Relationship Marketing

Course: 507

Relationship Marketing
IntroductionIntroduction-FB Suppliers Relationships-FB RelationshipsInternal Relationships-FB RelationshipsBusiness-toBusiness-to-Business Relationships-FB Relationships-

Relationship Marketing
Customer Relationship Management-Zikmund, Managementchch-1,2 CRM and IT-Zikmund 3,4 ITCustomer Loyalty and Retention StrategiesStrategiesZikmund, Ch-5,6,7 ChImplementing CRM Strategy, Zikmund-ch-11 Zikmund-chCustomer Based Marketing Metrics, VK-ch-5 VK-chCustomer Value Metrics,VK-ch-6 Metrics,VK-ch-

Relationship Marketing Practices in Selected Areas Areas Airlines, Hospitality and hotels, Retail Banking Sector-FB Sector-

Relationship Marketing: Theory and PracticePractice- Francis Buttle

Customer Relationship Management -William Zikmund Raymond Mcleod,JR Faye W Gilbert

Customer Relationship Management- A ManagementDatabase Approach V. Kumar and Werner J. Reinartz

Why do we need to study Relationship Marketing?

How can we define Relationship Marketing?

It is a new form of marketing

Micromarketing One-toOne-to-one Marketing Database Marketing Loyalty Marketing WrapWrap-around Marketing Symbiotic Marketing Interactive Marketing

Relationship marketing is a business strategy that proactively builds a preference for an organization with its individual customers, channel partners, and employees, driving increased performance and sustainable business results. results.

Transactional vs. Relationship Marketing

Transactional Marketing Single purchase Limited customer contact Focus on product benefits Emphasis on short-term performance Limited customer service Goal of customer satisfaction Quality at manufacturing responsibility

Relationship Marketing Repeated sales Close/frequent customer contact Focus on value to customer Emphasis on long-term performance High level of customer service Goal of delighting the customer Quality at total organization responsibility

Heart of Relationship Practice

Supplier Relationships Internal Relationships Business to Business Relationships

Features
Concern Trust Commitment Service

Prerequisites for Successful RM

Organizational Culture Internal Marketing Continuous flow of information Customer Database New organizational structure and supportive system

SupplySupply-chain Perspective
Selling price to buyer Retailers gross margin

Manufacturers added value

Raw materials cost

SupplySupply-chain Perspective
Branded product
Selling price to the buyer

Own-branded product Retailer

Manufacturer

Raw materials

Power Paradigm
Branding and Customer Franchise

Concentration of Buying power Alternative brands

Manufacturer

Retailer

Partnership Paradigm
Manufacturer Seller Retailer Traditional Buyer

Relational

SR
Too much power in the hand of suppliers erode companys profit Supply chain itself is a costly process Inefficient supply chain can hamper the total production

Supplier Relationships
Suppliers are all those who contribute to a companys value chain, including suppliers of raw material, components, technologies, money, people, and knowledge

Supplier Relationships
Supplier Relationships is the relationship of working collaboratively with the suppliers who are very crucial to the achievement of the objective of the organization

Supplier Relationships
Supplier relationship management (SRM) is a discipline of working collaboratively with those suppliers that are vital to the success of organization, to maximize the potential value of those relationships. relationships.

Benefits of Having Good Relationships

Improved communication, quicker problem resolution, and closer cooperation enable the suppliers to be more responsive to the purchasing companies special needs which are often derived from the customer expectations.

Benefits of Having Good Relationships

Purchase costs are reduced in two ways: ways: -The cost searching for cheaper suppliers is eliminated -The cost per transaction decreases because aligned IMS and simplified transaction process with strategic and long term suppliers

Benefits of Having Good Relationships

The long term relationship and joint investment drive both parties to cooperate more in sharing information and developing new products, so that more can be more innovative in producing value for customers

Internal Relationships
Employee Relations involves the body of work concerned with maintaining employeremployer-employee relationships that contribute to satisfactory productivity, motivation, and morale. morale.

Internal Relationships
Employee Relations is concerned with preventing and resolving problems involving individuals which arise out of or affect work situations. situations.

Business to Business Relationship

Assignment

Business to Business Relationship

Select the customers carefully to ensure fit Qualify the customer for chemistry Ensure that there is a clarity of expectation Ensure that the person who sold the deal is on the hook for the delivery of the promise

Business to Business Relationship

Keep the customer in loop and make sure that there is no surprises Build personal relationship by showing appreciation Thank them and release them

Relationship Retail Banking Sector

Benefits of RM to the Retail Banking

Increasing customer retention by 5% adds more than three years to the average customer lifetime Defection rates decline markedly across customer tenure with a financial institute Account usage per relationship increases over time

Benefits of RM to the Retail Banking

Top 5% customer generates 40% of total 40% deposits A 5% increase in retention among top customers yields a 24% increase 24% in profitability The minimum balance of top 20% of 20% customers is $20,000 20,

Reasons of becoming Profitable over Time

Over time, retail bank customers tend to increase their holding of other products from across the range of financial products/services available Over time, a bank can understand a customer better Customer in long term relationships are more comfortable with the service, organization, methods and procedure

Concepts regarding RM in Retail Banking

Customers are assigned a life time value Communication with customers is two way Interactions with customers is truly personalized to their particular situation

CLV is the amount of profit a customer delivers to a company for as long as the customer buys from that company. Its typically calculated as the net present value (the value in todays dollars) of the profit the company will earn from all of a customers purchases over time.

RM and segmentation Practices in the Retail Banking

Segmentation provides a basis for identifying and attracting a referred customer base It helps to achieve the ultimate goal of RM i.e. the development of close, personal, one-toone-to-one, mutually beneficial relationship with individual customer

Role of Service Quality and Customer Service

Reliability Performance Convenience Responsiveness Adaptability

RAK BANK

Relationship Marketing in Airlines

Rationale of RM in Airlines
Enhance the satisfaction of customers Build greater customer loyalty and retention Develop longer-term relationships longerLead ultimately to increased sales and profits

Air travel segments

Business Travels Leisure Travels Personal Travels Mail and Cargo

Competitive Strategies
Association Efficiencies through scope and scale Overhead efficiencies

Frequent Fliers Program

It is a club concept with passenger rewards for loyalty. Members accumulate benefits/points in direct relation to their utilization of the airline or its affiliated services. High air-mileage, fly on new routes, fly in airlowlow-demand periods

Problems of FFP
Hostility by companies which fund business travel Failure to recognize the heavy liability of unredeemed miles No competitive advantage due to similar offers by the companies Introduction of taxation imposed by Government Tighter control of FFPs for re-establishing a refairer market for smaller airlines or new entrants

Relationship Marketing In Hospitality

Relationship Marketing In Hospitality

The hospitality industry provides food, drink, accommodation and leisure customers. It covers a variety of business types from small privately run fast-food outlets to fastinternational hotel and leisure chain.

Segmentation
Leisure Travel Business Travel

The Marketing/Relational Evolution

Product Service Mix Presentation Mix

Features
Customer Retention Effective Price Discounting Use of Technology CRS Guest History Database Yield Management Strategic Alliance and Managing Distribution Channel

Ways to Build Relationship

Customizing the Relationship Service Augmentation Relationship Pricing Internal Marketing

Limitations to the Implementation of RM

Understanding the Customer Concern Trust, Commitment and good services

Customer Relationship Management

Customer Relationship Management

CRM is the practice of analyzing and utilizing marketing databases and marketing leveraging communication technologies to determine corporate practices and methods that will maximize the lifetime value of each individual customers to the firm. firm.

Potential Costs and Benefits of CRM

Benefits Customer focus Customer Retention Share of Customer Long Tern Profitability Costs Infrastructure Investment Process Change Organization Costs Privacy Opportunity Lifetime value of the relationship Benefits Continuity Contact Touch Points Personalized Service Enhanced Satisfaction Safety Customer

Strategic Options for Approaching Customers

UnUn-segmented, mass marketing Custom Marketing

Strategic Options for Approaching Customers

Geographic Demographic

Market Segmentation

Psychographic/lifestyles Behavioral Pattern

Analytically derived

CRM and IT
Hand written assignment should be submitted individually by July 30,2011

Customer Loyalty and Retention Strategies

Customer Loyalty Behavioral Brand Loyalty Attitudinal Brand Loyalty Factors that Affect Customer Loyalty Factors that may Lessen Customer Loyalty

Customer Loyalty
Customer loyalty refers to a customers commitment or attachment to a brand, store, manufacturer, service provider, or other entity based on favorable attitudes and behavioral responses

Behavioral Brand Loyalty

How consistent customers repurchasing brands Undivided loyalty Occasional Switcher Switched Loyalty Divided Loyalty Indifference are in

Attitudinal Brand Loyalty

The attitudinal brand loyalty approach takes the view that loyalty involves much more than repeat purchase behavior. It holds that brand loyalty must also include a favorable attitude that reflects a preference or commitment expressed over time

Loyalty indicates a commitment to and a support of a relationship. Relationship relationship. commitment is defined as an enduring desire to maintain a valued relationship. relationship. Commitment implies an attitude or affective response, a willingness to invest and the idea that the interactions or relationships will exist over time

Factors that Affect Customer Loyalty

Satisfaction Emotional Bonding Trust, Risk reduction
Choice reduction, habit

Attitudinal loyalty
Degree of customer Loyalty or commitment

Behavioral Loyalty

History with the company

Factors that may Lessen Customer Loyalty

Competitive parity VarietyVariety-seeking Behavior Low Involvement

Customer Retention Strategy

Relationship Program
Financial Incentives Social Bonding Structural Interactions

Customer Life Cycle

The stages a customer goes through from the time before deciding to do business with an organization until he or she decides to stop being a customer is called the CLC

Reasons for Loosing Customers

Novelty Seeking Dissatisfaction Relative Advantage Conflict Loss of Trust Cease to Need

Customer Retention Strategies

The welcome Reliability Responsiveness Recognition Personalization

Conflicts and Customer Complaint Management

What can a customer do when he or she is dissatisfied?

Factors that Influence Customer Decision to Complain

Level of Dissatisfaction Attribution of Blame Costs/benefits of Action Personal Characteristics

What to do when Customers Complain

Express Regret Resolve Conflict FollowFollow-up and Prevent Recurrence

Winback Strategies
Winback strategies make an effort to reactivate and revitalize relationships with highhigh-value lost customers

Winback Strategies
Identify who is about to terminate Consider Lifetime Customer Value Establish the Reason of Termination ReRe-contact Lapse Customers Provide a Reactivation Offer

CRM Aspects of Acquisition Strategies

Objectives Strategy Natural Referrals Affinity Program Affiliation Networks Relative Advantage Switching Costs Point of Entry

Issues for Implementing CRM Systems

Options for Implementing CRM

In-house development

Buy licensed CRM software

Outsource a managed service

In-house Development InAdvantages:

Can have a tailor-made solution adapted to tailorcompanys needs and structure Develop internal resources and skills that permit development of the system each time change is required Avoid dependence on CRM vendors or new software developments

Disadvantages:
Most expensive option-company has to optionmaintain, operate and improve the system on its own Difficult to attract and retain skills to solve and develop data warehousing challenges Longer time commitment(1-2 years) commitment(1comparatively

Buy Licensed CRM Software

Advantages:
Usually have proven record of success IT concept and developments implemented with help of CRM vendor, company only needs to adapt its IT structure to integrate the new solution

Disadvantages:
Expensive-initial fees and license costs, license renewal charges Expensiveusually high, maintenance costs over life of software, payments for newer versions High consulting fees charged to customize solution to companys needs Integration of new software with existing applications usually tough, expensive and time consuming(1-3 years) consuming(1-

Outsource A Managed Service

Advantages:
Upfront costs lower- dont need to pay for lowersoftware licenses and hardware systems Can adopt a pay-as-you-go approach, with pay-as-youvisible results

Disadvantages:
Needs to contact outsourcing company for every new requirement and pay for developments Risk of losing CRM solution investments if the outsourcing company goes out of business

Issues for Implementing CRM Systems

Potential Implementation Problems -Failure to provide proper project focus -Failure to develop the system in the proper way

Failure to provide proper project focus

Management and developers do not have a clear understanding or definition of the components or purpose of a CRM Management and developers define the project scope too large Management fails to commit an executive sponsor or champion to the project Management and developers fail to understand the expectations of key constituent groups in using the CRM system

Failure to develop the system in the proper way

The developers lack the required technical knowledge and skills The developers fail to recognize the importance of quality The developers fail to define all the risks The developers begin by selecting development tools rather than by defining functional requirements and system objectives

Failure to develop the system in the proper way

The developers fail to follow a phased development methodology The developers overlook the importance of privacy and security Management and the developers fail to perform a post implementation evaluation

Challenges for CRM Implementation

Expectations Investments Reaction o change

Customer Based Marketing Metrics

Topics
Traditional Marketing Metrics Customer based Marketing Metrics

Traditional and Customer Based Marketing Metrics

Traditional Marketing Metrics
Market share Sales Growth

Primary Customer Based metrics

Acquisition rate Acquisition cost Retention rate Survival rate P (Active) Lifetime Duration & Win-back rate Win-

Popular Customer Based metrics Strategic Customer Based metrics

Share of Category Requirement Size of Wallet Share of Wallet Expected Share of Wallet Past Customer Value RFM value Customer Lifetime Value Customer Equity

Traditional Marketing Metrics

Market share

Sales Growth

Market Share (MS)

Share of a firms sales relative to the sales of all firms across all customers in the given market Measured in percentage Calculated either on a monetary or volumetric basis

Market Share (%) of a firm (j) in a category = Where j = firm, S = sales, 7Sj = sum of sales across all firms in the market

Information source Numerator: Sales of the local firm available from internal records Denominator: Category sales from market research reports or competitive intelligence Evaluation Common measure of marketing performance, readily computed Does not give information about how sales are distributed by customer

Sales Growth
Compares increase or decrease in sales volume or sales value in a given period to sales volume or value in the previous period

100 v ?(S jt S jt 1 A
Measured in percentage
Indicates degree of improvement in sales performance between two or more time periods Sales growth in period t (%) = where: j = firm, Sjt = change in sales in period t from period t-1, Sjt-1 tjt= sales in period t-1 t-

Information source
Numerator and denominator: from internal records

Evaluation
-Quick indicator of current health of a firm -Does not give information on which customers grew or which ones did not

Primary Customer Based Metrics Customer Acquisition Measurements

Acquisition rate Acquisition cost

Customer Activity Measurements

Average interpurchase time (AIT) Retention rate Defection rate Survival rate P (Active) Lifetime Duration Win-back rate Win-

Acquisition Rate
Acquisition defined as first purchase or purchasing in the first predefined period Acquisition rate (%) = 100*Number of prospects acquired / Number of prospects targeted Denotes average probability of acquiring a customer from a population Always calculated for a group of customers Typically computed on a campaign-by-campaign basis campaign-by-

Information source
Numerator: From internal records Denominator: Prospect database and/or market research data

Evaluation
Important metric, but cannot be considered in isolation

Acquisition Cost
Measured in monetary terms Acquisition cost ($) = Acquisition spending ($) / Number of prospects acquired Precise values for companies targeting prospects through direct mail Less precise for broadcasted communication

Information source:
Numerator: from internal records Denominator: from internal records

Evaluation:
Difficult to monitor on a customer by customer basis

Customer Activity Measurement

Objectives
Managing marketing interventions Align resource allocation with actual customer to demonstrate how knowledge of customer activity adds to shareholder value behavior Key input in customer valuation models such as Net-present Value Net(NPV)

Average Inter-purchase Time Inter(AIT)

Average Inter-purchase Time of a customer Inter= 1 / Number of purchase incidences from the first purchase till the current time period Measured in time periods Information from sales records Important for industries where customers buy on a frequent basis

Information source
Sales records

Evaluation:
Easy to calculate, useful for industries where customers make frequent purchases Firm intervention might be warranted anytime customers fall considerably below their AIT

Retention and Defection Rate

Retention rate is defined as the average likelihood that a customer purchases from a focal firm in a given period (t), given that this customer has purchased in the last period (t-1) (tDefection rate is defined as the average likelihood that a customer defects from a focal firm in a given period (t), given that this customer was purchasing upto period (t-1) (t-

Survival Rate

Measured for cohorts of customers Provides a summary measure of how many customers survived between the start of the formation of a cohort and any point in time afterwards Survival ratet (%) = 100*Retention ratet * Survival ratet-1 Number of Survivors for period 1 = Survival Rate for Period 1 * number of customers at the beginning

Customer Lifetime Duration

Average Lifetime duration =

Customers retained
t !1

* Number of periods / N

Where: N = cohort size, t= time period

Differentiate between complete and incomplete information on customer

Complete information - customers first and last purchases are assumed to be known Incomplete information- either the time of first purchase, or the time of the informationlast purchase, or both are unknown

Customer Lifetime Duration when the Information is Incomplete

Buyer 1

Buyer 2

Buyer 3

Buyer 4

Observation window Buyer 1: complete information Buyer 2 : left-censored Buyer 3: right-censored Buyer 4: left-and-right-censored

Customer Lifetime Duration (contd.)

Customer relationships
Contractual (lost-for-good): Lifetime duration is time from the start of (lost-forthe relationship until the end of the relationship

Noncontractual (always-a-share): Whether customer is active at a (alwaysgiven point in time (e.g.: department store purchase) One-off purchases One-

P (Active)
Probability of a customer being active in time t P(Active) = Tn
Where, n is the number of purchases in a given period T is the time of the last purchase (expressed as a fraction of the observation period)

NonNon-contractual case

Estimation of P(Active)-Example P(Active)Customer 1

Customer 2

Observation period

Holdout period

Month 1

Month 8

Month 12

Month 18

An x indicates that a purchase was made by a customer in that month

To compute the P(Active) of each of the two customers in the 12th month of activity For Customer 1: T = (8/12) = 0.6667 and n = 4 P(Active)1= (0.6667)4 = 0.197 And for Customer 2: T = (8/12) = 0.6667 and n = 2 P(Active)2= (0.6667)2 = 0.444

WinWin-back Rate
Contractual and non-contractual situations non-

Proportion of the acquired customers in a period who are customers lost in an earlier period

Indicates either a successful communication of an important change in the product offering or service or a change in the customer needs

Topics
Popular Customer-based Value Metrics CustomerStrategic Customer-based Value Metrics CustomerPopular Customer Selection Strategies

Customer Based Value Metrics

Customer based value metrics

Popular

Strategic

Size Of Wallet

Share of Category Reqt.

Share of Wallet

Transition Matrix

RFM

Past Customer Value

LTV Metrics

Customer Equity

Share of Wallet (SOW) is a survey method used in performance management that helps managers understand the amount of business a company gets from specific customers

Size-ofSize-of-Wallet
Size-ofSize-of-wallet ($) of customer in a category = Sj j !1
Where: Sj = sales to the focal customer by the firm j j = firm,
J

= summation of value of sales made by all the J firms that

j !1

sell a category of products to the focal customer

Information source:
Primary market research

Evaluation:
Critical measure for customer-centric organizations based on the assumption customerthat a large wallet size indicates more revenues and profits

Example:
A consumer might spend an average of $400 every month on groceries across the supermarkets she shops at. Her size-of-wallet is $400 size-of-

Share of Category Requirement (SCR)

SCR (%) of firm or brand in category =

Vij / Vij
i !1
i !1

j !1

j = firm, V = purchase volume, i = those customers who buy brand

i !1

= summation of volume purchased by all the I customers from a firm j, = summation of volume purchased by all I customers from all j firms

j !1 i !1

Information source: Numerator: volumetric sales of the focal firm - from internal records Denominator: total volumetric purchases of the focal firms buyer basebasethrough market and distribution panels, or primary market research (surveys) and extrapolated to the entire buyer base Evaluation: Accepted measure of customer loyalty for FMCG categories, controls for the total volume of segments/individuals category requirements; however, does not indicate if a high SCR customer will generate substantial revenues or profits

Computation of SCR Ratio

Total requirement of Notebook computers per customer Total number of Notebook Computers purchased from ABC Computers per customer per period A B 20 Share of category requirement for ABC computers per customer per period

B/A .20

Customer 1 Customer 2 Customer 3

100

1000 2000

200 500

.20 .25

Customer 3 has the highest SCR. Therefore, ABC Computers should identify customer 3 and target more of their marketing efforts (mailers, advertisements etc.) towards customer 3 Also, customer 3s size-of-wallet (column A), is the largest

Share-ofShare-of-Wallet (SW)
Individual Share-of-Wallet Share-of Individual Share-of-Wallet of firm to customer (%) = Sj / Sj Share-ofj !1 J

Where: S = sales to the focal customer, j = firm, = summation of

j !1

value of sales made by all the J firms that sell a category of products to a buyer

Information source:
Numerator: From internal records Denominator: From primary market research (surveys), administered to individual customers, often collected for a representative sample and then extrapolated to the entire buyer base

Evaluation:
Important measure of customer loyalty; however, SW is unable to provide a clear indication of future revenues and profits that can be expected from a customer

Share-of- (ASW) (brand or firm level) Shareof-of-Wallet (contd.) - Wallet Aggregate Share-ofShare Aggregate Share-of-Wallet of firm (%) Share-of= Individual Share-of-Walletji / number of customers Share-ofi !1 I

= Si / Sij
i !1
j !1 i !1

Where: S = sales to the focal customer, j = firm, i = customers who buy brand

Information source:
Numerator: From internal records Denominator: Through market and distribution panels, or primary market research (surveys) and extrapolated to the entire buyer

Evaluation:
Important measure of customer loyalty

Applications of SCR and SW

SCR -for categories where the variance of customer expenditures is relatively small SW - if the variance of consumer expenditures is relatively high Share-ofShare-of-wallet and Size-of-wallet simultaneously with same share-of-wallet, Size-ofshare-ofdifferent attractiveness as customers: Example:

Share-ofShare-of-Wallet Buyer 1 Buyer 2 50% 50%

Size-of-Wallet Size-of$400 $50

Absolute expenses with firm $200 $25

Absolute attractiveness of Buyer 1 eight times higher than buyer 2

Segmenting Customers Along Share of Wallet and Size of Wallet

High

Maintain and guard Hold on

Share-ofShare-of-wallet

Do nothing
Low

Target for additional selling

Small
Size-ofSize-of-wallet

Large

The matrix shows that the recommended strategies for different segments differ substantively. The firm makes optimal resource allocation decisions only by segmenting customers along the two dimensions simultaneously

Share of Wallet and Market Share (MS)

MS of firm =

(Share-of-walleti * Size of wallet) / Sj (Share-ofi !1

j !1

Where: S = sales to the focal customer, j = firm, i = customers who buy the brand

Difference between share-of-wallet and market share: share-ofMS is calculated across buyers and non-buyers whereas SW is calculated only nonamong buyers MS is measured on a percent basis and can be computed based on unit volume, $ volume or equivalent unit volumes (grams, ounces) Example: Example: BINGO has 5,000 customers with an average expense at BINGO of $150 per month (=share-of-wallet * size of wallet) (=share-of The total grocery sales in BINGOs trade area are $5,000,000 per month 000,

BINGOs market share is (5,000 * $150) / $5,000,000 = 15% 150) 000, 15%

Transition Matrix
Brand Purchased next time

A A
Brand Currently Purchased

B 20% 20% 80% 80% 15% 15%

C 10% 10% 10% 10% 60% 60%

70% 70% 10% 10% 25% 25%

B C

Characterizes a customers likelihood to buy over time or a brands likelihood to be bought.

Example: -The probability that a consumer of Brand A will transition to Brand B and then come back to Brand A in the next two purchase occasions is 20% * 10% = 2%. - If , on an average, a customer purchases twice per period, the two purchases could be AA, AB, AC, BA, BB, BC, CA, CB, or CC. -We can compute the probability of each of these outcomes if we know the brand that the customer bought last

Strategic Customer Based Value Metrics

RFM Past Customer Value LTV Metrics Customer Equity

RFM
Recency, Recency, Frequency and Monetary Value-applied on historical Valuedata Recency -how long it has been since a customer last placed an order with the company FrequencyFrequency-how often a customer orders from the company in a certain defined period Monetary value- the amount that a customer spends on an valueaverage transaction Tracks customer behavior over time in a state-space state-

Past Customer Value

Computation of Customer Profitability Past Customer Value of a customer

n the customer, r = Where I = number representing n applicable discount rate in n = number of time periods prior to current period n!1 when purchase was made

! GC * (1 r)

GCin = Gross Contribution of transaction of the ith customer in the nth time period

Spending Pattern of a Customer

Jan $ Amount GC 800 240 Feb 50 15 March 50 15 April 30 9 May 20 6

Gross Contribution (GC) = Purchase Amount X 0.3 Past Customer Value Scoring = 6(1 + 0.0125 ) + 9(1 + 0.0125 ) 2 + 3 15(1 + 0.0125 )

+ 15 (1 + 0.0125 ) 4 + 240 (1 + 0.0125 ) 5 = 302.01486

The above customer is worth $302.01 in contribution margin, expressed in net present value in May dollars. By comparing this score among a set of customers a prioritization is arrived at for directing future marketing efforts

Lifetime Value metrics (Net Present Value models)

MultiMulti-period evaluation of a customers value to the firm Recurring
Revenues Recurring costs Contribution margin

Lifetime of a customer

Lifetime Profit LTV

Discount rate

Acquisition cost

Calculation of Lifetime Value: Simple Definition

T value of tan individual customer in $, where LTV = lifetime
CM = contribution margin, t H = interest rate, t = time unit, 7 = summation of contribution margins across time periods t !1 LTV is a measure of a single customers worth to the firm

1 LTV ! CM 1 H

Information source: CM and T from managerial judgment or from actual purchase data. The interest rate, a function of a firms cost of capital, can

LTV: Definition Accounting for Varying Levels of Contribution Margin

Where, LTV = lifetime value of an individual customer i in $, S = Sales to customer i, DC = direct cost of products purchased by customer i, MC = marketing cost of customer i

1 LTV ! [(Sit  DCit )  MCit ] 1 H t !1

T

Information source:
Information on sales, direct cost, and marketing cost

LTV: Definition Accounting for Acquisition Cost and Retention Probabilities 1

LTV ! Rr CM it t 1 H t !1 t !1
T T

 AC

Where, LTV = lifetime value of an individual customer in $ Rr = retention rate = Product of retention rates for each time period from 1 to T, AC = acquisition cost T = total time horizon under consideration Assuming that T g and that the contribution margin CM does not vary over time,

LTVi !

CM * Rr  AC 1  Rr  H

Customer Equity
Sum of the lifetime value of all the customers of a firm

Customer Equity,

1 CE ! theti Indicator of how muchCM firmis worth at a particular point in time as 1  H of the firms a result i!1 t !1 customer management efforts
I T
CE
k

Can be seen as a link to the shareholder value

Popular Customer Selection Strategies

Decision Trees
Used for finding the best predictors of a 0/1 or binary dependent variable Useful when there is a large set of potential predictors for a model Decision tree algorithms can be used to iteratively search through the data to find out which predictor best separates the two categories of a binary target variable

Decision Trees- Example TreesStep 2 (contd.)

Yes Buyer Yes No Total 280 2720 3000 No Buyer Yes No Total Total 80 1320 1400 Married Total Total 200 1400 1600 Female Buyer Yes No Total

Decision Trees- Example ( Treescontd.) Step 2 (contd.) The process can be repeated for each sub-segment
Yes Buyer Yes Male Buyer Yes No Total Total 1000 4000 5000 No Buyer Yes No Total Total 940 2860 3800 No Total 60 1140 1200

Bought Scuba Equipment

Total

Popular Customer Selection Strategies (contd.)

Logistic Regression
Method of choice when the dependent variable is binary and assumes only two discrete values

By inputting values for the predictor variables for each new customer the logistic model will yield a predicted probability

Logistic Regression- Examples RegressionExample 1: Home ownership

Home ownership as a function of income can be modeled whereby ownership is delineated by a 1 and non-ownership a 0 non The predicted value based on the model is interpreted as the probability that the individual is a homeowner With a positive correlation between increasing

Logistic Regression- Examples Regression(contd.)

Example 2: Credit Card Offering
Dependent Variable-- whether the customer Variable-signed up for a gold card offer or not Predictor Variables--other bank services the Variables--other customer used plus financial and demographic customer information By inputting values for the predictor variables for each new customer, the logistic model will

Linear and Logistic Regressions

In linear regression, the effect of one unit change in the independent variable on the dependent variable is assumed to be a constant represented by the slope of a straight line For logistic regression the effect of a one-unit increase in the predictor variable varies along an sshaped curve. This means that at the extremes, a one-unit change has very little effect, but in the middle a one unit change has a fairly large effect

Techniques to Evaluate Alternative Customer Selection Strategies

Lift Charts
Lifts indicate how much better a model performs than the no model or average performance Can be used to track a models performance over time, or to compare a models performance on different samples The lift will then equal (response rate for each decile) (overall response rate) 100 The cumulative lift = (cumulative response rate)

The practice of relationship marketing has been facilitated by several generations of customer relationship management software that allow tracking and analyzing of each customer's preferences, activities, tastes, likes, dislikes, and complaints. complaints. For example, an automobile manufacturer maintaining a database of when and how repeat customers buy their products, the options they choose, the way they finance the purchase etc., is in a powerful position to etc. develop one-to-one marketing offers and one-toproduct benefits. benefits.