Analytical CRM

PRESENTED BY-
ABHISHEK DUBEY
BALRAM
VAIBHAV GUPTA
JAY KUMAR NAHATA
 Topics covered in the presentation

■ Segmentation and selection

■ Retention and cross-sell analysis

■ Effects of marketing activities

■ Reporting results
Every customer is unique
 Every customer is unique

One-to-one marketing justifies this fact

Concept not realizable
Problems in approaching customers separately

Reasons
Capacity and customer insight to do this are
lacking
Benefits do not appear to justify the costs
Segmentation
 Segmentation

Dividing customers into

Distinct homogenous groups
Can be approached in specific ways

Common aspects
Needs and wants
Purchase behavior
Communication consumption
 Segmentation criteria

Used to divide up the market

Basis to identify or assign into groups

Groups are not profiled at this time

Buyer
User
Individual
Organization
 Kotler

1. Geographic
Postal code

2. Demographic
Age / Sex

3. Socio-economic
Social class / Education / Income
 Kotler

4. Behavior
Purchase
Communication

5. Psychographic
Lifestyle

6. Buying motives & purchase

considerations
 Anna

35 years old Drives a minivan

Married Works at home

Two children Subscribes to Sunday

newspaper, buys
Owns home occasional single-copy

Newcomer
Home value
$175,000
Interests:
$100,000+ HH
Food, Wine
income
Parenting
Reads Business
Week Travels out of state
& Sports Illustrated three times a year,
Plays tennis and golf international travel
once a year
 Bonoma & Shapiro

1. Demographic
Industrial classification / Co. size / location

2. Operating variables

Technology / User status / Customer support

3. Purchasing approaches

Organization / Nature of relationships maintained
 Bonoma & Shapiro

4. Situational factors

Urgency / Specific applications / Order size

5. Personal characteristics

Values and norms of employees
Risk attitude of customers
Loyalty to company
 Segmentation technique

Markets can be segmented in a number of

ways
Basis to identify or assign into groups

Choice
Number
Specific criteria
 Kotler

1. Measurability
Size / Purchase power/ Characteristics

2. Substantial
Segments are large and profitable
Largest homogenous group for a tailored
marketing program

3. Accessibility
Segments can be reached and served effectively
 Kotler

4. Differentiable
Conceptually distinguishable
Respond to different marketing stimuli

5. Actionable
Effective programs can be made for attracting and
serving customers
 Cluster solution

10

0
0 1 2 3 4 5 6 7 8 9 10
 Clustering

The art of finding groups in data

Objective
Gather items from a database into sets according to
(unknown) common characteristics
Much more difficult than classification since the classes
are not known in advance (no training)
 Profiling a segment

How to develop
Accurate
Complete
Current
Unique customer
profile

Important
Identification
Enriching profiles
Developing Marketing service concepts for each
segment

Segmentation
Aids in formulation of marketing strategy

Goal
Approach customer groups in differentiated manner
They become more satisfied and loyal
They spend more with the supplier
 Marketing service

Differentiation
Product range
Service
Price
Communication

Service concept can gain in quality

Who is the person ?
What motivates them ?
 Segmentation research

Objective
Who do we want to approach for a certain
marketing campaign activity
 Segmentation research

Three techniques
RFM : Recency Frequency Monetary Value
CHAID : Chi Squared Automated Interaction
Detection
CART : Classification And Regression Trees
 Recency Freq Monetary Value

Background

Historic behavior is better predictor than purchase

intention and attitude

Customers who spend most during certain period

may not do so during a new marketing campaign
 Recency Freq Monetary Value

Scores on three aspects

Last purchase date

Purchase frequency
Amount spent
 Last purchase

Scores ( weight 5 )

< 3 months : 20
3 – 6 months : 10
6 – 9 months : 3
> 12 months : 1
 Purchase freq / Amount

Purchase frequency ( weight 3 )

No. of purchase in last 2 – 4 years x 4
Maximum score of 20

Amount spent ( weight 2 )

10% of sum of purchase amounts in the last 2 years
Maximum score of 20
RFM Example
 RFM

Advantage
Past behavior is more accurate predictor
Uses transaction database

Disadvantage
Best buyers selected for promotion
They will experience excessive ‘Mail’ pressure
 2. CHAID

CHAID
Chi-squared Automated Interaction Detection

Produces a tree diagram

Creates categorization within each group
 CHAID

N = 240000
Response 4.36%

0-30 Min 30-60 Min

N = 80000 N = 160000
128% 86%

Registration Duration Folder Share

< 12 Years > 12 Years < 50% > 50%

N = 55000 N = 25000 N = 60000 N = 100000

150% 80% 105% 75%
CHAID
 3. CART analysis

CART
Classification & Regression Trees

Produces a tree diagram

Segment A is separated from Segment B
Segmentation variables applied to sub-divide
Retention and cross-sell analysis
Retention & Cross selling
 Retention & Cross selling

Retention question
Which customers run an increased risk of ending
relationship

Cross selling
Customers may be stimulated to buy another
product
Why retention ?
Customer satisfaction ?
Why retention ?
 Retention

Opportunity
Greatest gains may be realized
Closing back door costs less than enticing
customers with designer front door

Benefits
More than a cross-sell or a deep-sell exercise
Life time value is secured
 Retention

Meaning
Holding on to the customers

Determinant
Definition of former or current customers
Does someone become a departing customer at the
moment he / she no longer buys a certain product
Eg. Fairness cream
Retention
 MarketWhysTM

The Disposition Scale

INSIST The only brand consider using Proportion
of Preferrers
PREFER One of the brands I prefer using

INTEND Not one of the brands I prefer but would like to

try it
ACCEPT
I’d use it in certain circumstances only
NO OPINION

Heard of it but don’t know much about it

NOT AWARE

REJECT Never heard of it

Would never willingly buy it

Example - FAL
 Leakage analysis
Last
bght /
Last 12 Last 6 Last Last 12
Base : All random resp (503) mnts mnts Bought MOUB mnts
Any Fair & Lovely 90% 88% 77% 76% 85%
Fair & lovely Multi vitamin 75% 72% 61% 60% 81%
Fair & lovely Ayurvedic 27% 20% 11% 10% 43%
Fair Ever 12% 7% 4% 4% 37%
Fair One 12% 6% 4% 3% 31%
Fair One Plus Five 1% 0% 0% 0% 25%
Ponds white beauty 14% 9% 4% 4% 26%
Vicco Turmeric 16% 11% 5% 3% 29%
Any Garnier 10% 8% 5% 5% 54%
Fair & lovely Skin clarity 5% 3% 2% 2% 38%
Fair & lovely Active sun-block 3% 1% 1% 1% 31%
Emami natural fair 2% 1% 0% 0% 9%
 Share of usage

Last Bought Vs Next FAL FAL Multi Fair

Purchase Ayurvedic Vitamin Ever Fair One Garnier
Base:All 53 303 21 80 31
FAL Ayurvedic 91 1 0 1 3
FAL Multi Vitamin 9 96 0 3 3
Fair Ever 0 0 95 1 0
Fair One 4 3 0 98 13
Garnier 2 0 0 0 87

• FAL Multivitamin is successful in

attracting users of other brands.
 Variables

Need of reliable data

Only name, address etc. will not be enough
Intense interaction required
During relationship, need is to think of data that will
predict churn

Data availability and quality plays a critical

role
 Reasons for not continuing use of Fair One
Base: Respondents who have used in the last 1
37
yr, but not bought on last occasion
Product Issues 62%
Skin remains dry 27%
Doesn't make skin soft 5%
Smell is not good 5%
Oiliness remains on face 5%
Face is not clean after using it 3%
Has more bleach 3%
Gives patch look -
Cream stick on the faces -
Cream is not soft -
Causes side effects 24%
Causes rashes 14%
Causes wrinkles 5%
Causes side effects 3%
Does not make you fair 3%
Causes Pimples/Acne/Spots -
Have skin problems after using it 3%
Causes spots on face 3%
Others 22%
Satisfied with my regular brand 11%
Causes sweat 5%
New Cream -
Does not suit my skin 5%
Prefer Other Brands Page 47
 Investment company

Data requirement
Investment behavior
Number of different products purchased by
customer
Financial climate
Rate of return
Customer satisfaction
Investment objectives
Communication behavior
 Examples

Loss in stock market

Investor 1 - Invest in bank FD
Investor 2 – Invests more in equity

Differences
Active & non-active customers
Loyal & disloyal customers
Sedtec
Managing complaints
Cross-selling
 Cross-selling

Definition
Sale of products to current customers who are
already purchasing one or more products

Growth phase
Engaging in cross-selling ensures continuity and
further development of relationship
 Cross -selling

Opportunity
Reduces likelihood of a customer ending the
relationship prematurely

Benefits
Transaction profit
Boost to relationship
 Cross –selling - POV

Product
List of existing customers with history of
purchasing certain offering

Client
When customer contacts organization, it is possible
to estimate which product has best chance of being
cross-sold
 Cross-selling over time

More than one of same product in

contact
2 life insurance policies

Two or more of different products in

contact
Home insurance
Life insurance
Howz that ?
Effects of marketing
activities
What response ?
What response ?
 Basic question

How do we measure response of

marketing activities

How many people respond to a mail, a phone call

or an invitation on a website ?
Did it have a positive effect on customer value ?
Different responses ?
 Marketing activity

Selection of customers critical for

Cross-selling
Retention

Goal : Serve customers

Standardised marketing approach
 Sales process analysis

+/- 180 10 3 1

Order
Select 1st Quotation
Data Call for Visit Call
base appointmen Negotiation
t

Sales lead time – 10 weeks

 Sales – Transaction perspective

Order
Select 1st Quotation
Data Call for Visit Call
base appointmen Negotiation
t

■ Critical
 Logic of step in the sales process
 Conversion between the steps through time
 Allocation of resources at each step
 Marketing or sales cost of transaction
 How to increase value

Increase effectiveness of sales /

marketing

Ways to shorten throughput time of the sales

process ?
Eliminate one step to speed up the process ?
Can we make better selection of prospects ?
Will training of sales people help increase
conversion rate ?
Have we applied the appropriate channels ?
 Effectiveness of targeting

A step to relationship marketing

Who do we select for a specific sales process ?

Benefits
Allocation of marketing and sales resources to
segments, products, acquisitions of new customers
and retention of existing customers
Effectiveness of targeting
 Lifetime value

Each interaction
Takes relationship one step further
Influences future interactions
Direction of relationship

Type of interaction
A welcome call
A complaint
Reward for continuing relationship
Price discount during sales week
 Learning organization

Dialogue with customer is important

Knowledge about him
Used in developing relationship
Knowledge created from experience gained

Timing
In a real time market, short response times are a
pre-condition to success
 Examples

Low business from long term customers

Additional acquisition efforts required

New prospects
Offer incentives to become customers
 Learning

Agent in contact centre

 Learning

Service repairman in contact with the

customer
Learning
 Learning

Account manager
 Learning

Marketer
 Learning

Database manager
Learning
 Task of management

Encourage learning process and not

punish it
Motivation and inspiration must come from
individual

Agents in call-centre
Unable to convert numerous experience into
knowledge
Share it internally / externally
 Mental models

Construction of an image of reality

Bring reality to surface
Hold it up to light
Open for discussion
Images of others should not be renounced
 Shared vision

Common answer to ‘why are we doing

things this way’ to be developed

Every department should have a goal to

achieve together
Service employees are not to minimize cost
Salesmen are not to maximize turnover
Finance is not limited to reduction of WC
 Team learning

Develop vision and knowledge into

actions
Act collectively and learn from experience

Dialogue
Assumptions removed
Free exchange of information becomes possible
Eg. A slow agent in a call centre may not make
much sales but can give valuable customer
information
Team learning
Life Time Value
 What matter is …

Not transaction profit

One transaction is not sufficient

… but lifetime value

Customer’s profit contribution
Very few companies arrive at reliable calculation of
LCV
 Issues

Difficult to calculate
Economies and market changes
Loyal customers become less loyal and profitable
Investments designed results in losses

Necessity
More MIS
Insights into factors that bring final results
 Lifetime Value

Definition
Net present value of the future contribution by a
customer to the overhead and profit of a company

Accurate calculation
All income and expense are allocated to each
customer
 Example

The sum of the future profits yielded is 523

Assuming a discount rate of 10%, the CLV at moment 0 is 398
 CLV

Prospects Customers Retained Retained Retained

Customers Customers Customers

$ $ $ $
Discount Factor
Divide by Number of Initial Customers
= Customer Lifetime Value
 Lifetime Value

Formal definition:
The total net incoming a company can expect from
a customer

Abstract definition:
Future profit from a customer
OR how much the customer is worth now

Depends on many factors

Subscriber (telecom) vs. visitor (e-commerce)
 Business Uses

Numbers are of interest for marketing

For effective decision support need LTV

before and after marketing activities

Retention, incentive allocation, acquisition etc.

Profit estimate
LTV after – LTV before – cost
Calculation
 Calculation

Customer turnover
- Discount granted
+ Shipping cost passed on to customer
+ Supplier’s credit
Gross turnover
- Turnover from returns
Net order sales
- Cost of goods / service sold
- Administrative / Physical Order processing cost
- Admin / Physical Order cost of processing returns
- Bad debt expenses
- Cost of acquisition & relationship management
Customer’s contr’ to O/H and profit of organisn’
Example
 Difficulties

Insights
Actual expenses
Reliable cost estimates
Acquire, serve & manage relationships

Identify customers
In order to arrive at actual calculation
Intermediaries involved
 Resolution

1. Value calculation

Segment level instead of individual customer level

2. Restricted time period

Expected income or expense only for first two or
three years
1. Segments-based approach
 1. Segments-based approach

Segment is basic entity in marketing strategy

Based on elaborate research and modeling
Decisions (campaigns, incentives, channels) are done
at segment level
Segments implicitly assumed “homogeneous” for
specific property considered

So for marketing purposes we really only

need LTV at the segment level

2. Time Horizon
 2. Time Horizon

Theoretically, the horizon should be

infinite. It is unmanageable in the reality

Long-term relationship is important
Take a long horizon, e.g. 10 years

Short-term relationship is important

Take a small horizon, e.g. 1 year

In the empirical application

Use a horizon of 2 years
 Estimating Future Value

This is a forecasting problem

Seasonality effects
Market changes, competitor activity

Common solutions
“Leave to experts”
Use current customer value from current data

Segment-based approach makes it easier

Need only “average” correct forecast
 RFM Variables

Recency
the most recent date that the customer has requested
for a service (usually a purchase )

Frequency
The number of time the customer has purchased

Monetary
Total dollar amount that a customer has spent
 RFM Variables

3.0

2.5

2.0
Number of
purchases per
year 1.5

1.0

0.5

0.0
1 2 3 4 5
Years as a customer
 RFM Variables

$70

$60

$50
Average
PurchasePrice $40

$30

$20

$10

$0
1 2 3 4 5
Years as a customer
 RFM Variables

90%
80%
70%
Percentage 60%
Retained from
Previous Year 50%
40%
30%
20%
10%
0%
1 2 3 4 5
Years as a customer
 Why satisfaction is important ?

■ Study by Le Beouf:
 “The reasons why customers no longer dealt with a
particular supplier”
 Benefits of CLV

By knowing the CLV, one can

Focus on groups of customers of equal wealth

Evaluate the budget of a marketing campaign
Measure the efficiency of a past marketing campaign by
evaluating the CLV change it incurred
Focus on the most valuable customers, which deserve
to be closely followed
Neglect the less valuable ones, to which the company
should pay less attention
Pareto’s Principle
 Buford Electronics

Details
Electronics company
US $ 350 Mio turnover
Customers segmented into groups
Acquisition and relationship management policies
 Customer-Focused Initiatives
Customer Champion
Create a customer champion Director who
is responsible for championing the voice of
the customer through the organisation.
Everyday Life Observation
To gain deeper understanding of customer, send
video crews & TV cameras into 80 households
around world to capture customer daily routines
Customer Success Engineer
Team
Centralised group that diagnoses root causes of
complex customer problems and implements
solutions across business
Customer Value Attache
Nokia product engineer goes on-site with
customer for up to 1 month to learn about
challenges and show how Nokia can add
value
Customer Charter & Advocate
Independent customer advocate whose role is to
resolve particularly difficult customer and
business problems. Customer charter to improve
customer experience with service.
Customer Partner Experience
Organisation-wide customer and partner
satisfaction index to provide a holistic view of
business health and trigger specific corrective
actions where necessary.
 Conclusion

End result
Development of relation and value
Keeping customers is less expensive than attracting
new customers

CLV
A customer is an asset that represents value
Cash contribution to profits and O/H