There are two levels for value differentiation
There are two levels for value differentiation: the value created by the customer to the company/provider and the value the company/provider creates for the customer based on the customer's needs. Using these two levels, a company can 'differentiate' its customers and apply the appropriate sales, marketing, and service strategies.
Before preparing your responses, be sure to watch the Differentiate video under Module 4 by Martha Rogers. ( https://online.fiu.edu/videos/?vpvid=82fe41c9-2497-4d54-9e1b-acbe26f054d7 )Using the concepts of differentiation, state the question and then your response. Be sure to highlight the material from the module (Unit and page). Don't just state the concept but explain it so it's evident that you grasped the understanding of it.
Question 1: Using Module 2 Unit 3 as a base, and the concepts from Module 4, discuss the best ways in which two of the organizations below can measure the actual and the potential value of its existing customers:
- A large department store chain like Target (consumers)
- A supplier (business) of industrial equipment for restaurants (business)
- The Adrienne Arsht Center for the Performing Arts (consumers)
- A nonprofit organization (consumers)
In other words, if you were a marketing manager in charge of differentiating existing customers for two of the organizations above:
1) how would you quantitatively measure the value that your existing customers create for your organization
2) how would you be able to distinguish great customers from poor customers? For example, the easiest and most basic way to measure value is revenue or sales. Go way deeper than this. Think creatively! Remember that we are focusing on customer retention, not customer acquisition here. The customers already exist.
Question 2: Select one (1) of the types of organizations from Question 1 above. Then discuss how you might categorize your existing customers by their different needs in the same way that Module 4 Unit 3 discussed the example of the toy building blocks (Actors, Engineers, etc., and what each category represents. Create your own categories and descriptions.)
Question 3: Discuss one take-away or lesson learned from this module. Be specific as to what you actually learned and how you could apply it.
Question 4: State a thought-provoking question you have about differentiation or CRM in general. Don't ask it if the answer can be easily found in the course material!
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Cus om R afon an Module 4: Customer Differentiation Unit 1. Customer ta ua 10n Concepts
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MAR 4860 – Customer Relationship Management MODULE 4 UNIT 1
Introductioon
In this module, we will address the "D" or the differentiation of customers. If you recall, to treat each customer differently is the essence of CRM. We covered the "identification" stage in the last module.
CRM requires that companies develop strategic initiatives that grow the value of the customer as an asset to the company. To do this, Gartner suggests that companies must customize or improve some aspect of their products or services to create value for their customers, which in turn, builds customer satisfaction and loyalty. But to do this, companies must first understand how customers differ from each other in terms of their value to the company and their needs. Customers that have similar value and needs should be grouped into "portfolios." That way, companies can allocate resources based on these portfolios.
That’s what this module is all about. How do you, as a company, manage a business based on customer equity? How do you grow the lifetime value of each customer through differentiation?
Please be sure to watch the "Differentiate" video located in Canvas.
©2021 Sarah Cherres 1
Managed Analytics Overview
Gather Customer Data 2 Derive Custome, lns;ght (both in1emal and external)
• Customer needs • Contact information • Customer value • Preference • Customer defection • Purchasing behavior • What products customer MIi need next • Customer interaction history
Reporting & Feedbaclc
Analysis
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4 J Evaluate Response 3 Suggest Proactive Action • Increase in customer satisfaction • Align Marketing & Sales resources to customers based on opportunity • Incremental customer contribution ~ • Develop customized marketing collateral based on rustomer needs • Decrease in defection rate • Feed rustomer insights to product development • Increase in customer share
• Train mari(eting and sales staff on apptying rustomer insight • Increase in customer loyalty
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Managed analytics centers on leveraging customer insight to implement specific customer.focused actions, then learning from the customer response to improve furture interactions.
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MAR 4860 – Customer Relationship Management MODULE 4 UNIT 1
IDIC Model – Managed Analytics Overview
We saw this slide in our last module, where we spoke about the role of identifying customers individually. We must be able to "address" customers. Before a relationship can begin, both parties have to know each other’s identify. We studied that the goal of identifying customers is to recognize each unique customer when coming into contact with a business and then linking those different data points together to paint a full picture or profile of each particular customer.
Building relationships with customers involves making decisions and taking actions at the level of the individual customer, using customer specific information, in addition to information about the aggregate characteristics of a market population. We can’t have a relationship with the population or a group, but only with another individual. So the business trying to win with superior customer relationship strategies needs to first know the individual identities of the customers who make up the traditional marketer’s aggregate market population or segment. Then, the business can make different marketing, sales, distribution, and production decisions. It can also take different actions with respect to different customers to create better experiences, and to increase customer value even within the same market or segment.
Once you have identified your customers, differentiating them will help you focus your efforts to gain the most advantage with the most valuable customers. You will then be able to tailor your company’s behavior to each customer in order to reflect that customer’s value and needs. The degree and type of differentiation in a company’s customer base will also help you decide on the appropriate strategy for a given business situation.
Our goal in this module will be to focus on item number two on this slide, which is to derive customer insight based on the customer’s needs, on the value that the customer creates for the company, and how or what percentage of customers defect or churn. Also, identifying which products or services the customers may need so that strategies can be developed and designed around their needs and values. By having the information in steps one and two, a company is then positioned correctly to come up with proactive actions and then evaluate the responses of those actions through their interactions with the customer, which are steps three and four.
We want to leverage customer insight to implement customer-focused experiences!
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©2021 Sarah Cherres 2
Insight
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Identify
Identify & differentiate happen behind the scenes
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Differentiation gets applied in the Interact & Customize stage
Modu le4 1 Un itl: Custo=rva luationConcepts
MAR 4860 – Customer Relationship Management MODULE 4 UNIT 1
Basic Differentiation Concepts
Differentiation is the second stage of the IDIC framework. Although some people confuse differentiation with segmentation, they are not exactly the same thing. We will look at differentiation from two perspectives: 1) based on the value that the customer creates for the company, and 2) based on the needs of the customer. Remember that differentiation is not implemented until the Interact and Customize stages! Identify and Differentiate happen behind the scenes.
Different customers have different needs. Different customers also represent different values to a company. By differentiating your customers, a company can do a better job of 1) allocating resources to those customers that create the most value and contribute to performance, and 2) creating strategies that add value to different customers.
The entire value proposition between a business and a customer can be captured in terms of the value the customer provides for the company and the value that the company provides for the customer. All other customer differences, from demographics and psychographics to behaviors, transactional histories and attitudes, represent the tools and concepts that marketers must use simply to get at these two most fundamental differences.
Knowing which customers are the most valuable and least valuable to the enterprise will enable a business to prioritize its competitive efforts, allocating relatively more time, effort and resources to those customers likely to yield higher returns. In fact, a business’ financial objectives with respect to any single customer will be identified by the value the customer is currently creating for that business, called actual value. It's also important to consider potential value which is what the customer could create for the business. By presenting the exact right offerings at the right time as needed by the customer, a business can change the customer's behavior in a way that works both for the business and the customer at the end. It’s a win-win situation.
Of course, changing a customer's behavior can be accomplished only by appealing to the customer's own personal motives or needs. So while understanding the customer’s value profile can help the company’s financial objectives for that customer, using the right strategies and tactics require an understanding of that customer's needs. In this module, we will talk more about the concept of customer valuation, including various ways in which a company can rank its customers based on those individual values to the organization.
©2021 Sarah Cherres 3
ultimate objective of Managing by Customer Equity is to grow and maintain the lifetime Value of targeted customers.
Revenue
t ACOUISITlON OPa/llZATION LTV- Customer Lifecyde Time
Source: Unlocking the Value of CRM Initiatives by Peppers & Rogers
Modut~ 4 I lJnil 1: Custom~, Valuation Conc~pts
MAR 4860 – Customer Relationship Management MODULE 4 UNIT 1
Optimize LTV of Customers
A customer is a financial asset to a business. The diagram in this slide depicts the objective of managing by customer equity to grow and maintain the lifetime value of customers. If you recall, in Module 3, we talked about the customer lifecycle. We also discussed what the company does while the customers are going through their lifecycle and through their decision-making process.
Here we see the stages that a business goes through with customers over their lifetime. First, a business focuses on acquiring the customers. At first, we may spend more than we generate in revenue. Then, we try to optimize the relationships that we have with those customers and try to optimize the revenues that we generate from those relationships.
The idea of managing by customer equity is to increase the acquisition rates and then to lower the costs of acquiring new customers. In the optimization stage, we want to maximize the net present value of each customer that has been acquired. Lastly, in terms of retention, we want to create a stream of annuity or a stream of income and revenues from each of those individual customers.
Over time we want to go from a negative LTV to a positive LTV. We also want to increase that stream as time goes on, which depicts the focus of CRM: to build long-term relationships not just transactional relationships.
©2021 Sarah Cherres 4
Concepts
Continuum of Segmentation
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Capture data to create a customer focus .
CRM : Focus on customer value.
Modu l~ 4 I Un it 1 : Customu Va luation Conc~pts
MAR 4860 – Customer Relationship Management MODULE 4 UNIT 1
Segmentation Conce pts
Before we get into differentiation, let’s review some basic segmentation concepts. At the core of customer relationship management is market segmentation which is clustering customers into segments. Market segmentation is the process of dividing up a market into more-or-less homogeneous subsets for which it is possible to create different value propositions. What differentiates market segmentation in a CRM sense is a very clear focus on customer value.
As a business strategy, market segmentation is organizing a business around targeted segments and their product, service and purchase method preferences. The goal is to capture relevant data and develop private information that creates a customer focus for competitive advantage.
The diagram in the slide illustrates the continuum of segmentation. No segmentation assumes that all customers behave the same and have the same characteristics. Companies using no segmentation use a mass marketing approach – the same strategy regardless of the customer. Market segmentation uses clustering to group customers into homogeneous subsets, based on similar characteristics. Custom marketing involves very individualized 1-to-1 marketing, which is what we want to do but in an affordable way.
The outcome of this segmentation process should be the identification of the potential value of each identified segment. Traditional marketing segmentation is focused on demographic, geographic, and psychographic data. The more you focus on a one-to-one marketing or customer-centric strategy, the more inclined you are to be on the right side of the diagram above. Offerings are more tailored to the segment and although there may be a higher cost associated with the offering, the rewards are greater in the long-term.
In most cases, business marketers have already selected and grouped the market segments before the implementation of CRM. Part of CRM is a secondary form of market segmentation, with existing customers further segmented so that post-purchase promotions may be personalized.
©2021 Sarah Cherres 5
Approaches (New Customers)
Less Information
SINGLE TARGET MARKET
MULTI PLE TARGET MARKET
COMBINED TARGET MAR KET
• The marketer must evaluate the potential profot;ib1lotyof alternative segments before investing 1n :.cpar.uc marketing strategics
• Changes tn market & compet1tave cond1t1ons require that ,1 company's marketing segmentation strategy be adJusted ilCCord1ngly
More Information
CRM: Clustering or portfolio
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Mod u1~ 4 I Unit 1: Cus tom~r Va luat ion Conc~pts
MAR 4860 – Customer Relationship Management MODULE 4 UNIT 1
Segmentation Approaches (New Customers)
In segmentation, marketers study the typical characteristics of the segment members to determine potential product features and to figure out how to reach the segment members. Different segments may be more prone to specific media types. Marketers target market segment members by tailoring products to suit the needs and tastes of the segment members and then displaying the promotions on the market segment’s preferred media channels.
The diagrams on this slide illustrate different segmentation approaches mainly for acquisition of new customers. At this stage, you may not know enough about individual customers. Effective segmentation can allow a company to maximize its acquisition efforts by learning as much as you can about your potential market segment. This is more possible in today’s digital world. When potential customers visit a website or interact with you in some way digitally, you can learn something about their behaviors and better predict future customers. You can gain more insight by analyzing online data. This is where digital marketing comes in.
Regardless of where you get insights, you still need to design your marketing strategies. On the left side, we have the single market strategy, the most basic of the segmentation approaches. Here, the assumption is that all segments will receive the same strategy. In the multiple target market approach, the marketer designs a different strategy for each segment. This is very costly. In this case, a marketer must evaluate the potential profitability of alternative segments before investing in separate or unique marketing strategies. Marketing is by far one of the most costly investments for a business, dipping into the profit margins and influencing pricing decisions.
In the combined approach, a company can maximize its investments by doing a better job of grouping segments that can perform in a similar fashion. This requires more information about the potential customers. If done right, this is the optimum approach because it can yield the greatest results. In CRM, many call this "clustering" or portfolio management.
CRM marketers take the information in the CRM databases and create promotions designed to meet specific customer wants and needs. The initial market segmentation helps get new customers but further segmentation helps retain customers, and customer retention is vital to profitability.
©2021 Sarah Cherres 6
A customer portfolio is a classification of customers into different groups that are then managed on a portfolio, or collective , basis .
• It is a collection of mutually exclusive customer groups that comprise a business's entire customer base.
• Customer Portfolio Management (CPM) aims to optimize business performance – whether that means sales growth, enhanced customer profitability, or something else – across the entire customer base .
• CPM does this by offering differentiated value propositions to different segments of customers.
• Basic CPM disciplines are market segmentation sales forecasting, activity-based costing, customer lifetime value estimation, and data mining.
Source: Buttle (2009)
CI SarahCherres Mod ule4 1 Unitl: CustomerVa luationConcepts
MAR 4860 – Customer Relationship Management MODULE 4 UNIT 1
Portfolio Management
Another way of "segmenting" customers, particularly business customers, is the use of portfolios. A customer portfolio is a classification of customers into different groups that are then managed on a portfolio, or collective basis. It is the collection of mutually exclusive customer groups that comprise a business’s entire customer base.
Customer Portfolio Management (CPM) aims to optimize business performance – whether that means sales growth, enhanced customer profitability, or something else across the entire customer base. CPM does this by offering differentiated value propositions to different segments of customers. CPM is definitely in line with CRM, as it is sometimes impossible to realistically treat every single customer, especially consumers, differently.
For example, a bank normally manages its business customers on a portfolio basis. It can split customers into 3 segments based on their size (in terms of deposits), lifetime value and creditworthiness. Each group in the portfolio is treated with a different value proposition: different products, different pricing, different promotions and different distribution channels. The group is the portfolio. Because each portfolio is different, the bank can allocate different resources to each portfolio, depending on the value each tier has to the bank and the needs of each tier. The more value to the bank, the more individualized attention the customers get.
CPM uses these disciplines as part of its implementation: market segmentation, sales forecasting, activity-based costing, customer lifetime value estimation, and data-mining. These techniques are used to measure "value," allowing companies to determine what portfolio each customer fits into.
Most companies use intuitive processes to segment based on their experience and their insight. Marketing teams will normally meet and brainstorm on what variables should be used to differentiate customers, focusing more on demographic-type variables, although we know that this is changing. This is then used as a guide to either develop marketing strategy decisions or to supplement data-based segmentation models.
Segmentation in CRM is also data-based, focusing on data, whether internal or external or both. Data analysis is used to identify trends and patterns, something we’ll talk about later, called data mining. Ideally, companies should use both intuitive and data-based segmentation processes. Executives and managers with extensive experience in a market and industry are invaluable in the segmentation process. This insight can’t be replaced with tons of data.
©2021 Sarah Cherres 7
Based on Value
• Customer value is future-oriented
• Customer valuation • Actual value
• Potential value
• Net Present Value (NPV)
• Lifetime value (LTV) is the sum of the NPVs of all such future events attributed to a particular customer's actions .
• Think of the customer's trajectory with the company – when the relationship started, where it is today, and where it is going.
CI San1hChemes Modu le 4 I Un it 1: Customer Valuation Concepts
MAR 4860 – Customer Relationship Management MODULE 4 UNIT 1
Differentiation Based on Value The value the customer represents to a business should be thought of as the same type of value any other financial asset would represent. To say that some customers have more value for a business than others is to acknowledge that some customers are more valuable as assets than others. The primary objective of the customer-centric company should be to increase the value of its customer base for the simple reason that customers are the source of all short-term revenue and all long-term value creation. In other words, a company should strive to increase the total sum of all individual financial assets known as customers. Not as simple as it sounds. Customer value to a business is a function of the profit that the customer will generate in the future.
A customer’s value to a business is a future-oriented variable. It is a quantity that can be determined only from the customer's actual behavior in the future. To determine customer valuation we will use two different but related concepts. The first one is actual value. Actual value is the customer’s current value, given what we currently know or predict about the customer's future behavior. Potential value is what the customer’s value as an asset to the business could represent through some conscious strategy on the part of the company that would change the customer's future behavior in some way.
The actual value of the customer is the equivalent to the quantity we frequently term customer lifetime value. A customer's lifetime value is the net present value of the expected future stream of financial contributions from the customer. Every customer of a business today will be responsible for some specific series of events in the future, each of which will have a financial impact on the company. The purchase of a product, payment for service, remittance of a subscription fee, a product exchange, or an upgrade, a warranty claim, helpline telephone call, the referral of another customer, and so on. The net present value today of each of these future value creating events can be derived by applying a discount rate to the factor in the time value of money as well as the likelihood of the event. Lifetime value is in essence the sum of all of the net present values of all future events attributed to a particular customer's actions.
A useful way of thinking about this is to visualize each customer as having a trajectory that carries that customer through time in a financial relationship with the enterprise. For example, a customer can begin his relationship at a particular starting point and then have a particular spending level. At that point, he increases his spending, taking another product line from the company. Later, he begins paying more for an added service. Still later he has a complaint and it cost the company some expense to resolve it. He refers another customer to the company and that customer then begins his or her own trajectory, creating a whole additional value stream. Eventually, several years later, the original customer leaves the company because his children are grown up or he decides to switch to another product altogether or gets divorced or retires or dies. At this point his relationship with that company comes to an end. Different customers will have different direct trajectories in a way the lifetime value of each customer amounts to the net present value of the financial contribution represented by that customer's trajectory through the customer base.
©2021 Sarah Cherres 8
on Value
• The goal of value differentiation is not a historical understanding, but a predictive plan of action
• Unrealized potential value
• Lifetime value (LTV) is hard to calculate in practice, but some proxy variable can be used
• A proxy variable is the representation of a customer's value to the enterprise, rather than a quantification of it . Most common proxy variable is RFM
• R: Recency
• F: Frequency
• M: Monetary value
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MAR 4860 – Customer Relationship Management MODULE 4 UNIT 1
Differentiation Based on Value
This slide shows more key concepts behind value differentiation. The goal is to PREDICT future actions. Actual value should be re-calculated on a real-time basis, customer by customer, if a company’s technological capabilities permit. If this is not possible and customers’ actual values tend not to change drastically over time, the company can choose regular intervals for update (weekly, monthly, or yearly). Let’s take an example: the actual value of customers for a dry cleaner can be estimated based on the average annual dry cleaning expenditures per customer. This calculation would be possible only if the dry cleaner is tracking each customer's expenditures.
Potential value should be updated whenever new information about particular customers or groups of customers becomes available. Unrealized potential value is the amount by which the business could increase the value of a particular customer if it applied a strategy for doing so. Potential value could be based on an analysis of average annual expenditures per customer, by customer type, based on historical data. Thus, a male, age 35, who is currently dropping off 3 shirts per week at the dry cleaner, can be compared with average expenditures for other males in his age group. If it turns out that other similar customers bring an average of 5 shirts per week plus 2 pairs of slacks for dry cleaning, then the enterprise can calculate the difference in value for this customer, projected into the future, if he could become an "average" customer for his customer type.
Over time, the dry cleaner could try to cross-sell and up-sell this customer, and see to what degree his potential value was realized. A company can also use simple, proxy measures such as historical average sales data on current customers, as they may not have the technical power to conduct more advanced analyses, or the funds to hire someone to do so. Proxy-based analysis is based on a group of simple variables, such as RFM, or other measures relevant to a business.
Charles Schwab uses trading activity and investable assets as proxy variables to differentiate customers. They created a portfolio called the Schwab 500, which are customers making more than forty-eight trades a year.
An auto manufacturer can consider actual value as the share of a household's garage (how much an entire family unit spends on cars from that manufacturer) and the potential value as the increased share of "wallet," including credit card, service, repairs, etc. If the manufacturer knows that the household has 5 people at driving age but only 2 are driving cars from that manufacturer, then there’s some unrealized potential value.
©2021 Sarah Cherres 9
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Custome Re afons ip M n geMent Module 4: Customer Differentiation
Unit 3: D1ffere .tat n Based on Value O eeds
MAR 4860 – Customer Relationship Management MODULE 4 UNIT 3
Introduction
In this course, we are focusing on the IDIC model as a means of achieving a 1-to-1 marketing approach. We’ve already covered the differentiation based on the value a customer has for a business.
In this unit, we will focus our attention on differentiating customers based on their needs and behaviors. Then we will combine value and need differentiation to create the intersection points that will result in greater ROI.
©2021 Sarah Cherres 1
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