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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