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7/30/2019 Choosing a Loyalty Strategy
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CRM___
Choosing a loyalty STRATEGY
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Drawbacks of R.F.M.
RFM stands for
Recency - How recently did the customer
purchase? Frequency - How often do they purchase?
Monetary Value - How much do they spend?
Ignores the pacing of a customer's interactions,the time between each purchase
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Event history modeling
Based on past data
Formula: t^n
n=no of purchases
t=fraction ofthe period represented by the time
between his first purchase and his last one.
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Mr. Smith
Makes purchases in 2nd,6th& 8thmonth thus buyson an average every 2.3
months.
n=4
t=8/12=0.6667
Probability of being active=(0.667)^4=.198=20%
20%
Ms.Jones
Makes purchases after 7months
n=2
T=8/12=.6667
Probability of being active=(0.667)^2=0.44=45%
45%
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Example: Mr. Smith & Ms. Jones
This approach predicts how quickly a customer'spurchasing activity willdrop off, as the probability oftheir being active in the future drops steeply
with time
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Drawback 2
Monetary-value component is almost alwaysbased on revenue rather than profitability.
Per-period profitability -Multiply customers
average periodic profit figure by the
probability that the customer will still be active
at the end of that period.
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An example: Adam Incorporated & Eve Limited
Adam Incorporated
Average profit of$5,500
per quarter over the last
two years
Adam Incorporated willremain active is 85% in
the first quarter, 60% in
the second, 35% in the
third, and only 22% in thefourth
Profit generated: $11,110
Eve Limited
Average profit of$1,000
per quarter over the last
two years
Eve Limited are onlyslightly lower, starting at
80% in the first quarter
and declining to 50%,
27%, and 15% in thesubsequent quarters
Profit generated: $1,720
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Given that a visit by the full sales team costs the company $5,000 and a single
salesperson's visit costs $2,000, it's clear shows that Adam Incorporated merits thefull treatment
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Strangers Butterflies
True friends Barnacles
No loyalty, no Profits
Lowest profit potential
Little fit b/w company'sofferings and customers'needs
Profitable but disloyal
High profit potential
Good fit b/w company'sofferings & customers' needs
Profitable & likely to be loyal
Highest profit potential
Good fit between company'sofferings and customers' needs
Highly loyal but not veryprofitable
Low profit potential
Limited fit b/w company'sofferings & customers' needs
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True Friends
Communicate consistently but not too often
Build both attitudinal and behavioral loyalty
Delight these customers to nurture, defend,and retain them
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Butterflies
Aim to achieve transactional satisfaction, notattitudinal loyalty
Milk the accounts only as long as they areactive
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Barnacles
Measure both the size and share of wallet
if share of wallet is low, focus on up- and
cross-selling
if size of wallet is small, impose strict cost
controls
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Strangers
Make no investment in these relationships
Make profit on every transaction
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Conclusion
No company should ever take for granted the
idea that managing customersfor loyaltyis thesame as managing them for profits.
The only way to strengthen the link between profitsand loyalty is to manage both at the same time.
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