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Customer Portfolio Management

Master MOI University Nanterre 2009

Lars Meyer-Waarden

Professor University of Strasbourg/Ecole de Management Strasbourg

Meyer_waarden@yahoo.fr

http//:meyer-waarden. com

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Bibliography

For more information my websitehttp://meyer-waarden.com

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Customer Relationship ManagementA Databased Approach

V. Kumar

Werner J. Reinartz

Bibliography

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Contents

� Chapter 1: Introduction: From Mass Marketing to Customer Relationship Management (CRM)

� Chapter 2: Implementing customer portfolio management

� Database management

� Performing Database Analytics

� Customer Value Metrics and Segmentation

� Chapter 3: From product portfolio management to customer portfolio management

� Chapter 4: Conclusion

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Chapter 1: Introduction: From Mass Marketing to Customer Relationship

Management (CRM)

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Development in marketing

4

7

Form mass MKT to relationship MKT

Why:

� Market Saturation

� Strong competition & Multiplication offers

� Shorter Product life Cycles

� Development information data bases

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What is relationship marketing?

Relationship marketing involves creating, maintaining and enhancing strong relationships with customers and other stakeholders.

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9

Implications of Changes in Business Environment

� Focus on customer-centric instead of product-centric

strategies

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Relationship Marketing

« Instead of selling a product to a maximum of customers….

1 Product

Client 1

Client 2

Client 3

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Relationship Marketing

� Concentration on clients,and sales of a maximum of possible products/services to their expectations � personnalisation (1-2-1 or 1-2-few)

1 Client

Product 1

Product 2

Product 3

� Cross selling is when new, related or even unrelated products are offered to the customer.

� Beneficial strategy for profit maximization from current customer base.

� Up-selling is the promotion of more expensive products or services over the product or service originally discussed or purchased.

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Example of a Customized Offer

Copyright© 2010 Pearson Education, Inc. Publishing as Prentice Hall

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Every client is an asset

� Thus

maintaining clients

becomes the principal activity in companies

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Highly satisfied customers

� Tend to be more loyal customers

� Generate more profits over their lifetime of patronage

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Satisfaction-Loyalty-Profit Chain

Source: Strengthening the satisfaction-profit chain”, Eugene W Anderson, Vikas Mittal. Journal of

Service Research, Nov 2000. Vol 3, Iss.2, p 107

Product Performance

Service Performance

Employee

Performance

Customer

Satisfaction

Retention /

Loyalty

Revenue /

Profit

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Declining Customer Satisfaction-Example

Ho us e ho ld

A pp lia nc e s

60

65

70

75

80

85

90

1994 1996 1998 2000 2002

-3.5%

S c he du le d

A irline s

60

65

70

75

80

85

90

1994 1996 1998 2000 2002

-8.4%

C o m m e rc ia l

B a nks

60

65

70

75

80

85

90

1994 1996 1998 2000 2002

-2.7%

P a rc e l D e liv e ry

60

65

70

75

80

85

90

1994 1996 1998 2000 2002

-2.5%

P e rs o na l

C o m pute rs

60

65

70

75

80

85

90

1994 1996 1998 2000 2002

-9.0%

P ublis hing /

N e ws pa pe rs

60

65

70

75

80

85

90

1994 1996 1998 2000 2002

-12.5%

(American Customer Satisfaction Index) with products and services

Source: http://www.theacsi.org, University of Michigan

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The Reasons Why Loyal Customers Generate More Profits

1. Increase their spending over time

2. Cost less to serve than new customers

3. Generate word-of-mouth advertising or referrals

4. Are less price sensitive than new customers

Loyal Customers …

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Typical profit pattern in financial services and other high acquisition cost industries

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Mass MKT vs Relationship MKT

� Focus on transaction

� Short term orientated

� Priority: Acquisition new clients

� Market Share

� Product Differentiation and ProductManagement

� Focus on transaction and products

� Mass distribution, Mass advertising, Mass production, Communication in one sense

� Product portfolio management

� Key Indicateur : market share

� Focus on relationship and regulartransactions

� Long term orientated

� Micromarketing � Fine segmentation with precise knowledge about customers which have the most important probability to response (database) InteractiveDialog

� Priority: client retention/loyalty

� Client Differentiation and CustomerPortfolio Management

� Focus on clients

� Personalized, individualiseddistribution, advertising, production, Communication in 2 senses : Mass customisation

� Customer portfolio management

� Key Indicateur : Customer Share & Customer Life time value

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What is customer relationship management?

�Business strategy designed to identify and maximize customer value.� Capture customer data and interact with the customer simultaneously � Involves managing detailed information about individual customers. � Develop specific strategies for interaction with each customer� Develop better relationships with profitable customers�Target customer needs to maximize the customer’s experience and overall customer satisfaction. � Locating and enticing new customers that will be profitable� Finding appropriate strategies to deal with unprofitable customers, including termination of relationships

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Chapter 2: Implementing Customer Portfolio Management

Allocate resources based on customer value - and through adeep understanding of their needs. The results are deeper,richer customer interactions driven by more personalized and targeted value propositions that better meet customerexpectations.

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Operationalisation

Phase 1. Acquisition clients � Datawarehouse construction by using aloyalty program (CRM tool used by marketers to identify, award, and retain profitable customers)

Phase 2. Segmentation clients � Datamining (Identification, Evaluationbest clients)

Phase 3. Customer Portfolio Management: – Resource allocation based on economic value of customer

� Selection retention & development best clients;� Development average clients; � Abandon bad clients

Phase 4. Interactions

– Exchange of information and goods between customer

Phase 5. Personalisation/Mass Customisation according to segments:– Needs– Customer Lifetime Value

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Database Management

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– For relationship marketing it is necessary to know every client

– � Construction and management database

– Database technology made it possible to track customer transactions, actions and Lifetime Value of a Customer

– � Functions: storage, analyses

Operationalisation database

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Customer Database Defined

� A customer database is a list of customer names to which the marketer has added additional information in a systematic fashion.

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A Customer Database is…

� The heart of all direct and interactive marketing activities.

� The key to developing strong customer relationships and retaining customers.

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Primary Objectives of a Customer Database

� To get to know customers better Perform Marketing Research � Profile Customers

� To sell different products or services to existing customers �Cross-Selling

� To introduce new products or services� Develop A Customer Communication Program� Generate New Customers� Send Customized Offers To distribute information about an

upcoming event or sale � To manage customer lifecycles� To keep customers satisfied and happy � Retain Best

Customers

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Know

Know

Know

Target

Target

Target

Service

Service

Service

Sell

Sell

Sell

Customer Intelligence and Segmentation

Market Strategy

Communication Centre

Explore Find

Enjoy Buy

UnderstandMarkets &Customers

DevelopOffer

RetainCustomers

AcquireCustomers

Customer Data Warehouse

Service Force Effectiveness

Marketing Programmes

Sales Force Effectiveness

Channel Integration

Market-Focused Organisation

Know

Know

Know

Target

Target

Target

Target

Target

Target

Service

Service

Service

Service

Service

Service

Sell

Sell

Sell

Sell

Sell

Sell

Customer Intelligence and Segmentation

Market Strategy

Communication Centre

Explore Find

Enjoy Buy

Explore Find

Enjoy Buy

UnderstandMarkets &Customers

DevelopOffer

RetainCustomers

AcquireCustomers

Customer Data Warehouse

Service Force Effectiveness

Marketing Programmes

Sales Force Effectiveness

Channel Integration

Market-Focused Organisation

Database Management

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Database Management - Constitution

� Customer’s Name

� Address

� Telephone Number

� E-Mail Address

� Demographics

� Psychographics

� Past Purchases (Transaction Data)

� Media of recruitment

� Purchase dates

� Purchased products

� Expenditures

� Surveys, coupons, cookies, phone calls, subscriptions, scanning, loyalty programs,…)

� Purchase Frequency

� Reactions to promotions ,

� Satisfaction survey

� Life cycles

� Preferences & Needs

� Loyalty Programme

� Customer Lifetime Value

� Programme de fidélisation

Performing Database Analytics

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Performing Database Analytics

� Data Mining

– Defined: The process of using statistical and mathematical techniques to extract customer information from the customer database to draw inferences about an individual customer’s needs and predict future behavior.

– Online Analytical Processing (OLAP)

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What’s the Secret to Database Analytics?

1. Be able to identify their “most” and “least” valuable customers;

2. Clarify demographic and behavioral statistics that apply to each population.

For Marketers to…

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Link Between CRM and Database Marketing

Database Marketing

� Customer Databases

– Identify and analyze customer population

– Group based on similarities

– Recommend separate marketing campaigns for different groups

� CRM

– Applies database marketing techniques at customer level

– Develops strong company-to-customer relationships

Customer Value Metrics and Segmentation

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What is market segmentation?

Market segmentation involves dividing large, heterogeneous markets into smaller segments that can be reached more efficiently and effectively with products and services that match their unique needs.

Selection / Scoring by potential aiming at resource allocation optimisation (turnover, profit, loyalty development, recruitment, probable reaction)

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Segmentation and Target Marketing

Market Segmentation:

Divide the market into segments of customers & develop segment profiles

Target Marketing:

Select the most profitable segment to focus on

#1 #2

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� Consistent with the premises of the marketing concept and customer orientation

� Enables the firm to focus its marketing resources

� Helps the marketing firm gain strong competitive advantages through expertise in serving specific customer segments

Benefits of Segmentation:

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Levels of market segmentation and Target Marketing

– Mass marketing� Assumes market is homogenous and uses the same product, promotion and

distribution to all consumers.

– Segment marketing� Adapting a company’s offerings so they more closely match the needs of one or

more segments.

– Niche marketing� Adapting a company’s offerings to match the needs of one or more sub-segments

more closely where there is little competition.

– Micro marketing� Marketing programmes tailored to narrowly defined geographic, demographic,

psychographic behavioural segments.

– Local Marketing� Tailoring brands and promotions to the needs and wants of local customer groups.

– Individual marketing� Tailoring products and marketing programmes to the needs and preferences of

individual customers.

– Mass customisation� Preparing individually designed products and communication on a large scale.

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Target Marketing Strategies

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Variable for Segmenting consumer markets

Geographic

Demographic

Behavioral

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What is geographic segmentation?

Geographic segmentation means dividing the market into different geographical units such as nations, regions, states, counties, cities, or neighbourhoods.

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What is demographic segmentation?

Demographic segmentation means dividing the market into groups based on variables such as age, gender, family size, family life cycle, income, occupation, education, religion, race, generation and nationality.

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Customer lifecycle segmentation

Purchases vary according to:

- Time (fashion, preferences, needs,learning, forgetting) - Age (opinions, attitudes, tastes) - Generation (Values & Beliefs)

Example:

– Babies

– Children

– Teens

– Students

– Young Professionals

– Confirmed Professionals (with children)

– Seniors

Acqusition/

LearningDevelopment Maturity Decline/Re-Activation

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Customer Value Hierarchy

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What is behavioural segmentation?

Behavioural segmentation means dividing the market into groups based on their knowledge, attitudes, uses or responses to a product.

– Usage rate/Purchase Frequency– Purchase Amount– Purchase Recency– Loyalty status/CLV– Method or location of their purchases– Method of payment they choose– “Cookies” placed on their computers

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Customer Based Marketing Metrics for Behavioral Customer Portfolio Segmentation

–Acquisition rate (%) = (N prospects acquired/N of prospects targeted) x 100

– Acquisition cost = Acquisition spending ($) / N of prospects acquired

– Inter-purchase time = Time in days or months

– Retention rate (%) = (N customers in cohort buying in (t)| buying in (t-1) / N customers in cohort buying in (t-1) ) x 100

– Defection rate (%) = 1 – Avg. Retention rate

– Win-back rate (%) = Proportion acquired customers in a period who are customers lost in an earlier period

– Survival rate t (%) = (Retention rate t * Survival rate t-1) x 100

– Lifetime Duration in days, months or years

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Customer Based Marketing Metrics for Behavioral Customer Portfolio Segmentation

– Share of Wallet (%) = Expenditures individual i from firm j / Σ Expenditures individual i from all firms of the category x 100

– Size of Wallet ($) = summation of value of sales made by all the J firms that sell a category of products to the focal customer

$25$5050%Buyer 2

$200$40050%Buyer 1

Absolute expenses with firm

Size-of-WalletShare-of-Wallet

Absolute attractiveness of Buyer 1 eight times higher than buyer 2

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Customer Based Marketing Metrics for Behavioral Customer Portfolio Segmentation

– RFM value

– Customer Lifetime Value

– Customer Equity

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� Recency, Frequency and Monetary Value-applied on historical data

� Recency -how long it has been since a customer last placed an order with the company

� Frequency-how often a customer orders from the company in a certain defined period

� Monetary value- the amount that a customer spends on an average transaction

� Empirical Rule:

– All clients having purchased during the last 12 months are worth twice those who purchased 24 months ago.

– All clients having purchased 2 times during the last 12 months are worth twice those who purchased only once.

– All clients having purchased for 1000 Euros during the last 12 monthsare worth twice those who purchased for 500 Euros.

RFM

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RFM Method - Regression Method

� Regression techniques to compute the relative weights of the R, F,

and M metrics

� Relative weights are used to compute the cumulative points of each customer

� The pre-computed weights for R, F and M, based on a test sample are used to assign RFM scores to each customer

� The higher the computed score, the more profitable the customer is likely to be in the future

� This method is flexible and can be tailored to each business situation

� Dynamic segmentation in: Good, Mean and Bad clients � Switch of one to another class

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Recency Score

� 20 if within past 2 months; 10 if within past 4 months; 05 if within past 6 months; 03 if within past 9 months; 01 if within past 12 months; Relative weight = 5

Customer Purchases

(Number)

Recency

(Months)

Assigned

Points

Weighted

Points

1 2 20 100

JOHN 2 4 10 50

3 9 3 15

SMITH 1 6 5 25

1 2 20 100

MAGS 2 4 10 50

3 6 5 25

4 9 3 15

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Frequency Score

� Points for Frequency: 3 points for each purchase within 12

months; Maximum = 15 points; Relative weight = 2

Customer Purchases(#) Frequency Assigned

Points

Weighted

Points

1 1 3 6

JOHN 2 1 3 6

3 1 3 6

SMITH 1 2 6 12

1 1 3 6

MAGS 2 1 3 6

3 2 6 12

4 1 3 6

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Monetary Value Score

� Monetary Value: 10 percent of the $ Volume of Purchase with 12 months;

Maximum = 25 points; Relative weight = 3

Customer Purchases

(Number)

Monetary Assigned

Points

Weighted

Points

1 $40 4 12

JOHN 2 $120 12 36

3 $60 6 18

SMITH 1 $400 25 75

1 $90 9 27

MAGS 2 $70 7 21

3 $80 8 24

4 $40 4 12

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Customer Purchases

(Number)

Total Weighted Points Cumulative

Points

1 118 118

JOHN 2 92 210

3 39 249

SMITH 1 112 112

1 133 133

MAGS 2 77 210

3 61 271

4 37 308

RFM Cumulative Score

� Cumulative scores: 249 for John, 112 for Smith and 308 for Mags; indicate a potential

preference for Mags �The higher the computed RFM score, the more profitable the

customer is expected to be, in the future

� John seems to be a good prospect, but mailing to Smith might be a misdirected marketing

effort

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Customer Lifetime Value

� Customers should be viewed as an investment as without them there is no business

� Every client is an asset with past and future revenues (puchases) and costs

– Acquisition costs (advertising, recruitment,..)– Loyalty costs (Loyalty schemes, quality)

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Two CLV examples

� Leclerc: an average family spends 50€ per week on groceries � 3.000 €/per year and 30.000 € lifetime expenditure in 10 years)

� VW: Lifetime expenditure if a car (Golf = 20.000 €) is purchased every 5 years: 200.000 €.

� But a good customer is worth even more, since satisfied customers tell on average another 3-5 customers about the company.

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Calculation Customer Lifetime Value- Net Present Value models

� As the discounted stream of net revenues that a customer will generate over the period of his lifetime of patronage with a company=> Multi-period evaluation of a customer’s value to the firm

� The information needed to calculate CLV is derived from transactions recorded in a customer database

Recurring

Revenues

Recurring costs

Contribution margin

Lifetime of a customer Lifetime Profit

Acquisition cost

LTV

Discount rate

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LTV = lifetime value of an individual customer in $,

CM = contribution margin,

δ = interest rate,

t = time unit, Σ = summation of contribution margins across time periods

Information source:

CM and T from managerial judgment or from actual purchase data.

The interest rate, a function of a firm’s cost of capital, can be obtained from

financial accounting

Evaluation:

Typically based on past customer behavior and may have limited diagnostic

value for future decision-making

tT

t

tCMLTV ∑

=

+=

1 1

1

δ

Calculation CLV- Net Present Value models

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Calculation CLV- Future orientated models

� CLV analysis involves distinguishing active customers from defectors and then predicting their lifetime and future levels of transactions according to their observed past purchase behavior

� As the cumulated past and expected future profit by client (RFM models, multivariate logit or probit models, or stochastic models as Markov Chains or Pareto/NBD) :

– CLV = Acquisition Value + Σ Past Profits + (Σ Future Profits)

ACRr

CMLTV

i−

+−=

δ1

CM = contribution margin, Rr = Retention rate

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CLV Targets

� Maximize the net present value of both current and future customers

� If a marketing effort results in the acquisition of new customers who will generate value over time the action is desirable

� The maximization of CLV consists of optimizing of the customer portfolio: the acquisition, retention, and add-on selling processes (Blattberg et al., 2001) � balance the acquisition of new customers with the retention of existing ones (Blattberg & Deighton, 1996)

� Measure the value of a firm on the basis of the value of its current and future relationships (Gupta et al., 2004)

� Segmentation & allocate marketing spending for long-term profit

� Customer-focused approach for measuring firm value � Customer equity

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Customer Equity

� Customer equity is the total combined customer lifetime values of all the company’s customers.

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Attrition/Defection

� Attrition = Cessation of activity (Mean 20% annually)– Address change (20% / year) ==> database maintaining– Mortality,Dissatisfaction, Lost of needs or other life cycle, deal proneness,

variety searching)– Relation duration: high mortality for new clients than decrease and natural

increase with age

� Attrition depends on various factors– Client characteristics (acquisition mode, inertia, habits, attitudes…)– Relationship length : strong mortality for new clients

� Measure: Attrition rate– Systematic surveys (satisfaction)– Econometric modelisation with Survival Analysis (Recency,

Frequency, Monetary)

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Measure defection by survival analysis

� Survival tables (Kaplan 1966)

� Cox model (1972)

� S(t)=[S0(t)]eBX whereh(t)=h0(t)*eBX

X = indépendant co-variables

Chapter 3: From product portfolio Management to Customer

Portfolio Management

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Product Portfolio analysis

� The product portfolio:

– The collection of businesses and products that make up the company

� Portfolio analysis:

– Step 1:

Analyse the current product portfolio

– Step 2:

Shape the future product portfolio

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Development of Product Portfolios

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Customer Portfolio analysis

� The customer portfolio:

– The collection of clients that make up the company

� Questions of Portfolio analysis:

– How to maximize profits across various customer segments ?

– How to optimise customer acquisition and retention ?

� Step 1: Analyse/Segment the current customer portfolio

� Step 2: Shape the future customer portfolio (acquisition valuable customers, development of good clients and clients with potential)

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-Firm actions

-Customer actions

-Competitor actions

-Customer characteristics

Prospects

Acquired

Customers

Non-acquired

Customers

Relationship

Duration

CustomerCustomer

Profitability

Acquisition Process Retention Process

Customer Portfolio Analysis - Linking Customer

Acquisition, Relationship Duration, and Customer

Profitability

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� In contexts with high acquisition costs (Telecommunication) it costs about 5 times more to acquire a new customer than it does to keep an existing one (Bolton & Drew 1990).

� It is thus more cost effective to concentrate marketing efforts on customer retention and relationship building than on gaining newcustomers

� In other contexts with low acquisition costs (Grocery Retailing,Mail Order Business) it does not cost about more to acquire a new customer than it does to keep an existing one (Reinartz 1999).

� It is thus important to balance acquisition and retention resources.

Customer Portfolio Analysis balancing between Acquisition and Retention

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For a healthy portfolio acquisition and retention are necessary !!!

Customer Portfolio Analysis balancing between Acquisition and Retention

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Relational Approach : exit barriers, relationship

marketing, individualisation, create value

Transactional Approach:

Preference (attitude/ satis-

faction)

Acquisition/New

clients:

Heterogenity

management

Identification

�discrimination

Clients with

potential :

Relationship

Development

Selection � behavior

control � retention

- Experiantial

marketing

- Inactive clients

Relaunch/ Abandon

Clients Revenues

1 2 3

Valu

e

4

Customer Portfolio Analysis balancing between Acquisition and Retention

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Reallocation of Resources Based on Customer Value & Acquisition costs

Retention costs

LowLow

Acquisition costs High

HighLow

HighHigh

Always a Share

One Shot Transactional Marketing

Lost for Good

Loyalty and Relationship Marketing

Always a Share

One Shot Transactional Marketing

Lost for Good

Loyalty and Relationship Marketing

Low

High

Low

HighLow

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Customer Retention and Acquisition Strategies

Allocate resources between existing and new customers

Retention Strategy:

Keep existing customers

Market decisions:

-Segment your customers by

lifetime value

-Retain your best customers

-Develop one-to-one marketing

Product/Service decisions:

-Develop relationship marketing

-Retain your clients with superior

quality service

-Develop tailor-made products

-Cross-sell and up-sell

-Cross-merchandise

Acquisition Strategy:Attract new customers

Market decisions:

-Target the customers based on

the model of existing customers

-Develop new markets

Product decisions:

-Highlight your price/ product offer

-Have a clear positioning on the

market

-Develop attractive branding

-Give incentives to add initial

value to the new customer

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Retention and Acquisition Media

Direct Mail:

Mailings:

- Single-product

- Multi-product

- Miscellaneous

- - Birthday cards

- Thank-you notes

- Invitations

Enclosures:

- Statements

- Parcels

Telemarketing:

- Outbound

- Inbound

Catalogues

Newspapers / bulletins

TV: - Direct response TV (DRTV)

- TV spots

- Home shopping channels

- Digital TV

Radio: - Direct response radio (DRR)

- Radio spots

Telemarketing:

- Outbound

- Inbound

Print Media :

- Press / newspapers

- Magazines

- Insert

Direct mail :

- Mailings

- Inserts

Internet

Exhibitions / field marketing

Retention Media Acquisition Media

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CRM Strategies & marketing mix according tolifecycles

Telephonemarketing

Individual

communication for

recovery

Customermagazines

Eventmarketing

Dialog via forums &

mails

Call Center/ Toll Free

Number

Internetforum

Communication

Complaint

Management

Recovery

l/t contracts

Subscriptions

After Sales Service

24-h-Service

Expressbelieferung

Dialog via forums &

mails

InternetDistribution

Price warantiesQ Rebates

Loyalty Rebates

LP

Pricediscrimination

Price decrease

Price

Incomaptibility with

competitor products

L/t waranties

Personalisation

Products & Service

Product-

Codevelopment

Cross Selling

Products

Recovery

Exit Barriers

Retention

Récompense/Satis-

faction

Acqusition

Interaction/Dialogue

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Balancing Acquisition and Retention Resources

� The amount of investment in a customer and how it is invested has an

impact on acquisition, retention and customer profitability

� Investments in customer acquisition and retention have diminishing

marginal returns

� The relative effectiveness of highly personalized communication channels is much greater than the less personalized communication channels

.

� Under spending in acquisition and retention is more detrimental and results in smaller ROIs than overspending

� A suboptimal allocation of retention expenditures will have a larger

detrimental impact on long-term customer profitability than suboptimal

acquisition expenditures

� The customer communication strategy that maximizes long-term customer profitability maximizes neither the acquisition rate nor the relationship duration

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Profile Analysis for customer acquisition

� Used to define and compare the profile of campaign responders with

the actual profile of the company’s best customers and prospects

� Considers the input (generally geographic, demographic or psychographic) and clusters names into groups with similar tastes and preferences

� Statistical techniques as automatic interaction detection (AID) and

chi-square automatic interaction detection (CHAID) also used in

analysis

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Acquisition Development Retention Retention Abandon/

Re-

activation

Young

Professionals

Students

Professionals

with strong

potential

Clients with

strong value

Mailing ou

e-mailing

Mailing or e-

mailing, visit

Loyalty

Program, Visit

Telephone

marketing,

visit

Lifecycle

CLV

Customer Portfolio Management according to customer lifecycles

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Customer Portfolio Management according to Decile Analysis

Decile Analysis

35.18%

22.52%19.96%

11.08%8.98%

6.74%4.42%

2.26% 1.78% 0.90%

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

1 2 3 4 5 6 7 8 9 10

Deciles

Response Rate

The Decile analysis distributes customers into ten equal size groups

For a model that performs well, customers in the first decile exhibit the highest response rate

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Lift Analysis

3.09

1.981.75

0.970.79

0.590.39

0.20 0.16 0.08

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

1 2 3 4 5 6 7 8 9 10

Deciles

Lift

Lifts that exceed 1 indicate better than average performance

Less than 1 indicate a poorer than average performance

For the top decile the lift is 3.09; indicates that by targeting only these customers one can expect to

yield 3.09 times the number of buyers found by randomly mailing the same number of customers

Customer Portfolio Management according to Lift

Analysis

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Customer Portfolio Management according to Share of Wallet /Size of Wallet

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

High

Share-of-wallet

Low

Size-of-wallet

Hold on

Do nothingTarget for

additional selling

Maintain and guard

Small Large

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Customer Portfolio Management according tothe profit contribution of customers

5%14%

28%

100%100%

79%

30%

58%

0%

50%

100%

150%

Loyals Divided Loyals Multi-Loyals Occasionnal

0%

50%

100%

150%

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Customer Portfolio Management according tothe profit contribution of customers

860

161 159

435

17

-67-200

0

200

400

600

800

1000

Tier A

Tier B

Tier C

(in $'s)

Revenueper year

Annualprofit

Example of a firm with a highly heterogeneous customer base:

-Tier A represents 27% of the customer base, Tier B 42% and Tier C the remaining 71%.

- More than a quarter of the customers are unprofitable and need to be subsidized by the highly profitable ones

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Customer Portfolio Management according to CLV Profit Contribution

� CLV analysis to determine the segment value according to their profit contribution

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1 2 3 4

S e gme nt D

S e gme nt C

S e gme nt B

S e gme nt A

43

85

Customer Portfolio Management according to Profit Contribution and Potential

Retention Key Target

AbandonReactive

86

Reallocation of Resources Based on CLV

Customer Value

LowLow

Potential High

HighLow

HighHigh

Face to Face Meetings:Currently meets once every 6 monthsOptimal meeting frequency is once every 24 monthsDirect Mail/Telesales:Current Interval is 20 daysOptimal Interval is 100 days

Face to Face Meetings:Currently meets once every 6 monthsOptimal meeting frequency is once every 2 monthsDirect Mail/Telesales:Current Interval is 100 daysOptimal Interval is 20 days

Face to Face Meetings:Currently meets once every 4 monthsOptimal meeting frequency is once every 2 monthDirect Mail/Telesales:Current Interval is 21 daysOptimal Interval is 14 days

Face to Face Meetings:Currently meets once every 6 monthsOptimal meeting frequency is 1 monthDirect Mail/Telesales:Current Interval is 13daysOptimal Interval is 4 days

Low

High

Low

HighLow

44

87

Customer Portfolio Management according to CLV & Attrition

Attrition0 100

100

Potential

Treasure

LoyalDogs

10000

2500

1000

Preys

Conquest strategy Loyalty programs

Customer developmentControl/screening

A

B

88

Portfolio Management according to Attitudes–Behaviour

45

89

Customer Portfolio Management according to tolerance of critical negative incidents and defection risk

Risk of

defection

low

Risk of

defection

high

Risk of

defection

high

90

Customer Portfolio Management according to Risk of defection

Source C. Benavent & D. Crié

46

91

Customer Portfolio Management according to Risk of defection

Source C. Benavent & D. Crié

92

Customer Portfolio Management - Differentiated customer relationships

47

93

Customer Portfolio Management according to purchase orientations

Purchase Orientation

Econo-mical

Relatio-nal

Fonctio-nal

Habit-Loyal

Hedo-nistic

Ident. Relational 0 ++ - 0 +

Economical ++ 0 = 0 0

Hedonical 0 + - 0 ++

Fonctional 0 0 ++ 0 0

Gra

tifi

cati

on

Distr.-Inform. + 0 + ++ 0

94

Customer Portfolio Management, Marketing Planning and Resource Allocation

� Individualisation or Mass customisation / Versioning/ Discrimination price according to:

� Needs� CLV/Very Good, Good bad clients

Client Value

VGC

GC BC

Value/ Cost

Programme

1st tier

gratifications

2nd tier

gratifications3rd tier

gratifications

48

95

Minicase: Catalina - Changing Supermarket Shopper Measurement

� Catalina Inc. a Florida-based company that specializes in supermarket

shopper tracking and coupon issuing

� Built its business model on issuing coupons to grocery shoppers online when

they checkout at the cashier

� System consists of a printer connected to the cashier’s scanner as well as a

database

� The information on each shopping basket that checks out via the scanner is

then stored in the database

96

Minicase: Catalina (contd.)

� Using the person’s credit card number or check number, the database links

individual shopping baskets over time

� The system then allows both manufacturers and retailers to run

individualized campaigns based on the information in the database

� For customers who use Catalina as a secondary store.- the decision to

allocate a gift of say $10, for shopping for 4 weeks in a row spending at least

$40, per week in the store

� Goal is to selectively target those shoppers where the store only captures a

low share-of-wallet and to entice them to change their behavior

49

97

Minicase: Akzo Nobel, NV- Differentiating Customer Service According to Customer Value

� One of the world's largest chemical manufacturers and paint makers

� The polymer division, which serves exclusively the B-to-B market, established a

“tiered customer service policy” in the early 2000’s

� Company developed a thorough list of all possible service activities that is currently

offered

� To formalize customer service activities, the company implemented a customer

scorecard mechanism to measure and document contribution margins per individual

customer

� Service allocation, differentiated as:

– services to be free for all types of customers

– services subject to negotiation for lower level customer groups

– services subject to fees for lower level customers

– services not available for the least valuable set of customers

98

Minicase: American Airlines� Leading scheduled air carrier, First to implement a frequent flyer program (AAdvantage) � Uses Database Marketing & Portfolio Analyses for efficient customer acquisition,

development and retention

Purpose:

– To induce current members to spend more of their flight dollars with American

Airlines

– To efficiently target new prospects and convert patrons of competing airlines

Strategy: Segmentation

� Segmentation with different classes of passengers

� Each passenger segment (economy, business and first class passengers) desires a different set of benefits

� AA will respond to different segments using different marketing strategies

Strategy: Cooperation with the credit card company American Express

– To identify attractive customers who are not American Airlines flyers

– Provide attractive offers to these prospects for inducing them to try American

Airlines

50

99

Summary

� From a strategic perspective, CRM is the process of selecting the

customers a firm can most profitably serve and shaping the

interactions between a company and these individual customers

� Assessing Customer Value is critical to CRM and than for Customer

Portfolio Management

� Customer Portfolio Management’s goal is to optimize the current and

future value of the customers for the company

� Building a complete customer database incorporating all the relevant

customer information from different departments and external sources

is very crucial for a successful Customer Portfolio Management

100

Summary

� Effective Database analysis is important for successful Customer Portfolio

Management

� Data from active and inactive customers are important to ensure efficient

marketing function

� Marketing databases allow marketers to analyze customers and classify them

into different groups to implement different marketing programs effectively

� Databases also enable marketers to determine critical factors influencing

customer satisfaction and take measures to retain existing customers at

lowest cost

� Firms use different surrogate measures of customer value to prioritize their

customers and to differentially invest in them

� Firms employ different customer selection strategies to target the right

customers