Customer Relationship Management (CRM) 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 cross-selling, upgrades, or simply more products by existing customers. Reduced costs: CRM can lead to more cost effective marketing; avoids expenses of mass marketing, free-up 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 Spend Service Dollars Here Gold Your best hope for new gold… Spend Marketing Dollars Here Move-ups ??? Long Shots Archive Losers 1% of your revenue Hughs ‘00

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 cross-selling, upgrades, or simply more products by existing customers. Reduced costs: CRM can lead to more cost effective marketing; avoids expenses of mass marketing, free-up 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 cross-selling, upgrades, or simply more products by existing customers. Reduced costs: CRM can lead to more cost effective marketing; avoids expenses of mass marketing, free-up 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 1 4/11/95

Frequency Quintile Code 55 5 4 Average Products Purchased Per Year 3 2 1 1

Monetary Quintile Code $12,456 5 4 Average Amount Purchased Per Year 3 2 1 $10

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) 115 (765) 121 (2,743) 122 (3,670) 123 (1,110) 124 (250) 131 (874) 132 (2,190) 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) -Pre-Campaign -Tabulate Results Sample N=1,000

Data Mining Sample Explore Model Measure Assess Customer # Age Sex Zip Recency Frequency Monetary Product A Product B Product Z 25031 25 38104 1 2 25032 74 38765 3 5 25033 46 90054 4

-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 All Customers N=2,000,000 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…