CH 12 - Customer Relationship Management A Databased...

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Customer Relationship Management A Databased Approach V. Kumar Werner J. Reinartz Instructor’s Presentation Slides
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Chapter Twelve Applications of Database Marketing in B-to-C and B-to-B Scenarios
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Topics Discussed Customer Value- A Decision Metric Study 1: The Life-time-Profitability Relationship in a Non-contractual Setting Study 2: A model for incorporating customers’ projected profitability into lifetime duration computation Study 3: A model for identifying the true value of a lost customer
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Study 1:The Life-time-Profitability Relationship in a Non-contractual Setting Background and Objective The firm has to ensure that the relationship stays alive since the customer typically splits his/her category expenses with several firms Objectives: Test for the strength of the lifetime duration – profitability relationship Whether profits increase over time (lifetime profitability pattern) Whether the costs of serving long-life customers are actually less Whether long-life customers pay higher prices
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Study 1 (contd.) Conceptual Model To investigate the consequences of customer retention, namely, profitability: Individual customer lifetime profits are modeled as a function of a customer’s lifetime duration Revenue flows over the course of a customer’s lifetime Firm cost is associated with the marketing exchange
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Customer Lifetime and Firm Profitability: Proposition 1:The Nature of the Lifetime-Profitability Relationship is Positive Lifetime-Profitability Association Segmentation Scheme Lifetime Profit High Low Short Long Lifetime duration Segment 2 Segment 3 Segment 4 Segment 1 Long Lifetime Duration Short Low High Lifetime revenue
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Customer Lifetime and Firm Profitability : Proposition 2: Profits Increase over Time Analysis of the dynamic aspects of the lifetime-profitability relationship Non-contractual setting: cost of serving customer can easily exceed the profit margin brought in by the customer. Therefore, profits may not increase over time Example: catalog shopping or direct mail offerings - the customer may end up buying once a year and spend a smaller amount
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Customer Lifetime and Firm Profitability: Whether there is lower transaction costs for longer-life versus shorter-life customers (e.g.: retail sector) Whether the costs associated with promotional expenditures directed at longer- and shorter-life customers actually differ Proposition 3: The Costs of Serving Longer-life Customers are lower
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Customer Lifetime and Firm Profitability: Proposition 4: Longer-life Customers Pay Higher Prices Existing customers pay effectively higher prices than new ones, even after accounting for possible introductory offers OR Higher value consciousness of long-term customers because customers learn over time to trust lower priced items or brands rather than established name brand products
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Model for Measuring Customer Lifetime for Non-Contractual Relationships Negative Binomial Distribution (NBD)/Pareto model
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CH 12 - Customer Relationship Management A Databased...

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