CREATING VALUE &

CAPTURING VALUE FROM

CUSTOMERS
Understand the Design a customer- Construct an
marketplace & driven marketing integrated marketing
customer needs & strategy program that
wants delivers superior
value

Build profitable Capture value from

relationships & customers to create
create customer profits & customer
delight equity
 VALUE

 Have discussed needs, wants, value, satisfaction,

delight, CRM, etc.

 Will study value & loyalty in detail

 So Partner Relationship Management is also

needed in addition to Customer Relationship
Management
♣ Work in collaboration with internal & external partners

♣ Superior value & satisfaction can be created

 APPROACHES TO CREATING,
COMMUNICATING, & DELIVERING VALUE
 The job of marketers is to create, communicate, &
deliver value to customers

 Different approaches have been put forth by

different experts
♣ Approach I: the value creation & delivery sequence
can be divided into 3 phases
Phase 1: Choosing the value

Phase 2: Providing the value

Phase 3: Communicating the value

 APPROACHES TO CREATING,
COMMUNICATING, & DELIVERING VALUE
 Approach I: the value creation & delivery sequence
can be divided into 3 phases
♣ Phase 1: Choosing the value
The homework the marketers must do before any
product exists

Marketers must
 Segment the market & select the target markets
 Develop the market offering’s value proposition

The formula Segmentation-Targeting-Positioning

(STP) is the essence of strategic marketing
 APPROACHES TO CREATING,
COMMUNICATING, & DELIVERING VALUE
 Approach I: the value creation & delivery sequence
can be divided into 3 phases
♣ Phase 2: Providing the value
Include what marketers must do to create value

Take decisions about 3 of the 4 P’s

 Determine product features
 Determine the price(s) at which product will be
sold
 Select distribution channels
 APPROACHES TO CREATING,
COMMUNICATING, & DELIVERING VALUE
 Approach I: the value creation & delivery sequence
can be divided into 3 phases
♣ Phase 3: Communicating the value
The company
 Uses communication tools (advertising, sales
promotion, etc.) to announce & promote the product
 Utilizes the sales force

♣ The value delivery process:

Starts before the product is developed
Continues while the product is being developed
Continues after the product becomes available to the
market
 APPROACHES TO CREATING,
COMMUNICATING, & DELIVERING VALUE
 Approach II: the 1st approach we studied has been
differently described by Nirmalya Kumar of the
LONDON BUSINESS SCHOOL – the “3V
Approach” to Marketing
♣ 1st V: Define the Value Segment

♣ 2nd V: Define the Value Proposition

♣ 3rd V: Define the Value Network

 APPROACHES TO CREATING,
COMMUNICATING, & DELIVERING VALUE
 Approach II: The “3V Approach” to Marketing
♣ 1st V: Define the Value Segment
The customers & their needs

♣ 2nd V: Define the Value Proposition

The entire cluster of benefits the company promises
to deliver
Includes more than just the positioning of the
offering
 APPROACHES TO CREATING,
COMMUNICATING, & DELIVERING VALUE
 Approach II: The “3V Approach” to Marketing
♣ 2nd V: Define the Value Proposition
Examples:
 HUSH PUPPIES is positioned as a comfortable pair
of shoes
 But the brand promises more than comfort – style,
durability, & quality

 HONDA is positioned as a superior engine

 But it promises good service, long life, driving
pleasure, state-of-the-art technology, etc.
 APPROACHES TO CREATING,
COMMUNICATING, & DELIVERING VALUE
 Approach II: The “3V Approach” to Marketing
♣ 3rd V: Define the Value Network
The network that will deliver the promised value

 Approach III: Put forward by Frederick Webster –

Marketing consists of
♣ Value-defining processes

♣ Value-developing processes

♣ Value-delivering processes
 APPROACHES TO CREATING,
COMMUNICATING, & DELIVERING VALUE
 Approach III: Put forward by Frederick Webster – Marketing
consists of
♣ Value-defining processes
Market research
SWOT / company analysis

♣ Value-developing processes
New product development
Vendor selection

♣ Value-delivering processes
Advertising
Managing distribution
Includes all the experiences that a customer will have on the way to
obtaining & using the product
PARTNER RELATIONSHIP
MANAGEMENT
 PARTNER RELATIONSHIP MANAGEMENT
 Relationship Marketing is part of the Holistic Marketing
Concept
♣ Other than Customer Relationship Marketing (PRM), an
important dimension is Partner Relationship Marketing
(PRM)
Suppliers
Distribution channel members
Internal partners – within the organization

♣ Company has to work in collaboration with internal & external

partners

♣ Superior value & satisfaction can be created – keys to building

long-term customer relationships
 PARNTERS INSIDE THE COMPANY – THE
CONCEPT OF VALUE CHAIN
 As per the Marketing Concept, all functional
areas of an organization work together to create
customer value & satisfaction

 Michael Porter developed the concept of Value

Chain or Value Chain Analysis

The Value Chain Analysis suggests that a

company should analyze all its activities with
a view to determining how these contribute
to the value which the customer receives
S Firm Infrastructure
E
C Human Resource Management
O
N Technology Development
D
A
R Procurement
Y

Inbound Operation Outbound Marketing Service

Logistics s Logistics & Sales

PRIMARY
 PARNTERS INSIDE THE COMPANY – THE
CONCEPT OF VALUE CHAIN
 Company’s activities can be divided into 9 value activities
♣ 5 Primary Value Activities

♣ 4 Secondary Value Activities

Primary Value Activities are those associated with

input, throughput & output of goods & services in the
organization

Secondary Value Activities or Support Activities are

those which facilitate the Primary Value Activities in
the physical creation of the product & its sale &
transfer to the buyer
 PARNTERS INSIDE THE COMPANY – THE
CONCEPT OF VALUE CHAIN
 Primary Value Activities
♣ Inbound Logistics
 All materials & supplies coming into the organization
 Warehousing
 Materials handling
 Stock control

♣ Operations
 Assembly
 Manufacturing
 Testing
 Packaging
 Equipment maintenance
 PARNTERS INSIDE THE COMPANY – THE
CONCEPT OF VALUE CHAIN
 Primary Value Activities
♣ Outbound Logistics
 Finished goods warehousing
 Materials handling
 Order processing
 Deliveries (to customers or middlemen)

♣ Marketing & sales

 Market research
 Advertising
 Sales Promotion
 PR
 Pricing
 Distribution channels
PARNTERS INSIDE THE COMPANY – THE
CONCEPT OF VALUE CHAIN
 Primary Value Activities
♣ Service
 Installation
 Commissioning
 Maintenance
 Repair
 Replacement
 Parts supply
PARNTERS INSIDE THE COMPANY – THE
CONCEPT OF VALUE CHAIN
 Secondary Value Activities
♣ Procurement
 Purchasing procedures
 Vendor analysis
 Information systems

♣ Technology Development
 Activities that improve the products & the processes
R&D
 Technology support activities such as office
automation, communication, measuring quality, etc.
PARNTERS INSIDE THE COMPANY – THE
CONCEPT OF VALUE CHAIN
 Secondary Value Activities
♣ HRM
 Recruitment & selection
 Training & development
 Career development
 Performance appraisal
 Compensation
 Employee relations
 Union management

♣ Firm infrastructure
 Quality control systems
 Financial systems
PARNTERS INSIDE THE COMPANY – THE
CONCEPT OF VALUE CHAIN
 Competitive Advantage

When a company sustains profits that exceed the

average for its industry, it is said to possess a
Competitive Advantage over its rivals

When a company earns return on investment

higher than the cost of investment, it is said
to have a Competitive Advantage
PARNTERS INSIDE THE COMPANY – THE
CONCEPT OF VALUE CHAIN
 Competitive Advantage
♣ The value activities give the company an opportunity
to give superior customer value

♣ If a company performs the value activities

efficiently, it will gain profits

♣ This efficiency in itself becomes a Competitive

Advantage
PARNTERS INSIDE THE COMPANY – THE
CONCEPT OF VALUE CHAIN
 Horizontal Linkages
♣ All value chain activities are interdependent

♣ This interdependence is termed by Porter as Horizontal

Linkages

♣ These linkages form the basis of Competitive Advantage

♣ Linkages exist
 Amongst Primary Value Activities
 Amongst Secondary Value Activities
 Between Primary & Secondary Value Activities
PARNTERS INSIDE THE COMPANY – THE
CONCEPT OF VALUE CHAIN
 Example of Horizontal Linkages: Business
Development Teams
♣ Cross-functional teams
♣ Consist of members from major functional
departments
♣ Team leader is usually a marketer
 PARNTERS OUTSIDE THE COMPANY

 Extending the Value Chain outside the company’s

boundaries creates linkages with suppliers, distributors,
& customers

The Supply Chain describes the channel stretching

from raw materials to components to final
products that are carried to final buyers

 Example: the Supply Chain for computers consists of:

♣ Suppliers of computer chips & other components
♣ The computer manufacturer
♣ The distributors, retailers, & other sellers
 PARNTERS OUTSIDE THE COMPANY

 Through Supply Chain Management, companies

strengthen their connections with partners all
along the Supply Chain

 Smart marketers treat supply chain members as

partners

 The connection of Value Chains with agencies

outside the company is known as Vertical
Linkages
 PARNTERS OUTSIDE THE COMPANY

 In actual effect, these Vertical Linkages are

between the Value Chain of a company and the
Value Chain of one or more Supply Chain
members
 PARNTERS OUTSIDE THE COMPANY

 This entire system – consisting of the Value

Chains of the company & those of the suppliers
upstream, & the distributors / customers
downstream – is called the Value System

Supplier Company’s Channel Buyer Value

……. Value Chain Value Chain Value Chain Chain
 PARNTERS OUTSIDE THE COMPANY
 Linkages exists between Value Chains
♣ Through Vertical Integration
 Forward Integration – going ahead in the Supply
Chain & performing an activity earlier performed by a
distribution channel member

 Backward Integration – going backward in the Supply

Chain & performing an activity earlier performed by a
supplier / vendor

♣ Even when a company is not vertically integrated, it

can form Vertical Linkages through agreements &
partnerships
 PARNTERS OUTSIDE THE COMPANY
 Linkages exists between Value Chains
♣ Example:
 An automobile manufacturer can have his suppliers
set up their factories / facilities in close proximity to
his manufacturing plant

 This reduces transportation, warehousing, & inventory

costs

 This linkage gives the automobile manufacturer

Competitive Advantage
 PARNTERS OUTSIDE THE COMPANY
 A company’s ability to develop & sustain a
Competitive Advantage depends
♣ Not only on its own Value Chain & the Horizontal
Linkages it is able form among value activities

♣ But also on its ability to manage the Value System of

which it is a part, i.e. forming Vertical Linkages

 More companies today are partnering with other

members of the Supply Chain to improve the
performance of the customer Value Delivery
Network
 PARNTERS OUTSIDE THE COMPANY
Value Delivery Network is the network made up
of the company, suppliers, distributors, &
ultimately, customers who “partner” with
each other to improve the performance of the
entire system
 PARNTERS OUTSIDE THE COMPANY
 Similar concepts??
♣ Supply Chain
 Consists of the company itself, its suppliers, & its
distributors

♣ Value Chain
 Consists of all the departments within an organization

♣ Value System
 Consists of the Value Chains of the manufacturing
company, along with the Value Chains of all
suppliers, distributors, & those of the buyers
 PARNTERS OUTSIDE THE COMPANY
 Similar concepts??
♣ Value Delivery Network
 Consists of the company, its suppliers, distributors, &
its customers

♣ Looking at the last two terms, we see that the Value

System actually makes up the Value Delivery
Network
 PARNTERS OUTSIDE THE COMPANY
 Handout # 1 – TOYOTA’s Supplier Satisfaction Strategy
♣ Today, competition does not take place between
companies, but between Value Systems
 That is, between Value Delivery Networks created by
the competitors

♣ Thus, TOYOTA’s performance against HONDA depends on

the quality of TOYOTA’s overall Value System or Value
Delivery Network versus that of HONDA

♣ Even if TOYOTA makes the best cars, HONDA still might

emerge as the more successful competitor if it provides
more customer-satisfying sales and service
 GAINING COMPETITIVE ADVANTAGE
THROUGH COST LEADERSHIP OR
DIFFERENTIATION
 According to concept of Value Chain, a company
can gain Competitive Advantage through
♣ Cost Leadership: this give the company a cost
advantage
♣ Differentiation: this gives a Differentiation
Advantage

 Cost Leadership: can be achieved by

♣ Reducing cost of Value Chain activities
♣ Reconfiguring the Value Chain
 GAINING COMPETITIVE ADVANTAGE
THROUGH COST LEADERSHIP OR
DIFFERENTIATION
 Cost Leadership
♣ Reducing cost of Value Chain activities
 Achieve economies of scale
 Utilize capacity better
 Create linkages among activities
 Go for Vertical Integration
 Enter the market at the right time
 Institutional factors (taxes, regulation)
 GAINING COMPETITIVE ADVANTAGE
THROUGH COST LEADERSHIP OR
DIFFERENTIATION
 Cost Leadership
♣ Reconfiguring the Value Chain
 Structural changes
 New production process
 Different distribution channel
 Different vendor strategy
 GAINING COMPETITIVE ADVANTAGE
THROUGH COST LEADERSHIP OR
DIFFERENTIATION
 Differentiation
♣ Gain Competitive Advantage (Differentiation
Advantage) by doing things better than competitors

♣ Differentiation comes from uniqueness

♣ To achieve uniqueness, a company can

 Change individual Value Chain activities
 Reconfigure the Value Chain
 GAINING COMPETITIVE ADVANTAGE
THROUGH COST LEADERSHIP OR
DIFFERENTIATION
 Differentiation
♣ To achieve uniqueness, a company can
 Change individual Value Chain activities
 Policies
 Timing of activities
 Location
 Do something at a larger scale
 Many of these factors also act as cost drivers

 Reconfigure the Value Chain

 Develop new / better processes
 Use new distribution channels
 Forward integrate
 Backward integrate
 TECHNOLOGY & THE VALUE CHAIN

 Technology is used in every Value Chain activity

 Improvement in technology can improve the

activity, thereby creating or enhancing the
Competitive Advantage

 Handout # 2 – Technologies Used in Primary &

Secondary Value Activities
OUTSOURCING VALUE CHAIN ACTIVITIES
 Companies may perform certain value activities
themselves – outsource others

 Depends on how vertically integrated the company is

 When selecting which activities to outsource,

managers consider whether
♣ Activity can be performed better or cheaper if
outsourced

♣ Activity is a Core Competence of the company. Core

Competencies are not outsourced
OUTSOURCING VALUE CHAIN ACTIVITIES
 When selecting which activities to outsource,
managers consider whether
♣ How dynamic the company’s environment is
 In fast-changing environments, companies prefer to
outsource
 If activity relies on a fast-changing technology, companies
prefer to outsource

♣ Some real advantage can come from outsourcing

 Reduced lead time
 Reduced time-to-market
 Greater flexibility
 Reduced inventory costs
 CORE / DISTINCTIVE COMPETENCE

A set of extraordinary & unique capabilities that

allows it to make inroads into desired markets
& to gain advantages over the competitor

The set of strengths, characteristics & qualities

including skills, technologies, or resources
that distinguish it from competitors. When the
strength provides superior & unique customer
value and is difficult to imitate then the
Distinctive Competence creates a sustainable
Competitive Advantage
 CORE COMPETENCE
 An activity that a company performs better than its
competitors

 Also called Core Capability

 Examples:
♣ Getting better prices from suppliers
♣ Getting better services from distributors
♣ Having superior manufacturing technology

 Distinctive Competencies create differentiation & hence

Differentiation Advantage (which is one type of
Competitive Advantage)
CAPTURING VALUE FROM
CUSTOMERS
 CAPTURING VALUE FROM CUSTOMERS

 Outcomes of creating customer value

♣ Getting customer loyalty & retention

♣ Getting growing Share Of Customer

♣ Gaining Customer Equity

 CAPTURING VALUE FROM CUSTOMERS

 Customer loyalty & retention

♣ CPV

CPV is the customer’s evaluation of the

difference between the benefits & costs a
market offering relative to those of competing
offers

Total Customer Benefit is the perceived monetary

value of the benefits that the customer expects
from the market offering
 CAPTURING VALUE FROM CUSTOMERS

 Customer loyalty & retention

♣ CPV
 These benefits include
 Economic benefits
 Functional benefits
 Service benefits
 Psychological / image benefits

 The customer’s expectation of getting these benefits

is shaped by
 The company’s promotional efforts
 WOM
 Influence of Opinion Leaders
 Personality of the customer himself
 The cultural & social setting
 CAPTURING VALUE FROM CUSTOMERS

 Customer loyalty & retention

♣ CPV

Total Customer Cost is the perceived cost the

customer expects to incur in evaluating,
obtaining, using, & disposing of the market
offering

 These costs include

 Monetary costs
 Time costs
 Energy costs
 Psychological costs
 CAPTURING VALUE FROM CUSTOMERS

 Customer loyalty & retention

♣ CPV
 Thus, CPV is the customer’s evaluation of what he
gets & what he gives to get it

 Marketer can increase the value of the market offering

by giving some combination of
 Raising one or more of the types of benefits for
the customer, AND / OR

 Reducing one or more of the types of costs

 Energy costs
 CAPTURING VALUE FROM CUSTOMERS

 Customer loyalty & retention

♣ CPV
 Marketers intend not just to satisfy the consumer, but
to Delight him

 Delight = a high level of satisfaction

 At any level below it, customers may switch to other

brands
 CAPTURING VALUE FROM CUSTOMERS

 Customer loyalty & retention

♣ Retention dynamics
 The main steps in the process of attracting & retaining
customers are shown in the figure
Potentials

Disqualified
Prospects
Prospects

First-time
customers

Repeat
customers

Clients
Inactive or
Ex-customers

Members

Advocates

Partners
 CAPTURING VALUE FROM CUSTOMERS
 Customer loyalty & retention
♣ Retention dynamics
 Potentials
 Everyone who might conceivably have an interest in buying the
market offering
 May or may not have the desire or ability to buy it

 Prospects
 Next, the company has to identify Potentials that make really good
Prospects

Prospects are the people with the motivation, ability, & opportunity to
make a purchase

 First-time customers
 Marketers make efforts to convert Prospects into first-time
customers
 CAPTURING VALUE FROM CUSTOMERS

 Customer loyalty & retention

♣ Retention dynamics
 Repeat customers
 Then convert first-time customers to repeat
customers

 Clients
 & convert repeat customers into Clients

Clients are people to whom the company gives very

special & personalized treatment
 CAPTURING VALUE FROM CUSTOMERS

 Customer loyalty & retention

♣ Retention dynamics
 Clients
 Difference between customers & clients
 Customers may be nameless to the organization;
clients are not

 Customers are served as part of the mass market or

huge segments; clients are served on an individual
basis

 Customers are served by anyone who is available;

clients are served by managers specially assigned to
them
 CAPTURING VALUE FROM CUSTOMERS
 Customer loyalty & retention
♣ Retention dynamics
 Members
 The next step is to convert clients into Members by
starting membership programs that offer benefits to
customers who join

 Advocates
 Then to convert members to Advocates

Advocates are customers who engage in enthusiastic

positive WOM about the company

 They recommend the company & its products to others

 CAPTURING VALUE FROM CUSTOMERS
 Customer loyalty & retention
♣ Retention dynamics
 Partners
 The ultimate challenge is to convert advocates to
partners
 Partners are customers who are considered a part of the
company – stakeholders in the company’s profit & loss

 Marketers do not want to lose customers

Customer Churn refers to high customer defection

 Some industries are plagued with Customer Churn, e.g.

telecom industry
 CAPTURING VALUE FROM CUSTOMERS
 Customer loyalty & retention
♣ Retention dynamics
 A customer lost means more than losing a sale

 It means losing all the purchases the customer would

have made over his patronage lifetime had he been
delighted

 A customer who switches brands due to dissatisfaction

does not only cost the company revenue – the
potential damage is bigger
 A dissatisfied customer spreads the word
 His WOM may cause other customers to switch
 CAPTURING VALUE FROM CUSTOMERS

 Customer loyalty & retention

♣ Retention dynamics
 So the company also loses the revenue other
customers would have given the company

 So one lost customer may start a snowball effect of

lost revenue for the company

 Also, the company loses goodwill – far more difficult

to measure in monetary terms
 CAPTURING VALUE FROM CUSTOMERS
 Customer loyalty & retention
♣ Loyalty
 Customer Delight leads to Brand Loyalty

 Brand Loyalty or Customer Loyalty is the dream of a

marketer – to build an unbreakable relationship with the
customer

Brand Loyalty is a biased behavioral response of a

customer towards a brand out of a set of brands

 A Brand Loyal customer has an emotional attachment

to the brand – also called a Committed Customer
 CAPTURING VALUE FROM CUSTOMERS

 Customer loyalty & retention

♣ Loyalty
 By winning the loyalty of their customers, companies
want to capture their Lifetime Value (LV), also
known as Customer Lifetime Value (CLV) or
Lifetime Customer Value (LCV)

Customer Lifetime Value (CLV) is the value of the

entire stream of purchases that the customer
would make over a lifetime of patronage
 CAPTURING VALUE FROM CUSTOMERS

 Customer loyalty & retention

♣ Loyalty
 Marketers conduct the following types of activities to
improve loyalty & retention
 Interacting with customers
 Listening to customers is crucial

 Customer feedback is an important component of

Customer Relationship Management (CRM)
 CAPTURING VALUE FROM CUSTOMERS

 Customer loyalty & retention

♣ Loyalty
 Marketers conduct the following types of activities to
improve loyalty & retention
 Developing loyalty programs
 Frequency Marketing Programs help build loyalty
among high CLV customers

 Club Marketing Programs or Club Membership

Programs can be open to anyone who buys the
product, or can be restricted to those willing to pay a
small fee, e.g. the HARLEY OWNERS GROUP (H.O.G.)

 Handout # 3 – the HARLEY OWNERS GROUP

 CAPTURING VALUE FROM CUSTOMERS

 Customer loyalty & retention

♣ Loyalty
 Marketers conduct the following types of activities to
improve loyalty & retention
 Personalizing marketing
 Strong bonds with customers can be created by
giving them personalized service – customers are
converted to Clients
 CAPTURING VALUE FROM CUSTOMERS
 Growing Share of Customer

The portion of the customer’s purchasing that a

company gets in its product categories

♣ The amount of business each customer does with the

company

♣ Many companies emphasize on growing Market Share

♣ Relationship Marketing goes after Share of Customer

(also called Customer Share)
 CAPTURING VALUE FROM CUSTOMERS

 Growing Share of Customer

♣ The difference between Market Share & Share of
Customer
 Market Share
 How much of the market a company holds

 The %age of potential customers that are its

actual customers at any given point in time

 The proportion of the total available market or

market segment that is being serviced by a
company
 CAPTURING VALUE FROM CUSTOMERS

 Growing Share of Customer

♣ The difference between Market Share & Share of
Customer
 Market Share
 Can be expressed as sales revenue from a market
divided by total sales revenue available in that
market

 Can also be expressed as a company’s sales

volume in a market divided by the total volume of
units sold in that market
 CAPTURING VALUE FROM CUSTOMERS

 Growing Share of Customer

♣ The difference between Market Share & Share of
Customer
 Customer Share
 How much of the individual customer’s business a
company holds

 Example:
 A banker may have the deposit accounts of a
customer
 But that customer may have taken a home loan & a
car loan from another bank
 The banker does not have that customer’s entire
financial services business
 CAPTURING VALUE FROM CUSTOMERS
 Growing Share of Customer
♣ It is better to have a greater share of a customer’s
spending or purchases
 Makes it more difficult for customer to switch to
competitors
 Supermarkets want a greater share of wallet – stock
every kind of item from food products to home
decoration
 Restaurants want a greater share of stomach – have a
variety of menus

♣ The CEO of APPLE COMPUTERS, Steve Jobs, believes in

targeting Share of Customer as compared to Market
Share
 CAPTURING VALUE FROM CUSTOMERS

 Growing Share of Customer

♣ MOBILINK INDIGO boasts of having the largest
share of post-paid customers in the country by
focusing on being the most preferred connection for
their core audience – the “elite corporate urban
class”
 CAPTURING VALUE FROM CUSTOMERS
 Growing Share of Customer
♣ Customer Profitability
 Rather than pursuing every potential customer, companies
target the most profitable ones

 Building a profitable business is about finding the right

customers & retaining them - customers that have the potential
for giving highest profits over their patronage lifetime

 Many companies focus on upper classes for the same reason,

e.g. makers of luxury products

 Companies offer several benefits to such customers, so that

customers remain loyal to them
 CAPTURING VALUE FROM CUSTOMERS
 Growing Share of Customer
♣ Customer Profitability
 The 20-80 rule: the top 20% of the customers often
generate 80% or more of the company’s profits
 At times, the most profitable customers can
contribute as much as 150-300% of profitability,
while the least profitable 10-20% of the customers
can actually reduce profits by 50-200% per account

 Handout # 4 – The 150-20 Rule

 It shows the profit distribution of one customer,

with the implication that a company could improve
its profits by letting go of its worst customers
 CAPTURING VALUE FROM CUSTOMERS
 Growing Share of Customer
♣ Customer Profitability
 Large customers do not always give highest profits

 They may give high revenue, but the cost of servicing

those accounts is high as these customers demand
service as well as discounts

 In contrast, small customers do not get discounts; nor

do they get special services

 However, cost of transacting with small customers can

reduce their profitability
 CAPTURING VALUE FROM CUSTOMERS
 Growing Share of Customer
♣ Customer Profitability
 Middle-sized customers who get small discounts & get
medium services are often the most profitable

 Companies measure individual customer profitability

through Customer Profitability Analysis (CPA)
 An accounting technique called Activity-Based Costing
(ABC) estimates all revenues coming in from the
customer, less all costs

 Costs include not only cost of production / distribution,

but also other costs like phone calls, service visits,
entertainment, gifts, etc., i.e. all the activities
undertaken to serve the customer
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 Growing Share of Customer

♣ Customer Profitability
 Using CPA, companies can classify customers into
categories based on their profitability
 Platinum customers: most profitable

 Gold customers: profitable

 Iron customers: low profitability, but the company

wants these customers for volume sales

 Lead customers: unprofitable & undesirable

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 Growing Share of Customer

♣ Increasing value of the customer base: companies
use the following strategies
 Reducing the rate of customer defections (Churn)

 Increasing the life of the customer relationship

 Making extra efforts with highly profitable customers

 Enhancing the growth potential of each customer

 Taking actions with low-profit customers

 CAPTURING VALUE FROM CUSTOMERS

 Growing Share of Customer

♣ Strategies to increasing value of the customer base
 Reducing the rate of customer defections (Churn)
 If the cost of reducing defection rate is less than
the cost of lost profit from the customer (equal to
the CLV from a lost customer), companies should
spend the money to try to retain the customer

 Improving level of Customer Services (CS)

increases likelihood of winning customers &
retaining them
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 Growing Share of Customer
♣ Strategies to increasing value of the customer base
 Reducing the rate of customer defections (Churn)
 Companies select employees & train them so that they are
 Knowledgeable about the market offerings
 Friendly
 Pleasing to the customer

 The concept of CS is particularly important for the service

industry, e.g. banks, restaurants

 CRM focuses on building & retaining long-term relationships

with customers - includes PRM

 Smart companies treat their employees, vendors, & distributors

as partners in the value creation & delivery process
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 Growing Share of Customer

♣ Strategies to increasing value of the customer base
 Making extra efforts with highly profitable customers
 The most profitable customers are the most
desirable category

 So they deserve a disproportionate amount of

effort

 Relationship managers are appointed by companies

to ensure that high-value customers are well taken
care of
 Gifts
 Event invitations
 Birthday greetings

 Example: CLUB INDIGO by MOBILINK

 Invitations to dinners & other functions
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 Growing Share of Customer

♣ Strategies to increasing value of the customer base
 Enhancing the growth potential of each customer
 Companies want the major share of their
customers’ spending

 So they increase the base of their market offerings

 Supermarkets try to sell everything from food items
to electronic home appliances to clothing items, so
that each customer spends more at their outlets

 Banks offer a wide range of financial services

including car loans, home loans, small business loans,
money transactions, etc.
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 Growing Share of Customer

♣ Strategies to increasing value of the customer base
 Taking actions with low-profit customers
 Companies do not want customers that reduce
profitability

 They can encourage unprofitable customers to:

 Buy more
 Forgo certain features or services if they want to
pay less
 Pay higher amounts if they desire more services

 If these options do not work, companies are

better off terminating unprofitable customers
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 Customer Equity (CE)

The total combined Customer Lifetime Values (CLVs)

of all of a company’s customers

♣ CRM is long-term
 Companies not only want to choose the most profitable
customers

 But want to
 Own them for life
 Earn a greater share of their purchases &
 Capture their CLV
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 Customer Equity (CE)

♣ From definition of CE, we see that the more loyal the
company’s profitable customers are, the higher its
CE

♣ Better measure of company performance than sales

or Market Share
 Sales & Market Share are past- or present-oriented
 CE is future-oriented – how much a company expects
to earn from its profitable & loyal customers
 CAPTURING VALUE FROM CUSTOMERS
 Customer Equity (CE)
♣ In deciding the value of a company, it is important to know
how much value its customer base is worth in terms of future
revenues

♣ The greater the CE, the more future revenue in the lifetime of
its clients

♣ Hence a company with a higher CE can get more money from

its customers on average than another company that is
identical in all other characteristics

♣ Therefore, a company with higher CE is more valuable than

one without it
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 Customer Equity (CE)

♣ Handout # 5 – Five Components of CRM

♣ The handout also shows how the right technology

can help CRM achieve its objectives

♣ Example:
 Cellular companies give their customers the online bill
payment option because of the advances in
communications & computer technology