week 2: all customers change Flashcards
(14 cards)
List the 5 sources of customer dynamics (with examples)
Individual level
1) Discrete life events: first-time parents
2) Lifecycle: with age, become more focused on comfort, health, risk-reduction
3) Product learning effects: learn what extra high-tech features they want
Product market level
4) Product lifecycle: early stages: purchase more new features, later periods: get more price sensitive
Environmental level
5) Changes is economy, gov, industry, or culture: health food culture
Is there any type of firm that can ignore customer dynamics?
Only monopolies or firms in markets with huge entry/exit barriers
List the evolution of approaches for Managing Customer Dynamics
1) Lifecycle approach:
2) Customer Dynamic Segmentation Approach: Acquisition Espansion Retention model (AER)
3) Customer Lifetime Value
Describe the lifecycle approach to managing customer dynamics
Customer lifecyle: aging; strategies designed to cater to the average individual in each stage.
Product lifecycle: most products go through 4 trypical acceptance stages
*1) Introduction: *
- Perceived as risky
- Most relevant features still unknown by both customers and sellers
- High prices
- Focus: finding new customers and promoting product trials
*2) Growth: *
- Gains acceptance
- Users know what features they want
- Focus: retaining customers and generating repeat sales
- Increasingly price sensitive
3) Maturity:
- Widely accepted, growth begins to slow (few new users available)
- Market becomes competitive, some firms drop out
- Price competition erodes profits
- Some will focus on niche segments to differentiate and avoid competitive pressures
4) Decline:
- Destructive competition + Changing customer needs = product decline
- Sales and profits decline
- Higher-cost firms and those without unique advantage exit market
- Market consolidates with fewer suppliers
List the pros and cons of the lifecycle approach to managing customer dynamics
Pros:
- Simplicity and ease of use
Cons:
- Assumes all customers follow one single curve
- Averages all customers
- Ignores causes of customer dynamics
–> Speed of adjustment: slow
–> Size of segment managed: entire pool of customers
Describe the stages of the Customer Dynamic Segmentation Approach aka AER
Acquisition-Expansion-Retention model segments existing customers based on expected migration patterns.
- Evaluates behaviours/needs of existing customers to understand temporal differences.
- Assumption: Customers within each stage are “temporally” similar; behave similarly at a specific point in time.
Each one of the stages is often a self-contained marketing domain:
1) Acquisition stage: first contact, before the first purchase even occurs
2) Expansion stage: upsell or cross-sell to expand engagement with existing customers
3) Retention stage: deals with customers who migrate away trying to find something better
Describe Lost Customer Analysis and its 3 steps
Goal: identify cause of customer churn, work backward to ensure others don’t leave for same reason.
1) Set regular intervals for contacting lost customers to identify cause of churn (choice models)
2) If lost customer is *not *in firm’s main target segment:
- Change acquisition criteria (avoid paying acquisition costs for poorly fitting customers; particularly an issue when employees are rewarded for generating new customers)
- Evaluate an expansion to address customers
3) If lost customer is in firm’s target market:
- Fix problems
Describe how choice models work
Choice models predict the likelihood of observed customer choices/responses: joining, cross-buying, leaving.
Describe RFM analysis for segmentation
Recency, Frequency, Monetary analysis
A simplified version of CLV analysis that has been used for years
1) Recency: time elapsed since lasgt purchase
2) Frequency: number of purchases in last period
3) Monetary: value of purchases in last period
These variables put customers in rank-ordered groups based on their value in the past year (so, not modelling, but rank-order sorting).
- RFM code construction: 111 is low on all 3, 555 is high on all 3.
- Choose to focus on groups with an acceptable return on investment (above breakeven creo).
Note: CLV-based approaches consistently outperform RFM techniques.
Describe the CLV approach
Customer Lifetime Value: “value” added by an individual customer; a form of customer-centric accounting –> firm’s value = sum of all customers’ CLVs
CLV = Contribution to profits of each customer according to their expected migration path over entire lifetime with firm
- Capture differences among existing customers to identify, acquire and retain the best customers
Company’s profit = sum of each customer’s discounted cashflow over lifetime
- Captures ‘real’ contribution of each customer at each stage bc considers:
1) Heterogeneity and Dynamic Effects
2) Tradeoffs between AER strategies (eg. acquisition can affect retention; where are we going to earn the most?)
Target marketing towards most high-value customers
Both current and potential customers segmented according to CLV
Beyond 80/20 rule
Firms earn 150% of their profits from 30% of their customers –> want to capture these differences between existing customers to identify best ones
CLV full formula
CLVi = (sum from t=0 to T) (CFi,t)/ (1+d)^t
CFi,t = NET cashflow by i at t
T = time horizton for estimating CLV
d =
Simplified CLV formula (assuming T tends to infinity)
( Mi - Ci ) / (1 - ri + d) - ACi
Mi: margin
Ci: marketing costs
ri: retention rate
d: discount rate
ACi: acquisition costs
Describe CRV and advocated
Customer Referral Value: lifetime value of a customer bringing you another customer.
- Highest CLV not always generate highest CRV (so, weakness of CLV)
- Real value of “advocates” (3x) higher than CLV would predict, so protect these customers with high CRV.
- Identify advocates: protect, enable, expand –> referral programs, how to build advocates. Expect Apple and BMW, but not Walmart
