Popular Customer Selection Strategies (contd.

 Logistic Regression

▪ Method of choice when the dependent variable is binary and

assumes only two discrete values
▪ By inputting values for the predictor variables for each new
customer – the logistic model will yield a predicted probability
▪ Customers with high ‘predicted probabilities’ may be chosen to
receive an offer since they seem more likely to respond positively

V. Kumar, W. Reinartz, Customer Relationship Management, Springer Texts in Business

 Logistic Regression- Examples
 Example 1: Home ownership
Home ownership as a function of income can be modeled whereby
ownership is delineated by a 1 and non-ownership a 0
The predicted value based on the model is interpreted as the probability
that the individual is a homeowner
With a positive correlation between increasing income and increasing
probability of ownership, can expect results as
predicted probability of ownership is .22 for a person with an income
of $35,00
predicted probability of .95 for a person with a $250,000 income

V. Kumar, W. Reinartz, Customer Relationship Management, Springer Texts in Business

 Logistic Regression- Examples (contd.)

 Example 2: Credit Card Offering

 Dependent Variable-- whether the customer signed up for a ‘gold’

card offer or not

 Predictor Variables--other bank services the customer used plus

financial and demographic customer information

 By inputting values for the predictor variables for each new customer,
the logistic model will yield a predicted probability

 Customers with high ‘predicted probabilities’ may be chosen to

receive the offer since they seem more likely to respond positively
V. Kumar, W. Reinartz, Customer Relationship Management, Springer Texts in Business
 Linear and Logistic Regressions

• In linear regression, the effect of one unit change in the independent variable on the dependent

variable is assumed to be a constant represented by the slope of a straight line

• For logistic regression the effect of a one-unit increase in the predictor variable varies along an s-

shaped curve. This meansV.that

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middle a one unit change has a fairly large effect

 Logistic Regression Transformation Steps

p
Step 1: If p represents the probability of an event occurring, take the ratio 1− p

Since p is a positive quantity less than 1, the range of this expression is 0 to infinity

 p 
Step2: Take the logarithm of this ratio: log 
 1 − p 

This transformation allows the range of values for this expression to lie between negative
infinity and positive infinity

V. Kumar, W. Reinartz, Customer Relationship Management, Springer Texts in Business

Logistic Regression Transformation Steps (contd.)

V. Kumar, W. Reinartz, Customer Relationship Management, Springer Texts in Business

 Techniques to Evaluate Alternative
Customer Selection Strategies
 Lift Charts
▪ Lifts indicate how much better a model performs than the ‘no model’
or average performance
▪ Can be used to track a model’s performance over time, or to
compare a model’s performance on different samples
▪ The lift will then equal (response rate for each decile) ÷ (overall
response rate) ×100
▪ The cumulative lift = (cumulative response rate) ÷ (overall response
rate) ×100
▪ The cumulative response rate = cumulative # buyers ÷ cumulative #
customers
V. Kumar, W. Reinartz, Customer Relationship Management, Springer Texts in Business
 Lift Performance Illustration
# of # of Response Cumulative
Decile Customers Buyers Rate Lif t Lif t
1 5000 1759 35.18% 3.09 3.09
2 5000 1126 22.52% 1.98 5.07
3 5000 998 19.96% 1.75 6.82
4 5000 554 11.08% 0.97 7.80
5 5000 449 8.98% 0.79 8.59
6 5000 337 6.74% 0.59 9.18
7 5000 221 4.42% 0.39 9.57
8 5000 113 2.26% 0.20 9.76
9 5000 89 1.78% 0.16 9.92
10 5000 45 0.90% 0.08 10.00
V. Kumar, W. Reinartz, Customer Relationship Management, Springer Texts in Business
 Decile Analysis
Decile Analysis

40.00%
35.18%
35.00%

30.00%
Response Rate

25.00% 22.52%
19.96%
20.00%

15.00%
11.08%
8.98%
10.00%
6.74%
4.42%
5.00% 2.26% 1.78%
0.90%
0.00%
1 2 3 4 5 6 7 8 9 10
Deciles

The Decile analysis distributes customers into ten equal size groups
For a model that V.performs well,
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response rate
 Lift Analysis
Lift Analysis

3.50
3.09
3.00

2.50
1.98
2.00 1.75
Lift

1.50
0.97
1.00 0.79
0.59
0.39
0.50 0.20 0.16 0.08
0.00
1 2 3 4 5 6 7 8 9 10
Deciles

Lifts that exceed 1 indicate better than average performance

Less than 1 indicate a poorer than average performance
For the top decile V.the
Kumar, W. Reinartz, Customer Relationship Management, Springer Texts in Business
lift is 3.09; indicates that by targeting only these customers one can expect to yield
3.09 times the number of buyers found by randomly mailing the same number of customers
 Cumulative Lift Analysis
Cumulativ e Lift Analysis

10

7
Cumulative Lift

6
5

0
0 1 2 3 4 5 6 7 8 9 10
De cile

The cumulative lifts for the model reveal what proportion of responders we can expect to gain from targeting a
specific percent of customers using the model
V. Kumar, W. Reinartz, Customer Relationship Management, Springer Texts in Business

Choosing the top 30 % of the customers from the top three deciles will obtain 68% of
 Lift Performance Comparison
Comparison of Models

10
9
8
7
Cumulative Lift

6 Logistic
Past Customer Value
5
RFM
4 No Model
3
2
1
0
0 1 2 3 4 5 6 7 8 9 10
Deciles

Logistic models tend to provide the best lift performance

The Past Customer Value approach provides the next best performance
V. Kumar, W. Reinartz, Customer Relationship Management, Springer Texts in Business
The traditional RFM approach exhibits the poorest performance
 Summary
 Firms use different surrogate measures of customer value to prioritize their customers and to
differentially invest in them
 Firms can use information about size of wallet and share of wallet together for optimal
allocation of resources
 Transition matrix provides the probability that a customer will purchase a particular brand if
what brand has been purchased the last time is known
 The higher the computed RFM score, the more profitable the customer is expected to be, in
the future
 Firms employ different customer selection strategies to target the right customers
 Lift analysis, decile analysis and cumulative lift analysis are various techniques firms use to
evaluate alternative selection strategies
 Logistic Regression is superior to Past Customer Value and RFM techniques

V. Kumar, W. Reinartz, Customer Relationship Management, Springer Texts in Business

V. Kumar, W. Reinartz, Customer Relationship Management,
Springer Texts in Business
Homework
 Reading book “Kumar, V., &
Reinartz, W. (2018). Customer
Relationship Management,
Concept, Strategy, and Tools, 3rd
Edition. Berlin: Springer-Verlag.

V. Kumar, W. Reinartz, Customer Relationship Management,

Springer Texts in Business
EXERCISES

V. Kumar, W. Reinartz, Customer Relationship Management, Springer Texts in Business

 CRM
V. Kumar, W. Reinartz, Customer Relationship Management, Springer Texts in Business
Chapter 7

Data Mining
 Topics

• Applications of Data Mining

• Involvement of the three main groups participating

in a data-mining project

• Overview of the Data Mining Process

 Applications of Data Mining

• Reducing churn with the help of predictive models, which enable early
identification of those customers likely to stop doing business with the company
• Increasing customer profitability by identifying customers with a high growth
potential
• Reducing marketing costs by more selective targeting
 Overview of the Data Mining Process

V. Kumar, W. Reinartz, Customer Relationship Management, Springer Texts in Business

 Timeframe of Data Mining Methodology

V. Kumar, W. Reinartz, Customer Relationship Management, Springer Texts in Business

Extent of Involvement of The Three Main Groups
Participating in a Data-Mining Project

V. Kumar, W. Reinartz, Customer Relationship Management, Springer Texts in Business

Involvement of Business, Data Mining and IT Resources in a
Typical Data Mining Project

• Data mining group:

▪ Understand the business objectives and support the business
group to refine and sometimes correct the scope, and
expectations
▪ Most active during the variable selection and modeling phase
▪ Share the obtained customer insights with the business group
• IT resources:
▪ Required for the sourcing and extraction of the required data
used for modeling
Involvement of Business, Data Mining and IT Resources in a
Typical Data Mining Project

• Business group:
▪ Involved in checking the plausibility and soundness
of the solution in business terms
▪ Takes the lead in deploying the new insights into
corporate action such as a call center or direct mail
campaign
 Manipulations to Data Set
• Column manipulations
▪ Transformation
▪ Derivation
▪ Elimination
• Row manipulations
▪ Aggregation
▪ Change detection
▪ Missing value detection
▪ Outlier detection
 Data Preparation
For modeling, incoming data is sampled and split into various streams as:

• Train set: Used to build the models

• Test set: Used for out-of-sample tests of the model quality and to select the final model
candidate
• Scoring data: Used for model-based prediction , ‘large’ as compared to other data sets
 Define Business Objectives

• Modeling of expected customer potential, in order to target acquisition of

customers who will be profitable over the whole lifetime of the business
relationship

• Distinguish between customers with a target variable equal to zero and

customers with a target variable equal to one

• Establish likelihood threshold levels above which business group think a

prospect should be included in the marketing campaign

V. Kumar, W. Reinartz, Customer Relationship Management, Springer Texts in Business

 Define Business Objectives (contd.)
• Define the set of business or selection rules for the campaign (e.g.: , the customers that should
be excluded from or included in the target groups)

• Define the details of project execution specifying the start and delivery dates
of the data mining process, and the responsible resources for each task
• Define the chosen experimental setup for the campaign
• Define a cost/revenue matrix describing how the business mechanics will work in the supported
campaign and how it will impact the data mining process
• Establish the criteria for evaluating the success of the campaign
• Find a benchmark to compare against results obtained in the past for the
same or similar campaign setups using traditional targeting methods, and not predictive models
 Define Business Objectives (contd.)
• Define the set of business or selection rules for the campaign (e.g.: , the customers that
should be excluded from or included in the target groups)
• Define the details of project execution specifying the start and delivery dates
of the data mining process, and the responsible resources for each task
• Define the chosen experimental setup for the campaign
• Define a cost/revenue matrix describing how the business mechanics will work in the
supported campaign and how it will impact the data mining process
• Establish the criteria for evaluating the success of the campaign
• Find a benchmark to compare against results obtained in the past for the
same or similar campaign setups using traditional targeting methods, and not predictive
models
 Cost/Revenue Matrix

• Will have an impact on the choice of model

parameters such as the cut-off point for the selected model
scores
• It will also give business users an immediately interpretable
table
 Cost/Revenue Matrix
Cost/Revenue matrix In reality prospect did In reality prospect did
not purchase purchase
Cost: $0
Model predicts prospect lost business opportunity of
1st year revenue: $0
will not purchase +$895
Total: $0
(not contacted)

Cost: -$5 Cost: -$5-$100

Model predicts prospect
1st year revenue: $0 1st year revenue: +$1000
will purchase (contacted)
Total: -$5 Total: +$895

Assuming average cost per call is $5, each positive responder (purchaser) will generate additional cost due to
-administration work required to register him as a new customer
-the cost of the delivered phone handset (say, $100)
Customers, who respond positively will, generate average revenue of $1000 per year
 Get Raw Data

• Identify, extract and consolidate raw data in a database

(often called “Analytical Data Mart”)
• Check the quality of the analytical raw data - technical checks as well
as ensuring that the data makes sense in the given business context

V. Kumar, W. Reinartz, Customer Relationship Management, Springer Texts in Business

 Get Raw Data (contd.)
• Step 1: Looking for Data Sources

• Mixed top-down and bottom-up process, driven by business requirements

(top) and technical restrictions (bottom)

• Step 2 : Loading the Data

• Define how the data will be imported into the data mining environment
• Checking Data Quality
• Technical aspects of the data: primary keys, duplicate records, missing values
• Business context: realistic data
 Step 1: Looking for Data Sources

• Data warehouse infrastructures with advanced data cleansing

processes can help ensure that you are working with high-quality data
• Build a (simple) relational data model onto which the source data will
be mapped
 Step 2: Loading the Data

• Define further query restrictions , prepared by IT teams , for

execution at pre-defined time windows in batch mode
• Deliver extracted data to the data mining environment in a pre-
defined format
• Further processing and using data to fill previously defined data
model in the data mining environment as part of the ETL process
(Extract-Transform-Load)
 Step 3: Checking Data Quality

• Assess and understand limitations of data resulting from its inherent quality (good or
bad) aspects
• Create an analytical database as the basis for subsequent analyses
• Carry out preliminary data quality assessment
• To assure an acceptable level of quality of the delivered data
• To ensure that the data mining team has a clear understanding of how to interpret the data in business
terms

• Data miners have to carry out some basic data interpretation and aggregation exercises
 Identify Relevant Predictive Variables

Step 1: Create Analytical Customer View – “Flattening” the Data

Step 2: Create Analytical Variables

Step 3: Select Predictive Variables

V. Kumar, W. Reinartz, Customer Relationship Management, Springer Texts in Business
 Step 1: Create Analytical Customer View –
“Flattening” the Data
• Individual customer constitutes an observational unit for data analysis and
predictive modeling
• All data pertaining to an individual customer is contained in one observation (row,
record)
• Individual columns (variables, fields) represent the conditions at specific points in
time or a summary over a whole period
• Definition of the target or dependent variable- values should be generated for all
customers and added to the existing data tables
Step 2: Create Analytical Variables

• Introduce additional variables derived from the original ones

• When needed, transform variables to get new and more predictive variables
• Increase normality of variable distributions to help the predictive model training
process
• Missing value management is key for enhancing the quality of the analytical data set
 Step 3: Select Predictive Variables
• Inspect the descriptive statistics of all univariate distributions associated to all available variables
• Exclude those variables:

• which take on only one value (i.e. the variable is a constant)

• with mostly missing values
• directly or indirectly identifying an individual customer
• showing collinearities
• showing very little correlation with the target variable
• Containing personal identifiers
• Define a threshold missing value count level above which the field would be excluded from further analysis (e.g. more
than 95% missing values)
• Check if all variables have been mapped to the appropriate data types
 Gain Customer Insight

Step 1: Preparing data samples

Step 2: Predictive Modeling
Step 3: Select Model

V. Kumar, W. Reinartz, Customer Relationship Management, Springer Texts in Business

 Step 1: Preparing Data Samples

• Analyze if sufficient data is available to obtain statistically

significant results
• If enough data is available, split the data into two samples:
• the train set to fit the models
• the test set to check the model’s performance on observations that have
not been used to build it
 Step 2: Predictive Modeling
Two steps:

• The rules (or linear/non-linear analytical models) are built based on a training set
• These rules are then applied to a new dataset for generating the answers needed for the campaign
Guidelines:

• Distinguish between different types of predictive models obtained through different modeling paradigms:
supervised and un-supervised modeling
• Find the right relationships between variables describing the customers to predict their respective group
membership likelihood: purchaser or non-purchaser, referred to as scoring (e.g. between 0 and 1)

• Apply unsupervised modeling where group membership is not known beforehand

 Step 3: Select Model
Compare relative quality of prediction by comparing respective
misclassification rates obtained on the test set
Example of misclassification error rate or confusion matrix:

Input Node - Classification Neural Network (10)

Predicted
Totals
1 0

1 726 56 782
Observed
0 173 504 677

Totals 899 560 1459

 Act

Step 1: Deliver Results to Operational Systems

Step 2: Archive Results
Step 3 Learn

V. Kumar, W. Reinartz, Customer Relationship Management, Springer Texts in Business

 Step 1: Deliver Results to Operational Systems

• Apply the selected model to the entire customer base

• Prepare score data set containing the most recent information for each customer with
the variables required by the model
• The obtained score value for each customer and the defined threshold value will
determine whether the corresponding customer qualifies to participate in the campaign
• When delivering results to the operational systems, provide necessary customer
identifiers to unambiguously link the model’s score information to the correct customer
 Step 2: Archive Results
• Each data mining project will produce a huge amount of information including:
• raw data used
• transformations for each variable
• formulas for creating derived variables
• train, test and score data sets
• target variable calculation
• models and their parameterizations
• score threshold levels
• final customer target selections

• Useful to preserve especially if the same model is used to score different data sets obtained at
different times
 Step 3: Learn
• Referred to as “closing the loop”
• Obtain the facts describing performance of data mining project and
business impact
• Obtained by monitoring campaign performance while it is running and
from final campaign performance analysis after the campaign has ended
• Detect when a model has to be re-trained
 Summary
• Data Mining can assist in selecting the right target customers or in identifying previously unknown
customers with similar behavior and needs
• A good target list is likely to increase purchase rates, and have a positive impact on revenue
• In the context of CRM, the individual customer is often the central object analyzed by means of data
mining methods
• A complete data mining process comprises assessing and specifying the business objectives, data
sourcing, transformation and creation of analytical variables, and building analytical models using
techniques such as logistic regression and neural networks, scoring customers and obtaining feedback
from the field

• Learning and refining the data mining process is the key to success
V. Kumar, W. Reinartz, Customer Relationship Management, Springer Texts in Business
 Homework
• Reading book “Kumar, V., &
Reinartz, W. (2018). Customer
Relationship Management, Concept,
Strategy, and Tools, 3rd Edition.
Berlin: Springer-Verlag.

V. Kumar, W. Reinartz, Customer Relationship Management, Springer Texts in Business

 EXERCISES

V. Kumar, W. Reinartz, Customer Relationship Management, Springer Texts in Business

CRM
V. Kumar, W. Reinartz, Customer Relationship Management,
Springer Texts in Business
Chapter 8

Using Databases
Topics

Types of databases

The Benefits of Marketing Databases

The Uses of Marketing Databases

 Types of Databases
Categorization:
 Based on their main business functions
▪ Databases managing business operations
▪ Databases supporting decision-making activities
Alternate categorization:
 According to the information included in the
databases
 Based on the nature of the underlying marketing
activities
 Based on the database technology used
 Categorization Based on Information in the Databases

Types of databases:

▪ Customer database

▪ Prospect database

▪ Cluster database

▪ Enhancement database
 Customer Database
▪ Data from active and inactive customers

▪ Basic information: name, address, zip code, and telephone number

▪ Demographic information: age, gender, marital status, education,

number of people in household, income

▪ Psychographic information: values, activities, interests, preference

▪ Transaction history: frequency of purchase, amount of spending

▪ Other relevant information: inquiries and referrals, satisfaction, loyalty

 Customer Database (contd.)
 Data from inactive customers:
▪ How long have the customers been inactive?
▪ How long have they been active?
▪ What was their purchasing pattern when they were active?
▪ How much did they spend?
▪ How were they initially acquired?
▪ Why are they inactive?
 Examples for Customer Database
 D&B’s U.S Marketing File: Customer database comprising of telemarketing, direct mail,
competitor analysis and other types of data pertaining to 18.5 million small, privately owned
and large publicly owned businesses

 InfoBaseR eProducts – from Acxiom provides the user companies with the email addresses of
their customers

▪ email marketing - most inexpensive profit-generating marketing tool

- to augment companies’ direct mail or other channels

of communication with customers

 Customer Database – CRM at Work:
Email marketing at Blockbuster
 Email marketing :

▪ Targeted Personalized offers

▪ Reduced direct mail costs and therefore increased Net Marketing Contribution

▪ Additional customer touch point

▪ Larger number of customers visiting the company’s website

 Case: Email Marketing company Quris helped Blockbuster create its email newsletter

▪ Newsletter marketed Blockbuster’s new movies (on DVD/VHS) and games to its
customers via email which also included a bar-coded coupon for customers to
print and redeem
▪ Results: The total ROI for the program was 96% higher than the ROI for direct mail;
for customers receiving electronic coupons, it was 144% higher
 Prospect Database
 Non-customers that have profiles that are similar to the profiles of existing
customers
 Segments prospects and positions the company’s differentiated products
to the prospects’ specific needs
 Examples of some Prospect databases used in the industry:
▪ The InfoBaseR list: Offers a collection of US consumer data available in
one source for list rentals covering 111 million households and 176 million
individuals
▪ Harris Selectory Online: A prospect database from D&B which helps
companies find new customers allowing companies to:
▪ Qualify leads that they are developing
▪ Contact the decision-maker best suited to hear their sales pitch
▪ Research potential opportunities
 Cluster Database
 Clusters defined based on geographic reference groups,
affinity groups, and lifestyle reference groups

 Depending on the membership of prospective customers to specific clusters, firms can customize their
marketing communications

 Example: The Prizm database

 Segments every U.S neighborhood into 62 distinct areas

 Every Prizm database is categorized into groups with every group having clusters

▪ S1 (Elite Suburbs) –5 clusters with the nation’s most affluent social people

▪ U1 (Urban uptown) –clusters include a good number of executives and professionals

▪ C1 (City Society) – 3 clusters making the upper crust of America’s ‘second’ and ‘satellite’ cities

▪ T1 (Landed Gentry) –clusters comprise of multi-income families having school age kids and are
headed by well-educated executives and professionals
 CRM at Work: Globe and Mail
- Example of cluster database
 Globe and Mail, Canadian national newspaper
▪ Created a marketing database of prospective subscribers
▪ Enhanced existing customer’s data with Canadian cluster
codes and demographic data, provided by Compusearch
▪ Using cluster data, targeted customers in the prospect
database: sent offers to prospective customers whose
demographics matched that of current customers
▪ Used a predictive dialing method that doubled their
prospective customer contacts per hour
 Enhancement Database
 Used to transfer additional information on customers and prospects

 An overlaying process is used that eliminates duplications

 Enhancements may include demographic and psychographic data, transaction history, changes
in address, changes in income levels, privacy status, new product categories bought recently

 Example: InfoBaseR Enhanced

▪ InfoBaseR provides a large collection of U.S customer information like telephone & address
data, mailing lists including hotline files, e-mail data

▪ The InfoBaseR Enhanced provides the ability to append the latest demographics, socio-
economic and lifestyle data to your existing in-house customer database

▪ A consumer goods company can use this data to better target their advertising and marketing
campaigns, expand brand reach, improve acquisition and retention rates, increase profitability
 Categorization Based on The Nature of Underlying
Marketing Activities
 Passive marketing database
▪ A mailing list that passively stores information about acquired
customers
▪ Future marketing efforts target the same customers in the list

Customer list
Customer list

Campaign 1 Database Campaign 2

 Database Based on Nature of Underlying
Marketing Activity (contd.)
 Active marketing database

Database Strategic Marketing

Marketing Plan Programs

Data Results Execution

updates

Example: Travelers’ case

Retention program – Five ‘touches’ – Systematic and low-cost interactions
Result - increased retention rate; decreased defection by 5%
Categorization Based on Database Technology

 Hierarchical database
 Inverted database
 Relational database
 Hierarchical Database

 All information pertaining to a customer will be in a

master record
 Useful when the queries are standard and routine
but high speed processing is required
 Preferred in the banking, airline and hotel industries
 Inverted Database

 Suited for direct marketing applications

 Has speed and flexibility to respond to

unanticipated questions

 Easy to add new elements to an inverted database

as and when updated information is acquired
 Relational Database
 Has the greatest flexibility, but slower speed

 Examples are Databases like Oracle, SQL Server,

and Microsoft Access

 Users can create queries to extract information

from these tables and recombine it
 Benefits of Marketing Databases

 The ability to carry out profitable segmentation

 Ability to retain customers and repeat business

 The ability to spot potentially profitable customers

Uses of Marketing Databases

V. Kumar, W. Reinartz, Customer Relationship Management, Springer Texts in Business

 Uses of Marketing Databases
Uses that directly influence customer relationship:

▪ Identify and profile the best customers

▪ Develop new customers

▪ Deliver customized messages that are consistent with product/service usage

▪ Send follow-up messages to customers for post-purchase reinforcement

▪ Cross-sell products/services
▪ Ensure cost-effective communication with customers

▪ Improve promotion result by efficient targeting

▪ Personalize customer service
▪ Stealth communication with customers
 Uses of Marketing Databases (contd.)
Uses that directly influence other business operations:

▪ Evaluate and refine existing marketing practices

▪ Maintain brand equity

▪ Increase effectiveness of distribution channels

▪ Conduct product and market research

▪ Integrate the marketing program

▪ Create a new valuable management resource
 Summary

 Effective Database analysis is important for successful CRM

 Data from active and inactive customers are important to ensure efficient
marketing function

 Marketing databases allow marketers to analyze customers and classify them

into different groups to implement different marketing programs effectively

 Databases also enable marketers to determine critical factors influencing

customer satisfaction and take measures to retain existing customers at lowest
cost
V. Kumar, W. Reinartz, Customer Relationship Management,
Springer Texts in Business
Homework
 Reading book “Kumar, V., &
Reinartz, W. (2018). Customer
Relationship Management,
Concept, Strategy, and Tools, 3rd
Edition. Berlin: Springer-Verlag.

V. Kumar, W. Reinartz, Customer Relationship Management,

Springer Texts in Business
EXERCISES

V. Kumar, W. Reinartz, Customer Relationship Management, Springer Texts in Business

 CRM

V. KUMAR, W. REINARTZ, CUSTOMER RELATIONSHIP MANAGEMENT, SPRINGER TEXTS IN BUSINESS

 Chapter 9:

Software Tools and Dashboards

V. KUMAR, W. REINARTZ, CUSTOMER RELATIONSHIP MANAGEMENT,

SPRINGER TEXTS IN BUSINESS
 Topics
❑CRM Implementation Options
▪ Developing Software In-house
▪ Buying Licensed CRM Software
▪ Outsourcing a Managed Service
❑ CRM Software and Applications
▪Stage-Wise Implementation v. an Enterprise Wide CRM Solution
▪Relationships and Flows between CRM Modules

V. KUMAR, W. REINARTZ, CUSTOMER RELATIONSHIP MANAGEMENT,

SPRINGER TEXTS IN BUSINESS
CRM Implementation Options
▪Developing Software In-House
▪Buying Licensed Software
▪Outsourcing a Managed Service

V. KUMAR, W. REINARTZ, CUSTOMER RELATIONSHIP MANAGEMENT,

SPRINGER TEXTS IN BUSINESS
 Developing Software In-House
Requires the company to define all its requirements, pay for
software development, and internally bear all the R&D costs
Advantage:
Tailor-made solution fit to the current business practices
Develop internal skills that allow them to develop the system
each time the company requirements change
Avoid dependence on CRM software vendors

V. KUMAR, W. REINARTZ, CUSTOMER RELATIONSHIP MANAGEMENT,

SPRINGER TEXTS IN BUSINESS
 Developing Software In-House
Requires the company to define all its requirements, pay for software
development, and internally bear all the R&D costs
Disadvantage:
Most Expensive option (high development maintenance, and operating
costs)
Difficult to attract and retain the employees needed to solve data
warehouse challenges
Long time commitment (One to two years)

V. KUMAR, W. REINARTZ, CUSTOMER RELATIONSHIP MANAGEMENT,

SPRINGER TEXTS IN BUSINESS
 Buying Licensed CRM Software
Companies can license CRM software packages, which are sold as a block (different
modules) or as independent modules:
Advantage:
Many of these CRM software packages have a proven record of success CRM
vendors will provide knowledge and training for the IT concepts
Disadvantage:
Expensive option (high initial fees, licensing costs, and maintenance costs)
Companies need to develop the IT infrastructure and integrate the new software with
existing applications
Each time a new or upgraded version is released, companies have to repurchase and
retrain for them
Resistance from employees in terms of adapting to the new system

V. KUMAR, W. REINARTZ, CUSTOMER RELATIONSHIP MANAGEMENT,

SPRINGER TEXTS IN BUSINESS
Outsourcing a Managed Service
Companies can outsource the CRM solution to a third-
party company, which provides the hardware, software,
and human resources in exchange for a monthly fee
Advantage:
Lowest upfront costs: no software licensing fee, hardware
system, recruiting, or internal IT system costs
Pay-as-you-go approach: Pertinent for smaller companies
or those with limited marketing budget to benefit from
CRM programs

V. KUMAR, W. REINARTZ, CUSTOMER RELATIONSHIP MANAGEMENT,

SPRINGER TEXTS IN BUSINESS
Outsourcing a Managed Service
Companies can outsource the CRM solution to a
third-party company, which provides the
hardware, software, and human resources in
exchange for a monthly fee
Disadvantage:
High dependency on the outsourcing CRM
company
Not viable for companies who need specific
requirements in their CRM package

V. KUMAR, W. REINARTZ, CUSTOMER RELATIONSHIP MANAGEMENT,

SPRINGER TEXTS IN BUSINESS
Decision Process for Implementation

V. KUMAR, W. REINARTZ, CUSTOMER RELATIONSHIP MANAGEMENT,

SPRINGER TEXTS IN BUSINESS
 CRM Software and Applications
Stage-Wise Implementation vs. an Enterprise Wide CRM Solution
CRM industry mainly offers two types of CRM software solutions
based on the company’s needs and processes:
Stage Wise Implementation:
▪Offered in different and independent modules
▪ Each module is adapted to a specific department needs
▪Ex) the company buys the sales automation software and the contact
management module from different providers

V. KUMAR, W. REINARTZ, CUSTOMER RELATIONSHIP MANAGEMENT,

SPRINGER TEXTS IN BUSINESS
 CRM Software and Applications
Stage-Wise Implementation vs. an Enterprise Wide CRM Solution
CRM industry mainly offers two types of CRM software solutions
based on the company’s needs and processes:
Enterprise Wide CRM Solution
▪ Composed of different modules from the same provider
▪ Modules may be adapted to each department’s needs, yet they are
implemented as a whole

V. KUMAR, W. REINARTZ, CUSTOMER RELATIONSHIP MANAGEMENT,

SPRINGER TEXTS IN BUSINESS
 CRM Software and Applications

Relationship and flows between CRM Modules:

CRM modules, whether implemented
independently in phases or together in a global
solution, need to be integrated to have an
integrated view of the customer

V. KUMAR, W. REINARTZ, CUSTOMER RELATIONSHIP MANAGEMENT,

SPRINGER TEXTS IN BUSINESS
CRM Software and Applications
Example of an Integrated CRM Configuration

V. KUMAR, W. REINARTZ, CUSTOMER RELATIONSHIP MANAGEMENT,

SPRINGER TEXTS IN BUSINESS
 Summary
CRM provides capabilities for firms to optimize their marketing budget and
increase revenue, however poor CRM implementation can have negative
outcomes.
CRM implementation strategies are: (a) develop in-house software, (b) purchase
licensed software from a third party vendor, and (c) outsourcing to a managed
service
These strategies can be implemented via:
▪Stage wise implementation, which takes longer but allows firm to take
implementations one step at a time
▪Enterprise-wide implementation, which is more risky but allows the firm to take
advantage of the whole system’s benefits much sooner

V. KUMAR, W. REINARTZ, CUSTOMER RELATIONSHIP MANAGEMENT,

SPRINGER TEXTS IN BUSINESS
 Homework
Reading book “Kumar, V.,
& Reinartz, W. (2018).
Customer Relationship
Management, Concept,
Strategy, and Tools, 3rd
Edition. Berlin: Springer-
Verlag.

V. KUMAR, W. REINARTZ, CUSTOMER RELATIONSHIP

MANAGEMENT, SPRINGER TEXTS IN BUSINESS
V. KUMAR, W. REINARTZ, CUSTOMER RELATIONSHIP MANAGEMENT,
SPRINGER TEXTS IN BUSINESS
CRM
 CHAPTER 10

Designing Loyalty
Programs
 Topics Discussed

1. What Is Loyalty? Behavioral

Versus Attitudinal Loyalty
2. What Is a Loyalty Program?
Definition and Key
Objectives?
3. Loyalty Programs: Increasing
in Popularity
4. Problems with Loyalty
Programs
5. Design Characteristics
of Loyalty Programs
6. Drivers of Loyalty Program
Effectiveness
7. Empirical Evidence on Loyalty
Program Effectiveness –
8. Loyalty Programs, Shackle or
Reward: And to Whom?
9. The Seven-Point Checklist
for Successful LP Design
and Implementation
1. What Is Loyalty? Behavioral Versus
Attitudinal Loyalty

Loyal customers generate more repeat business,

develop a larger tolerance to price increases, and
are more profitable to the firm

Behavioral loyalty refers Attitudinal loyalty instead

to the observed actions refers to a customer’s
that customers have perceptions and attitudes
demonstrated toward a toward a particular product
particular product or or service
service
2. What Is a Loyalty Program?
Definition and Key Objectives
An LP comprises a marketing process that generates
rewards for customers, based on their repeat purchases or
engagement with the brand.
LPs offer an important CRM tool that marketers use to
identify, award, and retain profitable customers.

❑ The key objectives of introducing LPs consist of

four categories:
1. Building true (attitudinal and behavioral) loyalty
2. Efficiency profits
3. Effectiveness profits
4. Value alignment
2.1 Building True Loyalty

❑ An LP aims to build greater customer

commitment to the product or organization
by garnering true loyalty, which combines
elements of both attitudinal and behavioral
loyalty.
❑ According to this logic, customers exhibit
behavioral loyalty (i.e., purchase a product
repeatedly) for several reasons, including
convenience or price, as well as a sense of
loyalty. Behavioral loyalty may result from
attitudinal loyalty, but it can be driven by
other factors too
2.2 Efficiency Profits
Efficiency profits result from a change in the customer’s buying
behavior, induced by the LP. This change in behavior can be
measured in several ways:

❑ Basket size
❑ Purchase frequency acceleration
❑ Price sensitivity
❑ Share of category requirements
(SCR) or share of wallet Retention
❑ Lifetime duration
 2.3 Effectiveness Profits
Effectiveness profits refer to the medium- to longterm profit
consequences realized through the development of better
knowledge about customer preferences

❑ The LP is designed to gather information about individuals,

their behavior, and their preferences and then to derive
knowledge from this information.
❑ This process of learning allows the firm to improve its
knowledge of customer preferences and to offer
increasingly better tailored value propositions to various
customers.
❑ The improvement in the value proposition comes through
effective product and communication offerings.
Effectiveness profits – more than any other type of LP
outcome – are likely to generate sustainable competitive
advantages and yield the highest profits in the long run
 2.4 Value Alignment

Value alignment aims to match the cost to serve a

particular customer with the value that the person brings to
the firm

❑ The underlying concept states that for any

industry, customers have differential monetary
value to firms, and they also are differentially
expensive to serve.
❑ For example, if a provider of wireless services
were to arrange its customers from highest to
lowest value, it might discover that its business
users generate higher phone bills than casual,
occasional users
 3. Loyalty Programs: Increasing in Popularity

Interest in loyalty programs exploded in the late 1990s. Building mainly on the
premise that it is cheaper to market to existing customers than to acquire new
ones, firms across a multitude of industries raced to implement some form of
loyalty schemes. Thus the growth in LP usage has been staggering

❑ Example:
Frequent buyer programs:
Star Alliance Frequent Flyer Program
Payback:
4. Problems with Loyalty Programs

Although LPs have become widespread and

popular, the benefits are not always clear

❑ Most companies need to revisit their

business model, not only to reflect on
the impact of loyalty programs on their
bottom line, but also to determine how
customer service initiatives add value
and ensure future revenue streams
 5. Design characteristics of Loyalty
Programs

Regarding the composition and the choice of dimensions to include in their LP design, as
well as the corresponding weights assigned to each dimension. In this sense, we
characterize LPs along the following key dimensions, which must be defined when

designing a program :
❑ Reward structure:
• Hard versus soft rewards
• Product proposition support (choice of
rewards)
• Aspirational value of reward
• Rate of rewards
• Timing of rewards
• Rewards based on specific criteria
5. Design Characteristics of Loyalty Programs

01 Reward Mechanism 04 Payment Function

02 Reward Structure 05 Sponsorship

03 Participation Requirements 06 Cost and Revenue of LPs

5. Design characteristics of Loyalty
Programs

❑ Participation requirements:
• Voluntary or automatic enrollment
• Open versus closed LP
• Automatic or manual point accumulation
❑ Payment function
❑ Sponsorship(existence of partner network, network
externalities):
• Single versus multiform LP
• Within- versus across-sector LP
• Ownership (focal firm versus other firm)
6.1 Reward Structure

The principal motivation for consumers to

enroll in LPs is to accrue benefits from
rewards from their purchase transactions
over time. From a consumer’s perspective,
the rewards attained through an LP
membership are the key design benefit
6.2 Participation Requirements

Another important characteristic of LPs are

the requirements for becoming a member
and the way points get collected:
❑ Voluntary or Automatic Enrollment
❑ Open Versus Closed Loyalty Programs
❑ Automatic or Manual Point Accumulation
6.2 Participation Requirements
6.3 Payment Function
For some LP providers, it has become common practice to
endow loyalty cards with a payment within the same sector
or across different sectors?
Ownership:
Retailers offer two types of loyalty cards that include
payment functions. If the transactions aim to debit the
customer’s account and credit the retailer’s account, the
card must involve a banking partner (open loop). If instead
the transactions do not actually pay for the purchase but
rather grant the retailer access to an existing customer
account (e.g., automatic debit transfer systems), no banking
partner has to participate.
6.4 Sponsorship

The sponsorship function refers to supply-side

features that describe the LP owner.
6.5 Cost and Revenues of LP

❑ Cost factors include set-up/implementation, operating,

and variable costs. The implementation costs accrue
during the phases dedicated to planning and
introducing a loyalty program (e.g., buying hard- and
software, external consultancy, personnel training, initial
promotions).
❑ After the LP has been launched, several expenses
persist: maintenance of a service center, administration
of the customer database, and (if applicable) inventory
costs for the rewards themselves. Finally, variable
expenses include discounts, rewards, sales costs
(packaging, shipping), and communication, which
determine the total cost of a loyalty program
7. Drivers of Loyalty Program Effectiveness

❑ The factors that drive the effectiveness of

a loyalty program can be structured into
three main categories:
1. LP design characteristics
2. Customer characteristics
3. Firm characteristic
7.1 Loyalty Program Design Characteristics

The LP design characteristics, as we have noted,

can be classified according to their:
❑ Reward structure
❑ Participation requirements
❑ Payment function
❑ Sponsorship (existence of partner network,
network externalities) 5 Cost and revenues
7.2 Customer Characteristics

❑ The key customer characteristic relevant to the

effectiveness of LPs is the skewness of the customer
value distribution (or value heterogeneity). This
skewness varies greatly across industries. In some
industries, the value of individual customers or
accounts is widely similar, whereas in others, these
values diverge greatly.

❑ For example, in the gasoline industry, the average

driver’s monthly consumption of gasoline varies only
moderately. However, in the financial services or
telecom industries, usage patterns and customer
profitability are widely varied.
7.3 Firm Characteristics

Factors relevant to LP effectiveness in terms of

organizational characteristics include the:
❑ Perishability of a product.
❑ Breadth and depth of the firm offering the
product at the store/retail level.
7. Drivers of Loyalty Program Effectiveness
7.4 Achieving a Competitive Advantage

Any firm develops its LP to create competitive

advantage, or the ability to operate more
profitably over a sustained period of time
8. Empirical Evidence on Loyalty Program
Effectiveness

More and more empirical evidence in markets

indicates how successful LPs really are in achieving
their stated goals. But limited empirical evidence
details the success or failure of specific loyalty
programs.

It is particularly difficult to get unbiased information

about the performance of firm-specific LPs, because
proper metrics rarely are in place, and few firms are
likely to admit to their poor performance
9. The Seven-Point Checklist for Successful LP Design
and Implementation

We offer a checklist for developing, designing, and implementing

a successful LP, with seven key points:

Clearly determine your LP’s goals

Align the design of your LP with the characteristics of your market,
your customer base, and your firm
Manage the costs of LPs
Measure the predicted benefits of the LP for your organization
Avoid withdrawing an existing LP, which can have negative
consequences in the form of customer dissatisfaction and
defection
Design the LP to achieve maximum effectiveness in marketing
operations
Ensure that your firm has the necessary capabilities to manage its
LP effectively.
EXERCISES
case study p198
CRM

1
CHAPTER 10 2

Designing
Loyalty
Programs
 Topics 3
1. What Is Loyalty? Behavioral
Versus Attitudinal Loyalty
2. What Is a Loyalty Program?
Definition and Key
Objectives?
3. Design Characteristics
of Loyalty Programs
4. Drivers of Loyalty Program
Effectiveness
5. The Seven-Point Checklist
for Successful LP Design
and Implementation
1. What Is Loyalty?
Behavioral Versus Attitudinal Loyalty 4

Behavioral loyalty refers to

the observed actions that
customers have
demonstrated toward a
particular product or service

Attitudinal loyalty instead

refers to a customer’s
perceptions and attitudes
toward a particular product
or service
1*. What are Loyalty roles? 5

Loyal customers generate more

repeat business, develop a larger
tolerance to price increases, and are
more profitable to the firm.
2. What Is a Loyalty Program? 6
Definition

 An LP comprises a marketing
process that generates rewards
for customers, based on their
repeat purchases or
engagement with the brand.

 LPs offer an important CRM tool

that marketers use to identify,
award, and retain profitable
customers.
2. What Is a Loyalty
7
Program?

Key objectives
The key objectives of
introducing LPs consist
of four categories :

1) Building true
(attitudinal and
behavioral) loyalty
2) Efficiency profits
3) Effectiveness profits
4) Value alignment
 8

The key
objectives of
introducing LPs
consist of four
categories
2.1 Building True Loyalty
9

An LP aims to build greater customer

commitment to the product or
organization by garnering true loyalty,
which combines elements of both
attitudinal and behavioral loyalty.
 2.2 Efficiency Profits 10
Efficiency profits result from a change in the customer’s buying
behavior, induced by the LP. This change in behavior can be
measured in several ways:

❑ Basket size
❑ Purchase frequency
acceleration
❑ Price sensitivity
❑ Share of category
requirements (SCR) or
share of wallet
Retention
❑ Lifetime duration
2.3 Effectiveness Profits 11

Effectiveness profits refer to the medium- to long-term profit

consequences realized through the development of better
knowledge about customer preferences

The LP is designed to The improvement in the value

gather information proposition comes through
about individuals, their effective product and
behavior, and their communication offerings.
preferences and then Effectiveness profits – more
to derive knowledge than any other type of LP
to offer increasingly outcome – are likely to
better tailored value generate sustainable
propositions to various competitive advantages and
customers. yield the highest profits in the
long run
 2.4 Value Alignment
12

Value alignment aims to match the cost to serve a

particular customer with the value that the person brings
to the firm

The underlying concept states that for any industry,

customers have differential monetary value to firms, and
they also are differentially expensive to serve.
3. Design Characteristics of Loyalty Programs
13

01 Payment Function
Reward Mechanism 04

Reward Structure 02 05 Sponsorship

Participation
03 06
Cost and Revenue of LPs
Requirements
3.1 Reward Structure
14

The principal motivation for consumers to

enroll in LPs is to accrue benefits from
rewards from their purchase transactions
over time. From a consumer’s perspective,
the rewards attained through an LP
membership are the key design benefit
 3.1 Reward Structure
15

Regarding the composition and the choice of dimensions to

include in their LP design, and the corresponding weights assigned
to each dimension, The LP’s characterize following key dimensions
which must be defined when designing a program

❑ Reward structure:
• Hard versus soft rewards
• Product proposition support (choice of rewards)
• Aspirational value of reward
• Rate of rewards
• Timing of rewards
• Rewards based on specific criteria
3.2 Participation Requirements
16

Another important characteristic of LPs are the

requirements for becoming a member and the
way points get collected:

❑ Voluntary or Automatic Enrollment

❑ Open Versus Closed Loyalty Programs
❑ Automatic or Manual Point Accumulation
3.3 Payment Function
17
Ownership:
Retailers offer two types of
loyalty cards that include
payment functions:

 If the transactions aim to debit

the customer’s account and
credit the retailer’s account, the
card must involve a banking
partner

Ifinstead the transactions do

not actually pay for the purchase
but rather grant the retailer
access to an existing customer
account (e.g., automatic debit
transfer systems), no banking
partner has to participate.
3.4 Sponsorship
THE SPONSORSHIP FUNCTION REFERS TO SUPPLY-SIDE FEATURES THAT DESCRIBE THE LP OWNER.

18
3.5 Cost and Revenues of LP
19

Cost factors include set-up/implementation, operating, and

variable costs. The implementation costs accrue during the
phases dedicated to planning and introducing a loyalty program
(e.g., buying hard- and software, external consultancy, personnel
training, initial promotions).

After the LP has been launched, several expenses persist: maintenance of

a service center, administration of the customer database, and inventory
costs for the rewards themselves. Finally, variable expenses include
discounts, rewards, sales costs (packaging, shipping), and
communication, which determine the total cost of a loyalty program
4. Drivers of Loyalty Program Effectiveness
20

The factors that drive the effectiveness of

a loyalty program can be structured into
three main categories:

1. LP design characteristics
2. Customer characteristics
3. Achieving a Competitive Advantage
4.1 Loyalty Program Design Characteristics
21

The LP design characteristics can be classified

according to:

❑ Reward structure
❑ Participation requirements
❑ Payment function
❑ Sponsorship (existence of partner network,
network externalities)
❑ Cost and revenues
4. 2 Customer Characteristics
22

❑ The key customer characteristic relevant to

the effectiveness of LPs is the skewness of the
customer value distribution. This skewness
varies greatly across industries.

❑ For example, in the gasoline industry, the average driver’s monthly

consumption of gasoline varies only moderately. However, in the
financial services or telecom industries, usage patterns and customer
profitability are widely varied.
4.3 Achieving 23

a Competitive
Advantage

Any firm develops its

LP to create
competitive
advantage, or the
ability to operate
more profitably over
a sustained period
of time
5. The Seven-Point Checklist for Successful LP Design
and Implementation 24
1) Clearly determine your LP’s goals
2) Align the design of your LP with the characteristics of your
market, your customer base, and your firm
3) Manage the costs of LPs
4) Measure the predicted benefits of the LP for your organization
5) Avoid withdrawing an existing LP, which can have negative
consequences in the form of customer dissatisfaction and
defection
6) Design the LP to achieve maximum effectiveness in marketing
operations
7) Ensure that your firm has the necessary capabilities to manage
its LP effectively.
Co.op mark’s loyalty program 25
 26

EXERCISES
case study
P. 198
27
 CRM

V. KUMAR, W. REINARTZ, CUSTOMER RELATIONSHIP MANAGEMENT, SPRINGER TEXTS IN BUSINESS 1

 Chapter 13

Impact of CRM on
Marketing Channels

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SPRINGER TEXTS IN BUSINESS
2
 Topics
❑CRM and Marketing Channels
❑CRM and Multichannel Design
❑CRM and Multichannel Management

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SPRINGER TEXTS IN BUSINESS
3
CRM and Marketing Channels

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SPRINGER TEXTS IN BUSINESS
4
CRM and Marketing Channels – Definition

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SPRINGER TEXTS IN BUSINESS
5
CRM and Marketing Channels – Channel types

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6
CRM and Marketing Channels – Indirect channel

V. KUMAR, W. REINARTZ, CUSTOMER RELATIONSHIP MANAGEMENT,

SPRINGER TEXTS IN BUSINESS
7
CRM and Marketing Channels – indirect channel

V. KUMAR, W. REINARTZ, CUSTOMER RELATIONSHIP MANAGEMENT,

SPRINGER TEXTS IN BUSINESS
8
CRM and Marketing Channels – direct channel

V. KUMAR, W. REINARTZ, CUSTOMER RELATIONSHIP MANAGEMENT,

SPRINGER TEXTS IN BUSINESS
9
CRM and Marketing Channels – direct channel

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SPRINGER TEXTS IN BUSINESS
10
CRM and Marketing Channels – Channel
Combinations

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SPRINGER TEXTS IN BUSINESS
11
CRM and Marketing Channels – Multi Channel
Trends

V. KUMAR, W. REINARTZ, CUSTOMER RELATIONSHIP MANAGEMENT,

SPRINGER TEXTS IN BUSINESS
12
 CRM and Marketing Channels – Multi Channel
Trends

Overall opportunities and challenges due to multichannel trends

V. KUMAR, W. REINARTZ, CUSTOMER RELATIONSHIP MANAGEMENT,

SPRINGER TEXTS IN BUSINESS
13
CRM and Multichannel Design

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SPRINGER TEXTS IN BUSINESS
14
CRM and Multichannel Design
– Design Attributes

V. KUMAR, W. REINARTZ, CUSTOMER RELATIONSHIP MANAGEMENT,

SPRINGER TEXTS IN BUSINESS
15
CRM and Multichannel Design
– Designing Optimal Offers

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16
CRM and Multichannel
Management

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SPRINGER TEXTS IN BUSINESS
17
 CRM and Multichannel
Management – Channel Integration

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SPRINGER TEXTS IN BUSINESS
18
 CRM and Multichannel
Management – Channel Integration

V. KUMAR, W. REINARTZ, CUSTOMER RELATIONSHIP MANAGEMENT,

SPRINGER TEXTS IN BUSINESS
19
 CRM and Multichannel
Management – Channel Separation

V. KUMAR, W. REINARTZ, CUSTOMER RELATIONSHIP MANAGEMENT,

SPRINGER TEXTS IN BUSINESS
20
 CRM and Multichannel
Management –Multichannel Shoppers

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SPRINGER TEXTS IN BUSINESS
21
 CRM and Multichannel
Management – Research Shoppers

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SPRINGER TEXTS IN BUSINESS
22
Summary

V. KUMAR, W. REINARTZ, CUSTOMER RELATIONSHIP MANAGEMENT,

SPRINGER TEXTS IN BUSINESS
23
 Chapter 13

Customer Relationship Management in

the Business-To-Business Context

V. KUMAR, W. REINARTZ, CUSTOMER RELATIONSHIP MANAGEMENT,

SPRINGER TEXTS IN BUSINESS
24
 Topics
❑Characteristics of business-to-business (B2B) markets
❑ Premise of CRM in the B2B context
❑Sales force management (SFM) and its subtopics as most
important topics to realize the CRM premise in the B2B
context
❑CRM and sales force automation (SFA)
❑CRM and key account management (KAM)
❑CRM and the goods to services shift

V. KUMAR, W. REINARTZ, CUSTOMER RELATIONSHIP MANAGEMENT,

SPRINGER TEXTS IN BUSINESS
25
Premise of CRM in the B2B Context

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SPRINGER TEXTS IN BUSINESS
26
Role of CRM in B2B

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SPRINGER TEXTS IN BUSINESS
27
Role CRM and Sales Force Automation
(SFA) – SFA Benefits

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SPRINGER TEXTS IN BUSINESS
28
 CRM and Key Account Management
KAM refers to the performance of additional activities and/or dedication of special
personnel to a company’s most important customers (Workman, Homburg, &
Jensen, 2003)

Hit Rate = 225+66/324 = 90%

 Selection criteria

• Sales volume
The quantitative criteria
might include:
• Market share
• Revenues/contribution/profit

• Image
The quantitative criteria • Reference potential
might include: • Technology potential and know-how
• Interorganizational and cultural fit
Example of Selection Criteria
Design Elements of the KAM Program
Advancement of the KAM Program

V. KUMAR, W. REINARTZ, CUSTOMER RELATIONSHIP MANAGEMENT,

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 CRM and the Shift from Goods to Services
Many firms combine products with services to create innovative offerings, widely
known as hybrid offerings, hybrid solutions, solution selling, or customer
solutions
 SUMMARY

▪The CRM premise in the B2B context is to build stronger buyer-seller

relationships and to better manage the value of these relationships
▪Important CRM-related issues in the B2B context to realize this premise are
SFA, KAM, and the shift from goods to services
▪SFA is a tool to efficiently and effectively manage buyer-seller relationships by
realizing benefits for salespeople, sales manager, and senior management
▪KAM is a tool to allocate the right activities to the rights customers by following
a three step approach including the selection of key accounts, design elements of
the KAM program, and advancement of the KAM program
▪By selling hybrid offerings the right activities can be offered through selling
combinations of goods and services that offer increasing value for the customer
 CRM

V. KUMAR, W. REINARTZ, CUSTOMER RELATIONSHIP MANAGEMENT, SPRINGER TEXTS IN BUSINESS

 Chapter 15

Applications of CRM
in B2B and B2C Scenarios

V. KUMAR, W. REINARTZ, CUSTOMER RELATIONSHIP MANAGEMENT,

SPRINGER TEXTS IN BUSINESS
 Topics
Measuring customer Profitability

The Life-time-Profitability relationship in

a non-contractual setting

Incorporating customers’ projected profitability

into lifetime duration computation

identifying the true value of a lost customer

 Measuring customer Profitability
Customers are dynamic and involve several
marketing variables:
❑Tenure of the customers with the firm
❑Profitability of the customers
❑Purchase behavior
❑Adoption of multiple channels to purchase
❑Demographic factors governing purchase behavior

V. KUMAR, W. REINARTZ, CUSTOMER RELATIONSHIP MANAGEMENT,

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 Customer Lifetime Value (CLV)

❑Multi-period evaluation of a customer’s

value to the firm.
❑Assists managers to allocate resources
optimally and develop customer-level
marketing strategies.

V. KUMAR, W. REINARTZ, CUSTOMER RELATIONSHIP MANAGEMENT,

SPRINGER TEXTS IN BUSINESS
Computing CLV

V. KUMAR, W. REINARTZ, CUSTOMER RELATIONSHIP MANAGEMENT,

SPRINGER TEXTS IN BUSINESS
 Drivers of CLV

Exchange characteristics: variables which affect the customer-firm

relationship:

Characteristics: demographic variables:

▪B2B setting: industry, annual revenue, location of the business
▪B2C setting: age, gender, spatial income, physical location of the
customers
V. KUMAR, W. REINARTZ, CUSTOMER RELATIONSHIP MANAGEMENT,
SPRINGER TEXTS IN BUSINESS
The Life-time-Profitability Relationship in a
Non-contractual Setting
TEST

❑ The strength of the lifetime duration – profitability

relationship
❑ Whether profits increase over time (lifetime profitability
pattern)
❑ Whether the costs of serving long-life customers are
actually less
❑ Whether long-life customers pay higher prices

V. KUMAR, W. REINARTZ, CUSTOMER RELATIONSHIP MANAGEMENT,

SPRINGER TEXTS IN BUSINESS
 Conceptual model
❑Proposition 1: The nature of the lifetime-
profitability relationship is positive
❑Proposition 2: Profits increase over time
❑Proposition 3:The costs of serving longer-life
customers are lower
❑Proposition 4: Longer-life customers pay higher
price

V. KUMAR, W. REINARTZ, CUSTOMER RELATIONSHIP MANAGEMENT,

SPRINGER TEXTS IN BUSINESS
 Research Methodology

❑Model for measuring customer

lifetime for non-contractual
relationships
❑Establishment of cut-off threshold
❑Lifetime estimation
❑Profit calculation

V. KUMAR, W. REINARTZ, CUSTOMER RELATIONSHIP MANAGEMENT,

SPRINGER TEXTS IN BUSINESS
Conceptual Model of Profitable Customer Lifetime

V. KUMAR, W. REINARTZ, CUSTOMER RELATIONSHIP MANAGEMENT,

SPRINGER TEXTS IN BUSINESS
 Incorporating Customers’ Projected Profitability into
Lifetime Duration Computation

Critical for managers to understand customer’s profitability

and decide when to let go of an unprofitable customer
❑Empirically measure lifetime duration for non-
contractual customer-firm relationships, incorporating
projected profits
❑Understand the structure of profitable relationships and
test the factors that impact a customer’s profitable lifetime
duration
❑Develop managerial implications for building and
managing profitable relationship exchanges
V. KUMAR, W. REINARTZ, CUSTOMER RELATIONSHIP MANAGEMENT,
SPRINGER TEXTS IN BUSINESS
Incorporating Customers’ Projected Profitability into
Lifetime Duration Computation

Antecedents of Profitable Lifetime Duration:

V. KUMAR, W. REINARTZ, CUSTOMER RELATIONSHIP MANAGEMENT,

SPRINGER TEXTS IN BUSINESS
 Research Methodology

❑Database structure for B-to-C setting

❑Determining Profitable Customer Lifetime Duration
❑Decision of relationship termination
❑Calculation of finite lifetime estimate
❑Analysis
❑Summary of Results

V. KUMAR, W. REINARTZ, CUSTOMER RELATIONSHIP MANAGEMENT,

SPRINGER TEXTS IN BUSINESS
Summary of Results

V. KUMAR, W. REINARTZ, CUSTOMER RELATIONSHIP MANAGEMENT,

SPRINGER TEXTS IN BUSINESS
Summary of Results

V. KUMAR, W. REINARTZ, CUSTOMER RELATIONSHIP MANAGEMENT,

SPRINGER TEXTS IN BUSINESS
 A Model for Identifying the True Value of a Lost Customer

The value of a lost customer depends upon whether the customer defects to a
competing firm or dis adopt the product category
Defection: The firm loses direct sales that customer would have brought
in
Dis adoption: Customer stops purchasing from that product category
Affects the long term profitability by:
❑The loss of direct sales
❑ Indirect effects of word of mouth, imitation, and other social effects

V. KUMAR, W. REINARTZ, CUSTOMER RELATIONSHIP MANAGEMENT,

SPRINGER TEXTS IN BUSINESS
 Modeling the Effects of
Dis adoption on the Value of a Lost Customer

V. KUMAR, W. REINARTZ, CUSTOMER RELATIONSHIP MANAGEMENT,

SPRINGER TEXTS IN BUSINESS
 Modeling the Effects of
Dis adoption on the Value of a Lost Customer

Key determinants of the value of a lost customer:

❑The time when customer disadopts has the largest impact on the value
of the lost customer; earlier disadoption causes more loss of money
❑The external influence, p has a negative impact
❑The internal influence, q has a positive impact on penetration because
higher q signifies stronger word of mouth
❑Discount rate has positive impact on the value of lost customer

V. KUMAR, W. REINARTZ, CUSTOMER RELATIONSHIP MANAGEMENT,

SPRINGER TEXTS IN BUSINESS
 THANK YOU!

GOOD LUCK FOR THE

FINAL EXAMINATION
V. KUMAR, W. REINARTZ, CUSTOMER RELATIONSHIP MANAGEMENT,
SPRINGER TEXTS IN BUSINESS