Module iii

Module III : Managing different stages of CRM

 

 Building Customer Relationships- Loyalty Ladder,

 Bonding with Customers,
 Customer Service/ Sales Profile Models.
 Customer Acquisition Strategies,
 Customer Retention
 Customer Equity and Customer Metrics, calculating
customer lifetime value and customer equity.
 Customer loyalty, Loyalty ladder and Life time value,
 Causes Behind provider Switching

Pricing
 High price
 Price increases Response to Service Failure
 Unfair pricing  Negative response
 Deceptive pricing  No response
 Reluctant response
Inconvenience
 Location/hours Competition
 Wait for appointment  Found better service
 Wait for service
Service Switching
Ethical Problems
Core Service Failure Behavior  Cheat
 Service mistakes  Hard sell
 Billing errors  Unsafe
 Service catastrophe  Conflict of interest

Service Encounter Failures

 Uncaring
Involuntary Switching
 Impolite  Customer moved
 Unresponsive  Provider closed
 Unknowledgeable
LADDER OF LOYALTY

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 BONDING FOR CUSTOMER
RELATIONSHIP
• Financial Bonds- Volume and Frequency rewards,
Bundle and Cross-selling, and Stable pricing,
• Social Bonds- Personal relationships, continuous
relationships and Social Bonds among customers,
• Customization Bonds- Customer intimacy, Mass
Customization and Anticipation/ Innovation,
• Structural Bonds- Integrated information systems,
Joint Investments, and Shared Processes and
Equipment.

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 Acquisition
Acquisition is the act of gaining new customers
through various different methods with the
goal of turning potential customers into actual
customers. This is a very difficult stage because
with so much competition around today,
customers are inundated with choices meaning
that
competition is fierce and customers are more
informed. As a result of this people have
become
 Process of Acquisition

• The acquisition process constitutes the

following stages:
• 1. Enquiry
• 2. Interaction
• 3. Exchange
• 4. Coordination
• 5. Adoption
 Influences of Acquisition

• The application of the acquisition process

explained above is influenced by the
following:
• Type of buying
• Type of product
• Type of customer
• Economic environment
• Contextual operations
 Cost of acquiring
1. Marketing cost
a. Online marketing cost
b. Offline marketing cost
2. Resources cost
a. Infrastructure
b. Manpower
c. Expenditure on office equipments and
stationary
d. Electricity
Turning customer acquisition in to
customer loyalty
• Repeat Business :
• Greater Volume
• Cross-selling Opportunities
• Protects You From the Competition :
• Word-of-Mouth Marketing
• Benefit of the Doubt
Why Customers Defect?

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 Types of defectors

1. Price defectors
2. Product defectors
3. Service defectors
4. Market defectors
5. Technology defectors
6. Organisational defectors

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Customer Retention Program steps

Measure customer retention

Interview former customers

Analyze complaint and service data

Identify switching barriers

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 Why retention is important

• Repeat buyers:
– Buy more per year
– Buy higher priced options
– Buy more often
– Are less price sensitive
– Are less costly to serve
– Are more loyal
– Have a higher lifetime value

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 Keys to Retention

• Recruit loyal relationship buyers rather than

price cutting transaction buyers.
• How? Emphasize service and quality rather
than price
• Greet customers when they come back
• Find out more about your customers. Use this
info in your messages
• Give them a reason to come back soon.

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 Complaints
• A complaint can be viewed as
- a useful measure of performance
- guidance for improving quality
- an opportunity to increase customer loyalty
• A complaint may be categorised based on how
far outside of the service level agreement the
service received was.
• Expert handling of complaints can increase
customer loyalty and referrals.

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• Once categorised, complaints can be handled
electronically in a uniform way by a good CRM
system.
• They are viewed positively by organisations and
MUST be responded to positively.
• Usually response includes
– An apology (for inconvenience caused)
– An assurance that the complaint has been taken seriously
and quality is being improved
– A marketing gesture eg. Discount voucher.

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 Service Recovery
• Service recovery refers to the actions that companies take
when service failure occurs.
• Consumers respond differently to failures: do nothing,
complain later, take action through a third party, abandon
the supplier or spread negative word of mouth.
• The internet has empowered complaining practice.
• Companies should therefore encourage complaining.
• Complaints can come from staff or those who rarely
complain to the company but to other people.
• Technology allows complaint data to be linked to
customer records for future use.

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 RFM score
• RFM - RFM is a method used for analyzing customer
behavior and defining market segments
– Recency – When was the last touch with the customer
– Frequency – How often has there been a customer touch within X
amount of time (contacts per year)
– Monetary – How much has the customer spent within X amount of
time
• Another way to think of this is a conveyor belt with your best
customers at the beginning
• Additional help comes from
– Promotion History
– Demographic Data
– Survey data

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 How does RFM work?

• Rank Customers according to each variable into say 5

groups.
• Give preference to contacting customers who are in
the top groups for each variable
• Give the most preference to contacting customers
who are in the top group for all the variables
 How does RFM work?

• An RFM chart Response Rates by

Recency
depicting the
4
groups and the 3
Response
response rates for Rate (%) 2

each group 1

0
5 4 3 2 1
Recency Group
 How does RFM work?

Response Rates by
• An RFM chart Frequency
depicting the 2

groups and the

Response

response rates for Rate (%) 1

each group
0
5 4 3 2 1
Frequency Group
 How does RFM work?

Response Rates by
• An RFM chart Monetary Value
depicting the 2

groups and the Response

Rate (%) 1
response rates for
each group 0
5 4 3 2 1
Monetary Value
Group
 Purchase History Information

• Time or Tenure of being a customer

– Treat new and old customers differently
• For new customers send welcome packages
• For old customers send offers that recognize
their tenure
• Offer special privileges to long life customers
 Purchase History Information
• Total Sales Dollar or Total Sales Dollar over Time
– Calculate Revenue Velocity
Revenue Velocity (RV) = total amount customer spent
total time customer has been purchasing
– RV for a customer who has spent $100 in 2
months = 50
– RV for a customer who has spent $100 in 20
months = 5
– First customer preferred over the second
 Purchase History Information

• Product Ownership
– Avoid offending customers by recommending them to buy
a product they already have
– Very critical for expensive items like cars, insurance, and
financial services
– Contact customers who do not have a do-not-contact code
and are outside the too-soon to contact limit
 Purchase History Information

• Product Ownership over time

– How do you effectively eliminate customers who first sign-
up for all offers and then cancel them all within a month?
– Look for customers who have owned products/services for
a long time and offer only them additional offers
 Promotion History

• Used to define who is eligible for an upcoming

contact
• Helpful in creating a market segment
• Propensity Indicator
– Person’s response rate over time
 Promotion History
Propensity Indicator (PI) =
(# of times bought/ # of times promoted/ time period)
• Customer A was promoted 6 times, and bought twice in the last 12
months, PI = (2/6/12)= 0.027
• Customer B was promoted 6 times, and bought twice in the last 18
months, PI = (2/6/18)= 0.018
• Customer C was promoted 4 time, and bought twice in the last 6 months,
PI = (2/4/6) = 0.08
• Customer C > Customer A > Customer B
 Demographic Information

• Create relatively similar customer segments

based on demographic and lifestyle
characteristics
• Characteristics include
• Gender, marital status, age, income, home value,
presence of children, education level, etc.
• Age, marital status, income, presence of
children best bets!!!
 Attitudinal Information
• Survey data used to find
• Motivation for purchase
• Barriers to purchase
• Brand’s impression as compared to a
competitor
• Brand Equity
• Loyalty within a category
• Takes a long time to collect
• Not very reliable
• Use in combination with purchase history and
demographic data to profile segments
Combining all Types of Information

• Sequentially rank customers based on

– First by Purchase History
– Second by Demographic Information
– Third by attitudinal information
• Give preferences to customers who are ranked first
in all three categories, then to the ones ranked first
in purchase history and so forth
 Example: Consumer Products
Company
• Situation
– A number one market share company finds that
its market share is eroding
– Fall-off in store traffic by loyal and previously high
spending customers
– High Ad-spending, target trade promotions and in-
store promotions don’t work
Example:Consumer Products Company
• Strategy
– In-store survey designed to collect data on
• Name, address, phone number, birthday
• How many of a certain product were purchased in
the last 10 months?
• How many were purchased in this store?
• What were the primary reasons/occasions the
customer bought the product?
– Used this information to target customers as discussed
before
– The contact strategy involved multiple mailings over 12
months that involved a gift, and valuable tips to use
the product.
 Example:Consumer Products
Company
• Outcome
– Market share increased for the product line and
for the overall brand
– Customers in the program purchased at a higher
rate
 Example: Using RFM for a
Promotion
• A database marketer with a customer
database of 2.1 million names
• Wants to do a promotional Rollout
• Does a Test promotion first on 30,000
customers
• It sent videos costing $100 and it made $40 on
each successful sale. Cost of mailing was $0.55
per piece
Example: Using RFM for a Promotion
• First all 2.1 mn customers were coded by Recency, Frequency
and Monetary Value
• Then database was sorted by recency and divided into 5 equal
parts (quintiles) which were numbered from 5 (most recent)
to 1 (most ancient)
• Then each of the 5 recency quintiles was further sorted by
Frequency (total no of times a customer purchased from you)
and divided in to 5 equal parts
• Each recency quintile was thus numbered from 5 (most
frequent) to 1 (least frequent)
• Then each of the 25 Recency-Frequency combinations was
further sorted by Monetary Value and divided into 5 equal
parts. Each combo was numbered from 5(most value) to
1(least value)
 Example: Using RFM for a
• The Test groupPromotion
of 30000 was selected using an
Nth
• A Breakeven Index is calculated for each of
the 125 cells using the actual responses
• Breakeven is the response rate required for
the net profit from promotion to a test group
to exactly equal cost
 Example: Using RFM for a
Promotion
• The company found that only 34 of the 125
RFM cells broke even
• The final promotional offer was mailed to only
people in the 34 cells with positive breakeven
• Response rate and profits were higher by not
promoting to people unlikely to respond
 Customer Lifetime Value (CLV)
• The basic idea is that customers should be
judged on their profitability to the firm over
the total time (dubbed "lifetime") they make
purchases.
• Profitability is usually based on net value, that
is, the markups over cost less the cost of
acquiring and keeping the customer.
• Fixed costs are not considered because it is
assumed that these costs will be incurred with
or without the particular customer.

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 What is Lifetime Value?

 The net profits that you expect to receive

from the average new customer during the
next three or four years.
 It includes the revenue, the costs, the profit
and the discount rate.
 Revenue includes the retention rate, number
of orders per year, average order size.

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 An Applicable Solution
CFi , j ,t
CLVi  t 0, j 1
h, J

(1  d ) t
 Where
 CFi,j,t = profit yielded by the customer i, due to the
activity related to the product category j, during the
time period t
 h = time horizon of the prediction
 d = discount rate
 J = number of products the focal company sells
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 The Time Horizon (h)
• Theoretically, the horizon should be infinite. It
is unmanageable in the reality
– Long-term relationship is important
• Take a long horizon, e.g. 10 years
– Short-term relationship is important
• Take a small horizon, e.g. 1 year

In the empirical application, we will use a

horizon of 2 years.

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 The Discount Rate (d)
• Is theoretically unknown, but one could have a
reasonable approach, and choose it according the
focal company policy
– Short-term relationship is important
• Take a high discount rate, e.g. 15% annually
– Long-term relationship is important
• Take a small discount rate, e.g. 5% annually
– Neutral
• Take the Weighted Average Cost of Capital of the focal
company at the moment of prediction

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 The Number of Products (j)
• A multi-service (product) provider will sell several products.
• When predicting the future profits per product category
separately, the following problems could arise.
– Cross-selling: if the profits related to one product category
increase for a customer, another product category could
benefit of this.
– Cannibalism: if the profits related to one product category
increase for a customer, another product category could suffer
of this.
• In the empirical application, we will not consider a multi-product
case. The customers will be considered as buying only one type of
product.

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 Alternatives for lifetime value
• In CLV the non economic aspects of consumers and
the value which customer assigns to supplier are
totally ignored.
• So, arises need of alternatives of CLV.
• Many initiatives been taken by various companies
like the company loyalty profile, which attempts to
deduce the value assigned to a supplier by a
customer.
• This value is based on types of goods & services
purchased, the purchase frequency, the most recent
purchase date, and the amount spent.
• A balance scorecard can also be used.
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 Measuring Equity in Customer
Relationships
• True worth of a company is determined by its
customer equity.
• RoI or Return on Investment gives an indication on
how well the firm creates value from its investment,
Return on Customer (RoC) quantifies how well the
company creates value from its customers.
• Current period’s cash flow from its customers + any
change in customer equity divided by total customer
equity at the beginning of period.
• Customer equity = addition of CLVs of all current &
future customers.

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 Customer Lifetime Value( second
approach)
• Lifetime value is the NPV of the profit that you will
realize on a new customer during a given number of
years
• Factors in calculation of CLTV
- Retention rate
- Spending rate
- Acquisition cost
- Discount rate
- NPV calculation
- Referral rate
 Customer Lifetime Value
• Ridgeway Fashions is in fashion retailing
• Wants to test idea of a Birthday Club
• Women provide their fashion preferences and their
husband’s business address. Ridgeway sends
husbands a reminder and hints for gifts before wife’s
birthday
• We will look at Ridgeway before and after the
Birthday Club
• Look at 20000 customers over a 3 year period
 Customer Lifetime Value
• Retention rate
- The single most important number in the lifetime
value table
- Is calculated by a simple formula:
RR=year X customers/year 1 customers
eg RR=8000/20000=40%
- Year X customers represent those Year 1 customers
who are still buying in the later year
 Customer Lifetime Value
• Spending rate
- Average amount spent by the average customer
each year
- Calculated by dividing total sales for group being
studied in a given year by the number of customers
in the group
- Year 2 rate represents revenue from customers who
are still active out of the original year 1group
- Typically the longer customers are with you, the
more they will spend per year, per visit, per order
 Customer Lifetime Value
• Acquisition cost
- Add up all money spent on advertising,
marketing and sales efforts during the year
- Divide this by the number of new customers
who actually make purchases from you each
year
• Discount rate used because profits are
received from customers over many years
 Customer Lifetime Value

• Net Present Value

- Once you have the discount rate for each
year, each of your profits must be discounted
by the corresponding rate
- NPV profits=gross profits/discount rate
- Add up NPVs of all profits to get cumulative
NPV
 Customer Lifetime Value

• Lifetime value is simply the cumulative NPV profit

(CUM-NPV) in each year divided by the original
group of customers
• CLTV=CUM-NPV/acquired customers
3rd year CLTV in above example is
$1201057/20000=$60.05

• Represents the average profit that you can expect

to receive, after a given number of years, from the
average new customer whom you can sign up
 Customer Lifetime Value
• Referral rate
- Management assumes that the Birthday Club
will be successful enough that 5% of it’s
customers will recommend Ridgeway to
friends/relatives
• Usually referred people are more loyal and
have higher retention and spending rate than
the average new acquisition
 CRM Metrics
·The metrics are used to identify loyal customers and
evaluate their worth to the firm.
·With this information, firms attempt to increase
retention rates, reduce defection rates, and build AOV
and profits per customer over time.
• Lifetime value (LTV) – net present value of the
revenue stream for any particular customer over a
number of years.
·Average order value (AOV) – dollar sales divided by
the number of orders for any given period. This figure
may increase over time as loyal customers purchase
more per order.
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·Recency, frequency, monetary analysis (RFM) –
identifies high value customers.
·New customer acquisition cost & Current customer
retention cost.
·Share of customer spending – proportion of revenues
from high-value customers as compared to low-value
customers (e.g., the top 20% should provide over half
of the firm’s profits).
·Percentage of customer retention – proportion of
customers who repeat purchase.
·Rate of customer recovery – proportion of customers
who drop away that the firm can lure back using
various offers.
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