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Amity Global Business School

MBA, Semester 4 Customer Relationship Management Shalini Gautam

Customer Economics


Not all customers are of equal economic value. Companies earn: 150% of the profits from one third of the customers Break even on the middle third of the customers Run significant losses on bottom third of the customers

AGBS Economic Value of a customer

Present value of the stream of cash flow generated by the individual - Initial cost of acquiring the customer __________________________________ Economic value of an individual customer __________________________________

Economic Value of a customerAGBS

Positive Cash Flow

Negative Cash Flow Time

Customer Equity


Cost of Acquiring, Retaining & Developing (ARD) customers - Revenues obtained from customer __________________________________ Customer Equity __________________________________

Customer Value Distribution

No. of customers


Heavy Losses Modestly unprofitable Modestly profitable

Highly Profitable


Range of Customer Profitability


Ways to improve companys bottom-line


Stop doing business with people who persistently generate losses Develop an economically sound plan for moving modestly profitable customers into the high profit sector Create a plan for retaining customers in the profitable sector and developing their economic value still further

Bucket Theory of Marketing


New Customer Revenue +Existing Customer Growth -Defected Customer Revenue -Declining Customer Revenue __________________________________ Overall Revenue Growth ___________________________________

Customer Attitude Measure


What do customers think of your proposition? What opinions do your customers have of your competitors capabilities? Do their views differ by product group or customer segment?

Customer Retention Measures


How do your current customer retention rates compare with previous years & with those of your competitors? What are the triggers of customer defection? To which competitors are customers defecting? How do the characteristics, behavior and values of defecting customers contrast with those that remain?

Customer Value Measures


What are the current and potential lifetime values of you new and existing customers and how do they differ by customer or product segment? What percentage of your business volume and value does the top 20% of customers represent? What is the cost of replacing a lost customer compared to that of retaining an existing one? What would happen to profits if the retention rate increased by 5%/10%?

Potential Benefits of various measurements


Helps to identify the customers who are adding value To determine which customers to acquire and which to avoid Helps to develop more profitable product & service propositions Helps to target customers for up selling and cross selling Helps to divest customers

Some customer truisms


Different customers contribute different levels of value to each and every oganisation The value of an active customer generally increases the longer that customer remains active The difference in value between the high and low performers can be very large The difference in the potential, but unrealized value of customer varies significantly