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Healthy imitation. Win-lose strategies can backfire due to imitation Imitation is bad for strategies designed to achieve ‘competitive advantage’, i.e. to do better than others With win-win strategies, imitation is healthy!. Frequent-flyer programs. American Airlines introduced AAdvantage

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Healthy imitation
Healthy imitation

  • Win-lose strategies can backfire due to imitation

  • Imitation is bad for strategies designed to achieve ‘competitive advantage’, i.e. to do better than others

  • With win-win strategies, imitation is healthy!

Frequent flyer programs
Frequent-flyer programs

  • American Airlines introduced AAdvantage

  • This may have attracted some passengers from other airlines

  • One step forward for American, one step back for United - so far it is win-lose

  • When United imitated AAdvantage, American lost its ability to gain share

  • One step forward for United, one step back for American – a net wash

Frequent flyer programs1
Frequent-flyer programs

  • But now, with more loyal customers, American wasn’t about to start a price-war

  • In fact it had room to raise prices

  • That gave United some room to raise prices

  • The win-lose competition in terms of share-shifts can give way to win-win element in terms of pricing

Most favored customer clause mfc
Most-favored-customer clause (MFC)

  • Contractual arrangement that guarantees a customer the best price the seller gives to anyone

  • Very common in B2B situations

  • MFCs make it difficult for sellers to give price breaks to anyone

  • This makes it easier for sellers to maintain high prices

  • So, why do buyers agree?

Meet the competition clause mcc
Meet-the-competition clause (MCC)

  • A contractual arrangement that gives a company the option to retain a customer by matching a rival bid

  • Also called ‘last-look- provision’ or ‘meet-or-release-clause’

  • Very common in commodity markets where business stealing is based primarily on price cuts

  • Has the same competition reducing effects of an MFC

Mfc mcc like strategies for consumer markets
MFC/MCC-like strategies for consumer markets

  • Guaranteed rebates over a certain future period are sometimes given. Advantages are:

    -consumers less likely to wait for sales

    -seller not likely to offer many sales

  • MFCs don’t work with idiosyncratic products

  • MCCs don’t work since consumers are not required to give you the option to serve them

  • Charging a low price to all customers is problematic

  • Solution: charge a low price to only your own customers but not to your rival’s customers

Overview of crm database mkt
Overview of CRM / Database mkt

  • Mass Production, Mass Media and Mass Mkt now replaced by a one-to-one economic system

  • The one-on-one future represents:

    - customized products

    - individually addressable media

    - individualized delivery channels

    - personalized pricing

  • Database mkt is the engine that powers the movement towards effective CRM

  • The goal is ‘share-of-customer’ rather than market share (also called ‘share-of-wallet’ or ‘share-of-requirements’)

Basic premise of crm database marketing
Basic Premise of CRM/ Database Marketing

  • Retaining an existing customer is better than acquiring a new one

  • Not all customers are alike

  • Past behavior is a strong predictor of future behavior

  • Thus, gathering, maintaining, and analyzing customer and prospect info allows marketers to

    - identify their ‘better’ and ‘worse’ customers

    - individually tailor products, prices and promotions to reflect the rankings of various customers

    - develop relationships satisfying both buyers and sellers

Acquisition vs retention
Acquisition vs Retention

  • Why do companies find it easier to spend on acquisition rather than on retention:

    - Acquisition is easier to measure

    - With retention you have to rebut the claim that “they would have come anyway”

    - Managers find acquisition easier to carry out

    - Retention involves maintaining an extensive database and analyzing it for patterns

  • To measure effectiveness of retention, you must have a test and control groups

What is required for database marketing
What is required for Database Marketing?

  • Relevant data about customers and prospect

  • Database tech to transform raw data into powerful and accessible mkt info

  • Statistical techniques to rank customers in terms of their likeliness to

    - respond to mkt communication

    - buy products

    - return products

    - pay for products

    - stay or leave

Contact strategy what is it
Contact Strategy: What is it?

  • Contact strategy deals with using information about

    • Customer purchases

    • Promotion patterns

    • Interests, and

    • Preferences

  • In order to

    • Regulate the frequency and sequence of customer contact

    • Customize the offer, creative thrust, and positioning of contacts

  • What is new in today s contact strategy
    What is new in today’s Contact Strategy

    • All the key decision criteria are based at the customer or individual level

    • A customer is included in a promotion or campaign depending on whether there is any incremental profit from contacting the customer

    What s new in today s contact strategy
    What’s new in today’s Contact strategy

    • Previously all customers who did not own product A were mailed promotions about product A.

    • Today, a customer is mailed promotions about product A depending on

      • How long a person has been a customer?

      • What products the person has previously bought?

      • What were the person’s responses to previous mailings, or contacts?

      • What are the purchase patterns of the person?

  • These factors are then combined to compute the Return on Investment (ROI) for a particular customer

  • Customer lifetime value
    Customer Lifetime Value

    • Lifetime value is the NPV of the profit that you will realize on a new customer during a given number of years

    • Factors in calculation of CLTV

      - Retention rate

      - Spending rate

      - Acquisition cost

      - Discount rate

      - NPV calculation

      - Referral rate

    Customer lifetime value1
    Customer Lifetime Value

    • Ridgeway Fashions is in fashion retailing

    • Wants to test idea of a Birthday Club

    • Women provide their fashion preferences and their husband’s business address. Ridgeway sends husbands a reminder and hints for gifts before wife’s birthday

    • We will look at Ridgeway before and after the Birthday Club

    • Look at 20000 customers over a 3 year period

    Customer lifetime value2
    Customer Lifetime Value

    • Retention rate

      - The single most important number in the lifetime value table

      - Is calculated by a simple formula:

      RR=year X customers/year 1 customers

      eg RR=8000/20000=40%

      - Year X customers represent those Year 1 customers who are still buying in the later year

    Customer lifetime value3
    Customer Lifetime Value

    • Acquisition cost

      - Add up all money spent on advertising, marketing and sales efforts during the year

      - Divide this by the number of new customers who actually make purchases from you each year

    • Discount rate used because profits are received from customers over many years

    Customer lifetime value4
    Customer Lifetime Value

    • Net Present Value

      - Once you have the discount rate for each year, each of your profits must be discounted by the corresponding rate

      - NPV profits=gross profits/discount rate

      - Add up NPVs of all profits to get cumulative NPV

    Customer lifetime value5
    Customer Lifetime Value

    • Lifetime value is simply the cumulative NPV profit (CUM-NPV) in each year divided by the original group of customers

    • CLTV=CUM-NPV/acquired customers

      3rd year CLTV in above example is $1201057/20000=$60.05

    • Represents the average profit that you can expect to receive, after a given number of years, from the average new customer whom you can sign up

    Customer lifetime value6
    Customer Lifetime Value

    • Referral rate

      - Management assumes that the Birthday Club will be successful enough that 5% of it’s customers will recommend Ridgeway to friends/relatives

    • Usually referred people are more loyal and have higher retention and spending rate than the average new acquisition

    Rfm the workhorse
    RFM: The Workhorse

    • Key variables to consider for contact strategy:

      • Recency

      • Frequency

      • Monetary Value

    • Additional help comes from

      • Promotion History

      • Demographic Data

      • Survey data

    Rfm definitions
    RFM definitions

    • Recency

      • How recently has a customer bought?

  • Frequency

    • How frequently does a customer purchase?

  • Monetary Value

    • How much does a customer spend on each purchase?

  • How does rfm work
    How does RFM work?

    • Rank Customers according to each variable into say 5 groups.

    • Give preference to contacting customers who are in the top groups for each variable

    • Give the most preference to contacting customers who are in the top group for all the variables

    How does rfm work1
    How does RFM work?

    • An RFM chart depicting the groups and the response rates for each group

    How does rfm work2
    How does RFM work?

    • An RFM chart depicting the groups and the response rates for each group

    How does rfm work3
    How does RFM work?

    • An RFM chart depicting the groups and the response rates for each group

    Purchase history information
    Purchase History Information

    • Time or Tenure of being a customer

      • Treat new and old customers differently

        • For new customers send welcome packages

        • For old customers send offers that recognize their tenure

        • Offer special privileges to long life customers

    Purchase history information1
    Purchase History Information

    • Total Sales Dollar or Total Sales Dollar over Time

      • Calculate Revenue Velocity

        Revenue Velocity (RV) = total amount customer spent

        total time customer has been purchasing

      • RV for a customer who has spent $100 in 2 months = 50

      • RV for a customer who has spent $100 in 20 months = 5

      • First customer preferred over the second

    Purchase history information2
    Purchase History Information

    • Product Ownership

      • Avoid offending customers by recommending them to buy a product they already have

      • Very critical for expensive items like cars, insurance, and financial services

      • Contact customers who do not have a do-not-contact code and are outside the too-soon to contact limit

    Purchase history information3
    Purchase History Information

    • Product Ownership over time

      • How do you effectively eliminate customers who first sign-up for all offers and then cancel them all within a month?

      • Look for customers who have owned products/services for a long time and offer only them additional offers

    Promotion history
    Promotion History

    • Used to define who is eligible for an upcoming contact

    • Helpful in creating a market segment

    • Propensity Indicator

      • Person’s response rate over time

    Promotion history1
    Promotion History

    Propensity Indicator (PI) =

    (# of times bought/ # of times promoted/ time period)

    • Customer A was promoted 6 times, and bought twice in the last 12 months, PI = (2/6/12)= 0.027

    • Customer B was promoted 6 times, and bought twice in the last 18 months, PI = (2/6/18)= 0.018

    • Customer C was promoted 4 time, and bought twice in the last 6 months, PI = (2/4/6) = 0.08

    • Customer C > Customer A > Customer B

    Demographic information
    Demographic Information

    • Create relatively similar customer segments based on demographic and lifestyle characteristics

    • Characteristics include

      • Gender, marital status, age, income, home value, presence of children, education level, etc.

  • Age, marital status, income, presence of children best bets!!!

  • Attitudinal information
    Attitudinal Information

    • Survey data used to find

      • Motivation for purchase

      • Barriers to purchase

      • Brand’s impression as compared to a competitor

      • Brand Equity

      • Loyalty within a category

  • Takes a long time to collect

  • Not very reliable

  • Use in combination with purchase history and demographic data to profile segments

  • Combining all types of information
    Combining all Types of Information

    • Sequentially rank customers based on

      • First by Purchase History

      • Second by Demographic Information

      • Third by attitudinal information

    • Give preferences to customers who are ranked first in all three categories, then to the ones ranked first in purchase history and so forth

    Example using rfm for a promotion
    Example: Using RFM for a Promotion

    • A database marketer with a customer database of 2.1 million names

    • Wants to do a promotional Rollout

    • Does a Test promotion first on 30,000 customers

    • It sent videos costing $100 and it made $40 on each successful sale. Cost of mailing was $0.55 per piece

    Example using rfm for a promotion1
    Example: Using RFM for a Promotion

    • First all 2.1 mn customers were coded by Recency, Frequency and Monetary Value

    • Then database was sorted by recency and divided into 5 equal parts (quintiles) which were numbered from 5 (most recent) to 1 (most ancient)

    • Then each of the 5 recency quintiles was further sorted by Frequency (total no of times a customer purchased from you) and divided in to 5 equal parts

    • Each recency quintile was thus numbered from 5 (most frequent) to 1 (least frequent)

    • Then each of the 25 Recency-Frequency combinations was further sorted by Monetary Value and divided into 5 equal parts. Each combo was numbered from 5(most value) to 1(least value)

    Example using rfm for a promotion2
    Example: Using RFM for a Promotion

    • The Test group of 30000 was selected using an Nth

    • A Breakeven Index is calculated for each of the 125 cells using the actual responses

    • Breakeven is the response rate required for the net profit from promotion to a test group to exactly equal cost

    Example using rfm for a promotion3
    Example: Using RFM for a Promotion

    • The company found that only 34 of the 125 RFM cells broke even

    • The final promotional offer was mailed to only people in the 34 cells with positive breakeven

    • Response rate and profits were higher by not promoting to people unlikely to respond