Managing customer dynamics Flashcards
What are the five sources of customer dynamics? And some examples?
(1) Discrete life events (e.g., first-time parent)
(2) Typical life cycle (e.g., when people age they focus on risk reduction and are less willing to change etc.)
(3) Product learning effects (e.g., over time customer may learn that they like certain features of a product)
(4) Product life cycle
(5) Changing environment (e.g., culture around healthy food)
What are the three main approaches to managing customer dynamics?
(1) The lifecycle approach
(2) Dynamic customer segmentation
(3) Customer lifetime value
What are the four phases of a typical customer product lifecycle?
Introduction, growth, maturity, decline
What is captured by the AER (acquisition, expansion, retention) model? (This one should maybe be reformulated a bit)
Customers entering the firm’s portfolio and expansion over time
For what do you use a Hidden Markov Model?
To understand the dynamic stages of a customer’s relationship with a business, and for dynamic segmentation of the customer base.
What is customer lifetime value (CLV)?
Value added by an individual customer to the company.
What are the inputs to the “managing customer dynamics” framework?
(1) Information on existing customers
(2) Past customers’ responses in light of marketing programs
(3) Valuable information from lost customer analysis
What are the outputs from the “managing customer dynamics” framework?
(1) Description of customers and their expected migration patterns
(2) AER positioning statements
(3) AER strategies
How is marketing principle #2 related to principle #1?
Because customers change, we need to adapt the static segmentation of all customers (marketing principle #1) by focusing on our existing customers and accounting for their time dependent needs (marketing principle #2)
In the life cycle approach, what are the 3 different life cycles? Mention the stages in all of them
Customer life cycle: Capture how individuals typically change as they age and reach common age-related milestones
Industry life cycle (5 stages)
1. Early establishment of its range and boundaries
2. Innovation stage to set a “dominant design”
3. Stakeout stage (economies of scale –> smaller players get forced out)
4. Maturity (focus on market share and cash cows)
5. Decline stage
Product life cycle (4 stages)
1. Introduction
2. Growth
3. Maturity
4. Decline
What is the idea behind the acquisition-expansion-retention framework? Describe each stage in the framework.
Aim: Evaluate existing customer’s behavior/needs in each AER stage to understand temporal differences. Afterwards, segment a firm’s existing customers on the basis of their similar, expected migration patterns.
Acquisition stage: First contact with the customer (typically before first purchase) –> Customer onbording
Expansion stage: Trying to up-sell or cross-sell to expand sales to customers
Retention stage: Deals with customers who do not migrate because of mismatch in core offering or a life event (e.g., firm try to lock-in customers –> Apple with “dominant design”, high switching costs)
A form of dynamic segmentation is can be done using the Hidden Markov Model. Explain briefly the idea.
The model can uncover “stages” of customers behaviour, where each state describes all common behavior exhibited by some groups of customers at some point in their relationship with a firm. Further, it can uncover how those stages evolve.
Examples of an unobserved (hidden) stages: “strong” vs. “weak” stage, where customer behavior differs across the two stages (e.g., customers in the strong stage buy more than in the weak stage).
Inputs: Customer behavior (e.g., purchases) and firm actions (e.g., marketing)
Customers have a finite probability of transitioning from any stage to another as a function of marketing effort e.g., shift from weak to strong.
Model estimates:
1. Number of stages in the data
2. Probability that a customer is in each stage
3. Probability that customers move from one stage to another
4. The conditional probability of a behavior, given the customer’s hidden stage
5. Effect of marketing in each stage
Lost customer analysis can be integrated into a customer dynamic segmentation approach. What is the idea behind it? Which analyses method can be used?
It can identify reasons why customers leave. Firms set up a regular interval for contracting lost customers to identify the cause of their transition.
–> If lost customer is not in main target segment, the firm can change acquisition criteria and/or change the strategy to address new subsegment of customers.
–> If lost customer is in firm’s target market, fix the problem and implement retention strategies to build brand and relational loyalty.
A choice model can benefit the lost customer analysis.
A choice model can inform analyses across all AER-stages. What is the main idea and assumptions?
Choice models are excellent for determining “best” AER strategies.
A choice model predicts the likelihood of observed customer choices/responses, using data about that customer’s characteristics and past behaviors, as well as the firm’s
marketing interventions (=input).
It assumes that consumers make rational choices based on their individual utility with a demising sensitivity for marketing effort. Thus, it takes into account that marketing that if you are pretty sure yo choose an alternative, marketing impact is low since it is not easy to affect you.
Output: Elasticity for every output variable on outcome and probabilities of customer choices.
Choice models: What does the parameter estimates tell you and how to calculate elasticities? How to interpret elasticity results?
In a choice model, logistic regressions are used (e.g., logit model). Thus, the dependent variable is binary either equal to 0 or 1 (=the person make a choice).
Independent variables: characteristics of customer and marketing variables.
Since a logit model is used, the parameter estimates coefficients are only informative about the sign of the effect, but not the size (remember to check if they are significant). Thus, if the parameter to price is negative, we know that a higher price will affect the probability of acquiring the customer negatively, but we do not know how much the probability is affected.
To calculate the size, we need the odds ratio. It measures how the likelihood of acquiring a person changes, when you increase marketing activity by 1 unit.
Exp(parameter estimate of price)=0.955
Thus, when you increase price by 1 unit, then you reduce probability for acquiring the person with 4,5%.
Exp(parameter estimate of warranty)=1.047
Thus, when increase amount of warranty by one unit, then you increase the change to acquire that person with 4,7%.
Elasticities: what is the %change in output with a 1% change in input? E.g. when distance to campus increase by 1%, the probability of entering the MBA program decrease by 25%.
