The Customer Lifecycle

Transcription

1 Kenan-Flagler Business School The Universiy of Norh Carolina The Cusomer Lifecycle As businesses shif from a produc-cenric focus o a cusomer-cenric focus, he cusomer lifecycle has emerged as a framework o describe he sages over ime of he relaionship beween a cusomer and a business. I sars before a cusomer becomes a cusomer when hey are a prospec, and exends hrough heir lifeime as a cusomer and ends when hey become a former cusomer. Exhibi 1 shows he major sages: Prospecs Responders New Reained or Repea Former Universe of Prospecs Responders New Reained or Repea High Value High Poenial Low Value Former Winback Exhibi 1 progress hrough lifecycle sages Professor Charloe Mason prepared his noe o provide maerial for class discussion raher han o illusrae eiher effecive or ineffecive handling of a business siuaion.

2 Page 2 Cusomer Lifecycle Sages Prospecs are people who are in he arge marke, bu are no ye cusomers. Likely prospecs for car insurance are car owners or hose abou o purchase a car. Prospecs for digial cameras may be defined by a combinaion of demographics (such as income exceeding $35,000 and college educaed), known ineress (such as phoography), or produc ownership (such as personal compuer). Responders are hose who have made some conac wih he business, bu are no ye cusomers. Examples include a couple who calls a oll-free number o reques informaion on life insurance, a person who regisers a a websie, or an individual who sends in he reply card requesing addiional informaion from a direc mailing abou vacaion packages. New are hose who have made an iniial purchase of a produc or service. Ofen, he early behavior of cusomers is predicive of fuure behavior. Regardless, once acquired, he focus shifs owards encouraging repea purchases and cusomer loyaly. Reained or Repea are cusomers who have made more han he iniial purchase. Over ime, cusomers can be characerized according o heir value o he firm. Typically a small proporion of cusomers accoun for he majoriy of profis hese are high value cusomers ha he business wans o reain. There is also a group of low value cusomers ofen hese are unprofiable for he firm as i coss more o service hem han hey yield in revenues. For hese cusomers, he goal is o conver hem o profiable cusomers or perhaps encourage hem o ake heir business elsewhere. In beween are cusomers of varying profiabiliy. Of paricular ineres are hose ha can be idenified as high poenial cusomers. These cusomers are no ye in he high value caegory, bu appear o have he poenial o be in ha group if he firm is able o develop he cusomer relaionship. Former are hose ha are no longer acive cusomers. Some cusomers volunarily arie by aking heir business elsewhere. High levels of volunary ariion (ofen called churn) are prevalen in long-disance and wireless phone service, inerne access, and some financial services as cusomers are lured away by enicing offers from compeiors. In oher insances, cusomers may arie because hey no longer need he produc or service. A family may ougrow he need for children s producs or a reired couple may move o an aparmen and no longer need a lawn service. In many insances i is difficul o deermine when a cusomer becomes a former cusomer. Consider he regular caalog cusomer who doesn make a purchase for several years or he credi card cusomer who sops using he card, bu doesn close he accoun. Are hey sill cusomers or former cusomers? Finally, some cusomers are forced o churn if hey fail o make paymens. Cusomer Profiabiliy and he Cusomer Lifecycle The value of he cusomer relaionship varies across he sages of he lifecycle. Specifically, he value of he cusomer relaionship depends on he revenues received and he coss o service. To iniiae he cusomer revenue sream, he firm mus firs acquire he cusomer. The acquisiion cos reflecs he average per cusomer invesmen in adverising, markeing and selling expenses aimed a aracing new cusomers. Once acquired a business will ypically incur addiional expenses o develop and reain a cusomer. These may include spending on programs o increase he value of exising relaionships, he coss of loyaly or frequen buyer programs, coss of campaigns o winback former cusomers, or coss of servicing cusomer accouns.

3 Page 3 The ne cash flow received from a cusomer depends on he frequency and volume of purchases, he margin on hose purchases and he duraion of he cusomer relaionship. This will vary across cusomers and cusomer groups bu will follow he general shape shown in Exhibi 2. Cusomer Value $ Acquisiion Repurchase Reenion Winback Exhibi 2 Cusomer Value and he Cusomer Lifecycle More specifically, he lifeime value of a cusomer can be esimaed using he following formula: LTV P n ( Qπ ) ( D + R ) = n = 1 = 1 d d A where P = he probabiliy of purchase in period Q = he quaniy purchased in period π = he margin on purchases in period d = he discoun rae where d = [1+(ineres rae risk facor)] D = coss o develop he relaionship in period R = coss o reain he cusomer in period A = iniial acquisiion cos n = he number of periods The firs erm in he LTV equaion capures he ne revenues received from a cusomer discouned over ime. The second erm capures he ongoing coss o develop and reain he relaionship discouned over ime. The final erm reflecs he iniial cos o acquire he cusomer. Laer we will examine how o compue cusomer lifeime value in more deail.

4 Page 4 Cusomer Daa and he Cusomer Lifecycle Early in he cusomer lifecycle here is very limied daa available on individuals, bu gradually he amoun of cusomer daa accumulaes as he lifecycle progresses. A summary of some of he daa ypically acquired in differen lifecycle sages is shown in Exhibi 3. Some of he cusomer informaion is rouinely capured by ransacional sysems needed o run he business. For example, a bank auomaically capures a record of deposis and wihdrawals. An airline knows how ofen, o which desinaions and under which fare srucure is cusomers ravel. Phone companies can deermine how many calls a cusomer makes, o which counries, saes or numbers, and how long he calls las. The cusomer may voluneer oher pieces of daa. This poenially valuable informaion may be los unless an effor is made o capure i. The Four Seasons hoels are known for conscieniously recording cusomer requess and preferences in heir daabase. If a cusomer requess a foam, raher han feaher, pillow ha will be noed in he daabase and will be available he nex ime ha cusomer makes a reservaion a a Four Seasons propery. Oher valuable informaion abou cusomers is ofen buried in he daa and requires some analysis o uncover. Consider wha your favorie supermarke poenially knows abou your habis and preferences. Do you regularly purchase dog food or supplies? You mus have a dog. Purchases of diapers and baby food indicae very young children. Perhaps you frequen he deli couner for prepared ake-ou iems. Or do you prefer o sockpile frozen enrees? Cusomer Lifecycle Sage Prospecs Responders New Reained or Repea Former Cusomer Daa Purchased daa: Demographics (age, income, marial saus, household size) Geodemographic daa (e.g. PRIZM cluser profiles) Campaign Hisory daa (e.g., he number of imes and means of conacing prospecs) Varies bu ofen includes name, address, phone number, and produc caegory ineress. May also include financial or credi informaion, household size, educaion, employmen saus, produc ownership or oher relevan informaion. Amoun of purchase Goods or services purchased Paymen ype (cash, check, credi card) Source of cusomer (direc mail, saw ad, referral) Produc Usage Hisory Paymen Hisory Responses o markeing campaigns Channel preferences Reason for erminaion Exhibi 3 Cusomer daa builds over he cusomer lifecycle

5 Page 5 All oo ofen hese poenially valuable insighs are never uncovered simply because businesses have no made he effor. Recenly his has sared o change as he compeiive environmen has become more inense, as consumers are more demanding, and as he echnology is increasingly available businesses are saring o mine heir daabases o reveal insighs and relaionships ha can be used for a compeiive advanage. However, his is no small ask. Consider he housands, hundred of housands, or millions of cusomers ha a bank, a grocery sore, a websie, a caalog, or an airline has coupled wih poenially housands of pieces of daa for each cusomer accumulaed over he years and i is clear ha he managemen and analysis of cusomer daa is a formidable ask! Cusomer-Cenric Markeing Iniiaives and he Cusomer Lifecycle Cusomer relaionship managemen programs and iniiaives aim o increase he cusomer value over he lifecycle. While he differen programs and iniiaives are as varied as he markeplace, once again he cusomer lifecycle provides a useful framework. Some ypical cusomer-cenric iniiaives for key sages in he cusomer lifecycle are shown in Exhibi 4. Sage Markeing Iniiaives Cusomer Acquisiion Reduce acquisiion coss hrough more argeed acquisiion campaigns Profile valuable (and no-so-valuable) cusomers o ry o increase he acquisiion of high LTV cusomers Cusomer Developmen Increase he usage of curren producs or services Sell addiional (cross-sell) producs or services Sell higher margin (up-sell) producs or services Personalize communicaions and offers for he specific cusomer Marke-baske analysis o idenify opporuniies for cross-promoion or sore layou Cusomer Reenion Exend he duraion of he relaionship by reducing volunary ariion of valued cusomers Make unprofiable cusomers profiable by increasing fees or reducing service perhaps encouraging some o arie Exhibi 4 Cusomer Iniiaives during he cusomer lifecycle

6 Page 6 Cusomer Merics and he Cusomer Lifecycle I has been said ha you canno manage wha you do no measure. The key radiional measures or merics ha markeers have relied on include brand or caegory sales and marke share. Sales personnel are ofen rewarded for bringing in new accouns or cusomers and no always wih any regard for heir long-erm profiabiliy. An orienaion around cusomer-cenric markeing requires cusomer-cenric merics. An emerging se of merics by which o assess he effeciveness of cusomer-cenric markeing includes he following: Acquisiion cos he markeing cos o arac and acquire a new cusomer Reenion rae he percen of cusomers reained from one period o he nex Churn he percen of cusomers who arie per period Share of cusomer (or share of walle, share of garage if you are General Moors, share of somach if you are in he food business, ec.) a measure of how much of a cusomer s business you have LTV he lifeime value of a cusomer Duraion ime a cusomer remains a cusomer Gross income (equal o revenues-cogs and operaing coss) per cusomer boh for new and repea cusomers Repea cusomer mainenance cos In he e-commerce arena, here are numerous more merics including his, visis, conversion raes, yields, and more. These cusomer-cenric merics are becoming increasingly imporan as hey are direcly relaed o a business s financial well-being and profiabiliy.