Mr. Pinchuk

Revenue Management

Commodity Price Wars: Using Customer Centric Strategies to Maintain Guest Loyalty

By Steven Pinchuk, Founder & President , Profit Optimization Strategies

The best way to build and maintain guest loyalty during times of commodity price wars is to use Customer Centric Strategies (CCS). The term “commodity” means that the consumer sees all products as the same and the only difference to the consumer is their price. In a commodity market, consumers will usually make their purchase decision based predominately on price.

Increasing your value in a commodity market

Do you want to keep from becoming a commodity, and settling for the prevailing price of the other products that the consumer sees as a substitute? To avoid being bought as a commodity you can either make your product better than the competition, in the eyes of the consumers, or differentiate yourself to the consumer in another way.

Differentiating your product by building and maintaining guest loyalty using CCS is far less expensive than creating a product that is clearly superior to your competitors’ products in all of your customers’ minds. Customers want different things, therefore, swaying all of them with a clearly premium product is a complex and very expensive proposition. Remember that it is the customer that decides what a product is worth. Telling your staff what your product is worth and expecting that to influence what customers are willing to pay is at best naïve.

CCS can differentiate your product from the competition by creating true one to one customer loyalty between you and each individual customer. If you can get your product to exist as a “substitute product” in the customer’s value proposition decision on what to purchase, then loyalty derived from CCS can tip the scales your way. However, if you are not considered to be good enough to be a “substitute product” by the customer, then loyalty must be very intense and may not sway that customer’s decision. Understanding your market.

CCS applies to those customers who you know and can collect data about. The market is comprised of three large customer market categories: 1) unknown customers, 2) market segments and 3) individual customers. Unknown customers are those who have no loyalty and purchase your product when it suits their needs and the price is right. CCS applies to the market segment and the individual customer segment. Your goal should be to use CCS to try and capture some data to identify customers and move them into the market segment category. Then use CCS to give market segment customers a reason to give you enough personal information that you can establish a one to one relationship with them in the third individual customer category. However, customers will only give you data and respond to your attempts to bond with you if you truly give them a reason to invest in a relationship with you.

Market segments are customers who you have a little information about, but not enough to treat them as true individuals and predict their future behavior patterns and desires. You can group them into segments for different tactical promotions based on one or a few of their shared characteristics that are predictive in nature. A customer can belong to more than one segment. These segments are traditionally used as targets for marketing and other campaigns. The problem is that these “segments” may have similar attributes for a few dimensions of their behavior; however, they may have very different dimensions in other key behaviors. Therefore some of your promotional efforts are alienating some of their recipients from these segments. Your goal should be to try and capture more data to better identify them as individuals. Be careful that your messages to segments are not narrow enough to alienate those customers who do not share all the attributes needed to have the message apply to them. Also remember that you need to give customers real reasons to give you enough personal information that you can establish a one to one relationship with them and move them into the “individual” market category.

Individuals are just that – customers who you know enough about that you can create a one to one relationship with them. It costs more to capture new customers from competitors’ market shares than it will to nurture, build relationships with and retain existing customers. There will be a very large range between those customers who you know just enough about to treat with one to one care and those customers who are so loyal and frequent that you have more than enough personal data to predict their future behavior patterns. However, the important point is that you know enough that you do not need to relegate them to the market segment category and mass market to them. You can do better for these customers than placing them in the market segment category. If you do you are losing profits.

CCS can be used to entice and nurture customers along this customer category path from mass market through market segment and finally to individual customer status.

What is CCS?

CCS is not traditional CRM strategies that were developed for marketing promotions that target customer segments. CCS is not the same for all customers and for all products. The goal of CCS is optimizing the lifetime profitability of each individual customer by developing a one to one relationship with them or at least gathering enough data to better segment them for mass marketing campaigns. This involves as detailed and personal a relationship with each customer as they will allow. The goal of traditional CRM is to find targets for promotions/campaigns and gain incremental tactical revenues for one time frame or event.

CCS uses whatever techniques fit the needs of each customer the best, from an array of strategies. CCS’s goal is to create and build a truly dynamic one to one bond with each individual customer based on who they are, what they want and where they are in their lifetime lifecycles. The customer is no longer a target, they are a valued friend that you want to accompany on what you hope will be a long journey. This is not Customer Relationship Management it is Customer Relationship Optimization (CRO). CRO can also be called Customer Centric Relationship Optimization (CCRO) when it is in its advanced stage and a true one to one relationship had been built and is being optimized. For the remainder of this article we will use CRO to mean both CRO and CCRO.

Optimizing the lifetime profitability of all of your individual customers is more profitable than fulfilling all of your tactical promotion needs. Optimizing lifetime profitability for all your customers will increase base demand by increasing retention rate and your share of each customer’s wallet. Then fewer sales shortfalls will develop and fewer tactical promotions will be needed.

CCS, when properly cultivated and used, can achieve these results. Even if your product, by itself, is not clearly superior in the customer’s mind, loyalty derived from CCS can sway a customer to purchase your product. Typically CCS based on CRO involves your customer’s image of themselves, their relationship with you and the customer’s feeling that your company cares more about them and treats them “better” than the competition. A person likes to feel that their business is valued and their loyalty is recognized and rewarded and that they are recognized and valued as an individual.

The analytics behind CCS is very important. However, the art behind enticing customers to share more information with you is an art. You must be sincere and willing to give the customer something of value in return for their valuable personal information.

Implementing CCS

CCS is the use of CRO to guide your interactions with your customers. CRO is the art and science of understanding and optimizing your relationship with the customer. CCS is the way that this is accomplished. The key to implementing and using CCS to make your customers feel that you treat them “better” than the way that your competitors treat them relies on a holistic and one to one relationship between your company and each customer where you are:

• Understand them as individuals, not as members of a market segment or understand them as a member of a market segment and not as a part of a faceless mass market.
• Predict their behavior for their entire lifetime or lifecycle with you, not just how they will react to your next promotion or campaign or gather enough information to assure that the segments that they are placed in fit them as well as possible for the efforts that will target them.
• Only interact with them at the right time(s) with the right offers, based on their lifecycles or their market segments. Sending the wrong offer or at the wrong time relegates all of your future efforts to the realm of “junk mail” and they will ignore you. One wrong move can create immeasurable damage to your relationship.
• Nurture your relationship with them based on their lifecycle’s profit potential instead of today’s focus on tactical/campaign/promotional targeting of customers for short term revenues or for market segments assure that they are as properly segmented as possible and that the segment(s) is not overused and over targeted.
• Understand how you appear to each customer, based on all of your interactions with them, and proactively use this new perspective to improve your one to one relationship with each customer or your use of their market segment(s).
• Therefore the customer must be treated as a company asset and protected and nurtured instead of being an open target for any department’s use.

Each customer is at a different place in their lifecycle and relationship with a company. Using CCS means we must understand where each customer is in order to properly nurture and influence them at that point in their lifecycle’s path.

This involves large amounts of data and new sophisticated modeling (described later). If you dismiss this by convincing yourself that it cannot be done or is too costly, then you are far behind the power curve in modern predictive analytics and information technology. There has probably been more improvement in the past few years in the personal music players that your children use than there has been in your CRM and marketing strategies and capabilities.

However, for now let’s talk in generalities so we can understand the process and not get caught in the details.

Understanding the customer’s purchase decision

There are several steps in understanding and implementing these CCS. Let’s discuss the ones that deal with their purchase decisions.

• First, we must define what factors affect purchase decisions.
• Next we need to understand the major customer types and how these types affect each of the factors.

Only then will we understand the psychology of how to optimize the forces that will allow us to maintain loyalty in a commodity pricing market. The psychology of a customer’s purchase decisions is the result of a matrix of both their customer type and the many factors that affect their decision.

1. First we need to understand how to establish and maintain true customer loyalty on a one to one customer basis
2. Next we must learn how to Implement Customer Relationship Optimization (CRO) instead of Customer Relationship Management (CRM)
3. Finally we need to understand how to use Revenue Management to achieve these results continuously amidst thousands of decisions and interactions.

What information can we use to determine if and how CCS can be applied to an individual customer? First we have to understand the psychology of that customer, which relies on two things – the factors that influence their purchase decision and what type of customer they are at the time of their decision.

Purchase Decision Factors

Basic factors affecting a customer’s purchase decision are: price, product differences, substitute products, value and the circumstances concerning what they can spend. Value and the circumstances can be intertwined. If these basic factors dictate a certain purchase decision, other factors may sway customers emotionally. There may be a true price limit based on available funds that cannot be overcome by appealing to corporate travel managers that the product has the best loyalty program. It is unlikely that emotional factors will override a strong decision predicated on basic factors. Therefore at times we cannot expect customers to override strong basic factor influences and make a different choice based on loyalty.

Emotional factors affecting the market are: brand, loyalty, image and other emotional factors. These can affect their decision, but only if the basic factors do not preclude their deciding to buy your product. If they can spend what you want to charge then the secondary emotional factors can be appealed to. In some cases customers may be willing to accept your inferior product based on strategic loyalty benefits. However, these factors do not exist as the sole influences on the customer’s purchase decision. The type of customer they are and what their relationship is like with the company combines with the basic and emotional factors in influencing a customer’s purchase decisions.

Customer Types Affects on Purchase Decisions

Customer types have a large influence on the impacts that basic and emotional factors have on each customer. All customers are not the same. We need to understand the different types of customers and how basic and emotional factors affect each customer type when they make a purchase decision. This involves a matrix of behaviors.

The key to using loyalty to influence purchase decisions in a commodity market is to give each customer type a reason to decide that your product is worth buying given their basic and emotional factors. When a customer decides your product deserves to be purchased, and they will pay that price, they have established loyalty with you and determined that you stand apart from the larger commodity grouping of products they could have chosen.

In simple terms customers are either:

• Part of the mass market where there is little loyalty and the product is seen as a commodity. Interesting enough, most companies reciprocate and see and treat these people as a commodity – the great undifferentiated mass market. These customers are the most price sensitive and the least likely to pay a premium price.

• Part of a partially loyal market segment where we know, or should know, a little about the customer. However, we do not have their loyalty versus a competing product. We know enough about them to target them in a very broad sense, separating them from the mass market and sending them special and often excessive somewhat targeted offers and communications. However we do not treat them as individuals and they do not give us favored product status. This customer type is at the beginning stage of loyalty. The company has some information about them that differentiates them from the mass market and the company must begin leveraging that information to build a mutual bond with these customers. This bond compels them to choose your company among all the competing products, and sometimes even pay a premium for the company’s product.

• Loyal individuals where we have, or should have, good information on their individual behavior based on prior purchases or interactions. Their degree of loyalty may vary; however, we know enough about them that they are not relegated to just being treated as part of a market segment. We should treat these customers as honored guests and the lifeline of our company. We should proactively nurture their lifetime profit potential, not just their value in our next tactical campaign or promotion. In return, whenever possible, they should choose our product and be willing to pay reasonable premium for it in order to perpetuate and benefit from our one to one relationship with them.

In the last two customer types I qualified our knowledge of the customer with “or should have” because I strongly believe that we do not gather and correlate a fraction of the information that we can about individual customers. Do you have information in one place, a 360 degree view, of all the interactions that you have had with each customer – website visits, purchases, promotions and whether they were used, demographics, history, etc.? Each of these can be inter-correlated to identify and predict future behavior. Most companies are erroneously rejoicing at moving from mass marketing to segment marketing a decade ago and have not earnestly invested in identifying and nurturing the concept of individuals. More on this later…

Applying This Knowledge

The basic market factors are almost all the mass market customers consider when making a purchase decision. From the basic factors, price is most often their overriding influencer. They see all products as fungible commodities and will not or cannot pay a premium or show loyalty for another product. Trying to change this behavior requires moving them to the second grouping of customers, where we know them well enough to build some loyalty.

The market segment customers are better known by companies and therefore can be better catered to in attempts to build loyalty. If they have enough loyalty they will chose your product, but only if they are capable of paying that price. They allow the emotional factors to sway their purchase decisions. They will follow their loyalty to benefit from the emotional benefits that your product will give them. Individual customers and optimizing their lifetime profitability is the new frontier. Doing this will increase loyalty, which as described earlier, will influence their decisions within the framework of their factors and customer types.

What is Loyalty?

Loyalty will move customers through the different customer types, discussed above, to the last customer type where the customer values their relationship with your company enough to do whatever they can to allow their emotional factors to override their basic factors and utilize your product. Loyal individual customers repay your loyalty with their loyalty where possible. It is important to realize that some customers cannot override the basic factors enough to pay your premium price. Price elasticity modeling can show you the “sweet spot” price that results in the optimal revenues once the customers are as loyal as you can make them. This is not a silver bullet; it is a way to optimize your position with customers who will allow their emotional factors to sway their purchase decision.

Loyalty must be built; it is not acquired or given freely in a competitive market. Loyalty is the key to migrating customers from the first mass market customer group to the second market segment customer group. Migrating market segment customers to the Individual market customer group requires a level of effort and commitment that very few companies have exhibited. The key to all customer types and where a customer fits depends on the amount of data we have on them and the value and effectiveness of the understanding that we have about that customer’s past behavior and expected future lifetime behavior patterns, or life-cycles.

Often companies want customers to see them as a more loyal supplier and we want them to be willing to consolidate their share of wallet or even pay a premium price. However, today we are really not trying 100% to build the one to one loyalty that is needed to move each customer through the loyalty path from the mass market to the market segment to the individual. This is our only way to prove to them that we see them as worthy of being treated as valued individuals. We must invest in our relationships and show customers that our goal is to fully understand, track, forecast and nurture each of them individually for their entire lifetime with us. Then, we will begin to build the loyalty that we need to move them through the market type groupings.

Preferred dynamic pricing and availability are the obvious ways to show that you value a loyal customer. However, few if any companies today understand that increasing frequency will more than offset lower prices by creating demand in periods where today we have to offer our most severe discounts to get enough demand.

So far we have discussed the concept of customer relationship optimization, customer centric strategies, basic and the emotional factors and customer types that drive purchase decisions. We discussed the interrelationship between the three basic customer types that exist in the market and how different factors affect each customer type. Now we can focus further on how to build the one to one loyalty that is the key to moving customers along the customer type process until they attain the status of individuals who are treated accordingly.

Implementing Customer Relationship Optimization

Implementation is next. Now that we understand the factors and customer types and how they combine to influence purchase decisions, let’s address how we implement strategies to accomplish these goals. What do we need to do in order to build one to one loyalty?

We need to develop and implement customer centric profit optimization (CCPO) strategies (CCPOS) that are based on customer relationship optimization (CRO) instead of customer relationship management (CRM.) CRO (also remember CCRO) focuses on each individual customer and wherever possible not on segments of customers. CRO also focuses on the optimizing each individual customer’s lifetime profit potential instead of CRM’s current focus on identifying customer segments for tactical campaign management and to improve tactical revenues.

CCPO is the optimization of all company actions, across all the functions in a company, to support CRO. The main action items to accomplish this focuses on two areas:

1. Nurture the customer for their lifetime profit potential and stop targeting them for actions only when they are needed in a campaign or promotion.

Predict what each customer’s lifetime lifecycles will be along many dimensions of their behavior and track them against these projections.

• Offer dynamic pricing based on the customer’s lifetime or strategic profit potential
• Offer preferred availability based on lifetime customer value
• Understand the customer’s propensity to take certain actions, both good and bad, at certain points in their lifecycles and understand what actions from the company can positively influence their actions.
  - Automate the implementation of those actions at the points in each customer’s lifecycles where they can be optimally applied

2. Look at the company from the eyes and perspective of each individual customer and stop just looking at the customer from a company perspective.

• Reverse the perspective and understand what the customer sees and gets and interactions from/with the company.
• Today we just see company actions that impact many customers, we do not see what a customer sees is impacting them

The implementation of these theories is very complex and far beyond the scope of this article. Detailed descriptions of how to build customer centric profit optimization from customer relationship optimization can be found at: http://www.authorstream.com/stevepinchuk/Customer-Centric/ which is comprised of several briefings, including:
a 15 minute narrated PowerPoint Summary http://www.authorstream.com/Presentation/stevepinchuk-769519-customer-centric-strategies-summary-6b/
a 90 minute narrated PowerPoint Detailed presentation http://www.authorstream.com/Presentation/stevepinchuk-770157-customer-centric-strategies-details/ and a link to the article Turning CRM into Entity Optimization that Supports Enterprise Profit Optimization http://www.hospitalitynet.org/news/4049418.html

Revenue Management and dynamic pricing and availability

Revenue Management (RM) is the fabric that optimizes and ties together the real time implementation of all of these concepts in everyday actions. A good revenue management person and system will understand these various possibilities and tradeoffs and find the optimal mix of possible outcomes.

Without the right RM, your product will not be available or will not be at the right price and all CRO and CCPO efforts are wasted. Nothing say you do not care like not being able to sell to a willing repeat customer or having them find out that there pricing was the same as unknown customers.

If your product is not available for a customer the one to one relationship can be damaged. If your best customers pay more than others the relationship can be damaged. I believe that your best customers should have preferred availability to the last available room as well as preferred pricing. Can you really tell someone that their relationship with you is special and then deny them your product when they want it and instead give your product to someone that has no loyalty to the company?

Ultimately, the demand from each customer type, for each product, through each distribution channel, must be forecast at all of their various price points. From this the optimal mix of demand projections by price points and customer types that can be reached through each distribution channels should be selected. It is important that forecasts of incented demand, demand responding to promotions, are produced. Revenue management must be accomplished objectively based on sound analysis and not based on what we would like to have happen. To properly encompass customer centric pricing and availability into your revenue management system requires the use of a bid price RM system and not an older system that opens and closes “buckets” of demand.

Summary

Allow me to close with an objective perspective derived from years as an economist to a Sr US Senator. There is little that hotels can do to change the perceptions and value decisions of the mass market. Their buying decisions will be based more on price than on loyalty and what they perceive as minor differences in product differentiation that do not justify premium prices.

What suppliers can do is work to genuinely differentiate themselves through constant and focused efforts to enhance loyalty through diligent and analytical applications of one to one marketing that nurtures the lifetime profitability of each individual customer. I am not just talking about loyalty programs that give their members points or preferential check-in lines. The efforts that will create true loyalty and enable the customer, whenever it is possible, to prefer your product are efforts that predict what the customer will want and when and how they will want it based on their place in a long term lifecycle and then give them preferential access and pricing. These approaches are described in the briefings in the earlier links. Revenue management can assist by identifying the times when customers can be asked to pay a premium as well as gauging what price might be an acceptable premium price.

The real question during commodity price wars might be how to maintain loyalty instead of how to maintain premium prices. The strategic value of your frequent customers is far more important than their tactical value during times of price wars. If you lose them to a competitor a few times during a price war, you may have lost them as future loyal customers.

Steven Pinchuk is founder and President of Profit Optimization Strategies. Mr. Pinchuk's past positions have included SVP Resort Profitability for Westgate Resorts; VP, Profit Optimization Systems, for SAS software (SAS is the leader in business intelligence and predictive analytics software);Corporate VP of RM & Distribution for Harrah’s Entertainment, Inc., the world’s largest Casino Hotel Company with annual revenues of $20 billion USD. Mr. Pinchuk also held Director and Vice President positions at top travel companies including Princess Cruises, Club Med and American Airlines. Mr. Pinchuk can be contacted at 561-623-9677 or steve@profitoptimization.com Extended Bio...

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