The cost to serve – exchange of value
High cost customers
• Small Order quantities
• Large pre-sale and post-sale
support
• Unpredictable ordering
• Order custom products
• Customized delivery
• Change in delivery
• 24/7 Onsite handholding
• Multiple delivery points
• Manual Processing
• Require high inventory
• Pay slowly (high account
receivables), incomplete
Low cost customers
• High order quantities
• Little to no pre-sale and
post-sale support
• Predictable order arrivals
• Order standard products
• Standard delivery terms
• Less negotiation
• No Change in delivery
• Electronic Processing
• Single delivery point
• Replenish as produced
• Pay on time, low default
Discounting and the Cost to serve
Total Discount From
List Price
60%
50% B
40% C
30% H
G
20% E D
10% F
0% A

0.5 0.6 0.7 0.8 0.9 1.0 1.1

Total Cost to Serve (Product and customer costs($/L b)

H < 1 million G 1-2 million

F 8-11million A > 20 million
 Product or Customer profitability
• If all products in portfolio not equally profitable
• Different strategy for each product
• Are all customers equally profitable?
• Are all the Customers to be treated as Kings?
• Can we differentiate for each customer?
• What’s the desired relationship?
 The right customer mix

•Passive Costly to Service,

Product is Crucial But pay top
 dollar
Profits Good Supplier
Match
Price Sensitive Aggressive
Few Special Leverage their
demands buying power
Low price and lots of
customised service and
features Cost to serve

Profitability depends on whether and how much the net product margins recover
the customer specific costs
Source: Shapiro, Moriarty and Ross, " Managing Customers for profits( not just sales)",HBR,
Sep,Oct 1987
 The Road Map 1:1
III IV
Highly
Differentiated Database 1:1
Marketing Marketing

Customer
Valuation I

Mass Niche
Uniform Marketing Marketing

Uniform Highly
Customer Needs Differentiated
 Guests and Contributions - Hilton
% % % Net
Guests Revenue Profits

Diamond + Gold Hilton 1 6 17

HHonors Members
Silver Hilton HHonors 2 5 18
Members
Blue Hilton HHonors Members 6 7 10

Nonmember Business travelers 25 21 6

Convention & Resort Travelers 66 61 49

Bell et al (2001) ‘Seven barriers to Customer Equity Management’, Journal of Service Research, August 2002,77-85
 Customer Portfolio – Right customers

Migration Retention
Platinum
Gold
Silver
Acquisition Iron Defection

Lead

Prospects
 CUSTOMERS MORE PROFITABLE OVER TIME
Retention - Profit Drivers
6
Profit
5 Profit from price premium

4 Profit from referrals

Profit from reduced
3
operating costs
2 Profit from increased
purchases
1

0 Base profit
1 2 3 4 5 6 7 Years
-1
Customer acquisition cost
Source: Bain & Co.
 Lifetime value drivers
1. Base Revenue: size 1. Cost to acquire
of wallet
2. Cost to serve (programs,
2. Cross selling customization)
3. Up selling 3. Cost of retention
4. Higher premium for (incentives)
customized products 4. Migration costs
5. Referrals
6. Growing with 1. Portfolio profitability
customer 2. Scale optimisation for
7. Share of wallet portfolio
8. Lifespan/duration
3. Capability development,
9. RFM
co-creating, risk sharing…
 Customers for life: Lifetime corridor

Voice

Data/VAS

Level of Product Usage

School Marriage 1st House Vacations Full Nest Empty nest

1st job Children Schooling Child’s college Retire

Customer Entry

Acquire Align Engage/grow Retain/Divest

Indicator
 Origins of CRM methods
• Loyalty - promotions for repurchase/switching
• Database marketing
• Direct Marketing
• Aftermarketing
• Experience marketing
• Relationship marketing, …..
 Defining CRM
• CRM is database marketing (Bickert, 1992)
– emphasizes the promotional aspects of marketing
limited to database efforts
• CRM is customer retention (Vavra , 1992)
– aftermarketing tactics are used for customer
bonding and staying in touch after the sale is made
 Defining CRM … contd.
• Establish, maintain and enhance relationships with
customers and other partners, at a profit, so that the
objectives of the parties involved are met. This is
achieved by a mutual exchange and fulfillment of
promises (Gronroos, 1990)

• RM refers to all marketing activities directed towards

establishing, developing and maintaining successful
relationships (Morgan and Hunt, 1994)
 CRM Definitions
• At its core, CRM is a set of business policies and
processes designed to acquire, retain and service
customers.
• The aim of CRM is to increase customer satisfaction,
revenue and business efficiency by building strong
customer relationships - with the entire organization
sharing and contributing to that view.
“Customer relationship management is the commitment of
the company to place the customer experience at the
centre of its priorities, and to ensure that incentive
systems, processes and information resources leverage the
relationship by enhancing the experience”.
 Relationship Management
•Relationship defined
–Characteristic nature of
–the past, present and intended future interactions
–between two/more parties
–undertaken for mutual exchange of values
 Defining CRM
• CRM is an ongoing process
• of engaging in and maintaining relationships
• over the long term
• through cooperative and collaborative activities
and programs
• with immediate and end user customers
• to create and enhance mutual economic value
at reduced cost.
 Corporate strategy
vision & customer portfolio

Customer strategy Financials & Value IT & operation/

& loyalty program chain analysis process

Future proofing

GAINS FROM CRM

CRM: The Strategic Coverage
The Relationship Ladder
Partner
Advocate
Supporter
Client
Customer
Prospect
What it takes to grow the relationship
As the relationship Progresses,
Initial Perceived value

Satisfaction

Dependance, reliability

Intimacy/Vital sharing & vulnerability

Commitment and/ or Loyalty

The Relationship Ladder…

Partner Commitment

Advocate Trust, intimacy

Supporter
Dependence
Client

Customer
Satisfaction

Prospect Perceived Value

Managing LTV Target Programs through Relationship Ladder

Evolving Approach Earlier Approach

Commitment Bonds
Trust +
Relationship
Rewards Loyalty programs

Satisfaction & Product & service

Total Quality excellence

Rel. Customer Brand, Sales,

Value (RCV) Promotions