WEEK 9

CURRENT EVENTS
MIDTERM REVIEW
FINAL PROJECT
SELECT A COMPANY
RESEARCH IT AND ITS CRM APPROACHES
ANALYSE
COMMENT ON PROS AND CONS
ADVISE RECOMMENDATIONS
PRESENTATION (10 MINUTES) AND REPORT

CHAP.11 - CUSTOMER ANALYTICS

CHAP 12
Managing Customer Relationships: A
Strategic Framework, Second Edition Don
Peppers and Martha Rogers

Week 9
ICE #4 Implementing CRM
Key Strategic Points
large change, resistance to new culture,
strategy development, buy-in and implementation
cost
company-wide buy-in, holistic,
assigning responsibilities & motivations
Develop and implement training,
Good/relevent KPIs & metrics,
Technical/system requirements,
Media strategy - website, call center/CSRs, social
media strategy etc.
Managing Customer Relationships: A
Strategic Framework, Second Edition Don
Peppers and Martha Rogers

Chapter 11 Preview
Measuring Customer Value
Customer Loyalty and Customer Equity
Creating, Harvesting, and Destroying Value
Measuring Return on Customer
Predictive Modeling and Leading Indicators

Managing Customer Relationships: A Strategic Framework, Second Edition

Don Peppers and Martha Rogers

Where are we ?
SO FAR:
Established the foundations of Relationship theory
Know the importance of a Learning Relationship
Discussed the challenges, pros and cons of Privacy Protection
Identified the four key CRM process needs I.D.I.C.
Look at CRM technical tools that can help us accelerate

relationships
NEXT:
Using the science of Customer Analytics for predicting

customer behaviour and anticipating their needs

Transforming an enterprise that grows through building
customer value, including infrastructure changes
Managing Customer Relationships: A
Strategic Framework, Second Edition Don
Peppers and Martha Rogers

Chapter 11
Optimizing around the Customer:
Measuring the Success of Customer-Based
Initiatives
Managing Customer Relationships: A Strategic
Framework

Managing Customer Relationships: A Strategic Framework, Second Edition

Don Peppers and Martha Rogers

Question
If a company rewards employees

based on a combination of current and

future values of customers, how might
that change decision making?

Managing Customer Relationships: A

Strategic Framework, Second Edition Don
Peppers and Martha Rogers

Refresher: Measuring Customer

Value
LTV can include many factors, not just

NPV of direct sales margins.

LTV should include NPV estimates of
value ($) attached to:

Potential increase in share of wallet

Value in terms of referrals
Value in terms of new product development

input
Value in terms of flexibility in times of stress
Others ?
Managing Customer Relationships: A Strategic Framework, Second Edition
Don Peppers and Martha Rogers

Customer Equity
The principal economic asset
Customer Life Time Value (LTV) =Customer Equity =
= net present value of a customers future cash flow stream
THUS is can be argued that a firms total economic

value
= the sum of all current and future customers LTVs
= the total Customer Equity of a firm
Describes effectiveness of customer strategies and

implementation
However, most companies look at quarterly balance
sheets as the primary measure of economic assets
which only measures short-term value
Managing Customer Relationships: A Strategic Framework, Second Edition
Don Peppers and Martha Rogers

Customer Equity
The Catch 22
There significant tension/stress between motivating customers to

provide value in the short term (via immediate sales) and

encouraging them to create value in the long term (through
changing customer predisposition).
Most companies look at quarterly and annual balance sheets as the primary

measure of economic assets which only measures short-term value

Executive compensation is often linked to short term measurements

Too aggressively pursuing short-term sales threatens long-term

value
Investing too much in great service threatens short-term value
(i.e., funds required to produce that great service)

Balance is required
Balance long and short term goals include a metric for
customer equity, or customer lifetime value
Managing Customer Relationships: A Strategic Framework, Second Edition
Don Peppers and Martha Rogers

Customer Equity
Prospects, as well as current customers, are

included in customer lifetime value (or

equity)
BUT how can you attached Life Time
Value to a customer you dont have, and
possibly may never have????

Managing Customer Relationships: A Strategic Framework, Second Edition

Don Peppers and Martha Rogers

Customer Equity
Prospects, as well as current customers, are included in customer

lifetime value (or equity)

BUT how can you attached Life Time Value to a customer you
dont have, and possibly may never have????
Recall that LTV is the sum of all estimated future value cash flows

froma customer, discounted at the cost of money/internal rate of

return
= Net Present Value of cash flows @ discount rate
The LTV OF A PROSPECT
equals the LTV if they were your customer multiplied by the
Probability they will become your customer
= LTV x % probability you will get them as a customer
Managing Customer Relationships: A Strategic Framework, Second Edition
Don Peppers and Martha Rogers

Calculating (Estimating) Prospect

LTV
A SIMPLE EXAMPLE:
Your company:
has a 20% market share
loses 16% of current customers each year
Prospects
The rest of the market (80%) are your prospects
What % converstion rate of the prospect pool do you

need in order to replace the 16% annual loss of your

current customers ?
Managing Customer Relationships: A
Strategic Framework, Second Edition Don
Peppers and Martha Rogers

Calculating (Estimating) Prospect

LTV
A SIMPLE EXAMPLE:
Your company:
has a 20% market share
loses 16% of current customers each year
Prospects
The rest of the market (80%) are your prospects
What % conversion rate of the prospect pool do you need in order to

replace the 16% annual loss of your current customers ?

If 80% of market is available as prospect, then converting 4% of
them will equate to your loss of 16% of your share of 20% of
the Market.

Estimating Prospect LTV equates to the Net Present Value of

the average prospect annual cash flow (annual cash flow
for all future years at discount (interest) rate.
Managing Customer Relationships: A
Strategic Framework, Second Edition Don
Peppers and Martha Rogers

Customer Equity and Customer

Loyalty
Difficult to measure customer loyalty

(retention)

A multifaceted variable one possibly

composed of multiple relationships across

business units

Distinguish customer attrition and

customer defection

Attrition: results from circumstance outside

companys control (retirement, moves out of

area)
Defection: customer chooses to move
business to the competition
Managing Customer Relationships: A Strategic Framework, Second Edition
Don Peppers and Martha Rogers

Factors that increase Customer

Equity
Acquire more customers
Acquire customers who are more valuable
Increase profit per customer
Reduce servicing costs per customer; sell

customers additional products or services

Increase the propensity of customers to
refer other customers
Reduce the rate of customer attrition

Study by Gupta/Lehmann, Wharton

(test pg. 318)
If the cost of new customer

acquistion is reduced by 10%, customer

equity value increased 0.5-1.5%
If product margins are raised by 10%,
customer equity levels increased by about
the same (10%)
If customer loyalty is increased 10%,
then customer equity levels increased by
30%
Improving customer loyalty can be a
Managing Customer Relationships: A
Strategic
Framework,
Second Editionendevour.
Don
very
rewarding
Peppers and Martha Rogers

Return on Customer
Measures how well an enterprise is using

customers to create value both short term

and long term
Analogous to return on investment (which
measures how efficiently an enterprise
uses capital to create value)
Return on Customer = Total Shareholder
Return
Just as with TSR, if ROC is less than cost of

capital, its not worth the investment

Managing Customer Relationships: A Strategic Framework, Second Edition
Don Peppers and Martha Rogers

Creating, Harvesting, and Destroying Value

Value creators
Combination of short-term and long-term value created by

customers is greater than cost of capital

Future earnings likely to grow
Value harvesters
They are harvesting customer profits from customer equity they

already have, but are not increasing customer equity

ROC is below Cost of Capital
Future earnings likely to decline
Value destroyers
ROC is below zero likely showing a profit by offering deep

discounts
Future earnings will certainly decline
SEE TEXT CHART PAGE 324
Managing Customer Relationships: A Strategic Framework, Second Edition
Don Peppers and Martha Rogers

Measuring ROC
Two major steps:
1. Measure the marketing activities and
analyze their effect on customer
acquisition, retention, and growth
2. Estimate customer LTV and total equity of
all customers at a certain time point

ROC

P(t) CE(t) CE(t1)

CE(t1)

Managing Customer Relationships: A Strategic Framework, Second Edition

Don Peppers and Martha Rogers

Predictive Modeling
Devise an equation for LTV that includes

any data on measurable behaviors

Identify the most predictive variables
currently available
Generate a second equation for LTV to
predict individual customers LTV rather
than using data to calculate it
retrospectively

Managing Customer Relationships: A Strategic Framework, Second Edition

Don Peppers and Martha Rogers

Leading Indicators for LTV Change

Lifetime value drivers

Cross-selling rate, share of customer, influence on

other customers

Lifestyle changes

Professional/career moves, address changes, marital

status changes, children added to household,
education level, health
Business and consumer

Behavioral cues

Signing up for different plan, buying product

upgrades, signing up for an e-mail newsletter

Customer attitudes

Surveys, market research, RSx tool

Managing Customer Relationships: A Strategic Framework, Second Edition
Don Peppers and Martha Rogers