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Managing Customers for Profit

Discover the impact of customer referral behavior on profitability. Learn how to estimate Customer Referral Value (CRV) and incorporate it alongside Customer Lifetime Value (CLV) to enhance marketing strategies. Case studies and examples show the potential for increased ROI through effective referral programs.

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Managing Customers for Profit

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  1. Managing Customers for Profit V. Kumar Chapter – 13 Managing Customer Referral Behavior Instructor’s Presentation Slides

  2. Relevant Issues

  3. The Power of the Referral “We know that the most powerful form of marketing is an advocacy message from a trusted friend.” -Steve Knox, CEO of Vocalpoint

  4. Customer Referral Value (CRV) Case Study: A Telecommunications firm and A Financial Services Firm If a customer intends to refer a product to a friend or a colleague (prospect), how frequently does that customer actually follow through and speak to the prospects? Are the prospects willing to listen if the customer talks to them about the product or the company? Do the prospects actually become customers even if they are willing to listen? Even if they become customers, do the prospects spend enough to be profitable for the firm?

  5. Case Study Results These findings show that there is a definite gap between a customer’s willingness to refer and his actual referral behavior.

  6. Case Study Results (cont’d) Equation 13.1 Where: T = the number of periods that will be predicted into the future (e.g. years) Aty = the gross margin contributed by customer y who otherwise would not have bought the product aty = the cost of the referral for customer y 1 to n1 = the number of customers who would not join w/o the referral n2 – n1 = the number of customers who would have joined anyway Mty = The marketing costs needed to retain the referred customers ACQ1ty = The savings in acquisition cost from customers who would not join w/o the referral ACQ2ty = The savings in acquisition cost from customers who would have joined anyway

  7. Estimating CRV

  8. Estimating CRV (Contd.)

  9. Calculating CRV – An Example

  10. Calculating CRV (cont’d) • Separate the calculation into two parts: • The value of the customers who would not have joined without the referral • The value of the customers who would have joined anyway at a later time * The impact grows as time progresses

  11. As illustrated in the above table, after ranking the customers by CLV (high to low) into 10 deciles, the top 30% of customers based on CLV (deciles 1, 2, and 3) have no overlap with the top 30% of customers based on CRV (deciles 5, 6, and 7). This means that managers who focus on customers based on CLV alone and provide them the best service are missing the high CRV customers and therefore ignoring these profitable customers. Are CLV and CRV Related?

  12. Implementing CLV and CRV Northwest Airlines Referral Program

  13. CLV and CRV Computation (telecom example) HIGH LOW HIGH Table 13.4: CLV and CRV for a Telecommunications Firm (N = 9,900)

  14. Campaign Objectives

  15. Campaign Objectives

  16. Campaign Objectives

  17. Migration from Misers towards Affluents, Advocates, or Champions Misers (Before Campaign) 21% of Customers CLV(1 year) = $130 CRV(1 year) = $64 Towards Affluents 4% of Customers Avg. CLV increased to $370, a $240 (185%) increase After Campaign Towards Champions 4% of Customers Avg. CLV increased to $310, a $180 (138%) increase Avg. CRV increased to $274,a $210 (328%) increase Misers (After Campaign) 9% of Customers Towards Advocates 4% of Customers Avg. CRV increased to $334, a $270 (422%) increase Campaign Results (Misers) Figure 13.7 Source: Kumar, V, J Andrew Petersen, and Robert P Leone, "Looking Beyond CLV," forthcoming, Harvard Business Review.

  18. Migration from Affluents towards Champions Affluents (Before Campaign) 29% of Customers CLV(1 year) = $1,219 CRV(1 year) = $49 Towards Champions 4% of Customers Avg. CRV increased to $239,a $190 (388%) increase Avg. CLV stayed at $1,219 After Campaign Affluents (After Campaign) 25% of Customers Campaign Results (Affluents) Figure 13.8 Source: Kumar, V, J Andrew Petersen, and Robert P Leone, "Looking Beyond CLV," Harvard Business Review.

  19. Migration from Advocates towards Champions Advocates (Before Campaign) 29% of Customers CLV(1 year) = $180 CRV(1 year) = $670 Towards Champions 5% of Customers Avg. CLV increased to $290,a $110 (61%) increaseAvg. CRV stayed at $670 After Campaign Advocates (After Campaign) 24% of Customers Campaign Results (Advocates) Figure 13.9 Source: Kumar, V, J Andrew Petersen, and Robert P Leone, "Looking Beyond CLV," forthcoming, Harvard Business Review

  20. Summary Results Table 13.4: Campaign ROI (Telecommunications Firm) Table 13.5: Gains in CLV and CRV for a Telecommunications Firm

  21. End of Chapter 13

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