Managing Markets Strategically: Professor Noel Capon

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Managing Markets Strategically

Professor Noel Capon
R.C. Kopf Professor of International Marketing
Columbia Business School
New York, NY
© Noel Capon, 2017. All rights reserved. PRESENTATION 2 OF 20 / 1

Managing Markets Strategically
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Section 1: Marketing and the Firm

Chapter 1: Introduction to Managing Marketing
Chapter 2: The Value of Customers
Section 2: Fundamental Insights for Strategic Marketing
Transition to Strategic Marketing
Section 3: Strategic Marketing
Section 4: Implementing the Market Strategy

CHAPTER 2
The Value of Customers

Chapter Roadmap
Why Customers Are So Important for the Firm

Options for Being Selective
CLV Increasing CLV Acquiring New Customers
Addressing Customers About Customers
Calculating CLV Increase the Profit Margin the Current Customers Customer Profitability
Firm Earns from Customers
Potential Customers Customer Suitability
Increase Customer Retention
Rate – Reduce Customer
Defection Rate
Profit Margins and Customer
Retention
How to Bind Customers Closer to the Firm

Customer Relationship
Customer Loyalty Programs
Management
Developing a CRM System Value of Rewards Programs:
Customers
Assessing the Value of
Customers and Designing Firm Value of the Rewards
Actions Program: The Firm

The Fundamental Business Model
Shareholder Value
Organizational Survival, Growth
Current, Potential Profits

Competitors
Attract, Retain, Grow Customers
Competitors
Customer Value
Company

• Customers are the firm’s core assets

When the firm creates value for customers, and retains them…
Customers create value for the firm
• Customers are the critical source of cash inflows

They buy more products & services
So long as the firms continues to deliver customer value
• Globalization is driving increased emphasis on creating

shareholder value
The firm must determine how to use CLV to enhance shareholder
value

Two Faces of Value
Products and services create Customer value attracts,

customer value retains, and grows customers
By being attracted, grown,

and retained, customers in
turn create value for the
firm and its shareholders

Starbucks Stock Price Performance

Amazon Stock Price Performance

Netflix Stock Price Performance

Apple Stock Price Performance

Nokia Stock Price Performance

Kodak Stock Price Performance
© Yahoo Inc.
Samsung Stock Price Performance

Core Topics
• Why are customers so important for the firm?
Customer Lifetime Value (CLV)
• How can the firm bind customers closer?

Customer Relationship Management (CRM)

Why Are Customers So Important for the Firm?
Session Roadmap A
• Customer lifetime value (CLV)
• Profit margin
• Customer retention
• Addressing current customers and potential customers
• Customer suitability

Session Roadmap A
• Profit margin

Year 1 Year 2 Year 3

m1 x r1 m2 x r1 x r2 m3 x r1 x r2 x r3
CLV = + + + ………
(1 + d) (1 + d)2 (1 + d)3
m = profit margin
r = customer retention rate
d = discount rate (cost of capital)
Definition: CLV = Discounted profit margin earned from the customer, factored by
customer retention rate

Customer Lifetime Value depends on three factors:

• Profit Margin
• Retention Rate
• Discount Rate
rxm
CLV =
(1 + d – r)
m1 = m 2 = m 3 … = m
r1 = r2 = r3 … = r

Profit margin
rxm r
CLV = Margin multiple =
(1 + d – r) (1 + d – r)
Increase profit margin, m
mxr
CLV = Increase customer retention rate, r
(1 + d – r)
Reduce discount rate, d

Customer Retention
Margin Multiple Values
Discount Rate (d)

Retention Rate (r) 8% 12% 16% 20%
60% 1.25 1.15 1.07 1.00
70% 1.84 1.67 1.52 1.40
80% 2.86 2.50 2.22 2.99
90% 5.00 4.09 3.46 3.00
95% 7.31 5.59 4.52 3.80

Customer Lifetime Value
Margin Multiple Values
Discount Rate (d)

Retention Rate (r) 8% 12% 16% 20%
60% 1.25 1.15 1.07 1.00
70% 1.84 1.67 1.52 1.40
80% 2.86 2.50 2.22 2.99
90% 5.00 4.09 3.46 3.00
95% 7.31 5.59 4.52 3.80

Review
• Customer lifetime value depends on just three factors
• profit margin
• customer retention rate
• discount rate
• Margin multiple definition — margin multiple = r / (1 + d – r)
• CLV simplification — CLV = m x r / (1 + d – r)
• Actions to increase CLV
• increase profit margin
• increase customer retention rate
• reduce discount rate

Session Roadmap A
• Profit margin

Profit Margin
Increasing Profit Margin Aid to the Firm

• Customer selection • Learning
• Customer satisfaction • Network externalities
• Customization • Positive word of mouth and
referrals
• Raise prices
• Referral programs
• Reduce operating costs
• Signals

Session Roadmap A
• Profit margin

Customer Retention
Customer Retention/Defection Patterns

90% retention 80% retention
Year Start 1,000 customers 1,000 customer
Year 1 900 remain; 100 customers lost 800 remain; 200 customers lost

Session Roadmap A
• Profit margin

Addressing Current Customers and Potential Customers
mxr
Current Customers CLV =
(1 + d – r )
mxr
Potential Customers CLV = – AC
(1 + d – r )
Decision Rule: Acquire potential customers when expected CLV is greater than
the acquisition cost.

• Some customers bring value to the firm; some do not

• Measuring customer profitability is critical
• A critical firm challenge is to identify the right customers
Options

How to Acquire Customers

• Independent marketing activities
• Affiliations
• Channel strategies
• Firm and business-unit acquisitions

Session Roadmap A
• Profit margin

Customer Suitability
Issues
• Capacity constraints Insufficient ability to serve all customers
• Competition Customers may be potential competitors
• Evolving strategy Customer may not be a target with the new strategy
• Foreclosing options Potential customer will refuse to do business
• Impact on the firm’s reputation “Is there a Gucci in Kohl’s?”
• Impact on the offer Rule breakers create a bad image
• Instability May lead to a difficult relationship
• Non-payer High collection costs; write off receivables
• Potential costs High service or customization costs

Session Roadmap A
• Profit margin

How Can the Firm Bind Customers Closer?
Session Roadmap B
• Customer relationship management (CRM)
• Customer loyalty

Session Roadmap B

Customer Relationship Management
• Definitions and features

• The customer database
• Customer value and customer loyalty

Definition
Customer relationship management is the ongoing process of identifying and creating
new value with individual customers and sharing these benefits over a lifetime of
association with them.
Features

Definition
Features
• Synthesis of marketing, customer service, and quality management
• Goal is to form mutually beneficial relationships between the firm and its customers
• Technology plays an important role in CRM, but CRM is not about technology
• CRM techniques can be applied to other firm stakeholders – suppliers,
shareholders, and current and potential employees



The Customer Database
Customer Customer Customer Value Customer Value

Customer Customer Customer
Purchase Reponses to
Identifier Characteristics Contact History
History Firm Decisions Received to the Firm
Jane Doe
John Smith
XYZ Inc.
XYZ influencers
and decision
makers



Customer Value and Customer Loyalty

Session Roadmap B

Value for Customers — Design Factors

• Rate of earning
• Aspirational value of the reward
• Cash value of the reward
• Deterministic or probabilistic rewards
• Ease of collecting the reward
• Length of time to earn the reward
• Rewards based on the firm’s products or services, or a broad variety
• Soft and hard rewards
• Type of reward
Value for the Firm

Value for Customers — Design Factors

Value for the Firm
• Creates competitor barriers
• Gains insight into customer behavior
• Lowers cost to serve loyal customers
• Makes loyal customers less price sensitive
• Encourages loyal customers to spend more
• Stimulates positive word of mouth from loyal customers
• Increases sales by purchase acceleration closer to the goal

Session Roadmap B

Core Topics
• Why are customers so important for the firm?
• How can the firm bind customers closer?

CHAPTER 2

Managing Markets Strategically: Professor Noel Capon

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www.wessexlearning.

Managing Markets Strategically

© Noel Capon, 2017. All rights reserved. PRESENTATION 2 OF 20 / 1

Section 1: Marketing and the Firm

© Noel Capon, 2017. All rights reserved. PRESENTATION 2 OF 20 / 2

The Value of Customers

© Noel Capon, 2017. All rights reserved. PRESENTATION 2 OF 20 / 3

Why Customers Are So Important for the Firm

How to Bind Customers Closer to the Firm

© Noel Capon, 2017. All rights reserved. PRESENTATION 2 OF 20 / 4

Organizational Survival, Growth

Current, Potential Profits

© Noel Capon, 2017. All rights reserved. PRESENTATION 2 OF 20 / 5

• Customers are the firm’s core assets

• Customers are the critical source of cash inflows

• Globalization is driving increased emphasis on creating

© Noel Capon, 2017. All rights reserved. PRESENTATION 2 OF 20 / 6

Products and services create Customer value attracts,

By being attracted, grown,

© Noel Capon, 2017. All rights reserved. PRESENTATION 2 OF 20 / 7

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• How can the firm bind customers closer?

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Year 1 Year 2 Year 3

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Customer Lifetime Value depends on three factors:

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Increase profit margin, m

Reduce discount rate, d

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Margin Multiple Values

Discount Rate (d)

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Margin Multiple Values

Discount Rate (d)

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Increasing Profit Margin Aid to the Firm

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Customer Retention/Defection Patterns

Year Start 1,000 customers 1,000 customer

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• Some customers bring value to the firm; some do not

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How to Acquire Customers

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• Definitions and features