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 Coca-Cola’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.

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