Chapter 16:
Applications of CRM in
B2B and B2C Scenarios (Part 2)
Topics Discussed

Optimal Resource Allocation across Marketing and Communication Strategies

Purchase Sequences Analysis

Link between Acquisition, Retention, and Profitability

Preventing Customer Churn

Customer Brand Value

Customer Referral Value
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Optimal Resource Allocation

Customer Equity: Aggregation of expected lifetime values of a firm’s entire base of
existing customers and the expected future value of newly acquired customers

The NPV objective function required to maximize the Customer Equity of a firm is
related to
 The cash flow from each customer
 The expected Inter-purchase time
 The cost and frequency of marketing/communication strategies employed
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Optimal Resource Allocation (2)

The NPV objective function required to maximize Customer Equity of a firm is based
on 3 elements:
 A probability based model that predicts the inter-purchase time of each
customer
 A panel data model that predicts the cash flows from each individual customer
 An optimization algorithm that maximizes the profits from each individual
customer
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Real World Industry Application of Optimal Resource Allocation

By applying an optimization model, a manager can know:
 The extent to which face-to-face meetings should be decreased and frequency of
direct sales increased or vice-versa
 How to maximize profits across various customer segments

Two-step approach:
 Develop model and check predictive accuracy
 Examine the improvements in profits
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Effect of Firm and Market Variable on the Value of a Lost
Customer
Example:
Actually Bought in
the next 12 months
Actually did not buy
in the next 12months
Total
Expected to buy in the
next 12 months as per
the model
N = 225
N = 21
246
Not expected to buy in
the next 12 months as
per the model
N = 12
N = 66
78
Total
324
Hit Rate = 225+66/324 = 90%
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Duration of Association Approach

Comparison of average profits:
Duration of Customer-Firm Association
Average Profit per
customer

Short
Long
$29,235
(n = 170)
$141,655
(n = 154)
Cross analysis of Duration of Relationship and Customer Value obtained on the
basis of the NPV maximization objective function indicates that:

Not all the short duration customers deliver lower profits, and not all the long
duration customers deliver higher profits

Some of the profitable customers had escaped the firm’s attention

Firm was allocating disproportionately higher resources to some Long duration
customers in the mistaken belief that the duration of their association with the firm
was indicative of their profitability
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Customer Value Based Approach
Low Customer
Value
High Customer
Value

Shorter Duration
Longer Duration
Cell I
Cell III
N = 78
Average Profit = $ 1,387
N = 82
Average Profit = $ 1,245
Cell II
Cell IV
N = 92
Average Profit = $ 52,976
N = 72
Average Profit = $ 302,542
The observations in cell III indicate that more than 50 % of the customers that the firm
was chasing in the long duration segment were actually low value customers

The observations in cell II indicate that the firm was ignoring a sizable set of customers by
classifying them as short duration customers, when indeed they were contributing
significantly to profits
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Reallocation of Resources Based on Customer Value
Customer Value
High
Low
Low
Low/ High
High/ High
Face to Face Meetings:
-Currently meets once every 4 months
-Optimal meeting frequency is once
every month
Face to Face Meetings:
-Currently meets once every 6 months
-Optimal meeting frequency is 4
months
Direct Mail/Telesales:
Current Interval is 21 days
Optimal Interval is 13 days
Direct Mail/Telesales:
Current Interval is 13 days
Optimal Interval is 4 days
Low/ Low
High/ Low
Face to Face Meetings:
-Currently meets once every 6 months
-Optimal meeting frequency is once
every 14 months
Face to Face Meetings:
-Currently meets once every 3 months
-Optimal meeting frequency is once
every 4 months
Direct Mail/Telesales:
Current Interval is 27 days
Optimal Interval is 26 days
Direct Mail/Telesales:
Current Interval is 10 days
Optimal Interval is 19 days
Duration of Relationship
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High
9
Purchase Sequence Analysis

It is important to understand which product in the portfolio is likely to be needed next by
a customer

Purchase Sequence Model addresses:
 What is the sequence in which a customer is likely to buy multiple products or
product categories?
 When is the customer expected to buy each product?
 What is the expected revenue from that customer?

Other attributes of the model include:
 The model captures the differences in the durations between purchases for
different product categories
 The interdependence in purchase propensities across products is modeled by
incorporating cross-product category variables
 An individual customer level profit function is developed to predict Customer Value
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Purchase Sequence Analysis (contd.)
Example:

Model developed for hardware products of a firm

Test group of sales people adopted strategies based on the model for a year

Comparison made between previous year and current year for test group and with control
group for current year alone

Test group
performs better
Change between current year and previous year
Revenue ($)
Cost of Communication ($)
# of Attempts Before
Purchase
Profits ($)
Return on Investment (%)
Test Group
Control Group
Difference
1,050 (18,130)
1,033 (17,610)
537
-750 (3,625)
75 (4,580)
-1,780
-4 (15)
1 (18)
-8
3,000 (9080)
637 (6,275)
5,168
5,4 (3,7)
2,2 (2)
4,9
Customer value approach improves the quality of marketing decisions
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Linking Customer Acquisition, Relationship Duration, and
Customer Profitability
Relationship
Duration
Acquired
Customers
Customer
Profitability
Prospects
Non-acquired
Customers
Acquisition Process
Retention Process
- Firm actions
- Customer actions
- Competitor actions
- Customer characteristics
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Balancing Acquisition and Retention Resources

The amount of investment in a customer and how it is invested has an impact on
acquisition, retention and customer profitability

Investments in customer acquisition and retention have diminishing marginal returns

The relative effectiveness of highly personalized communication channels is much greater
than the less personalized communication channels

Under spending in acquisition and retention is more detrimental and results in smaller ROIs
than overspending

A suboptimal allocation of retention expenditures will have a larger detrimental impact on
long-term customer profitability than suboptimal acquisition expenditures

The customer communication strategy that maximizes long-term customer profitability
maximizes neither the acquisition rate nor the relationship duration
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Preventing Customer Churn

Impacts of Customer Churn on a firm

Incurs a loss of revenue from the customers who have defected

Loses the opportunity to recover the acquisition cost incurred on the defected
customers

Loses the opportunity to up-sell/cross-sell to the defected customers

Loses social effects


Influencing other customers on product/service adoption

Potential negative word-of-mouth
Invests additional resources to replace
the lost customers with new customers
Customer churn drains the
firm’s performance level and
resources
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Preventing Customer Churn (2)


Analytical models (ex: dynamic churn models)

Analytical tools to prevent customer churns

Used to predict future customer behavior

Help firms decide which customer/distributor is likely to quit at what time
Key questions managers consider to prevent customer churn

Should we intervene?

Which customer should we intervene?

When do we intervene?

Through which channel do we intervene?

What do we offer them?
Build Propensity-to-Quit models
and integrate them with the CLV based models
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Predicting Propensity to Quit
1. Identify the need to intervene
2. Decide which customer to intervene
3. Pick the appropriate time to intervene
Customer B and C should
be targeted with
intervention offers
Propensity to Quit
Strong tendency to quit from early on
C
B
A
Increase in propensity to quit
from Jan 2010
Does not intend to quit
Time
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Proactive Intervention Strategy
Propensity to Quit
Intervention
Points
I2
I1
C
B
A
Time

Decision on the channel of intervention and type of intervention offer is based on
individual customer characteristics

The amount of resources to be spent on each customer is directly linked to the
Customer Lifetime Value
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Preventing Customer Churn (2)

Churn models help firms to identify the customers who are likely to quit

The Intervention strategy based on CLV helps to effectively intervene to retain
valuable customers

Accurate customer profiling analysis helps firms to target profitable prospects and
implement a solid marketing strategy

Firms should apply the knowledge gained about the new customer across the entire
organization by:

Cultivating customers

Synchronizing departments

Approaching customers on the one-to-one basis

Providing solutions to customers’ needs and wants
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Customer Brand Value (CBV)



Important roles of Brands

Draw new customers to the firm

Remind existing customers about the products/services it offers

Forge an emotional attachment with its consumers
Customer Brand Value (CBV)

Brand Knowledge – Brand Awareness and Brand Image

Brand Attitude – Brand Trust and Brand Affect

Brand Behavior Attention – Purchase Intention

Brand Behavior – Brand Loyalty, Brand Advocacy, and Brand Premium Behavior
Customers with greater CBV are more likely to engage in activities that increase in CLV
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Customer Brand Value (2)

Linking CBV to CLV

Established using customer-level data and advanced modeling techniques

Compute CLV from customer transaction database

Compute CBV from CBV survey results
CLV
High
Low

Managerial Benefits of Linking CBV to CLV

High
Monitor the overall performance of CBV

Identify the weak components in the
individual brand values and develop
Poor Patrons
True Loyalties
Strangers
Acquaintance
CBV
different strategies

Manage brand at the segment level

Manage brand at the individual level

Low
Personalized marketing actions can be
performed to send the right message at the right
time to simultaneously maximize the the individual CLV and CBV
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Customer Referral Value (CRV)
Customer Referral Value
 Customer’s expected future referral value with the firm
 Enables managers to measure and manage each customer based on his/her ability to
generate indirect profit to the firm
CRVi 
Valueof custom erswho joinedbecauseof referral
Discountrate
Valueof custom erswho would join anyway

Discountrate
T
n1
CRVi  
t 1 y 1
Where
( Aty  aty  M ty  ACQ1ty )
(1  r )t
T
n2

t 1 y  n1
( ACQ2ty )
(1  r )t
T = the number of periods that will be predicted into the future (e.g. quarters, years)
Aty = the gross margin contributed by customer ‘y’ who otherwise would not have bought the product
aty = the cost of the referral for customer ‘y’
1 to n1 = the number of customers who would not join without the referral
n2 – n1 = the number of customers who would have joined anyway
Mty = the marketing costs needed to retain the referred customers
ACQ1ty = the savings in acquisition cost from customers who would not join without the referral
ACQ2ty = the savings in acquisition cost from customers who would have joined anyway
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Customer Referral Value – Example (1/2)
Tom is a customer from a financial services company. Calculate the Tom’s
customer referral value (CRV)
Number of referrals per period (n2)
4
Marketing cost per period (Mty)
$18
Average gross margin (Aty)
$98
Cost of referral (aty)
$40
Acquisition cost savings (ACQ1ty and ACQ2ty)
$5
Number of referrals that would have joined anyway (n2 – n1)
2
Yearly discount rate (r)
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15%
22
Customer Referral Value – Example (2/2)
Tom is a customer from a financial services company. Calculate the Tom’s
customer referral value (CRV)
1. Determine the number of customers who would have made purchases anyway
(n2 – n1) = 4-2 = 2
2. Predict future value of each referred customers
(Aty – Mty – aty + ACQ1ty)/ (1+r)t =
(98-18-40+5) / (1.15)t
3. Predict number of referrals generated
(4 referrals per period) * (2 periods in a year) = 8 referrals per year
4. Predict the timing of customer referrals
Since Tom has 8 referrals per year, assume 4 referrals each in first
and second half of the year
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Customer Referral Value – Example
Tom is a customer from a financial services company. Calculate the Tom’s
customer referral value (CRV)
Period 1:
n1
CRV1  
y 1
Period 2:
( A1 y  a1 y  M1 y  ACQ11 y )
(1  r )1

n2

y  n11
( ACQ21 y )
(1  r )1
($98  $40  $18  $5) 4
($5)
CRV1  

 $93
1
1
(
1

0
.
075
)
(
1

0
.
075
)
y 1
y 3
n1
CRV2  
y 1
( A2 y  M 2 y )
(1  r )
2
n1

y 1
( A2 y  a2 y  M 2 y  ACQ12 y )
(1  r )
2

n2

y  n11
( ACQ22 y )
(1  r ) 2
2
($98  $18) 2 ($98  $40  $18  $5) 4
($5)


 225
2
2
2
(1  0.075)
y 1 (1  0.075)
y 1
y 3 (1  0.075)
2
CRV2  
TotalCRV  CRV1  CRV2  318

Impact of CRV grows as time progresses, because of the growth of the new customer
base due to referrals in each period

In period 2, there were 6 new customer base because of 2 customers from period 1 who
bought only because of the referral.
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Customer Referral Value (2)

Linking CRV to CLV

Measure CLV: Value provided by the actual purchases made by the customer

Measure CRV: Influence the customer has on other people (CRV)

Managers need to market to customers based on the various combinations of
whether the customer is low or high CLV

Marketing studies found that customers with high CRV are not the most valuable
Deciles
customers
(ranked by CLV)
1
2
3
4
5
6
7
8
9
10
CLV ($)
(high(1
CLV)
year)
1,933
1,067
633
360
313
230
190
160
137
120
CRV ($)
(1 year)
40
52
90
750
930
1,020
870
96
65
46
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Top 30% CLV customers have no
overlap with the top 30% CRV
customers
Managers need to consider both the
concepts of CRV and CLV to avoid
decrease in customer growth and
negative WOM
25
Customer Referral Value (3)

Managerial Benefits of Linking CRV and CLV

High CLV and high CRV customers are distinct sets of customers

Customers in each cell should be evaluated differently with respect to their total
value to the company and then be approach with different types of marketing offers
to get the greatest overall value
CRV
High
Low
High
Affluents
29% of customers
CLV (1yr) = $1,219
CRV (1yr) = $49
CLV
Misers
Low
21% of customers
CLV (1yr) = $130
CRV (1yr) = $64
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Champions
21% of customers
CLV (1yr) = $370
CRV (1yr) = $590
Advocates
29% of customers
CLV (1yr) = $180
CRV (1yr) = $670
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Customer Referral Value (4)

Customer Referral Value (CRV) or Customer Lifetime Value (CLV)?

Firms should measure both CLV and CRV to implement marketing campaigns that
focus on customers based on both dimensions

Marketing campaign focusing on both metrics will allow firms to increase both the
customer profitability and the positive WOM

However focus on either one depending on the campaign goal:

CLV campaign: Encourage users to buy more within/across category

Usually occurs in a competitive market, when difficult to acquire new
customers

CRV campaign: Acquire more customers/prospects through current customers

Necessarily if the current customer is already spending majority of
their spending budget on the company
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Summary

The NPV objective function required to maximize customer equity of a firm, is related to
cash flow from each customer, expected inter-purchase time and cost and frequency of
the marketing/communication strategies employed

Cross analysis of duration of relationship and customer value indicates that not all short
duration customers deliver lower profits and not all long duration customers deliver
higher profits

By linking acquisition and retention process, it is possible to see a complete and
unbiased picture of the drivers behind customer selection/acquisition, relationship
duration, and customer profitability

When firms understand the link between CBV and CLV, they can efficiently allocate
resources to maximize value

Customers should be evaluated and approached with different types of marketing offers
catering to maximizing CLV and/or CRV
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