17-Dec-20

STRATEGIC CRM Customer portfolio definition

• A customer portfolio is the

collection of mutually
CONCEPTS AND TECHNOLOGIES exclusive customer groups
that comprise a business’s
Theme 5 entire customer base.
Customer portfolio management

Objectives of Customer Portfolio Management (CPM) How B2B customers differ from B2C customers

• CPM aims to optimize • Fewer in number

business performance –
whether that means sales • Bigger in size
growth, enhanced customer • Closer relationships with
profitability or something suppliers
else – across the entire
customer base. • Derived demand
• It does this by offering • Professional buying
differentiated value • Direct purchase
propositions to different
segments of customers.

Basic disciplines for CPM Market segmentation definition

• Market segmentation • Market segmentation is the

• Sales forecasting process of dividing up a
• Activity-based costing market into more-or-less
homogenous subsets for
• Customer lifetime value which it is possible to create
estimation different value propositions.
• Data mining

1
 17-Dec-20

Intuitive vs. data-based segmentation 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) Criteria for segmenting consumer markets

• 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 Segmenting Consumer Markets
the same benefit.
• Geographic competitors
• these are benefit and product
competitors operating in the
same geographic territory.

Criteria for segmenting consumer markets Bivariate segmentation (Exp: chocolate market)

2
 17-Dec-20

Criteria for segmenting business markets Criteria for segmenting business markets

Segmenting Business Markets

Example: IBM targets 18 industry sectors Evaluation of segmentation opportunities

Segmenting opportunities

Evaluation of segmentation opportunities McKinsey/GE customer portfolio matrix

Customer Portfolio Matrix

3
 17-Dec-20

McKinsey/GE customer portfolio matrix 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 Activity-based costing (ABC)

Costs do vary from customer-to-

Sales volumes 2-year moving 4-year moving customer. Some customers are
Year average average very costly to acquire and serve,
2013 4830 others are not.
2014 4930
2015 4870 4880
Customer acquisition costs
2016 5210 4900 • Some customers require
considerable sales effort to shift
2017 5330 5040 4960 them from prospect to first-time
2018 5660 5270 5085 customer status: more sales
2019 5440 5495 5267 calls, visits to reference
2020 5550 5410 customer sites, free samples,
engineering advice, guarantees
that switching costs will be met
by the vendor.

Activity-based costing (ABC) Example: ABC in a claims processing department

• Terms of trade
• Price discounts, advertising and
promotion support, slotting
allowances (cash paid to retailers
for shelf space), extended invoice
due dates.
• Customer service costs
• Handling queries, claims and
complaints, demands on
salesperson 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.

4
 17-Dec-20

How ABC helps CPM? Preparation for data mining

• When combined with revenue 1. Define the business problem you

figures, it tells you the absolute are trying to solve.
and relative levels of profit 2. Create a data mart that can be
generated by each customer, subjected to data mining.
segment or cohort
3. Develop a model that solves the
• It guides you towards actions that problem. This is an iterative
can be taken to return customers process of developing a
to profit hypothetical solution to the
problem (also known as model
• It helps prioritize and direct building), testing and refinement.
customer acquisition, retention
and development strategies 4. Improve the model. As new data
are loaded into the data
• It helps establish whether warehouse, further subsets can be
customization, and other forms of extracted to the data mining data
value creation for customers, pays mart and the model enhanced.
off

Data mining for CPM Example: Credit risk training set

• Clustering techniques
Name Debt Income Married? Risk
• CART
• CHAID Taaha High High Yes Good

• Decision trees Alman Low High Yes Good

Humayl Low High No Poor
• Neural networks
Husnain High Low Yes Poor
Hamdan Low Low Yes Poor

Decision tree output 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.

5
 17-Dec-20

The 80:20 rule or Pareto principle The 80:20 rule or Pareto principle

80:20 Rule

Customer profitability by sales volume quintile Shapiro et al.’s customer portfolio matrix

Customer Portfolio Matrix

Shapiro et al.’s customer portfolio matrix How costs vary between customers?

6
 17-Dec-20

Fiocca’s CPM model: step 1 Fiocca’s CPM model: step 1

CPM Model

Fiocca step 1: Strategic importance Fiocca step 1: Difficulty of managing relationship

• Difficulty of managing the

• Strategic importance is related customer relationship is related
to: to:
• product characteristics such as
• value/volume of the customer’s novelty and complexity
purchases • account characteristics such as the
customer’s needs and
• potential and prestige of the requirements, customer’s buying
customer behaviour , customer’s power,
customer’s technical and
• customer market leadership commercial competence and the
• general desirability in terms of customer’s preference to do
business with a number of suppliers
diversification of the supplier’s • competition for the account which
markets, providing access to is assessed by considering the
new markets, improving number of competitors, the
strength and weaknesses of
technological expertise, and the competitors and competitors’
impact on other relationships position vis à vis the customer

Fiocca’s CPM Model: step 2 Fiocca step 2: Customer’s attractiveness

• Assess key easy and key

difficult accounts:
• The customer’s business
attractiveness
• The strength of the
buyer/seller relationship

7
 17-Dec-20

Fiocca step 2: Strength of relationship Fiocca step 2: Strategic options

• 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
• cooperation in product
development
• management distance
(language and culture)
• geographical distance

Turnbull and Zolkiewski’s 3D model Turnbull and Zolkiewski’s 3D model

3D Model

Additional CPA tools SWOT Analysis

• SWOT analysis
• BCG matrix analysis

8

Boston Consulting Group (BCG) matrix
Strategically Significant Customers
• 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.
Example: SSC’s at a Scandinavian timber processor
This company considers five 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
17-Dec-20
Strategically Significant Customers
• High future lifetime 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.
Strategically Significant 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.
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
9
17-Dec-20

10