MANAGING PROFITABLE CUSTOMER RELATIONSHIPS

Marketing Management
L EC T UR E 2 3 2 N D F E BR UA RY, 2 0 1 5
I N STRUC TOR: R E HA N M A HM OOD

Customer Profitability
A profitable customer is a person, household, or company that over time yields a revenue
stream exceeding by an acceptable amount the companys cost stream for attracting, selling and
serving that customer

Customer Lifetime Value

Companies are now oriented towards maximizing long term customer profitability
CLV describes the net present value of the stream of future profits expected over the
customers lifetime purchases
The company must subtract from its expected revenues the expected costs of attracting,
selling, and servicing the account of that customer, applying the appropriate discount rate
(depending on cost of capital and risk attitudes)

Attracting and Retaining Customers

Different acquisition methods yield customers with varying CLVs
Customers acquired through the offer of a 35% discount had about one-half the long term
value compared to normally acquired customers (without discount)

Reducing Defection
Many companies suffer from high customer churn (defection)
Telecom faces high customer churn
When Mobile Number Portability was introduced in India in 2011, many customers switched

According to one estimate, about 95% of mobile subscribers in India are in the prepaid
category, and this segment witnesses a monthly churn of 4 to 5%

Reducing Defection
1.

Define and measure the retention rate

2.

Distinguish the causes of customer attrition and identify those that be managed better

3.

Compare the lost customers lifetime value to the costs of reducing the defection rate
1.

If the cost to discourage defection is lower than the lost profit, spend the money to try to retain the
customer

Retention Dynamics
The Marketing Funnel identifies the percentage of the potential target market at each stage in
the decision process
Customers must move through each stage before becoming loyal
By calculating conversion rates, the funnel allows marketers to identify any bottleneck stage or
barrier to building a loyal customer base (e.g. if the % of recent users is significantly lower than
triers, there must be something that is preventing repeat buying)

Retention Dynamics
Acquiring new customers can cost five times more than satisfying and retaining customers
The average company loses 10% of its customers each year
A 5% reduction in customer defection rate can increase profits by 25% to 85%, depending on
industry
Profit rate tends to increase over the life of the retained customer due to increased purchases,
referrals, price premiums, and reduced operating costs to service

Managing the Customer Base

Winning companies improve the value by excelling at strategies like the following:
Reducing the rate of customer defection Selecting and training employees to be
knowledgeable and friendly increases the likelihood that customers questions will be answered
satisfactorily
Increasing the longevity of the customer relationship Higher engagement leads to high
retention. Nearly 65% of new Honda purchases replace an older Honda. Drivers cite Hondas
reputation for creating safe vehicles with high resale value

Managing the Customer Base

Enhancing the growth potential of each customer through share of wallet, cross-selling, and
up-selling
Harley Davidson sells more than motorcycles and accessories like gloves, leather jackets, helmets and
sunglasses. Its dealerships sell more than 3,000 items of clothing. Other items sold are zippo lighters,
cell phones, cologne)

Managing the Customer Base

Making low profit customers more profitable or terminating them
To avoid termination, marketers can encourage unprofitable customers to buy more or in larger
quantities, forgo certain features or services, or pay higher amounts or fees
Free customers, e.g. social media users, create useful direct and indirect network effects

Focusing disproportionate effort on high profit customers

Birthday greetings, small gifts, invitations to special events

Chapter 5: Analyzing Consumer Markets

Introduction

Adopting a holistic marketing orientation means understanding customers gaining a 360

degree view of both their daily lives and the changes that occur during their lifetimes so the
right products are always marketed to the right customers in the right way