Customer Value Analysis

Session Coverag ge

S Share a eo of Custo Customer e Lifetime Value of Custo omers Customer Profitability Analysis A

Share of Customer r Vs Share of Market

Ne eeds Sati isfied

Customers Reached

Needs Satisf fied Customers Reached

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Market Share vs Share e of Customer

Customer Centric g Marketing Marketing Practice & Philosophy

Seg gment Centric M Marketing

Product Centric Marketing

1960s

1980s

1990s
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Customer Lifetim me Value

Net profit over the Lif fe-Time of an Individual Customer

Market Share vs Customer Share Example-Maruti p

A typical t i l buyer b of f a Mar M ruti ti Car C incurs i th the f following ll i expenses over the assum med 7 years of the cars life-Product expenses: Purcha ase price of a car -Financial service expenses p s: Car loans, , insurance -Servicing and spares -Fuel

When Maruti was focuse ed on increasing market share h b selling by lli more cars, it was t targeting ti only l 35% of each of its customers s expenses. Attracting customers is expensive as the industry is really competitive Maruti shifts its focus fro om Market share to customer share, by-Providing car loans through its dealer d network at POS -Car insurance -Servicing and spare parts
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N Now Maruti M ti is i targeting t ti 65 % of f all ll expenses incurred by the custome er over a seven year period So its Customer share can c increase from 35 % to 65% From a single transaction n at the beginning of a sale, there are opportunities pp for many y interactions spread over 7 years

Th The C Customer t share h f focus requires i companies to enter in nto new business areas to tap the opportunit ties Some Maruti ties. initiatives include Maruti Countrywide finance and d Citicorp Maruti Finance Entry into auto insurance busine ess Increased focus on service and spare sp parts. p Purchase and sale of pre-owned d cars through Maruti true value N2N-Targeted towards corpora ate segment for fleet management

CLV Example p
Retention Rate Year 3 360 1,000 360,000 1,960,000 1,960 1 960 230,400 1,710,400 1 710 1,710

Expected p Profit from a New Customer New Customers Expected No. of Customers Average Profit for Each Customer Profit Expected Profit from New Customers Average Profit from Each of the New Customers Use Discount rate Cumulative Per Customer Discount Rate ar 1 Yea 1,0 000 000 1,0 1,000 0,000 0,000 1,000 1,0 1 0 000 1,000 0,000 1,000 0,000 10 1,0 000 25.0 00% Year 2 600 1,000 600,000 1,600,000 1,600 1 600 480,000 1,480,000 1 480 1,480

60.00% Year 4 216 1,000 216,000 2,176,000 2,176 2 176 110,592 1,820,992 1 821 1,821
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Customer Li ife-time Value

7000 6000 5000

N P V

4000 000 3000 2000 1000 0

0. 65

0. 90

0. 70

0. 50

0. 60

0. 75

R Retention Rate
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0. 85

0. 55

0. 80

0. 95

Customer Value Segments g

Source : Prof. Sudhi Seshadri, IIMB

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Customers Are Profitable P over Time

Profit from price premium Profit from references Profit from reduced op. costs Profit from increased usage Base Profit

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Source: Reichheld and Sasser

Year

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Loyalty y y Strategy gy y
Butterflies eds Good fit between offerings & customer nee high profit potential Actions : Transactional satisfaction Milk the accounts as long as they are active e Key challenge - cease investing soon enough Strangers Little fit between offerings & customer needs Lowest profit potential Actions : Make no investment in these relationships Make profit on every transaction True Friends Good fit between offerings & customer needs Highest profit potential Actions : Communicate consistently but not too often Build both attitudinal & behavioral loyalty Barnacles Limited fit between offerings & customer needs Low profit potential Actions : Measure both size & share of wallet If share of wallet is low, focus on X & Up selling If size of wallet is small, impose strict controls Long Term Customers

High Profitability

Low Profitability

Short Term Customers

Source; Reinartz, W. and V. Kumar (2002), The Mismanagemen nt of Customer Loyalty, Harvard Business Review, July.

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Guests and Contrib butions - Hilton

% Guests % Revenue 6 5 7 21 61 % Net P fit Profits 28 18 10 6 49

Diamond + Gold Hilton HHonors Members Silver Hilton HHonors Members Blue Hilton HHonors Members Nonmember Business travelers Convention & Resort Travelers

1 2 6 25 66

Bell et al (2002) Seven barriers to Customer Equity Mana agement, Journal of Service Research, August, 77-85

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Activity y Based Costing C g

ABC classifies l ifi cost ti into t

Material Cost and a Activity Cost

For service firms, material cost c may be zero or low (hotel) Critical activity centres are identified and cost information collected Activity costs are charged to o product or service or customers
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Philosophy Phil h of f Ac Activity ti it Based B d Costing C ti

Organisation O i ti exists it t to perform f set t of f activities ti iti to t add dd value l to t product/service Activities performed by men or r machine or both In a multi-product or customer rs environment, products and customers demand on activities differs considerably Costing of activities helps in costing of products or customers

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Activity y or Cost Driver D

Cost associated with differe ent activities are charged to the product or customers on th he basis of the level of activity consumed What drives the cost of acti ivity is important in allocation of costs to products Examples of Activities and Activity/Cost A Drivers
Activity Purchase Ordering Shipping activities Invoices Cost Driver Number of Orders mber of shipments Num Num mber of invoices
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Customer Cost Analysis A

Why y do we need separate p c customer cost analysis? y

Customers include end-custo omers or dealers/distributors Customers are not identical in terms of cost e.g. product manufactured in Bangalore but sold in Delhi i or Calcutta; cost of transportation, transportation insurance, packing needs, etc. . differ Sales terms of customers diffe er -discount, credit period,.. Customers demand on after-s sale service differ Customers may require differ rent product mixes or specification

Product cost may be e same at the factory gate but may differ at t the customers door
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Customer Differe ences

Customers differ mainly on n four accounts Revenue Differences

Discounting and credit ter rms

Cost Differences
p packing, g distribution, after r-sale service, specification p Delivery schedule (just-in-t time)

Distribution Channel Diff fferences

industrial customers vis--vis individual customers

Service Level Differences s

on-site on site service, service full service e etc. e, etc
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Profitable Customers

Who are p profitable customer rs?

Are all large customers profitab ble? Are all small customers unprofit table?

Are there loss making custom mers for the same product?
Where do we incur loss? Is there e any way to cut cost or increase price?

A customer c stomer may ma be less profitable toda today b but t ma may be a major profitable customer in the fut ture
e.g. Overseas customers

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Characteristics of hi igh g cost and hidden profit p

Low cost to serve customers
Order standard products High order quantities Predictable order arrivals Standard delivery No Change in delivery requirements Electronic Processing Little to no pre-sale and post-sale support Replenish as produced Pay on time

High cost to serve customers

Order custom products Small Order quantities Unpredictable order arrivals Customized delivery Change delivery requirements Manual Processing Large pre-sale and post-sale support Require Company to hold inventory Pay slowly (high account receivables)

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Options for Manag ging Customers

Types of Customers Passive Product is Crucial Good Supplier Match Costly to Service, S But pay to op dollar

Customers above the cost-plus diagonal are more p profitable

Profits
High

Net Margin Realized

Price Sensitive and few special demands

Aggressiv ve Leverage their t buying power Low price e and lots of customised d service and features

Low Low

Cost to serve

High

Losses

Profitability depends on whether and how much the net product margins recover the cu ustomer specific costs
Source: Shapiro, Rangan, Moriarty and Ross, " Managing Customers for Pro ofits (Not Just Sales)", Harvard Business Review, September - October 1987.

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Managers follow strategic ABM principles by by...

protecting existing highly profit table customers re-pricing expensive services, based b on cost-to-serve discounting, if necessary to gain business with low cost-to-serve customers win-win win relationship ps that lower cost to serve with negotiating win cooperative customers profitable customers that provide being patient with currently unp other non-quantified benefits to o the company attempt to capture high profit cu ustomers from competitors

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Summary

S Share a eo of Custo Customer e Lifetime Value of Custo omers Customer Profitability Analysis A

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