Customer Relationship Management (CRM)
Chapter 4 Customer portfolio Analysis
Learning Objectives
Why customer portfolio analysis is necessary for CRM
implementation
That there are a number of disciplines that contribute to customer
portfolio analysis (CPA): market segmentation, sales forecasting,
activity-based costing and lifetime value estimation
How the CPA process differs between business-to-consumer and
business-to-business contexts
How to use a number of business-to-business portfolio analysis tools
The role of data mining in CPA
Life Time Value
Lifetime value is an important theme in CRM. The LTV measures a
customer’s profit-generation for a company.
A customer’s LTV can be defined as the present-day value of all net
margins earned in a relationship with a customer. Historical net margins
are compounded up to today’s value. Future net margins are discounted
back to today’s value. Estimates of LTV potential look to the future only.
For most companies, the concern will be to identify those customers or
segments that have the highest LTV potential. They are unconcerned with
the past. What matters is the future.
Researcher:
Research by Reichheld and Sasser indicates why it is important to
look forward to compute LTV.18 Their data suggest that profit
margins rise tend to accelerate over time, as shown in Fig below.
This has four causes………….
Reasons:
First, revenues from customers tend to grow over time, as they buy more.
In the credit-card example in Fig above, users tend to grow their balances
over time as they become more relaxed about using their card for an
increasing range of purchases.
Secondly, existing customers are cheaper to serve, because the supplier
and customer understand each other. For example, customers do not
make demands on the company that it cannot satisfy. Similarly, companies
do not communicate offers that have little or no value to customers.
Thirdly, they generate referrals. Lexus UK, for example, believes that every
retained and delighted customer generates £600 000 of referral business.
Fourthly, they pay higher prices than new customers. This is partly
because they are not offered the discounts that are often employed to win
new customers, and partly because they are less sensitive to price offers
from other potential suppliers because they are satisfied with their
experience.
Computation of LTV:
For an existing customer, you need to know the following information.
 What is the probability that the customer will buy products and services
from the company in the future, period-by-period?
 What will be the gross margins on those purchases, period-by-period?
 What will be the cost of serving the customer, period-by-period?
For new customers an additional piece of information is needed.
 What is the cost of acquiring the customer?
Strategically Significant Customers:
The goal of this entire CPA process is to identify those customers that will be
strategically significant for the company’s future (see Case). As a result of the
process you should be able to identify a number strategically significant customers
(SSCs), as follows.
• High future LTV customers: these customers will contribute significantly
to the company’s profitability in the future.
• High volume customers: these customers might not generate much
profit, but they might be of strategic value because of their absorption
of fixed costs, and the economies of scale they generate to keep unit
costs low.
Strategically Significant Customers:
• Benchmark customers: these are customers that other customers follow.
For example, Japan Coin Company supplies the hardware and software for CocaCola’s vending operation. While they might not make much margin from that
relationship, it has allowed them to gain access to many other markets. ‘If we are
good enough for Coke, we are good enough for you’, is the implied promise. Some
IT companies create ‘reference sites’ at some of their more demanding customers.
• Inspirations: these are customers who bring about improvement in the
supplier’s business. They may identify new applications for a product, product
improvements or cost reductions. They may complain loudly and make
unreasonable demands.
Case:
Strategically Significant Customers at Barclays Bank
Barclays is a leading UK based bank with global operations. As part of the bank’s
CRM strategy, it undertook customer portfolio analysis to identify which retail
segments were most strategically significant. The analysis found that customers
within the 25–35 year age group, who were professionally employed, and who had
a mortgage and or credit card product were most strategically significant. These
were the bank’s most profitable customers.
The bank also found that this segment represented the highest potential lifetime
value (LTV) for the bank, 12 per cent greater than any other segment. LTV is
derived from the bank’s estimates of future income from fees, interest and other
charges over their lifetime as a customer.
SSC:
SSC:
Door openers: these are customers that allow the supplier to gain access
to a new market. This may be done for no initial profit, but with a view to
proving credentials for further expansion. This may be particularly important if
crossing cultural boundaries, say between west and east.
Technology partners: these customers formally co-operate with the
supplier to improve the performance of the supplier’s technology in return for some
agreed advantages. There may be sharing of resources (people, money,
knowledge) to the common goal.
Customer Portfolio Strategies:
This sort of analysis pays off when it drives the development of different
strategies for different customers in the portfolio. There are several core
strategies.
Protect the relationship: this makes sense when the customer is
strategically significant and attractive to competitors. The creation of
exit barriers is discussed in the review of customer retention strategies.
Re-engineer the relationship: in this case, the customer is currently
unprofitable but could be converted to profit if costs were trimmed from the
relationship. This might mean reducing or automating service levels, or
servicing customers through lower cost channels.
Customer Portfolio Strategies:
In a banking industry, Data-monitor reports the transaction costs detailed in
Fig below. It cost 120 times more to service a customer in a branch than
it does online. An Australian electricity company found that its average
annual margin per customer is $60. It costs $13 to serve a customer who
pays by credit card, but only 64 cents to service a direct debit customer.
Each customer moved to the lower cost channel therefore produces a
transaction cost saving of more than $12, which increases the average
customer value by 20 per cent. Re-engineering a relationship requires
attention to the activities that create costs in the relationship
Customer Portfolio Strategies:
• Enhance the relationship
• Harvest the relationship
• End the relationship
• Win back the customer
• Start the relationship
Sales support varies by segment at Syngenta
Syngenta, a leading global agribusiness organization, sought to segment
the global market for crop protection products, such as herbicides and
pesticides. Using qualitative and quantitative data Syngenta identified four
segments amongst farmers.
1 ‘Professionals’. These are large spenders and keen to trial new
technologies
2 ‘Progressives’. These have large landholdings and are early adopters of
new technologies
3 ‘Traditionalists’ are older and spend the least on crop protection products
4 ‘Operators’ are pessimistic about farming and have difficulty in keeping
up to date with new technologies and farming practices.
Syngenta now uses these four segments to guide all of its marketing
activities. Service levels vary between segments. Face-to-face
communications are available to Professionals and Progressives and
direct mail used for Traditionalists and Operators.
Thank You!!!!!
Q&A