Economics of Building Customer Relationship

Customer Lifetime Value
‡ The present value of the stream of future profits expected purchases. ‡ The company has to subtract the expected costs (of attracting, selling & servicing the customers) from the expected revenues. over the customer¶s lifetime

An Example of Estimating CLV
‡ Suppose a co. analyses its new-customer acquisition cost: ± Cost of an average sales call (including salary, commission, benefits & expenses) Rs 300

± Average no of sales calls to convert an average prospect into a customer ± Cost of attracting a new customer 4 Rs 1,200

‡ Now suppose the co. estimates average CLV as follows ± Annual customer revenue ± Average no. of loyal years ± Company profit margin ± CLV Rs 500 X 20 .10 Rs 1,000

This co. is spending more to attract new customers than they are worth. Therefore, the co. may become bankrupt unless it ± signs up customers with fewer sales calls ± spends less per sales call ± stimulates higher new-customer annual spending ± retains customers longer or ± sells them higher-profit products.

Customer Equity
‡ Aim of CRM is to produce high customer equity. ‡ CE is the total of the discounted lifetime values of all of the firm¶s customers. ‡ So the more loyal the customers the higher the customer equity. ‡ 3 drivers of customer equity ± Value equity ± Brand equity ± Relationship equity


Value equity: Customer¶s objective assessment of the utility of an offering. Sub-drivers are quality, price & convenience.


Brand equity: Customer¶s subjective & intangible assessment of the brand. Sub-drivers are customer brand awareness, customer attitude & perception towards brand. Companies use advertising, PRs & other communication tools to affect those subdrivers.


Relationship equity: Customer¶s tendency to stick with the brand. Sub-drivers are loyalty programs, special recognition and treatment programs etc.

Framework for CRM
Identify prospects and customers Differentiate customers by needs and value to company Interact to improve knowledge Customize for each customer

CRM Strategies
Reduce the rate of defection Increase longevity Enhance ³share of wallet´ Terminate low-profit customers Focus more effort on high-profit customers

Mass vs. One-to-One Marketing
Mass ‡ Average customer ‡ Customer anonymity ‡ Standard product ‡ Mass production ‡ Mass distribution ‡ Mass advertising ‡ One-way message ‡ Economies of scale ‡ Share of market ‡ All customers ‡ Customer attraction One-to-One ‡ Individual customer ‡ Customer profile ‡ Customized market offering ‡ Customized production ‡ Indivisualised distribution ‡ Indivisualised message ‡ Two-way message ‡ Economies of scope ‡ Share of customer ‡ Profitable customers ‡ Customer retention

Customer-Development Process

Prospects First-time customers

Disqualified Repeat customers



Partners Ex-customers

Happy CRM

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