chapter 16: applications of crm in b2b and b2c scenarios (part 2)
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C. R. M. Chapter 16: Applications of CRM in B2B and B2C Scenarios (Part 2). Topics Discussed. Optimal Resource Allocation across Marketing and Communication Strategies Purchase Sequences Analysis Link between Acquisition, Retention, and Profitability Preventing Customer Churn - PowerPoint PPT PresentationTRANSCRIPT
Chapter 16:Applications of CRM in B2B and B2C Scenarios (Part 2)
2V. Kumar and W. Reinartz – Customer Relationship Management
Topics Discussed
Optimal Resource Allocation across Marketing and Communication Strategies
Purchase Sequences Analysis
Link between Acquisition, Retention, and Profitability
Preventing Customer Churn
Customer Brand Value
Customer Referral Value
3V. Kumar and W. Reinartz – Customer Relationship Management
Optimal Resource Allocation
Customer Equity: Aggregation of expected lifetime values of a firm’s entire base of
existing customers and the expected future value of newly acquired customers
The NPV objective function required to maximize the Customer Equity of a firm is
related to
The cash flow from each customer
The expected Inter-purchase time
The cost and frequency of marketing/communication strategies employed
4V. Kumar and W. Reinartz – Customer Relationship Management
Optimal Resource Allocation (2)
The NPV objective function required to maximize Customer Equity of a firm is based
on 3 elements:
A probability based model that predicts the inter-purchase time of each
customer
A panel data model that predicts the cash flows from each individual customer
An optimization algorithm that maximizes the profits from each individual
customer
5V. Kumar and W. Reinartz – Customer Relationship Management
Real World Industry Application of Optimal Resource Allocation
By applying an optimization model, a manager can know:
The extent to which face-to-face meetings should be decreased and frequency of
direct sales increased or vice-versa
How to maximize profits across various customer segments
Two-step approach:
Develop model and check predictive accuracy
Examine the improvements in profits
6V. Kumar and W. Reinartz – Customer Relationship Management
Effect of Firm and Market Variable on the Value of a Lost Customer
Actually Bought in the next 12 months
Actually did not buy in the next 12months
Total
Expected to buy in the next 12 months as per the model
N = 225 N = 21 246
Not expected to buy in the next 12 months as per the model
N = 12 N = 66 78
Total 324
Hit Rate = 225+66/324 = 90%
Example:
7V. Kumar and W. Reinartz – Customer Relationship Management
Duration of Association Approach
Comparison of average profits:
Cross analysis of Duration of Relationship and Customer Value obtained on the basis of the NPV maximization objective function indicates that: Not all the short duration customers deliver lower profits, and not all the long duration customers deliver higher profits
Some of the profitable customers had escaped the firm’s attention
Firm was allocating disproportionately higher resources to some Long duration customers in the mis taken belief that the duration of their assoc iation with the firm was indicative of their profitability
Average Profit per customer
Duration of Customer-Firm AssociationShort Long
$29,235 (n = 170)
$141,655 (n = 154)
8V. Kumar and W. Reinartz – Customer Relationship Management
Customer Value Based Approach
The observations in cell III indicate that more than 50 % of the customers that the firm was
chasing in the long duration segment were actually low value customers
The observations in cell II indicate that the firm was ignoring a sizable set of customers by
classifying them as short duration customers, when indeed they were contributing
significantly to profits
Shorter Duration Longer Duration
Low Customer Value
Cell I
N = 78Average Profit = $ 1,387
Cell III
N = 82Average Profit = $ 1,245
High Customer Value
Cell II
N = 92Average Profit = $ 52,976
Cell IV
N = 72 Average Profit = $ 302,542
9V. Kumar and W. Reinartz – Customer Relationship Management
Reallocation of Resources Based on Customer Value
Cus
tom
er V
alue
Duration of Relationship High
Low
High
Low
Low/ LowFace to Face Meetings:-Currently meets once every 6 months-Optimal meeting frequency is once every 14 months
Direct Mail/Telesales:Current Interval is 27 daysOptimal Interval is 26 days
Face to Face Meetings:-Currently meets once every 3 months-Optimal meeting frequency is once every 4 months
Direct Mail/Telesales:Current Interval is 10 daysOptimal Interval is 19 days
Face to Face Meetings:-Currently meets once every 4 months-Optimal meeting frequency is once every month
Direct Mail/Telesales:Current Interval is 21 daysOptimal Interval is 13 days
Face to Face Meetings:-Currently meets once every 6 months-Optimal meeting frequency is 4 months
Direct Mail/Telesales:Current Interval is 13 daysOptimal Interval is 4 days
High/ Low
Low/ High High/ High
10V. Kumar and W. Reinartz – Customer Relationship Management
Purchase Sequence Analysis
It is important to understand which product in the portfolio is likely to be needed next by
a customer
Purchase Sequence Model addresses:
What is the sequence in which a customer is likely to buy multiple products or
product categories?
When is the customer expected to buy each product?
What is the expected revenue from that customer?
Other attributes of the model include:
The model captures the differences in the durations between purchases for
different product categories
The interdependence in purchase propensities across products is modeled by
incorporating cross-product category variables
An individual customer level profit function is developed to predict Customer Value
11V. Kumar and W. Reinartz – Customer Relationship Management
Purchase Sequence Analysis (contd.)
Model developed for hardware products of a firm
Test group of sales people adopted strategies based on the model for a year
Comparison made between previous year and current year for test group and with control
group for current year alone
Change between current year and previous year
Example:
Test Group Control Group DifferenceRevenue ($) 1,050 (18,130) 1,033 (17,610) 537
Cost of Communication ($) -750 (3,625) 75 (4,580) -1,780
# of Attempts Before Purchase -4 (15) 1 (18) -8
Profits ($) 3,000 (9080) 637 (6,275) 5,168
Return on Investment (%) 5,4 (3,7) 2,2 (2) 4,9
Customer value approach improves the quality of marketing decisions
Test group performs better
12V. Kumar and W. Reinartz – Customer Relationship Management
Prospects
Non-acquiredCustomers
Relationship Duration
CustomerCustomerProfitability
Acquisition Process Retention Process
- Firm actions - Customer actions - Competitor actions - Customer characteristics
AcquiredCustomers
Linking Customer Acquisition, Relationship Duration, and Customer Profitability
13V. Kumar and W. Reinartz – Customer Relationship Management
Balancing Acquisition and Retention Resources
The amount of investment in a customer and how it is invested has an impact on
acquisition, retention and customer profitability
Investments in customer acquisition and retention have diminishing marginal returns
The relative effectiveness of highly personalized communication channels is much greater
than the less personalized communication channels
Under spending in acquisition and retention is more detrimental and results in smaller ROIs
than overspending
A suboptimal allocation of retention expenditures will have a larger detrimental impact on
long-term customer profitability than suboptimal acquisition expenditures
The customer communication strategy that maximizes long-term customer profitability
maximizes neither the acquisition rate nor the relationship duration
14V. Kumar and W. Reinartz – Customer Relationship Management
Preventing Customer Churn
Impacts of Customer Churn on a firm
Incurs a loss of revenue from the customers who have defected
Loses the opportunity to recover the acquisition cost incurred on the defected customers
Loses the opportunity to up-sell/cross-sell to the defected customers
Loses social effects
Influencing other customers on product/service adoption
Potential negative word-of-mouth
Invests additional resources to replace
the lost customers with new customers
Customer churn drains the firm’s performance level and
resources
15V. Kumar and W. Reinartz – Customer Relationship Management
Preventing Customer Churn (2)
Analytical models (ex: dynamic churn models)
Analytical tools to prevent customer churns
Used to predict future customer behavior
Help firms decide which customer/distributor is likely to quit at what time
Key questions managers consider to prevent customer churn
Should we intervene?
Which customer should we intervene?
When do we intervene?
Through which channel do we intervene?
What do we offer them?
Build Propensity-to-Quit models and integrate them with the CLV based models
16V. Kumar and W. Reinartz – Customer Relationship Management
Predicting Propensity to Quit
1. Identify the need to intervene
2. Decide which customer to intervene
3. Pick the appropriate time to intervene
Time
Propensity to Quit
B
C
A Does not intend to quit
Increase in propensity to quit from Jan 2010
Strong tendency to quit from early on
Customer B and C should be targeted with intervention offers
17V. Kumar and W. Reinartz – Customer Relationship Management
Proactive Intervention Strategy
Time
Propensity to Quit
BC
A
Decision on the channel of intervention and type of intervention offer is based on
individual customer characteristics The amount of resources to be spent on each customer is directly linked to the
Customer Lifetime Value
I2I1
Intervention Points
18V. Kumar and W. Reinartz – Customer Relationship Management
Preventing Customer Churn (2)
Churn models help firms to identify the customers who are likely to quit
The Intervention strategy based on CLV helps to effectively intervene to retain
valuable customers
Accurate customer profiling analysis helps firms to target profitable prospects and
implement a solid marketing strategy
Firms should apply the knowledge gained about the new customer across the entire
organization by:
Cultivating customers
Synchronizing departments
Approaching customers on the one-to-one basis
Providing solutions to customers’ needs and wants
19V. Kumar and W. Reinartz – Customer Relationship Management
Customer Brand Value (CBV)
Important roles of Brands
Draw new customers to the firm
Remind existing customers about the products/services it offers
Forge an emotional attachment with its consumers
Customer Brand Value (CBV) Brand Knowledge – Brand Awareness and Brand Image Brand Attitude – Brand Trust and Brand Affect Brand Behavior Attention – Purchase Intention Brand Behavior – Brand Loyalty, Brand Advocacy, and Brand Premium Behavior
Customers with greater CBV are more likely to engage in activities that increase in CLV
20V. Kumar and W. Reinartz – Customer Relationship Management
Customer Brand Value (2)
Linking CBV to CLV Established using customer-level data and advanced modeling techniques Compute CLV from customer transaction database
Compute CBV from CBV survey results
Managerial Benefits of Linking CBV to CLV Monitor the overall performance of CBV
Identify the weak components in the
individual brand values and develop
different strategies
Manage brand at the segment level
Manage brand at the individual level
Personalized marketing actions can be
performed to send the right message at the right
time to simultaneously maximize the the individual CLV and CBV
Poor Patrons True Loyalties
Strangers Acquaintance
HighLowCLV
High
Low
CBV
21V. Kumar and W. Reinartz – Customer Relationship Management
Customer Referral Value (CRV)
Customer Referral Value Customer’s expected future referral value with the firm
Enables managers to measure and manage each customer based on his/her ability to generate indirect profit to the
firm
rateDiscountanywayjoinwouldwhocustomersofValue
rateDiscountreferralofbecausejoinedwhocustomersofValueCRVi
T
t
n
nytty
T
t
n
yt
tytytytyi r
ACQrACQMaA
CRV1
2
11
1
1 )1()2(
)1()1(
Where T = the number of periods that will be predicted into the future (e.g. quarters, years)Aty = the gross margin contributed by customer ‘y’ who otherwise would not have bought the productaty = the cost of the referral for customer ‘y’1 to n1 = the number of customers who would not join without the referraln2 – n1 = the number of customers who would have joined anywayMty = the marketing costs needed to retain the referred customersACQ1ty = the savings in acquisition cost from customers who would not join without the referralACQ2ty = the savings in acquisition cost from customers who would have joined anyway
22V. Kumar and W. Reinartz – Customer Relationship Management
Customer Referral Value – Example (1/2)
Tom is a customer from a financial services company. Calculate the Tom’s
customer referral value (CRV)
Number of referrals per period (n2) 4
Marketing cost per period (Mty) $18
Average gross margin (Aty) $98
Cost of referral (aty) $40
Acquisition cost savings (ACQ1ty and ACQ2ty) $5
Number of referrals that would have joined anyway (n2 – n1) 2
Yearly discount rate (r) 15%
23V. Kumar and W. Reinartz – Customer Relationship Management
Customer Referral Value – Example (2/2)
1. Determine the number of customers who would have made purchases anyway (n2 – n1) = 4-2 = 2
2. Predict future value of each referred customers
(Aty – Mty – aty + ACQ1ty)/ (1+r)t = (98-18-40+5) / (1.15)t
3. Predict number of referrals generated
(4 referrals per period) * (2 periods in a year) = 8 referrals per year
4. Predict the timing of customer referralsSince Tom has 8 referrals per year, assume 4 referrals each in first
and second half of the year
Tom is a customer from a financial services company. Calculate the Tom’s
customer referral value (CRV)
24V. Kumar and W. Reinartz – Customer Relationship Management
Customer Referral Value – Example
Impact of CRV grows as time progresses, because of the growth of the new customer base
due to referrals in each period In period 2, there were 6 new customer base because of 2 customers from period 1 who bought only
because of the referral.
Tom is a customer from a financial services company. Calculate the Tom’s
customer referral value (CRV)
Period 1: Period 2:
2
1111
1
11
11111 )1(
)2()1(
)1(CRV
n
ny
yn
y
yyyy
rACQ
rACQMaA
93$)075.01(
)5($)075.01(
)5$18$40$98($CRV4
31
2
111
yy
2
1122
1
12
22221
1222
2 )1()2(
)1()1(
)1()(
CRVn
ny
yn
y
yyyyn
y
yy
rACQ
rACQMaA
rMA
225)075.01(
)5($)075.01(
)5$18$40$98($)075.01()18$98($CRV
4
32
2
12
2
122
yyy
318CRVCRV CRV Total 21
25V. Kumar and W. Reinartz – Customer Relationship Management
Customer Referral Value (2)
Linking CRV to CLV
Measure CLV: Value provided by the actual purchases made by the customer
Measure CRV: Influence the customer has on other people (CRV)
Managers need to market to customers based on the various combinations of whether the customer is low or
high CLV
Marketing studies found that customers with high CRV are not the most valuable customers (high CLV)
Deciles (ranked by CLV)
CLV ($)(1 year)
CRV ($)(1 year)
1 1,933 402 1,067 523 633 904 360 7505 313 9306 230 1,0207 190 8708 160 969 137 6510 120 46
Top 30% CLV customers have no overlap with the top 30% CRV customers
Managers need to consider both the concepts of CRV and CLV to avoid decrease in customer growth and negative WOM
26V. Kumar and W. Reinartz – Customer Relationship Management
Customer Referral Value (3)
Managerial Benefits of Linking CRV and CLV
High CLV and high CRV customers are distinct sets of customers
Customers in each cell should be evaluated differently with respect to their total value to the company
and then be approach with different types of marketing offers to get the greatest overall value
Affluents
29% of customers CLV (1yr) = $1,219CRV (1yr) = $49
Champions
21% of customersCLV (1yr) = $370CRV (1yr) = $590
Misers
21% of customersCLV (1yr) = $130CRV (1yr) = $64
Advocates
29% of customersCLV (1yr) = $180CRV (1yr) = $670
HighLowCRV
High
Low
CLV
27V. Kumar and W. Reinartz – Customer Relationship Management
Customer Referral Value (4)
Customer Referral Value (CRV) or Customer Lifetime Value (CLV)?
Firms should measure both CLV and CRV to implement marketing campaigns that focus on
customers based on both dimensions
Marketing campaign focusing on both metrics will allow firms to increase both the customer
profitability and the positive WOM
However focus on either one depending on the campaign goal:
CLV campaign: Encourage users to buy more within/across category
Usually occurs in a competitive market, when difficult to acquire new customers
CRV campaign: Acquire more customers/prospects through current customers
Necessarily if the current customer is already spending majority of their
spending budget on the company
28V. Kumar and W. Reinartz – Customer Relationship Management
Summary
The NPV objective function required to maximize customer equity of a firm, is related to
cash flow from each customer, expected inter-purchase time and cost and frequency of the
marketing/communication strategies employed
Cross analysis of duration of relationship and customer value indicates that not all short
duration customers deliver lower profits and not all long duration customers deliver higher
profits
By linking acquisition and retention process, it is possible to see a complete and unbiased
picture of the drivers behind customer selection/acquisition, relationship duration, and
customer profitability
When firms understand the link between CBV and CLV, they can efficiently allocate
resources to maximize value
Customers should be evaluated and approached with different types of marketing offers
catering to maximizing CLV and/or CRV