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DIFFERENTIATING CUSTOMERS

Agenda DIFFERENTIATING CUSTOMERS

DIFFERENTIATING CUSTOMERS Customer-strategy enterprisean enterprise that

engages in customer specic behaviors, in order to
CUSTOMER VALUE IS A FUTURE-ORIENTED VARIABLE
increase the overall value of its customer base.

CUSTOMER VALUE CATEGORIES
IdenSfy
MANAGING THE MIX OF CUSTOMERS DierenSate (need dierent things from the
enterprise and dierent values to the enterprise.)
DIFFERENTIATING CUSTOMERS BY THEIR NEEDS Development of an interacSve, customer-centric
learning relaSonship with each customer.

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An example
An example
DKNY: AYer a photographer realised that DKNY were using
his photos in a window display without his permission, he
mobilised his community to share a post asking DKNY to
donate $100,000 to a local YMCA in lieu of compensaSon.
DKNY responded quickly by way of an apology. They
explained that the Bangkok store involved had accidently
used the mock-up photos and they promised to donate
$25,000 to the YMCA. The photographer accepted it was an
honest mistake and thanked them for the donaSon. DKNYs
quick and strong response successfully defused the situaSon
before a social media crisis erupted.

ADVANTAGES OF DIFFERENTIATION CUSTOMER VALUATION

PrioriSze companys compeSSve eorts Actual value is the customers value as an asset to the
enterprise, given what we currently know or predict
Possible to allocate relaSvely more Sme,
about the customers future behavior, assuming there
eort, and resources to priority customers are no major changes in the compeSSve environment.
Can yield higher returns
Catering to that parScular customers needs Poten2al value is all the value that this customer could
and by doing so lock in the customers loyalty, represent if we were to apply a conscious strategy to
increasing his value to the enterprise. improve it, by changing the customers future behavior
in some way.

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CUSTOMER VALUE IS A FUTURE-ORIENTED VARIABLE CUSTOMER LIFETIME VALUE

The actual value of a customer is equivalent to a quanSty

Customer lifeSme value that is frequently called the customer lifeSme value
Growing share of customers (LTV), or the net present value of the stream of expected
future nancial contribuSons from the customer.


It someSmes happens that the costs associated with a
customer actually outweigh the customers posiSve
contribuSons altogether, in which case the customers
LTV is below zero (BZ).

CUSTOMER LIFETIME VALUE CUSTOMER LIFETIME VALUE

Any model that aiempts to calculate individual customer LTVs should
According to CRM consultant Frederick Newell, LTV models have a employ some or all of the following data, quanSed and weighted
number of uses. They can help appropriately:

# an enterprise determine how much it can aord to spend to acquire Repeat customer purchases
a new customer, or perhaps a certain type of new customer. Greater prot and/or lower cost (per sale) from repeat customers than
# a rm decide just how much it would be worth to retain an exisSng from iniSal customers (converSng prospects)
customer. Indirect benets from customers, such as referrals
# With a model that predicts higher values for certain types of Customers stated willingness to do business in the future rather than
customers, an enterprise can target its customer acquisiSon eorts in switch suppliers
order to concentrate on airacSng mostly higher-value customers. Customer records, transacSon records
# in jusSfying markeSng investments than just looking at immediate Products and product costs, cost to serve/support
sales. MarkeSng and transacSon costs (including acquisiSon costs)
Response rates to markeSng/adverSsing eorts

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CUSTOMER LIFETIME VALUE GROWING SHARE OF CUSTOMERS

The goal of any customer strategy enterprise should be to

LTV is a quanSty that no enterprise can ever calculate posiSvely alter the customers nancial trajectory,
precisely, no maier how sophisScated its models are. increasing the customers overall value to the
enterprise---- Unrealized potenSal value.
Nevertheless, every enterprise has an interest in
understanding and posiSvely aecSng its customers LTVs
Unrealized potenSal value is a term used to denote the
to the extent possible.
amount by which the enterprise could increase the value
of a parScular customer if it applied a strategy for doing
so.

GROWING SHARE OF CUSTOMERS CUSTOMER VALUE IS A FUTURE-ORIENTED VARIABLE

As an enterprise realizes more and more of a customers
potenSal value, however, it can be said to have a greater Three types of strategies an enterprise could
and greater share of that customers business.
employ to increase a customers actual value.
Increasing share of customer (SOC) is an important goal for a
customer strategy enterprise, and can be accomplished by
increasing the amount of business a customer does, by 1. CompeSSve business
applying a strategy to favorably aect the customers
trajectory (ex: customer in a retail bank) 2. Behavior change
3. Customer growth
Share of customer (SOC) refers to the percentage of total
business conducted by a customer with a par2cular
enterprise, in the product and service arena oered by that
enterprise.

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DIFFERENT CUSTOMERS HAVE DIFFERENT VALUES

Dieren2a2ng customers
Differentiating customers and Pareto's law
- An empirical relationship for the 80-20 curve is
Increasing a customers value encompasses the central mission of an
enterprise: to get, keep, and grow its customers. ( 1+A)X
Y=
A+X
The goal of value dierenSaSon is not a historical understanding, but a where
predic;ve plan of acSon.
Y = cumulative fraction of sales
Pareto Principle X = cumulative fraction of customers
A = constant to be determined

Proxy variables (the RFM model - is based on individual customer purchase The constant is found by
histories, and incorporates three separate but quanSed components,
Example: frequent-ier mileage, grocery purchase data) X( 1-Y)
A=
Y-X
Recency: Date of this customers most recent transac;on
Frequency: How oDen this customer buys
Monetary value: How much this customer has spent in the most recent
specied period
CR (2004) Pren;ce Hall, Inc. 3-18

ABC Classica2on for 14 customers

Customers Monthly Cumula;ve Cumula;ve An ABC Dieren2a2ng customers
Customer Rank by Sales Percent of Percent of Classi -
Number Sales (000s) Total Sales Total customers
ca;on
D - 204 1 $5,056 36.2% 7.1% Suppose that in a customer base of 10 specic customers, 15% of the customers
Example
D - 212 2 3,424 60.7 14.3 account for 80% of the sales volume. The total sales from all 10 customers is
A
$90,000 per year. How much expenditure per customers can be expected if turnover

for A group of customers = 8, B group of customers = 5, and C group of customers =
D - 185 - 0 3 1,052 68.3 21.4 2?
D - 191 4 893 74.6 28.6 B First, nd A .
D - 192 5 843 80.7 35.7
D - 193 6 727 85.7 42.9 .15(1 - .80)
A = = 0.0462
D - 179 - 0 7 451 89.1 50.0 .80 - .15

Then, using A = 0.0462 and the rst item (1/10), we project the sales
D - 195 8 412 91.9 57.1
volume to be:
D - 196 9 214 93.6 64.3
D - 186 - 0 10 205 95.1 71.4 C (1 + .0462).10
D - 198 - 0 11 188 96.4 78.6 Y = = 0 . 7156 , or 71.6% of the sales
.0462 + .10
D - 199 12 172 97.6 85.7
D - 2 00 13 170 98.7 92.9 The expenditure for this customers is expected to be 0.716(90,000)/8 = $8,055.
D - 205 14 159 100.0 100.0
$13,966 ConSnue for the remaining customers and generate the following table.

CR (2004) Pren;ce Hall, Inc. 3-5 3-20

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CUSTOMER VALUE CATEGORIES

CUSTOMER VALUE CATEGORIES
3. Below-zeros (BZs)
1. Most valuable customers (MVCs) customers who, no maier what eort a company makes, will generate less revenue than
cost-to-serve. That means that not only is their actual value below zero, but their
customers with the highest actual value to the enterprise, potenSal value is also less than zero.
yield the highest margins, are most willing to collaborate,
and tend to be the most loyal. May or may not be the Strategy- create incenSves either to convert the customers trajectory into a breakeven or
protable one (for instance, by imposing service charges for services previously given
tradiSonal heavy users. Strategy RetenSon away for free) or to encourage the BZ to become someone elses unprotable
customer.

2. Most growable customers (MGCs) 4. Migrators

customers linger on the brink between being not protable and having some growth
customers who have the most growth potenSal; growth that potenSal.
can be realized through cross selling, through keeping the
customer for a longer period, or perhaps by changing Strategy- to decide whether they can be nurtured to grow or are not capable of being
customers behavior. Strategy maximize unrealized highly valuable.

potenSal values Summary: Enterprises wants to create more protability among its MGCs, while it retains
its MVCs for a longer period. It wants to convert BZs to protability or else expunge
them from the franchise. The migrators need to be moved up on the value scale, to
become more protable over Sme.

Is It Fair to Fire Unprotable Customers?

Some enterprise such as retail banks report that they
actually lose money consistently for serving their
unprotable customers.

Protable customers are, in eect, subsidizing the

unprotable ones (who create losses without prot).

Firing unprotable customers is not at all a hosSle

acSvity, but one designed to make the overall value
proposiSon fairer to all. some important ground rules
to follow, when reducing the number of below-zero
customers.

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Is It Fair to Fire Unprotable Customers? MANAGING THE MIX OF CUSTOMERS

- Dene actual and potenSal value of customers in One way to think about the process of managing customer
the same way to everyone. relaSonships is that the enterprise is aiempSng to improve its
situaSon not just by adding as many new customers as possible
- Some companies that have enjoyed monopoly or to the customer base, but by managing the mix of customers it
near-monopoly status in the past, such as uSliSes deals with.
or telecommunicaSons (or banks, in some
countries), dene value or customer protability It wants to create more protability among its MGCs, while it
in a more sophisScated way than simple revenue- retains its MVCs for a longer period. It wants to convert BZs to
minus-cost-of-service. protability or else expunge them from the franchise. The
migrators need to be moved up on the value scale, to become
- Nothing about customer dierenSaSon means more protable over Sme.
treaSng anybody badly, ever

MANAGING THE MIX OF CUSTOMERS MANAGING THE MIX OF CUSTOMERS

CreaSng a valuable customer porxolio requires understanding the
distribuSon of customer relaSonship values and invesSng in
acquisiSon, development, and retenSon accordingly.

By taking the Sme to understand the value of a customer, relaSve to
other customers, enterprises can begin to allocate resources
intenSonally to ensure that the most valuable customers remain
loyal.

The future of an enterprise, therefore, depends on how eecSvely it
acquires protable new customers, develops the protability of
exisSng customers, and retains exisSng protable relaSonships

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DIFFERENTIATING CUSTOMERS BY THEIR NEEDS DIFFERENTIATING CUSTOMERS BY THEIR NEEDS

Customers will likely be grouped together based on individually NEEDS- most generic sense
expressed very-similar needs, but it is the feedback from a
parScular customer that determines which needs group he/she is Needs are not just about product usage, but about an expanded need set or the
in, rather than any of the tradiSonal approaches to forming combinaSon of product, cross-buy product and services opportuniSes, delivery
channels, communicaSon style and channels, invoicing methods, and so on.
segments of customers who are then treated the same.

The amount the customer pays the enterprise is a component of the customers value
The key to building protable relaSonships is developing an to the enterprise, the need that the enterprise saSses is a part of the enterprises
understanding of - value to the customer.

Which customers?
How customers are dierent in terms of their needs,
How such needs-based dierences relate to dierent customer Customers needs and products benets (Needs are based on the customer, not the
values, both current and potenSal? product / features, aiributes, and benets are all based on the product)
What behavior changes on the customers part can be
accomplished by meeSng those needs? Focusing on customer needs, rather than on product features, in fact, will oYen reveal
that dierent customers purchase the same product in order to saSsfy very
What are the triggers that will allow the rm to actualize some of dierent individual needs
that unrealized potenSal value?

DIFFERENTIATING CUSTOMERS BY NEED: AN DIFFERENTIATING CUSTOMERS BY NEED: AN

ILLUSTRATION ILLUSTRATION

Consider a company that manufactures interlocking toy blocks for children, and
suppose this rm goes to market with a set of blocks suitable for construcSng a
spaceship. Three seven-year-old boys playing with this set of blocks might all
have dierent needs for it. One child might use the blocks to play a make-
believe role, perhaps assembling a spaceship and then pretending he is an
astronaut on a mission to Mars. Another child might enjoy simply following the
direcSons, meSculously assembling the ship in exact detail, according to the
instrucSons. Once the ship is built, however, he would be less interested in it. A
third child might use the spaceship block set to build something enSrely
dierent, drawn from his own vivid imaginaSon. He simply wouldnt enjoy
puyng together a toy according to someone elses diagram.

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DIFFERENTIATING CUSTOMERS BY NEED: AN WHY DOESNT EVERY COMPANY ALREADY

ILLUSTRATION DIFFERENTIATE THEIR CUSTOMERS BY NEEDS?

Indirect contact
Need to interact with the customers
individually and processing their feedback
Rather, it could start by idenSfying its most
avid fans, its highest-volume, most valuable
consumer customers.

CATEGORIZING CUSTOMERS BY THEIR NEEDS CATEGORIZING CUSTOMERS BY THEIR NEEDS

complexity of describing and categorizing customers

deeply held beliefs, psychological predisposiSons, life stages, Example: If segments and porxolios were made up of toys, then
moods, ambiSons. red re trucks might be in a segment of toys that included red
checkers sets, red dolly makeup lipsScks, and red blocks. But
Rather than grouping customers into segments based on the red re trucks would be in a porUolio of toys that included
products appeal, the customer-based enterprise places ambulances, reboats, police cars, and maybe medical
customers into porUolios, based primarily on type of need. helicopters, along with re hats and axes, stued DalmaSans,
and ladders.

A market segment is made up of customers with a similar

airibute. A customer porxolio is made up of similar

customers.

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CHARACTERISTICS OF CUSTOMER NEEDS EXAMPLE IN THE PHARMACEUTICAL INDUSTRY

With the cost-ecient, powerfully interacSve technology of the World Wide Web, this
Customer needs can be situaSonal in nature pharmaceuScal company wants to begin to establish genuine, one-to-one
relaSonships with at least some of the more valuable consumers of its products.
Customer needs are dynamic and can change over Sme,
as well Compliance is a problem

Customer needs oYen correlate with customer value The pharmaceuScal enterprise undertakes to design a paSent-centric Web site.

The most fundamental human needs are psychological Enterprise conduct a survey of paSents, and discovers that a paSents aytude toward
keeping the disease in check will drive the individual needs for using the Web site.
There is no single best way to dierenSate customers by
their needs Aytudes toward the disease tend to fall into one of three primary categories.

Even in B2B seyngs, a rms customers are not really Individualists.
another company, with a clearly dened, Abdicators
Connectors
homogeneous set of needs

Discussion QuesSon

For each of the following product categories, name a branded

example, then hypothesize about how you might categorize
customers by their dierent needs, in the same way our sample toy
company and pharmaceuScal company did. Unless noted for you,
you can specify whether the brand is B2C or B2B:

Automobiles (consumer) WE ARE DONE FOR TODAY
Automobiles (B2B, i.e. eet usage)
Air transportaSon
CosmeScs
Computer soYware (B2B)
Pet food
Refrigerators
Hotel rooms

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