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Roots of Profits: The Basics of CRM

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Marissa Valente

on 3 July 2013

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Transcript of Roots of Profits: The Basics of CRM

Foundation: What is it and Where did it come from?
Roots of Profits: The Basics of CRM
CRM- Customer Relationship Management
Key Takeaways
The purpose of CRM is to increase the number of "the RIGHT" customers in order to increase the company's profits!
Customer Service
Database Mining
Relationship Marketing
Customer Management
Public Relations
Satisfaction, Loyalty and Value need to be managed separately
The roles of Traditional CRM need to blend with Social CRM to create a more modernized and effective plan
The use of metrics and analytics to select and manage customer segments and strategies
Marketing over the Years
Mass Marketing
Few Campaigns
Wide Reach
Little or no research
Market Segmentation
General Category Profiles
More Campaigns
Smaller Reach
Based on segment analysis of demographics
Relationship Marketing
Targeted to individuals
Many campaigns
Discrete Reach
Based on detailed customer behavior and profiles
Social/Media Marketing
Co-Creation of value and customer experience
"Network Effect"
Customers rule the ecosystem
Transformation from P's to C's
Positioning (value)
Promotion (pitch)
Placement (channel control)
Price (value extraction)
Consumer (value)
Communication (conversation)
Convenience (accessibility)
Cost (value exchange)

How to Grow an Effective CRM Program
Customer databases
Identify & analyze customer population
Group based on similarities
Recommend separate marketing campaigns
CRM Application
Applies database marketing technique at customer level
Develops strong company-to-customer relationships
Customer Value
economic value of the customer relationship to the firm (contribution margin, CM)
CRM Application
CRM is the practice of analyzing and utilizing marketing databases and leveraging communication technologies to determine corporate practices and methods that will maximize the lifetime value of each individual customer
Implementing and Conceptualizing CRM
Capture customer data and interact with the customer, simultaneously
Develop strategies for interaction with EACH customer
better relationships with profitable customers
locating and enticing new customers that will be profitable
finding appropriate strategies to deal with unprofitable customers, including termination of relationship
Functional Level
Customer Facing Front-End Level
Strategy Level
Total Customer Experience
Customer Satisfaction
Sales force automation in the sales function
Campaign management in the marketing function
To build a single-view of customers across contact channels
To distribute customer intelligence to all customer-facing functions
Describes CRM as a process to implement customer centricity in the market and build shareholder value
Knowledge about customers affects the entire organization
Customer Databases and Customer Value
Components of CRM from a Business Perspective
Strategic Process
Optimizing Current and Future Value of Customer
Spans multiple organization function--entire business
Continuous effort towards becoming customer-centric
Resource allocation based on economic value of customer
Exchange of information and goods between customer and firm evolves as a function of past exchanges
End-users and intermediaries such as distributors and retailers
Greater fine-tuning of segmentation strategies to eventually target individual customers with customized product offerings
Maximizing customer equity by maximizing profits over a series of transactions
CRM is Relevant because...
Firms are facing major changes with respect to:
Marketing functions
Key Issues:
CRM is a response to these changes
Growing Diversity
Time Scarcity
Value Consciousness
Information Availability
Decrease in Loyalty
More Intense Competition
Fragmentation of markets
Diminishing product-quality

Better technology, cheaper, and larger storage
Huge decrease in demand for data stroage
Increased popularity of data warehouses
Marketing Functions
Media Dilution and multplication of channels
Desreasing market efficiency and effectiveness
Key Consequences
marketers should be wary of placing heavy time demands on consumers
Major challenge facing companies has become meeting consumer demands rather than cost reduction
value added to customers by offering customized products and service propositions
Maintain market share, need to realign business strategy to become customer-centric
Better information about customer behavior and attitudes
Better prediction of customer buying behavior
Too much data can lead to misapplication and wrong analysis
Pressure on marketing function
Marketing in danger of being restricted to advertising and media planning
Where is this Leading...?
Evolution of Market Ecosystem
-Print, Radio, TV
-Market Orientation
-CRM 1.0
-Price Premium
-CRM 2.0
-Individualizing Experience
Changing from Traditional CRM to Social CRM
Traditional vs Social CRM


Traditional CRM
Social CRM
Consumers dictate how they will purchase and consumer using channels largely configured by themselves
Characteristics of "Gen C"
They want information so they can make intelligent decisions about how and where they do their business
They are intermeshed with each other at a peer-to-peer level, and they are mobile and un-tethered about how they are connected
Open to new ideas that are free rather than proprietary
Interested in co-production: engaging companies and partners to come up with solutions that benefit all of the parties involved (i.e. open source)
Knowledge and ideas--> specific circumstances. No problems with context switching
They will talk about comapnies whether the companies like it or not
The Big Picture: CRM in Action
Determining Customer Profitability
But Why is CRM Necessary?
Market Share (MS)
Basics on Metrics
Sales Growth
-Companies increase or decrease in sales volume or sales value in a given period of sales volume or value in the previous period
Calculated: 100 x [change in sales in period t from period t-1/sales in period t-1] (%)
Acquisition Rate
-denotes average probability of acquiring a customer from a population
-Always calculated for a group of customers
Calculated: 100 x Prospects Acquired/Prospects Targeted (%)
Acquisition Cost
-Responsiveness to a Campaign (measured in monetary terms)
-Monitored on a customer-to-customer basis
Calculated: Acquisition spending ($)/Prospects Acquired
Retention Rate (%)
(N customers in cohort buying in (t)| N customers in cohort buying (t-1)/N customers in cohort buying in (t-1))x100
-Key indicator of market competitiveness
-Judge growth and decline
Calculated: taking share of the firm's sales relative to the sales of all firms--across customers in the given market
Customer Activity
Survival Rate
100 x Retention rate(in t) x Survival Rate (t-1)
Probability of a customer being active in time t
-n is # of purchases in a given period
-T is the time elapsed between when customer was acquired and the most recent purchase
-N is the time elapsed between when a cuatomer was acquired and the period for which P(Active) needs to be determined
Size of Wallet
Amount of buyer's total spending in a category
Share of Wallet (SW)
Degree a customer satisfies his/her needs in a category with a single brand
% of size of wallet given to a particular firm
Lifetime Value
How to Pick the "Right" Customers
NPV, LTV, CLV, etc.
-Sum of cumulated cash flows--discounted using the WACC--of customer over his/her entire lifetime with the company
CLV=Present Value (future profits from customer in n years)
CLV=Present Value (Revenues- COGS-Cost of customer acquisition- direct customer carrying costs)
Customer Selection Strategies:
CLV, PCV, Decision Trees, & Logistics Regression.
Managing Loyalty and Profitability
-retain customers
-minimize churn
-customer/market segment analysis
-customer/market segment selection
Marketing Actions
-Strategic Planning
-Tactical Decisions and Actions
-Resource Allocation
Conceptualized View
More on Metrics...
Note: To get the NPV you must divide, to get the PCV must multiple to get both to PRESENT VALUES
When using trends, volatile markets etc.
profits/DR=NPV, cumulative NPV/#of customers (yr1)= average CLV per customer.
PCV (Past Customer Value)
-Extrapolates the results of the past transactions into the future
-Past performance indicated the future level of profitability
i=number representing customer
r=applicable discount rate
n=number of time periods prior to current purchase
GCin=Gross Contribution of transaction of ith
customer at nth time period
-Does not consider whether a customer is going to be active in the future
-Does not incorporate the expected cost of maintaining the customer in the future
Decision Trees and Logistic Regression
Decision Trees
-Finding the best predictors of a 0/1 or binary dependent variable
- When there is a large set of potential predictors for a model
-Prone to over-fitting; the model developed may not perform nearly as well on a new or separate dataset
Logistic Regression
-When dependent variable is binary and assumes only two discrete values
-Yields predicted probability
-Customers with high 'predicted probabilities' may receive an offer since they seem more likely to respond positively
-Need data, demographics, to use to create model, that's what makes it predictive
Keeping Track of the Leaves
The Importance of Databases
"Information Theory"
Collect Data
-Effective Database analysis is CRITICAL for successful CRM
-Up-to-date data for active and inactive customers ensure efficient marketing function
-Enable marketers to analyze and classify customers into different groups to implement different marketing programs effectively
-Enable marketers to determine critical factors influencing customer satisfaction and take measures to retain existing customers at lowest cost
Categorizing Databases
*Decision Making | Operations
*Customer | Prospect |
| Cluster | Enhancement
*Passive | Active
*Hierarchical | Inverted | | Relational | +BIG
CRM and Database Utility
Database Information
Database Technologies
Data-mining Process
But wait..
What is Social CRM and Why is it Valuable?

Swaying through Social CRM
*Social CRM = Experience Management
*Co-creation of value Co-Production
Social CRM is a philosophy and a business strategy, supported by a technology platform, business rules, processes, and social characteristics, designed to engage the customer in a collaborative conversation in order to provide mutually beneficial value in a trusted and transparent business environment. It's the company's response to the customer's ownership of the conversation
Experience Mapping
Benefits in the Field
*Improves relationship with customers
* Order Management
*Sales information for customers
*Competitive Intelligence
*Customer Intelligence
How Can We Retain These "Right" Customers?
Loyalty Programs
Link Between Satisfaction and Retention
Customer Satisfaction and Retention
Customer Loyalty
What is a Loyalty Program?
-A marketing process that generates rewards to customers based on their repeat purchasing
-Consumers who enter a loyalty program are expected to transact more with the focal company, giving up the free choice they have otherwise
-In exchange for concentrating their purchases with the focal firm, they accumulate "assets" (points)
-Assets are exchanged for products and services, typically but not necessarily associated with the focal firm
-A CRM tool used by marketers to identify, reward, and retain profitable customers
Objectives of Loyalty Programs
* Loyalty to a product or service by repeat purchases can be due to customer's natural satisfaction and preference for the products' features and benefits
*Loyalty can also be induced through marketing plans and programs from the firm
*Behavioral loyalty: the observed action that consumers demonstrate towards a particular product of service
*Attitudinal loyalty: the perceptions and attitudes that a consumer has towards a particular product or service
Efficiency Profits
Effectiveness Profits
Value Alignment
Effectiveness Profits, Efficiency Profits, & Value Alignment
Loyalty Program Details
Key Elements of LP's
Reward Structure
Hard vs. soft rewards
Product proposition support (Choice of rewards)
Aspirational value of reward
Rate of rewards
Tiering of rewards
Timing of rewards
Existence of partner network, network externalities
Single vs. multiform LP
Within sector vs. across sector LP
Ownership (focal firm vs. other firm)
Reward Structure
Hard vs. Soft Rewards
Financial or tangible rewards (hard) and those based on psychological or emotional benefits (soft)
Hard Rewards
Soft Rewards
-price reductions, promotions, free products and preferred treatment
-psychological benefits of having special status in addition to receiving preferred customer service
Loyalty Programs and a Source of Competitive Advantage
*Ability to operate more profitably over a sustained period of time
*Create unique competency to manage LP costs (efficiency profits)
*Create LP's focused on effectiveness profits (emphasis on customer knowledge and creating extended relationships)
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