v. kumar

© Dr V.Kumar

V. Kumar

PROFITABLE CUSTOMER ENGAGEMENT

Concepts, Metrics & Strategies

2

Chapter 4

Valuing customer contributions The future looks green!!!

Instructor’s Presentation Slides

3© Dr V.Kumar www.drvkumar.com

Traditional measures of Customer Value

Recency-Frequency-Monetary Value (RFM)

Past Customer Value (PCV)

Share of Wallet (SOW)

Tenure/Duration


Customer Lifetime Value

Customer Lifetime Value (CLV) is defined as “the sum of cumulated future cash flows – discounted

using the weighted average cost of capital (WACC) – of a customer over their entire lifetime with the

company.”

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


Measuring CLV

Recurring Revenues

Recurring Costs

Gross Contribution

Margin

Marketing Costs

Net Margin

Expected number of purchases over next

3 years

Accumulated Margin

Acquisition Costs

Customer Lifetime

Value

Adjusted for NPVminus

minus

times

minus

CLV Measurement Approach – A Conceptual Framework

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


Measuring CLV

CLV Computation in a Contractual Setting

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where,CLVi = lifetime value for customer i= predicted probability that customer i will purchase in time period t= predicted gross contribution margin provided by customer i in time period t= predicted marketing costs directed toward customer i in time period tt = index for time periods; such as months, quarters, years, etc.T = marks the end of the calibration or observation time framer = monthly discount factorBase GC = predicted base monthly gross contribution margin


Measuring CLV

CLV Computation in a Noncontractual Setting

where,CLVi = lifetime value for customer i= predicted probability that customer i will purchase in time period t= predicted gross contribution margin provided by customer i in time period t= predicted marketing costs directed toward customer i in time period tt = index for time periods; such as months, quarters, years, etc.T = marks the end of the calibration or observation time framer = monthly discount factorBase GC = predicted base monthly gross contribution margin

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Drivers of CLV

Exchange Characteristics Customer Characteristics

Product Characteristics Firm’s Marketing Actions


Maximizing CLV

• Which customers should we retain? How can we retain more customers?

• Can we ensure that the customers we retain are profitable or potentially profitable?

• What efforts/programs influence customer retention and CLV?

• When are customers prone to switch? What are the drivers to switching?

Customer Retention

• How can we increase customer acquisition? Is it possible to acquire profitable customers rather than just any customers?

• What acquisition sources are most/least profitable? Which sources are ultimately providing the best customers?

• How much to spend on acquiring a customer?

Customer Acquisition

• How can we increase our overall profitability? • How to recruit profitable customers who will stay longer? • How long is the customer's actual lifecycle? • Which customers are more prone to specific campaigns?

(e.g., discounts, deals etc.)

Customer Profitability


1. Customer Selection

Need for Strategy Traditional metrics like RFM, PCV, SOW, Tenure or Duration are

based on past customer behavior. • A poor indicator of future customer purchase behavior• Fails to identify customers who will be profitable in the future.

CLV, a forward-looking metric, focuses on customers who are likely to be profitable in the future.

How does it work? Selection is important for two reasons;

a) Not all customers are equally profitableb) Limited budgets to spend resources on

By selecting the right customers to manage, CLV enables firms to rank-order customers based on their value to the company, and prioritize resources accordingly.


2. Managing Loyalty and Profitability Together

Need for Strategy Loyalty is not always the true measure of customer

profitability. Traditionally, customer loyalty has been defined solely

as a behavioral measure with the assumption that the loyalty of a customer is obtained from his purchasing behavior.

Chasing loyal customers is not the same as chasing profitable customers.

How does it work? Customers are rank-ordered and segmented into four

cells based on their loyalty and profitability levels. Segmentation and strategies shown on the next slide.


2. Managing Loyalty and profitability together

BUTTERFLIES

Good fit between company offering and customer needs

High profit potentialAction:

Aim to achieve transactional satisfaction, not attitudinal loyalty.

Milk the accounts as long as they are active.

Key challenge: Cease investment once inflection point is reached

TRUE FRIENDS

Good fit between company offering and customer needs

Highest profit potentialActions:

Consistent intermittently spaced communication

Achieve attitudinal and behavioural loyalty

Delight to nurture/defend/retain.

BARNACLES

Limited fit between company offering and customer needs

Low profit potentialAction:

Measure size and share-of-wallet If share-of-wallet is low, specific up-

selling and cross-selling If size of wallet is small, strict cost

control

STRANGERS

Little fit between company offering and customer needs

Lowest profit potentialAction:

Eliminate all investments towards these relationships

Profitize every transaction

Short-term Customers Long-term Customers

Low Profitability

HighProfitability


3. Optimal Allocation of Resources

Need for Strategy Firms cannot allocate equal resources to all of their customers. Also, not all customers are equally loyal and profitable. Hence, firms should allocate their limited resources to the most

loyal and profitable customers.

How does it work? To optimally allocate resources, firms must identify;

a) their most profitable customers, and

b) those who are the most responsive to marketing efforts By carefully monitoring the purchase frequency of customers,

the inter-purchase time, and the contribution toward profit, managers can determine the frequency of marketing initiatives to maximize CLV through an optimal contact strategy.

© Dr V.Kumar www.drvkumar.com

4. Cross-buying Behavior

Need for Strategy When customers buy across product categories;

a) they contribute to an increase in revenueb) contribute to profits c) increase their own switching costs

Therefore, firms should identify and target the right customers who are most likely to cross-buy.

How does it work? In order to identify the customers who are likely to cross-buy,

firms not only need to understand the motivation and drivers influencing customers to cross-buy but also the impact on revenues and other customer-related metrics.

Drivers of cross buying will help managers retain customers for a greater duration.

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

Need for Strategy Cross-selling is an important strategy for firms to increase customer

retention and customer value. As not all customers are likely to cross-buy, it is imperative for firms to

identify customers who have a higher propensity to cross-buy.

How does it work? To predict the purchase sequence of each customer firms need to

collect the following information: a) In which product category the customer is likely to make a

purchase?b) At what intervals and at time period the customer will make a

purchase? c) How much the customer is likely to spend towards that purchase?


6. Preventing Customer Attrition

Need for Strategy As it is less expensive to retain a current customer than to gain a

new one, monitoring customer churn/attrition is vital for companies.

How does it work? By building a “propensity to quit” model. These models give us the probability of a customer quitting at a

particular point in time. Based on when the customer is likely to leave and his/her ability

to contribute profits, firms can provide appropriate intervention strategies that will aid retention.


7. Product Returns Need for Strategy

Product returns:a) Reflect the discontent of customers with the firm’s offeringb) Increase service costs for the firmc) Eventually reduce margins for the firm

Firms can benefit greatly by estimating optimal amount of product returns

How does it work? Firms need to address the following questions:

a) What factors affect customers’ return behavior? b) How does customers' return behavior influence their future

buying behavior and the firm-initiated marketing communication plans?

c) Should firms consider product returns as a necessary evil in the exchange process?

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8. Managing Multichannel Shoppers

Need for Strategy Customers often engage through different channels such as retail stores,

brick-and-mortar stores, the Internet, or by mail-order catalogs. Each of these channels services a different set of customers and provides

varying levels of service.

How does it work? To effectively manage multiple channels, firms have to first identify who

the multichannel shoppers are by studying the drivers associated with purchase behavior across multiple channels.

After identifying the drivers, firms have to determine whether multichannel shoppers are: (a) more likely to buy in the future, (b) spend more money, and (c) more profitable than single-channel customers.

Ascertain which channel a customer is likely to adopt next and when this is likely to happen.

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9. Linking Investments in Branding to Customer Profitability

Need for Strategy Brands add value to companies

How does it work? It is possible to strengthen a brand by ascertaining

and increasing the value a customer provides to the brand.

This value is referred to as the Customer Brand Value (CBV).


10. Acquiring Profitable Customers

Need for Strategy Understanding how firms acquire customers and the best metric

to use while acquiring those customers is essential for firms to maximize their overall profitability.

How does it work? Using the concept of CLV, the study proposed the introduction of

an ARPRO framework (Allocating Resources for Profit) that would help firms decide which customers are worth chasing and which dormant customers should be pursued to come back to the firm.

Firms using this strategy can use customer profiles to identify customers who are most likely to be profitable and should be acquired and retained.


11. Interaction Orientation

Need for Strategy Traditionally, firms used a product-centric approach which

focused on making and selling superior products. A customer-centric approach allows firms to focus on the

interaction with customers thereby maintain future profitability.

How does it work? Customer Concept Interaction response capacity Customer empowerment Customer value management


12. Viral and Referral Marketing Strategies

Need for Strategy Customers not only contribute through their own transactions

but also have an impact on the transactions of other customers through word-of-mouth and referrals.

How does it work? The concept of Customer Referral Value (CRV) enables managers

to measure and manage customer referral behavior. In a B2B context, the concept of Business Reference Value (BRV)

enables managers to measure and manage client references that are critical to business.

Social media and its impact on marketing is captured under Customer Influence Value (CIV) where managers can understand the social media influence of their customers on prospects and current customers.


Conclusion

CLV is a direct means to measure the value of a customer to a firm in the future

It is a strong indicator of the level of customer engagement with the firm.

A customer’s value to a firm is not limited to the direct impact of that customer.

Customers can also affect the profitability of other customers of a firm through their activities and behavior.

As a result, firms should consider the influence of these indirect factors of customer engagement; CRV, CIV, and CKV, and their relationship with CLV which can further quantify the value of a customer to a firm.


End of Chapter – 4

v. kumar

Documents

customer loyalty

customer selectionneed

metrics strategies dr

past customer behavior

profitable customers

noncontractual setting

com7drivers of clv8

com8maximizing clv9