Chapter 7

Customer Relationship Management

CRM
 Learning Objectives
 Marketing review
– Define relationship marketing
– Explain six major differences between mass marketing
and relationship marketing
 Tell how the Internet can build relationship with
four major stakeholders
 Differentiate and give examples of three levels of
relationship building for Internet marketers
 Define CRM by explaining its processes
 Explain the benefits of CRM to consumers and
firms
 Learning Objectives
 Tell why effective CRM involves SCM
integration
 Identify several metrics used to measure CRM
 Discriminate between incoming and outgoing e-
mail for relationship building
 Discuss several small segment Internet CRM
tools
 Describe several individual Internet CRM tools
 Describe how intranets, extranets, and e-mail are
used to build relationship with stakeholders
 The Amazon Story
 Jeff Bezos is the founder and CEO of
Amazon.com

 The key to Amazon’s success:

⇒ Using technology to build relationships and brand
loyalty both with the customers and the partners

 The problem:
⇒ Customers are skeptical when it comes to purchasing
and giving their credit card number online
 The Amazon Story
 The solution: add value by
⇒ Treating customers as individuals,
⇒ Anticipating their needs,
⇒ Building relationships

 The relationship that Bezos build with his customer would

turn out to be much greater than any small bookstore could
create:
• A personal greeting would appear when you entered the web site.
• Recommendations based on their past purchases were also available
upon logging on.
• Recommendations were also available based on the mood of the
customer.
• New releases.
• A message board was also created, in order to allow other customers
to chat with one another.
 The Amazon Story
 The Amazon’s customer:
– 44% of Amazon’s customers are repeat purchasers
– Customers tend to be more loyal online then offline:
in the online world all retailers are all an equal
distance away

 Amazon also builds relationships with affiliates

(Site Partners):
– Amazon rewards their affiliates with up to 15%
commissions for every customer referred to Amazon.
– This is monitored by a monthly report displaying
connection times between sites.
 Building Customer
Relationships, 1:1
 The key: Treat customers like friends

 The old fashioned way:

– Rina’s Salons
• When a customer calls or comes in the store, she tries to build a
personal relationship with that individual. This will bring the
situation into a personal level, rather than business.

• Rina doesn’t push a specific product but, instead suggests a solution

based upon her understanding of the client and their needs.

• Rina’s Salon develops long term relationships one at a time, rather

then the ones created in the early 1900’s.
 Building Customer
Relationships
 A major shift in marketing thought:
– from mass marketing to individualized marketing
– From focus on acquiring lots of new customers to
retaining and building more business with fewer
loyal high-value customers
– Goal: build long-term relationship, 1:1

 A firms ability to build and maintain relationships

with customers, suppliers, and partners may be more
important than the firms land, property, and financial
assets.
 Relationship Marketing
 “Establishing, maintaining, enhancing, commercializing
customer relationships through promise fulfillment”

 Building long-term profitable relationships with mutual

benefit

 Tool: promise fulfillment => customer satisfaction

• Domino’s Pizza ads claim 30 minute delivery of
pizza’s.
• Amazon promise’s some books to be delivered in 2
days, a customer will be satisfied if this promises
are met.
 Building Customer Relationships:
Relationship Marketing
 Today, relationship marketing involves much more than
promise fulfillment
⇒ It’s about maintaining and enhancing

 The companies focus on customers and differentiate

individual customers based on their need rather than
differentiating products for target group.
 Mass marketing Relationship marketing

Discrete transactions Continuing transactions

Short-term emphasis Long-term emphasis

Two-way communication /collaboration

One-way communication

Acquisition focus Retention focus

Share of market Share of mind

Exhibit 7 - 1 Continuum from Mass Marketing to Relationship Marketing

 Stakeholders
 The main idea in relationship marketing:
– A firm’s profitability increases by satisfying
individual needs, one at a time

 Relationship marketing is also used to build

mutually supportive environment with
stakeholders other than consumers:
– Employees
– Business customers in the supply chain
– Lateral partners
– Consumers
 Relationship Levels
 Relationship marketing is practiced on
three levels.

 The strongest relationships are formed:

– If all three levels are used
– If the product itself satisfies buyers
 Potential for
Sustained Main Element
Primary Bond Competitive of Marketing
Level Advantage Mix Web Example

One Financial Low Price www.cdnow.com

Two Social Medium Personal www.palmpilot.com

Build 1:1 communications
relationships
Build
community

Three Structural High Service delivery my.yahoo.com

Exhibit 7 - 2 Three Levels of Relationship Marketing

Source: Adapted from Berry and Parasuraman (1991)
Subject: Free Upgrade to Palm(TM) Desktop 3.0 Ready to Download
Date: Fri, 31 Jul 1998 00:31:36 PDT
From: InSync Online <SjzZk.2@insync-palm.com>
To: Judy Strauss straussj@ccsu.edu

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 Customer Relationship
Management
 What is CRM?

– A holistic process of identifying, attracting, differentiating,

and retaining customers

– It’s more than simply listening to customers or providing

better products and customer service

– It’s integrating a firm’s entire supply chain to create

customer value at every step
 CRM stakeholders
 End users (i.e., consumers or businesses)

 Use of CRM Applications to Benefit

Stakeholders:
One use would be to integrate incoming e-mail and
telephone call inquiries from a single consumer so that
customer service representatives can understand the
entire picture.
Role of Technology in CRM
 The Internet & other technologies form as the
centerpiece of a firm’s CRM abilities.

 Tools to Collect Data on Customer Behaviors

and Characteristics:
• Cookies
• Web site logs
• Bar code scanners
 Role of Technology in CRM
 Storage and Distribution Tools used to Develop
Marketing Mixes:

• Databases
• Data warehouses

 Provide Limited Customer Access to Company

Databases to Acquire:

• Product
• Pricing
• Account information
 CRM Process Steps

1 . Ide ntify

Interaction 3. Cu stom ize

2. Differe ntiate

Exhibit 7 - 4 CRM Process

 1. Identifying customers
 Firms gather information about customers from:
– Sales force
– Customer service encounter
– Bar code scanners at retailer
– Web site activity

 Firms obtain prospect, business customer, and

end consumer information through:
– Personal disclosure
– Automated tracking
 2. Differentiating Customers
 Companies differentiate customers by:

• Similarities and differences in groups and

individuals

• Customer value: 20% of the customers provide 80%

of the profits

• Lifetime Value (LTV) – the total value of the

customer over that customer’s lifetime (e.g., parents
influence their children’s purchasing patterns)
 3. Customizing
the Marketing Mix
 Mass Customization:

• Marketing communication messages tailored to individuals

and delivered over the Internet in a timely manner.

• Customers who can customize to meet their individual needs

are more likely to use that company’s products and services
over time.

• Examples:
– Amazon.com customers receive book recommendations
via e-mail.
www.amazon.com
Exhibit 7 - 5 Dell Inspiron: Configuration Options
Source: www.dell.com
 Interaction
 It allows companies to collect the data necessary for
identification and differentiation, and to evaluate the
resulting customization effectiveness on a
continuous basis.

= “learning relationship”

 The idea is that both the firm and the customer learn
from each experience and interaction
⇒ Increase trust & loyalty
 CRM-SCM Integration
 It refers to “front-end” operations

 It means that firms work to create satisfying

experience at all customer touch point.

 A good customer service is not enough but

technology allows the linkage of :
– the e-tailer’s “back end” (e.g., Supply Chain
Management - inventory and payment)
– with the “front end” (e.g., customer media
interactions)
⇒The entire supply chain can work together to single-
minded focus on meeting consumer needs
 Employees

Information
Partners CRM Staff
Backbone

Customers and Prospects

at Various Touch Points

Suppliers

Exhibit 7 - 6 CRM–SCM Integration

 CRM-SCM Integration
 Advantages:
• All firms will share transaction data so that
inventories can be kept low.

• Upstream firms can use the data to design products

that better meet consumer needs.

• If customer service representatives have constant

information about product inventories, they will be
able to better help consumers on-the-fly.
CRM Benefits: Increased Profits
• CRM is cost effective:
– Less expensive to retain one customer than to acquire one
– Less expensive to sell more products to one customer than
to sell the same amount to 2 customers
– Reduced promotion costs

• Not only does a firm have to acquire and retain customers, but
they also have to increase the amount purchased by each
customer.
– www.amazon.com - Cross-sells by offering music, videos,
and toys to it's book customers
– CDNow - E-mails special offers to it's customers to repeat
business with them.
 Acquisition Emphasis Retention Emphasis

Gain 6 new $3,0 Gain 3 new $1,500

customers 00 customers
($500 each) ($500 each)
Retain 5 current $ Retain 20 current $2,000
customers 500 customers
($100 each) ($100 each)

Total cost $3,5 Total cost $3,500

00

Total number of 11 Total number of 23

customers customers

Exhibit 7 - 7 Maximizing Number of Customers

Source: Adapted from Peppers and Rogers (1996)
 Total Retention Total Net NPV at 10-Year

Year Customers Rate Revenue Profit 15% LTV

1 1,000 60% $35,900 $ 5,900 $ 5,900 $ 66.94

2 600 65% 45,540 27,540 23,948 118.12

3 390 70% 29,601 17,901 13,536 129.15

4 273 75% 20,721 12,531 8,239 138.35

5 205 78% 15,541 9,398 5,373 143.45

6 160 79% 12,122 7,330 3,645 145.55

7 126 80% 9,576 5,791 2,504 146.81

8 101 80% 7,661 4,633 1,742 146.81

9 81 80% 6,129 3,706 1,212 146.81

10 65 80% 4,903 2,965 843 146.81

Exhibit 7 - 8 Customer Lifetime Value (LTV)

Source: Adapted from Peppers and Rogers Group at www.1to1.com
CRM Benefits: Increased Profits
– CRM Metrics

• Lifetime value (LTV) – net present value of the revenue stream for any
particular customer over a number of years.

• Average order value (AOV) – dollar sales divided by the number of orders for
any given period. This figure may increase over time as loyal customers
purchase more per order.

• Recency, frequency, monetary analysis (RFM) – identifies high value

customers.

• Average annual sales growth for repeat customers over time.

• New customer acquisition cost.

• Current customer retention cost.

 CRM Benefits: Increased Profits
– CRM Metrics

• Profits current customer retention cost per customer, and high-

value, low-value comparison.

• Share of customer spending – proportion of revenues from

high-value customers as compared to low-value customers
(e.g., the top 20% should provide over half of the firm’s
profits).

• Percentage of customer retention – proportion of customers

who repeat purchase.

• Rate of customer recovery – proportion of customers who drop

away that the firm can lure back using various offers.

• Price premium – savings by not having to offer discounts to

current loyal customers.
CRM Benefits: Increased Profits
– CRM Metrics

• These and other metrics are used to identify loyal

customers and evaluate their worth to the firm.

• With this information, firms attempt to increase

retention rates, reduce defection rates, and build
AOV and profits per customer over time.

• Many successful firms use some of these methods to

identify the least profitable customers and minimize
interactions with them which saves time spent on
them.
CRM Benefits: Increased Profits
Word-of-mouth Communication and Referrals

• Known as the heart of CRM.

• One research study reported that each

dissatisfied customer tells 10 people about the
unhappy experience, and 13% of dissatisfied
customers each tell 20 people about how bad
the company/products were.

• Main forms of word-of-mouth communications

on the internet are of e-mail, newsgroups, chat,
and personal Web pages.
Subject: [Fwd: Fwd: FW: Free Stock!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!]
Date: Thu, 18 Jun 1998 14:21:30 -0400
From: Jeff Jacobs <jacobs@xx.net>
To: dailey@xx.com, mp_word@xx.com, na@xx.com, Nicole@xx.com,
SBailey@xx.com, m3raf@xx.com, M3ros@xx.com
CC: weidler@xx.net, herbr@xx.com, jack@xx.com, br01@xx.net,
Straussj@ccsu.edu,
lchristen@xx.com, boyken@xx.com, leslie @xx.com

This appears to work. I tried just a couple of times and was able to get registered
for my three shares of stock. When you register, please input my email address
“jacobs@xx.net” so I can qualify for more shares!
Good luck!
Jeff

-------------------------------------------
Subject: Fwd: FW: Free Stock!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
Date: Wed, 17 Jun 1998 18:23:24 EDT
From: <JBasin@xx.com>
To: Sutliff@xx.com, Hooper@xx.com, DEVADOBE@xx.com, s3cott@xx.net,
steven@compuserve.com, jacobs@xx.net
 
This is really easy and if it works it could be fun. Remember to use my name
jbasin@xx.com when you sign up. I had to try two or three times yesterday to
sign up so keep trying.

-------------------------------------------
Subject: Fwd: FW: Free Stock!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
Date: Mon, 15 Jun 1998 21:49:08 EDT
From: Sheets@xx.com
To: EULYS@xx.com, JBasin@xx.com, NyrDreams@xx.com, Ltllady@xx.com,
Pozas@xx.com,
Exhibit 7 - 9
ROBINSON@xx.com Word of Mouth
Hi, try this if you’re interested, but be sure to use my email address: via E-Mail
sheets@xx.com
CRM Benefits: Increased Profits
Partnership Synergy:
The joining between two or more firms in a business
relationship often exceeds what each firm might have
accomplished alone.

http://www.amazon.com
- Amazon sells more books because of its additional
thousands of points of sale at partner Web sites.
- Through the Amazon relationship, each affiliate can offer
added value to customers without incurring the expense of
entering electronic commerce.
- Each partner also receives additional revenue from Amazon
with virtually no expenses. A “win-win” situation for both
partners.
 CRM Benefits:
Benefits to the Customer
– The average customer desires brand loyalty
as much as the firms they patronize.

– From a consumer’s perspective the basic

tenet of CRM is choice reduction.

– Consumers want to patronize the same

store, mall, and service providers
⇒ It’s more convenient
Internet Strategies Facilitating
CRM
 Eight critical factors for building successful e-
business relationships with customers from Patricia
Seybold (1998) www.psgroup.com

• Identify the best prospects and learn everything about them

• Own the customer’s total experience; share of mind
• Streamline business processes that impact the customer; CRM-SCM
• Provide 360-degree view of the customer relationship
• Let customers help themselves; provide Web sites
– www.usps.com/moversnet
– www.cbwwrealty.com
• Help customers do their jobs; B2B
• Deliver personalized service; marketing mix
• Foster community; build loyalty
– www.espn.go.com
 Internet Strategies Facilitating
CRM
 Technology used to implement these
strategies:
• Incoming toll-free numbers
• Electronic kiosks
• FAX-on-demand
• Voice mail
• Automated telephone routing
 Internet Strategies Facilitating
CRM: Customization Tools
 Firms tailor their marketing mixes to meet the needs of
small target segments, even to the individual level, using
electronic marketing tools.
Customization = Personalization

 E-marketing allows efficient automated customization to

an individual business customer or one final customer
on-the-fly and 24 hours a day.

 It is through customization that firms zero in on the

precise needs of each prospect and customer and, thus,
building long-term profitable relationships.
Internet Strategies Facilitating
CRM: Customization Tools
– Example:
• Web pages that greet users by their name
• e-mail that is automatically sent to individuals with
personal account information

– Mass Customization is the Internet’s ability to individualize

marketing mixes electronically and automatically to the
individual level.
• can be initiated by an organization (company-side) or by a
customer (client-side)
• can be examined at two levels: small segments and
individuals

www.walmartstores.com/supplier/supplier_requirements.html
 Level

Small Segment/Group Individual

Company-Side Collaborative filtering Cookies

Tools Data mining and Web log analysis
(push) profiling Real-time profiling
Outgoing e-mail Outgoing e-mail

Client-Side Tools Agents Individualized Web

(pull) Experiential marketing portals
Wireless data services
Web page forms
FAX-on-demand
Incoming e-mail

Exhibit 7 - 4 Selected E-Marketing Customization Tools

 Internet Strategies Facilitating
CRM
Small Segment Customization: Company-side Tools

• Collaborative filtering software: recommendations about

movies, sports, travel, etc. from like-minded users in cyberspace
and returns these opinions to the individual in real-time.
www.bid.com

• Data mining: extraction of hidden predictive information in large

databases through statistical analysis- simply ask the software to
find patterns of interest. Nissan & E.piphany

• Customer profiling: data warehouse information to help marketers

understand the characteristics and behavior of specific target
groups. American Express

• Outgoing e-mail from firm to customer: used to build

relationships by keeping in touch with information that is useful
and timely for users.
www.travelocity.com / www.expedia.com
Exhibit 7 - 5 MyPoints Rewards Members for Time Spent Online
Source: www.mypoints.com
 Internet Strategies Facilitating
CRM
Small Segment Customization: Client-side Tools

• Agents: programs that perform functions on behalf of the

user.

• Shopping agents and search engines: match user input to

databases and return customized information. Inference’s
k-Commerce

• Experiential marketing: gets the customer involved in the

product to create a memorable experience. “NikeTown”
 Internet Strategies Facilitating
CRM
Individual Customization: Company-side Tools

• Cookies: small files written to the user’s hard drive after visiting a Web
site that the site recognizes each time the customer returns and uses it to
personalize the site. www.amazon.com

• Web site log: a file that keeps track of which pages the user visits, how
long he stays, and whether he purchases or not.

• Real-time profiling: special software tracks a user’s movements through a

Web site, then compiles and reports on the data at a moment’s notice
www.tokyopop.com

• Outgoing e-mail:communicate with individuals and attempt to increase

their satisfaction and loyalty www.hallmark.com / www.onsale.com
 Internet Strategies Facilitating
CRM
Individual Customization: Client-side Tools

• Individualized Web portals are created by the user when registering at a

Web site www.my.yahoo.com

• Wireless data services: tailored to customers with cell phones, pagers,

and PDAs which can receive wireless Internet transmission.
www.datacastnews.com

• Web forms: technical term for a Web page form that has designated places
for the user to type information. www.Travelocity.com

• FAX-on-demand: works like this: Customers telephone a firm, listen to

an automated voice menu, and through selecting options request that a
FAX be sent on a topic of interest.

• Incoming e-mail:e-mail inquiries, complaints, or compliments initiated by

customers or prospects. In a 1997, only 62% of the firms responded to e-
mail complaints.
Exhibit 7 - 6 Complaint Web Form at the FTC
Source: www.ftc.gov
 Internet Strategies Facilitating CRM:
Building Partnerships Using Community

 “Groups of people or employees with similar

interests and tasks”

 Result:
• A company who brings a community together can
present products and messages customized to the
group interests and have the community forge
relationships with the company.
 Internet Strategies Facilitating CRM:
Building Partnerships Using Communities
 Communities Come From:
• Chat rooms
• Discussion groups
• Bulletin boards
• Distributed e-mail lists
• Intranets and Extranets

• Examples:
• College Club provides e-mail, chat rooms, etc. for college students. www.
collegeclub.com
• Deja provides web access to the Usenet with its over 35,000 special interest
bulletin board discussion groups. www.deja.com
• SAP user community portal, includes many web pages of “best practices for
12,000 companies and 10 million professionals using SAP software.
www.sap.com
 Internet Strategies Facilitating CRM:
Building Partnerships Using Communities
 Nine Principles for Building Good
Communities:

2. Define Community Purpose – mission statement, identify target

market, create a strong site personality
3. Create Extensible Gathering Places – provide a good map, include
rich communication features, all members to extend the
environment
4. Create Evolving Member Profiles – communicate the benefits of
membership, make profile creation easy and as fun as possible,
keep profiles up-to-date and evolving
5. Promote Effective Leadership & Hosting – set-up your program to
grow, build some flexibility into the house rules, & set reasonable
expectations for online support.
 Internet Strategies Facilitating CRM:
Building Partnerships Using Communities
1. Define a Clear / Flexible Code of Conduct – create and enforce
your code of
conduct and do not try to stifle all conflict.
2. Organize & Promote Cyclic Events – hold regular, hosted,
themed events, conduct community surveys, and hold contests
that reinforce the purpose.
3. Provide a Range of Roles – offer newcomers a controlled
experience, offer increased privileges to regulars, and recruit
leaders and mentors from within.
4. Facilitate Member-Created Subgroups – provide features that
facilitate small groups and create events an contests for groups
5. Integrate with the Real World – celebrate events that reinforce
social identity, acknowledge important personal events and
encourage real-life meetings (when appropriate).
 Internet Strategies Facilitating
CRM
 Intranet :
– A computer network established within an organization to
provide information internally to employees.

 Good CRM Principles:

– Netscape and Prudential Health Care created a Web-based
benefits management system for Netscape employees.
Employees use a password to access the HMO-approved
doctors, change primary care physicians, download claim
forms, etc.
– Many companies use the Lotus Notes e-mail system to
facilitate a collaborative work environment.
– Blaxxun Interactive Inc.’s 3-D software and avatar
technology allows companies to present new products to
business partners meeting all over the globe.
 Internet Strategies Facilitating
CRM
 Extranet:
– Two or more networks that are joined for the
purpose of sharing information.

 Good CRM Principles:

– Electronic Data Systems (EDS) created an innovative
extranet call the Renasence Channel, which links
desktops of its suppliers, clients, and employees in a
500,000 computer electronic marketplace
– Forty suppliers selling over 2,000 software products
fund the private network by paying $25K to $100K
each to display their products and services in a catalog-
type format.
 Internet Strategies Facilitating
CRM
 Chats, Bulletin Boards and Distributed E-mail
– Uses:Analysis of chats, bulletin boards and
e-mail postings is aggregated to design
marketing mixes that meet user needs.
Example:
• If many people log onto a Caribbean Chat at Expedia,
it might feature special tours to Caribbean Islands
during the next week.
www.expedia.com
• Expedia also send e-mail messages to chat room
participants and offer special tours.
 Internet Strategies Facilitating
CRM
 E-mail Distribution Lists Uses:
• Some companies maintain e-mail distribution lists for
customers and other stakeholders.
Example: The ELMAR e-mail distribution lists keep
academics up-to-speed on teaching and research issues
in the field.

• Communities of Ex-employees are being created –

especially in the Technology industry.
Example: A Microsoft Alumni Network is made up of
2,500 former Microsoft employees who pay $100
annually to be a part of this nonprofit group.
 Guarding Consumer Privacy
 CRM is based on trust:

– Implement a privacy policy that factors in the goals of

firms Web site and consumer’s privacy anxiety.

– Notice and disclosure of collection and use should be

posted.

– Give users choice and consent over how their personal

information is used and shared.

– Putting data security and quality and access measures in

place to safeguard, update, and correct personally
identifiable information.
Review Questions
 1. Define relationship
marketing and compare it with
mass marketing.
Question 1:

Relationship marketing differentiates individual

customers based on need rather than differentiating
products for target groups. It is about promise fulfillment
and two-way communication with individual
stakeholders, one at a time (1:1). Mass marketing by
contrast differentiates products for entire populations.
2. Discuss the three levels of
relationship marketing.

Tell which strategies are

appropriate at each level.
Question 2:

Level 1 has a financial bond and uses pricing

as a strategy.

Level 2 has a social bond and uses personal

communications as a strategy.

Level 3 has a structural bond and uses

service delivery as a strategy.
3. What are the three steps in
the CRM process?

How can each be

accomplished?
Question 3:

CRM first involves research to gain insights

to help identify current and potential
customers.

The second step is to use that information to

differentiate among individual customers,
especially focusing on differences between
high-value and low-value customers.

Finally, firms customize marketing mix

offerings to meet the needs of individual
customers. The Internet can be used to
accomplish each step.
4. What are the advantages to
CRM-SCM integration?

Be sure to give an example in

your explanation.
Question 4:

Connecting customers with supply chain

businesses provides several advantages.
First, all firms will share transaction data so
that inventories can be kept low. If producers
and wholesalers have constant data about
consumer orders, they will be able to
produce goods in a timely manner. Second,
upstream firms can use these data to design
products that better meet consumer needs.
For example, books and short videos have
already been co-created with customers.
Third, if customer service reps have constant
information about product inventories, they
will be able to better help consumers on-the-
fly. While catalog firms are already fairly
accomplished at this, it breaks down when
5. Why should firms employ
CRM?

What advantages does the

CRM firm’s customer enjoy?
Question 5:

CRM is cost-effective. This is true both

because it is less expensive to retain one
customer than to acquire one, and because it
is easier and less costly to sell more products
to one customer than to sell that same
amount to two customers.

Another benefit of CRM is the positive word-

of-mouth communication spread by satisfied
customers. Finally, in the B2B market, when
two firms join forces and create a strong
market relationship, synergy occurs.
6. Identify several metrics used
to measure CRM effectiveness.

Which one or two do you think

are most important?
Question 6:

• Lifetime value (LTV)—net present value of the

revenue stream for any particular customer over a
number of years. (A good candidate for most
important.)
• Average order value (AOV)—dollar sales divided by
the number of orders for any given period. This figure
may increase over time as loyal customers purchase
more per order.
• Recency, frequency, monetary analysis (RFM)—
identifies high value customers. (A good candidate for
most important.)
• Average annual sales growth for repeat customers
over time.
• New customer acquisition cost.
• Current customer retention cost.
• Profits current customer retention cost per
Question 6:

• Share of customer spending—proportion of

revenues from high-value customers as compared to
low-value customers (e.g., the top 20% should provide
over half of the firm’s profits).
• Percentage of customer retention—proportion of
customers who repeat purchase. (A good candidate
for most important.)
• Rate of customer recovery—proportion of customers
who drop away that the firm can lure back using
various offers. For example, many people let
magazine subscriptions expire and subsequently can
be won back.
• Referral revenue—dollars in sales from customers
referred to the firm by current customers.
Price premium—savings by not having to offer discounts to current
loyal customers.
 7. Explain how data mining,
profiling, collaborative
filtering, and outgoing e-mail
help firms to customize
offerings.
Question 7:

These techniques are initiated by firms and

used to understand customer behavior and
characteristics, and then to “push”
customized product, price, and distribution
information, including promotional messages
to customers.
8. How are company-side and
client-side customization tools
different?

Explain your answer.

Question 8:

Client-side customization tools are initiated

by the user whereas company-side tools are
initiated by the Web site. A client-side
example would be filling out a form
specifying your preferences whereas a
company-side example would be tracking the
user throughout the site in order to learn her
preferences. The difference is sometimes
referred to as explicit (client-side) vs. implicit
(company-side) customization.
9. How do cookies, real-time
profiling, and individualized
Web portals help firms
customize offerings?

How can a firm concerned

with privacy justify these
techniques?
Question 9:

Cookies are used to identify users on repeat

visits. Real-time profiling tracks a user during
the current visit. Individualized portals allow
users to customize content that they view on
the site. Firms concerned with privacy can
justify these techniques as long as they give
their customers notice and receive consent
prior to monitoring. It is also important to
provide value in exchange for information.
 10. Compare and contrast the
tools for customizing products
and marketing communication
messages.
Question 10:

  Level

  Small Individual
Segment/Group

Company-Side Collaborative filtering Cookies

Tools Data mining and Web log analysis
(push) profiling Real-time profiling
Outgoing e-mail Outgoing e-mail

Client-Side Agents Individualized Web

Tools Experiential portals
(pull) marketing Wireless data
  services
Web page forms
FAX-on-demand
Incoming e-mail
The End