COPYRIGHTED MATERIAL. Index. buying experience, impact on value perception buying patterns see purchasing patterns

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1 Index 80:20 rule 19, 21, 32 accruals 49, 88 activity-based costing (ABC) 40, 58 60, 116 additional potential 130 1, 134, evaluating advocacy customer attractiveness criterion measure of relationship warmth personal loans case study 166 9, 170 reducing cost of customer acquisition 160 referral value 158 Amazon 10, 24, 139 attitudinal loyalty attitudinal metrics 197, 200, 204 attitudinal segmentation bad debt, risk of 231 balancing customer acquisition and retention 32 4, behaviour patterns of customers, monitoring changes in 138 9, behavioural loyalty behavioural metrics 197, 199 behavioural segmentation bell-shaped curve see normal distribution curve borrowing, true overall cost of 84, 89 bottom-up customer profitability analysis 19 Bravissimo Ltd, case study 339 breakthrough value propositions buying experience, impact on value perception buying patterns see purchasing patterns cannibalization 303 predicting radar charts 304 5, 311 cash flows vs. profits 88 9 cash-to-cash cycle channels calculating customer equity by 130, 142 encouraging use of cheaper 186, 191 Chocobel case study churn see customer churn classification data 69, 70 1, 74 8, 82 collaborative relationships, benefits of 184, 331, 352 3, 354 commodity customers 178 cost containment strategies for competitive edge, maintaining using VRIN 332, 333, competitor pricing 303, contractual relationships, conversion rates 277, cost of capital, calculation of 39, 60 1 cost drivers 125, 126, cost of goods or services sold (COGS) 39, 41, 42 in calculation of CLV 106 components of 52 3 in customer profitability calculation 42, 64 future costs of goods sold (FCOGS) using 53 4 cost-plus pricing 303, 315 cost transparency COPYRIGHTED MATERIAL

2 364 Index costs to serve (CTS) 40, 41, 54 6 calculations activity-based costing (ABC) 58 9 customer lifetime value 106 customer profitability 42, 62, 65 standard costs 57 8 components of 56 and customer retention future costs to serve (FCTS) , 117 overlaying onto service packages rise of 10 12, 26, 44 credit ratings/scores 73 4, 75, 77, 78, 228, Critical Success Factors (CSFs) and building the DPM using to develop value propositions worksheet 225 CRM see customer relationship management (CRM) cross-selling 131 2, cross-subsidization 37 Crossing the Chasm (Moore) 314 customer acquisition 7 cost of 89, 105, 287 reference and referral reducing 156 8, 160, 162 impact on customer equity 143 5, 148 payback period to 34 5, 80 and retention, balancing 32 4, selective balancing costs and benefits developing criteria planning targeting customers 278, through pricing and marketing of new products/services customer asset management 177, 179, 180 customer assets, valuing 15 16, 17 customer attractiveness 197, , 218, 219, 221 2, 224 customer churn 3, 7 measure of relationship warmth 206 reducing 8, 12 13, 281 customer defection 277 causes of monitoring reducing risk of customer dependency 19, 21, 30 1, 79 customer equity adoption of advantages of calculation of 128, 134, 150 additional potential, completing customer acquisition and retention forecasting costs forecasting revenues incorporating risk Delphi Panel technique four components of granularity, deciding level of limitations of maximising in the portfolio and portfolio management and relationship warmth uses of 133, 149 customer lifetime value (CLV) 15, 83 5, 103, 122 adjusting for probability advantages 90 9 appropriate customer management strategies 91 2 calculation of 87 90, 97, 98, 106 discounting future profits estimating customer lifetime forecasting differential costs forecasting year-by-year revenues definition of 86 7, 105 forecasting identifying most valuable customers key account management (KAM) 93 7 limitations of reasons companies need to measure 85 6 segmentation and differentiated strategies 92 3, 97 9 customer migration 144, 233, 236 8

3 Index 365 customer payback period 69, 80, 82, 277, customer perspective, importance of customer portfolios 15, 16, 17 constructing using the DPM need for diversification in 180 overall relational value of risk analysis advantages and disadvantages causes of defection customer equity calculations effects on sales and marketing decisions risk drivers strategies to reduce risk see also portfolio risk analysis using customer equity to analyse variables used in constructing see also portfolio management customer profiling 278, 283 4, 300 customer profitability analysis (CPA) advantages of balancing customer acquisition and retention 32 4 customer dependency 30 1 payback period to customer acquisition 34 5 bottom-up vs top-down analysis 27 8 calculating 39 41, 61 6 cost of goods or services sold 52 4 costs to serve customer revenues customer-specific overheads 60 1 individual CP analysis 42 4 definition of customer profitability 41 2 granularity, deciding level of 27 9 key concepts and tools for larger customer numbers decision tree approach 71 8 top-down analysis 71, 78 9 limitations of 35 7 reasons for switching to 22 3 globalization 23 6 customer relationship management (CRM) factors affecting CLV 90 1 valuing customers as assets 5, 14 16, 180 customer retention 4, 7, 125 and acquisition, balancing 32 4, calculation of and cross-selling 131 2, danger of overspending on impact on customer equity 148 selective 289 monitoring defection payoffs, calculating reducing risk of defection ways of defining customer revenues 39 customer revenue forecasts calculating 44 5 obtaining data for four elements of 43 4 customer risk, strategies to reduce customer satisfaction as measure of relationship warmth 199, 200, 204 and referrals 158, replacing with advocacy 206 customer segmentation 84, 92 3, 97, 99 customer-specific overheads (CSO) 11, 40, 41, 42 calculating costs of 60 1, 62, 66 calculating future in customer lifetime value 106 forecasting future costs of , 140 customers changes in management of 5 6 differentiation strategies 92 3 failing to recognize importance of 45 6 value chain analysis types of in equity portfolio commodity demanding highly profitable 183 5

4 366 Index customers (cont.) less profitable uncommitted Daikin Europe, case study decile analysis 70, decision tree analysis 70, 71 2 factors driving customer profitability 72 3 ordering the factors 73 4 testing with pilot data set 74 using customer profitability data 74 8 default risk 230 1, 236 Delphi Panel 126, 128, demanding customers 178 retain but manage strategies for demographic segmentation 255 7, 260, Diffusion of Innovation technique 305, direct costs forecasting future see also cost of goods or services sold (COGS) directional policy matrix (DPM) 198, 199 advantages and limitation of 222 constructing a customer portfolio 211 building the DPM customer attractiveness, measuring relative attractiveness of supplier, measuring uses and applications discount payoff calculator 305, discount rate adjusting determined by WACC 89 expressed as a factor 103, discounted cash flow (DCF) 83 discounting 103 deciding on price discounts drawbacks of price effects on customer perception 313 future profits worksheet 328 downward-sloping demand curve 303, 308 9, 316 DPM see directional policy matrix economies of scale 304, 307, 316 efficient frontier of marketing portfolios 228, Europal case study features/needs/benefits, pricing approach 305 financial impact of relational benefits 154, financial value of customers 4, financial value of referrals 154, financial vs. customer portfolios firing the customer 192, First Direct 31, 202, 352 fit for purpose CP analysis 43 Five Forces of competition 104, forecasting customer equity cost forecasts Delphi Panel technique forecasting accuracy revenue forecasts customer lifetime value 104 5, 107 accuracy problems 99 differential costs 88, probability and risk relationship duration 85, 87, 88, year-by-year revenues 84, 85, 89, 97, future costs of goods sold (FCOGS) future costs to serve (FCTS) future costs of goods sold (FCOGS) future costs to serve (FCTS) future profits, discounting gateway criteria for key accounts 84, 94 6, 101 globalization, effects of 23 6 granularity 20 customer equity calculations customer profitability analysis 27 9 high vs. low 20 1, 41

5 Index 367 highly profitable customers 177, 183 and customer dependency 30 1 defend strategies for historical data, danger of relying on 35 6, 86 hygiene factors indirect costs see costs to serve (CTS) individual customer profitability analysis 42 4 information sharing relationships 158 9, 184 innovation value 159 insurance companies 97, 98, 163 6, 184 invoicing differing practices 47 8, 49 slow payment risk iwantoneofthose.com 24 6 key account management (KAM) 14, 83 activity-based cost of 58 9 and customer equity and customer lifetime value 92 7 demanding customers using relational value for marketing decisions 170 key accounts activity-based costing approaches 58 9 airline example causes of defection as demanding customers gateway criteria for selection of 94 6 high granularity for 20, 21, 22, 27 9 identifying using relational value index individual CPA 42 4 reviews of relationship quality 294 top-down CPA 71 learning curve effects 304, 308 learning value less profitable customers 178 positive management strategies for problems with lifetime value of the customer see customer lifetime value litigation, risk driver 235 localization of products logistics costs 53 4 reducing for less profitable customers 191 and risk of volatility 234 loyalty of customers 5, attitudinal vs. behavioural loyalty cards/schemes 6, 189 rewarded by relationship pricing 318 see also value propositions marketing overhead vs. investment activity 23, 26 as a science, not an art marketing decisions and CPA 35 6, 85 6 effect of risk on using relational value for marketing portfolios efficient frontier of 228, finding and selecting optimal role of portfolio management marketing spend 12 14, 228, 236, 246 mergers and acquisitions multi-year projects 49 net present value (NVP) 83, 98, new products/services customer trials of 211, 212, 213 innovation value 159 predicting cannibalization selectively acquiring customers for traditional approaches to pricing normal distribution curve 21, 22, 30 on-costs 52 open book accounting 186 7, 326 optimization 227, 245 6, Orange approach to segmentation reducing customer churn 7, 8 OTIFNIE (On Time, In Full, No Invoice Errors) concept 235

6 368 Index Pareto Principle 21, 32 pattern analysis/matching 139 payback period to customer acquisition 34 5, 69, 80, 275, penetration pricing 304, 305, performance measurement, professional services personal loans providers customer profitability decision trees 74 8 overall relational value of customer portfolio segment maps portfolio management and customer assets 179 customer perspective customer portfolios variables used in constructing customer vs. financial portfolios definitions of 177, 180 maximizing customer equity using customer equity portfolio matrix 178, 182, 195 and warmth of relationship portfolio risk analysis 228, advantages and disadvantages of strategies to reduce potential value of a customer base see customer equity price bundling 191, price unbundling 186 pricing key concepts poor decisions, effect on value price discounts deciding how much to give getting a positive return on worksheet 328 setting the price relationship pricing advantages of 318 risk-based pricing total cost of ownership (TCO) 319 total cost of relationship (TCR) value-in-use pricing 317 versus transactional pricing summary 305 6, traditional approaches to pricing new products/services customer portfolio issues probability and customer lifetime value process innovation 159 product costs see cost of goods or services sold (COGS) product profitability 9, 22 3 professional services effect of acquisitions/mergers on 233 generating reference value 157 uncertain revenues profit 20 calculation of 62 discounting future effect of price discounts on profit margins 50, 305 vs. cash flow 88 9 vs. profitability 26 7 profitability 20, 26 7 purchasing patterns analysis of forecasting future 109, online for demanding customers 186 volatility in 234 realization 51 rear view mirror problem 35 6 recommendation see advocacy reducing skim 304, 305, 309 drawbacks of reference value 157 referral patterns 168, 170 referral value 154, 158 relational attractiveness relational benefits 15, 156 valuing relational contracts 235 relational value of customers 4, 15 16, four sources of plus financial value using relational value for marketing decisions valuing relational benefits

7 Index 369 developing a relational value index overall relational value of customer portfolio simple additive approach versus financial value worksheet for evaluating 172 relational value, definition of 153 relational value index 153, 163 6, 172 relationship marketing 4, 6 9 shift from product to customer profitability 9 12 relationship pricing 304, relationship quality 278 metrics tackling poor relationship warmth/customer equity portfolios advantages and limitations of constructing using the matrix relative attractiveness of supplier, measuring relative business strength of supplier 198, 218, 221 resource usage, calculation of 50 1 retention of customers see customer retention returning customers returns 48 9 revenue 9 forecasting future 87 8, 97, 112, revenue drivers 126, risks that reduce see also customer revenues RFM/RFA (Recency, Frequency, and Monetary/Amount) 70, 72 3, 81, for customer equity calculation risk analysis customer portfolio 228, 237, individual customers 230 1, risk-based pricing 304, risk, definitions of 227, 229 risk drivers affecting costs affecting costs and revenues 236 affecting revenues identifying SAG (Sales, Administration and General) costs see costs to serve (CTS) sales and costs trend diagnostic 4, 11 sample size for customer segments 130 segment maps 253, 261 2, 272 segmentation 84, 85, 92 3, 97, 99, 253 combining two or more approaches for customer equity analysis different approaches to 255 attitudinal behavioural demographic and managing a customer portfolio service-based segmentation advantages and disadvantages of 270 characteristics of 264 implementing traditional approaches to 254 service elements, mapping 266, 267 service packages, designing 269 service provision, patterns of servicization 20, 26, 44 share of spend/wallet and customer migration 233 measuring 113 metric for relationship quality 144, 199, 205, 293 not a gateway criterion 96 ways of increasing 189, 318 simple additive method skimming pricing 304, 305 reducing skim 304, 305, vs. penetration pricing slow payment, risk driver socio-demographics 104, 253, 254, 260 standard costs 40, 56 8, 116 STEEP analysis 104, strategic accounts, identifying 93 7, supermarkets 130, 138, 139, 189

8 370 Index suppliers additional value created by customer relationships attractiveness, measuring benefits of collaboration 353 relative business strength 198, 218, 221 relative performance 200 1, 216 target pricing 304, 316 targeting customers 278, technology, uses of 10, 31, 59 top down customer profitability analysis 20, 71 advantages and disadvantages 28 decision tree approach 71 8 using the data total cost of ownership (TCO) 304, 306, 319, 320, 351 total cost of relationship (TCR) 304, 306, total or true value of a customer 16, 154, unattractive customers, strategies for dealing with uncommitted customers 178, 182 core develop strategies for unprofitable customers balancing acquisition and retention of 32 4 and customer dependency 30 1 and customer lifetime value 86 dealing with and limitations of CPA 36 7 and relational value 170 see also less profitable customers utilization 50 1 value chains 331, 332, customer strengths/weaknesses, analysing developing breakthrough ideas using worksheet for analysing 355 value of customers 4, 43, 15 16, value propositions 332 4, benefiting from collaboration breakthrough value propositions customer strengths/weaknesses, analysing developing breakthrough ideas as a competitive differentiation tool developing and using profitably financial evaluation of as an opportunity selection tool value-in-use pricing 317 vendor-managed inventory (VMI) system 40, volatility, risk driver 227, 234 VRIN (Valuable; Rare; Imperfectly Imitable; and Non-substitutable) checklist 332, 341 3, 356 weighted average cost of capital (WACC) 84, 89, weighting and scoring system (WSS) 153, word-of-mouth effect of negative 236 for targeting customers see also advocacy year-by-year revenues, forecasting 84, 85, 89, 97,