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Flashcards in Customer Profitability Deck (24)
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Customer relationship management (CRM)

the process of carefully managing detailed information about individual customers and to maximise satisfaction and loyalty. How to engage the customer and convince to purchase from us.


Customers, recency, retention rate purpose

-To monitor customer numbers (and their increase or decrease) as a first step toward determining customer profitability within a specific time period


Customer Recency Construction

- Calculate average recency or to identify group of most recent users
- Especially important for categories prone to sporadic use
- Source of data can be company records, market research


Retention rate

Retention rate = Customers retained/ customers at risk. Only really meaningful in contractual/ subscription situations.


Churn/ Attrition rate

- Complement of Retention is attrition or churn
- Customer must be at risk of leaving in order to be counted as retained
- Ideal to measure retention in “customer time” rather than “calendar time”


Problems with customers, recency and retention rates

- Who is the customer? in terms of Household/ individuals, Participants in
the decision process, Contract/actual use?, How loyal?, Multi- headed customers (user, purchaser, decider, influencer, initiator)
- Not all “customers” are the same
- Where is the customer (what sales territory, branch would they fall under?)


Customer Profit Purpose

- To identify the "best customers" in terms of financial worth within a specified time period
- To dissect/de-average profitability on the customer level
- Understanding which customer relationships are better than others and take steps to ensure the continuation of the most profitable relationships


Customer Development

First time customers
Repeat customers


Counting Customer methods

- Contractual relationships: count # of contracts – e.g., Vodafone accounts
- Non-contractual/ identifiable customers: customer database, but sporadic use is an issue – e.g., catalogs, hotels, casinos
- Count how many customers bought within a certain period of time
- Non-contractual/non-identifiable customers: has to be estimated from transaction records, market research – e.g., Store cash register records
- Count only visits and/or # of transactions


Types of customers to improve profitability

Top Tier customers - reward
Second tier customers -grow
Third tier customers - fire


Top Tier Customer

- Most profitable so give more attention and value
- Profit suffers most if you lose them


Second Tier Customer

- Middle to low profits
- Identify and move up customers with growth potential


Third Tier customer

- Company loses money servicing these people
- Either promote them towards profitability or charge them more for moving up or moving out


Customer Profit Construction

- Profit the firm makes from serving a customer or customer group over a specified period of time
- Calculation can be based on individuals
- Or with large number of customers. Use meaningful groups (quartiles, deciles based on profitability)


Customer Profit Problems

- Assigning costs to customers is hard but assigning indirect costs to customers is complex (methods such as Activity Based Costing may help)
- Profitability changes over time & unless you repeat the measurement this metric does not take into account potential changes (CLV tries to resolve this)
- Company need to serve unprofitable customers (contractual, legal, anti discrimination issues)
- Abandoning customers is very sensitive and businesses need to consider PR consequences.


Acquisition and retention costs purpose

To determine how much the firm is spending on acquiring new customers and retaining existing ones per capita.


Acquisition and retention cost problems

- Specific periods need to be stated
- The formula discounts inertia: some customers would be retained even if there is no retention spending
- There can be costs that can be attributed to both acquisition and retention


Customer Lifetime Value (CLV)

- a measure of customer profitability over time.
- a measure of a customer's aggregate profit to the firm over the total time that the customer deals with the firm".
- calculated as a single dollar number, summarizing the net profit/loss position of the customer's total relationship with the firm. - calculated on per customer basis, but is more usually determined for an average customer within a particular market segment. A firm will calculate multiple CLV's for different customer segments.
- helps to recognize that a customer does not represent a single transaction but a relationship that is far more valuable than any one-time exchange.


Customer Profit vs. CLV

- CP measures the past, CLV looks forward
- Quantifying CP is a matter of carefully reporting & summarizing results of past activity, where as quantifying CLV involves forecasting future activity


CLV Purpose

- To assess value of each customer taking into account time value of money
- It is the net present value of future (expected number of periods) cash flows attributed to the customer relationship
- It is the upper limit on what the firm would be willing to pay to acquire/ retain customers
- CLV will represent single lump sum value today of customer relationship


Types of specific marketing decisions CLV can help make

- To decide which type of customer (or customer segment) would be more profitable
- To decide when to scale up or scale down marketing expenditure for a particular customer
- To decide when to “fire” a customer
- To decide how much to spend to acquire a new customer, retain to existing customer, or try to cross-sell or up-sell additional products to existing customers
- To decide how to offer products and services tailored for the best customers?


CLV should be used if these assumptions are met:

- Margins are constant. (Contribution after deducting costs).
- Retention rates are constant. The amount of money a company has to spend in a given period to retain an existing customer
- Discount rate is the “opportunity cost of capital”(The concept is based on the time value of money, the premise that a dollar today is worth more than a dollar tomorrow).


CLV Problems

- The formula is very sensitive to the selection of retention and discount rates
- Infinite horizon and constant margin/retention rate assumptions can give a more precise estimate
- Accuracy in parameter is vital to meaningful results. Small changes to retention, discount rates, and margins may make major differences in CLV calculation.
- Most cases, it is typical to calculate 4~5 year customer values instead of using infinite time horizon. There are outcome differences between a fixed year vs infinite time
- All methods of calculating CLV are estimates because they are either using historical averages or manager’s estimates.
- The value of a customer is far more than the initial sale; and adjusting strategies to improve the probability that the customer will repurchase, or use new goods or services will increase CLV.


Combining Profitability with CLV

High CLV and current profitability - grow and retain
High CLV and low profitability - grow, reduce costs, manage risks
Low CLV and High profitability - maintain relationships, transition to high CLV
Low CLV and profitability - manage costs, identify transition opportunities