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PROFITABLE CUSTOMER ENGAGEMENT Concepts, Metrics & Strategies. V. Kumar. Chapter 4 Valuing customer contributions The future looks green!!!. Instructor’s Presentation Slides. Traditional measures of Customer Value. Recency -Frequency-Monetary Value (RFM ) Past Customer Value (PCV )

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slide1

PROFITABLE

CUSTOMER ENGAGEMENT

Concepts, Metrics & Strategies

V. Kumar

slide2

Chapter 4

Valuing customer contributions

The future looks green!!!

Instructor’s Presentation Slides

slide3

Traditional measures of Customer Value

  • Recency-Frequency-Monetary Value (RFM)
  • Past Customer Value (PCV)
  • Share of Wallet (SOW)
  • Tenure/Duration
slide4

Customer Lifetime Value

Customer Lifetime Value (CLV) is defined as “the sum of cumulated future cash flows – discounted using the weighted average cost of capital (WACC) – of a customer over their entire lifetime with the company.”

CLV tracks the future purchase behavior of a customer and computes his /her value in present day terms.

slide5

Measuring CLV

CLV Measurement Approach – A Conceptual Framework

Recurring

Revenues

Gross

Contribution

Margin

Adjusted for

NPV

minus

Recurring

Costs

minus

Net

Margin

Marketing

Costs

Accumulated

Margin

times

Customer

Lifetime

Value

Expected

number of

purchases

over next

3 years

minus

Acquisition

Costs

Source:Adapted from Kumar, V. (2008), Managing Customers for Profits, Upper Saddle River, NJ: Wharton School Publishing.

slide6

Measuring CLV

CLV Computation in a Contractual Setting

where,

CLVi = lifetime value for customer i

= predicted probability that customer i will purchase in time period t

= predicted gross contribution margin provided by customer i in time period t

= predicted marketing costs directed toward customer i in time period t

t = index for time periods; such as months, quarters, years, etc.

T = marks the end of the calibration or observation time frame

r = monthly discount factor

Base GC = predicted base monthly gross contribution margin

slide7

Measuring CLV

CLV Computation in a NoncontractualSetting

where,

CLVi = lifetime value for customer i

= predicted probability that customer i will purchase in time period t

= predicted gross contribution margin provided by customer i in time period t

= predicted marketing costs directed toward customer i in time period t

t = index for time periods; such as months, quarters, years, etc.

T = marks the end of the calibration or observation time frame

r = monthly discount factor

Base GC = predicted base monthly gross contribution margin

slide10

1. Customer Selection

  • Need for Strategy
    • Traditional metrics like RFM, PCV, SOW, Tenure or Duration are based on past customer behavior.
      • Apoor indicator of future customer purchase behavior
      • Fails to identify customers who will be profitable in the future.
    • CLV, a forward-looking metric, focuses on customers who are likely to be profitable in the future.
  • How does it work?
    • Selection is important for two reasons;
      • Not all customers are equally profitable
      • Limited budgets to spend resources on
    • By selecting the right customers to manage, CLV enables firms to rank-order customers based on their value to the company, and prioritize resources accordingly.
slide11

2. Managing Loyalty and Profitability Together

  • Need for Strategy
    • Loyalty is not always the true measure of customer profitability.
    • Traditionally, customer loyalty has been defined solely as a behavioral measure with the assumption that the loyalty of a customer is obtained from his purchasing behavior.
    • Chasing loyal customers is not the same as chasing profitable customers.
  • How does it work?
    • Customers are rank-ordered and segmented into four cells based on their loyalty and profitability levels.
    • Segmentation and strategies shown on the next slide.
slide12

2. Managing Loyalty and profitability together

  • BUTTERFLIES
  • Good fit between company offering and customer needs
  • High profit potential
  • Action:
    • Aim to achieve transactional satisfaction, not attitudinal loyalty.
    • Milk the accounts as long as they are active.
    • Key challenge: Cease investment once inflection point is reached
  • TRUE FRIENDS
  • Good fit between company offering and customer needs
  • Highest profit potential
  • Actions:
    • Consistent intermittently spaced communication
    • Achieve attitudinal and behavioural loyalty
    • Delight to nurture/defend/retain.

High

Profitability

  • STRANGERS
  • Little fit between company offering and customer needs
  • Lowest profit potential
  • Action:
    • Eliminate all investments towards these relationships
    • Profitizeevery transaction
  • BARNACLES
  • Limited fit between company offering and customer needs
  • Low profit potential
  • Action:
    • Measure size and share-of-wallet
    • If share-of-wallet is low, specific up-selling and cross-selling
    • If size of wallet is small, strict cost control

Low Profitability

Short-term Customers

Long-term Customers

slide13

3. Optimal Allocation of Resources

  • Need for Strategy
    • Firms cannot allocate equal resources to all of their customers.
    • Also, not all customers are equally loyal and profitable.
    • Hence, firms should allocate their limited resources to the most loyal and profitable customers.
  • How does it work?
    • To optimally allocate resources, firms must identify;
      • their most profitable customers, and
      • those who are the most responsive to marketing efforts
    • By carefully monitoring the purchase frequency of customers, the inter-purchase time, and the contribution toward profit, managers can determine the frequency of marketing initiatives to maximize CLV through an optimal contact strategy.
slide14

4. Cross-buying Behavior

  • Need for Strategy
    • When customers buy across product categories;
      • they contribute to an increase in revenue
      • contribute to profits
      • increase their own switching costs
    • Therefore, firms should identify and target the right customers who are most likely to cross-buy.
  • How does it work?
    • In order to identify the customers who are likely to cross-buy, firms not only need to understand the motivation and drivers influencing customers to cross-buy but also the impact on revenues and other customer-related metrics.
    • Drivers of cross buying will help managers retain customers for a greater duration.
slide15

5. Pitching the Right Product to the Right Customer at the Right Time

  • Need for Strategy
    • Cross-selling is an important strategy for firms to increase customer retention and customer value.
    • As not all customers are likely to cross-buy, it is imperative for firms to identify customers who have a higher propensity to cross-buy.
  • How does it work?
    • To predict the purchase sequence of each customer firms need to collect the following information:
      • In which product category the customer is likely to make a purchase?
      • At what intervals and at time period the customer will make a purchase?
      • How much the customer is likely to spend towards that purchase?
slide16

6. Preventing Customer Attrition

  • Need for Strategy
    • As it is less expensive to retain a current customer than to gain a new one, monitoring customer churn/attrition is vital for companies.
  • How does it work?
    • By building a “propensity to quit” model.
    • These models give us the probability of a customer quitting at a particular point in time.
    • Based on when the customer is likely to leave and his/her ability to contribute profits, firms can provide appropriate intervention strategies that will aid retention.
slide17

7. Product Returns

  • Need for Strategy
    • Product returns:
      • Reflect the discontent of customers with the firm’s offering
      • Increase service costs for the firm
      • Eventually reduce margins for the firm
    • Firms can benefit greatly by estimating optimal amount of product returns
  • How does it work?
    • Firms need to address the following questions:
      • What factors affect customers’ return behavior?
      • How does customers' return behavior influence their future buying behavior and the firm-initiated marketing communication plans?
      • Should firms consider product returns as a necessary evil in the exchange process?
slide18

8. Managing Multichannel Shoppers

  • Need for Strategy
    • Customers often engage through different channels such as retail stores, brick-and-mortar stores, the Internet, or by mail-order catalogs.
    • Each of these channels services a different set of customers and provides varying levels of service.
  • How does it work?
    • To effectively manage multiple channels, firms have to first identify who the multichannel shoppers are by studying the drivers associated with purchase behavior across multiple channels.
    • After identifying the drivers, firms have to determine whether multichannel shoppers are: (a) more likely to buy in the future, (b) spend more money, and (c) more profitable than single-channel customers.
    • Ascertain which channel a customer is likely to adopt next and when this is likely to happen.
slide19

9. Linking Investments in Branding to Customer Profitability

  • Need for Strategy
    • Brands add value to companies
  • How does it work?
    • It is possible to strengthen a brand by ascertaining and increasing the value a customer provides to the brand.
    • This value is referred to as the Customer Brand Value (CBV).
slide20

10. Acquiring Profitable Customers

  • Need for Strategy
    • Understanding how firms acquire customers and the best metric to use while acquiring those customers is essential for firms to maximize their overall profitability.
  • How does it work?
    • Using the concept of CLV, the study proposed the introduction of an ARPRO framework (Allocating Resources for Profit) that would help firms decide which customers are worth chasing and which dormant customers should be pursued to come back to the firm.
    • Firms using this strategy can use customer profiles to identify customers who are most likely to be profitable and should be acquired and retained.
slide21

11. Interaction Orientation

  • Need for Strategy
    • Traditionally, firms used a product-centric approach which focused on making and selling superior products.
    • Acustomer-centric approach allows firms to focus on the interaction with customers thereby maintain future profitability.
  • How does it work?
    • Customer Concept
    • Interaction response capacity
    • Customer empowerment
    • Customer value management
slide22

12. Viral and Referral Marketing Strategies

  • Need for Strategy
    • Customers not only contribute through their own transactions but also have an impact on the transactions of other customers through word-of-mouth and referrals.
  • How does it work?
    • The concept of Customer Referral Value (CRV) enables managers to measure and manage customer referral behavior.
    • In a B2B context, the concept of Business Reference Value (BRV) enables managers to measure and manage client references that are critical to business.
    • Social media and its impact on marketing is captured under Customer Influence Value (CIV) where managers can understand the social media influence of their customers on prospects and current customers.
slide23

Conclusion

  • CLV is a direct means to measure the value of a customer to a firm in the future
    • It is a strong indicator of the level of customer engagement with the firm.
  • A customer’s value to a firm is not limited to the direct impact of that customer.
  • Customers can also affect the profitability of other customers of a firm through their activities and behavior.
  • As a result, firms should consider the influence of these indirect factors of customer engagement; CRV, CIV, and CKV, and their relationship with CLV which can further quantify the value of a customer to a firm.