CRM adoption and implementation proposal

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Cust.RelationshipMgmt.SectionY01Fall2018CO-11272018-1104PM.zip
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Applications of Database Marketing

1.0 Topics

  • Customer Value- A Decision Metric

  • Study 1: The Life-time-Profitability Relationship in a Non-contractual Setting

  • Study 2: A model for incorporating customers’ projected profitability into lifetime duration computation

  • Study 3: A model for identifying the true value of a lost customer

2.0 Study 1:

The Life-time-Profitability Relationship in a Non-contractual Setting

  • Background and Objective

    • The firm has to ensure that the relationship stays alive since the customer typically splits his/her category expenses with several firms

  • Objectives:

  • Test for the strength of the lifetime duration – profitability relationship

  • Whether profits increase over time (lifetime profitability pattern)

  • Whether the costs of serving long-life customers are actually less

  • Whether long-life customers pay higher prices

  • Conceptual Model

  • To investigate the consequences of customer retention, namely, profitability:

  • Individual customer lifetime profits are modeled as a function of a customer’s lifetime duration

  • Revenue flows over the course of a customer’s lifetime

  • Firm cost is associated with the marketing exchange

Customer Lifetime and Firm Profitability

  • Proposition 1: The Nature of the Lifetime-Profitability

    • Relationship is Positive

  • Proposition 2: Profits Increase over Time

    • Analysis of the dynamic aspects of the lifetime-profitability relationship

    • Non-contractual setting: cost of serving customer can easily exceed the profit margin brought in by the customer. Therefore, profits may not increase over time

    • Example: catalog shopping or direct mail offerings - the customer may end up buying once a year and spend a smaller amount

  • Proposition 3: The Costs of Serving Longer-life Customers are lower

    • Whether there is lower transaction costs for longer-life versus shorter-life customers (e.g.: retail sector)

    • Whether the costs associated with promotional expenditures directed at longer- and shorter-life customers actually differ

  • Proposition 4: Longer-life Customers Pay Higher Prices

    • Existing customers pay effectively higher prices than new ones, even after accounting for possible introductory offers

      OR

    • Higher value consciousness of long-term customers because customers learn over time to trust lower priced items or brands rather than established name brand products

Research, Test of the Propositions

  • Proposition 1:

  • Could customers with shorter tenure might actually be more profitable than long-term customers, a claim that runs counter to the theoretical expectations of a relationship perspective?

  • Which group of customers is of more interest to the firm, the one that buys heavily for a short period or the one with small spending but with long-term commitment?

  • Proposition 2

  • Examine the profitability evolution visually

  • Analyze the sign of the slope coefficient

  • The exact specification of the regression is:

Profits = as+ b1s*Dummy + b2s *ts+ error

where t = month, bis = regression coefficient, s =segment,

Dummy = 1 if first purchase month, else 0

  • Proposition 3

    • Compute the ratio of promotional costs in a given period over the revenues in the same period

  • Proposition 4

  • Whether longer-life customers do pay higher prices as compared to shorter-life customers

Proposition Summary

  • A strong linear positive association between lifetime and profits does not necessarily exist

  • A static and a dynamic lifetime-profit analysis can exhibit a much differentiated picture: profitability can occur for the firm from high and low lifetime customers

  • Profits do not increase with increasing customer tenure: the cost of serving long-life customers is not lower

  • Long-life customers do not pay higher prices

3.0 Study 2: A model for Incorporating Customers’ Projected Profitability into Lifetime Duration Computation

Background and objectives

  • Empirically measure lifetime duration for non-contractual customer-firm relationships, incorporating projected profits

  • Understand the structure of profitable relationships and test the factors that impact a customer’s profitable lifetime duration

  • Develop managerial implications for building and managing profitable relationship exchanges

Estimating Profitable Lifetime Duration

  • Determine the contribution margin expected from each customer in future periods based on the average of the contribution margins in the past

  • Determine for each future period, the probability that the customer will be alive and will transact with the firm

  • Combine these two components

  • Discount the expected contribution margin in each future period to its Net Present Value (NPV) using the cost of capital applicable to the firm

  • If in a given month, cost of additional marketing efforts is greater than NPV, determine that the Profitable Lifetime Duration of the customer has ended

Determining Profitable Customer Lifetime Duration

  • Calculation of net present value (NPV) of expected contribution margin (ECMit)

  • Decision of relationship termination

  • Formally, if NPV of Expected CMi< Cost of Mailing, the firm would decide to terminate the relationship

  • Decision rule incorporates the cost of mailings and an average flat contribution margin before mailings of 25 percent

  • Discount rate is assumed to be 15% per year

  • Calculation of finite lifetime estimate

    • Based on decision of relationship termination, average lifetime across Cohort 1 is 29.3 months, Cohort 2 is 28.6 months, and Cohort 3 is 27.8 months

    • Variability in lifetime duration evidenced through

      • a wide range between lowest and highest lifetime estimate

      • the standard deviation of the lifetime estimate

      • the relatively small value of s in the NBD/Pareto model

–

4.0 Study 3:

A Model for Identifying the True Value of a Lost Customer

  • Conceptual Background

  • The value of a lost customer depends upon whether:

  • the customer defects to a competing firm or

  • dis-adopts the product category

  • Defection: The firm loses direct sales that customer would have brought in

  • Dis-adoption: Customer stops purchasing from that product category altogether

  • Affects the long term profitability by:

  • The loss of direct sales

  • Indirect effects of word of mouth, imitation, and other social effects

  • Modeling the Effects of Dis-adoption on the Value of a Lost Customer

  • Value of an average lost customer (VLC) is calculated as:

VLC = µ VLCdisadopter + (1- µ) VLCdefectors

where µ is the proportion of disadopters in a firm’s lost customers

  • Profit impact of a lost customer = sales estimate from new product growth model without dis-adoption – the sales estimate when the customer dis-adopts after certain time

  • Key determinants of the value of a lost customer:

  • The time when customer dis-adopts has the largest impact on the value of the lost customer; earlier dis-adoption causes more loss of money

  • The external influence, p has a negative impact

  • The internal influence, q has a positive impact on penetration because higher q signifies stronger word of mouth

  • Discount rate has positive impact on the value of lost customer

5. Summary and Conclusions

  • A study of the Life-time-Profitability relationship in a non-contractual setting highlights concern with the widespread assumption of a clear-cut positive lifetime-profitability relationship and underlines the importance of a differentiated analysis

The empirical evidence showed that:

  1. a strong linear positive association between lifetime and profits does not necessarily exist;

  2. profits do not necessarily increase with increasing customer tenure,

  3. the cost of serving long-life customers is not lower, and

  4. long-life customers do not pay higher prices

  • The main drivers of customer’s profitable lifetime duration are classified as exchange characteristics and customer heterogeneity

  • The key determinants of the value of a lost customer are identified as dis-adoption time, external and internal influences and the discount rate

  • The dis-adoption time is found to have the maximum negative impact on the value

  • The earlier a customer dis-adopts, the higher is the value of the lost customer

CRM.gif

content/Unit6/Chapter14.html

Impact of CRM

1.0 Topics

  • Role of traditional channels in customer relationships

  • Emerging channel trends that impact CRM

  • Recent opportunities and challenges for CRM with respect to distribution channels

  • Implications for CRM

  • CRM through direct channel

  • Drivers and Behavioral Characteristics of multi-channel buying

2.0 Channels

  • “Flow” of the organization’s offerings, physical goods or information, to the ultimate end users (“end customer”), as well as that of sales proceeds or realizations from the customer back to the marketing firm

  • “Marketing or distribution channels”:

  • All entities (distributors, wholesalers, retailers, broker, agents, etc.) that perform certain functions for the marketing firm

  • “Communication or contact channels”:

  • Convey information to the customers to raise their awareness about the firm’s products and services and persuade them to make purchases

3.0 Role of Traditional Channels in Customer Relationships

  • Indirect Customer relationship

  • Building a good working relationship with the channel member (Upstream Relationship)

  • Providing the channel member incentives to build a strong customer relationship (Downstream Relationship)

  • Direct Customer relationship

  • Firm communicates product information to consumer through contact channels

  • Point of purchase advertising and promotions at the channel outlet (e.g. retail point) persuades consumer to make the purchase

  • Consumer information flows indirectly to the firm through the channel’s sales data

  • By building brand equity helps firms often try to build a “pseudo-relationship” with all prospective consumers

4.0 Key Factors Affecting CRM through Traditional Channels

  • Incentives for coordinating information exchange

  • Procter & Gamble and Wal-Mart invested in EDI (Electronic Data Interchange) technology

  • Allowed Procter & Gamble access to real time customer data to forge customer relationships as well as reduce distribution costs

  • Protecting the Interests of the Channels

  • Toyota Motor Corporation’s Lexus division required dealers to invest in facilities, systems and personnel required to deliver extraordinary customer service

  • Result: Lexus enabled its dealers to make several thousand dollars on the sale of each new car

5.0 Challenges Facing CRM through Traditional Channels

  • Prevent Dilution of CRM strategies

  • Traditional intermediary entities make continual and direct interaction with end customer difficult

  • Private label promotions by retailers often go diametrically against customer relationship programs of the national brands

  • Indirect Control of CRM through Channels

  • Vertical integration and strategic alliances by firms to control or align interests of their channels to their customer relationship strategy

  • Eliciting Customer Information from all Channels for Central Processing

  • Lack of precise information about individual customers complicates CRM implementation

  • Since retailers often compete against one another, it is difficult for many firms to convince them to part with critical sales information that will be centrally processed by the firm

6.0 Emerging Channel Trends that Impact CRM

  • Proliferation of Direct Channels

  • Firms have direct access to the end-customers

  • Firms can recognize at every instance of interaction a prior customer

  • Interaction through a technology enabled channel, enables firm to record and store all relevant information about the customer

    • Avoids trouble of negotiating with, providing incentives to, and training a third-party channel member, such as a retailer

  • Media channel proliferation and emergence of multi-channel shoppers

  • People change their channel habits and different consumers derive differing benefits from different channels

  • New channels allow agents other than the firm and its dedicated marketing channels to transmit or even broadcast information related to the firm or product

7.0 Recent Opportunities and Challenges for CRM

  • Opportunities for increasing returns for CRM

  • Widening Coverage of the Consumer Population

  • Improved Customer Information for the Firm

  • Lower dependency on Specific Channel Partners

  • Customer Self-selection across Channels and Individualization

  • New challenges for the firm to benefit from CRM

  • Media Planning becoming increasingly difficult

  • Consistency in service level and the need for IT systems

  • Channel Conflict and Channel Differentiation

8.0 Implications for CRM

  • Electronic channels and availability of precise customer information

  • Possible to individualize the marketing mix offering including products and services more precisely to each customer

  • Opportunities to sell complementary products

  • Sophisticated customer databases may also allow firms to conceive and test market new products to meet needs of the customers

  • Seamless Customer Information Systems

  • Marketing proposition and initiatives remain consistent to a particular end customer across channels

  • Co-opetition among Channels

  • Co-operation in terms of exchange and availability of customer information across channels

9.0 CRM through a Direct Channel – the Internet

  • Communication and Sales

  • Broadcast as well as customized marketing communication

  • Low cost (direct) channel for transacting business

  • Auto-Segmentation

  • Automatically targets a certain segment of consumers - younger, more educated, with a higher than average income, and probably with a lower base rate loyalty

  • Channel Specialization and Differentiation on the Internet:

  • Advertisers

  • Incentive providers

  • Bargain discounters

  • Infomediaries

  • Free offerer

  • Recommendation systems

  • Track user navigation and habits for targeted advertising

8.0 Customer Characteristics

  • Cross Buying:

  • Defined as the number of different product categories that a customer has bought

  • Familiarity with a brand or firm is expected to reduce the perceived risk in customer purchases leading to a higher degree of multi-channel buying

  • Returns:

  • Returns are expected to be positively associated with multi-channel buying until a certain threshold, beyond which an increase in the number of returns can lead to a decrease in the motivation to shop across multiple channels

  • Therefore an inverted “U”-shaped relationship is expected between returns and multi-channel buying

  • Customer-Initiated Contacts:

  • Higher degree of customer- initiated contacts are associated with multi-channel buying due to higher degree of familiarity with the firm and the various channels of communication

  • Purchase Frequency:

  • We can expect that the higher the purchase frequency of a customer the higher the likelihood of multi-channel buying

  • Frequency of Web-Based Contacts:

  • Awareness of a supplier’s Website indicates customer willingness to utilize new technology, hence we can expect that the higher the frequency of web-based contacts, the higher the likelihood of multi-channel buying

  • Customer tenure:

  • The longer the tenure of a customer with a firm, the higher is the likelihood of their buying from multiple channels

9.0 Supplier Factors

  • Number of Channels used for Contact:

  • Supplier contacts through multiple channels can inform a customer about the multitude of options available for purchasing products

  • Suppliers can use their contact strategy in one channel to migrate customers to other channels

  • The higher the number of different communication channels a supplier uses to contact a customer, the higher the likelihood of multi-channel buying

  • Type of Contact Channel:

  • One-way communication: E.g. direct mail : unidirectional, limited in content, and non-personal

  • Two-way communications:

  • Firms can gain greater understanding of customer needs and/or preferences

  • Educate customers on the various channels available for making transactions

  • Respond to customer predilections

  • Contacts via more interpersonal channels can be expected to have a greater positive impact on multi-channel buying

  • Contact Mix Interactions

  • Positive synergistic effect on multi-channel buying can be expected by contacting through more than one channel due to the mutual reinforcement of the message delivered through different contact channels at the same time

10.0 Behavioral Characteristics

  • Sample of customers divided into two segments:

  • Customers who have shopped in more than one channel (Segment A)

  • Customers who have shopped in only one channel (Segment B)

  • Findings:

  • The difference between the two segments in likelihood to stay active is significantly different and higher for the multi-channel buyer

  • The mean revenue of multi-channel buyers is significantly higher than the mean revenue of customers who shop in a single channel

  • The mean share of wallet for multi-channel customers is higher than the single channel customer

11.0 Synopsis of Empirical Findings

  • Customers more likely to shop in multiple channels are those:

  • Who buy across multiple product categories

  • Initiate more contacts with the firm

  • Have past experience with the supplier through the online channel

  • Have longer tenure

  • Purchase more frequently

  • Are larger

  • Have been communicated to by the supplier through multiple communication channels, especially through highly interpersonal channels

  • Evidence for a nonlinear relationship between returns and multi-channel buying

12.0 Summary

  • Customer relationships are created and sustained through marketing channels

  • For a successful CRM strategy directed at the final customer, conventional channels structure has to provide incentives for coordinating information exchange while integrating their downstream channel partners’ interests

  • CRM demands that customer information from different contact channels be centrally processed by the firm and forms a critical input to the planning and execution of the physical distribution of the goods

  • Multi-channel buyers are likely to provide higher revenues, higher share of wallet, have higher past customer value, and have a higher likelihood of being active than single channel shoppers

Table of Contents.html

 
Cust. Relationship Mgmt. Section Y01 Fall 2018 CO - Applications of Database Marketing

1. CRM Applications

2. Channels and CRM