1. 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
Bibliography
For more information my
website
http://meyer-waarden.com
2
1
2. Bibliography
Customer Relationship Management
A Databased Approach
V. Kumar
Werner J. Reinartz
3
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
4
2
3. Chapter 1: Introduction: From Mass
Marketing to Customer Relationship
Management (CRM)
Development in marketing
6
3
4. Form mass MKT to relationship MKT
Why:
Market Saturation
Strong competition & Multiplication offers
Shorter Product life Cycles
Development information data bases
7
What is relationship marketing?
Relationship marketing involves creating,
maintaining and enhancing strong
relationships with customers and other
stakeholders.
8
4
5. Implications of Changes in Business
Environment
Focus on customer-centric instead of product-centric
strategies
9
Relationship Marketing
« Instead of selling a product to a maximum of customers….
Client 1
1 Product
Client 2
Client 3
10
5
7. Every client is an asset
Thus
maintaining clients
becomes the principal activity in companies
13
Highly satisfied customers
Tend to be more loyal customers
Generate more profits over their lifetime
of patronage
14
7
8. Satisfaction-Loyalty-Profit Chain
Product
Performance
Customer Retention / Revenue /
Service
Performance Satisfaction Loyalty Profit
Employee
Performance
Source: Strengthening the satisfaction-profit chain”, Eugene W Anderson, Vikas Mittal. Journal of
Service Research, Nov 2000. Vol 3, Iss.2, p 107
15
Declining Customer Satisfaction-
Example
S c he dule d Ho us e ho ld Co mme rc ial P arc e l De live ry P e rs o nal P ublis hing/
Airline s Applia nc e s B a nks Co mpute rs
90
90 90 90 90 Ne ws pape rs
90
85 85 85 85 85 85
80 80 80 80 80 80
75 75 75 75 75 75
70 70 70 70 70 70
65 65 65 65 65
65
-8.4% -3.5% -2.7% -2.5% -9.0% 60 -12.5%
60 60 60
60 60
1994 1996 1998 2000 2002 1994 1996 1998 2000 2002 1994 1996 1998 2000 2002 1994 1996 1998 2000 2002 1994 1996 1998 2000 2002 1994 1996 1998 2000 2002
(American Customer Satisfaction Index) with products and services
Source: http://www.theacsi.org, University of Michigan
16
8
9. The Reasons Why Loyal Customers
Generate More Profits
Loyal Customers …
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
17
Typical profit pattern in financial services and other high
acquisition cost industries
18
9
10. Mass MKT vs Relationship MKT
Focus on relationship and regular
Focus on transaction transactions
Short term orientated Long term orientated
Priority: Acquisition new clients Micromarketing Fine
Market Share segmentation with precise
Product Differentiation and Product knowledge about customers which
Management have the most important probability
Focus on transaction and products to response (database) Interactive
Dialog
Mass distribution, Mass advertising,
Mass production, Communication in Priority: client retention/loyalty
one sense Client Differentiation and Customer
Product portfolio management Portfolio Management
Key Indicateur : market share Focus on clients
Personalized, individualised
distribution, advertising, production,
Communication in 2 senses : Mass
customisation
Customer portfolio management
Key Indicateur : Customer Share &
19 Customer Life time value
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
20
10
11. Chapter 2: Implementing
Customer Portfolio Management
Allocate resources based on customer value - and through a
deep understanding of their needs. The results are deeper,
richer customer interactions driven by more personalized and
targeted value propositions that better meet customer
expectations.
Operationalisation
Phase 1. Acquisition clients Datawarehouse construction by using a
loyalty program (CRM tool used by marketers to identify, award, and
retain profitable customers)
Phase 2. Segmentation clients Datamining (Identification, Evaluation
best 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
22
11
12. Database Management
Operationalisation database
– 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
24
12
13. Customer Database Defined
A customer database is a list of customer
names to which the marketer has added
additional information in a systematic
fashion.
25
A Customer Database is…
The heart of all direct and
interactive marketing
activities.
The key to developing
strong customer
relationships and
retaining customers.
26
13
14. 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
27
Database Management
Understand
Develop
Markets &
Customers
Offer
Customer Intelligence Market Strategy
and Segmentation
Ta
Ta
Ta
Ta
w
Channel Integration
ar
ar
ar
ar
ar
no
Customer
rg
r
r
r
Data Warehouse
K
Market -Focused
ett
e
et
et
Organisation
Explore Find
Enjoy Buy
Se
Se
Se
Se
Se
Se
Se
Se
Se
Sales Force
Communication
rv
rv
rv
rv
rv
rv
rv
Effectiveness
viii
viiic
Centre
iiic
ll
ce
ce
Se
Service Force
e
e
e
e
e
Marketing Programmes
Effectiveness
Retain Acquire
Customers Customers
28
14
15. Database Management - Constitution
Surveys, coupons, cookies, phone calls, subscriptions,
scanning, loyalty programs,…)
Customer’s Name Purchase Frequency
Address Reactions to promotions ,
Telephone Number Satisfaction survey
E-Mail Address Life cycles
Demographics Preferences & Needs
Psychographics Loyalty Programme
Past Purchases (Transaction Customer Lifetime Value
Data)
Programme de fidélisation
Media of recruitment
Purchase dates
Purchased products
Expenditures
29
Performing Database Analytics
15
16. 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)
31
What’s the Secret to Database
Analytics?
For Marketers to…
1. Be able to identify their “most” and “least” valuable
customers;
2. Clarify demographic and behavioral statistics that apply to
each population.
32
16
17. 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
33
Customer Value Metrics and
Segmentation
17
18. 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)
35
Segmentation and Target Marketing
#1 #2
Market Segmentation:
Divide the market into
segments of customers &
develop segment profiles
Target Marketing:
Select the most profitable
segment to focus on
36
18
19. Benefits of Segmentation:
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
37
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.
38
19
21. What is
geographic segmentation?
Geographic segmentation means dividing
the market into different geographical units
such as nations, regions, states, counties,
cities, or neighbourhoods.
41
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.
42
21
22. Customer lifecycle segmentation
Acqusition/
Development Maturity Decline/Re-Activation
Learning
Purchases vary according to: Example:
– Babies
- Time (fashion, preferences, needs, – Children
learning, forgetting) – Teens
- Age (opinions, attitudes, tastes) – Students
- Generation (Values & Beliefs) – Young Professionals
– Confirmed Professionals (with
children)
43 – Seniors
Customer Value Hierarchy
44
22
23. 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
45
Customer Based Marketing Metrics for
Behavioral Customer Portfolio
Segmentation
–Acquisition rate (%) = (N prospects acquired/N of prospects targeted) x
100
– Acquisition cost = Acquisition spending ($) / N of prospects acquired
– Inter-purchase time = Time in days or months
– Retention rate (%) = (N customers in cohort buying in (t)| buying in (t-
1) / N customers in cohort buying in (t-1) ) x 100
– Defection rate (%) = 1 – Avg. Retention rate
– Win-back rate (%) = Proportion acquired customers in a period who
are customers lost in an earlier period
– Survival rate t (%) = (Retention rate t * Survival rate t-1) x 100
– Lifetime Duration in days, months or years
46
23
24. Customer Based Marketing Metrics for
Behavioral Customer Portfolio
Segmentation
– Share of Wallet (%) = Expenditures individual i from firm j
/ Σ Expenditures individual i from all firms of the category x
100
– Size of Wallet ($) = summation of value of sales made by
all the J firms that sell a category of products to the focal
customer
Share-of-Wallet Size-of-Wallet Absolute expenses
with firm
Buyer 1 50% $400 $200
Buyer 2 50% $50 $25
Absolute attractiveness of Buyer 1 eight times higher than buyer 2
47
Customer Based Marketing Metrics for
Behavioral Customer Portfolio
Segmentation
– RFM value
– Customer Lifetime Value
– Customer Equity
48
24
25. RFM
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 months
are worth twice those who purchased for 500 Euros.
49
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
50 one to another class
25
26. 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 Recency Assigned Weighted
(Number) (Months) Points 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
51
Frequency Score
Points for Frequency: 3 points for each purchase within 12
months; Maximum = 15 points; Relative weight = 2
Customer Purchases(#) Frequency Assigned Weighted
Points 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
52
26
27. Monetary Value Score
Monetary Value: 10 percent of the $ Volume of Purchase with 12 months;
Maximum = 25 points; Relative weight = 3
Customer Purchases Monetary Assigned Weighted
(Number) Points 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
53
RFM Cumulative Score
Customer Purchases Total Weighted Points Cumulative
(Number) 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
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
54 effort
27
28. 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)
55
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.
56
28
29. 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
Contribution
margin
Recurring
costs
Lifetime of a
customer Lifetime Profit
LTV
Discount Acquisition
rate cost
57
Calculation CLV- Net Present Value
models
t
T
1
LTV = ∑ CM
t =1
t
1+ δ
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
58
29
30. 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)
CM
LTVi = − AC
1 − Rr + δ
CM = contribution margin, Rr = Retention rate
59
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
60
30
31. Customer Equity
Customer equity is the total combined
customer lifetime values of all the
company’s customers.
61
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)
62
31
32. Measure defection by survival
analysis
Survival tables (Kaplan 1966)
Cox model (1972)
S(t)=[S0(t)]eBX where
h(t)=h0(t)*eBX
X = indépendant co-variables
63
Chapter 3: From product portfolio
Management to Customer
Portfolio Management
32
33. 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
65
Development of Product
Portfolios
66
33
34. 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)
67
Customer Portfolio Analysis - Linking Customer
Acquisition, Relationship Duration, and Customer
Profitability
Relationship
Duration
Acquired Customer
Customers Profitability
Prospects
Non-acquired
Customers
Acquisition Process Retention Process
-Firm actions
-Customer actions
-Competitor actions
-Customer characteristics
68
34
35. Customer Portfolio Analysis balancing between
Acquisition and Retention
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 new
customers
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.
69
Customer Portfolio Analysis balancing between
Acquisition and Retention
For a healthy portfolio
acquisition and retention are
necessary !!!
70
35
36. Customer Portfolio Analysis balancing between
Acquisition and Retention
Transactional Approach: Relational Approach : exit barriers, relationship
Preference (attitude/ satis- marketing, individualisation, create value
faction)
Clients Revenues
Value
1 2 3 4
Acquisition/New Clients with - Experiantial
clients: potential : marketing
Heterogenity Relationship - Inactive clients
management Development Relaunch/ Abandon
Identification Selection behavior
discrimination control retention
71
Reallocation of Resources Based on
Customer Value & Acquisition costs
High High
High Low High
Always a Share Lost for Good
One Shot Transactional Loyalty and Relationship
Marketing Marketing
Retention costs
Always a Share Lost for Good
One Shot Transactional Loyalty and Relationship
Marketing Marketing
Low Low High
Low Low
Low Acquisition costs High
72
36
37. Customer Retention and Acquisition Strategies
Allocate resources between existing and new customers
Retention Strategy: Acquisition Strategy:
Keep existing customers Attract new customers
Market decisions:
Market decisions:
-Segment your customers by
-Target the customers based on
lifetime value
the model of existing customers
-Retain your best customers
-Develop new markets
-Develop one-to-one marketing
Product decisions:
Product/Service decisions: -Highlight your price/ product offer
-Develop relationship marketing -Have a clear positioning on the
-Retain your clients with superior market
quality service -Develop attractive branding
-Develop tailor-made products -Give incentives to add initial
-Cross-sell and up-sell value to the new customer
-Cross-merchandise
73
Retention and Acquisition Media
Retention Media Acquisition Media
Direct Mail: TV: - Direct response TV (DRTV)
Mailings: - TV spots
- Single-product - Home shopping channels
- Multi-product - Digital TV
- Miscellaneous Radio: - Direct response radio (DRR)
- - Birthday cards - Radio spots
- Thank-you notes
Telemarketing:
- Invitations
- Outbound
Enclosures:
- Inbound
- Statements
Print Media :
- Parcels
- Press / newspapers
- Magazines
Telemarketing:
- Insert
- Outbound
Direct mail :
- Inbound
- Mailings
Catalogues
- Inserts
Internet
Newspapers / bulletins
Exhibitions / field marketing
74
37
38. CRM Strategies & marketing mix according to
lifecycles
Acqusition Retention Recovery
Interaction/Dialogue Récompense/Satis- Exit Barriers
faction
Products Product- Personalisation Incomaptibility with
Codevelopment Products & Service competitor products
Cross Selling L/t waranties
Communication Call Center/ Toll Free Customermagazines Telephonemarketing
Number Eventmarketing Individual
Internetforum Dialog via forums & communication for
mails recovery
Distribution Internet 24-h-Service Complaint
Expressbelieferung Management
Dialog via forums & Recovery
mails l/t contracts
Subscriptions
After Sales Service
Price Pricediscrimination Q Rebates Price waranties
Price decrease Loyalty Rebates
LP
75
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
76 relationship duration
38
39. 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
77
Customer Portfolio Management according to
customer lifecycles
Acquisition Development Retention Retention Abandon/
Re-
CLV
Mailing or e- Professionals
activation
Mailing ou Clients with
e-mailing mailing, visit with strong
strong value
potential
Loyalty Telephone
Program, Visit marketing,
Young
visit
Professionals
Students
78 Lifecycle
39
40. Customer Portfolio Management
according to Decile Analysis
Decile Analysis
40.00%
35.18%
35.00%
30.00%
Response Rate
25.00% 22.52%
19.96%
20.00%
15.00%
11.08%
8.98%
10.00%
6.74%
4.42%
5.00% 2.26% 1.78% 0.90%
0.00%
1 2 3 4 5 6 7 8 9 10
Deciles
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
79
Customer Portfolio Management according to Lift
Analysis
Lift Analysis
3.50
3.09
3.00
2.50
1.98
2.00 1.75
L ift
1.50
0.97
1.00 0.79
0.59
0.39
0.50 0.20 0.16 0.08
0.00
1 2 3 4 5 6 7 8 9 10
Deciles
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
80 3.09 times the number of buyers found by randomly mailing the same number of customers
yield
40
41. Customer Portfolio Management according
to Share of Wallet /Size of Wallet
High Maintain and guard
Hold on
Share-of-wallet
Target for
Do nothing additional selling
Low
Small Large
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
81
Customer Portfolio Management according to
the profit contribution of customers
150% 150%
100% 100% 100%
79%
50% 58% 50%
30% 28%
14%
0% 5% 0%
Loyals Divided Loyals Multi-Loyals Occasionnal
82
41
42. Customer Portfolio Management according to
the profit contribution of customers
1000
860
800
600
435
(in $'s)
Revenue
400
per year
161 159
200 Annual
17
profit
0
-67
-200 Tier A Tier B Tier C
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
83
Customer Portfolio Management
according to CLV Profit Contribution
CLV analysis to determine the segment value according to their profit
contribution
100%
90%
80%
70%
60% S e g me nt D
S e g me nt C
50%
S e g me nt B
40%
S e g me nt A
30%
20%
10%
0%
1 2 3 4
84
42
43. Customer Portfolio Management according to Profit
Contribution and Potential
Retention Key Target
Reactive Abandon
85
Reallocation of Resources Based on CLV
High High
High Low High
Face to Face Meetings:
Face to Face Meetings:
Currently meets once every 6 months
Currently meets once every 4 months
Optimal meeting frequency is once Optimal meeting frequency is 1
every 2 month month
Direct Mail/Telesales: Direct Mail/Telesales:
Current Interval is 13days
Customer Value
Current Interval is 21 days
Optimal Interval is 14 days Optimal Interval is 4 days
Face to Face Meetings: Face to Face Meetings:
Currently meets once every 6 months Currently meets once every 6 months
Optimal meeting frequency is once Optimal meeting frequency is once
every 24 months every 2 months
Direct Mail/Telesales: Direct Mail/Telesales:
Current Interval is 20 days Current Interval is 100 days
Optimal Interval is 100 days Optimal Interval is 20 days
Low Low High
Low Low
Low Potential High
86
43
44. Customer Portfolio Management
according to CLV & Attrition
100 10000
Preys Treasure
Conquest strategy Loyalty programs
2500
Potential
A
1000 B
Control/screening Customer development
Loyal
Dogs
0 Attrition 100
87
Portfolio Management according to
Attitudes–Behaviour
88
44
45. Customer Portfolio Management according
to tolerance of critical negative incidents
and defection risk
Risk of
Risk of
defection
defection
high
low
Risk of
defection
high
89
Customer Portfolio Management
according to Risk of defection
Source C. Benavent & D. Crié
90
45
46. Customer Portfolio Management
according to Risk of defection
Source C. Benavent & D. Crié
91
Customer Portfolio Management - Differentiated
customer relationships
92
46
47. Customer Portfolio Management
according to purchase orientations
Purchase Orientation
Econo- Relatio- Fonctio- Habit- Hedo-
mical nal nal Loyal nistic
Ident. Relational 0 ++ - 0 +
Gratification
Economical ++ 0 = 0 0
Hedonical 0 + - 0 ++
Fonctional 0 0 ++ 0 0
Distr.-Inform. + 0 + ++ 0
93
Customer Portfolio Management,
Marketing Planning and Resource
Allocation
Individualisation or Mass customisation / Versioning/
Discrimination price according to:
Needs
CLV/Very Good, Good bad clients
Value/ Cost Client Value
Programme
VGC 2nd tier
gratifications
3rd tier
1st tier gratifications
gratifications GC BC
94
47
48. 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
95
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
96
48
49. 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
97
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
98
49
50. 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
99
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
100
50
