Module 5: Measuring & Managing Customer Relationships Flashcards
what does MSDA stand for
Marketing, selling, distribution, and administrative expenses
what are MSDA independent of?
Most are independent of the volume and mix of products and cannot be traced through causal relationships to products
how do MSDA expenses differ and give example
Customers and channels differ considerably in their use of MSDA resources (ex. Cost of reaching company clients is much lower than individuals)
what can help trace MSDA expnese to customers, customer orders and channels
ABC
what is included in process perspective in BSC
cost of production and purchasing processes
what happens when we allocate MSDA based on % of sales?
can result in skewed profitability for customers
9 things that result in high cost to serve customers
Order custom products Small order quantities Unpredictable order arrivals Customized delivery Change delivery requirements Manual processing: high order error rates Large amounts of pre-sales support Large amounts of post-sales support Pay slowly
9 things that result in low cost to serve customers
Order standard products High order quantities Predictable order arrivals Standard delivery No changes in delivery requirements Electronic processing with 0 defects Little to no pre-sales support No post-sales support Pay on time
what does 80-20 rule only apply to
sales revenue, not profits
explain 80-20 rule
When companies rank products and customers from highest volume to lowest, they find top-selling 20% of products/customers generate 80% of total sales
explain 40-1 rule
Lowest volume 40% of products/customers generate only 1% of total sales
how can we portray customer profitability
from an ABC customer analysis as a whale curve
x and y axis of whale curve
Plot cumulative profitability (y) vs cumulative % of customers (x)
how do we rank customers on x axis for whale curve
from most profitable to least profitable
3 things whale curve reveals
1) The most profitable 20% of customers generate about 180% of total profits
2) Middle 60% of customers break even
3) Least profitable 20% of customers lost 80% of total profits, leaving company with 100% of total profits
where do high profit customers appear on whale curve
left side
3 characteristics of high profit customers and what managers should do
1) These customers should be protected
2) They could be vulnerable to competitive inroads
3) Managers should be prepared to offer discounts, incentives and special services to retain loyalty of these valuable customers if a competitor threatens
where do low profit customers appear on whale curve
right side
characteristic of low profit customers and what managers should do
Managers can use ABC to help understand why these customers are unprofitable and to provide insight on how to transform unprofitable customers into profitable ones
why do service companies have to focus on customer costs and profitability more?
because the variation in demand for org resources is much more customer driven than in manufacturing companies
in manufacturing, what is customer dependent/independent
manufacturing costs are customer independent, only MSDA expenses might be customer dependent
in service companies, how should be measure revenues and costs?
Measuring revenues and costs at customer level provides company with far more relevant and useful info than at product level
4 ways to increase customer profitability
1) Process improvements
2) Deploy menu-based pricing to allow customers to select features and services for which they are willing to pay
3) Enhance customer relationship to improve margins and lower cost to serve
4) Use more discipline in granting discounts and allowances
how can managers improve processes?
by analyzing internal operations
what can managers do if company receives large number of small orders
1) strive to reduce costs of setup and order handling
2) encourage customers to place orders electronically
what is the most powerful tool to turn unprofitable customer into profitable one?
pricing
explain activity based pricing
Establishes base price for producing and delivering a standard quantity for each standard product
activity based pricing - special services
Special services may be priced just to cover costs or also to earn a margin
what does activity based pricing price?
prices orders, not products
how can companies turn unprofitable customers into profitable ones by managing relationships
1) Persuade them to use greater scope of products/services
2) Establish min order sizes
what should customer do with newly acquired unprofitable customers
be more tolerant of them than longer customers
what should firm do before giving customer price increase
company should examine the many ways it has already reduced the effective price the customer actually pays
what does pricing waterfall chart list?
lists multiple revenue leaks from the price list caused by special allowances and discounts granted to customer
types of customer axis
X axis is cost to serve (MSDA) from low to high
Y axis is net ABC margin realized from low to high profits
passive/champions on grid
High profits, low cost to serve
passive/champions characteristics
product is crucial, good supplier match
what type of customers do firms want?
passive/champions
savvy/demanders on grid
High profits, high cost to service
savy/demanders characteristics
costly to service but pay top dollar
cheap/acquaintances on grid
Low profits, low cost to serve
cheap/acquaintances characteristics
price sensitive and few special demands
losers/agressive on grid
Low profits, high cost to serve
losers/agressive characteristics
leverage buying power, low price and lots of customizes service and features
what type of customers do firms not want?
losers/agressors
what are customers that are above cost plus diagonal
more profitable
explain salesperson compensation
Compensation plan typically sets min quotas and provides incentive commissions based on sales revenue. May be special rewards like vacation trips for achieving sales revenue above stretch goal
what do salesperson incentive plans sometimes fail to take into account
fail to take into consideration decreases in profitability due to special discount allowances and arrangements negotiated to close the deal
what do salespeople focus on and not focus on?
Salespeople focus on sales, not profits
what parameters does Customer lifetime value take?
Initial cost to acquire customer
Profits or losses from customer each year
Any additional costs to retain customer in a year
Probability of retaining customer each year or the known length of relationship
CLV formula
[sum for each t (margin t - cost to serve t) * retention rate t^(t - 1) / (1+ cost of capital)^t] - initial acquisition cost
what could happen if firm only focuses on non-financial metrics?
may cause company to take actions that could improve short-term financial performance but damage long-term customer relationships
how can firms measure customer satisfaction?
surveys
5 reasons customer loyalty is valuable
1) Greater likelihood to repurchase
2) Persuade others to become new customers
3) Less likely to defect for price discounts from competitors
4) Willing to pay a price premium to retain relationship with key supplier
5) Willing to work with supplier to improve performance and develop new products
what is there a low correlation between?
customer satisfaction and future revenue growth
why do customers often remain with current supplier?
inertia, high switching costs or lack of alternative
what is there a strong correlation between?
customer’s willingness to recommend company and future sales growth
formula for Net promoter score
NPS = promoters (9 or 10) - detractors (1-6) / total
what do we call customers on 7-8 scale
passively satisfied
how does % change in operating profit relate to % change in sales
% change in operating profit = x%/initial profit margin where x% is % change in net sales revenue
profit margin formula
net income / net sales
