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Customer Portfolio Management
                       Master MOI University Nanterre 2009

                       Lars Meyer-Waarden
                       Professor University of
                       Strasbourg/Ecole de Management
                       Strasbourg
                       Meyer_waarden@yahoo.fr
                       http//:meyer-waarden. com




                 Bibliography


For more information my
website
http://meyer-waarden.com




2




                                                             1
Bibliography
                                   Customer Relationship Management
                                        A Databased Approach




                                     V. Kumar
                                     Werner J. Reinartz
3




Contents

    Chapter 1: Introduction: From     Mass   Marketing to Customer
    Relationship Management (CRM)

    Chapter 2: Implementing customer portfolio management
       Database management
       Performing Database Analytics
       Customer Value Metrics and Segmentation

    Chapter 3: From product portfolio management to customer portfolio
    management

    Chapter 4: Conclusion



4




                                                                         2
Chapter 1: Introduction: From Mass
    Marketing to Customer Relationship
            Management (CRM)




Development in marketing




6




                                         3
Form mass MKT to relationship MKT

     Why:
       Market Saturation
       Strong competition & Multiplication offers
       Shorter Product life Cycles
       Development information data bases




7




    What is relationship marketing?

         Relationship marketing involves creating,
         maintaining and enhancing strong
         relationships with customers and other
         stakeholders.




8




                                                     4
Implications of Changes in Business
 Environment

     Focus on customer-centric instead of product-centric
     strategies




9




    Relationship Marketing

     « Instead of selling a product to a maximum of customers….




                                           Client 1
             1 Product
                                           Client 2

                                           Client 3




10




                                                                  5
Relationship Marketing
 Concentration on clients,and sales of a maximum of possible
 products/services to their expectations  personnalisation (1-2-1 or 1-2-
 few)

                                                    Product 1
              1 Client
                                                    Product 2

                                                    Product 3


     Cross selling is when new, related or even unrelated products are
     offered to the customer.
     Beneficial strategy for profit maximization from current customer base.
     Up-selling is the promotion of more expensive products or services
     over the product or service originally discussed or purchased.

11




 Example of a Customized Offer




                         Copyright© 2010 Pearson Education, Inc.
12                              Publishing as Prentice Hall




                                                                               6
Every client is an asset


         Thus


                maintaining clients

      becomes the principal activity in companies




13




     Highly satisfied customers

         Tend to be more loyal customers
         Generate more profits over their lifetime
         of patronage




14




                                                     7
Satisfaction-Loyalty-Profit Chain
         Product
       Performance
                                                    Customer                             Retention /                               Revenue /
          Service
        Performance                                Satisfaction                              Loyalty                                        Profit
         Employee
        Performance



     Source: Strengthening the satisfaction-profit chain”, Eugene W Anderson, Vikas Mittal. Journal of
     Service Research, Nov 2000. Vol 3, Iss.2, p 107




15




 Declining Customer Satisfaction-
 Example

       S c he dule d               Ho us e ho ld              Co mme rc ial              P arc e l De live ry           P e rs o nal                 P ublis hing/
         Airline s                 Applia nc e s                 B a nks                                               Co mpute rs
90
                            90                          90                          90                          90                                   Ne ws pape rs
                                                                                                                                              90

85                          85                          85                          85                          85                            85

80                          80                          80                          80                          80                            80

75                          75                          75                          75                          75                            75

70                          70                          70                          70                          70                            70

65                                                      65                          65                          65                            65
                            65

       -8.4%                     -3.5%                       -2.7%                        -2.5%                      -9.0%                    60   -12.5%
60                                                                                  60                          60
                            60                          60
 1994 1996 1998 2000 2002    1994 1996 1998 2000 2002    1994 1996 1998 2000 2002    1994 1996 1998 2000 2002    1994 1996 1998 2000 2002      1994 1996 1998 2000 2002
                                   (American Customer Satisfaction Index) with products and services
                                              Source: http://www.theacsi.org, University of Michigan

16




                                                                                                                                                                          8
The Reasons Why Loyal Customers
     Generate More Profits
      Loyal Customers …

     1.   Increase their spending over time
     2.   Cost less to serve than new customers
     3.   Generate word-of-mouth advertising or referrals
     4.   Are less price sensitive than new customers




17




Typical profit pattern in financial services and other high
acquisition cost industries




18




                                                              9
Mass MKT vs Relationship MKT
                                               Focus on relationship and regular
     Focus on transaction                      transactions
     Short term orientated                     Long term orientated
     Priority: Acquisition new clients         Micromarketing        Fine
     Market Share                              segmentation with precise
     Product Differentiation and Product       knowledge about customers which
     Management                                have the most important probability
     Focus on transaction and products         to response (database) Interactive
                                               Dialog
     Mass distribution, Mass advertising,
     Mass production, Communication in         Priority: client retention/loyalty
     one sense                                 Client Differentiation and Customer
     Product portfolio management              Portfolio Management
     Key Indicateur : market share             Focus on clients
                                               Personalized, individualised
                                               distribution, advertising, production,
                                               Communication in 2 senses : Mass
                                               customisation
                                               Customer portfolio management
                                               Key Indicateur : Customer Share &
19                                             Customer Life time value




     What is customer relationship
     management?


           Business strategy designed to identify and maximize
          customer value.
            Capture customer data and interact with the customer
          simultaneously     Involves managing detailed information
          about individual customers.
            Develop specific strategies for interaction with each
          customer
            Develop better relationships with profitable customers
           Target customer needs to maximize the customer’s
          experience and overall customer satisfaction.
            Locating and enticing new customers that will be
          profitable
            Finding appropriate strategies to deal with unprofitable
          customers, including termination of relationships
20




                                                                                        10
Chapter 2: Implementing
              Customer Portfolio Management


Allocate resources based on customer value - and through a
deep understanding of their needs. The results are deeper,
richer customer interactions driven by more personalized and
targeted value propositions that better meet customer
expectations.




     Operationalisation
Phase 1. Acquisition clients Datawarehouse construction by using a
loyalty program (CRM tool used by marketers to identify, award, and
retain profitable customers)

Phase 2. Segmentation clients             Datamining (Identification, Evaluation
best clients)

Phase 3. Customer Portfolio Management:
 –   Resource allocation based on economic value of customer
        Selection retention & development best clients;
        Development average clients;
        Abandon bad clients

Phase 4. Interactions
 –   Exchange of information and goods between customer

Phase 5. Personalisation/Mass Customisation according to segments:
          –   Needs
          –   Customer Lifetime Value
22




                                                                                   11
Database Management




 Operationalisation database


     –   For relationship marketing it is necessary to
         know every client
     –       Construction and management database
     –   Database technology made it possible to
         track customer transactions, actions and
         Lifetime Value of a Customer
     –       Functions: storage, analyses


24




                                                         12
Customer Database Defined


       A customer database is a list of customer
       names to which the marketer has added
       additional information in a systematic
       fashion.




25




     A Customer Database is…

       The heart of all direct and
       interactive marketing
       activities.
       The key to developing
       strong customer
       relationships and
       retaining customers.


26




                                                   13
Primary Objectives of a Customer
     Database
       To get to know customers better Perform Marketing Research
          Profile Customers
       To sell different products or services to existing customers
       Cross-Selling
       To introduce new products or services
       Develop A Customer Communication Program
       Generate New Customers
       Send Customized Offers To distribute information about an
       upcoming event or sale
       To manage customer lifecycles
       To keep customers satisfied and happy         Retain Best
       Customers




27




     Database Management

                Understand
                                                                     Develop
                 Markets &
                Customers
                                                                      Offer

        Customer Intelligence                                     Market Strategy
           and Segmentation
                                                      Ta
                                                      Ta
                                                      Ta
                                                      Ta
                                    w




                                                                     Channel Integration
                                                       ar
                                                       ar
                                                       ar
                                                       ar
                                                       ar
                                  no




               Customer
                                                         rg
                                                         r
                                                         r
                                                         r




         Data Warehouse
                                 K




                                                                       Market -Focused
                                                            ett
                                                            e
                                                            et
                                                            et




                                                                       Organisation
                                         Explore   Find

                                          Enjoy    Buy
                                Se
                                Se
                                Se
                                Se
                                Se
                                Se
                                Se
                                Se
                                Se




                                                                       Sales Force
         Communication
                                   rv
                                   rv
                                   rv
                                   rv
                                   rv
                                   rv
                                   rv




                                                                       Effectiveness
                                    viii
                                    viiic




                Centre
                                     iiic




                                                            ll
                                         ce
                                         ce




                                                         Se




             Service Force
                                          e
                                          e
                                          e
                                          e
                                          e




                                                                    Marketing Programmes
             Effectiveness



                  Retain                                            Acquire
                Customers                                          Customers

28




                                                                                           14
Database Management - Constitution
     Surveys, coupons, cookies, phone calls, subscriptions,
     scanning, loyalty programs,…)

      Customer’s Name               Purchase Frequency
      Address                       Reactions to promotions ,
      Telephone Number              Satisfaction survey
      E-Mail Address                Life cycles
      Demographics                  Preferences & Needs
      Psychographics                Loyalty Programme
      Past Purchases (Transaction   Customer Lifetime Value
      Data)
                                    Programme de fidélisation
      Media of recruitment
      Purchase dates
      Purchased products
      Expenditures




29




         Performing Database Analytics




                                                                15
Performing Database Analytics
           Data Mining
            –    Defined: The process of using statistical and
                 mathematical techniques to extract customer
                 information from the customer database to draw
                 inferences about an individual customer’s needs
                 and predict future behavior.
            –    Online Analytical Processing (OLAP)




31




     What’s the Secret to Database
     Analytics?
           For Marketers to…

      1.        Be able to identify their “most” and “least” valuable
                customers;
      2.        Clarify demographic and behavioral statistics that apply to
                each population.




32




                                                                              16
Link Between CRM and Database
 Marketing
     Database Marketing
       Customer Databases
        –   Identify and analyze customer population

        –   Group based on similarities

        –   Recommend separate marketing campaigns for different groups



       CRM
        –   Applies database marketing techniques at customer level

        –   Develops strong company-to-customer relationships




33




              Customer Value Metrics and
                    Segmentation




                                                                          17
What is market segmentation?

           Market segmentation involves dividing
           large, heterogeneous markets into smaller
           segments that can be reached more
           efficiently and effectively with products and
           services that match their unique needs.

           Selection / Scoring by potential aiming at
           resource allocation optimisation (turnover,
           profit, loyalty development, recruitment,
           probable reaction)



35




           Segmentation and Target Marketing
                                      #1                   #2

     Market Segmentation:
     Divide the market into
     segments of customers &
     develop segment profiles



       Target Marketing:
 Select the most profitable
   segment to focus on

36




                                                                18
Benefits of Segmentation:

      Consistent with the premises of the
      marketing concept and customer
      orientation
      Enables the firm to focus its marketing
      resources
      Helps the marketing firm gain strong
      competitive advantages through expertise
      in serving specific customer segments



37




     Levels of market segmentation and
     Target Marketing
 –   Mass marketing
        Assumes market is homogenous and uses the same product, promotion and
        distribution to all consumers.
 –   Segment marketing
        Adapting a company’s offerings so they more closely match the needs of one or
        more segments.
 –   Niche marketing
        Adapting a company’s offerings to match the needs of one or more sub-segments
        more closely where there is little competition.
 –   Micro marketing
        Marketing programmes tailored to narrowly defined geographic, demographic,
        psychographic behavioural segments.
          –   Local Marketing
                  Tailoring brands and promotions to the needs and wants of local customer groups.
          –   Individual marketing
                  Tailoring products and marketing programmes to the needs and preferences of
                  individual customers.
          –   Mass customisation
                  Preparing individually designed products and communication on a large scale.

38




                                                                                                     19
Target Marketing Strategies




39




     Variable for Segmenting consumer
     markets



                 Geographic

                 Demographic

                  Behavioral



40




                                        20
What is
     geographic segmentation?


        Geographic segmentation means dividing
        the market into different geographical units
        such as nations, regions, states, counties,
        cities, or neighbourhoods.




41




What is demographic segmentation?

       Demographic segmentation means
       dividing the market into groups based on
       variables such as age, gender, family size,
       family life cycle, income, occupation,
       education, religion, race, generation and
       nationality.




42




                                                       21
Customer lifecycle segmentation




  Acqusition/
                    Development       Maturity         Decline/Re-Activation
  Learning


Purchases vary according to:                 Example:
                                             – Babies
      - Time (fashion, preferences, needs,   – Children
      learning, forgetting)                  – Teens
      - Age (opinions, attitudes, tastes)    – Students
      - Generation (Values & Beliefs)        – Young Professionals
                                             – Confirmed Professionals (with
                                               children)
 43                                          – Seniors




       Customer Value Hierarchy




 44




                                                                               22
What is behavioural segmentation?

          Behavioural segmentation means dividing the
          market into groups based on their knowledge,
          attitudes, uses or responses to a product.
           –    Usage rate/Purchase Frequency
           –    Purchase Amount
           –    Purchase Recency
           –    Loyalty status/CLV
           –    Method or location of their purchases
           –    Method of payment they choose
           –    “Cookies” placed on their computers




45




Customer Based Marketing Metrics for
Behavioral Customer Portfolio
Segmentation

 –Acquisition rate (%) = (N prospects acquired/N of prospects targeted) x
 100
 – Acquisition cost = Acquisition spending ($) / N of prospects acquired
 – Inter-purchase time = Time in days or months
 – Retention rate (%) = (N customers in cohort buying in (t)| buying in (t-
 1) / N customers in cohort buying in (t-1) ) x 100
 – Defection rate (%) = 1 – Avg. Retention rate
 – Win-back rate (%) = Proportion acquired customers in a period who
 are customers lost in an earlier period
 – Survival rate t (%) = (Retention rate t * Survival rate t-1) x 100
 – Lifetime Duration in days, months or years



46




                                                                              23
Customer Based Marketing Metrics for
Behavioral Customer Portfolio
Segmentation

  – Share of Wallet (%) = Expenditures individual i from firm j
  / Σ Expenditures individual i from all firms of the category x
  100
  – Size of Wallet ($) = summation of value of sales made by
  all the J firms that sell a category of products to the focal
  customer
                     Share-of-Wallet    Size-of-Wallet      Absolute expenses
                                                                with firm
       Buyer 1              50%               $400                 $200
       Buyer 2              50%                $50                  $25


      Absolute attractiveness of Buyer 1 eight times higher than buyer 2
 47




Customer Based Marketing Metrics for
Behavioral Customer Portfolio
Segmentation


  – RFM value
  – Customer Lifetime Value
  – Customer Equity




 48




                                                                                24
RFM
     Recency, Frequency and Monetary Value-applied on historical data

     Recency -how long it has been since a customer last placed an
     order with the company
     Frequency-how often a customer orders from the company in a
     certain defined period
     Monetary value- the amount that a customer spends on an average
     transaction
     Empirical Rule:
      –   All clients having purchased during the last 12 months are worth twice
          those who purchased 24 months ago.
      –   All clients having purchased 2 times during the last 12 months are
          worth twice those who purchased only once.
      –   All clients having purchased for 1000 Euros during the last 12 months
          are worth twice those who purchased for 500 Euros.


49




 RFM Method - Regression Method

     Regression techniques to compute the relative weights of the R, F,
     and M metrics

     Relative weights are used to compute the cumulative points of each
     customer

     The pre-computed weights for R, F and M, based on a test sample
     are used to assign RFM scores to each customer

     The higher the computed score, the more profitable the customer is
     likely to be in the future

     This method is flexible and can be tailored to each business
     situation

     Dynamic segmentation in: Good, Mean and Bad clients             Switch of
50   one to another class




                                                                                   25
Recency Score
     20 if within past 2 months; 10 if within past 4 months; 05 if within past
     6 months; 03 if within past 9 months; 01 if within past 12 months;
     Relative weight = 5


        Customer      Purchases      Recency      Assigned      Weighted
                      (Number)      (Months)       Points         Points
                            1           2            20            100
         JOHN               2           4            10             50
                            3           9            3              15


         SMITH              1           6            5              25


                            1           2            20            100
         MAGS               2           4            10             50
                            3           6            5              25
                            4           9            3              15


51




 Frequency Score
     Points for Frequency: 3 points for each purchase within 12
     months; Maximum = 15 points; Relative weight = 2

     Customer      Purchases(#)     Frequency      Assigned        Weighted
                                                    Points          Points
                        1               1                 3              6
       JOHN             2               1                 3              6
                        3               1                 3              6

      SMITH             1               2                 6              12

                        1               1                 3              6
      MAGS              2               1                 3              6
                        3               2                 6              12
                        4               1                 3              6
52




                                                                                 26
Monetary Value Score
       Monetary Value: 10 percent of the $ Volume of Purchase with 12 months;
       Maximum = 25 points; Relative weight = 3


            Customer        Purchases       Monetary          Assigned      Weighted
                            (Number)                           Points        Points

                               1                 $40             4             12
              JOHN             2                 $120            12            36
                               3                 $60             6             18

             SMITH             1                 $400            25            75


                               1                 $90             9             27
             MAGS              2                 $70             7             21
                               3                 $80             8             24
                               4                 $40             4             12


53




     RFM Cumulative Score
        Customer           Purchases       Total Weighted Points         Cumulative
                           (Number)                                        Points

                               1                        118                 118
            JOHN               2                        92                  210
                               3                        39                  249

         SMITH                 1                        112                 112


                               1                        133                 133
          MAGS                 2                        77                  210
                               3                        61                  271
                               4                        37                  308
     Cumulative scores: 249 for John, 112 for Smith and 308 for Mags; indicate a potential
     preference for Mags    The higher the computed RFM score, the more profitable the
     customer is expected to be, in the future
     John seems to be a good prospect, but mailing to Smith might be a misdirected marketing

54 effort




                                                                                               27
Customer Lifetime Value


     Customers should be viewed as an investment as without them
     there is no business

     Every client is an asset with past and future revenues (puchases)
     and costs
      –   Acquisition costs (advertising, recruitment,..)
      –   Loyalty costs (Loyalty schemes, quality)




55




     Two CLV examples

          Leclerc: an average family spends 50€ per week on
          groceries    3.000 €/per year and 30.000 € lifetime
          expenditure in 10 years)

          VW: Lifetime expenditure if a car (Golf = 20.000 €) is
          purchased every 5 years: 200.000 €.

          But a good customer is worth even more, since
          satisfied customers tell on average another 3-5
          customers about the company.

56




                                                                         28
Calculation Customer Lifetime
     Value- Net Present Value models
     As the discounted stream of net revenues that a customer will
     generate over the period of his lifetime of patronage with a
     company=> Multi-period evaluation of a customer’s value to the
     firm
     The information needed to calculate CLV is derived from
     transactions recorded in a customer database

         Recurring
         Revenues
                             Contribution
                             margin
         Recurring
         costs

                             Lifetime of a
                              customer                    Lifetime Profit
                                                                              LTV

                                 Discount                     Acquisition
                                   rate                          cost
57




     Calculation CLV- Net Present Value
     models
                                                          t
                                  T
                                                 1 
                      LTV    =   ∑ CM
                                  t =1
                                            t        
                                                1+ δ 

LTV = lifetime value of an individual customer in $,
CM = contribution margin,
δ = interest rate,
t = time unit, Σ = summation of contribution margins across time periods


Information source:
     CM and T from managerial judgment or from actual purchase data.
     The interest rate, a function of a firm’s cost of capital, can be obtained from
     financial accounting

Evaluation:
     Typically based on past customer behavior and may have limited diagnostic
     value for future decision-making
58




                                                                                       29
Calculation CLV- Future orientated
 models

     CLV analysis involves distinguishing active customers from defectors
     and then predicting their lifetime and future levels of transactions
     according to their observed past purchase behavior

     As the cumulated past and expected future profit by client (RFM
     models, multivariate logit or probit models, or stochastic models as
     Markov Chains or Pareto/NBD) :

      –   CLV = Acquisition Value + Σ Past Profits + (Σ Future Profits)


                             CM
                 LTVi =              − AC
                          1 − Rr + δ
      CM = contribution margin, Rr = Retention rate
59




     CLV Targets
      Maximize the net present value of both current and future customers
      If a marketing effort results in the acquisition of new customers who
      will generate value over time the action is desirable
      The maximization of CLV consists of optimizing of the customer
      portfolio: the acquisition, retention, and add-on selling processes
      (Blattberg et al., 2001)     balance the acquisition of new customers
      with the retention of existing ones (Blattberg & Deighton, 1996)
      Measure the value of a firm on the basis of the value of its current
      and future relationships (Gupta et al., 2004)
      Segmentation & allocate marketing spending for long-term profit
      Customer-focused approach for measuring firm value           Customer
      equity



60




                                                                              30
Customer Equity


          Customer equity is the total combined
          customer lifetime values of all the
          company’s customers.




61




     Attrition/Defection

     Attrition = Cessation of activity (Mean 20% annually)
      –   Address change (20% / year) ==> database maintaining
      –   Mortality,Dissatisfaction, Lost of needs or other life cycle, deal proneness,
          variety searching)
      –   Relation duration: high mortality for new clients than decrease and natural
          increase with age

     Attrition depends on various factors
      –   Client characteristics (acquisition mode, inertia, habits, attitudes…)
      –   Relationship length : strong mortality for new clients

     Measure: Attrition rate
      – Systematic surveys (satisfaction)
      – Econometric modelisation with Survival Analysis (Recency,
        Frequency, Monetary)


62




                                                                                          31
Measure defection by survival
     analysis


     Survival tables (Kaplan 1966)
     Cox model (1972)
     S(t)=[S0(t)]eBX where
     h(t)=h0(t)*eBX
      X = indépendant co-variables


63




      Chapter 3: From product portfolio
             Management to Customer
                  Portfolio Management




                                          32
Product Portfolio analysis
      The product portfolio:
       –   The collection of businesses and products that make up the company
      Portfolio analysis:
       – Step 1:
       Analyse the current product portfolio
       – Step 2:
       Shape the future product portfolio




65




           Development of Product
           Portfolios




66




                                                                                33
Customer Portfolio analysis
       The customer portfolio:
         –   The collection of clients that make up the company
       Questions of Portfolio analysis:
         –   How to maximize profits across various customer segments ?
         –   How to optimise customer acquisition and retention ?
                  Step 1: Analyse/Segment the current customer portfolio
                  Step 2: Shape the future customer portfolio (acquisition valuable
                  customers, development of good clients and clients with potential)




67




     Customer Portfolio Analysis - Linking Customer
     Acquisition, Relationship Duration, and Customer
                        Profitability
                                                      Relationship
                                                       Duration

                           Acquired                                          Customer
                          Customers                                             Profitability
     Prospects
                         Non-acquired
                          Customers

                 Acquisition Process                         Retention Process




                                        -Firm actions
                                        -Customer actions
                                        -Competitor actions
                                        -Customer characteristics


68




                                                                                                34
Customer Portfolio Analysis balancing between
Acquisition and Retention

      In contexts with high acquisition costs (Telecommunication) it
      costs about 5 times more to acquire a new customer than it does
      to keep an existing one (Bolton & Drew 1990).
      It is thus more cost effective to concentrate marketing efforts on
      customer retention and relationship building than on gaining new
      customers
      In other contexts with low acquisition costs (Grocery Retailing,
      Mail Order Business) it does not cost about more to acquire a new
      customer than it does to keep an existing one (Reinartz 1999).

      It is thus important to balance acquisition and retention resources.




 69




Customer Portfolio Analysis balancing between
Acquisition and Retention



For a healthy portfolio
acquisition and retention are
necessary !!!




 70




                                                                             35
Customer Portfolio Analysis balancing between
Acquisition and Retention

         Transactional Approach:                             Relational Approach : exit barriers, relationship
         Preference (attitude/ satis-                        marketing, individualisation, create value
         faction)



                                                 Clients Revenues
      Value




                                   1      2              3                         4




      Acquisition/New                          Clients with                     - Experiantial
      clients:                                 potential :                      marketing
      Heterogenity                             Relationship                     - Inactive clients
      management                               Development                      Relaunch/ Abandon
      Identification                           Selection     behavior
         discrimination                        control     retention


 71




  Reallocation of Resources Based on
  Customer Value & Acquisition costs

                                                  High                                       High
              High                                Low                                        High

                                       Always a Share                           Lost for Good

                                       One Shot Transactional                   Loyalty and Relationship
                                       Marketing                                Marketing
                 Retention costs




                                       Always a Share                           Lost for Good

                                       One Shot Transactional                   Loyalty and Relationship
                                       Marketing                                Marketing



               Low                                Low                                            High
                                                  Low                                            Low

                Low                             Acquisition costs                                 High



 72




                                                                                                                 36
Customer Retention and Acquisition Strategies

                  Allocate resources between existing and new customers



              Retention Strategy:                       Acquisition Strategy:
              Keep existing customers                    Attract new customers
     Market decisions:
                                                 Market decisions:
          -Segment your customers by
                                                     -Target the customers based on
           lifetime value
                                                       the model of existing customers
         -Retain your best customers
                                                     -Develop new markets
         -Develop one-to-one marketing
                                                 Product decisions:
     Product/Service decisions:                      -Highlight your price/ product offer
         -Develop relationship marketing             -Have a clear positioning on the
         -Retain your clients with superior           market
          quality service                            -Develop attractive branding
         -Develop tailor-made products               -Give incentives to add initial
         -Cross-sell and up-sell                      value to the new customer
         -Cross-merchandise


73




 Retention and Acquisition Media
                   Retention Media                       Acquisition Media
     Direct Mail:                             TV:       -    Direct response TV (DRTV)
        Mailings:                                       -    TV spots
                      -   Single-product                -    Home shopping channels
                      -   Multi-product                 -    Digital TV
                      -   Miscellaneous       Radio:     -     Direct response radio (DRR)
          -           -   Birthday cards                 -     Radio spots
                      -   Thank-you notes
                                              Telemarketing:
                      -   Invitations
                                                         - Outbound
     Enclosures:
                                                         -     Inbound
                      -   Statements
                                              Print Media :
                      -   Parcels
                                                         - Press / newspapers
                                                         - Magazines
     Telemarketing:
                                                         - Insert
                      -   Outbound
                                              Direct mail :
                      -   Inbound
                                                         - Mailings
     Catalogues
                                                         -     Inserts
                                              Internet
     Newspapers / bulletins
                                              Exhibitions / field marketing



74




                                                                                             37
CRM Strategies & marketing mix according to
 lifecycles
                    Acqusition               Retention             Recovery
                    Interaction/Dialogue     Récompense/Satis-     Exit Barriers
                                             faction
Products            Product-                 Personalisation       Incomaptibility with
                    Codevelopment            Products & Service    competitor products
                    Cross Selling                                  L/t waranties
Communication       Call Center/ Toll Free   Customermagazines     Telephonemarketing
                    Number                   Eventmarketing        Individual
                    Internetforum            Dialog via forums &   communication for
                                             mails                 recovery
Distribution        Internet                 24-h-Service          Complaint
                                             Expressbelieferung    Management
                                             Dialog via forums &   Recovery
                                             mails                 l/t contracts
                                                                   Subscriptions
                                                                   After Sales Service
Price               Pricediscrimination      Q Rebates             Price waranties
                    Price decrease           Loyalty Rebates
                                             LP
75




Balancing Acquisition and Retention
Resources
        The amount of investment in a customer and how it is invested has an
        impact on acquisition, retention and customer profitability

        Investments in customer acquisition and retention have diminishing
        marginal returns

        The relative effectiveness of highly personalized communication
        channels is much greater than the less personalized communication
        channels
 .
        Under spending in acquisition and retention is more detrimental and
        results in smaller ROIs than overspending

        A suboptimal allocation of retention expenditures will have a larger
        detrimental impact on long-term customer profitability than suboptimal
        acquisition expenditures

        The customer communication strategy that maximizes long-term
        customer profitability maximizes neither the acquisition rate nor the
76      relationship duration




                                                                                          38
Profile Analysis for customer
acquisition

  Used to define and compare the profile of campaign responders with
  the actual profile of the company’s best customers and prospects

  Considers the input (generally geographic, demographic or
  psychographic) and clusters names into groups with similar tastes
  and preferences

  Statistical techniques as automatic interaction detection (AID) and
  chi-square automatic interaction detection (CHAID) also used in
  analysis




 77




  Customer Portfolio Management according to
  customer lifecycles

           Acquisition    Development      Retention          Retention         Abandon/
                                                                                Re-
CLV
                          Mailing or e-       Professionals
                                                                                activation
           Mailing ou                                            Clients with
           e-mailing      mailing, visit      with strong
                                                                 strong value
                                              potential

                                            Loyalty           Telephone
                                            Program, Visit    marketing,
                           Young
                                                              visit
                           Professionals




               Students



 78                                                             Lifecycle




                                                                                             39
Customer Portfolio Management
      according to Decile Analysis
                                                                          Decile Analysis

                                     40.00%
                                              35.18%
                                     35.00%

                                     30.00%
                     Response Rate




                                     25.00%            22.52%
                                                                19.96%
                                     20.00%

                                     15.00%
                                                                          11.08%
                                                                                       8.98%
                                     10.00%
                                                                                                   6.74%
                                                                                                            4.42%
                                      5.00%                                                                           2.26%   1.78%   0.90%
                                      0.00%
                                                   1     2        3         4            5           6            7     8       9      10
                                                                                          Deciles




  The Decile analysis distributes customers into ten equal size groups
  For a model that performs well, customers in the first decile exhibit the highest response rate

 79




Customer Portfolio Management according to Lift
Analysis
                                                                          Lift Analysis

              3.50
                                     3.09
              3.00

              2.50
                                              1.98
              2.00                                      1.75
      L ift




              1.50
                                                                  0.97
              1.00                                                              0.79
                                                                                             0.59
                                                                                                           0.39
              0.50                                                                                                    0.20     0.16     0.08
              0.00
                                      1        2         3            4          5             6            7          8        9        10
                                                                                     Deciles



  Lifts that exceed 1 indicate better than average performance
  Less than 1 indicate a poorer than average performance
  For the top decile the lift is 3.09; indicates that by targeting only these customers one can expect to
 80 3.09 times the number of buyers found by randomly mailing the same number of customers
  yield




                                                                                                                                               40
Customer Portfolio Management according
to Share of Wallet /Size of Wallet


                 High                                           Maintain and guard
                                      Hold on


          Share-of-wallet
                                                                      Target for
                                    Do nothing                     additional selling

                 Low

                                     Small                              Large
                                                  Size-of-wallet


 The matrix shows that the recommended strategies for different segments differ
 substantively. The firm makes optimal resource allocation decisions only by segmenting
 customers along the two dimensions simultaneously
 81




      Customer Portfolio Management according to
      the profit contribution of customers

       150%                                                               150%


       100%                                                        100% 100%

                                                     79%
        50%                            58%                                50%
                         30%                        28%
                                      14%
          0%            5%                                                0%

                   Loyals    Divided Loyals Multi-Loyals Occasionnal




 82




                                                                                          41
Customer Portfolio Management according to
the profit contribution of customers
                      1000
                              860

                      800

                      600
                                    435
           (in $'s)



                                                                         Revenue
                      400
                                                                         per year
                                          161            159
                      200                                                Annual
                                                17
                                                                         profit
                          0
                                                               -67
                      -200    Tier A      Tier B         Tier C

 Example of a firm with a highly heterogeneous customer base:
   -Tier A represents 27% of the customer base, Tier B 42% and Tier C the remaining
 71%.
   - More than a quarter of the customers are unprofitable and need to be subsidized
 by the highly profitable ones
83




     Customer Portfolio Management
     according to CLV Profit Contribution
     CLV analysis to determine the segment value according to their profit
     contribution


       100%
         90%
         80%
         70%
         60%                                                             S e g me nt   D
                                                                         S e g me nt   C
         50%
                                                                         S e g me nt   B
         40%
                                                                         S e g me nt   A
         30%
         20%
         10%
          0%
                      1               2              3               4


84




                                                                                           42
Customer Portfolio Management according to Profit
     Contribution and Potential



                            Retention                             Key Target




                             Reactive                             Abandon




85




 Reallocation of Resources Based on CLV

                                         High                                     High
          High                           Low                                      High
                                                                     Face to Face Meetings:
                            Face to Face Meetings:
                                                                     Currently meets once every 6 months
                            Currently meets once every 4 months
                            Optimal meeting frequency is once        Optimal meeting frequency is 1
                            every 2 month                            month
                            Direct Mail/Telesales:                   Direct Mail/Telesales:
                                                                     Current Interval is 13days
           Customer Value




                            Current Interval is 21 days
                            Optimal Interval is 14 days              Optimal Interval is 4 days



                            Face to Face Meetings:                   Face to Face Meetings:
                            Currently meets once every 6 months      Currently meets once every 6 months
                            Optimal meeting frequency is once        Optimal meeting frequency is once
                            every 24 months                          every 2 months
                            Direct Mail/Telesales:                   Direct Mail/Telesales:
                            Current Interval is 20 days              Current Interval is 100 days
                            Optimal Interval is 100 days             Optimal Interval is 20 days


           Low                            Low                                         High
                                          Low                                         Low

           Low                          Potential                                      High



86




                                                                                                           43
Customer Portfolio Management
     according to CLV & Attrition
          100                                            10000
                  Preys                              Treasure
                 Conquest strategy        Loyalty programs

                                              2500

     Potential
                            A

                           1000      B
                 Control/screening       Customer development
                                                      Loyal
                 Dogs

             0                    Attrition                     100
87




     Portfolio Management according to
     Attitudes–Behaviour




88




                                                                      44
Customer Portfolio Management according
 to tolerance of critical negative incidents
 and defection risk

                                                Risk of
                   Risk of
                                                defection
                   defection
                                                high
                   low




                                    Risk of
                                    defection
                                    high




89




     Customer Portfolio Management
     according to Risk of defection




     Source C. Benavent & D. Crié

90




                                                            45
Customer Portfolio Management
     according to Risk of defection




     Source C. Benavent & D. Crié

91




     Customer Portfolio Management - Differentiated
     customer relationships




92




                                                      46
Customer Portfolio Management
according to purchase orientations

                                                           Purchase Orientation
                                       Econo-           Relatio- Fonctio- Habit-         Hedo-
                                       mical              nal      nal      Loyal        nistic
                     Ident. Relational    0               ++         -        0            +
     Gratification




                     Economical          ++                0        =         0            0
                     Hedonical            0                +         -        0           ++
                     Fonctional           0                0        ++        0            0
                     Distr.-Inform.            +            0       +            ++        0




93




     Customer Portfolio Management,
     Marketing Planning and Resource
     Allocation
     Individualisation or Mass customisation / Versioning/
     Discrimination price according to:
            Needs
            CLV/Very Good, Good bad clients



Value/ Cost                                   Client Value
Programme

                             VGC               2nd tier
                                               gratifications
                                                                        3rd tier
                             1st tier                                   gratifications
                             gratifications        GC             BC


94




                                                                                                  47
Minicase: Catalina - Changing
 Supermarket
 Shopper Measurement
      Catalina Inc. a Florida-based company that specializes in supermarket
      shopper tracking and coupon issuing


      Built its business model on issuing coupons to grocery shoppers online when
      they checkout at the cashier


      System consists of a printer connected to the cashier’s scanner as well as a
      database


      The information on each shopping basket that checks out via the scanner is
      then stored in the database




95




 Minicase: Catalina (contd.)
     Using the person’s credit card number or check number, the database links
     individual shopping baskets over time


     The system then allows both manufacturers and retailers to run
     individualized campaigns based on the information in the database


     For customers who use Catalina as a secondary store.- the decision to
     allocate a gift of say $10, for shopping for 4 weeks in a row spending at least
     $40, per week in the store


     Goal is to selectively target those shoppers where the store only captures a
     low share-of-wallet and to entice them to change their behavior


96




                                                                                       48
Minicase: Akzo Nobel, NV- Differentiating
Customer Service According to Customer Value

          One of the world's largest chemical manufacturers and paint makers

          The polymer division, which serves exclusively the B-to-B market, established a
          “tiered customer service policy” in the early 2000’s

          Company developed a thorough list of all possible service activities that is currently
          offered

          To formalize customer service activities, the company implemented a customer
          scorecard mechanism to measure and document contribution margins per individual
          customer

          Service allocation, differentiated as:

           –   services to be free for all types of customers
           –   services subject to negotiation for lower level customer groups
           –   services subject to fees for lower level customers
           –   services not available for the least valuable set of customers



97




Minicase: American Airlines
     Leading scheduled air carrier, First to implement a frequent flyer program (AAdvantage)
     Uses Database Marketing & Portfolio Analyses for efficient customer acquisition,
     development and retention
Purpose:

      –    To induce current members to spend more of their flight dollars with American
           Airlines
     – To efficiently target new prospects and convert patrons of competing airlines
Strategy: Segmentation
    Segmentation with different classes of passengers
    Each passenger segment (economy, business and first class passengers) desires a
    different set of benefits
    AA will respond to different segments using different marketing strategies

Strategy: Cooperation with the credit card company American Express
      –    To identify attractive customers who are not American Airlines flyers
      –    Provide attractive offers to these prospects for inducing them to try American
           Airlines



98




                                                                                                   49
Summary
      From a strategic perspective, CRM is the process of selecting the
      customers a firm can most profitably serve and shaping the
      interactions between a company and these individual customers

      Assessing Customer Value is critical to CRM and than for Customer
      Portfolio Management

      Customer Portfolio Management’s goal is to optimize the current and
      future value of the customers for the company
      Building a complete customer database incorporating all the relevant
      customer information from different departments and external sources
      is very crucial for a successful Customer Portfolio Management



99




  Summary
      Effective Database analysis is important for successful Customer Portfolio
      Management
      Data from active and inactive customers are important to ensure efficient
      marketing function
      Marketing databases allow marketers to analyze customers and classify them
      into different groups to implement different marketing programs effectively
      Databases also enable marketers to determine critical factors influencing
      customer satisfaction and take measures to retain existing customers at
      lowest cost
      Firms use different surrogate measures of customer value to prioritize their
      customers and to differentially invest in them
      Firms employ different customer selection strategies to target the right
      customers


100




                                                                                     50

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Strategies De Gestion De Portefeuille

  • 1. Customer Portfolio Management Master MOI University Nanterre 2009 Lars Meyer-Waarden Professor University of Strasbourg/Ecole de Management Strasbourg Meyer_waarden@yahoo.fr http//:meyer-waarden. com Bibliography For more information my website http://meyer-waarden.com 2 1
  • 2. Bibliography Customer Relationship Management A Databased Approach V. Kumar Werner J. Reinartz 3 Contents Chapter 1: Introduction: From Mass Marketing to Customer Relationship Management (CRM) Chapter 2: Implementing customer portfolio management Database management Performing Database Analytics Customer Value Metrics and Segmentation Chapter 3: From product portfolio management to customer portfolio management Chapter 4: Conclusion 4 2
  • 3. Chapter 1: Introduction: From Mass Marketing to Customer Relationship Management (CRM) Development in marketing 6 3
  • 4. Form mass MKT to relationship MKT Why: Market Saturation Strong competition & Multiplication offers Shorter Product life Cycles Development information data bases 7 What is relationship marketing? Relationship marketing involves creating, maintaining and enhancing strong relationships with customers and other stakeholders. 8 4
  • 5. Implications of Changes in Business Environment Focus on customer-centric instead of product-centric strategies 9 Relationship Marketing « Instead of selling a product to a maximum of customers…. Client 1 1 Product Client 2 Client 3 10 5
  • 6. Relationship Marketing Concentration on clients,and sales of a maximum of possible products/services to their expectations personnalisation (1-2-1 or 1-2- few) Product 1 1 Client Product 2 Product 3 Cross selling is when new, related or even unrelated products are offered to the customer. Beneficial strategy for profit maximization from current customer base. Up-selling is the promotion of more expensive products or services over the product or service originally discussed or purchased. 11 Example of a Customized Offer Copyright© 2010 Pearson Education, Inc. 12 Publishing as Prentice Hall 6
  • 7. Every client is an asset Thus maintaining clients becomes the principal activity in companies 13 Highly satisfied customers Tend to be more loyal customers Generate more profits over their lifetime of patronage 14 7
  • 8. Satisfaction-Loyalty-Profit Chain Product Performance Customer Retention / Revenue / Service Performance Satisfaction Loyalty Profit Employee Performance Source: Strengthening the satisfaction-profit chain”, Eugene W Anderson, Vikas Mittal. Journal of Service Research, Nov 2000. Vol 3, Iss.2, p 107 15 Declining Customer Satisfaction- Example S c he dule d Ho us e ho ld Co mme rc ial P arc e l De live ry P e rs o nal P ublis hing/ Airline s Applia nc e s B a nks Co mpute rs 90 90 90 90 90 Ne ws pape rs 90 85 85 85 85 85 85 80 80 80 80 80 80 75 75 75 75 75 75 70 70 70 70 70 70 65 65 65 65 65 65 -8.4% -3.5% -2.7% -2.5% -9.0% 60 -12.5% 60 60 60 60 60 1994 1996 1998 2000 2002 1994 1996 1998 2000 2002 1994 1996 1998 2000 2002 1994 1996 1998 2000 2002 1994 1996 1998 2000 2002 1994 1996 1998 2000 2002 (American Customer Satisfaction Index) with products and services Source: http://www.theacsi.org, University of Michigan 16 8
  • 9. The Reasons Why Loyal Customers Generate More Profits Loyal Customers … 1. Increase their spending over time 2. Cost less to serve than new customers 3. Generate word-of-mouth advertising or referrals 4. Are less price sensitive than new customers 17 Typical profit pattern in financial services and other high acquisition cost industries 18 9
  • 10. Mass MKT vs Relationship MKT Focus on relationship and regular Focus on transaction transactions Short term orientated Long term orientated Priority: Acquisition new clients Micromarketing Fine Market Share segmentation with precise Product Differentiation and Product knowledge about customers which Management have the most important probability Focus on transaction and products to response (database) Interactive Dialog Mass distribution, Mass advertising, Mass production, Communication in Priority: client retention/loyalty one sense Client Differentiation and Customer Product portfolio management Portfolio Management Key Indicateur : market share Focus on clients Personalized, individualised distribution, advertising, production, Communication in 2 senses : Mass customisation Customer portfolio management Key Indicateur : Customer Share & 19 Customer Life time value What is customer relationship management? Business strategy designed to identify and maximize customer value. Capture customer data and interact with the customer simultaneously Involves managing detailed information about individual customers. Develop specific strategies for interaction with each customer Develop better relationships with profitable customers Target customer needs to maximize the customer’s experience and overall customer satisfaction. Locating and enticing new customers that will be profitable Finding appropriate strategies to deal with unprofitable customers, including termination of relationships 20 10
  • 11. Chapter 2: Implementing Customer Portfolio Management Allocate resources based on customer value - and through a deep understanding of their needs. The results are deeper, richer customer interactions driven by more personalized and targeted value propositions that better meet customer expectations. Operationalisation Phase 1. Acquisition clients Datawarehouse construction by using a loyalty program (CRM tool used by marketers to identify, award, and retain profitable customers) Phase 2. Segmentation clients Datamining (Identification, Evaluation best clients) Phase 3. Customer Portfolio Management: – Resource allocation based on economic value of customer Selection retention & development best clients; Development average clients; Abandon bad clients Phase 4. Interactions – Exchange of information and goods between customer Phase 5. Personalisation/Mass Customisation according to segments: – Needs – Customer Lifetime Value 22 11
  • 12. Database Management Operationalisation database – For relationship marketing it is necessary to know every client – Construction and management database – Database technology made it possible to track customer transactions, actions and Lifetime Value of a Customer – Functions: storage, analyses 24 12
  • 13. Customer Database Defined A customer database is a list of customer names to which the marketer has added additional information in a systematic fashion. 25 A Customer Database is… The heart of all direct and interactive marketing activities. The key to developing strong customer relationships and retaining customers. 26 13
  • 14. Primary Objectives of a Customer Database To get to know customers better Perform Marketing Research Profile Customers To sell different products or services to existing customers Cross-Selling To introduce new products or services Develop A Customer Communication Program Generate New Customers Send Customized Offers To distribute information about an upcoming event or sale To manage customer lifecycles To keep customers satisfied and happy Retain Best Customers 27 Database Management Understand Develop Markets & Customers Offer Customer Intelligence Market Strategy and Segmentation Ta Ta Ta Ta w Channel Integration ar ar ar ar ar no Customer rg r r r Data Warehouse K Market -Focused ett e et et Organisation Explore Find Enjoy Buy Se Se Se Se Se Se Se Se Se Sales Force Communication rv rv rv rv rv rv rv Effectiveness viii viiic Centre iiic ll ce ce Se Service Force e e e e e Marketing Programmes Effectiveness Retain Acquire Customers Customers 28 14
  • 15. Database Management - Constitution Surveys, coupons, cookies, phone calls, subscriptions, scanning, loyalty programs,…) Customer’s Name Purchase Frequency Address Reactions to promotions , Telephone Number Satisfaction survey E-Mail Address Life cycles Demographics Preferences & Needs Psychographics Loyalty Programme Past Purchases (Transaction Customer Lifetime Value Data) Programme de fidélisation Media of recruitment Purchase dates Purchased products Expenditures 29 Performing Database Analytics 15
  • 16. Performing Database Analytics Data Mining – Defined: The process of using statistical and mathematical techniques to extract customer information from the customer database to draw inferences about an individual customer’s needs and predict future behavior. – Online Analytical Processing (OLAP) 31 What’s the Secret to Database Analytics? For Marketers to… 1. Be able to identify their “most” and “least” valuable customers; 2. Clarify demographic and behavioral statistics that apply to each population. 32 16
  • 17. Link Between CRM and Database Marketing Database Marketing Customer Databases – Identify and analyze customer population – Group based on similarities – Recommend separate marketing campaigns for different groups CRM – Applies database marketing techniques at customer level – Develops strong company-to-customer relationships 33 Customer Value Metrics and Segmentation 17
  • 18. What is market segmentation? Market segmentation involves dividing large, heterogeneous markets into smaller segments that can be reached more efficiently and effectively with products and services that match their unique needs. Selection / Scoring by potential aiming at resource allocation optimisation (turnover, profit, loyalty development, recruitment, probable reaction) 35 Segmentation and Target Marketing #1 #2 Market Segmentation: Divide the market into segments of customers & develop segment profiles Target Marketing: Select the most profitable segment to focus on 36 18
  • 19. Benefits of Segmentation: Consistent with the premises of the marketing concept and customer orientation Enables the firm to focus its marketing resources Helps the marketing firm gain strong competitive advantages through expertise in serving specific customer segments 37 Levels of market segmentation and Target Marketing – Mass marketing Assumes market is homogenous and uses the same product, promotion and distribution to all consumers. – Segment marketing Adapting a company’s offerings so they more closely match the needs of one or more segments. – Niche marketing Adapting a company’s offerings to match the needs of one or more sub-segments more closely where there is little competition. – Micro marketing Marketing programmes tailored to narrowly defined geographic, demographic, psychographic behavioural segments. – Local Marketing Tailoring brands and promotions to the needs and wants of local customer groups. – Individual marketing Tailoring products and marketing programmes to the needs and preferences of individual customers. – Mass customisation Preparing individually designed products and communication on a large scale. 38 19
  • 20. Target Marketing Strategies 39 Variable for Segmenting consumer markets Geographic Demographic Behavioral 40 20
  • 21. What is geographic segmentation? Geographic segmentation means dividing the market into different geographical units such as nations, regions, states, counties, cities, or neighbourhoods. 41 What is demographic segmentation? Demographic segmentation means dividing the market into groups based on variables such as age, gender, family size, family life cycle, income, occupation, education, religion, race, generation and nationality. 42 21
  • 22. Customer lifecycle segmentation Acqusition/ Development Maturity Decline/Re-Activation Learning Purchases vary according to: Example: – Babies - Time (fashion, preferences, needs, – Children learning, forgetting) – Teens - Age (opinions, attitudes, tastes) – Students - Generation (Values & Beliefs) – Young Professionals – Confirmed Professionals (with children) 43 – Seniors Customer Value Hierarchy 44 22
  • 23. What is behavioural segmentation? Behavioural segmentation means dividing the market into groups based on their knowledge, attitudes, uses or responses to a product. – Usage rate/Purchase Frequency – Purchase Amount – Purchase Recency – Loyalty status/CLV – Method or location of their purchases – Method of payment they choose – “Cookies” placed on their computers 45 Customer Based Marketing Metrics for Behavioral Customer Portfolio Segmentation –Acquisition rate (%) = (N prospects acquired/N of prospects targeted) x 100 – Acquisition cost = Acquisition spending ($) / N of prospects acquired – Inter-purchase time = Time in days or months – Retention rate (%) = (N customers in cohort buying in (t)| buying in (t- 1) / N customers in cohort buying in (t-1) ) x 100 – Defection rate (%) = 1 – Avg. Retention rate – Win-back rate (%) = Proportion acquired customers in a period who are customers lost in an earlier period – Survival rate t (%) = (Retention rate t * Survival rate t-1) x 100 – Lifetime Duration in days, months or years 46 23
  • 24. Customer Based Marketing Metrics for Behavioral Customer Portfolio Segmentation – Share of Wallet (%) = Expenditures individual i from firm j / Σ Expenditures individual i from all firms of the category x 100 – Size of Wallet ($) = summation of value of sales made by all the J firms that sell a category of products to the focal customer Share-of-Wallet Size-of-Wallet Absolute expenses with firm Buyer 1 50% $400 $200 Buyer 2 50% $50 $25 Absolute attractiveness of Buyer 1 eight times higher than buyer 2 47 Customer Based Marketing Metrics for Behavioral Customer Portfolio Segmentation – RFM value – Customer Lifetime Value – Customer Equity 48 24
  • 25. RFM Recency, Frequency and Monetary Value-applied on historical data Recency -how long it has been since a customer last placed an order with the company Frequency-how often a customer orders from the company in a certain defined period Monetary value- the amount that a customer spends on an average transaction Empirical Rule: – All clients having purchased during the last 12 months are worth twice those who purchased 24 months ago. – All clients having purchased 2 times during the last 12 months are worth twice those who purchased only once. – All clients having purchased for 1000 Euros during the last 12 months are worth twice those who purchased for 500 Euros. 49 RFM Method - Regression Method Regression techniques to compute the relative weights of the R, F, and M metrics Relative weights are used to compute the cumulative points of each customer The pre-computed weights for R, F and M, based on a test sample are used to assign RFM scores to each customer The higher the computed score, the more profitable the customer is likely to be in the future This method is flexible and can be tailored to each business situation Dynamic segmentation in: Good, Mean and Bad clients Switch of 50 one to another class 25
  • 26. Recency Score 20 if within past 2 months; 10 if within past 4 months; 05 if within past 6 months; 03 if within past 9 months; 01 if within past 12 months; Relative weight = 5 Customer Purchases Recency Assigned Weighted (Number) (Months) Points Points 1 2 20 100 JOHN 2 4 10 50 3 9 3 15 SMITH 1 6 5 25 1 2 20 100 MAGS 2 4 10 50 3 6 5 25 4 9 3 15 51 Frequency Score Points for Frequency: 3 points for each purchase within 12 months; Maximum = 15 points; Relative weight = 2 Customer Purchases(#) Frequency Assigned Weighted Points Points 1 1 3 6 JOHN 2 1 3 6 3 1 3 6 SMITH 1 2 6 12 1 1 3 6 MAGS 2 1 3 6 3 2 6 12 4 1 3 6 52 26
  • 27. Monetary Value Score Monetary Value: 10 percent of the $ Volume of Purchase with 12 months; Maximum = 25 points; Relative weight = 3 Customer Purchases Monetary Assigned Weighted (Number) Points Points 1 $40 4 12 JOHN 2 $120 12 36 3 $60 6 18 SMITH 1 $400 25 75 1 $90 9 27 MAGS 2 $70 7 21 3 $80 8 24 4 $40 4 12 53 RFM Cumulative Score Customer Purchases Total Weighted Points Cumulative (Number) Points 1 118 118 JOHN 2 92 210 3 39 249 SMITH 1 112 112 1 133 133 MAGS 2 77 210 3 61 271 4 37 308 Cumulative scores: 249 for John, 112 for Smith and 308 for Mags; indicate a potential preference for Mags The higher the computed RFM score, the more profitable the customer is expected to be, in the future John seems to be a good prospect, but mailing to Smith might be a misdirected marketing 54 effort 27
  • 28. Customer Lifetime Value Customers should be viewed as an investment as without them there is no business Every client is an asset with past and future revenues (puchases) and costs – Acquisition costs (advertising, recruitment,..) – Loyalty costs (Loyalty schemes, quality) 55 Two CLV examples Leclerc: an average family spends 50€ per week on groceries 3.000 €/per year and 30.000 € lifetime expenditure in 10 years) VW: Lifetime expenditure if a car (Golf = 20.000 €) is purchased every 5 years: 200.000 €. But a good customer is worth even more, since satisfied customers tell on average another 3-5 customers about the company. 56 28
  • 29. Calculation Customer Lifetime Value- Net Present Value models As the discounted stream of net revenues that a customer will generate over the period of his lifetime of patronage with a company=> Multi-period evaluation of a customer’s value to the firm The information needed to calculate CLV is derived from transactions recorded in a customer database Recurring Revenues Contribution margin Recurring costs Lifetime of a customer Lifetime Profit LTV Discount Acquisition rate cost 57 Calculation CLV- Net Present Value models t T  1  LTV = ∑ CM t =1 t   1+ δ  LTV = lifetime value of an individual customer in $, CM = contribution margin, δ = interest rate, t = time unit, Σ = summation of contribution margins across time periods Information source: CM and T from managerial judgment or from actual purchase data. The interest rate, a function of a firm’s cost of capital, can be obtained from financial accounting Evaluation: Typically based on past customer behavior and may have limited diagnostic value for future decision-making 58 29
  • 30. Calculation CLV- Future orientated models CLV analysis involves distinguishing active customers from defectors and then predicting their lifetime and future levels of transactions according to their observed past purchase behavior As the cumulated past and expected future profit by client (RFM models, multivariate logit or probit models, or stochastic models as Markov Chains or Pareto/NBD) : – CLV = Acquisition Value + Σ Past Profits + (Σ Future Profits) CM LTVi = − AC 1 − Rr + δ CM = contribution margin, Rr = Retention rate 59 CLV Targets Maximize the net present value of both current and future customers If a marketing effort results in the acquisition of new customers who will generate value over time the action is desirable The maximization of CLV consists of optimizing of the customer portfolio: the acquisition, retention, and add-on selling processes (Blattberg et al., 2001) balance the acquisition of new customers with the retention of existing ones (Blattberg & Deighton, 1996) Measure the value of a firm on the basis of the value of its current and future relationships (Gupta et al., 2004) Segmentation & allocate marketing spending for long-term profit Customer-focused approach for measuring firm value Customer equity 60 30
  • 31. Customer Equity Customer equity is the total combined customer lifetime values of all the company’s customers. 61 Attrition/Defection Attrition = Cessation of activity (Mean 20% annually) – Address change (20% / year) ==> database maintaining – Mortality,Dissatisfaction, Lost of needs or other life cycle, deal proneness, variety searching) – Relation duration: high mortality for new clients than decrease and natural increase with age Attrition depends on various factors – Client characteristics (acquisition mode, inertia, habits, attitudes…) – Relationship length : strong mortality for new clients Measure: Attrition rate – Systematic surveys (satisfaction) – Econometric modelisation with Survival Analysis (Recency, Frequency, Monetary) 62 31
  • 32. Measure defection by survival analysis Survival tables (Kaplan 1966) Cox model (1972) S(t)=[S0(t)]eBX where h(t)=h0(t)*eBX X = indépendant co-variables 63 Chapter 3: From product portfolio Management to Customer Portfolio Management 32
  • 33. Product Portfolio analysis The product portfolio: – The collection of businesses and products that make up the company Portfolio analysis: – Step 1: Analyse the current product portfolio – Step 2: Shape the future product portfolio 65 Development of Product Portfolios 66 33
  • 34. Customer Portfolio analysis The customer portfolio: – The collection of clients that make up the company Questions of Portfolio analysis: – How to maximize profits across various customer segments ? – How to optimise customer acquisition and retention ? Step 1: Analyse/Segment the current customer portfolio Step 2: Shape the future customer portfolio (acquisition valuable customers, development of good clients and clients with potential) 67 Customer Portfolio Analysis - Linking Customer Acquisition, Relationship Duration, and Customer Profitability Relationship Duration Acquired Customer Customers Profitability Prospects Non-acquired Customers Acquisition Process Retention Process -Firm actions -Customer actions -Competitor actions -Customer characteristics 68 34
  • 35. Customer Portfolio Analysis balancing between Acquisition and Retention In contexts with high acquisition costs (Telecommunication) it costs about 5 times more to acquire a new customer than it does to keep an existing one (Bolton & Drew 1990). It is thus more cost effective to concentrate marketing efforts on customer retention and relationship building than on gaining new customers In other contexts with low acquisition costs (Grocery Retailing, Mail Order Business) it does not cost about more to acquire a new customer than it does to keep an existing one (Reinartz 1999). It is thus important to balance acquisition and retention resources. 69 Customer Portfolio Analysis balancing between Acquisition and Retention For a healthy portfolio acquisition and retention are necessary !!! 70 35
  • 36. Customer Portfolio Analysis balancing between Acquisition and Retention Transactional Approach: Relational Approach : exit barriers, relationship Preference (attitude/ satis- marketing, individualisation, create value faction) Clients Revenues Value 1 2 3 4 Acquisition/New Clients with - Experiantial clients: potential : marketing Heterogenity Relationship - Inactive clients management Development Relaunch/ Abandon Identification Selection behavior discrimination control retention 71 Reallocation of Resources Based on Customer Value & Acquisition costs High High High Low High Always a Share Lost for Good One Shot Transactional Loyalty and Relationship Marketing Marketing Retention costs Always a Share Lost for Good One Shot Transactional Loyalty and Relationship Marketing Marketing Low Low High Low Low Low Acquisition costs High 72 36
  • 37. Customer Retention and Acquisition Strategies Allocate resources between existing and new customers Retention Strategy: Acquisition Strategy: Keep existing customers Attract new customers Market decisions: Market decisions: -Segment your customers by -Target the customers based on lifetime value the model of existing customers -Retain your best customers -Develop new markets -Develop one-to-one marketing Product decisions: Product/Service decisions: -Highlight your price/ product offer -Develop relationship marketing -Have a clear positioning on the -Retain your clients with superior market quality service -Develop attractive branding -Develop tailor-made products -Give incentives to add initial -Cross-sell and up-sell value to the new customer -Cross-merchandise 73 Retention and Acquisition Media Retention Media Acquisition Media Direct Mail: TV: - Direct response TV (DRTV) Mailings: - TV spots - Single-product - Home shopping channels - Multi-product - Digital TV - Miscellaneous Radio: - Direct response radio (DRR) - - Birthday cards - Radio spots - Thank-you notes Telemarketing: - Invitations - Outbound Enclosures: - Inbound - Statements Print Media : - Parcels - Press / newspapers - Magazines Telemarketing: - Insert - Outbound Direct mail : - Inbound - Mailings Catalogues - Inserts Internet Newspapers / bulletins Exhibitions / field marketing 74 37
  • 38. CRM Strategies & marketing mix according to lifecycles Acqusition Retention Recovery Interaction/Dialogue Récompense/Satis- Exit Barriers faction Products Product- Personalisation Incomaptibility with Codevelopment Products & Service competitor products Cross Selling L/t waranties Communication Call Center/ Toll Free Customermagazines Telephonemarketing Number Eventmarketing Individual Internetforum Dialog via forums & communication for mails recovery Distribution Internet 24-h-Service Complaint Expressbelieferung Management Dialog via forums & Recovery mails l/t contracts Subscriptions After Sales Service Price Pricediscrimination Q Rebates Price waranties Price decrease Loyalty Rebates LP 75 Balancing Acquisition and Retention Resources The amount of investment in a customer and how it is invested has an impact on acquisition, retention and customer profitability Investments in customer acquisition and retention have diminishing marginal returns The relative effectiveness of highly personalized communication channels is much greater than the less personalized communication channels . Under spending in acquisition and retention is more detrimental and results in smaller ROIs than overspending A suboptimal allocation of retention expenditures will have a larger detrimental impact on long-term customer profitability than suboptimal acquisition expenditures The customer communication strategy that maximizes long-term customer profitability maximizes neither the acquisition rate nor the 76 relationship duration 38
  • 39. Profile Analysis for customer acquisition Used to define and compare the profile of campaign responders with the actual profile of the company’s best customers and prospects Considers the input (generally geographic, demographic or psychographic) and clusters names into groups with similar tastes and preferences Statistical techniques as automatic interaction detection (AID) and chi-square automatic interaction detection (CHAID) also used in analysis 77 Customer Portfolio Management according to customer lifecycles Acquisition Development Retention Retention Abandon/ Re- CLV Mailing or e- Professionals activation Mailing ou Clients with e-mailing mailing, visit with strong strong value potential Loyalty Telephone Program, Visit marketing, Young visit Professionals Students 78 Lifecycle 39
  • 40. Customer Portfolio Management according to Decile Analysis Decile Analysis 40.00% 35.18% 35.00% 30.00% Response Rate 25.00% 22.52% 19.96% 20.00% 15.00% 11.08% 8.98% 10.00% 6.74% 4.42% 5.00% 2.26% 1.78% 0.90% 0.00% 1 2 3 4 5 6 7 8 9 10 Deciles The Decile analysis distributes customers into ten equal size groups For a model that performs well, customers in the first decile exhibit the highest response rate 79 Customer Portfolio Management according to Lift Analysis Lift Analysis 3.50 3.09 3.00 2.50 1.98 2.00 1.75 L ift 1.50 0.97 1.00 0.79 0.59 0.39 0.50 0.20 0.16 0.08 0.00 1 2 3 4 5 6 7 8 9 10 Deciles Lifts that exceed 1 indicate better than average performance Less than 1 indicate a poorer than average performance For the top decile the lift is 3.09; indicates that by targeting only these customers one can expect to 80 3.09 times the number of buyers found by randomly mailing the same number of customers yield 40
  • 41. Customer Portfolio Management according to Share of Wallet /Size of Wallet High Maintain and guard Hold on Share-of-wallet Target for Do nothing additional selling Low Small Large Size-of-wallet The matrix shows that the recommended strategies for different segments differ substantively. The firm makes optimal resource allocation decisions only by segmenting customers along the two dimensions simultaneously 81 Customer Portfolio Management according to the profit contribution of customers 150% 150% 100% 100% 100% 79% 50% 58% 50% 30% 28% 14% 0% 5% 0% Loyals Divided Loyals Multi-Loyals Occasionnal 82 41
  • 42. Customer Portfolio Management according to the profit contribution of customers 1000 860 800 600 435 (in $'s) Revenue 400 per year 161 159 200 Annual 17 profit 0 -67 -200 Tier A Tier B Tier C Example of a firm with a highly heterogeneous customer base: -Tier A represents 27% of the customer base, Tier B 42% and Tier C the remaining 71%. - More than a quarter of the customers are unprofitable and need to be subsidized by the highly profitable ones 83 Customer Portfolio Management according to CLV Profit Contribution CLV analysis to determine the segment value according to their profit contribution 100% 90% 80% 70% 60% S e g me nt D S e g me nt C 50% S e g me nt B 40% S e g me nt A 30% 20% 10% 0% 1 2 3 4 84 42
  • 43. Customer Portfolio Management according to Profit Contribution and Potential Retention Key Target Reactive Abandon 85 Reallocation of Resources Based on CLV High High High Low High Face to Face Meetings: Face to Face Meetings: Currently meets once every 6 months Currently meets once every 4 months Optimal meeting frequency is once Optimal meeting frequency is 1 every 2 month month Direct Mail/Telesales: Direct Mail/Telesales: Current Interval is 13days Customer Value Current Interval is 21 days Optimal Interval is 14 days Optimal Interval is 4 days Face to Face Meetings: Face to Face Meetings: Currently meets once every 6 months Currently meets once every 6 months Optimal meeting frequency is once Optimal meeting frequency is once every 24 months every 2 months Direct Mail/Telesales: Direct Mail/Telesales: Current Interval is 20 days Current Interval is 100 days Optimal Interval is 100 days Optimal Interval is 20 days Low Low High Low Low Low Potential High 86 43
  • 44. Customer Portfolio Management according to CLV & Attrition 100 10000 Preys Treasure Conquest strategy Loyalty programs 2500 Potential A 1000 B Control/screening Customer development Loyal Dogs 0 Attrition 100 87 Portfolio Management according to Attitudes–Behaviour 88 44
  • 45. Customer Portfolio Management according to tolerance of critical negative incidents and defection risk Risk of Risk of defection defection high low Risk of defection high 89 Customer Portfolio Management according to Risk of defection Source C. Benavent & D. Crié 90 45
  • 46. Customer Portfolio Management according to Risk of defection Source C. Benavent & D. Crié 91 Customer Portfolio Management - Differentiated customer relationships 92 46
  • 47. Customer Portfolio Management according to purchase orientations Purchase Orientation Econo- Relatio- Fonctio- Habit- Hedo- mical nal nal Loyal nistic Ident. Relational 0 ++ - 0 + Gratification Economical ++ 0 = 0 0 Hedonical 0 + - 0 ++ Fonctional 0 0 ++ 0 0 Distr.-Inform. + 0 + ++ 0 93 Customer Portfolio Management, Marketing Planning and Resource Allocation Individualisation or Mass customisation / Versioning/ Discrimination price according to: Needs CLV/Very Good, Good bad clients Value/ Cost Client Value Programme VGC 2nd tier gratifications 3rd tier 1st tier gratifications gratifications GC BC 94 47
  • 48. Minicase: Catalina - Changing Supermarket Shopper Measurement Catalina Inc. a Florida-based company that specializes in supermarket shopper tracking and coupon issuing Built its business model on issuing coupons to grocery shoppers online when they checkout at the cashier System consists of a printer connected to the cashier’s scanner as well as a database The information on each shopping basket that checks out via the scanner is then stored in the database 95 Minicase: Catalina (contd.) Using the person’s credit card number or check number, the database links individual shopping baskets over time The system then allows both manufacturers and retailers to run individualized campaigns based on the information in the database For customers who use Catalina as a secondary store.- the decision to allocate a gift of say $10, for shopping for 4 weeks in a row spending at least $40, per week in the store Goal is to selectively target those shoppers where the store only captures a low share-of-wallet and to entice them to change their behavior 96 48
  • 49. Minicase: Akzo Nobel, NV- Differentiating Customer Service According to Customer Value One of the world's largest chemical manufacturers and paint makers The polymer division, which serves exclusively the B-to-B market, established a “tiered customer service policy” in the early 2000’s Company developed a thorough list of all possible service activities that is currently offered To formalize customer service activities, the company implemented a customer scorecard mechanism to measure and document contribution margins per individual customer Service allocation, differentiated as: – services to be free for all types of customers – services subject to negotiation for lower level customer groups – services subject to fees for lower level customers – services not available for the least valuable set of customers 97 Minicase: American Airlines Leading scheduled air carrier, First to implement a frequent flyer program (AAdvantage) Uses Database Marketing & Portfolio Analyses for efficient customer acquisition, development and retention Purpose: – To induce current members to spend more of their flight dollars with American Airlines – To efficiently target new prospects and convert patrons of competing airlines Strategy: Segmentation Segmentation with different classes of passengers Each passenger segment (economy, business and first class passengers) desires a different set of benefits AA will respond to different segments using different marketing strategies Strategy: Cooperation with the credit card company American Express – To identify attractive customers who are not American Airlines flyers – Provide attractive offers to these prospects for inducing them to try American Airlines 98 49
  • 50. Summary From a strategic perspective, CRM is the process of selecting the customers a firm can most profitably serve and shaping the interactions between a company and these individual customers Assessing Customer Value is critical to CRM and than for Customer Portfolio Management Customer Portfolio Management’s goal is to optimize the current and future value of the customers for the company Building a complete customer database incorporating all the relevant customer information from different departments and external sources is very crucial for a successful Customer Portfolio Management 99 Summary Effective Database analysis is important for successful Customer Portfolio Management Data from active and inactive customers are important to ensure efficient marketing function Marketing databases allow marketers to analyze customers and classify them into different groups to implement different marketing programs effectively Databases also enable marketers to determine critical factors influencing customer satisfaction and take measures to retain existing customers at lowest cost Firms use different surrogate measures of customer value to prioritize their customers and to differentially invest in them Firms employ different customer selection strategies to target the right customers 100 50