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Chapter 5 CPM - Merged

This document discusses customer portfolio management. It defines a customer portfolio as a business's collection of customer groups. Customer portfolio management aims to optimize business performance by offering differentiated value propositions to customer segments. It also discusses how business-to-business customers differ from business-to-consumer customers. Key disciplines for customer portfolio management include market segmentation, sales forecasting, activity-based costing, customer lifetime value estimation, and data mining.

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Sahil Mathur
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105 views

Chapter 5 CPM - Merged

This document discusses customer portfolio management. It defines a customer portfolio as a business's collection of customer groups. Customer portfolio management aims to optimize business performance by offering differentiated value propositions to customer segments. It also discusses how business-to-business customers differ from business-to-consumer customers. Key disciplines for customer portfolio management include market segmentation, sales forecasting, activity-based costing, customer lifetime value estimation, and data mining.

Uploaded by

Sahil Mathur
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Chapter 5

Customer Portfolio Management


Customer Portfolio definition

 A customer portfolio is the collection of mutually


exclusive customer groups that comprise a
business’s entire customer base.
Objectives of Customer Portfolio Management (CPM)

 CPM aims to optimise business performance –


whether that means sales growth, enhanced
customer profitability, or something else - across the
entire customer base.
 It does this by offering differentiated value
propositions to different segments of customers.
How B2B customers differ from B2C customers

 Fewer in number
 Bigger in size
 Closer relationships with suppliers
 Derived demand
 Professional buying
 Direct purchase
Basic disciplines for CPM

 market segmentation
 sales forecasting
 activity-based costing
 customer life-time value estimation
 data-mining
Market segmentation definition

 Market segmentation is the process of dividing up a


market into more-or-less homogenous subsets for
which it is possible to create different value
propositions.
Intuitive vs. data-based segmentation

Figure 5.1
Market segmentation process

1. identify the business you are in


2. identify relevant segmentation variables
3. analyse the market using these variables
4. assess the value of the market segments
5. select target market(s) to serve
Types of competitor (kitchen furniture example)

 Benefit competitors
● other companies delivering the same benefit to customers.
These might include window replacement companies,
heating and air-conditioning companies and bathroom
renovation companies
 Product competitors
● other companies marketing kitchens to customers seeking
the same benefit.
 Geographic competitors
● these are benefit and product competitors operating in the
same geographic territory
Criteria for segmenting consumer markets
Bivariate segmentation of the chocolate market

Figure 5.2
Criteria for segmenting business markets
Account-based segmentation variables

 account value
 share of category (share of wallet) spend
 propensity to switch
McKinsey/GE customer portfolio matrix

Figure 5.3
Activity based costing 1

Costs do vary from customer-to-customer. Some


customers are very costly to acquire and serve, others
are not.
 Customer acquisition costs.
● Some customers require considerable sales effort to shift
them from prospect to first-time customer status: more sales
calls, visits to reference customer sites, free samples,
engineering advice, guarantees that switching costs will be
met by the vendor.
 Terms of trade.
● Price discounts, advertising and promotion support, slotting
allowances (cash paid to retailers for shelf-space), extended
invoice due-dates.
Activity based costing 2

 Customer service costs.


● Handling queries, claims and complaints, demands on sales-
person and contact centre, small order sizes, high order
frequency, just-in-time delivery, part-load shipments,
breaking bulk for delivery to multiple sites.
 Working capital costs.
● Carrying inventory for the customer, cost of credit.
ABC in a claims processing department

Figure 5.4
How ABC helps CPM

 When combined with revenue figures, it tells you the


absolute and relative levels of profit generated by
each customer, segment or cohort
 It guides you towards actions that can be taken to
return customers to profit.
 It helps prioritise and direct customer acquisition,
retention and development strategies
 It helps establish whether customisation, and other
forms of value creation for customers, pays off
Shapiro et al’s customer classification matrix

Figure 5.8
How costs vary between customers

Pre-sale costs Production costs Distribution costs Post-sale costs


Geographic location: Order size Shipment consolidation Training
close v. distant
Prospecting Set-up time Preferred transportation Installation
mode
Sampling Scrap rate Back-haul opportunity Technical
support
Human resource: Customization Location: close v. distant Repairs and
management v. reps maintenance
Service: design Order timing Logistics support e.g.
support, applications field inventory
engineering

Table 5.10
Trivariate CPM Model

Figure 5.9
Strategically significant customers 1

 High future life-time value customers.


● These customers will contribute significantly to the
company’s profitability in the future
 High volume customers.
● These customers might not generate much profit, but they
are strategically significant because of their absorption of
fixed costs, and the economies of scale they generate to
keep unit costs low
Strategically significant customers 2

 Benchmark customers.
● These are customers that other customers follow. For
example, Nippon Conlux supplies the hardware and software
for Coca Cola’s vending operation. Whilst they might not
make much margin from that relationship, it has allowed
them to gain access to many other markets. ‘If we are good
enough for Coke, we are good enough for you’, is the
implied promise. Some IT companies create ‘reference sites’
at some of their more demanding customers.
Strategically significant customers 3

 Inspirations.
● These are customers who bring about improvement in the
supplier’s business. They may identify new applications for a
product, product improvements, or opportunities for cost
reductions. They may complain loudly and make
unreasonable demands, but in doing so, force change for the
better.
 Door openers.
● These are customers that allow the supplier to gain access
to a new market. This may be done for no initial profit, but
with a view to proving credentials for further expansion. This
may be particularly important if crossing cultural boundaries,
say between west and east.
Seven core customer management strategies

1. Start a relationship
2. Protect the relationship
3. Re-engineer the relationship
4. Grow the relationship
5. Harvest the relationship
6. Win back the customer
7. End the relationship
Customer Life Cycle

 Acquisition

 Retention and development

 Win back
CUSTOMER AQUISITION

 Attrition
 Demographic, competitors, uncontrollable factors
 New customer can be
New to category
New to company
New to company

 Conversion model in B2B (Jan Hofmeyr)


entrenched
average commitment- switch in medium term
shallow- considering alternatives
convertible- made up their mind
CUSTOMER ACQUSITION

 DATABASE of prospects
 Profiling of prospects (lead qualifying)
 Acquisition campaign cycle time
 Calculate all costs for conversion
 Length of time needed to keep them
 Natural referrals community building
 Switching barriers
 Point of entry
 Affinity programs
 Affiliate networks
KPI

 Number of acquisitions
 Cost per acquired customer
 Value of acquired customer over time
Operational tools

 Lead management
 Campaign management
 Pipeline management and others
Customer retention

Number of customers doing business with a firm at


the end of a financial year expressed as a
percentage of customers who were active at the
beginning of the year

repurchase time can be considered

multiple products with varied repurchase times


There Are Three Levels of
Relationship Marketing

Level 1: relies primarily on pricing incentives. Aim at


customers at far left.
Level 2: relies primarily on social bonds involving
customization and personalization.
Level 3: bonds are established by structural solutions
Which Companies Benefit Most from
CRM?
 Companies serving large numbers of customers
through complex and frequent interactions:
● Communications companies
● Retail banks
● Insurance companies
● Healthcare organizations
● Utilities
 Companies with heterogeneous customers
 Companies in which switching cost is high
 Switching barrier
 Always a share market
 Lost for good market
Silos

Product silos – product based information systems

Channel silos

Functional silos- finance, sales, service


integration
True retention and defection

Averages and what they hide

Sales, cost to serve and buying behavior are


different

10 percent defection could actually be 25 percent


defection or zero defection
quality
BONDING FOR CUSTOMER RELATIONSHIP

Berry and Parasuraman (1991)


1.Financial Bonds
volume and frequency rewards
bundle and cross selling
stable pricing
4.Structural Bonds
integrated information systems
joint investments
shared processes and equipment
2. Social Bonds
personal relationships
continuous relationships
bonds among customers
3. Customization Bonds
customer intimacy
mass customization
anticipation/innovation
CUSTOMER RETENTION PROGRAM

1. Measure customer retention


2. Interview former customers
3. Analyse complaint and service data
4. Identify switching barriers
Economics of customer retention

More purchases
More variety of purchases
Lower customer management costs
Higher price
Referrals
The satisfaction-profit chain

Customer Customer Business


satisfaction loyalty performance

Understand customer requirements Revenue growth


Meet customer expectations Share of customer wallet
Deliver customer value Customer tenure
Returns from investments in customer satisfaction
High
repeat purchase rates

Low
4
1 2 3 5 6 7
not at all
satisfied
customer satisfaction level very satisfied
Three measures of customer retention

 Raw customer retention rate.


● the number of customers doing business with a firm at the end of a
trading period expressed as percentage of those who were active
customers at the beginning of the period.
 Sales-adjusted retention rate.
● the value of sales achieved from the retained customers expressed
as a percentage of the sales achieved from all customers who were
active at the beginning of the period.
 Profit-adjusted retention rate.
● the profit earned from the retained customers expressed as a
percentage of the profit earned from all customers who were active
at the beginning of the period.
Retention strategies

Recognition

Up selling

Cross selling

Personalization

Customization

Loyalty programs
Negative and positive customer retention strategies

 Create exit barriers  Delight customers


 Enforce the contract  Create customer-perceived
 Extract switching added value
penalties  Create social and structural
bonds
 Create customer
engagement
What is customer delight?

Customer delight = P > E

where
P = Perception of performance
E = Expectation.
KANO MODEL ANALYSIS

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