Customer Relationship Management: Concepts and Technologies

CUSTOMER RELATIONSHIP MANAGEMENT
CONCEPTS AND TECHNOLOGIES
Chapter 5
Customer Portfolio Management
Section B: Strategic CRM
Section B consists of 3 chapters focused on the

following.
Chapter 5: Customer portfolio management

Chapter 6: Customer perceived value
Chapter 7: Customer experience
Customer Portfolio definition
 A customer portfolio is the collection of mutually

exclusive customer groups that comprise a
business’s entire customer base.
Objectives of Customer Portfolio Management (CPM)
 CPM aims to optimise business performance –

whether that means sales growth, enhanced
customer profitability, or something else - across the
entire customer base.
 It does this by offering differentiated value
propositions to different segments of customers.
How B2B customers differ from B2C customers
 Fewer in number
 Bigger in size
 Closer relationships with suppliers
 Derived demand
 Professional buying
 Direct purchase
Basic disciplines for CPM
 market segmentation
 sales forecasting
 activity-based costing
 customer life-time value estimation
 data-mining
Market segmentation definition
 Market segmentation is the process of dividing up a

market into more-or-less homogenous subsets for
which it is possible to create different value
propositions.
Intuitive vs. data-based segmentation
Figure 5.1
Market segmentation process
1. identify the business you are in

2. identify relevant segmentation variables
3. analyse the market using these variables
4. assess the value of the market segments
5. select target market(s) to serve
Types of competitor (kitchen furniture example)
 Benefit competitors
● other companies delivering the same benefit to customers.
These might include window replacement companies,
heating and air-conditioning companies and bathroom
renovation companies
 Product competitors
● other companies marketing kitchens to customers seeking
the same benefit.
 Geographic competitors
● these are benefit and product competitors operating in the
same geographic territory
Criteria for segmenting consumer markets
ACORN
Bivariate segmentation of the chocolate market
Figure 5.2
Criteria for segmenting business markets
Examples of ISIC codes
Account-based segmentation variables
 account value
 share of category (share of wallet) spend
 propensity to switch
Evaluation of segmentation opportunities
McKinsey/GE customer portfolio matrix
Figure 5.3
Sales forecasting methods
 Qualitative methods
● Customer surveys
● Sales team estimates
 Time-series methods
● Moving average
● Exponential smoothing
● Time-series decomposition
 Causal methods
● Leading indicators
● Regression models
Sales forecasting using moving averages
Sales 2-year moving 4-year moving

Year volumes average average
2013 4830
2014 4930
2015 4870 4880
2016 5210 4900
2017 5330 5040 4960
2018 5660 5270 5085
2019 5440 5495 5267
2020 5550 5410
Activity based costing 1
Costs do vary from customer-to-customer. Some customers

are very costly to acquire and serve, others are not.
Customer acquisition costs.
● Some customers require considerable sales effort to shift them
from prospect to first-time customer status: more sales calls, visits
to reference customer sites, free samples, engineering advice,
guarantees that switching costs will be met by the vendor.
Terms of trade.
● Price discounts, advertising and promotion support, slotting
allowances (cash paid to retailers for shelf-space), extended
invoice due-dates.
Activity based costing 2
 Customer service costs.

● Handling queries, claims and complaints, demands on
sales-person and contact centre, small order sizes, high
order frequency, just-in-time delivery, part-load shipments,
breaking bulk for delivery to multiple sites.
 Working capital costs.
● Carrying inventory for the customer, cost of credit.
ABC in a claims processing department
Figure 5.4
How ABC helps CPM
 When combined with revenue figures, it tells you the

absolute and relative levels of profit generated by
each customer, segment or cohort
 It guides you towards actions that can be taken to
return customers to profit.
 It helps prioritise and direct customer acquisition,
retention and development strategies
 It helps establish whether customisation, and other
forms of value creation for customers, pays off
CLV formula
Margin multiples
RETENTION RATE DISCOUNT RATE

10% 12% 14% 16%
60% 1.20 1.15 1.11 1.07
70% 1.75 1.67 1.59 1.52
80% 2.67 2.50 2.35 2.22
90% 4.50 4.09 3.75 3.46
Table 5.7
Preparation for data-mining
1. Define the business problem you are trying to solve.

2. Create a data mart that can be subjected to data
mining.
3. Develop a model that solves the problem. This is an
iterative process of developing a hypothetical
solution to the problem (also known as model
building), testing and refinement.
4. Improve the model. As new data is loaded into the
data warehouse, further subsets can be extracted to
the data mining data mart and the model enhanced.
Data-mining for CPM
 Clustering techniques
● CART
● CHAID
 Decision trees
 Neural networks
Credit risk training set
Name Debt Income Married? Risk

Joe High High Yes Good
Sue Low High Yes Good
John Low High No Poor
Mary High Low Yes Poor
Fred Low Low Yes Poor
Cross-tab of dependent and independent variables
Predicted High Low debt High Low Not

risk debt income income Married married
Good 1 1 2 0 2 0
Poor 1 2 1 2 2 1
Table 5.9
Decision tree output
Figure 5.5
Neural networks
 Neural networks, also known as machine–based

learning, are another way of fitting a model to existing
data for prediction purposes.
 Neural networks can produce excellent predictions
from large and complex datasets containing
hundreds of interactive predictor variables, but the
neural networks are neither easy to understand nor
straightforward to use.
 Neural networks are represented by complex
mathematical equations, with many summations,
exponential functions and parameters.
The 80:20 rule or Pareto principle
Figure 5.6
Customer profitability by sales volume quintile
Figure 5.7
Shapiro et al’s customer classification matrix
Figure 5.8
How costs vary between customers
Pre-sale costs Production costs Distribution costs Post-sale costs

Geographic location: Order size Shipment consolidation Training
close v. distant
Prospecting Set-up time Preferred transportation Installation
mode
Sampling Scrap rate Back-haul opportunity Technical
support
Human resource: Customization Location: close v. distant Repairs and
management v. reps maintenance
Service: design Order timing Logistics support e.g.
support, applications field inventory
engineering
Table 5.10
Fiocca step 1
Figure 5.9
Fiocca step 1: Strategic importance
 Strategic importance is related to

● value/volume of the customer’s purchases
● potential and prestige of the customer
● customer market leadership
● general desirability in terms of diversification of the supplier’s
markets, providing access to new markets, improving
technological expertise, and the impact on other
relationships
Fiocca step 1: Difficulty of managing relationship
 Difficulty of managing the customer relationship is

related to:
● product characteristics such as novelty and complexity
● account characteristics such as the customer’s needs and
requirements, customer’s buying behaviour , customer’s
power, customer’s technical and commercial competence
and the customer’s preference to do business with a number
of suppliers
● competition for the account which is assessed by
considering the number of competitors, the strength and
weaknesses of competitors and competitors’ position vis à
vis the customer
Fiocca step 2
 Assess key easy and key difficult accounts:

● The customer’s business attractiveness
● The strength of the buyer/seller relationship
Fiocca step 2: strength of relationship
 the length of relationship

 the volume or dollar value of purchases
 the importance of the customer (percentage of
customer’s purchases on supplier’s sales)
 personal friendships
 co-operation in product development
 management distance (language and culture)
 geographical distance
Fiocca step 2: strategic options
Figure 5.10
Additional CPA tools
 SWOT analysis
 BCG matrix analysis
BCG matrix
Figure 5.11
Strategically significant customers 1
 High future life-time value customers.

● These customers will contribute significantly to the
company’s profitability in the future
 High volume customers.
● These customers might not generate much profit, but they
are strategically significant because of their absorption of
fixed costs, and the economies of scale they generate to
keep unit costs low
 Benchmark customers.
● These are customers that other customers follow. For
example, Nippon Conlux supplies the hardware and
software for Coca Cola’s vending operation. Whilst they
might not make much margin from that relationship, it has
allowed them to gain access to many other markets. ‘If we
are good enough for Coke, we are good enough for you’, is
the implied promise. Some IT companies create ‘reference
sites’ at some of their more demanding customers.
 Inspirations.
● These are customers who bring about improvement in the
supplier’s business. They may identify new applications for a
product, product improvements, or opportunities for cost
reductions. They may complain loudly and make unreasonable
demands, but in doing so, force change for the better.
 Door openers.
● These are customers that allow the supplier to gain access to
a new market. This may be done for no initial profit, but with a
view to proving credentials for further expansion. This may be
particularly important if crossing cultural boundaries, say
between west and east.
SSC’s at a Scandinavian timber processor
This company considers 5 attributes in identifying their
strategically significant customers
 Economic return
 Future business potential
 Learning value
 Reference value
 Strategic value by
 providing access to new markets
 strengthening incumbent positions
 building barriers to new entrants
Seven core customer management strategies
1. Protect the relationship

2. Re-engineer the relationship
3. Grow the relationship
4. Harvest the relationship
5. End the relationship
6. Win-back the customer
7. Start a relationship

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CUSTOMER RELATIONSHIP MANAGEMENT

CONCEPTS AND TECHNOLOGIES

Section B consists of 3 chapters focused on the

Chapter 5: Customer portfolio management

 A customer portfolio is the collection of mutually

 CPM aims to optimise business performance –

 Market segmentation is the process of dividing up a

1. identify the business you are in

Sales 2-year moving 4-year moving

Costs do vary from customer-to-customer. Some customers

 Customer service costs.

 When combined with revenue figures, it tells you the

RETENTION RATE DISCOUNT RATE

1. Define the business problem you are trying to solve.

Name Debt Income Married? Risk

Predicted High Low debt High Low Not

 Neural networks, also known as machine–based

Pre-sale costs Production costs Distribution costs Post-sale costs

 Strategic importance is related to

 Difficulty of managing the customer relationship is

 Assess key easy and key difficult accounts:

 the length of relationship

 High future life-time value customers.

1. Protect the relationship

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