Gaining Competitive Advantage through Engagement Strategy · 21/4/2018 · Richard and Susan Lenny Distinguished Chair & Professor of Marketing, ... Center for Excellence in Brand

www.drvkumar.com© Dr. V Kumar

Gaining Competitive Advantage through

Engagement StrategyISB Customer Behavior & Branding PGPpro

V. Kumar, PhDRegents’ Professor,

Richard and Susan Lenny Distinguished Chair & Professor of Marketing, Executive Director, Center for Excellence in Brand & Customer Management,

and Director of the Ph.D. Program in MarketingJ. Mack Robinson College of Business, Georgia State University, Atlanta GA

andChang Jiang Scholar, HUST, Wuhan China.

Fellow, Hagler Institute for Advanced Study, TAMU, College Station, TX Senior Fellow, Indian School of Business, India

Measuring and Maximizing Customer Engagement Value (I)Day 1 – Session 4

April 21, 2018 DelhiApril 28, 2018 Hyderabad

1


Measuring and Maximizing Customer Lifetime Value (CLV)

2


The Wheel of Fortune Strategies Used for Maximizing CLV

Acquiring Profitable Customers

Customer Selection

Preventing Attrition of Customers

Referral Marketing

Strategy

Linking Investments in

Branding to Customer Profitability

Pitching the Right Product,to the Right Customer, at

the Right Time

Managing Loyalty and Profitability

Simultaneously

MEASURING& MAXIMIZING CUSTOMER

LIFETIME VALUE

Linking CLV to Shareholder

Value

Product Returns

Future of Customer

Management

Cross - Buy

Source: Kumar, V., “Managing Customers for Profits”, Reprinted 2009, The Wharton School Publishing

Optimal Allocation of

ResourcesManaging

Multi-channel Shoppers

Interaction Orientation

3


Improvement over the currently usedShare of Wallet approach

• The Share of Wallet approach yields the following classification of customers and their average profits.

• However a cross analysis of Share of Wallet and Customer Value indicates that a superior approach can be adopted by identifying more responsive and profitable customers who may have escaped attention when only the Share of Wallet approach is followed.

$19,490

(n=113)

$94,437

(n= 103)

Share of Wallet

Average Profit

Low High

4


Customer Value versus Share of Wallet: Distribution of customers

N=61

Average Profit =

$ 35,317

N=48

Average Profit =

$ 201,695

N=52

Average Profit =

$925

N=55

Average Profit =

$830

High CLV

Low CLV

Low SOW High SOW

5


$19.2 M

Incremental revenue due to contacting

Incremental purchases from existing customers

Purchases from new customers

$7.68 M $11.52 M

40% 60%

How to induce incremental sales?

6


Marketing Dollars Potential Customers

What to sell? To whom? And when?

7


Q2 Q3 Q4 Q5 Q6Q1

Time

PredictedObserved Financial Services Industry

Product

Purchased ?Retirement

Online Services

WealthManagement

InvestmentServices

Research Issue: Purchase Sequence

8


Purchase Sequence for an average telecom customer

Television

Q2 Q3 Q4 Q5 Q6Q1

Time

PredictedObserved Telecommunications Industry

Product

Purchased ?

Mobile Phone Land Line Internet

9


Optimal Contact Strategy(B-to-C Financial Services Firm)

Pro

pen

sit

y D

ecil

es

Lowest

Credit Card Internet Banking Savings Account

Customer* Ranking based on Propensity to Purchase in Q4 2004 Highest

Madonna

Martha Stewart

Bill Cosby

Madonna

Madonna

Bill CosbyOprah Winfrey

* All names are fictitious and used hypothetically in this slide. It bears no resemblance to any living person by the same name.

Willie Nelson

Nelson Mandela

Michael Jordan

Tom Hanks

Jennifer Aniston

Martha Stewart

Martha Stewart

Willie Nelson Willie Nelson

Nelson Mandela

Nelson Mandela

Jennifer Aniston

Jennifer Aniston

Bill CosbyMichael Jordan

Michael JordanOprah Winfrey

Oprah Winfrey

Tom HanksTom Hanks

10

http://www.texaco.com/index2.html



Optimal Contact Strategy (B-to-B High Tech Firm)

Hardware Software Services

Customer Ranking based on Propensity to Purchase in Q4 2004

Pro

pen

sit

y D

ecil

es

Highest

Lowest

11



http://www.pepsi.com/current/frame_content_main_link.html

http://www.pepsi.com/current/frame_content_main_link.html

http://www.mobil.com/


http://www.walmart.com/

http://www.walmart.com/



http://www.cigna.com/index.html

http://www.cigna.com/index.html

http://www.gm.com/

http://www.gm.com/

http://www.chase.com/pages/chase

http://www.chase.com/pages/chase

http://www.eds.com/

http://www.eds.com/



http://www.gm.com/

http://www.gm.com/


What can we expect from a Customer-focused Sales Campaign?

• Higher Revenues

• Lower Marketing Costs

• Improved Relationship with clients

• Improved efficiency of campaign for customers with higher level of marketing investment

• Improved effectiveness for customers with lower level of marketing investment

12


Test Group: Customer-

focused Sales Campaign

Control Group: Product-

focused Sales Campaign

Financial Metrics

Revenue ($) 1,702*** (13,181)b 671* (13,252)

Marketing Investment ($) -2,190** (5,288) 30 (5,206)

Number of Contacts Before

Purchase

-6** (17) 2 (18)

Profits ($) 2,681*** (7,401) 654* (7,284)

Return on Investment 1.9*** (1.4) 0.11 (1.4)

Relational Metrics c

Firm Understands my Needs 3.58*** (4.92) -0.09 (4.96)

Firm Provides Good Value 2.74** (5.34) 0.12 (5.40)

Likely to Repurchase from the

Firm

3.52*** (5.42) 0.38 (5.36)

Likely to Recommend the

Firm

3.23*** (5.21) 0.42 (5.47)

Comparison within Test and Control Group (Telecom Industry)

13


Exploring the Dark Side of Cross-selling

14


Relationship between Customer Cross-buy (CB) and Profitability

B2B Financial

Service Firm

B2B IT Firm B2C Retail Bank B2C Catalog

Retailer

B2C High

Fashion Retailer

$53,135$12,185 $510

$10$135

$262,981

$48,883 $1200

$74

$702

$1,189,549

$559,686

$2400

$331

$990

No CB Low-Med CB High CB

• At the aggregate level, it is pretty clear that CB and Profit as positively related.• However at the individual level, we find that 10-35% of customers who partake in

cross-buying are, in fact, UNPROFITABLE.

15


Should you cross-sell or not?

Why do firms like to cross-sell to everycustomer who is likely to cross-buy?

• Aggregate level analyses

– The average profit of a customer increases exponentially with the level of cross-buy.

• AVERAGE PROFIT OF ALL CUSTOMERS ACROSS FIRMS OBSERVED OVER A TIME PERIOD OF 4 TO 7 YEARS.

$x

(WITH NO CROSS-BUY)

$5x

(WITH LOW TO MEDIUM LEVELS OF CROSS-BUY)

$23x

(WITH HIGH LEVEL OF CROSS-BUY)

Why firms should NOT cross-sell to everycustomer that is likely to cross-buy?

• Customer level analyses

– The majority of customer losses come from customers that cross-buy, with the amount of loss increasing exponentially with the level of cross-buy.

• AVERAGE LOSS OF UNPROFITABLE CUSTOMERS ACROSS FIRMS OBSERVED OVER A TIME PERIOD OF 4 TO 7 YEARS.

$-x

(WITH NO CROSS-BUY)

$-3x

(WITH LOW TO MEDIUM LEVELS OF CROSS-BUY)

$-24x

(WITH HIGH LEVEL OF CROSS-BUY)

16


Business Problem

Can customers who willingly purchase additional products and/or services from a firm be unprofitable?

• If so, what factor(s) can potentially characterize customers with unprofitable cross-buy?

• Can the collective action of such customers substantially impact the firm’s bottom-line over time?

17


Factors that characterize the unprofitable cross-buyers (1)

Problem Segment 1: Eternal service demanders

• Persistently demand excessive customer service through various channels such as phone and/or personal interaction.

• Exhibit a higher frequency of customer service requests.

Problem Segment 2: Frequent revenue reversers

• Frequently generate revenue reversals for the firm.

• In the case of firms selling products, revenue reversals typically happen through product returns.

• In the case of firms selling services, revenue reversals can happen through premature termination of services or defaulting on loans.

18


Factors that characterize the unprofitable cross-buyers (2)

Problem Segment 3: Persistent promotion maximizers

• Tend to be price sensitive.

• Tend to selectively purchase products that are steeply discounted by the firm.

• Consequently, the more steeply discounted products they purchase, the more likely they are to result in low or negative margins for the firm.

Problem Segment 4: Perpetual limited spenders

• Have a small share-of-wallet with the firm (or) size-of-wallet.

• Upon cross-buying, these customers merely reallocate their limited fixed spending amount across a greater number of products of the firm.

19


What proportion of your customers are in the PROBLEM SEGMENT?

6%9%

58%

27%

B2B IT firm

22%

47%

31%

0%

B2C Retail bank

24%

61%

3% 12%

B2C catalog retailer

51%

24%

6%

19%

B2C fashion retailer

67%4%

29%

0%

B2B Financial Firm

Perpetual Limited Spenders

Frequent Revenue Reversers

Eternal Service Demanders

Persistent Promotion Maximizers

20


Business Problem

Can customers who willingly purchase additional products and/or services from a firm be unprofitable?

• If so, what factor(s) can potentially characterize customers with unprofitable cross-buy?

• Can the collective action of such customers substantially impact the firm’s bottom-line over time?

21


Analyzing Customer Profits over time

22


How to smart-sell to maximize profit

Customer Database

Customer likely to engage in unprofitable

cross-buying?

Is the customer likely to cross-

buy?

Predictive Analytics (e.g., statistical cross-

sell models)

YES

NO

Analyze underlying

customer behavior & customer

characteristics

CROSS-SELL

NO-SELL

MAXIMIZE CUSTOMER PROFITS

NO

YES

23


Linking Acquisition & Retention to

profitability

24


Acquisition & RetentionAcquisition Effort

Retention

Effort

High

Low

HighLow

Easy to acquire and difficult to retain

Difficult to acquire and difficult to retain

Easy to acquire and easy to retain

Difficult to acquire and easy to retain

Ideal Customers??

25


Conceptual Framework

-Firm actions

-Customer actions

-Competitor actions

-Customer characteristics

Acquired

CustomersCustomer

Profitability

Relationship

Duration

Prospects

Non-acquired

Customers

Offensive Process Defensive Process

26


Single-framework “ARPRO” Model

Relationship

Duration

Customer

ProfitabilityAcquisition

Likelihood

Firm actions

-Acquisition expenditures

-Contact mix

Customer actions

-Customer-initiated contacts

Customer characteristics

-Industry type

-Annual revenue

-Firm size (Employees)

Firm actions

-Retention expenditures

-Contact mix

Customer actions


-Cross-buying

-Frequency

Competitor actions

-Share-of-wallet (SOW)

Firm actions-Acquisition expenditures

-Retention expenditures

-Contact mix

Customer actions


-Cross-buying

-Frequency

Competitor actions

-Share-of-wallet (SOW)

27


High Maintenance

Customers

25% of Customers

15% of Profits

Royal Customers

28% of Customers

25% of Profits

Casual Customers

32% of Customers

20% of Profits

Low Maintenance

Customers

15% of Customers

40% of Profits

Low

Retention Cost

HighLowAcquisition Cost

High

Acquisition versus Retention Strategy

28


Typical Airline Traveler Profile

Customer Segments

Customers who have flown at least once for

the last 12 months

Customers who used to fly but didn’t fly for the

last 12 months

Customers who have never flown with firm

Inactives

Virgins

Actives

29


Recruit the Look-alikes

• Armed with the profile of the high-value customer, go into the prospect pool

• Look for the look-alikes!

30

Source: NBC News


Company

How much more or less

should be spent

on direct marketing to reach

optimal levels?

How much profits would

increase

if spending on direct

marketing were optimal?

B2B

-68% 42%

Pharmaceutical

31% 36%

Catalog Retailer

-31% 29%

Optimizing Direct Marketing ExpendituresHow Right or Wrong Can You Be?

31

Source: J. Thomas, W. Reinartz, and V. Kumar, “Getting the Most Out of All Your Customers,” Harvard Business Review, July-August 2004: 116-123.


Methods and Tools for Acquisition

• Measuring Metrics and accounting for acquisition

– Computing acquisition equity

1. Determine the number of prospects

2. Measure the marketing and servicing costs associated with contacting and

selling to the prospects

3. Determine number of prospects who became customers

4. Compute sales revenue and gross margin for the new customers’ first set of

purchases

5. Compute acquisition equity of the entire pool of customers by subtracting the

costs in step 2 from gross margin in step 4

6. Divide the total acquisition equity by the number of customers to determine the

average acquisition equity per customer

32


Computing Acquisition Equity – Example 1

33

Number of prospects = 10,000

Acquisition cost per prospect = $0.50

Response rate = 4%

Average Sales Revenue from first sale = $40

Gross margin = 40% of Sales Revenue

Computation

Number of prospects who became customers = 0.04*10,000 = 400

Total acquisition cost = 10,000*0.50 = $5,000

Sales revenue = $40 * 400 = $16,000

Gross Margin = 40% of Sales = 0.4 * 16,000 = $6,400

Acquisition equity = 6,400 - 5,000 = $1,400

Average acquisition equity per customer = $1,400/400 = $3.5


Computing Acquisition Equity – Example 2

34

Number of prospects = 20,000

Acquisition cost per prospect = $1

Response rate = 6%

Average Sales Revenue from first sale = $60

Gross margin = 45% of Sales Revenue

Computation

Number of prospects who became customers =

Total acquisition cost =

Sales revenue =

Gross Margin = 45% of Sales =

Acquisition equity =

Average acquisition equity per customer =

0.06 * 20,000 = 1,200

20,000 * 1 = $20,000

$60 * 1,200 = $72,000

0.45 * 72,000 = $32,400

32,400 – 20,000 = $12,400

$ 12,400/1,200 = $10.33


Assignment 3:In-class Customer Acquisition Equity

Calculation

35

www.drvkumar.com© Dr. V Kumar 36

Documents

Gaining Competitive Advantage through Engagement Strategy · 21/4/2018 · Richard and Susan Lenny Distinguished Chair & Professor of Marketing, ... Center for Excellence in Brand