Customer Profitability Flashcards
Customer relationship management (CRM)
the process of carefully managing detailed information about individual customers and to maximise satisfaction and loyalty. How to engage the customer and convince to purchase from us.
Customers, recency, retention rate purpose
-To monitor customer numbers (and their increase or decrease) as a first step toward determining customer profitability within a specific time period
Customer Recency Construction
- Calculate average recency or to identify group of most recent users
- Especially important for categories prone to sporadic use
- Source of data can be company records, market research
Retention rate
Retention rate = Customers retained/ customers at risk. Only really meaningful in contractual/ subscription situations.
Churn/ Attrition rate
- Complement of Retention is attrition or churn
- Customer must be at risk of leaving in order to be counted as retained
- Ideal to measure retention in “customer time” rather than “calendar time”
Problems with customers, recency and retention rates
- Who is the customer? in terms of Household/ individuals, Participants in
the decision process, Contract/actual use?, How loyal?, Multi- headed customers (user, purchaser, decider, influencer, initiator) - Not all “customers” are the same
- Where is the customer (what sales territory, branch would they fall under?)
Customer Profit Purpose
- To identify the “best customers” in terms of financial worth within a specified time period
- To dissect/de-average profitability on the customer level
- Understanding which customer relationships are better than others and take steps to ensure the continuation of the most profitable relationships
Customer Development
Potential Prospects First time customers Repeat customers Clients Members Advocates Partners
Counting Customer methods
- Contractual relationships: count # of contracts – e.g., Vodafone accounts
- Non-contractual/ identifiable customers: customer database, but sporadic use is an issue – e.g., catalogs, hotels, casinos
- Count how many customers bought within a certain period of time
- Non-contractual/non-identifiable customers: has to be estimated from transaction records, market research – e.g., Store cash register records
- Count only visits and/or # of transactions
Types of customers to improve profitability
Top Tier customers - reward
Second tier customers -grow
Third tier customers - fire
Top Tier Customer
- Most profitable so give more attention and value
- Profit suffers most if you lose them
Second Tier Customer
- Middle to low profits
- Identify and move up customers with growth potential
Third Tier customer
- Company loses money servicing these people
- Either promote them towards profitability or charge them more for moving up or moving out
Customer Profit Construction
- Profit the firm makes from serving a customer or customer group over a specified period of time
- Calculation can be based on individuals
- Or with large number of customers. Use meaningful groups (quartiles, deciles based on profitability)
Customer Profit Problems
- Assigning costs to customers is hard but assigning indirect costs to customers is complex (methods such as Activity Based Costing may help)
- Profitability changes over time & unless you repeat the measurement this metric does not take into account potential changes (CLV tries to resolve this)
- Company need to serve unprofitable customers (contractual, legal, anti discrimination issues)
- Abandoning customers is very sensitive and businesses need to consider PR consequences.
