Today’s Objective
Learn Fundamental Concepts of
Customer Relationship Management (CRM)
o Definition and Goals
o Concept of Lifetime Value of a customer
o Some customers are better than others...
o E-commerce communication, data collection and, technologies
o Customer Profiling
o CRM marketing example
- RFM
- Data Mining
o What info do you need to capture at your e-commerce web site?
Customer Relationship Management
(CRM)
The business and technology discipline to coordinate
all of business processes for dealing with customers.
Laudon and Laudon ‘02
“Instead of treating customers as exploitable sources of
income, businesses are now viewing them as long-term
assets to be nurtured through CRM.” p.53
Goals of CRM
• Retention rate: CRM, relationship building, increases
customer loyalty which increase revenue per
customer and frequency of purchases.
• Referrals: CRM can turn customers into advocates.
Referrals typically have higher retention rates and
spending rates than other newly acquired customers.
• Increased sales: CRM leads to increased crossselling, upgrades, or simply more products by
existing customers.
• Reduced costs: CRM can lead to more cost effective
marketing; avoids expenses of mass marketing, freeup sales professionals, reduces direct mailings.
Lifetime Value (LTV) of a Customer
Ideally, customer’s LTV is the stream of expected future
value flows discounted back to current present value.
Benefits – Costs = Value (to firm)
Benefits = revenues, referrals
Costs = COGS, marketing expenses, phone, e-mail, sales call
Lifetime Value (LTV) of a Customer
Lifetime value is the net present value of the profit that
you will realize on the average new customer during a
given number of years. – Hughes ‘00
This definition allows us to compare groups of
customers with other groups of customers….
Some customers are better than others….
Most companies break their
customers down into five groups,
(quintiles) based on LTV,
profitability or net revenue.
Your best customers
80% of your revenue
Your best hope for
new gold…
Gold
Move-ups
Spend Service
Dollars Here
Spend Marketing
Dollars Here
???
Long Shots
1% of your revenue
Losers
Archive
Goals of CRM
LTV based Communication
• Retention rate: CRM, relationship building, increases
customer loyalty which increase revenue per
customer and frequency of purchases.
• Referrals: CRM can turn customers into advocates.
Referrals typically have higher retention rates and
spending rates than other newly acquired customers.
• Increased sales: CRM leads to increased crossselling, upgrades, or simply more products by
existing customers.
• Reduced costs: CRM can lead to more cost effective
marketing; avoids expenses of mass marketing, freeup sales professionals, reduces direct mailings.
Using the Internet to
Communicate with Customers
• Far cheaper than any
other medium
• Operates 24/7/365
• Know which
customers have read a
message and when
• Enables customers to
find out information
for themselves
• Can build a bond with
customers –
interactive, addictive
• Can communicate
across borders and
languages
Dimensions of Customization
Customization of a site can occur in many different ways:
•
PERSONALIZATION
Log-in Registration
 The site recognizes return users and
configures itself accordingly
Cookies
 Temporary files that track and gather
data about user’s behavior
Personalized E-Mail Accounts
 Provided free-of-charge to site users
Content and Layout Configuration
 Users select layout and content based on
their interests
Storage
 Sites provide virtual hard-disk storage
Agents
 Programs designed to perform simple
tasks
•
TAILORING
Based on Past User Behavior
 Many sites adjust themselves
dynamically based on a user’s past
behavior and preferences
Based on Behavior of Other Users
With Similar Preferences
 Some sites make recommendations to
the user based on preferences of other
users with similar profiles
Personalization
• Client based - Customer (client) selects
content and style of the web page presented
• Extranet – the best way to communicate
with customers (Dell Computers, Premier
Pages), requires password
• Personalized page – not as personal as
extranet, yet very specific as to style and
content (Excite, My Excite Start Page),
requires account
Personalization by User Example — Mylook.com
Enables the user to modify site content and context based on consciously
articulated and acted-upon preferences:
The first step
in this site’s
customization
process is to
choose the
category with
which you are
the best fit;
content will
then be
customized
accordingly.
Tailoring
• Server based – the e-commerce firm
(server) selects content and style of web
page presented
• Collaborative filtering – based on
customers past behavior. Possibly uses
registration, cookies, log-file analysis,
purchase history
Tailoring by Site Example — Amazon.com
Enables the site to reconfigure itself based on past behavior by the user or by
others with similar profiles:
Without
consciously
articulating
preferences, users
find that
Amazon.com
makes
recommendations
based on their past
buying habits.
Other Methods of Communication
• E-mail – complaints (should be welcomed)
special occasions (birthdays, etc.)
points programs (awards)
• Chatting – builds sense of community
• Frequently Asked Questions (FAQs) –
frees up staff
Goals of CRM
CRM Based Marketing
• Retention rate: CRM, relationship building, increases
customer loyalty which increase revenue per
customer and frequency of purchases.
• Referrals: CRM can turn customers into advocates.
Referrals typically have higher retention rates and
spending rates than other newly acquired customers.
• Increased sales: CRM leads to increased crossselling, upgrades, or simply more products by
existing customers.
• Reduced costs: CRM can lead to more cost effective
marketing; avoids expenses of mass marketing, freeup sales professionals, reduces direct mailings.
Build Customer Profile
•
•
•
•
Demographics – age, income, sex, education
Product Affinity – Product A, Product B, etc.
Recency – most recent purchase date
Frequency – total number of times customer
has made a purchase in a given time period
• Monetary – total amount spent on
products/services during a given time period
Recency Quintile Code
2/4/2002
5
4
3
2
4/11/95
1
Frequency Quintile Code
55
Average
Products
Purchased
Per Year
5
4
3
2
1
1
Monetary Quintile Code
$12,456
5
Average
Amount
Purchased
Per Year
4
3
2
$10
1
Putting it all together (RFM)
125 possible combinations (5x5x5)
(cells, segments, groups) (N= members)
111
(1,256)
112
(3,567)
113
(1,777)
114
(457)
121
(2,743)
122
(3,670)
123
(1,110)
124
(250)
131
(874)
132
(2,190)
115
(765)
555
(367)
Putting it all together (RFM)
• Each customer belongs to a group and is
coded accordingly: Customer #1003 – 432
• Draw a random sample from all customers
and make sure that it matches exactly
• Direct the pre-marketing campaign at the
sample
• Tabulate the results, and direct the actual
marketing effort only towards the profitable
segments
All Customers
N=2,000,000
-Actual campaign aimed
only at profitable cells
-Can calculate meaningful
Pro forma ROI
Random Sample
(All cells)
Sample
N=1,000
-Pre-Campaign
-Tabulate Results
Data Mining
Customer #
25031
25032
25033
Age
25
74
46
Sex
0
0
1
-Sample
-Explore
-Model
-Measure
-Assess
Zip Recency Frequency Monetary Product AProduct B Product Z
38104 1
2
1
1
0
0
38765 3
5
5
0
1
1
90054 3
4
3
0
1
0
All Customers
N=2,000,000
-Run all customers through the
model
-Actual campaign aimed
at targeted customers with
laser like precision
-Can calculate meaningful
Pro forma ROI
Assess actual results
Random Sample
(All cells)
Sample
N=1,000
-Explore
-Modify
-Model
Application of ANN in Banking
What data do you need to capture
at your web site to accomplish
CRM goals?
Pre 2000: CRM leads to competitive
advantage…
Post 2000: CRM is a minimum
competitive threshold…