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    Customer Profitability Analysis: Prof. Chhabi Sinha

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    1. Retaining customers is more profitable than acquiring new customers as retained customers generate more profit over time from factors like price premiums, referrals, reduced costs, and increased purchases. 2. Higher customer retention rates lead to longer average customer lifetimes. For example, a 90% retention rate results in an average customer lifetime of 10 years. 3. There are four types of customers - butterflies, strangers, barnacles, and true friends - and different loyalty strategies should be applied to each type based on their profitability and longevity as customers.

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    Customer Profitability Analysis: Prof. Chhabi Sinha

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    165 views21 pages
    1. Retaining customers is more profitable than acquiring new customers as retained customers generate more profit over time from factors like price premiums, referrals, reduced costs, and increased purchases. 2. Higher customer retention rates lead to longer average customer lifetimes. For example, a 90% retention rate results in an average customer lifetime of 10 years. 3. There are four types of customers - butterflies, strangers, barnacles, and true friends - and different loyalty strategies should be applied to each type based on their profitability and longevity as customers.

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    Customer Profitability Analysis

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    1. Retaining customers is more profitable than acquiring new customers as retained customers generate more profit over time from factors like price premiums, referrals, reduced costs, and increased purchases. 2. Higher customer retention rates lead to longer average customer lifetimes. For example, a 90% retention rate results in an average customer lifetime of 10 years. 3. There are four types of customers - butterflies, strangers, barnacles, and true friends - and different loyalty strategies should be applied to each type based on their profitability and longevity as customers.

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    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    165 views21 pages

    Customer Profitability Analysis: Prof. Chhabi Sinha

    Uploaded by

    Maagathalephoto
    1. Retaining customers is more profitable than acquiring new customers as retained customers generate more profit over time from factors like price premiums, referrals, reduced costs, and increased purchases. 2. Higher customer retention rates lead to longer average customer lifetimes. For example, a 90% retention rate results in an average customer lifetime of 10 years. 3. There are four types of customers - butterflies, strangers, barnacles, and true friends - and different loyalty strategies should be applied to each type based on their profitability and longevity as customers.

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    of 21

    Customer profitability analysis

    Prof. Chhabi Sinha


    Retained customers generate considerably
    more profit than new ones
    Profit

    Profit from price premium

    Profit from referrals

    Profit from
    reduced operating costs

    Profit from
    increased purchases

    Base profit

    1 2 3 4 5 6 7 Years

    Customer Source: Bain & Co.


    acquisition
    cost
    Impact of customer retention rate
    on customer lifetime
    20
    18
    16
    14
    12
    avg customer
    10
    lifetime(in yrs) 8
    avg. cust lifetime
    6
    4
    2
    0
    50 60 70 80 90 100
    Retention rate(%)
    Link between the customer
    retention rate and the average
    customer lifetime
    • Average customer lifetime(years)
    = 1/ 1-retention rate
    e.g. If the customer retention rate is 90
    percent per annum(meaning that we lose 10
    percent of our existing customer base each
    year), then the average customer lifetime
    will be ten years
    Linking profitability and loyalty
    • High profitability and Shortterm
    customers(Butterflies)
    • Low Profitability and Short vterm
    customers(Strangers)
    • Long term customers and Low
    profitability(Barnacles)
    • High profitability and Long term customers
    (True friends)
    Butterflies
    True friends
    -good fit between
    customer’s offerings and -good fit between
    customer’s needs customer’s offerings
    and customer’s needs
    -high profit potential
    -highest profit potential

    Strangers
    Barnacles
    -little fit between
    -limited fit between company’s
    company ‘s offerings and
    offerings and customer’s needs
    customer’s needs
    -low profit potential
    -lowest profit potential
    Choosing a Loyalty strategy for
    different customers
    • Butterflies
    -Aim to achieve transactional satisfaction
    not attitudinal loyalty
    -milk the accounts only as long as they are
    active
    -key challenge is to cease investing soon
    enough
    Continued..
    • Strangers
    -make no investment in these relationships
    -make profit on every transaction
    Continued..
    • Barnacles
    -measure both the size and share of wallet
    -If share of wallet is low, focus on up selling
    and cross selling
    -If size of wallet is small, impose strict cost
    controls
    Continued..
    • True friends
    -communicate consistently but not too often
    -build both attitudinal and behavioral loyalty
    -delight these customers to nurture,defend and
    retain them
    A basic issue among researchers is
    whether to define brand loyalty in
    terms of
    - attitudinal measures or
    -Behavioural measures
    OPERATIONALIZATION OF
    VARIABLES
    • Attitudinal Component

    -Product and Service quality


    -Customer Satisfaction
    -Trust
    -Commitment
    Operationalization of
    Behavioural Loyalty
    • Recency
    • Frequency
    • Monetary
    • Length of the relationship
    • Number of brands used
    Research findings ..
    • Customers of the grocery chain who scored
    high on both loyalty measures where 54%
    more likely to be active word-of-mouth
    marketers and 33 % more likely to be
    passive word-of-mouth marketers than
    those who scored high on behavioural
    loyalty alone(Article “ The Mismanagement
    of Customer Loyalty, HBR July 2002)
    RFM(Recency,
    Frequency,Monetary Value-Poor
    measure of customer loyalty
    • Patterns of buying behaviour for frequently
    buying goods are quite different than those
    for infrequently bought goods.
    • RFM cannot distinguish between the two
    • It ignores the pacing of a customer’s
    interactions, the time between each
    purchase
    RFM continued..
    • Monetary value component is almost
    always based on revenue rather than
    profitability
    • But the decision to continue investing in
    customer relationships needs to be based on
    customer’s profitablity not the revenue they
    generate
    Model of buying behavior
    • Special case of ‘event-history modelling’
    • In the present context, ‘event’ will indicate
    Purchasing
    -Like most statistical methods, it figures the
    probability that some future event will
    occur based on statistical patterns observed
    empirically in the past
    Event History Model

    To compute the probability that the customer will keep on


    purchasing
    Formula is t raised to the power n
    Where n=number of purchases the customer made in the entire
    time period(say the whole year)
    And t =fraction of the period represented by the time between his
    first purchase and the last one
    Application of customer
    profitability analysis
    -FedEx analyzed the returns on its business for about 30
    large customers that generate about 10 percent of its total
    volume
    -It found that certain customers including some requiring
    lots of residential deliveries weren’t bringing in as much
    revenue as they had promised when they first negotiated
    discounted rates
    -FedEx demanded that some customers pay higher rates
    A couple of big customers who refused to budge were told
    they could take their shipping business elsewhere
    Application of customer
    profitabilty analsis
    Thomas Cook divided its customers into
    A’s(those who bring in $750 or more in annual revenues),
    Bs(those bringing in $250-$749)
    And Cs(those who bring in less than $250)
    -It found that 80% of its customers were C’s.
    -when C customers are asked demand consuming services e.g.
    asking an agent to research a trip they’re not positive they want to
    take, they are asked for a $25 deposit.
    -This differentiation between best and worst customers has resulted
    in 20% growth in the company’s A and B level clients

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