Download Acquiring, developing and retaining profitable customers with

Creating Customer and Company
Value through CRM
Richard Staelin
Edward & Rose Donnell Professor
of Business Administration
Duke University
What is CRM?
Strategic
CRM
Operational
CRM
Analytical
CRM
2
Core CRM Processes
„
„
„
„
„
Collaborative Communication
Information Capture
Information Integration
Information Access
Information Use
–
–
–
–
–
–
–
–
Develop customer profile
Segmentation
Retention behavior
Channel analysis
Customize offers
Best customers
CLV
Knowledge of costs
3
What has gone wrong with CRM?
Core
Capabilities
Firm
Performance
Technology
4
Why CRM works
„
The more relationships the customer has with
the firm, the higher the real and psychological
switching costs
Number of years with the bank
20
15
10
5
0
2 or
less
4
6
8 or
more
Number of Services Used
5
Why CRM works
„
The more relationships the customer has with
the firm, the greater the expected profits
Contribution Margin (Index)
450
400
350
300
250
200
150
100
50
0
2 or
less
4
6
8 or
more
Number of services used
6
Why CRM works
„ The
more relationships the firm has with
the customer, the more the firm knows
about the customer’s behavior
– Use CRM as a tool for learning about
customers’ needs
– Avoid “black-box” tools for database
marketing when doing CRM
– Good predictions are even better with
behavioral insights
7
Why CRM works
„ Cost
of acquiring new customers is
higher than cost of retaining them
– New customer you can acquire at the margin is likely to be a
“switcher” who will eventually switch to a better offer.
Retention
probability
Marginal acquisition cost
8
The Problem
„
“In many businesses, the customers most likely to
sign on are precisely the worst customers you could
possibly find”
» Reichheld, The Loyalty Effect.
»
„
“The customers you want to attract don't respond,
and the ones you don't want to attract do”
» Richard E. Mirman, Chief Marketing Officer, Harrah’s
Entertainment, Inc.
„
“(M)ost of the people applying for a card with say, a
12 percent APR, were the last people issuers would
approve”
» Lucy Lazarony, bankrate.com
9
The Culprit: Adverse Selection
„
„
„
There are good and bad customers
Often, you do not know which is which before
it is too late
Major problem in marketing risk products
– Insurance, loans, credit cards
„
„
Potential for conflict between functions
acquiring and approving customers
Solutions:
– Self-selection through multiple products
• Need as many products as types of customers
– Screening
10
Problems with Screening
„ Costly
– Must screen all customers to determine
type
„
When cross-selling to current
customers…
– Best customers will not respond
• Wider range of options
– Rejection can lead to termination of
relationship
11
Results for Top 3 Deciles
N = 1157
Select based
on Response
Select based
on Approval
Simultaneous
Approach
Responses
835
319
689
Approvals
214
198
284
Rejections
621
121
405
12
Analytic CRM for Customer
Retention
„ How
bad is customer churn?
„ Some Industry Statistics:
– Cellular
Paging
Computer on-line service
Long Distance Phone
25-35%
30-48%
33%
25%
13
The Value of Customer Retention
Typical Wireless Carrier
„
„
„
„
„
500,000 users
25% churn rate
$300/customer acquisition cost
$500/year average customer value
5% reduction in churn equals:
– $1.9 million acquisition savings
($1.9 m = 125,000 churners x 5% x
$300/customer)
– $3.1 million in retained customer value
($3.1 m = 125,000 churners x 5% x
$500/customer)
TOTAL SAVINGS: $5.0 million => $15,000 per
day
Source: Oracle website
14
How to reduce churn?
„ Don’t
be too aggressive in customer
acquisition (marginal acquisitions are
more likely to attrite)
„ Your current customer is your best
prospect
– Cross-selling
– Up-selling
„ Exit
surveys & early attrition-detection
15
Customer Retention Modeling
„ Exit
surveys
– Why do you want to leave?
– Where are you going?
– What could we have done to keep you? (too late)
„ Attrition
modeling (looking at the past)
– Detecting early signals of attrition
– Identifying customers “at risk” for
preventive measures
16
Early defection detection
Exit
Interview
Past behavior
17
Analytic CRM for Customer
Development
„
„
Customer transactions are becoming
increasingly impersonal, reducing the
opportunities for personal selling
Cross-selling
– increases the number of ties between the firm and the
customer (higher switching costs)
– Opportunity to learn about customer’s needs, improving the
firm’s competitiveness
– is done by value rather than persuasion
– More effective on incoming than outgoing calls
„
Must avoid “over-touching” the customer
– The right product for the right customer at the
right time
18
“The Royal Bank of Canada
experienced a direct response rate of
40% when it increased the timeliness
and relevancy of its campaigns.”
„
- Peppers & Rogers Group
19
Observed
?
Product
Purchased
Q1
Predicted
High Technology Industry
Q2
Q3
Q4
Q5
Q6
Time
Managerial Questions:
•Which customers would provide revenue in the next planning cycle?
•What product (s) would a customer purchase given past purchases?
•When would the customers make their purchase(s)?
•How much to spend on a given customer?
20
Results from the field experiment
(B-to-B High Tech Firm)
Difference between test and control group
Hardware
Software
Hardware &
Software
356
180
-15
-952***
-1,182**
-1000***
-6***
- 4***
-5***
Profits ($)
970***
1,1116***
749**
Return on Investment
1.4***
1.5***
1.9***
Parameter
Revenue ($)a
Cost of Communication ($)
Number of Contacts Before Purchase
The reported values are unit values per customer during the experiment year and are
cell medians;
a
*** Significant at α = .01
21
Cross-selling of financial services
„ If
there is a “natural” sequence of
acquisition of financial services, it can
be inferred from observed buyer
behavior
– Services are ordered according to their
“difficulty”
– The financial needs or “financial maturity”
of a household can be inferred from the
financial services currently in use.
22
The pyramid of financial
independence
Risk
& Tax
Protection
Growth stocks, municipal
bonds, tax shelters & real estate
Growth to offset inflation
Stocks, mutual funds, bonds, cash
management accounts
Risk
management
Insurance,
Pension/IRA plans
Emergency
cash reserve
Money market, time
deposits
Foundation
Products
Checking, savings,
credit card, loans
23
Empirical Evidence
„
„
„
Panel of 3000 investors in the US
Portfolio of financial services utilized during a
year
Application of Latent Trait Theory to estimate:
– “difficulty” of each financial service
– Financial Maturity of each investor
– Item Characteristic Curve relating a service
“difficulty” to the investors’ Financial Maturity
24
Item characteristic curve
Likelihood of Buying
1
0.5
0
-3
-2
-1
0
1
2
3
Score
25
Foundation Products
100.0%
90.0%
Usage Probablity
80.0%
70.0%
60.0%
50.0%
Average Difficulty of
Foundation Products
40.0%
30.0%
20.0%
Difficulty of
a service
10.0%
0.0%
-6
-4
-2
0
2
4
6
Financial Maturity
Checking/Savings/NOW
Bank Credit Card
Home Mortgage
Other Loans
26
Risk Management & Cash Reserves
100.0%
90.0%
Usage Probablity
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
-6
-4
-2
0
2
4
6
Financial Maturity
Life Insurance
Pension Plan
IRA
Money Market
27
Growth to offset inflation
100.0%
90.0%
Usage Probablity
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
-6
-4
-2
0
2
4
6
Financial Maturity
Corporate Stocks
Cash Management Account
Mutual Funds
28
Risk and Tax Protection
100.0%
90.0%
80.0%
Usage Probablity
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
-6
-4
-2
0
2
4
6
Financial Maturity
Tax Shelters
Corp.Govmt Bonds
Real Estate
29
Current Income -Post Retirement
100.0%
90.0%
80.0%
Usage Probablity
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
-6
-4
-2
0
2
4
6
Financial Maturity
CD/T-Bill
Time Deposit
Annuity
30
Probability of Ownership
How to utilize the model
Financial Maturity
31
Probability of Ownership
How to utilize the model
Financial Maturity
32
The iceberg effect
„
The customer database provides only a
glimpse of the customers’ behavior
Relationship
with your firm
Relationships with your
competitors
33
Cross-selling of financial services
„ Sample
of customers from a
commercial bank in Brazil
„ Data
– Internal (customer database)
• Number of transactions/month
• Volume of Deposits in the bank
• Demographic data
• Use of 22 services within the bank
– External (survey)
• Use of 22 services outside the bank
34
Model Calibration
DATA
Customer
Database
MODEL
Sequence of
acquisition for
services within and
outside the bank
Survey
35
Implementation Test
Model of service
usage within and
outside the bank
Customer
Database
Survey
Test
Likelihood of
usage outside
the bank
36
% of all
users
outside
the
bank
Top users outside the bank,
as predicted by the model
37
38
39
Product Centric
Cross-selling
Prod.A
Prod.B
Etc….
Prod.Z
Cust.1
Cust.2
Etc.
Cust.N
40
Customer-Centric Cross-Selling
„ Analyze
customer behavior
„ Measure customer value
„ What should be the strategy with this
customer?
– Cost reduction
– Revenue enhancement
– Development
– Retention
41
Customer Centric
Cross-selling
Prod.A
Prod.B
Etc….
Prod.Z
Cust.1
Cust.2
Etc.
Cust.N
42
How analytics can
enhance CRM
„
„
„
Acquisition: Look back at past acquisition
efforts to identify the profile of profitable
acquired customers.
Development: Look at patterns of past
service usage across customers to identify
the next service to cross-sell to each
customer
Retention: Relate exit surveys to past
customer behavior to identify early signals of
attrition
43
Acquiring, developing and
retaining profitable
customers
„ What’s
CRM
„ Why CRM works
„ Analytical CRM
– Customer acquisition
– Developing customer relationships
– Churn management
44
What’s CRM: A Historical
Perspective
Mass
Marketing
Segmented
Marketing
One-to-One
Marketing
45
One-to-One Marketing
„ Small
businesses
„ Limited number of customers
„ Regional monopolies
46
Mass Marketing
47
Segmented Marketing
48
What’s CRM:
Back to One-to-One Marketing
„ Market
saturation
„ Brand proliferation
Consumer demand
for personalized
services
Brand switching
Customization
CRM
Information
Technology
49
The Customer’s Value to Us
Low
High
Customer Relationship
Management
?
Low
High
Our Value to the Customer
50
The customer life cycle
Universe of Customers
acquisition
Prospect
Development and retention
Retained or
repeat customer
Responder
Low
Value
Target
Market
Responder
New
Customer
Former
Customer
Forced
Churn
High
Potential
High
Value
Voluntary
Churn
Winback
51
Analytic CRM for Customer
Acquisition
„ Typical
Customer Acquisition Program
1-4%
RESPONSE
SAMPLE
OF LEADS
NON-RESPONSE
96-99%
GEO-DEMOGRAPHICS
(AND THE KITCHEN SINK)
RESPONSE MODEL:
RESPONSE = f(β, PREDICTORS)
52
Problems with Response Modeling for
Customer Acquisition
„
Most response models pay more attention to
non-responses (majority) than to responses,
leading to false negatives
– False positives produce small direct costs
– False negatives produce larger opportunity costs
„
Leads with high response probability might
not be the most attractive customers on the
long run
– Learn from the past, by looking at subsequent
Customer Lifetime Value from previous
acquisition programs
53