Measuring Customer Relationship Value

Introduction

Customer relationship value is a function of customer perceptions of the cost of switching to another supplier (Dikolli, Kinney, & Sedatole, 2006). Empirical studies of the effect of the cost of switching on the customer relationship value have not determined the cost effect of switching to an alternative supplier. Therefore, conventional performance and customer satisfaction indicators do not reflect switching cost effect within comparable market segments across firms as measured by customer satisfaction. The purpose of the study, therefore, was to measure the effect of customer perception of switching costs on customer relationship value. Dikolli, Kinney, and Sedatole (2008), collected empirical data from online retail customers to test the influence of the cost factor on customer relationship value, by market segment. Study findings indicate that the cost of switching suppliers has a statistically significant influence on the future customer behavior at the segment level and future performance at the firm level.

The study results show a positive relation between future buyer behavior and customer attitudes increases with an increase in the switching cost. In relation to the study results, external, non-financial data generated periodically across market segments can provide valuable data about segment and consolidated entity performance.

Analytical Review

The study’s goal was to establish the role of the cost of switching suppliers, in relation to customer relationship value. The study provides a sound description of the impact of the cost effect on buyer behaviors. The authors interpret customer perceptions of costs to reflect the expectations for the future buyer behavior and consumer attitudes. The authors justify the study by highlighting the fact that conventional measures of firm performance and customer satisfaction do not incorporate items that measure the weight of the cost of switching suppliers. Financial measures do not take into account the potential future impact of current transactions or expenditures that create favorable customer relationships within a market segment. Using financial measures, firms evaluate the costs of creating favorable customer relationships only against a cost budget. The likely result is that firms may under-invest in the development of future value in a manner that supports the long-term customer strategy. In addition, the lack of knowledge on the future economic impact of customer relationship value can lead to future economic successes being attributed to conventional sources when instead it is as a result of the benefits of prior period expenditures. The study, therefore, collects data and interprets the influence of non-financial measures on the future customer relationship value.

Customers express satisfaction with historical expenditures and transactions through repeat purchases and price premiums. Conventional measures include transaction prices, quantity sold, or other accounting estimates. The authors of the article Kinney, Dikolli, and Sedatole are credible authors working for the University of Texas, Duke University, and Michigan State University, respectively. They are a learned group of professionals working in the academia. In view of their vast experience in research and academic work, the vast experience in consumer behavior make them the best possible sources of analytical knowledge. In line with the credibility and competence of the authors, the design of the report follows academic standards. It begins with an abstract, then hypothesis, then literature, methodology, analysis, and conclusion. The analysis section uses figures and tables to express the implications of the findings on customer attitudes and buyer behavior.

The analysis not only focuses on the cost effect, but also the relative value that a customer gets through continued trade with the supplier. It is a balanced approach to analysis that provides credible conclusions. The paper contributes to knowledge expansion by demonstrating the significance of external factors on financial performance and buyer behavior. It is essential and demonstrates the necessity of assessment of the impact of non-financial measures of customer attitudes and performance measures. In relation to the methodology, the study uses online customers as participants and comprises a variety of products ranging from books (standardized products) to clothing and apparel (differentiated products). Online trade is a context of business setting that is appropriate for measuring sensitivity to the cost variation between suppliers within the same market segment.

The study used the e-commerce pulse (ECP) which corrects the online customer attitudes and behavior for age, education, race, income, sex, geographic region, propensity to shop online, and the propensity to buy online. Online shopping is a representative setting that represents a medium that shows sensitivity to price fluctuation across firms within the same segment. ECP is an exceptional data collection technique that is comprehensive in terms of the definition of customer demographics so as to correct date for confounding factors. Demographic factors often influence the decisions that consumers make, and, so, to prevent bias, the study must record and analyze customer behavior and correct for the various confounding factors.

The study uses a sample of 182 firms, both private and public making it representative of the market. In terms of products, the study utilized a wide range of products ranging from books, transport materials and services, electronics, computer software, health and beauty, among other products in the publicly-traded firms. The variables for the study are the switching cost, customer attitudes, customer buying behavior, and future financial performance. The design of the methodology facilitates an easy way of conducting analysis relative to different potential confounding factors. The study has one kind of weakness; it only uses a sample of online clients. The methodology is such that the study can only represent the online setting. The study’s methodology comes from the use of information technology, and not the traditional data accounting methods. In relation to the method used, data availability limits the ability to generalize findings to include other market segments not studied. To a large part, the authors have achieved study objectives, which is to determine the role of price differentiation in determining customer attitudes and shopping behavior.

In the current status of financial analysis and future forecasting, companies mostly use financial measures of customer satisfaction and buyer behavior. The methods do not take into account the potential effect of these measures in customer response to price fluctuation. In this sense, the economic value accrued by the firm that directly relates to achievement in customer relationship value is attributed to conventional factors of economic growth in a firm. The study highlights this disparity and the need to pay attention to the effect that the difference in cost may have on the decision by a customer to shift firms.

In the short term, the differential in costs may not have a huge impact on customer decisions to shift to services or products provided by alternative suppliers. However, in the long term customers are likely to show sensitivity price difference as firms compete in customer value creation. Therefore, firms that do not pay attention to the cost effect on customer decisions to switch to an alternative provider of service may experience a reduction in revenue and an increase in expenses.

Conclusion

The cost associated with switching to an alternative product or service provider has an effect on the future customer attitudes and performance of the firm. The effect is likely to be enhanced by increasing competition and consumer awareness. The study uses a systematic and empirical methodology to measure the impact of the differential supplier cost on the future of customer attitudes and behavior. This model of analysis does not use financial indicators, but uses non-financial measures of customer satisfaction and future business performance. In relation to the study, customer attitudes and the switching cost effect have a positive correlation to the future customer behaviors and business performance. The findings portray the potential of measuring customer perceptions and other non-accounting measures that add up the ability to make decisions informed by broad information analysis.

In view of the study findings, customer relationship value is a function of several factors. Therefore, research should further consider the contribution of cost effect to customer attitudes and purchasing behavior. Overall, the study is a representative analysis of consumer behavior. The bottom line is that consumer behavior, in relation to a decision to switch to an alternative product or service provider, is a function of the associated costs.

Reference

Dikolli, S., Sedatole, K. & Kinney, W. (2006). “Measuring Customer Relationship Value: The Role of Switching Cost”. Duke University.

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