Customer Profitability

MUTHULAKSHMI
SREYA
CHANDRAKALA
AISHWARYA
CRM
• Customer relationship management (CRM) refers to the principles, practices and
guidelines that an organization follows when interacting with its customers.
• From the organization's point of view, this entire relationship encompasses direct
interactions with customers, such as sales and service-related processes, and
forecasting and analysis of customer trends and behaviors.
• Ultimately, CRM serves to enhance the customer's overall experience.
• It uses data analysis about customers' history with a company to improve business
relationships with customers, specifically focusing on customer retention and ultimately
driving sales growth.
• The focus of CRM is to create value for the customer and the company over the
longer term
• CRM System-
• Customer Relationship Management (CRM) systems are used to organize, automate, and track
business processes like sales, lead generation, marketing, forecasting, customer service and ROI
measurement. The purpose of a CRM system is to improve integration in these areas and measure
and track the value of customer relationships. CRM systems are designed to reach the ultimate
goals of increased efficiency and profitability.
 Understanding CRM

• Customer relationship management (CRM) is an approach to manage a

company's interaction with current and potential customer. It uses data
analysis about customers' history with a company to improve business
relationships with customers, specifically focusing on customer
retention and ultimately driving sales growth
• CRM approach is the systems of CRM that compile data from a range of
different communication channels, including a company's website,
telephone, email, live chat, marketing materials, and more recently, social
media.
• CRM approach and the systems used to facilitate it, businesses learn more
about their target audiences and how to best cater to their needs
Benefits of CRM
 Increased customer satisfaction
 Improved customer service efficiency and effectiveness
 Increased sales
 Reduced costs
 Growth in number of customers
 Maximization of opportunities and generation of new business
 Increased access to a source of market and competitor information
 Longterm profitability and sustainability
 Loyalty maximization
 Enhanced ability to target profitable customers.
 Enhanced sales force efficiency and effectiveness
 Improved pricing
 Customized products and services
 Individualized marketing messages also called campaigns
 Connect customers and all channels on a single platform.
Why Customer Profitability?

• To simply count how many customer the firm serves

• To summarize the past financial performance of a customer
relationship , customer lifetime value looks forward in an attempt
to value existing customer relationship
• To calculate and interpret customer lifetime value.
• To accomplished and draw careful distinction between prospect
and customer value
• Acquisition and retention spending to track marketing spending
METERICS

TO MEASURE THE PERFORMANCE OF INDIVIDUAL CUSTOMER

RELATIONSHIP

• Customers,Recency,Retention Rate
• Customer Profit
• Customer Lifetime Value
• Prospect Lifetime Value
• Average Acquisition Cost
• Average Retention Cost
 CUSTOMERS,RECENCY ,RETENTION RATE

• Purpose :To monitor firm performance in attracting and

retaining customer
• CONSTRUCTION
• COUNTING CUSTOMERS
• Contractual situation :One complication in counting customers in contractual
situations is the handling of contracts that cover two or more indivduals.A
second complication in counting customers in contractual situations is the
treatment of customers with multiple contracts with single firm
• Non-contractual customers:The ability of the firm to count customers depends
on whether individual customers are identifiable.
• Recency:The length of time since customers last purchase
• Retention Rate:The ratio of the number of customers retained to the
number.
DATA SOURCES,COMPLICATIONS AND CAUTIONS

• ADVICE ON COUNTING CUSTOMERS:

• Defining the customer properly is critical
• Not all the customers are same
• Where is the customer?
• Who is the customer?

The key takeaway is that customer definition for counting depends fundamentally on the
purpose of the count. You may have the count the same customer in different ways for
different people
CUSTOMER PROFIT

PURPOSE : To identify the profitability of individual customer

The overall profitability of the company can be improved by treating dissimilar customer differently
In essence three different tiers of customers
Top tier customer – REWARD
Second tier customer – GROW
Third tier customer – FIRE

A database that can analyze the profitability of customers at an individual level can be a competitive
advantage.The chance to defend your best customer and maybe even poach the most profitable
consumers from your competitors
CUSTOMER PROFIT

• Construction :Find out the cost serve each customer and revenue assocated
wth each customer for a given period.Do subtraction to get the profit for the
customer based on the profit
• To abandon the notion of calculating profit for each individual customer and
work with meangiful groups of customers instead
• Sorted list of of customer profits from high to loe
• Profitability increase (high to low)
• Negative profit curve when profit increase 100%.The graph always ends at
100%of the customer accounting for 100% of total profit refers as “whale
curves:”
CUSTOMER PROFIT

• Data Sources,Complication and Cautions

• When considering for profit from customer ,most thing change over
time.The plan is that future profits will compensate for current losses.
• Capturing customer information to decide which customer to serve ,it is
important to consider the leagal environment in which company operates
• Intrusive capturing of customer specific data can damage customer
relationship
• Sound finicial reasons to serve the unprofitable customers eg some
companies relies on network
• The whale curves examine cumulative percentage of total profits ,the
number are very sensitivre to the dollar amount of total profit
CUSTOMER LIFETIME VALUE

• Customer lifetime value is the dollarvalue of the customer

relationship based on the present value of the projected future
cash flows from the customer relationship

CLV = Margin * Retention rate (%)/1+Discount Rate (%)-Retention Rate (%)

It encourages firm to shift their focus from quarterly profit to long

term health of their customer relationship
CUSTOMER LIFETIME VALUE

• PURPOSE : To assess the value of each customer.

• Customer profit (CP)is the difference between the revenues and the cost
associated with the customer relationship during a specific period.

• The central difference between CP and CLV is that CP measures the past
and CLV looks forward

• CLV is the present value of future cash flow attributed to customer

relationship
CUSTOMER LIFETIME VALUE

• CONSTRUCTION: CLV model has only three parameters

• 1)constant margin
• 2)contant retention
• 3)Discount rate
• The model assumes that the first margin will be received at the
end of the first period
• Firm uses infinite horizon when it calculates the present values of
future cash flows
• CLV is the multiple of the margin (expected number of periods in
the customer reltionship
CUSTOMER LIFETIME VALUE

• DATA SOURCES,COMPLICATION AND CAUTION

• If firm wants to estimate sequence of retention rate ,a spreadsheet model
might be more useful in calculating CLV

• Customer lifetime value (CLV) with Initial margin

• CLV with intital margin =Margin * 1+Discount rate (%)/1+Discount rate (%)-
Retention rate (%).
• The Infinite assumption
• Over shorter period customer retention rates are less likely to be affected
by major shifts in technology or competitive startegies and are more likely
to be captured of historical retention rates
PROSPECT LIFETIME VALUE VS CUSTOMER VALUE

• Purpose : To account for the lifetime value of a newly acquired customer

(CLV) When Making Prospecting Decision.

A propect is someone whom the firm will spend money on in an attempt to

acquire her or him as a customer
The acquisition spending must be compared not just to the contribution from
immediate sales it generate but also to the future cash flows expected from new
customer.
PROSPECT LIFETIME VALUE VS CUSTOMER
VALUE

• CONSTRUCTION:
• The expected prospect lifetime value is the value expected from each
prospect –cost of prospecting

• PLV= Acquisition rate (%) * (Intital margin ($)+ CLVv ($))- Acquisition
spending ($)
• PLV is positive investment is to be made
• PLV is negative then acquisition spending should not be made.
PROSPECT LIFETIME VALUE VS CUSTOMER
VALUE

• DATA SOURCES,COMPLICATION AND CAUTION

• The firm need to know the planned amount of acquisition spending ,the
expected success rate ,the average margin the firm will receive from intial
purchase of newly accqured customer

• The decision to spend money on customer acquisition whenevr PLV is

positive rest on an assumption that the customers acquired would nothave
been acquired if the firm had not spend the money
• Firm should search for economical way for acquiring customer
Acquisition VS Retention Cost

• The ratio of acquisition spending to the number of customer

acquired is the avg acquisition cost
• The ratio of retention spending directed towards a group of
customers to the number of those customer successfully is called
avg retention cost

• To monitor firm effectiveness in categories of marketing spending

Acquisition VS Retention Cost

• PURPOSE : To determine the firm’s cost of acquisition and

retention
• CONSTRUCTION :
• Average Acquisition cost =Acquisiton spending/No of customer acquired
• Average Retenation cost = Retention spending/No of customer retained
Acquisition VS Retention Cost

• DATA SOURCES,COMPLICATION AND CAUTION

• The avg retention cost calculated will be associated with the length of the
period,if period is a year ,the avg retention cost will be a cost per year per
customer retained
• Customer will be retained if firm spends nothing in retention assume that if
firm increase the retention budget by the avg retention cost that it will
retain one more customer
• To allocate all spending as either acuqistion or retention ,it is suggested it is
perfectly acceptable to maintain a separate category that is neither of
them.