1. 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?

2. 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

3. 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.

4. 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, , sales call

5. 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….

6. Some customers are better than others….
Most companies break their customers down into five groups, (quintiles) based on LTV, profitability or net revenue.

7. 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

8. 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.

9. 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

10. 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 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

11. 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

12. 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.

13. 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

14. 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.

15. Other Methods of Communication
– complaints (should be welcomed)
special occasions (birthdays, etc.)
points programs (awards)
Chatting – builds sense of community
Frequently Asked Questions (FAQs) – frees up staff

16. 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.

17. 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

18. Recency Quintile Code
2/4/2002 5 4 3 2 1
4/11/95

19. Frequency Quintile Code55 5 4
Average
Products
Purchased
Per Year 3 2 1 1

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

21. 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)

22. 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

23. 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

24. 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

25. -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

26. Application of ANN in Banking

27. 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…