Understanding Customer Value: Analyzing Profitability and Retention, Slides of Customer Relationship Management (CRM)

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Unit

CUSTOMER VALUE, ANALYSING

PROFITABILITY OF CUSTOMERS, CUSTOMER

RETENTION

Introduction-

 Recently there has been growing tide of articles, papers and even

conferences devoted to the question of the future of business. As we

approach through the new millennium, we are living in a world that is the

most unstable, dynamic, exciting and frustrating for the last decades. Not

only change it but also the rate of change is accelerating. Operating in an

uncertain, highly competitive and highly complex business environment

brings so many questions to the businesses. Business insights often fail to

recognize that their marketplace/market space changes every few years.

Leading edge companies increasingly seek ways to measure customer

satisfaction, loyalty and value as mean of setting strategies of the

companies.

 Because the focus on the business is to satisfy the customer needs and

wants so the practice may need to be changed fundamentally. Complex

business environment brings so many questions to the companies. Their

profitability and viability will depend on the efforts of an increasingly diverse

customer value. Looking more closely at the question of customer value

could help for the challenges for the new millennium.

Customer Value

The following stages strive to determine the main components of the various styles of CustomerRelationship Management: (a) Functional (b) Departmental (c) Partial CRM (d) Full CRM (a) Functional CRM: This model of implementation is possible only with the large scale organizations. This will be possible only with the organizations which will not be having any departmental coordination. These modules will work only for the particular departments. This can be called as specialized modules. Because of this department-wise implementation the initial amount spent will always be higher than the Return on Investment (ROI). This method will benefit only to the specific area not to the entire organization. For example, we can consider the company like TATA which will be having various types of business with variety of modules where the commonality will be very less. In this kind of situation this type of CRM will come into the picture. (b) Departmental: This model is possible for all size of organizations. There will be some departments which will be common for one or more business modules. This intra departmental coordination can be utilized and the modules can be implemented accordingly. This will give success from bottom line to the middle level. Customer Relationship Management: Components and

 (^) (c ) Partial CRM: This module is possible only when the intra departmental coordination is more among the departments. In this model two to three departments will be sharing a common master database. For example the sales, marketing departments will always share a common database of the products and the customers.  (^) (d) Full CRM : This model is applicable with all levels of organizations. In this model the entire organization will be using a same database. There will be a greater coordination among the departments with this type of organization. As a whole the implementation is done.  (^) Customer intelligence- is another name for customer facing system. This creates the strong base of data about the customers that the organization is having with itself. Any organization which is having good customer intelligence can create a best customer data repository with which the retention of customer will be easy for the organization.  (^) The customer intelligence is having mentioned four steps that are to be followed. Each and every step is interrelated with each other

 Action: The final step in the customer intelligence.Actions will be taken based on the strategies plan.Final repository will be stored with the plans.Any organization which is following the above mentioned steps can create a good customer data repository.

There are following types of CRM technology: (a) Operational CRM (b) Collaborative CRM (c) Analytical CRM Operational CRM -  (^) This is an ERP(enterprise resource planning) like segment of CRM.  (^) Typical business functions involving customer service, order management, invoice or billing or sales and marketing automation and management are the parts of operational CRM. It provides support to “Front Office” business processes, including sales, marketing and service.  (^) Each interaction with a customer is generally added to a customer’s contact history, and staff can retrieve information on customers from the database when necessary.  (^) One of the main benefits of this contact history is that customers can interact with different people or different contact channels in a company over time without having to describe the history of their interaction each time. Technology and CRM Technology Components

 (^) The components of customer value are deceptively simple. Product quality, service quality, price, and image shape a customer’s perception of value. A firm’s strategy and performance in these areas are integrated by customers into a perception of the value proposition. This is particularly important for first time customers. In this highly competitive business environment, the customer will compare the perceived value of competitive offerings. The ultimate “winner” in the battle for the customer’s pocket book is the firm that delivers the “best value” from the customer’s perspective. These components of customer value can be shaped into a simple model  (^) Once a customer has made a purchase decision, a fifth component of value emerges.That component is the relationship between the customer and the vendor. Over time the relationship component can develop into an extremely important element. Unfortunately, firms often have explicit strategies to develop the other four components of value but simply expect the relationship to happen naturally and spontaneously. Such an expectation can be unrealistic.  (^) Each of these components can and should be broken down into much more detail to be managerially useful. Let’s use a full line department store as an example, since most of us have experience with such purchases. Product quality refers to the tangible features that a customer evaluates. For a department store, product quality can be partitioned into two dimensions. One dimension deals with the characteristics of the store itself. These characteristics would probably include location, accessibility, convenient parking, store design and layout, lighting, signs, fixtures, and furnishings. The other product dimension would include characteristics of the products themselves. These would probably include characteristics such as variety and assortment of products in each area. Customer Value

 (^) Other product mix characteristics might include the quality of the products, specific brands, and merchandise displays. In total, it may be possible for customers to identify thirty, forty, or even fifty different characteristics of the store and products that shape perceptions of value.  (^) In addition to the product characteristics, service factors also shape value perceptions.  (^) These might include the availability, knowledge, and helpfulness of cashiers and clerks or the ease of making returns and exchanges. Service factors would also include the customer service issues of call centres, complaint handling, and information availability.  (^) Since products are often fairly homogeneous across competitors, these service factors have become increasingly important to customers in differentiating between competitors.

 (^) Value creation is a never-ending cycle. It begins with modelling business operations, prioritizing areas for more detailed investigation, identifying opportunities for improvement, implementing the changes required to maximize success and the measurement and revision that starts the process over again and allows management to stay abreast of company and market changes  (^) Customer Lifetime Value  (^) In the past two decades, the firms tended to focus on either cost management or revenue growth. When a firm adopts one of these approaches it loses out on the other (Rust, Lemon, & Zeithaml,2004). For instance, if a firm focuses only on revenue growth without emphasis on cost management, it fails to maximize the profitability. Similarly, cost management without revenue growth affects the market performance of the firm.  (^) In simple terms, the value of a customer is the value the customer brings to the firm over his/her lifetime.  (^) Customer lifetime value takes into account the total financial contribution—i.e. revenues minus costs—of a customer over his or her entire lifetime with the company and therefore reflects the future profitability of the customer. Customer lifetime value (CLV) is defined as the sum of cumulated cash flows—discounted using the Weighted Average Cost of Capital (WACC) — of a customer over his or her entire lifetime with the company

 (^) Base profit is the difference between sales revenue generated by a specific product or service and the cost to produce or provide the product or service. To a customer, value involves the expected benefits and costs of a product or service, and the customer’s perception is of significant relevance. The expected benefits are derived from the product and service attributes and the expected costs include the transaction costs, the life-cycle costs, and the risk. Transaction costs are typically the immediate financial outlay, which includes the price, delivery, and installation costs. The lifecycle costs are the additional expected costs that the customer will incur over the life of the product. The risk is associated with the lifecycle costs. Conceptually, the profit levels generated by customers due to retention, related sales, and referrals .Customers do not determine corporate strategy, but their values and expectations for the company’s products and services are influential. Base Profit Analysis

 (^) The value chain framework is an approach for breaking down the sequence (chain) of business functions into the strategically relevant activities through which utility is added to products and services. Value chain analysis is undertaken in order to understand the behaviour of costs and the sources of differentiation (Shank & Govindarajan, 1993). In education, differentiation is achieved by creating a perception among targeted learners that the course, the program, or the university’s offerings as a whole are unique in some important way, usually by being of higher quality. The appeal of differentiation is strong for higher education institutions, for which image and the perception of quality are important. This perception allows the institution to charge higher tuition fees, and so to outperform the competition in revenues without reducing costs significantly Value Chain Analysis

 (^) Customer defection is also termed as ‘’customer exit’’ or ‘’switching behaviour’’. In Colgate and Hedge (2001), the terms switching, defection and exit were used interchangeably, which showed that the terms have similar definition. Defection can be defined as customers forsaking one product or service for another (Garland, 2002). The customer decides not to purchase a product or service again.  (^) Crie (2003) defined defection as an active and destructive response to dissatisfaction, exhibited by a break of the relationship with the object (brand, product, retailer, supplier, etc.). According to Colgate and Hedge (2001), defection is the customer’s decision to stop purchasing a particular service or patronising the service firm completely, which is a gradual dissolution of relationships due to problem(s) encountered over time. They explained that defection is a complex process following customers faced with problem(s). Customer defection

 (^) Retaining and developing customers has long been a critical success factor for businesses. In that sense, Customer Relationship Management is not new, previously falling under the guise of customer satisfaction. Worldwide, service organizations have been pioneers in developing cause retention strategies.

1. Innovative Measures: Banks have relationship managers for select customers, airlines have frequent flyer programs to reward loyal customers, credit card companies offer redeemable bonus points for increased card usage, telecom service operators provide customized services to their heavy users, and hotels have personalized services for their regular guests. It is, however, with the rapid rise of new entrants into the market place and increased competition that companies in other sectors have recognized the business potential within a captured base.
2. improved Operating Performance: Sluggish growth rates, intensifying competition and technological developments businesses induced to reduce costs and improve their effectiveness. Business process reengineering, automation and downsizing reduced the manpower costs. Financial restructuring and efficient fund management reduced the financial costs. Production and operation costs have been reduced trough Total Quality Management (TQM), Just in Time (JIT) inventory, Flexible Manufacturing Systems (FMS) and efficient Supply Chain Management (SCM). Trends in Customer Retention

 (^) Increased Focus: However, reduction in costs alone is no longer enough or is necessarily an effective strategy. In facing the competitive threats, such as new entrants, pricing pressures, technology along with the related costs and also including the time lags in procuring, maintaining and strengthening one’s market, more and more organizations are realizing that the traditional marketing model is no longer effective. With a flood of new entrants offering quality products and services at lower prices, many sectors have been turned into commodity markets. In a market place where loyalty has plummeted and the cost of acquiring new customers is prohibitive, companies have turned to their current customers in an attempt not only to retain them but also to exploit the potential within. This has enabled them not only to respond to the threats in their market place but also positioned them strategically to take advantage of the opportunities available.