1. CUSTOMER RELATIONSHIP MANAGEMENT
Week 4 – Relationships (4)
Customer Portfolio Management, Acquisition

2. Week 5 Topics Customer Profitability 2. Lifetime Value
3. Customer Portfolios
4. Acquisition

3. Customer Profitability
Determining profitability of customers or segments requires both revenue and cost calculations
In B2B context it is easy to trace revenues to customers
For B2C customers this is only possible to trace revenues to identifiable customers if the company acquires customer details and uses these details in billing or has a membership/loyalty programme
However, tracing costs is not easy as costs vary considerably from customer to customer
It is also difficult to apportion some costs appropriately
There are different categories of costs that need to be considered

4. Costs Vary Over the Customer Base
Customer acquisition costs. - Some customers require considerable sales effort to shift them from prospect to first-time customer status: more sales calls, visits to reference customer sites, free samples, engineering advice, guarantees that switching costs will be met by the vendor.
Terms of trade - Price discounts, advertising and promotion support, slotting allowances (cash paid to retailers for shelf-space), extended invoice due-dates.
Customer service costs - Handling queries, claims and complaints, demands on sales-person and contact centre, small order sizes, high order frequency, just-in-time delivery, part-load shipments, delivery to multiple sites.
Working capital costs - Carrying inventory for the customer, cost of credit

5. Activity Based Costing (ABC)
Activity Based Costing is an approach to costing that splits costs into 2 groups: Volume-based and Order-related costs
Volume based costs are product related and are variable against the size of the order but fixed per unit for any order and any customer
Order-related costs are customer related and vary according to the product and process requirements of each particular customer
Conventional cost accounting report what was spent, ABC reports what the money was spent doing
This allows costs to be more easily apportioned to each customer and hence makes profitability easier to determine

6. ABC in a Claims Processing Department
General ledger: claims processing department
ABC view: claims processing dept.
$ $ $
Actual Plan Variance $
Key/scan claims ,500
Analyse claims ,000
Suspend claims ,500
Receive provider enquiries 101,500
Resolve member problems ,400
Process batches ,000
Determine eligibility ,000
Make copies ,500
Write correspondence ,100
Attend training ,000
Total ,500
Salaries 620, ,000 (21,400)
Equipment 161, ,000 (11,200)
Travel expenses 58, , ,000
Supplies 43, , (3,900)
Use & Occupancy 30, ,
Total 914, ,000 (34,500)

7. How ABC helps CPM and CRM
CRM needs ABC because of its overriding goal of generating profitable relationships with customers
When combined with revenue figures, it tells you the absolute and relative levels of profit generated by each customer, segment or cohort
It guides you towards actions that can be taken to return customers to profit.
It helps prioritise and direct customer acquisition, retention and development strategies
It helps establish whether customisation, and other forms of value creation for customers, pays off

8. Customer Life-time Value
Core CRM idea is a customer should not be viewed as a set of independent transactions but as a life-time income stream
Life-Time Value (LTV) is the present day value of all net margins earned from a relationship with a single customer, customer segment or cohort
The total present day value of a customer is the sum of all past net margins compounded to today’s value, and all future net margins discounted to today’s value
The potential value of a customer is all future net margins discounted to today’s value
LTV is an important economic indicator of the value from the organisation’s view of a relationship with the customer

9. What You Need to Compute LTV
LTV needs estimates of potential revenues and costs for each customer or segment
Requires insight into future buying behaviour - probabilities of customers buying given products and the quantities bought over the next x time periods (customer or segment level sales forecasts)
Need to know the margins earned from those products
Periodic costs of customer management (also for new customers you require costs of customer acquisition)
Some indicator of the discount rate (cost of capital)

10. LTV Formula
LTV = lifetime value m = margin or profit from a customer per period r = retention rate probability (e.g. 0.8 or 80%) i = discount rate (usually the WACC – Weighted Average Cost of Capital)

11. LTV Examples

13. Customer Portfolio Management (CPM)
A customer portfolio is the collection of mutually exclusive customer groups that comprise a business’s entire customer base
CPM aims to optimise business performance – whether that means sales growth, enhanced customer profitability, or something else - across the entire customer base
It does this by offering differentiated value propositions to different segments of customers
CPM requires market segmentation, sales forecasts, activity based costs, customer life-time value estimation and data mining

14. Customer Portfolio Decisions
The tools described earlier such as sales forecasts and LTV are primarily economic indicators of the value to the organisation of customers or segments
Generally, organisational motivations for relationships will primarily be related to the economic benefits
It would seem to make sense to prioritise relationships with customers with greater LTV’s
However, the organisation may also need to consider a broader range of factors other than LTV when making decisions regarding which relationships to pursue
There may be some customers with strategic value for the organisation even though they may have low LTV’s

15. Strategically Significant Customers
High volume customers - These customers might not generate much profit, but absorb fixed costs, and the economies of scale they generate to keep unit costs low
Benchmark customers - These are customers that other customers follow. Some IT companies create ‘reference sites’ It may allow them to gain access to many other markets
Inspirations - Customers who bring about improvement in the by identifying new applications for a product, product improvements, or opportunities for cost reductions.
Door openers - Customers that allow the supplier to gain access to a new market. This may be done for no initial profit, but with a view to proving credentials for further expansion

16. Incorporating Relationships into CPM
Choosing your Portfolio may involve more than LTV
Fiocca’ s model considers both relationship strength & customer attractiveness
Relationship strength includes length, volume of purchases, importance of customer (%total sales), personal friendships, co-operation in product development, management and geographic distance
Attractiveness includes market, financial, technological factors and the customer’s competition,

17. Turnbull & Zolkiewski’s 3D model
3 dimensions to consider- Cost to Serve, Net Price and Relationship Value
Relationship Value - how critical are the goods/services to the customer, % of sales volume, replacement difficulty and potential cost savings
CPM entails placing each customer (or segment) in 3D space and then making decisions about further relationship development

18. Customer Relationship Options
For customers or potential customers the organisation needs to consider the following relationship options
Win-back the customer
Start a relationship
Protect the relationship
Re-engineer the relationship
Enhance the relationship
Harvest the relationship
End the relationship
Acquisition
Retention
Development
Termination

19. When is Acquisition Important?
Business Lifecycle
– New product launches, New business start-ups, Growth of small businesses
Customer Life Stage
– B2C: customers shift in and out of targeted demographic as they age and progress through the family/personal life-stages; births – education – marriages - death
– B2B: customer acquired by another company with other supplier preferences; or have stopped producing the goods and services for which company provided input

20. Two Types of New Customer
New-to-category customers
– Have identified a new need eg New parents buying baby clothes, new recreation
– Have found a new category of solution for an existing need eg DVD’s replacing HVS, Music downloads replacing CD’s
New-to-company customers
– Customers won from competitors switch for a better solution, or because they value variety.

21. Customer Valuation & Acquisition
Which segments to target will depend on the considerations listed below:
What is the estimated value of the customer?
What is the cost to acquire a particular new customer?
If that customer switches, what proportion of that spending will your company earn?
What is the probability that the customer will switch from current suppliers?
Are the customers strategic switchers and/or portfolio purchasers (share of wallet)?

22. Hofmeyer Model - Will they Switch?
For Current Customers
Committed customers
Entrenched customers are unlikely to switch in the foreseeable future
Average customers are unlikely to change in the short term but may switch in the medium term
Uncommitted customers
Shallow customers have a lower commitment than average, and some of them are already considering alternatives
Convertible customers are most likely to defect
For Non-Customers
Open non-customers
Available non-customers prefer the alternative to their current offer though they have not yet switched, and are ready to switch.
Ambivalent non-customers are as attracted to the alternative as to their current brand
Unavailable non-customers
Weakly unavailable non-customers prefer their current brands
Strongly unavailable non-customers have a strong preference for their current brands

23. Prospecting
First major decision to be made for a customer acquisition plan is the identification of prospects.
Prospecting means searching for opportunities that might convert into significant customers.
Prospecting is an outcome of the segmenting and targeting process.
In B2B, Prospecting typically produces leads

24. Sources of B2B Leads
Networking – Personal contacts with well connected and co-operative people
Web-sites – Online forums and discussions
Lists and directories
– SIC listings, telephone directories, List brokers
Canvassing (cold calls)
Tele-marketing,
Reference Customers
– Satisfied/Committed customers willing to recommend
Promotional activities
– Exhibitions, seminars, tradeshows, conferences
– Advertising response inquiries
- Delegate and attendee lists
– Publicity

25. Prospecting B2C Customers
In B2C contexts, the distribution of customer acquisition effort is different although many of the B2C lead techniques are used they are used differently
Typically B2C prospecting involves advertising, sales promotion, buzz/word-of mouth, merchandising
Websites are a source of new leads for companies

26. New Customers - Advertising
Advertising can predispose audiences to make an intention to buy based on cognitive and emotive components of the advertising message
Cognitive components are aimed at awareness, information search and perception, preference formation
Powerful affective components can invoke powerful emotional responses in audiences which can be linked to buying intention
Messages must also cut-through the many messages being received by consumers – execution of the message is key
Media selection can be simple or may be more complex if a mix of media is required. Important considerations are also frequency and reach.
Critics suggest advertising is ineffective and/or inefficient

27. New Customers - Sales Promotions
Temporary incentive aimed at prospects, customers, channel members or salespeople eg.
Sampling
Free trial
Coupons
Discounts
Rebates or cash-back
Bonus packs
Banded packs
Free premiums
Lotteries
Competitions

28. Buzz Marketing/Referral Schemes
Many companies are trying to attract new customers through WOM
WOM is considered effective because of its independence from the commercial message delivery (trustworthiness for consumers)
Create “buzz” through sponsorship of opinion leaders, innovative and controversial advertising, online forums and discussion groups
Viral marketing enables information to be passed on from consumer to consumer through links to product websites and social media
Customer Referral Schemes (CRS) are also known as Member-Get-Member (MGM) and Recommend-A- Friend (RAF) schemes.
These work by inviting existing customers to recommend a friend and rewarding the recommender with a gift. Schemes are more effective when targeted at a relevant section of the customer base, e.g. customers who are satisfied or customers who have just experienced excellent service.

29. Other B2C Acquisition Tools
Other tools include:
Invitations to special “events” for new customers – Lexus
Fashion shows for retailers
Party plans for showcasing products to new prospects
Publicity and Public Relations – Usually innovative
Cold-canvassing – Can be intrusive and ineffective
SMS messaging – bars and clubs, cinemas
Product Placement/Product Integration
Pitchers – Nightclubs/Bars

30. Making the Right Offer
Entry-level products for customer acquisition
Banks use relatively high interest rates on deposit account, relatively low charges on credit cards and young saver accounts
Insurance companies use car insurance
Car makers use specifically targeted models
Supermarkets price high demand, frequently purchased items such as bread as loss leaders in order to build store traffic.

31. CRM Tools that Help Acquisition
Lead management - The lead management process includes a number of sub-processes, including lead generation, lead qualification, lead allocation and lead tracking
Campaign management - design, execute and measure marketing campaigns with the support of CRM technologies. Sometimes these are multi-media campaigns across direct mail, , fax, outbound telephony, and SMS platforms
Event-based marketing - EBM provides opportunities to approach prospects at times which have a higher probability of leading to a sale, e.g. important life-stage events
CRM Data Bases and Analytics will play a key role in all of the above processes