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Transcript of 23646922 Customer Lifetime Value
8/3/2019 23646922 Customer Lifetime Value
http://slidepdf.com/reader/full/23646922-customer-lifetime-value 1/98
Prof. A. K. Biswas 1
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Prof. A. K. Biswas 2
Management Tools
The essence of business is theacquisition , retention , and
enhancement of business fromcustomers at a profit to the company.There are few key issues here:
Which customers we shouldacquire?How do we acquire the desiredcustomers?
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Prof. A. K. Biswas 3
Management Tools
Which customers we should retainand grow our business with?
How can we retain the desiredcustomers?How do we enhance the businesswith these customers at a profit toour business?
What management tools can help usto take decisions on these issues?
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Prof. A. K. Biswas 4
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Prof. A. K. Biswas 5
Agenda What Is Customer Relationship
Management?
Why Customer RelationshipManagement?
Are All Loyal Customers Profitable?
With Which Customers To Build
Relationship? How To Grow Business With Profitable
Customers?
#
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Prof. A. K. Biswas 6
Agenda How To Retain Profitable Customers?
How to Measure the Impact of CRMStrategy? How To Measure Customer Lifetime Value?
How to Measure Net Promoter Score?
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What is Customer
Relationship Management? Customer relationship management is
the strategic use of information ,processes , technology , and people tomanage the customer’s relationshipwith your company across the wholecustomer life cycle.
Customer life cycle is the total time thatthe customer is engaged with yourcompany from the customer’s experience and viewpoint.
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Business is all about getting , keeping ,and growing business with customers.
In a competitive market, customers aredifficult to find and hard to keep.
To remain competitive, the companymust figure out how to keep the
customers longer, grow them intobigger customers, make them moreprofitable and serve them moreefficiently.
Why Customer Relationship
Management?
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Customers , therefore, should bethought of as assets , and expenditures
directly relating to acquiring andmaintaining them should be treatedaccordingly.
There are two sides of customer value –
the value a firm provides to thecustomer and the value of a customer tothe firm.
Why Customer Relationship
Management?
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The value of a customer to a businessfirm over the ‘life time’ of its
relationship with the firm is the presentvalue of all current and future profits generated from the customer over itslife of business with the firm.
It is called Customer Life Time Value
(CLV). The longer a customer stays with the
firm, it generates more profit to thefirm.
Why Customer Relationship
Management?
8/3/2019 23646922 Customer Lifetime Value
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Customer loyalty is generallymeasured by the retention rate - the
percentage of customers buying this year who also buy next year.
For most companies, customer
loyalty is the single most importantdeterminant of long term growth andprofit margins.
Why Customer Relationship
Management?
h C l i hi
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Growth of Total Number of Customersover 10 year Period
Growth of new accounts
Retention (%) 0% 10% 20%
95 -37 55 252
90 -61 0 136
85 -77 -37 55
80 -87 -67 0
(Mature) (Moderate) (High)
Why Customer RelationshipManagement?
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It is argued that there are four sourcesmaking loyal customers more profitable.
Profit from reduced operating costs. Profit from price premium.
Profit derived from increased
purchases. Profit from referrals to other
customers.
Why Customer Relationship
Management?
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Prof. A. K. Biswas 14
The customer lifetime value (CLV ) isthe net present value of a customer -that is, the discounted value of thenet cash flow (profit) generated overthe life of the relationship with thecompany.
The cash flow is usually low or evennegative at the beginning and thengrows strongly over the years as a
result of the factors described earlier.
Why Customer Relationship
Management?
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Prof. A. K. Biswas 15
How much a 5% increase in loyalty lifts CLV
B a n k i n g
C a r i n s u r a n c e
C a r S e r v i c e
S o f t w a r e
9585 85 84
81 75
35
Why Customer Relationship
Management?
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Prof. A. K. Biswas 16
Value with 90 per cent retention(with 10% growth of new accounts)
Customers 100,000 Average CLV Rs.10,000Business Value Rs.100 crore
Value with 95 percent retention
(with 10% growth of new accounts)Customers 155,000 Average CLV Rs.18,500Business Value Rs.287 crore
Why Customer Relationship
Management?
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Prof. A. K. Biswas 17
Are All Loyal Customers
Profitable? However, there are no strong evidence
that the loyal customers are alwaysmost profitable.
Certain empirical evidences suggestthat long-standing customers are notconsistently cheaper to manage thanshort term customers.
Within any one company, monthly costof maintaining relationship with anindividual customer vary enormously.
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Prof. A. K. Biswas 18
At the very least, the link betweenloyalty and lower costs is industryspecific.
No doubt there are industries in whichthe older customers are the cheapest to
serve, but there are also others in whichthey are more expensive to satisfy.
Are All Loyal Customers
Profitable?
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Prof. A. K. Biswas 19
Certain evidences from the corporateservice provider show that long termcustomers consistently paid lower prices
than the new customers did – between5% to 7% lower, depending on theproduct category.
There is also no evidence that loyal
customers paid higher prices in theconsumer businesses as well.
Indeed, like corporate clients, consumersalso expect, and get, some tangible
benefits for their loyalty.
Are All Loyal Customers
Profitable?
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Prof. A. K. Biswas 20
Empirical evidences do not also show anystrong link between customer longevity
and the propensity to market thecompany by word-of-mouth.
Empirical evidences do, however, suggestcustomers who scores high on both onattitudinal and actual loyalty are morelikely to be active word-of-mouthmarketers.
Are All Loyal Customers
Profitable?
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Prof. A. K. Biswas 21
If all loyal customers are not necessarilyprofitable , or at least, not equallyprofitable, then with which customers
to we should build relationships? Since all customers are not equally
profitable, investment in customers should vary by their profit potential.
A firm provides value to the customer interms of products and services, and acustomer provides value to a firm interms of stream of profits over time.
With Which Customers to
Build Relationship?
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Prof. A. K. Biswas 22
V a l u e o f C u s t o m e r s
High
Low
Value to Customers
Low High
StarCustomers
Lost
Causes
VulnerableCustomers
Free
Riders
With Which Customers to
Build Relationship?
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Prof. A. K. Biswas 23
Vulnerable Customers provide highvalue to the firm but do not get lot of
value from the company’s productsand services.
These may include newly acquiredcustomers or long-standingcustomers who, largely throughinertia, remain loyal.
With Which Customers to
Build Relationship?
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Prof. A. K. Biswas 24
In a sense, these customers arebeing exploited by the company.
These customers are vulnerable andprone to defect to the competitors unless corrective action is taken.
A company can invest in thesecustomers through better productofferings, additional services, andrelated activities.
With Which Customers to
Build Relationship?
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Prof. A. K. Biswas 25
Free Riders get a superior value fromusing the company’s products and
services but are not very valuable tothe firm.
For whatever reason (large size,competition), these customers areexploiting the relationship with thecompany, appropriating the lion’s share of value.
With Which Customers to
Build Relationship?
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Prof. A. K. Biswas 26
In general, a firm should eitherreduce its service level or raise
prices for the Free Riders. Although there would be risk in
loosing these customers, it would,
if successful, enhance their valueto the firm.
With Which Customers to
Build Relationship?
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Prof. A. K. Biswas 27
Lost causes are a group of customers whogets low value from the companycompany and these customers are notvaluable for the company either.
It is not worth building relationships withsuch customers.
Star customers , on the other hand,receive high value from the company and
in turn, contributes high value to thecompany. These customers are more stable in their
relationship with the company andtherefore need to be retained and growbusiness with.
With Which Customers to
Build Relationship?
With Which Customers to Build
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Prof. A. K. Biswas 28
Butterflies• Good fit between company's
offerings and customers' needs• High profit potential Actions• Aim to achieve transactional
satisfaction, not attitudinalloyalty.
• Milk the accounts only as long asthey are active.
Strangers• Little fit between company's
offerings and customers' needs.• Lowest profit potential Actions• Make no investment in these
relationships• Make profit on every transaction
True Friends• Good fit between company's
offerings and customers' needs.• Highest profit potential. Actions• Communicate consistently but
not too often.• Build both attitudinal and
behavioral loyalty.• Delight these customers to
nurture, defend, and retain themBarnacles• Limited fit between company's
offerings and customers' needs.• Low profit potential
Actions• Measure both the size and share
of wallet.• If share of wallet is low, focus on
up-and cross-selling.• If size of wallet is small, impose
strict cost controls.
HighProfitability
Low
Profitability
With Which Customers to BuildRelationship?
Short Term Customers Long Term Customers
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Prof. A. K. Biswas 29
Every company’s customers can bedivided in three categories:
Promoters are loyal enthusiasts whokeep buying from a company andurge their friends to do the same.
Passives are satisfied but
unenthusiastic customers who can beeasily wooed by the competition.
Detractors are unhappy customerstrapped in a bad relationship.
With Which Customers to
Build Relationship?
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Prof. A. K. Biswas 30
Customers can be categorized accordingto their answer to the ultimate
question: How likely is it that you would
recommend this company to a friendor a colleague?
Those who answer nine or ten on azero-to-ten scale are promoters.
With Which Customers to
Build Relationship?
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Prof. A. K. Biswas 31
Those who score seven or eight arepassive.
Those who answer six to zero aredetractors.
A company should continuously makeeffort to increase the percentage of
promoters by building effective andmutually beneficial relationships withsuch customers and simultaneouslyreducing the percentage of detractors.
With Which Customers to
Build Relationship?
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Prof. A. K. Biswas 32
Customer profitability is primarilydriven by three components: Customer acquisition (acquisition
rate and cost);
Customer margin (profit marginand growth); and
Customer retention (retention rateand cost).
With Which Customers to
Build Relationship?
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Prof. A. K. Biswas 33
The company should acquire customerswho desire its value proposition and sofit its core capabilities.
A company should acquire a customeronly if the value of the customer to thecompany over his/her entire life withthe company is more than the
acquisition cost. A customer acquisition strategy must
also take into account the differences incustomers’ lifetime value.
With Which Customers to
Build Relationship?
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Prof. A. K. Biswas 34
Customers’ value depends not onlyon how much they spend on a
single occasion but also theirpurchase frequency and longevity. Bank and credit card companies
have realized this for many years,
offering credit cards to studentswho have limited current butsignificant future value.
With Which Customers to
Build Relationship?
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Prof. A. K. Biswas 35
In business markets, a firm must look for customers who are expected to growdifferentially faster than the industry,
either because they are in fast growthmarket segments or because they havestrong competitive advantages (sharedetermining customers).
They may cost a lot to acquire, but theydeliver higher returns than many othercustomers because of the duration andextent of their influence.
With Which Customers to
Build Relationship?
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Prof. A. K. Biswas 36
A company may also targetcompetitors’ customers who have
low acquisition costs: the genuineswitchable customers.
In fact, a company should target
customers based on the life cycleof the product/market.
With Which Customers to
Build Relationship?
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Prof. A. K. Biswas 37
Customer TypeHigh-Profit
Share-Determining
Switchable
YourLoyal
Competitor’s Loyal
Entry
Growth
Maturity
Decline
With Which Customers to
Build Relationship?
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Prof. A. K. Biswas 38
A company may also like to acquire acustomer if it is an opinionleader/leading edge customer who can
open the door to other customers whoare influenced by them.
Finally, it makes sense to have a
portfolio of customers that takes intoaccount not only their expected lifetimevalue but also the risk or uncertainty associated with it.
With Which Customers to
Build Relationship?
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Prof. A. K. Biswas 39
While customer acquisition focuses ongrowing the number of customers,increasing customer margin focuses on
growing the profit from each customer. Growth can be achieved by a variety of
methods such as: Up-selling (e.g., migrating customers
to a higher price/profit product) and Cross-selling related products (e.g.,
providing a credit card to a bank customer).
How to Grow Business With
Profitable Customers?
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Prof. A. K. Biswas 40
A company which wants to growprofits from its customers, mustknow not just the amount of money customers spend with thecompany, but also the ‘share of wallet’ the company has.
Disney is a company thatsuccessfully increased itscustomers’ share of wallet.
How to Grow Business With
Profitable Customers?
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Prof. A. K. Biswas 41
During the mid-1980s, Disney foundthat a typical family of four people whovisited the theme park in Orlando,Florida, spent several thousand dollarsfor their trip which included cost of airfare, the hotel stay, and the entrancefee to the Disney’s theme park.
However, Disney found that it captured only a relatively small fraction of thetotal money spent by a family.
How to Grow Business With
Profitable Customers?
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Prof. A. K. Biswas 42
In its effort to increase it’s share of the customers’ wallet, Disney
decided to build hotels on Disneyproperty, offer a choice of multipleDisney restaurants , and even have aDisney cruise ship.
This investment has led to asubstantial increase in Disney’s shareof wallet of a typically Disney visitor.
How to Grow Business With
Profitable Customers?
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Prof. A. K. Biswas 43
Careful examination of share of wallet requires strategic thinking
about how you define your market (or wallet) and your competition.
The ‘share of wallet’ should not be
too broad (i.e., total spending), nottoo narrow (i.e., just yourrevenues), but ‘just right’ .
How to Grow Business With
Profitable Customers?
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Prof. A. K. Biswas 44
It often takes considerable effort toacquire a customer.
Once you establish a relationshipwith a customer, it makes sense tomaximize the value of therelationship by selling customers
multiple products. In many cases, there is a natural
progression of the products.
How to Grow Business With
Profitable Customers?
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Prof. A. K. Biswas 45
For example, bank customerstypically start with a savings
account and then gradually moveto loans and investment advice.
Cross-selling also has the potential
to improve customer satisfactionand retention.
How to Grow Business With
Profitable Customers?
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Prof. A. K. Biswas 46
Having invested in a customer, it alsoseems logical to prolong this
relationship by providing productsand services that meet the changingneeds of that customer over time.
In case of automobile manufacturers,financing has become a veryprofitable part of the business.
How to Grow Business With
Profitable Customers?
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Prof. A. K. Biswas 47
However, when products andservices seem to have little synergyin production or image match,
customers are skeptical of such jointoffering. Moreover, even seemingly related
products may require different skills
to produce and deliver. Moreover, a varied product line may
divide company’s attention so thatbusiness may suffer.
How to Grow Business With
Profitable Customers?
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Prof. A. K. Biswas 48
In their zeal to grow, many companiesfocus almost exclusively on enteringinto new markets, introducing newproducts, and acquiring new customers.
However, often as they add newcustomers, old ones defect from thefirm.
Some studies report that averageretention rate for U.S. companies isabout 80%.
How to Retain Profitable
Customers?
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Prof. A. K. Biswas 49
Studies also show that the cost of acquisition is generally much higher than the cost of retaining existingcustomers.
It is, therefore, obvious that a firmshould focus on retaining its existingcustomers.
Unfortunately, in general, the cost of retention increases dramatically as thecompany reaches high retention levels.
How to Retain Profitable
Customers?
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Prof. A. K. Biswas 50
Not all customers have the sameattraction to the company.
Some may receive high value from the
firm , while others may find the benefitsmarginal.
While the first group can be retainedrelatively easily, retaining the second
group is typically expensive. Therefore, there is an optimal level of
retention that a company should strivefor.
How to Retain Profitable
Customers?
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Prof. A. K. Biswas 51
At the core of customer retentionstrategy lies a simple commitment -
to deliver results. Not satisfaction, not delight, but thebest possible solution to anindividual customer's needs.
Each customer’s needs are uniqueand present an opportunity to deliveran unique solution.
How to Retain Profitable
Customers?
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Prof. A. K. Biswas 52
Learn these needs well, and promise your customer an unique solution.
Deliver the results promised. Flex your commercial imagination
and search ambitiously for ever-better solutions to your customer’s
needs.Probe their markets and theiroperations, their habits and theirhopes.
How to Retain Profitable
Customers?
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Prof. A. K. Biswas 53
Innovate constantly for delivering bestvalue to the customers at the lowestcost possible.Trust of the customer grows as youdeliver results, dependably, time aftertime.
Cultivating those relationships takesagility and flexibility, with a culture,systems, measurements, andeconomics to match.
How to Retain Profitable
Customers?
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Prof. A. K. Biswas 54
Engage the customers in an activedialogue and involve them increating the value for them.The competence that customersbring is a function of the knowledge
and skills they possess, theirwillingness to learn and experiment.
How to Retain Profitable
Customers?
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Prof. A. K. Biswas 55
More than 650,000 customerstested a beta version of Microsoft’s Windows 2000 andshared with the software gianttheir ideas of changing some of
the product’s features.
How to Retain Profitable
Customers?
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Prof. A. K. Biswas 56
CISCO gives its customers open accessto its information, resources, andsystems through an on-line service thatenables Cisco’s customers to engage ina dialogue.In this way, Cisco’s customers solves
the problems encountered by othercustomers, and each customer hasaccess to Cisco’s knowledge base anduser community.
How to Retain Profitable
Customers?
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Prof. A. K. Biswas 57
Michael Dell, Chairman and CEO of Dell Computer, in his book ‘Direct
from Dell’ says: ‘You need to involve yourcustomers intimately in the
process’ to ‘create a greatcustomer experience.’
How to Retain Profitable
Customers?
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Prof. A. K. Biswas 58
‘We take our customers’ pulse regularly through more than 300,000 telephone,
online, and face to face interactionsevery week and we are constantlyhumbled by the experience.They’ve taught us things that have
directly affected our success; they’ve kept us on course and prevented usfrom doing things that would have beendisastrous.’
How to Retain Profitable
Customers?
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Prof. A. K. Biswas 59
When you and your customers areinvolved together in creation of
value, you can shape the customers’ value criteria.
Successful companies often are oftenas effective at influencing thepurchase decision as they are atdelivering superior customer value.
How to Retain Profitable
Customers?
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Prof. A. K. Biswas 60
Incumbent companies have a majoradvantage in shaping their value criteriaas they have more information abouttheir customers than any competitor
would have. Oracle , the software giant, after initially
winning the customer, attacksapplications and integration services assoon as its sales team has gathered upenough information about the customerrequirements of these services.
Oracle, thus, has built an enviable recordof base retention.
How to Retain Profitable
Customers?
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Prof. A. K. Biswas 61
As you give customized solution to thecustomer effectively you are increasingthe switching costs of customers.
For your customer to enjoy the valueproposition of a new supplier, it mustincur the cost, aggravation, andinconvenience of switching.
If you have done a diligent job of entangling that customer , thoseswitching costs could be a formidablebarrier.
How to Retain Profitable
Customers?
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Prof. A. K. Biswas 62
If you can entice customers into complexrelationships to create enough immediateeconomic value for them, they may be
reluctant to go through the hassle of undoing these relationships.
GE’s initiative ‘At the Customer, for theCustomer’, was intended to make every
GE division a kind of consultant for itscustomers, providing free help and adviceto improve their operations and entanglethem with their benevolent supplier.
How to Retain Profitable
Customers?
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As an organization translates abusiness model into action, it must
execute effectively at the level of theindividual customer – where profit isultimately created.
A company must therefore invest indeveloping a detailed understandingof how profit happens at this level.
CUSTOMER PROFITABILITY
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Customer profitability analysis helps thefirm to focus on the handful of profitable accounts and make the others
profitable or replace them by moreprofitable customers.
An understanding of customerprofitability allows an organization to
rationalize investment, to focus on skillsand activities that are most importantto customers.`
CUSTOMER PROFITABILITY
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PROTECTING PROFITABILITY
While a company is developing apowerful business model to generateprofit growth, it must simultaneously
search for and develop the strategiccontrol points in its industry.
The purpose of a strategic control pointis to protect the profit stream that the
business model has created against thecorrosive effects of competition andcustomer power.
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There are many types of strategiccontrol points:
Brand Patent Two year product development lead Twenty percent cost advantage
Control of distribution Control of supply Value chain control
PROTECTING PROFITABILITY
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STRATEGIC CONTROL POINTINDEX
ProfitProtecting
Power
StrategicControl Point
Example
High Own theStandard
Microsoft,Oracle
High Manage the
Value Chain
Intel
High Own theCustomer
Relationship
GE
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STRATEGIC CONTROL POINTINDEX
ProfitProtecting
Power
StrategicControl Point
Example
Medium Brand, Patent Countless
Medium Two-yearProduct
DevelopmentLead
Intel
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STRATEGIC CONTROL POINTINDEX
ProfitProtecting
Power
StrategicControl Point
Example
Low One YearProduct
DevelopmentLead
Countless
Low Commoditywith 10 to20% Cost
Advantage
Nucor, SW Air
i fi bl
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The value of a customer is a mindset.
Its implementation requires a
cultural change in the organizationand needs to be supported byappropriate changes in the
organizational structure andincentive systems.
How to Retain Profitable
Customers?
i fi bl
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The organizational culture and climatemust effectively encourage thefollowing behaviours:
Employees constantly try to seethings from the customer’s perspective , putting themselves in
the customer’s shoes. A set of beliefs that puts thecustomer’s interest first.
How to Retain Profitable
Customers?
H R i P fi bl
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The ability of the organization togenerate , disseminate , and use superior information about
customers. Every decision is evaluated in terms
of the return it generates from thecustomer.
The coordinated application of inter-functional resources to the creationand delivery of superior customervalue.
How to Retain Profitable
Customers?
H t R t i P fit bl
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In a product based organization , eachproduct manager tries to maximize hisor her own product’s profitability.
This structure does not facilitate thetransfer of relevant customerinformation across products.
However, a customer basedorganization provides a completepicture of a customer across products.
How to Retain Profitable
Customers?
H t R t i P fit bl
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A product based organization issuboptimal because:
Individual product manager does notknow the potential of that customerfor another product of the firm andthus looses cross-sellingopportunities.
It can create inherent conflicts amongproduct managers and departments.
How to Retain Profitable
Customers?
H t R t i P fit bl
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A new organizational structure mustalso be supported by an appropriateincentive system to reward employees.
Firstly, each manager should berewarded on the basis of profitability of each customer and not on theprofitability of individualproduct/brand.
Secondly, the incentive system shouldrecognize and reward the key elementsthat drive customer profitability.
How to Retain Profitable
Customers?
H t R t i P fit bl
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As a firm moves from a product to acustomer based organization, it requiresa very different skill set for the
employees. While a product orientation requires an
employee to be an expert in his productonly, a customer orientation requires
that employees know about multipleproducts and understand customerneeds more than productcharacteristics.
How to Retain Profitable
Customers?
H t R t i P fit bl
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A second aspect of employee trainingrelates to the training of frontline
employees. As these employees come in contact
with the customers, how they behave
and interact with customers has asignificant impact on customersatisfaction and retention.
How to Retain Profitable
Customers?
H t R t i P fit bl
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A focus on customer profitabilityrequires firm to move to customer-
based costing , where costs areallocated to individual customers.
Without such cost allocation, it is
difficult to assess the profitabilityof each customer and hence designeffective customer strategies.
How to Retain Profitable
Customers?
How to Measure the
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There are two methods to measurethe impact of Customer
Relationship Management Strategyof a company:
Customer long-term profitability orCustomer Lifetime Value of all thecustomers of the company.
Net Promoter Score of the company.
How to Measure theImpact of CRM Strategy?
How to Measure the
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The fundamental metric incustomer-oriented strategy is a
customer’s long-term profitabilityor customer life time value.
Drivers of customer life time value,
such as acquisition cost, margin,and customer retention should alsobe monitored on a regular basis.
How to Measure theCustomer Lifetime Value?
How to Measure the
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There is a simple approach to measurethe lifetime value of a customer that istransparent to both company executivesand investors, does not require largeamount of data, is easy to understandand use for decision-making purpose.
To arrive at this simplification, we needto make three assumptions:
How to Measure theCustomer Lifetime Value?
How to Measure the
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Profit margins remain constant overthe life of a customer.
Retention rate for customers remainconstant over time.
Customer lifetime value is estimatedover an infinite horizon.
There is ample justification for thesame.
How to Measure theCustomer Lifetime Value?
How to Measure the
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One study cautioned that there aresignificant costs associated withkeeping customers for a longer lifetime
through reward programs. Another study found that there is little
or no evidence to suggest thatcustomers who purchase steadily from
a company are necessarily cheaper toserve , less price sensitive orparticularly effective in bringing in newbusiness.
How to Measure theCustomer Lifetime Value?
How to Measure the
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Many studies have shown that modelswith constant retention rates for acustomer or customer segment that
allows for differences across customersare consistent with most data.
It is also not necessary to arbitrarilythe duration of a customer lifecycle,since the retention rate automaticallyaccounts for the fact that over time thechances of a customer staying with afirm go down significantly.
How to Measure theCustomer Lifetime Value?
How to Measure the
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Using the three simple, but reasonableassumptions, the Customer Lifetime
Value may be estimated simply as under:
CLV = m{r/(1+i-r)}
where
m = margin or profit from a customer per
period (e.g., per year)r = retention rate (e.g., 80%)
i = discount rate (e.g., 12%)
How to Measure theCustomer Lifetime Value?
How to Measure the
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CLV is thus equal to the margin (m)multiplied by a factor r/(1 + i - r).
This factor is called the margin multiple.
This multiple depends on customerretention rate (r) and the company’s discount rate (i).
This discount rate is a function of thecompany’s cost of capital and depends onthe riskiness of its business and its debt-equity structure.
How to Measure theCustomer Lifetime Value?
How to Measure the
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How to Measure theCustomer Lifetime Value?
Some typical margin multiple isprovided in the table below:
Retention
Rate
Discount
Rate10% 12% 14% 16%
60% 1.20 1.15 1.11 1.07
70% 1.75 1.67 1.59 1.52
80% 2.67 2.50 2.35 2.22
90% 4.50 4.09 3.75 3.46
How to Measure the
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The table provides a quick and easy wayto estimate the lifetime value of acustomer.
For example, consider a company withdiscount rate of 12%, retention rate of 90%, and the annual margin for one of
its customer is $100. The lifetime value of this customer is
$100*4.09 = $409
How to Measure theCustomer Lifetime Value?
How to Measure the
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The table also shows the value of retention.
For example, at a 12% discount rate and80% retention, the margin multiple is 2.5
instead of 4.09. Put differently, the lifetime value of a
customer with $100 margin increasesfrom $250 to $409 if the retention rate
can be increased from 80% to 90%. This difference in customer value
provides us with an idea of the maximumamount of money a firm should be willingto invest to improve customer retention.
How to Measure theCustomer Lifetime Value?
How to Measure the
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If we add together all the life timevalues of a firm’s current and futurecustomers, the result is ‘customer equity’ .
Customer Equity is the net value(profit), discounted back to the present,
of all the future cash flows a firmexpects its customers to generate.
How to Measure theCustomer Lifetime Value?
How to Measure the
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Customer equity management is anew approach to marketing and
corporate strategy that finally putscustomers, and more important,strategies designed to grow thevalue of each customer, at theheart of the organization.
How to Measure theCustomer Lifetime Value?
How to Measure the Net
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Besides customer lifetime value (andcustomer equity), another still simplerway to assess the impact of acompany’s CRM strategy is to measurethe Net Promoter Score of the company.
Net Promoter Score (NPS)of a companyis the percentage of promoters minusthe percentage of detractors in its
customer base. It provides the easiest-to-understand
measure of how a company isperforming.
How to Measure the NetPromoter Score?
How to Measure the Net
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Tracking net promoters offersorganizations a powerful way tomeasure and manage customer loyalty.
Firms with the highest net promoterscores consistently garner the lion’s share of industry growth.
Those companies with most efficientgrowth engines – companies such as Amazon. com , eBay , Dell – operate atNPS efficiency ratings of about 50 to 80percent.
How to Measure the NetPromoter Score?
How to Measure the Net
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So even they have room for improvement.
But the average sputters along at an NPSefficiency of only 5 to 10 percent.
Many firms have negative NPS , whichmeans that they are creating moredetractors than promoters day in and dayout.
These abysmal scores explain why somany companies can’t deliver profitablesustainable growth , no matter howaggressively they spend to acquire newbusiness.
How to Measure the NetPromoter Score?
How to Measure the Net
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For a measure to be practical ,operational , and reliable – that is todetermine the percentage of net
promoters among customers and allowmanagers to act on it – the process andresults need to be owned and accepted by all of the business functions.
And all the people in the organizationmust know which customers they areresponsible for.
How to Measure the NetPromoter Score?
How to Measure the Net
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Overseeing such a process is a moreappropriate task for the General managerof the business unit , than for themarketing department.
The path to sustainable, profitablegrowth begins with creating morepromoters and few detractors andmaking the net-promoter numbertransparent throughout the organization.
This number is the number you need togrow. It is that simple and that profound.
How to Measure the NetPromoter Score?
The Manifesto For Blowing The
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You are a product of your decisions , not your conditions.
Choose to be a player.
Choose to be accountable.
Choose service over self-interest.
Choose to focus forward.
Choose to play to your genius. Choose to get it done.
Choose to risk more and gain more.
#
The Manifesto For Blowing TheDoors Off Business-as-Usual
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