process of becoming an enterprise focused on building its

value by building customer value doesn’t begin with installing technology, but
instead begins with:
■ A strategy or an ongoing process that helps transform the enterprise from
a focus on traditional selling or manufacturing to a customer focus while
increasing revenues and profits in the current period and the long term.

■ The leadership and commitment necessary to cascade throughout the organiza-
tion the thinking and decision-making capability that puts customer value and

relationships first as the direct path to increasing shareholder value.
The reality is that becoming a customer-strategy enterprise is about using
information to gain a competitive advantage and deliver growth and profit. In its

Exhibit 1.1 Increasing the Value of the Customer Base

Keep
Get

Grow

Acquire profitable customers.
Retain profitable customers longer.
Win back profitable customers.
Eliminate unprofitable customers.

Upsell additional products in a solution.
Cross-sell other products to customers.
Referral and word-of-mouth benefits.
Reduce service and operational costs.

Chapter 1: Evolution of Relationships with Customers and Strategic Customer Experiences 7
most generalized form, CRM can be thought of as a set of business practices designed,
simply, to put an enterprise into closer and closer touch with its customers, in
order to learn more about each one and to
deliver greater and greater value to each one,
with the overall goal of making each one
more valuable to the firm to increase the

value of the enterprise. It is an enterprise-
wide approach to understanding and influ-
encing customer behavior through meaningful

analysis and communications to improve cus-
tomer acquisition, customer retention, and

customer profitability.2 Customer centricity
is distinguishable from product centricity and
from technology centricity. These differences
will be discussed more in Exhibit 1.3 later in
this chapter.

Defined more precisely, what makes cus-
tomer centricity into a truly different model for

doing business and competing in the market-
place, is this: It is an enterprise-wide business

strategy for achieving customer-specific objec-
tives by taking customer-specific actions. It is

2Peter Fader, Customer Centricity: Focus on the Right Customers for Strategic Advantage,
Wharton Executive Essentials, 2nd ed., 2012 (1st ed., 2011); Ju-Yeon Lee, Shrihari Sridhar,
Conor Henderson, and Robert W. Palmatier, Effect of Customer-Centric Structure on Firm
Performance, Marketing Science Institute Working Paper Series, Report No. 12–111, available
at http://www.lehigh.edu/~incbeug/Attachments/Lee%20et%20al%202012%20MSI_Report.pdf,
accessed February 3, 2016; Erik M. van Raaij, “The Strategic Value of Customer Profitability
Analysis,” Marketing Intelligence & Planning 23, no. 4/5 (2005): 372–381, accessed January 28,
2010, available at ABI/INFORM Global (document ID: 908236781); Sunil Gupta and Donald
R. Lehmann, Managing Customers as Investments (Philadelphia: Wharton School Publishing,
2005); Robert S. Kaplan, “A Balanced Scorecard Approach to Measure Customer Profitability,”
Harvard Business School’s Working Knowledge Web site, August 8, 2005, available at: http://
hbswk.hbs.edu/item/4938.html, accessed January 28, 2010; Phillip E. Pfeifer, Mark E. Haskins,
and Robert M. Conroy, “Customer Lifetime Value, Customer Profitability, and the Treatment of
Acquisition Spending,” Journal of Managerial Issues 17, no. 1 (Spring 2005): 11–25; George S.
Day, Market-Driven Strategy: Processes for Creating Value (New York: Free Press, 1999); Don
Peppers and Martha Rogers, The One to One Future (New York: Doubleday Books, 1993);

Ronald S. Swift, Accelerating Customer Relationships: Using CRM and Relationship Technolo-
gies (Upper Saddle River, NJ: Prentice Hall, 2001); Fred Reichheld, The Loyalty Effect (Boston:

Harvard Business School Press, 1996); and Fred Reichheld and Rob Markey, The Ultimate
Question 2.0: How Net Promoter Companies Thrive in a Customer Driven World (Cambridge,
MA: Harvard Business Review Press, 2011).

Enterprises determined to build
successful, profitable customer
relationships understand that the process
of becoming an enterprise focused on
building its value by building customer

value doesn’t begin with installing tech-
nology but rather begins with:

▪ A strategy or an ongoing process
that helps transform the enterprise
from a focus on traditional selling or
manufacturing to a customer focus
while increasing revenues and profits in
the current period and the long term.
▪ The leadership and commitment
necessary to cascade throughout
the organization the thinking and
decision-making capability that put
customer value and relationships first

as the direct path to increasing share-
holder value.

8 Principles of Managing Customer Experience and Relationships
enterprise-wide because it can’t merely be assigned to marketing if it is to have any
hope of success. Its objectives are customer-specific because the goal is to increase
the value of each customer. Therefore, the firm will take customer-specific actions for
each customer, often made possible by new technologies.

In essence, building the value of the cus-
tomer base requires a business to treat differ-
ent customers differently. Today, there is a

customer-focus revolution under way among
businesses. It represents an inevitable—

literally, irresistible—movement. All busi-
nesses will be embracing customer strategies sooner or later, with varying degrees of

enthusiasm and success, for two primary reasons:
1. All customers, in all walks of life, in all industries, all over the world, want to be
individually and personally served.
2. It is simply a more efficient way of doing business.
We find examples of customer-specific behavior, and business initiatives driven
by customer-specific insights, all around us today3
:

■ An airline offers a passenger in the airport waiting for his flight to arrive an
upgrade offer to business class through a phone app he has used to check his
flight status, as an apology for a 45-minute departure delay.
■ A woman receives an e-mail before her eight-month obstetrics appointment
that gives information about what to expect at the appointment and her baby’s
stage of growth. A month later, the same woman receives a notification of her
baby’s immunization appointment that is triggered when she leaves the hospital
with her newborn.
■ A retail clothes company sends a message to a customer it knows is standing
outside one of their stores to come in and use a 15 percent discount, sometimes
with a sweetener such as free shipping. Or the items appear as a reminder next
to the newspaper articles the shopper reads next morning.
■ A business sees that a customer has left their Web site, abandoning a cart with
selected products before checkout, and sends an e-mail with more detailed
information about those specific products to the customer the next day.
■ An outdoor gear company sees that their tents are being discussed on a social
channel and sends a free tent as a trial sample to a consistent product supporter.
■ A group of three friends open the Web page of the same kitchenware company
that they all have ordered from in the past. Each friend views a different offer
featured on the company home page on her device.
An enterprise-wide business strategy
for customer centricity achieves
customer-specific objectives by taking
customer-specific actions.

3 Thanks to the SalesForce Marketing Cloud Web site for inspiring many of these examples;
available at http://www.salesforce.com/marketing-cloud/overview/, accessed December 4, 2015.

Chapter 1: Evolution of Relationships with Customers and Strategic Customer Experiences 9
■ A customer service representative sees a complaint a customer has made on a
social channel and is able to view at the same time his purchasing history and
order status. The service rep uses that information to reply to the complaint via
the same social channel.
■ Instead of mailing out the same offer to everyone, a company waits for specific
trigger behavior from a customer and increases response rates 25-fold.
■ An insurance company not only handles a claim for property damage but also
connects the insured party with a contractor in her area who can bypass the
purchasing department and do the repairs directly.
■ A supervisor orders more computer components by going to a Web page that
displays his firm’s contract terms, his own spending to date, and his departmental
authorizations.
■ Sitting in the call center, a service rep sees a “smart dialogue” suggestion
pop onto a monitor during a call with a customer, suggesting a question the
company wants to ask that customer (not the same question being asked of all
customers who call this week).
Taking customer-specific action, treating different customers differently,
improving each customer’s experience with the company or product, building the

value of the customer base, creating and managing relationships with individual cus-
tomers that go on through time to get better and deeper—that’s what this book is

about. In the chapters that follow, we will look at lots of examples. The overall busi-
ness goal of this strategy is to make the enterprise as profitable as possible over time

by taking steps to increase the value of the customer base. The enterprise makes
itself, its products, and/or its services so satisfying, convenient, or valuable to the

customer that she becomes more willing to devote her time and money to this enter-
prise than to any competitor. Building the value of customers increases the value of

the demand chain, the stream of business that flows from the customer down
through the retailer all the way to the manufacturer. A customer-strategy enterprise
interacts directly with an individual customer. The customer tells the enterprise about
how he would like to be served. Based on this interaction, the enterprise, in turn,
modifies its behavior with respect to this particular customer. In essence,
the concept implies a specific, one-customer-to-one-enterprise relationship, as is the
case when the customer’s input drives the enterprise’s output for that particular
customer.4
A suite of buzzwords have come to surround this endeavor: customer relationship
management (CRM), one-to-one marketing, customer experience management,
4 Ranjay Gulati, “From Inside-Out to Outside-In Thinking,” Economic Times, May 10, 2013,

available at http://ranjaygulati.com/rg/images/the-economic-times_from-inside-out-to-inside-
in-thinking.pdf, accessed on February 3, 2016. Also see Ranjay Gulati, “The Quest for Cus-
tomer Focus,” Harvard Business Review 83, no. 4 (April 2005): 92–101. Also see Don Peppers

and Martha Rogers, Ph.D., One to One B2B (New York: Doubleday Broadway Books, 2001).

10 Principles of Managing Customer Experience and Relationships
customer value management, customer focus, customer orientation, customer
centricity, customer experience journey mapping, and more. You can see it in
the titles on the business cards: Chief Marketing Officer, of course, but also a host
of others, including “Chief Relationship Officer,” “Customer Care Leader,” “Customer
Value Management Director,” and even “Customer Revolutionary” at one firm. Like
all new initiatives, this customer approach (different from the strictly financial
approach or product-profitability approach of the previous century) suffers when it
is poorly understood, improperly applied, and incorrectly measured and managed.
But by any name, strategies designed to build the value of the customer base by
building relationships with one customer at a time, or with well-defined groups of
identifiable customers, are by no means ephemeral trends or fads any more than
computers or connectivity are.
A good example of a business offering that benefits from individual customer
relationships can be seen in online banking services, in which a consumer spends
several hours, usually spread over several sessions, setting up an online account and
inputting payee addresses and account numbers, in order to be able to pay bills
electronically each month. If a competitor opens a branch in town offering slightly
lower checking fees or higher savings rates, this consumer is unlikely to switch
banks. He has invested time and energy in a relationship with the first bank, and it
is simply more convenient to remain loyal to the first bank than to teach the second
bank how to serve him in the same way. In this example, it should also be noted
that the bank now has increased the value of the customer to the bank and has
simultaneously reduced the cost of serving the customer, as it costs the bank less to
serve a customer online than at the teller window or by phone.
Clearly, “customer strategy” involves much more than marketing, and it cannot
deliver optimum return on investment of money or customers without integrating
individual customer information into every corporate function, from customer
service to production, logistics, and channel management. A formal change in the
organizational structure usually is necessary to become an enterprise focused on

growing customer value. As this book shows, customer strategy is both an opera-
tional and an analytical process. Operational CRM focuses on the software

installations and the changes in process affecting the day-to-day operations of a
firm—operations that will produce and deliver different treatments to different
customers. Analytical CRM focuses on the strategic planning needed to build
customer value as well as the cultural, measurement, and organizational changes
required to implement that strategy successfully.
Focusing on Customers Is New to Business Strategy
The move to a customer-strategy business model has come of age at a critical
juncture in business history, when managers are deeply concerned about declining

customer loyalty as a result of greater transparency and universal access to informa-
tion, declining trust in many large institutions and most businesses, and increasing

Chapter 1: Evolution of Relationships with Customers and Strategic Customer Experiences 11
choices for customers. As customer loyalty decreases, profi t margins decline, too,

because the most frequently used customer acquisition tactic is price cutting. Enter-
prises are facing a radically different competitive landscape as the information about

their customers is becoming more plentiful and as the customers themselves are
demanding more interactions with companies and creating more connections with
each other. Thus, a coordinated effort to get, keep, and grow valuable customers
has taken on a greater and far more relevant role in forging a successful long-term,
profi table business strategy.

If the last quarter of the twentieth century heralded the dawn of a new com-
petitive arena, in which commoditized products and services have become less reli-
able as the source for business profi tability and success, it is the new computer

technologies and applications that have arisen that assist companies in managing

their interactions with customers. These technologies have spawned enterprise-
wide information systems that help to harness information about customers, analyze

the information, and use the data to serve customers better. Technologies such as
enterprise resource planning (ERP) systems, supply chain management (SCM)
software, enterprise application integration (EAI) software, data warehousing,
sales force automation (SFA), marketing resource management (MRM), and a
host of other enterprise software applications have helped companies to
mass-customize their products and services, literally delivering individually
confi gured communications, products, or services to unique customers in response
to their individual feedback and specifi cations.
The accessibility of the new technologies is motivating enterprises to reconsider
how they develop and manage customer relationships and map the customer

experience journey. More and more chief executive offi cers (CEOs) of leading enter-
prises have made the shift to a customer-strategy business model a top business

priority for the twenty-fi rst century. Technology is making it possible for enterprises
to conduct business at an intimate, individual customer level. Indeed, technology is
driving the shift. Computers can enable enterprises to remember individual customer
needs and estimate the future potential revenue the customer will bring to the
enterprise. What’s clear is that technology is the enabler; it’s the tail , and the
one-to-one customer relationship is the dog.

traditional Marketing redux
Historically, traditional marketing efforts have centered on the “four Ps”—
product, price, promotional activity, and place—popularized by marketing
experts E. Jerome McCarthy a

and Philip Kotler. These efforts have been
enhanced by our greater (and deeper) understanding of consumer behavior,
organizational behavior, market research, segmentation, and targeting. In other
(continued)

12 principles of Managing Customer experience and relationships

words, using traditional sampling and aggregate data, a broad understanding of
the market has preceded the application of the four Ps, which enterprises have
deployed in their marketing strategy to bring uniform products and services to
the mass market for decades. b In essence, the four Ps are all about the “get” part
of “get, keep, and grow customers.” These terms have been the focal point for

building market share and driving sales of products and services to consum-
ers. The customer needed to believe that the enterprise’s offerings would be

superior in delivering the “four Cs”: customer value, lower costs, better conve-
nience, and better communication. c

Marketing strategies have revolved around
targeting broadly defi ned market segments through heavy doses of advertising
and promotion.
This approach fi rst began to take shape in the 1950s. Fast-growing living
standards and equally fast-rising consumer demand made organizations aware
of the effectiveness of a supply-driven marketing strategy. By approaching the
market on the strength of the organization’s specifi c abilities, and creating a
product supply in accordance with those abilities, it was possible for the fi rm
to control and guide the sales process. Central to the strategic choices taken
in the area of marketing were the—now traditional—marketing instruments of
product, price, place, and promotion—the same instruments that served as the
foundation for Philip Kotler’s theory and the same instruments that still assume
an important role in marketing and customer relations today.

The four Ps all, of course, relate to the aggregate market rather than to indi-
vidual customers. The market being considered could be a large mass market or

a smaller niche market, but the four Ps have helped defi ne how an enterprise
should behave toward all the customers within the aggregate market:
1. Product is defi ned in terms of the average customer—what most members
of the aggregate market want or need. This is the product brought to
market, and it is delivered the same way for every customer in the market.
The defi nition of product extends to standard variations in size, color,
style, and units of sale as well as customer service and aftermarket service
capabilities.
2. Place is a distribution system or sales channel. How and where is the product

sold? Is it sold in stores? By dealers? Through franchisees? At a single loca-
tion or through widely dispersed outlets, such as fast-food stores and ATMs?

Can it be delivered directly to the purchaser?
3. Price refers not only to the ultimate retail price a product brings but also to
intermediate prices, beginning with wholesale; and it takes account of the
availability of credit to a customer and the prevailing interest rate. The price
is set at a level designed to “clear the market,” assuming that everyone will
pay the same price—which is only fair because everyone will get the same
(Continued)

Chapter 1: Evolution of Relationships with Customers and Strategic Customer Experiences 13

product. And even though different customers within a market actually have

different levels of desire for the same product, the market price will gener-
ally be the same for everybody.

4. Promotion has also worked traditionally in a fundamentally nonaddress-
able, noninteractive way. The various customers in a mass market are all

passive recipients of the promotional message, whether it is delivered
through mass media or interpersonally, through salespeople. Marketers
have traditionally recognized the trade-off between the cost of delivering
a message and the benefi t of personalizing it to a recipient. A sales call
can cost between $300 and $500 (a 2012 Center for Exhibition Industry
Research study put the average cost of a business-to-business [B2B] sales
call at $596), d

but at least it allows for the personalization of the promotion
process. The CPM or cost per thousand to reach an audience through mass
media is far lower but requires that the same message be sent to everyone.
Ultimately, the way a product is promoted is designed to differentiate it
from all the other, competitive products. Except for different messages
aimed at different segments of the market, promotion doesn’t change by
customer but by product.
initial assessment: Where is a Firm on the Customer Strategy Map?
Recognizing that two families of technology have mandated the competitive
approach of building customer value by building customer relationships, we can
map any organization—large or small, public or private, profi t or nonprofi t—by

the level of its capabilities in the arenas of interacting with customers and tailor-
ing for them. A company would be rated high on the interactivity dimension if

it knows the names of its individual customers and if it can send different mes-
sages to different customers and can remember the feedback from each one. A

low rating would go to a company that doesn’t know its customers’ identities
or does but continues to send the same message the same way to everybody.
On the tailoring dimension, a fi rm would rate highly if it mass-customizes in lot
sizes of one; it would rate low if it sells the same thing pretty much the same
way to everybody. Based on its rating in these two dimensions, a company can
be pinpointed on the Enterprise Strategy Map (see Exhibit 1.2 ).
Quadrant I: Traditional Mass Marketing. Companies that compete primarily

on cost effi ciencies based on economies of scale and low price. Com-
panies in this quadrant are doomed to commoditization and price

competition.
Quadrant II: Niche Marketing. Companies that focus on target markets, or
niches, and produce goods and services designed for those defi ned
(continued)

14 principles of Managing Customer experience and relationships

customer groups. This more strategic and targeted method of mass mar-
keting still offers the same thing the same way to everyone, but for a

small, relatively homogeneous group.

Quadrant III: Database Marketing. Companies utilize database manage-
ment to get better, more effi cient use of their mailing lists and other

customer information. Generally focused primarily on continuation of
traditional strategies but at lower costs to serve.

Quadrant IV: Learning Relationships based on individual analytics. Com-
panies use data about customers to predict what each one needs next

and then are able to treat different customers differently and increase
mutual value with customers.
In Quadrants I through III, the focus is still primarily on the product to be
sold, with an eye to fi nding customers for that product. In Quadrant IV, the

direction of the strategy changes; the Quadrant IV company focuses on a cus-
tomer and fi nds products for that customer.

To realize the highest possible return on the customer base, the goal of an
enterprise will be to move up and to the right on the Enterprise Strategy Map.
exhibit 1.2 Enterprise Strategy Map
Source: Don Peppers and Martha Rogers, Ph.D., Enterprise One to One (New York:
Doubleday/Currency, 1997).
(Continued)

Chapter 1: Evolution of Relationships with Customers and Strategic Customer Experiences 15

■ To move up on the Enterprise Strategy Map, an enterprise has to be able
to recognize individual customers’ names and addresses, to send different
messages to different customers, and to remember the responses of each.
■ To move to the right on the Enterprise Strategy Map, an enterprise has to

be able to increase its production and logistics fl exibility. The most fl ex-
ible production would entail customizing and delivering individual prod-
ucts for individual customers. The least fl exible would be mass-producing

a standardized product or service for a large market. (We talk more about
customization in Chapter 10 .)
a E. Jerome McCarthy, Basic Marketing: A Managerial Approach (Homewood, IL: Irwin, 1958). b Philip Kotler, Marketing Management: Analysis, Planning, Implementation, and Control ,
9th ed. (Upper Saddle River, NJ: Prentice Hall, 1997), pp. 92–93.
c Philip Kotler, Kotler on Marketing (New York: Free Press, 1999), pp. 116–120. d Bloomberg Business, “Sales Moves Beyond Face-to-Face Deals onto the Web,” January

10, 2013, available at: http://www.bloomberg.com/bw/articles/2013–01–10/sales-moves-
beyond-face-to-face-deals-onto-the-web ; “The Cost of a Sales Call,” 4D Sales, accessed

February 3, 2016, available at: http://4dsales.com/the-cost-of-a-sales-call/ , accessed Feb-
ruary 3, 2016.

Managing Customer relationships and experience is a
Different Dimension of Competition
The story goes that in 1996, the executives at Barnes & Noble bookstores invited Jeff
Bezos, the founder of a startup named Amazon.com , to lunch, with a proposition.
Amazon.com had not yet made any profi t (and would not, for its fi rst 28 quarters in
a row), so the nice guys at the well-established bookstore offered, as a favor to Jeff,
to buy him out—before they launched barnesandnoble.com , the online version of
the bookstore chain. They argued that Jeff’s relatively unknown brand would not
stand up to their highly popular name and that he should make some money on his
software and systems. He declined.
How did that turn out? Twenty years after that lunch meeting, in 2016, Barnes
& Noble had a market cap of US$667 million and Amazon.com had a market cap of
US$323 billion. 5

So whether the lunch ever really took place or not, the story still

serves to illustrate the fundamental difference between a very well run product-
oriented company (Barnes & Noble, which has stores to populate with products and

tries to fi nd customers for those products) and a fairly well run customer-oriented
company (Amazon.com, which got us all as customers to buy books and DVDs, and
now wants to sell each of us everything). Note: One of the authors, who lives in
New York City, found the best selection and service from Amazon.com for a
refrigerator bought for and installed in an Upper West Side apartment.
5 NYSE BKS, NASDAQ AMZN, accessed January 2, 2016.

16 Principles of Managing Customer Experience and Relationships
A lot can be understood about how traditional, market-driven competition is
different from today’s customer-driven competition by examining Exhibit 1.3. The
direction of success for a traditional aggregate-market enterprise (i.e., a traditional
company that sees its customers in markets of aggregate groups) is to acquire more

customers (widen the horizontal bar), whereas the direction of success for the cus-
tomer-driven enterprise is to keep customers longer and grow them bigger (lengthen

the vertical bar). The width of the horizontal bar can be thought of as an enterprise’s
market share—the proportion of total customers who have their needs satisfied by
a particular enterprise, or the percentage of total products in an industry sold by this
particular firm. But the customer-value enterprise focuses on share of customer—
the percentage of this customer’s business that a particular firm gets—represented
by the height of the vertical bar. Think of it this way: Kellogg’s can either sell as
many boxes of Corn Flakes as possible to whomever will buy them, even though

sometimes Corn Flakes will cannibalize Raisin Bran sales, or Kellogg’s can concen-
trate on making sure its products are on Mrs. Smith’s breakfast table every day for

the rest of her life, and thus represent a steady or growing percentage of that break-
fast table’s offerings. Toyota can try to sell as many Camrys as possible, for any

price, to anyone who will buy; or it can, by knowing Mrs. Smith better, make sure
all the cars in Mrs. Smith’s garage are Toyota brands, including the used car she buys
for her teenage son, and that Mrs. Smith uses Toyota financing, and gets her service,
maintenance, and repairs at Toyota dealerships throughout her driving lifetime.

Although the tasks for growing market share are different from those for build-
ing share of customer, the two strategies are not antithetical. A company can simul-
taneously focus on getting new customers and growing the value of and keeping

Product Centricity
Market share

Customer
Needs

Customers Reached
Share of
customer
Customer Centricity

Maximizing the value created by
each product
Maximizing the value created by
each customer

Exhibit 1.3 Objective of Customer Centricity

Chapter 1: Evolution of Relationships with Customers and Strategic Customer Experiences 17
the customers it already has.6

Customer-strategy enterprises are required to interact
with a customer and use that customer’s feedback from this interaction to deliver a
customized product or service. Market-driven efforts can be strategically effective

and even more efficient at meeting individual customer needs when a customer-
specific philosophy is conducted on top of them. The customer-driven process is

time-dependent and evolutionary, as the product or service is continuously fine-
tuned and the customer is increasingly differentiated from other customers.

The principles of a customer-focused business model differ in many ways from
mass marketing. Specifically:
The aggregate-market enterprise competes by differentiating products, whereas
the customer-driven enterprise competes by differentiating customers.
The traditional, aggregate-market enterprise attempts to establish an actual
product differentiation (by launching new products or modifying or extending

established product lines) or a perceived one (with advertising and public rela-
tions). The customer-driven enterprise caters to one customer at a time and relies on

differentiating each customer from all the others.
The traditional marketing company, no matter how friendly, ultimately sees
customers as adversaries, and vice versa. The company and the customer play a
zero-sum game: If the customer gets a discount, the company loses profit margin.
Their interests have traditionally been at odds: The customer wants to buy as much
product as possible for the lowest price, while the company wants to sell the least

product possible for the highest price. If an enterprise and a customer have no rela-
tionship prior to a purchase, and they have no relationship following it, then their

entire interaction is centered on a single, solitary transaction and the profitability of
that transaction. Thus, in a transaction-based, product-centric business model, buyer
and seller are adversaries, no matter how much the seller may try not to act the part.
In this business model, practically the only assurance a customer has that he can
trust the product and service being sold to him is the general reputation of the
brand itself.7
By contrast, the customer-based enterprise aligns customer collaboration with
profitability. Compare the behaviors that result from both sides if each transaction

occurs in the context of a longer-term relationship. For starters, a one-to-one enter-
prise would likely be willing to fix a problem raised by a single transaction at a loss

if the relationship with the customer were profitable long term (see Exhibit 1.4).
6 Srividya Sridharan, “Evolve Your Approach to Acquisition and Retention,” Forrester Research,

Inc., December 12, 2012, available at www.forrester.com. Also see George S. Day, Market-
Driven Strategy: Processes for Creating Value (New York: Free Press, 1999), for a useful dis-
cussion of the difference between “market-driven” and “market-driving” strategies.

7 Marco Bertini and John T. Gourville, “Pricing to Create Shared Value,” Harvard Business
Review, June 2012, available at https://hbr.org/2012/06/pricing-to-create-shared-value,
accessed February 3, 2016; Don Peppers and Martha Rogers, Ph.D., The One to One Manager
(New York: Doubleday, 1999).

18 Principles of Managing Customer Experience and Relationships

The central purpose of managing cus-
tomer relationships and experiences is for

the enterprise to focus on increasing the

overall value of its customer base—and cus-
tomer retention is critical to its success.

Increasing the value of the customer base,

whether through cross-selling (getting cus-
tomers to buy other products and services),

upselling (getting customers to buy more expensive offerings), or customer referrals,
will lead to a more profitable enterprise. The enterprise can also reduce the cost of
serving its best customers by making it more convenient for them to buy from the
enterprise (e.g., by using Amazon’s one-click ordering process or online banking
rather than a bank teller).
Technology Accelerates—It Is Not the Same as—Building Customer Value

The interactive era has accelerated the adoption and facilitation of this highly inter-
active collaboration between the customer and the company. In addition, techno-
logical advancements have contributed to an enterprise’s capability to capture the

feedback of its customer, then customize some aspect of its products or services
to suit each customer’s individual needs. Enterprises require a highly sophisticated
level of integrated activity to enable this customization and personalized customer
interaction to occur. To effectuate customer-focused business relationships, an
Exhibit 1.4 Comparison of Market-Share and Share-of-Customer Strategies

The central purpose of managing cus-
tomer relationships and experiences

is for the enterprise to focus on increas-
ing the overall value of its customer

base—and customer retention is critical
to its success.
Market-Share Strategy Share-of-Customer Strategy
Company sees products and brands as
the source of all company value.

Company sees customers as—by
definition—the only source of revenue.

Product (or brand) managers sell one
product at a time to as many customers
as possible.

Customer manager sells as many products
as possible to one customer at a time.
Differentiate products from competitors. Differentiate customers from each other.
Sell to customers. Collaborate with customers.
Find a constant stream of new customers. Find a constant stream of new business
from established customers.

Company makes sure each product, and
likely each transaction, is profitable,
even at the cost of a customer’s
confidence.

Company makes sure each customer
is profitable, even if that means losing
money on an occasional product or
transaction.

Use mass media to build brand and
announce products.

Use interactive communication to
determine individual needs and
communicate with each individual.

Chapter 1: Evolution of Relationships with Customers and Strategic Customer Experiences 19
enterprise must integrate the disparate information systems, databases, business
units, customer touchpoints—everywhere the company touches the customer and
vice versa—and many other facets of its business to ensure that all employees who
interact with customers have real-time access to current customer information. The
objective is to optimize each customer interaction and ensure that the dialogue is
seamless—that each conversation picks up from where the last one ended. And to
participate in a transparent and helpful way in conversations customers have with
each other online.

Many software companies have devel-
oped enterprise point solutions and suites of

software applications that, when deployed,

elevate an enterprise’s capabilities to trans-
form itself to a customer-driven model. And

as we said earlier, while one-to-one customer
relationships are enabled by technology,
executives at firms with strong customer relationships and burgeoning customer
equity (CE) believe that the enabling technology should be viewed as the means
to an end, not the end itself. Managing customer experiences and relationships is an
ongoing business process, not merely a technology. But technology has provided
the catalyst for CRM to manifest itself within the enterprise. Computer databases

help companies remember and keep track of individual interactions with their cus-
tomers. Within seconds, customer service representatives can retrieve entire histo-
ries of customer transactions and make adjustments to customer records. Technology

has made possible the mass customization of products and services, enabling busi-
nesses to treat different customers differently, in a cost-efficient way. (You’ll find

more about mass customization in Chapter 10.) Technology empowers enterprises
and their customer contact personnel, marketing and sales functions, and managers
by equipping them with substantially more intelligence about their customers.
Implementing an effective customer
strategy can be challenging and costly
because of the sophisticated technology and
skill set needed by relationship managers to
execute the customer-driven business model.

A business model focused on building cus-
tomer value often requires the coordinated

delivery of products and services aligned
with enterprise financial objectives that meet

customer value requirements. While enter-
prises are experimenting with a wide array of technology and software solutions

from different vendors to satisfy their customer-driven needs, they are learning that

they cannot depend on technology alone to do the job. Before it can be imple-
mented successfully, managing customer relationships individually requires commit-
ted leadership from the upper management of the enterprise and wholehearted

Technology has made possible the
mass customization of products and
services, enabling businesses to treat

different customers differently, in a cost-
efficient way.

The foundation for an enterprise
focused on building its value by
building the value of the customer base
is unique: Establish relationships with
customers on an individual basis, then

use the information gathered to treat dif-
ferent customers differently and increase

the value of each one to the firm.

20 principles of Managing Customer experience and relationships
participation throughout the organization as well. Although customer strategies are
driven by new technological capabilities, the technology alone does not make a

company customer-centric. The payoff can be great, but the need to build the strat-
egy to get, keep, and grow customers is even more important than the technology

required to implement that strategy.

The fi rms that are best at building customer value are not the ones that ask,
“How can we use new technologies to get our customers to buy more?” Instead
they are the companies that ask, “How can we use new technologies to deliver
more value to our customers?”

The foundation for an enterprise focused on building its value by building the

value of the customer base is unique: Establish trustable relationships with custom-
ers on an individual basis, then use the information gathered to treat different cus-
tomers differently and increase the value of each one to the fi rm. The overarching

theme of such an enterprise is that the customer is the most valuable asset the com-
pany has; that’s why the primary goals are to get, keep, and grow profi table custom-
ers. Use technology to take the customer’s point of view, and act on that as a

competitive advantage.

What is a relationship? is that Different from Customer experience?
What does it mean for an enterprise and a customer to have a relationship with each
other? Do customers have relationships with enterprises that do not know them?
Can the enterprise be said to have a relationship with a customer it does not know?
Is a relationship possible if the company knows the customer and tailors offers
and communications, remembers things for the customer, and deliberately builds
customer experience—even if the customer is not aware of a “relationship”? Is it
possible for a customer to have a relationship with a brand? Perhaps what is thought

to be a customer’s relationship with a brand is more accurately described as the cus-
tomer’s attitude or predisposition toward the brand. This attitude is a combination of

impressions from actual experiences with that brand, as well as what one has heard
about the brand from ads (company-originated communication), from news, and
from others (comments from friends and ratings by strangers). Experts have studied
the nature of relationships in business for many years, and there are many different
perspectives on the fundamental purpose of relationships in business strategies.
This book is about managing customer relationships and experiences more
effectively in the twenty-fi rst century, which is governed by a more individualized
approach. The critical business objective can no longer be limited to acquiring the

Chapter 1: Evolution of Relationships with Customers and Strategic Customer Experiences 21
most customers and gaining the greatest market share for a product or service.
Instead, to be successful going forward, now that it’s possible to deal individually

with separate customers, the business objective must include establishing meaning-
ful and profi table relationships with, at the least, the most valuable customers and

making the overall customer base more valuable. Technological advances during
the last quarter of the twentieth century have mandated this shift in philosophy.

In short, the enterprise strives to get a customer, keep that customer for a life-
time, and grow the value of the customer to the enterprise. Relationships are the

crux of the customer-strategy enterprise. Relationships between customers and

enterprises provide the framework for everything else connected to the customer-
value business model, even if the customer is not aware of the “relationship.” After

all, the customer is aware of what she experiences with the company. In fact, we
could say that managing the customer relationship is all about what the company
does, and customer experience is what the customer feels like as a result . The
exchange between a customer and the enterprise becomes mutually benefi cial, as

customers give information in return for personalized service that meets their indi-
vidual needs. This interaction forms the basis

of the Learning Relationship, based on a col-
laborative dialogue between the enterprise

and the customer that grows smarter and
smarter with each successive interaction. 8

8 B. Joseph Pine II, Don Peppers, and Martha Rogers, Ph.D., “Do You Want to Keep Your
Customers Forever?” Harvard Business Review 73, no. 2 (March–April 1995): 103–114.
Managing the customer relationship
is all about what the company
does, and customer experience is what
the customer feels like as a result.

Who is the Customer?
Throughout this book, we refer to customers in a generic way. To some, the
term will conjure up the mental image of shoppers. To others, those shoppers
are end users or consumers, and the customers are upstream businesses in
the distribution chain—the companies that buy from producers and either sell
directly to end users or manufacture their own product. In this book, customer
refers to the constituents of an organization, whether it’s a business-to-business
customer (which could mean the purchasing agent or user at the customer

company, or the entire customer company) or an end-user consumer (an indi-
vidual or a family/household)—or, for that matter, a hotel patron, a hospital

patient, a charitable contributor, a voter, a university student or alum, a blood
donor, a theme-park guest, and so on. That means the competition is anything
a customer might choose that would preclude choosing the organization that is
trying to build a relationship with that customer. The word customer includes
both current and prospective buyers and users.

22 principles of Managing Customer experience and relationships

how to think about Customer experience
In our view, any useful defi nition of customer experience should be based on
straightforward language, while at the same time clearly differentiating the term
from all the other marketing terms and buzzwords, such as customer service,
brand preference, customer satisfaction, CRM, or customer loyalty.
Customer experience is the sum total of a customer’s individual interactions
with a product or company, over time.
■ Individual means that we are talking about each different customer’s own
individual perception or impression of the experience. What you intend to

provide a customer is not nearly as important as how the customer per-
ceives what you provide.

■ Interactions occur in addressable or reciprocal channels, that is, non–
mass media. Marketing campaigns, taglines, and brand messages may be
important, but they aren’t interactions, so they lie outside the “customer
experience” domain. On the other hand, improving your mobile app by,
for instance, embedding voice or chat connections into it would defi nitely
improve your customer experience. When a company makes it easier for a
prospect to fi nd information about its product, for instance, that company is
improving the “customer experience” even though the prospect may never
actually become a customer.

■ When we talk about “customer experience,” we are only including direct con-
tact. The interactions a customer has in person or online with other people or

companies about a brand or product or company are not really a part of it,
although, of course, how your company actually engages with customers and
prospects within various social channels is, because it is a direct interaction.
■ Customer experience applies to all of a company’s marketing, selling, and
servicing entities. In addition to your own company, it includes dealers and
distributors, marketing and advertising agencies, any retailers that sell your
product, and any service fi rms that install or repair your company’s product
or that handle customer inquiries or interactions of any kind. For each of
these interactions, you can contract out the task but not the responsibility—
at least not as far as the customer is concerned.
■ Each customer’s experience is not an isolated event, but accumulates through
time. A company improves its customer experience, for instance, when it
makes it easier for a repeat customer to get back to his or her preferred
confi guration, or when a call-center agent already knows what a prospect
was recently trying to fi nd out on the Web site.
■ A company cannot improve customer experience without considering all
of these issues, including how each one impacts the others. Integrating all
interaction channels is one of the fi rst, and possibly the most important,
steps a company can take to improve customer experience.

Chapter 1: Evolution of Relationships with Customers and Strategic Customer Experiences 23
Learning Relationships: The Crux of Managing Customer Relationships

The basic strategy behind Learning Relationships is that the enterprise gives a cus-
tomer the opportunity to teach it what he wants, remember it, give it back to him,

and keep his business. The more the customer teaches the company, the better

the company can provide exactly what the customer wants and the more the cus-
tomer has invested in the relationship. Ergo, the customer will more likely choose

to continue dealing with the enterprise rather than spend the extra time and effort
required to establish a similar relationship elsewhere.9
The Learning Relationship works like this: If you’re my customer and I get you to
talk to me, and I remember what you tell me, then I get smarter and smarter about you.
I know something about you that my competitors don’t know. So I can do things for
you my competitors can’t do, because they don’t know you as well as I do. Before long,
you can get something from me you can’t get anywhere else, for any price. At the very
least, you’d have to start all over somewhere else, but starting over is more costly than
staying with me, so long as you like me and trust me to look out for your best interests.

This happens every time a customer buys groceries by updating her online gro-
cery list10 or adds a favorite movie to her “My List” online. Even if a competitor were

to establish exactly the same capabilities, a customer already involved in a Learning
Relationship with an enterprise would have to spend time and energy—sometimes
a lot of time and energy—teaching the competitor what the current enterprise
already knows. This creates a significant switching cost for the customer, as the
value of what the enterprise is providing continues to increase, partly as the result
of the customer’s own time and effort. The result is that the customer becomes more
loyal to the enterprise because it is simply in the customer’s own interest to do so.

It is more worthwhile for the customer to remain loyal than to switch. As the rela-
tionship progresses, the customer’s convenience increases, and the enterprise

becomes more valuable to the customer, allowing the enterprise to protect its profit
margin with the customer, often while reducing the cost of serving that customer.

Learning Relationships provide the basis for a completely different arena of com-
petition, separate and distinct from traditional, product-based competition. An enter-
prise cannot prevent its competitor from offering a product or service that is perceived

to be as good as its own offering. Once a competitor offers a similar product or ser-
vice, the enterprise’s own offering is reduced to commodity status. But enterprises

that engage in collaborative Learning Relationships with individual customers gain a
distinct competitive advantage because they know something about one customer
that a competitor does not know. In a Learning Relationship, the enterprise learns
about an individual customer through his transactions and interactions during the
process of doing business. The customer, in turn, learns about the enterprise through
his successive purchase experiences and other interactions. Thus, in addition to an
increase in customer loyalty, two other benefits come from Learning Relationships:
9 B. Joseph Pine II, Don Peppers, and Martha Rogers, Ph.D., “Do You Want to Keep Your
Customers Forever?”
10 Adele Berndt and Annekie Brink, Customer Relationship Management and Customer Service
(Lansdowne, South Africa: Juta, 2004), p. 25.

24 Principles of Managing Customer Experience and Relationships
1. The customer learns more about his own preferences from each experience and
from the firm’s feedback, and is therefore able to shop, purchase, and handle
some aspect of his life more efficiently and effectively than was possible prior
to this relationship.
2. The enterprise learns more about its own strengths and weaknesses from each
interaction and from the customer’s feedback, and is therefore able to market,
communicate, and handle some aspects of its own tactics or strategy more
efficiently and effectively than was possible prior to the relationship.11
Cultivating Learning Relationships depends on an enterprise’s capability to elicit and
manage useful information about customers. Customers, whether they are consumers or
other enterprises, do not want more choices. Customers simply want exactly what they
want—when, where, and how they want it. And technology is now making it more and
more possible for companies to give it to them,
allowing enterprises to collect large amounts of
data on individual customers’ needs and then
use that data to customize products and services

for each customer—that is, to treat different cus-
tomers differently.12 This ability to use customer

information to offer a customer the most relevant product at the right price, at the right
moment, is at the heart of the kind of customer experience that builds share of customer
and loyalty.
One of the implications of this shift is an imperative to consider and manage the
two ways customers create value for an enterprise. We’ve already said that a product
focus tends to make companies think more about the value of a current transaction

than the long-term value of the customer who is the company’s partner in that trans-
action. But building Learning Relationships has value only to a company that links

its own growth and future success to its ability to keep and grow customers, and
therefore commits to building long-term relationships with customers. This means

we find stronger commitments to customer trust, employee trust, meeting commu-
nity responsibilities, and otherwise thinking about long-term, sustainable strategies.

11 Steve Blank, “Why the Lean Startup Changes Everything,” Harvard Business Review,
May 2013, available at https://hbr.org/2013/05/why-the-lean-start-up-changes-everything,

accessed February 3, 2016; Katherine Lemon, Don Peppers, and Martha Rogers, Ph.D., “Man-
aging the Customer Lifetime Value: The Role of Learning Relationships,” working paper.

12 David C. Edelman and Marc Singer, “Competing on Customer Journeys,” Harvard Business

Review 93, no. 11 (November 2015): 88–100; Joe Stanhope, “Behavioral Targeting Powers Cus-
tomized Content and Increased Conversion,” Forrester Research, Inc., June 13, 2012, available

at www.forrester.com; Jeff Bertolucci, “Big Data: Matching Personalities in the Call Center,”

Information Week, February 17, 2015, available at http://www.informationweek.com/big-
data/big-data-analytics/big-data-matching-personalities-in-the-call-center/d/d-id/1319108,

accessed February 3, 2016. Also see B. Joseph Pine II, Don Peppers, and Martha Rogers,

Ph.D., “Do You Want to Keep Your Customers Forever?” in Markets of One: Creating Cus-
tomer-Unique Value through Mass Customization, eds. James H. Gilmore and B. Joseph Pine

II (Boston: Harvard Business School Publishing, 2000).

Customers, whether they are con-
sumers or other enterprises, do not

want more choice. Customers simply
want what they want when, where, and
how they want it.

Chapter 1: Evolution of Relationships with Customers and Strategic Customer Experiences 25
Companies that are in the business of building the value of the customer base are
companies that understand the importance of balancing short-term and long-term
success. We talk more about that in Chapters 5 and 11.
return on Customer: Measuring the effi ciency with
Which Customers Create Value
Most business executives would agree, intellectually, that customers represent the
surest route to business growth—getting more customers, keeping them longer,
and making them more profi table. Most understand that the customer base itself
is a revenue-producing asset for their company—and that the value it throws off
ultimately drives the company’s economic worth. Nevertheless, when companies
measure their fi nancial results, they rarely if ever take into account any changes in
the value of this underlying asset, with the result that they are blind— and fi nancial
analysts are blind— to one of the most signifi cant factors driving business success.
Think about your personal investments. Imagine you asked your broker to
calculate your return on investment for your portfolio of stocks and bonds. She
would tally the dividend and interest payments you received during the year, and
then note the increases or decreases in the value of the various stocks and bonds
in the portfolio. Current income plus underlying value changes. The result, when
compared to the amount you began the year with, would give you this year’s
ROI (return on investment). But suppose she chose to ignore any changes in the
underlying value of your securities, limiting her analysis solely to dividends and
interest. Would you accept this as a legitimate picture of your fi nancial results? No.
Well, this is exactly the way nearly all of today’s investors assess the fi nancial

performance of the companies they invest in, because this is the only way com-
panies report their results. They count the “dividends” from their customers and

ignore any increase (or decrease) in the value of the underlying assets. But just as a

portfolio of securities is made up of individual stocks and bonds that not only pro-
duce dividends and interest but also go up and down in value during the course

of the year, a company is, at its roots, a portfolio of customers, who not only buy
things from the fi rm in the current period but also go up and down in value.
Return on investment quantifi es how well a fi rm creates value from a given

investment. But what quantifi es how well a company creates value from its cus-
tomers? For this you need the metric of Return on Customer SM (ROC SM ). The ROC

equation has the same form as an ROI equation. ROC equals a fi rm’s current-
period cash fl ow from its customers plus any changes in the underlying customer

equity, divided by the total customer equity at the beginning of the period.
Source: Excerpted from Don Peppers and Martha Rogers, Ph.D., Return on Customer
(New York: Currency/Doubleday, 2008), pp. 6–7. Return on Customer will be discussed
in more detail in Chapter 11 .

26 Principles of Managing Customer Experience and Relationships
When it comes to customers, businesses are shifting their focus from product sales
transactions to relationship equity. Most soon recognize that they simply do not know
the full extent of their profitability by customer.13 Not all customers are equal. Some are
not worth the time or financial investment of establishing Learning Relationships, nor
are all customers willing to devote the effort required to sustain such a relationship.
Enterprises need to decide early on which customers they want to have relationships
with, which they do not, and what type of relationships to nurture. (See Chapter 5 on

customer value differentiation.) But the advantages to the enterprise of growing Learn-
ing Relationships with valuable and potentially valuable customers are immense.

Because much of what is sold to the customer may be customized to his precise needs,
the enterprise can, for example, potentially charge a premium (as the customer may be
less price sensitive to customized products and services) and increase its profit margin.14
The product or service is worth more to the customer because he has helped shape and
mold it to his own specifications. The product or service, in essence, has become
decommoditized and is now uniquely valuable to this particular customer.
Managing customer relationships effectively is a practice not limited to products
and services. When establishing interactive Learning Relationships with valuable
customers, customer-strategy enterprises remember a customer’s specific needs for
the basic product but also the goods, services, and communications that surround
the product, such as how the customer would prefer to be invoiced or how the
product should be packaged. Even an enterprise that sells a commodity-like product
or service can think of it as a bundle of ancillary services, delivery times, invoicing
schedules, personalized reminders and updates, and other features that are rarely

commodities. The key is for the enterprise to focus on customizing to each indi-
vidual customer’s needs. A teenager in California had gotten a text from her wireless

phone service suggesting her parents could save money if she texted “4040” in an
offer to switch her to a cell phone plan that was a better fit for her and the way she
actually uses the service. She was so impressed she made a point of telling us about
it. And of course, she told all her friends at school—and on Twitter and Facebook.
The coverage, the hardware, the central customer service, and the “brand” all
remained the same. But the customer experience, based on actual usage interaction

with the customer—information not available to competitors—improved the cus-
tomer relationship, increased loyalty and lifetime value of the customer, and posi-
tively influenced other customers as well.

13 Peter O’Neill, “Differentiate with the Five C’s of Community Marketing,” Forrester Research,
Inc., March 24, 2011, available at www.forrester.com; Carrie Johnson and Elizabeth Davis, with

Kate van Geldern, “Beyond Sales: Driving eBusiness with Engagement,” May 15, 2009, For-
rester Research, Inc., www.forrester.com, accessed September 1, 2010; Jeff Sands, “Account-
Based Marketing,” B to B 91, no. 6 (2006): 11. 14 J. P. Gownder, “Mass Customization Is (Finally) the Future of Products,” Forrester Research,

Inc., April 15, 2011, available at www.forrester.com. Also see Pine, Peppers, and Rogers, “Do
You Want to Keep Your Customers Forever?”

Chapter 1: Evolution of Relationships with Customers and Strategic Customer Experiences 27
When a customer teaches an enterprise what he wants or how he wants it, the

customer and the enterprise are, in essence, collaborating on the sale of the prod-
uct. The more the customer teaches the enterprise, the less likely the customer will

want to leave. The key is to design products, services, and communications that
customers value, and on which a customer and a marketer will have to collaborate
for the customer to receive the product, service, or benefit.

Enterprises that build Learning Relation-
ships clear a wider path to customer profit-
ability than companies that focus on

price-driven transactions. They move from a

make-to-forecast business model to a make-
to-order model, as Dell Computer did when it

created a company that reduced inventory levels by building each computer after it
was paid for. By focusing on gathering information about individual customers and

using that information to customize communications, products, and services, enter-
prises can more accurately predict inventory and production levels. Fewer orders may

be lost because mass customization can build the products on demand and thus make
available to a given customer products that cannot be stocked ad infinitum. (Again,
we will discuss customization further in Chapter 10.) Inventoryless distribution from a
made-to-order business model can prevent shortages caused in distribution channels
as well as reduce inventory carrying costs. The result is fewer “opportunity” losses.
Furthermore, efficient mass-customization operations can ship built-to-order custom
products faster than competitors that have to customize products from scratch.15
Learning Relationships have less to do with creating a fondness on the part of a

customer for a particular product or brand and more to do with a company’s capa-
bility to remember and deliver based on prior

interactions with a customer. An enterprise

that engages in a Learning Relationship cre-
ates a bond of value for the customer, a rea-
son for an individual customer or small

groups of customers with similar needs to
lose interest in dealing with a competitor,
provided that the enterprise continues to
deliver a product and service quality at a fair price and to remember to act on the
customer’s preferences and tastes.16 Learning Relationships may also be based on an
Enterprises that build Learning
Relationships clear a wider path to
customer profitability than companies
that focus on price-driven transactions.

15 Hyun-Hwa Lee and Eunyoug Chang, “Consumer Attitudes toward Online Mass Custom-
ization: An Application of Extended Technology Acceptance Model,” Journal of Computer-
Mediated Communication 16, no. 2 (January 2011): 171–200; Fabrizio Salvador, Pablo Martin

de Holan, and Frank T. Pillar, “Cracking the Code of Mass Customization,” MIT Sloan Manage-
ment Review 50, no. 3 (Spring 2009): 71–78. 16 Pedro S. Coelho and Jörg Henseler, “Creating Customer Loyalty through Service Customiza-
tion,” European Journal of Marketing 46, no. 3/4 (2012): 332–356; Pine, Peppers, and Rogers,

“Do You Want to Keep Your Customers Forever?” pp. 103–104.

Learning Relationships have less to
do with creating a fondness on
the part of a customer for a particular
product or brand and more to do with a
company’s capability to remember and
deliver based on prior interactions with
a customer.

28 Principles of Managing Customer Experience and Relationships
inherent trust between a customer and an enterprise. For example, a customer might
divulge his credit card number to an organization, which records it and remembers
it for future transactions. The customer trusts that the enterprise will keep his credit
card number confidential. The enterprise makes it easier and faster for him to buy
because he no longer has to repeat his credit card number each time he makes a
purchase. (In the next chapter, we’ll learn more about the link between attitude and
behavior in relationships.)

The Technology Revolution and the Customer Revolution
During the past century, as enterprises sought to acquire as many customers as they
possibly could, the local proprietor’s influence over customer purchases decreased.
Store owners or managers became little more than order takers, stocking their
shelves with the goods that consumers would see advertised in the local newspaper
or on television and radio. Mass-media advertising became a more effective way to

publicize a product and generate transactions for a wide audience. But now tech-
nology has made it possible, and therefore competitively necessary, for enterprises

to behave, once again, like small-town proprietors and deal with their customers
individually, one customer at a time.
At the same time, technology has generated a business model that we will refer
to as the trust platform.

17 Becoming prominent since the last edition of this book,
trust platforms are epitomized by companies such as Uber, Airbnb, and TaskRabbit.
This kind of business depends on using interactive technology to connect willing
buyers with willing sellers, while relying on crowd-sourced feedback to ensure
mutual trust. Rather than a “sharing” economy, trust platforms facilitate an “initiative”
economy, based on the entrepreneurial initiatives of thousands of individuals, all
seamlessly connected to the larger network.
We must note that social interactions are not as manageable as a company’s
marketing and other functions are. The social interactions a company has with

customers and other people can’t be directed the same way advertising cam-
paigns or cost-cutting initiatives can. Instead, in the e–social world, what compa-
nies are likely to find is that top-down, command-and-control organizations are

not trustable, while self-organized collections of employees and partners moti-
vated by a common purpose and socially empowered to take action are more

trustable.

17 Thomas L. Friedman, “And Now for a Bit of Good News . . . ,” Sunday Review, New
York Times, July 19, 2014, available at http://www.nytimes.com/2014/07/20/opinion/

sunday/thomas-l-friedman-and-now-for-a-bit-of-good-news.html?_r=0, accessed Febru-
ary 4, 2016.

Chapter 1: Evolution of Relationships with Customers and Strategic Customer Experiences 29
Customers Have Changed, Too

The technological revolution has spawned another revolution, one led by the cus-
tomers themselves, who now demand products just the way they want them and

flawless customer service. Enterprises are realizing that they really know little or
nothing about their individual customers and so are mobilizing to capture a clearer
understanding of each customer’s needs. Customers, meanwhile, want to be treated
less like numbers and more like the individuals they are, with distinct, individual
requirements and preferences. They are actively communicating these demands
back to the enterprise (and, through social media and mobile apps, with each
other!). Where they would once bargain with a business, they now tell managers
of brand retail chains what they are prepared to pay and specify how they want
products designed, styled, assembled, delivered, and maintained. When it comes to
ordering, consumers want to be treated with respect. The capability of an enterprise
to remember customers and their logistical information not only makes ordering
easier for customers but also lets them know that they are important. Computer
applications that enable options such as “one-click,” or express, ordering on the
Web are creating the expectation that good online providers take the time to get
to know customers as individuals so they can provide this higher level of service.18

The customer revolution is part of the reason enterprises are committing them-
selves to keep and grow their most valuable customers. Today’s consumers and

businesses have become more sophisticated about shopping for their needs across

multiple channels; more and more CMOs refer to this multiple channel market-
ing as omnichannel marketing, but what it really means is that customers will

come at companies in various ways, in ways that suit those customers, and compa-
nies must be ready to present a logical, coherent response to each customer—not

just messages sent through media channels—and to remember what is learned
through each interaction and apply that learning to all channels. The idea here is
not just to make sure that we prepare and send a message, but to make sure each
customer receives one. The online channel, in particular, enables shoppers to locate
the goods and services they desire quickly and at a price they are willing to pay,
which forces enterprises to compete on value propositions other than lowest price.
Customer Retention and Enterprise Profitability
Enterprises strive to increase profitability without losing high-margin customers by
increasing their customer retention rates or the percentage of customers who have

met a specified number of repurchases over a finite period of time. A retained cus-
tomer, however, is not necessarily a loyal customer. The customer may give business

to a competing enterprise for many different reasons.
18 See Dave Frankland, “The Intelligent Approach to Customer Intelligence” (October 16,
2009), Forrester Research, Inc., available at www.forrester.com.

30 principles of Managing Customer experience and relationships

royal bank of Canada’s 16 Million Loyal Customers
Organizations have accelerated their customer-focused strategies during the last
few years, but managing customer relationships has been a business discipline
for many years. Before the Industrial Revolution, and before mass production
was born, merchants established their businesses around keeping customers.
Small towns typically had a general store, a local bank, and a barbershop.
Each proprietor met and knew each one of his customers individually. The bank
teller, for example, knew that Mr. Johnson cashed his paycheck each Friday
afternoon. When Mr. Johnson came into the bank, the bank teller already had
his cash ready for him in twenties and tens, just as he liked it. If Mr. Johnson

unexpectedly stopped cashing his paycheck at the bank, the teller would won-
der what had happened to him. In short, the bank depended on the relationship

with the individual customer and how much the people who worked for the
bank knew about that customer. The teller’s memory in this example is akin to
today’s data warehouses, which can store millions of data points, transaction
histories, and characteristics about customers. Personal memory enabled the
teller to fulfi ll each customer’s individual banking needs and, ultimately, to build

a profi table relationship with each one. The more the teller knew about a cus-
tomer, the more convenient he could make banking for that customer—and the

more likely the customer would continue to use the bank.

But here’s the important question 100 years later: Can an international fi nan-
cial services enterprise with 18 million customers a

ever hope to deliver the same
intimate customer service as a small-town bank? The attitude at Royal Bank of
Canada (RBC), according to several of its executives, is “Absolutely.”
According to McKinsey’s EMEA Banking Practice,
Royal Bank of Canada (RBC) pursues this kind of a niche strategy with great
success. After identifying attractive customer groups via micro-segmentation,
RBC tailors products for each group. Their approach comprises three layers of
segmentation. First, “basic segmentation” defi nes fi ve customer groups using
demographic criteria. Next, “strategic segmentation” cuts the customer base
into a multitude of subsegments by factors such as profi tability, risk profi le,
or customer lifetime value. Finally, “tactical segmentation” focuses primarily
on product sales, drawing on parameters such as probability of purchase,
risk of cancellation, or frequency with which products are used.
This micro-segmentation helped RBC detect a previously neglected customer
segment: senior citizens spending the winter in Florida. The bank developed
a “VIP Banking” account for this segment that includes a senior rebate for
eligible clients above 60, travel discounts, easy access to Canadian funds, a

Chapter 1: Evolution of Relationships with Customers and Strategic Customer Experiences 31

consolidated account review online, ability to leverage a Canadian credit
history for mortgages in the US, and a toll-free number for cross-border
banking questions. As a result, over the last fi ve years sales per customer
have more than doubled, the attrition rate has dropped by nearly 50 percent,
and net income has grown by 75 percent. Other examples are the Swiss Bank
Coop’s fi nancial advice for women, the Dutch Rabobank’s package for the
divorced, or Wells Fargo’s offer for soldiers. Managing all these opportunities
systematically will create a sustainable development agenda. b
As far back as the 1990s, RBC developed superior computing and database

power, along with sophisticated statistical programs, to analyze customer infor-
mation and test specifi c actions it should take with specifi c customers. Only then

could the bank’s frontline personnel deliver more effective personal contact and
attention to individual customers.
To learn the most about its customers, RBC has undertaken an intense,

ongoing statistical analysis of them. It is developing and refi ning the proto-
type for an algorithm to model the long-term lifetime values of its individual

customers. Part of this effort includes a “client potential” model that measures
how “growable” certain kinds of customers are to the bank. The bank also

analyzes a customer’s vulnerability to attrition and tries to fl ag the most vul-
nerable before they defect, in order to take preventive action in a focused,

effective way.
To expand share of customer, Royal Bank also tries to predict statistically
which additional services a customer might want to buy, and when. Royal Bank
not only makes different offers to different customers, it also equips its sales
and service people with detailed customer profi les. Thus, rather than providing
a one-size-fi ts-all service, the bank’s customer-contact people spend their time
and energy making on-the-spot decisions based on each customer’s individual

situation and value. Note that this type of business practice not only bene-
fi ts from individual customer interactions, it requires individual interactions to

achieve the greatest success. As an RBC executive told the authors of this book,
the bank discovered it “could lift contributions and penetration rates by up to

10 percent by virtue of the contact alone.” (We look at Royal Bank’s customer-
profi tability strategies more in Part III.)

a According to Royal Bank of Canada Web site’s corporate profi le, RBC “currently serves
more than 16 million personal, business, public sector, and institutional clients through
offi ces in Canada, the U.S. and 38 other countries.” Available at http://www.rbc.com/
aboutus/index.html , accessed February 4, 2016.

b McKinsey & Company, EMEA Banking Practice, “Banking on Customer Centricity: Trans-
forming Banks into Customer-Centric Organizations,” April 2012, available at http://www

.mckinsey.com/search.aspx?q=banking+on+customer+centricity , accessed February 4, 2016.

32 Principles of Managing Customer Experience and Relationships
In 1990, Fred Reichheld and W. Earl Sasser analyzed the profit per customer in
different service areas, categorized by the number of years that a customer had been
with a particular enterprise.19 In this groundbreaking study, they discovered that the
longer a customer remains with an enterprise, the more profitable she becomes.
Average profit from a first-year customer for the credit card industry was $30; for the
industrial laundry industry, $144; for the industrial distribution industry, $45; and for
the automobile servicing industry, $25.
Four factors contributed to the underlying profit growth:
1. Profit derived from increased purchases. Customers grow larger over time and
need to purchase in greater quantities.
2. Profit from reduced operating costs. As customers become more experienced,
they make fewer demands on the supplier and fewer mistakes when involved in
the operational processes, thus contributing to greater productivity for the seller
and for themselves.
3. Profit from referrals to other customers. Less needs to be spent on advertising and
promotion due to word-of-mouth recommendations from satisfied customers.

4. Profit from price premium. New customers can benefit from introductory promo-
tional discounts, while long-term customers are more likely to pay regular prices.

No matter what the industry, the longer an enterprise keeps a customer, the more
value that customer can generate for shareholders.20 Reichheld and Sasser found in a

classic study that for one auto service company, the expected profit from a fourth-
year customer is more than triple the profit that same customer generates in the first

year. Other industries studied showed similar positive results (see Exhibit 1.5).
19 Frederick F. Reichheld and W. Earl Sasser Jr., “Zero Defections: Quality Comes to Services,”
Harvard Business Review 73 (September–October 1990): 59–75. Fred Reichheld is the father
of the Net Promoter Score (NPS), which is a measure of the quality of a company’s customer
relationships and indicator of profitability. The score is based on what Reichheld calls the
ultimate question: “Would you recommend us to a friend?” Customers can be sorted into
detractors or promoters based on their answers, and percentages of each category give the
Net Promoter score. Reichheld lays out the Net Promoter System and gives many examples
of standout companies that have high profitability and high Net Promoter ratings in his book
The Ultimate Question 2.0: How Net Promoter Companies Thrive in a Customer-Driven World
(Boston: Harvard Business Review Press, 2011), written with Rob Markey.
20 Authors’ note: This point is not without controversy. Some research has shown that in
some instances—especially those where a business is very dependent on one or a very few
customers, such as automotive parts makers—a long-term customer has the power to extract
so many concessions that the company’s margins are squeezed sometimes to the breaking
point. But generally, academic research and real-world experience have demonstrated that if
a company acquires the right customers, the longer those customers continue to do business,

the more profitable they become—for many reasons, especially reduction in churn replace-
ment costs, increasing value to the customer of the relationship, and positive word of mouth

and social networking by a contented or delighted customer.

Chapter 1: Evolution of Relationships with Customers and Strategic Customer Experiences 33

Enterprises that build stronger individual customer relationships enhance customer
loyalty, as they are providing each customer with what he needs. 21 Loyalty building
requires the enterprise to emphasize the value of its products or services and to show

that it is interested in building a relationship with the customer. 22 The enterprise real-
izes that it must build a stable customer base rather than concentrate on single sales. 23

exhibit 1.5 Profi t One Customer Generates over Time
Industry Year 1 Year 2 Year 3 Year 4 Year 5
Credit Card $30 $42 $44 $49 $55
Industrial Laundry $144 $166 $192 $222 $256
Industrial Distribution $45 $99 $123 $144 $168
Auto Servicing $25 $35 $70 $88 $88
Source: Frederick F. Reichheld and W. Earl Sasser Jr., “Zero Defections: Quality Comes to
Services,” Harvard Business Review 68:5 (September–October 1990): 106.
No matter what the industry, the longer an enterprise keeps a customer, the
more value that customer can generate for shareholders.

21 Authors’ note: Which comes fi rst, loyalty or satisfaction? In a 2008 article, Mark Johnson, Eugene
Sivadas, and Ellen Garbarino questioned the directionality of the link between satisfaction and
loyalty, suggesting there is more evidence to indicate that loyalty leads to customer satisfaction
rather than satisfaction (customer relationships) leading to loyalty; see “Customer Satisfaction,
Perceived Risk, and Affective Commitment,” Journal of Services Marketing 22, no. 4/5 (2008):
353–362. Also see an earlier article, which originally questioned some of our assertions here:
Ellen Garbarino and Mark Johnson, “The Different Roles of Satisfaction, Trust, and Commitment
in Customer Relationships,” Journal of Marketing 63 (April 1999): 70–87. More recent articles
by Flint, Blocker, and Boutin (2011) and Chen (2012), among others, squarely support the link
between satisfaction and loyalty. See Daniel J. Flint, Christopher P. Blocker, and Philip J. Boutin
Jr., “Customer Value Anticipation, Customer Satisfaction and Loyalty: An Empirical Examination,”
Industrial Marketing Management 40, no. 2 (February 2011): 219–230; and Shu-Ching Chen,
“The Customer Satisfaction–Loyalty Relation in an Interactive E-Service Setting: The Mediators,”
Journal of Retailing and Consumer Services 19, no. 2 (March 2012): 202–210. 22 Jill Griffi n, Customer Loyalty: How to Earn It, How to Keep It (San Francisco: Jossey-Bass,
1997).

23 For a different view of the value of loyalty, see Werner Reinartz and Mark Eisenbeiss, “Man-
aging Customer Loyalty to Maximize Customer Equity,” in Handbook of Research on Customer

Equity in Marketing , eds. V. Kumar and Denish Shah (Northampton, MA: Edward Elgar, 2015),
pp. 139–159; and Werner Reinartz and V. Kumar, “The Mismanagement of Customer Loyalty,”
Harvard Business Review (July 2002): 86–94. Reinartz and Kumar’s work shows that more

loyal customers are not necessarily more profi table as a class, especially using their method-
ology of one moment in time; but we should also point out that in the case of an individual

customer, the more loyalty and the greater share of customer achieved from one customer
over time, the more valuable by defi nition that individual customer will become.

34 principles of Managing Customer experience and relationships
A customer-strategy fi rm will want to reduce customer defections because they

result in the loss of investments the fi rm has made in creating and developing cus-
tomer relationships. Customers are the lifeblood of any business. They are, literally,

the only source of its revenue .24 Loyal customers are more profi table because they
likely buy more over time if they are satisfi ed. It costs less for the enterprise to serve
retained customers over time because transactions with repeat customers become
more routine. Loyal customers tend to refer other new customers to the enterprise,
thereby creating new sources of revenue. 25 It stands to reason that if the central goal
of a customer-strategy company is to increase the overall value of its customer base,
then continuing its relationships with its most profi table customers will be high on
its list of priorities.
On average, U.S. corporations tend to lose half their customers in fi ve years, half
their employees in four, and half their investors in less than one. 26 In his classic
study on the subject, Fred Reichheld described a possible future in which the only
business relationships will be onetime, opportunistic transactions between virtual
strangers. 27 However, he found that disloyalty could stunt corporate performance by

25 to 50 percent, sometimes more. In contrast, enterprises that concentrate on fi nd-
ing and keeping good customers, productive employees, and supportive investors

continue to generate superior results. For this reason, the primary responsibility for
customer retention or defection lies in the chief executive’s offi ce.

24 Authors’ note: Some may question the statement: “Customers are a company’s only source
of revenue.” By defi nition, however, this is literally true. If a company sells products, for
example, then the revenue does not come from the products; it comes from the customers
who buy them. And if that same company also runs some ancillary businesses—say, renting

out unused real estate space or spare capital—then those who make lease payments or inter-
est payments are also customers.

25 Philip Kotler and Milton Kotler, Market Your Way to Grow: Eight Ways to Win (Hoboken, NJ:
John Wiley & Sons, 2013); Phillip Kotler, Kotler on Marketing (New York: Free Press, 1999). 26 Fred Reichheld, “Learning from Customer Defections,” Harvard Business Review 74:2
(March–April 1996): 87–88.
27 Reichheld, The Loyalty Effect.
the rOi of building Customer relationships in Financial Services
Managing individual customer relationships has a profound effect on enhancing

long-term customer loyalty, thereby increasing the enterprise’s long-term profi t-
ability. Relationship strategies, for example, have a substantial effect on customer

retention in the fi nancial services sector. A study conducted by Peppers & Rogers

Group (with Roper Starch Worldwide) found that—looking at a group of “satis-
fi ed customers”—only 1 percent of consumers who rate their fi nancial services

Chapter 1: Evolution of Relationships with Customers and Strategic Customer Experiences 35

Customer loyalty is closely associated with customer relationships and may, in
certain cases, be directly related to the level of each customer’s satisfaction over
time. 28 According to James Barnes, satisfaction is tied to what the customer gets from
provider high on relationship management say they are likely to switch away
products. One-fourth of consumers (26 percent) who rate their primary fi nancial
services provider as low on relationship management attributes say they are likely
to switch away one or more products during the next 12 months. The fi nancial

implications of these fi ndings are staggering (see Exhibit 1.6 ). Using a conserva-
tive average annual profi tability per household for U.S. retail banks of $100, a

reduction in attrition of 9 percent represents over $700 million in incremental
profi ts for all U.S. households with accounts. If an individual fi nancial institution
with 20,000 customers can reduce attrition by 9 percentage points by providing

excellent customer relationship management (e.g., recognizing returning custom-
ers, anticipating their needs, etc.), that institution can increase profi ts by $180,000.

For a similar-size fi nancial institution with an average household profi tability of
$500, the increase in profi tability climbs to $900,000.
Percent likely to
add one or
more products
in next 12 months

MEDIUM CRM 21% 10%
LOW CRM 15%

HIGH CRM 31% 1%
26%

Good
customer
service and:

Percent likely to
switch away one
or more products
in next 12 months

exhibit 1.6 Benefi ts of CRM in Financial Services
Source: Peppers & Rogers Group, Roper Starch Worldwide survey, September 2000.

28 Authors’ note: It is generally a challenge to agree on what we all mean by “customer satis-
faction.” See Richard L. Oliver, Satisfaction: A Behavioral Perspective on the Consumer (New

York: Routledge, 2015). Additionally, Dave Power III has defi ned customer satisfaction as
measuring the difference between what the customer expects to get and what he perceives
he gets. More and more we are becoming capable of measuring what Pine and Gilmore call
“customer sacrifi ce,” which is the difference between what the customer wants exactly and

what the customer settles for. B. Joseph Pine and James Gilmore, “Satisfaction, Sacrifi ce, Sur-
prise: Three Small Steps Create One Giant Leap into the Experience Economy,” Strategy and

Leadership 28, no. 1 (January–February 2000): 18.

36 principles of Managing Customer experience and relationships
dealing with a company as compared with what he has to commit to those dealings
or interactions. 29 For now, it’s enough to know that the customer satisfaction issue
is controversial—maybe even problematic. There are issues of relativity (are laptop
users just harder to satisfy than desktop users, or are they really less satisfi ed?) and
skew (is the satisfaction score the result of a bunch of people who are more or less
satisfi ed, or a bimodal group whose members either love or hate the product?).
Barnes believes that by increasing the value that the customer perceives in each

interaction with the company, enterprises are more likely to increase customer sat-
isfaction levels, leading to higher customer retention rates. When customers are

retained because they enjoy the service they are receiving, they are more likely to
become loyal customers. This loyalty leads to repeat buying and increased share of
customer. (We will discuss more about the differences between attitudinal loyalty
and behavioral loyalty, as well as ways to measure loyalty and retention, in the next
chapter.)
Retaining customers is more benefi cial to the enterprise for another reason:
Acquiring new customers is costly. Consider the banking industry. Averaging across
channels, banks can spend at least $200 to replace each customer who defects. So if
a bank has a clientele of 50,000 customers and loses 5 percent of those customers
each year, it would need to spend $500,000 or more each year simply to maintain its

customer base. 30 Many Internet startup companies, without any brand-name recogni-
tion, faced an early demise during the 2000–2001 dot-com bubble bust, largely

because they could not recoup the costs associated with acquiring new customers.
The typical Internet “pure-play” spent an average of $82 to acquire one customer in
1999, a 95 percent increase over the $42 spent on average in 1998. 31 Much of that

increase can be attributed to the dot-com companies’ struggle to build brand aware-
ness during 1999, which caused Web-based fi rms to increase offl ine advertising

spending by an astounding 518 percent. Based on marketing costs related to their
online business, in 1999, offl ine-based companies spent an average of $12 to acquire

a new customer, down from $22 the previous year. Online fi rms spent an unsustain-
able 119 percent of their revenues on marketing in 1999. Even with the advantages

of established brands, offl ine companies spent a still-high 36 percent.

29 James G. Barnes, Secrets of Customer Relationship Management (New York: McGraw-Hill,
2001).
30 Banks’ customer acquisition costs can vary wildly, between $150 and $3,600, depending on
the source, the product, and the channel, so $200 is a more-than-conservative fi gure.

31 Boston Consulting Group and Shop.org, “The State of Online Retailing” (April 2000), avail-
able at www.shop.org/web/guest/research/store .

The problem is simple arithmetic. Given the high cost of customer acquisition, a
company can never realize any potential profi t from most customers, especially
if a customer leaves the franchise.

Chapter 1: Evolution of Relationships with Customers and Strategic Customer Experiences 37

The problem is simple arithmetic. Given the high cost of customer acquisition,
a company can never realize any potential profit from most customers, especially if
a customer leaves the franchise (see Exhibit 1.7). High levels of customer churn
trouble all types of enterprises, not just those in the online and wireless industries.
The problem partly results from the way companies reward sales representatives:
with scalable commissions and bonuses for acquiring the most customers. Fact is,

many reps have little, if any, incentive for keeping and growing an established cus-
tomer. In some cases, if a customer leaves, the sales representative can even be

rewarded for bringing the same customer back again!
Although it’s always somebody’s designated mission to get new customers, too
many companies still don’t have anybody responsible for making sure this or that
particular customer sticks around or becomes profitable. Often, a service company
with high levels of churn needs to rethink not only how its reps engage in customer

relationships but also how they are rewarded (or not) for nurturing those relation-
ships and for increasing the long-term value to the enterprise of particular custom-
ers. Throughout this book, we will see that becoming a customer-value enterprise

is difficult. It is a strategy that can never be handled by one particular department

within the enterprise. Managing customer relationships and experiences is an ongo-
ing process—one that requires the support and involvement of every functional

area in the organization, from the upper echelons of management through produc-
tion and finance, to each sales representative or contact-center operator. Indeed,

customer-driven competition requires enterprises to integrate five principal business
functions into their overall customer strategy:
1. Financial custodianship of the customer base. The customer-strategy enterprise

treats the customer base as its primary asset and carefully manages the invest-
ment it makes in this asset, moving toward balancing the value of this asset to

the long-term as well as the short-term success of the company.

2. Production, logistics, and service delivery. Enterprises must be capable of cus-
tomizing their offerings to the needs and preferences of each individual cus-
tomer. The Learning Relationship with a customer is useful only to the extent

that interaction from the customer is actually incorporated in the way the enter-
prise behaves toward that customer.Managing Customer Experience and Relationships_ A Strategic Framework ( PDFDrive )

(SOLVED) Group Discussion 4

Quick Links

Share