Chat with us, powered by LiveChat What kind of advantages and benefits are possible for a company adopting this objective?? How would it help a company balance the short-term and long-term goals of the company?? Expla - Payper Homework

What kind of advantages and benefits are possible for a company adopting this objective?? How would it help a company balance the short-term and long-term goals of the company?? Expla

 Discussion   (50 points) Refer to Chapter 11:  Consider the concept of “Return on Customer” (ROC) as discussed in the chapter.  

  • What kind of advantages and benefits are possible for a company adopting this objective? 
  • How would it help a company balance the short-term and long-term goals of the company? 
  • Explain how ROC is different from customer lifetime value LTV?  

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

MKT 456-CRM Instructor: Cynthia Bellian, MBA E-mail: [email protected]

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Managing Customer Experience and Relationships: A Strategic Framework

Chapter 11

Optimizing Around the Customer: Measuring the Success of Customer-Based Initiatives and the Customer- Centric Organization

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Chapter 11 Preview

Measuring Customer Value

Customer Equity

Customer Loyalty and Customer Equity

Factors in Customer Equity

Return on Customer

Creating, Harvesting, and Destroying Value

Measuring Return on Customer

Predictive Modeling

Leading Indicators of LTV Change

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

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Measuring Customer Value

Short-term: immediate sales

Long-term: changes in customer’s predisposition toward company

Balance required

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)

To strike a balance, measure customer equity, or customer lifetime value

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

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Customer Equity

The principal economic asset

The sum of all current and future customers’ LTV = firm’s total economic value

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

Prospects, as well as current customers, are included in customer lifetime value (or equity)

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

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Customer Equity and Customer Loyalty

Difficult to measure customer loyalty/customer retention

Defining retention:

A progressive variable – a volume dial, not an on-off switch

A multifaceted variable – one possibly composed of multiple relationships across business units

Distinguish customer attrition and customer defection

Attrition: results from circumstance outside company’s control (retirement, moves out of area)

Defection: customer chooses to move business to the competition

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

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Factors in 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

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

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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, it’s not worth the investment

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

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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

Harvesting customer profits from customer equity they already have, but are not increasing customer equity

Future earnings likely to decline

Value destroyers

ROC is below zero – likely showing a profit by offering deep discounts

Future earnings will certainly decline

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

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Creating, harvesting, or destroying value: Will the ROC support the ROI goals?

Company 1 Company 2 Company 3 Company 4 Company 5
$1,000 $1,000 $1,000 $1,000 $1,000
$1,200 $1,200 $975 $950 $900
$200 $200 ($25) ($50) ($100)
$50 ($50) $50 $50 $50
25% 15% 2.5% 0 (5%)

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

Value Destroyer

Value

Harvester

Value

Creator

Beginning customer equity

Ending customer equity

Change in customer equity

Profit during the period

Return on Customer

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Companies 1 and 2 in this table have achieved a combination of profit and customer equity change that nets out to something reasonably positive. In each case they are ending their year with more customer equity than they began it with, so they can expect to grow their earnings in future years. They are creating net new value for their shareholders. In Company 2’s case, this net new value is being created despite the fact that the firm’s reported current profits are negative. We would classify them as “Value Creators.”

Companies 3 and 4, on the other hand, are doing nothing more than treading the financial water. While each is reporting a current profit to its shareholders, all or a good portion of this profit seems to be coming out of existing customer equity, which is not being replenished. As a result, it’s unlikely that either of these companies will be able to achieve much growth in future years. Although they may continue to report tepid, increasingly hard-fought profits for the time being, sooner or later their customer equity will no longer be sufficient to sustain a profit at all. We classify these two firms as “Value Harvesters.”

Company 5 is in the worst situation of all, however. It has scraped out a profit this year, but this profit was only achieved by stealing even more from the future. One can imagine a car manufacturer offering the deepest-ever discounts in order to prop up this year’s numbers, saddling itself in the process with a saturated market and customers trained to wait for discounts, creating a much more difficult problem in making next year’s numbers. This company is on the skids. It may be reporting a profit to shareholders, but for the most part its shareholders are unlikely to be fooled. They will know that what the firm is really doing is “eating itself” and reporting the meal as a profit. We call this kind of company a “Value Destroyer.”

Measuring ROC

Two major steps:

Measure the marketing activities and analyze their effect on customer acquisition, retention, and growth

Estimate customer LTV and total equity of all customers at a certain time point

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

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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 customer’s LTV rather than using data to calculate it retrospectively

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

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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, Third Edition, Don Peppers and Martha Rogers

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