CRM and Information

Visualization
Gürdal Ertek, Ph.D.
Tuğçe Gizem Martağan

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 Customer Relationship
Management (CRM)
Traditional Marketing CRM

Goal: Expand customer base, Goal: Establish a profitable,

increase market share by long-term, one-to-one
mass marketing relationship with customers;
understanding their needs,
preferences, expectations
Product oriented view Customer oriented view

Mass marketing / mass Mass customization, one-to-one

production marketing
Standardization of customer Customer-supplier relationship
needs
Transactional relationship Relational approach
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 What is CRM?

“The approach of identifying, establishing,

maintaining, and enhancing lasting relationships
with customers.”

“The formation of bonds between a company

and its customers.”

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 Strategies in CRM
for Mass Customization
• Prospecting (of first-time consumers)
• Loyalty
• Cross-selling / Up-selling
• Win back or Save

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 The Marketing Perspective

CAMPAIGN MANAGEMENT
RECENCY FREQUENCY MONETARY VALUE METHOD
CUSTOMER VALUE METRICS

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 Campaign Management:
The Marketing Perspective
• Developing effective campaigns
• Effectively predicting the future
• Retaining existing customers
• Acquiring new customers

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 Campaign Management:
The Cap Gemini Model
KNOW TARGET
Understand market and consumers’ ( Offer is developed )
needs and preferences
Define market strategies
Exploit customer intelligence,
Use channel integration
Perform segmentation

SERVICE SELL
Retain customers by: Acquire customers

Loyalty programs Use sales force effectively

Communication
Service forces Develop marketing programs 9
 Campaign Management:
The Marketing Perspective
The marketing manager...

1. Defines objectives
2. Identifies customers
3. Defines communication strategies
4. Designs/improves
products/offers/services/promotions
5. Tests the impacts of her decisions
6. Revises her decisions for maximum
effectiveness
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 Campaign Management
Step 1: Define Objectives

Creating Loyalty?
Targeting
Existing Customers Increasing the satisfaction level?
Retention Strategy Cross-selling or Up-selling?

Targeting Target customers that show

New Customers characterstics similar to
existing groups of customers
Acquisition Strategy

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 Campaign Management
Step 2: Identify Customers
Perform SEGMENTATION

• Define the right customers

• Use information of past transactions as key
for making predicting future ones
• Define the segments and their characteristics
• Develop customized marketing strategies for
the different segments

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 Campaign Management
Step 3: Communication Strategies
• Which message should be transmitted?
• Which channel should be used?

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 Campaign Management
Step 4: Design the Products, Offers,
Services and Promotions

• Analyze the price, time period, risks, marketing

costs
• Define the product / offer / service / promotion
and its general structure
• Identify effective use of sales and
communication channels

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 Campaign Management
Step 5: Test the Impacts
• Impacts of the decisions have to be tested and
and assessed on a sample

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 Campaign Management
Step 6: Revise the Decisions
• Make revisions to the targeted offer / service /
promotions
• Finally apply the decisions to the whole
segment or population

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 RFM Method
(Recency, Frequency, Monetary Value )
• Recency
– When was the last customer interaction?
• Frequency
– How frequent was the customer in its
interactions with the business?
• Monetary value of the interactions

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 RFM Method
(Recency, Frequency, Monetary Value )

Marketing Problem:
A firm has sent e-mail to 30,000 of its existing
customers, announcing a promotion of $100.
458 of them responded (1.52% of the
customers)

Is there any relation between the responding

customers and their historical purchasing
behaviours?
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 RFM Method:
Recency Coding

• 30,000 customers are sorted in descending

order with respect to their most recent
purchases

• Sorted data is divided into 5 equal groups,

each of them containing 6,000 people

• Recency codes are assigned: Top group has

code 5, bottom group has code 1

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 RFM Method:
Recency Coding
Recency Results
4.00 • According to analysis based on
customer recency, the group
Response %

3.1 having the highest recency

3.00 group has also the highest
response rate
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2.00 1.5 • Remark:
(3.10% + 2.00% + 1.50% + 0.62%
+ 0.38) / 5= 1,52% which is the
1.00 0.62 response rate
0.38
• Strict Rule: Ones who have
0.00 purchased recently are much
5 4 3 2 1 more willing to buy new
products than others purchasing
Recency code R in the past 22
 RFM Method:
Frequency Coding
• Sort the 30,000 customers with respect to
frequency metrics.
– Frequency metrics: Average number of
purchases made by customer in a time period t
– Sort customers in descending order with
respect to their purchase frequency.
• Assign them to 5 groups, top %20 in the first
frequency group.
• Assign frequency codes such that the top
group has code 5 and the bottom group has
code 1. 23
 RFM Method:
Frequency Coding
Frequency Results
3 2.8
• It is observed that highest
2.5 response rate is from the
2.1
customers having highest
Response %

2 frequency
1.5 1.3 • Frequent people respond
0.9 better than less frequent
1 0.8
ones but differences between
0.5 groups are less than the ones
in the recency
0 • The lowest frequency group
5 4 3 2 1
always contains new
Frequency code F customers
• That is why it is named RFM
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 RFM Method:
Monetary Value Coding

• The same process as recency and frequency

coding
• Sorting is done with respect to monetary
value metric
– Monetary value metric is the average amount
purchased in a time period t
• At the end of the monetary value coding,
assign monetary value codes M = 1,...,5 to
groups according to their groups.

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 RFM Method:
Monetary Value Coding
2.5 Frequency Results
2.1
2 1.8 • It is observed that highest
Response %

1.4
response rate is from the
1.5 customers having highest
1.2
1.1
monetary value
1
• Unlike the recency case,
0.5 there are not big
differences between
0 groups
5 4 3 2 1
Monetary value code M

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 RFM Method:
Putting the Codes Together
• At the end of the monetary coding firm obtain
R F M metrics for customers. Each customer
belongs to one of 125 possible combinations
of the RFM values:

Database

R
1 2 3 4 5

F
21 22 23 24 25

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231 232 233 234 235 M
 RFM Method:
STEPS
• Create 3 digits RFM codes cells
• All cells having the same number of customers in
them
• RFM values are used to define group of customers
that marketing campaign should target or should
avoid
• Used for identifying customers having high
probability to respond to campaigns:
555’s response rate > 552’s > 543’s >541....
• Increase the response rate
• Increase profitability

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 Customer Value Metrics

• Critical measures used to define customer

worth in knowledge-driven and customer-
focused marketing

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 Customer Value Metrics:
Size of Wallet
J

• Size of wallet = S
j 1
j

Sj  Sales to focal customer by firm j

• Assumption: Firms prefer customers with

large size of wallet in order to retain large
revenues and profits

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 Customer Value Metrics:
Individual Share of Wallet (SW)
• A proportion expressed in terms of percentage,
calculated among buyers
• Measured at individual level
• A measure of loyalty
• Can be used in future predictions
• Different from the “market share”, which also
considers customers with no purchase
Sj
• Individual share of wallet % = J

S
j 1
j

S j  Sales to focal customer by firm j

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 Customer Value Metrics

• Share of wallet and size of wallet should be

analyzed together because...

Size of Share of Purchases

Wallet Wallet
Customer 1 $500 50% $250

Customer 2 $100 50% $50

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 Customer Value Metrics:
Transition Matrix
• Shows expected share of wallet from multiple
brands
• Depicts consumer’s willingness to buy over
time
• Transition probability from B to A, than from
A to C: 10%*20% = 2%

Brand A Brand B Brand C

Brand A 60% 30% 20%
Brand B 10% 80% 15%
Brand C 20% 15% 70% 33
The Engineering Perspective

DATA MINING

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 Data Mining

• Collection, storage, and analysis of –typically

huge amounts of- data
• Data readily resides in the company’s data
warehouse
• Data cleaning is almost inevitable

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 Data Mining

Goals of Data Mining

• Developing deeper understanding of the data

• Discovering hidden patterns
• Coming up with actionable insights
• Identifying relations between variables,
inputs and outputs
• Predicting future patterns

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 Data Mining:
Steps
• Data selection
• Data cleaning
• Sampling
• Dimensionality reduction
• Data mining methods

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 Data Mining:
Methods
• Exploratory Data Analysis
• Segmentation
– Cluster Analysis
– Decision Trees
• Market Basket Analysis
• Association rules
• Information Visualization
• Prediction
– Regression
– Neural Network
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– Time Series Analysis
 Information Visualization

Data mining algorithms...

• Can only detect certain types of
patterns and insights
• Are too complex for end users to
understand

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 Information Visualization
• A field of Computer Science which has evolved
since the 1990s.

• Before 1990s: Graphical methods for data

analysis to pave the way for statistical methods
• After 1990s:
– Computer hardware has advanced with
respect to memory, computational power,
graphics calculations
– Software has advanced with respect to user
interfaces
– Data collection systems have advanced
(barcodes, RFID, ERP)

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 Information Visualization

• The analyst does not have to

understand complex
algorithms.

• Almost no training required.

• There are no limits to the

types of insights that can be
discovered.
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 Case Studies

Analysis of Supermarket
Sales Data

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 The Data

Field Name Desciption

TRANSACTION_ID Transaction ID
PRODUCT_NO Product Number

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Frequent Itemsets

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Frequent Itemsets

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Association Rules

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 Case Studies

Analysis of Spare Parts

Sales Data

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 The Data
Field Name Desciption
DEPOT Depot ID
SKU_NO SKU (Stock Keeping Unit) Number
VENDOR Vendor (Customer) Number
DAY Day of the month (1,...,31)
MONTH Month of the year (1,...,12)
YEAR Year (ex: 2002)
QUANTITY Quantity required
UNIT_PRICE Price of one unit of product in YTL*
REVENUE Revenue from the order line
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Assumption: Each customer gives at most one order each day.
 Determining Top Products:
Pivot Table for Determining REVENUE_SUM

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 Determining Top Products:
Pivot Table for Determining COUNT (Frequency)

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Determining Top Products:
Scatter Plot

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 Seasonality of Top Products

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Seasonality of Top Customers:
Pivot Table

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 Determining Top Customers:
Pareto Curve (ABC Analysis)

100
90
Cumulative % Revenue

80
70
60
50
40
30
20
10
0
0 10 20 30 40 50 60 70 80 90 100
Cumulative % Customers
Revenue 54
Seasonality of Top Customers:
Starfield Visualization

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 Case Studies

Analysis of ÖSS 2004 Data

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 The Data

Field Name Desciption

HS_NAME High School Name

HS_TYPE_TEXT High School Type

UNIV_NAME University Name

UNIV_DEPT University Department

RANK_SAY Rank According to Sayısal

Score
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 Pareto Squares
L
Y(L)

H s

Y5(H)

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Pareto Squares:
Model Definitions

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 Pareto Squares:
Optimization Model

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General Insights

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Benchmarking Highschools

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Benchmarking Departments

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Relationship Management

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 References
• Berry, M. J. A., Linoff, G. S. (2004) Data Mining
Techniques. Wiley Publishing.
• Ertek, G. Visual Data Mining with Pareto Squares for
Customer Relationship Management (CRM) (working
paper, Sabancı University, Istanbul, Turkey)
• Ertek, G., Demiriz, A. A framework for visualizing
association mining results (accepted for LNCS)
• Hughes, A. M. Quick profits with RFM analysis.
http://www.dbmarketing.com/articles/Art149.htm
• Kumar, V., Reinartz, W. J. (2006) Customer Relationship
Management, A Databased Approach. John Wiley & Sons
Inc.
• Spence, R. (2001) Information Visualization. ACM Press.

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