Overview of Effective CRM Implementation and Operation
Alan McSweeney
February 27, 2010 2
Objectives
• To provide an overview of effective CRM system implementation and operation
February 27, 2010 3
Agenda
• Introduction to CRM
• Customer Analysis and Segmentation
• CRM Implementation Approach
• Activity Based Costing for CRM Analysis
• Data Mining
• Summary
February 27, 2010 4
What is CRM?
• End-to-end customer management
• Process enabled by set of technologies
• Process designed to integrate all customer interactions through all channels
• Like all processes organisational change is needed
• CRM systems need information and applications support
• CRM processes should be consistent and repeatable
February 27, 2010 5
Illusion of Customer Relationship Management
• Myth of CRM
• Customers are not outsiders
• We are all customers – of utilities, service providers, financial institutions, government agencies
• CRM is about how WE want to be treated by our service providers
• When we talk about customers (THEM), we mean us
• How do you want to be treated by your service providers?
• That is exactly how your customers want to be treated by you
February 27, 2010 6
Customer Service and Customer Satisfaction
• Poor customer service is still pervasive despite awareness of the need for and benefits of improved customer service
• Many organisations have not changed their business processes to deliver improved customer service and provide what customers want
• Improved customer service means optimising end-to-end processes from the customer viewpoint
− Involves linking multiple internal processes to get cross-functional view from customer perspective
February 27, 2010 7
What Customers Really Want – More For Less
• More Of
− Value
− Responsiveness
− Involvement
− Consideration
− Dependability
− Flexibility
• Less Of
− Aggravation
− Time to Complete Transaction
− Rigidity
− Cost
− Bureaucracy
− Excuses
− Lack of Integration
February 27, 2010 8
What Organisations Try to Do – More With Less
• More Of
− Work
− Customers
− Sales
− Revenue
− Margin
• Less Of
− Personnel
− Facilities
− Cost
February 27, 2010 9
Balance Between Internal and External
• Need to balance management focus between “more with less” and “most for less”
• More with less focuses on internal reductions: cost, staff
• More for less focuses on external improvements
• Only a cross-functional customer-oriented view of business processes can achieve this balance
− Internal processes focus on operational functions
− Cross-functional view links internal processes to get end-to-end customer view of organisation
• Cross-functional processes are those that really affect customers – from start to end
February 27, 2010 10
Overall CRM Solution Architecture
Continuous dialogue across all customer
channels/touch points
Personalised products/services based on
customer needs and expectations
Consistent user experience across all contact points
Real-time access to all customer informationacross the enterprise
February 27, 2010 11
Technology and Application Components of a CRM Strategy
CRM Strategy
Sales Force Automation
Campaign Management
Document Management
Call Centre Automation
Workflow and Process
Data Mining/ Modelling
Telesales Automation
Internet/ Intranet/ Extranet
Data Warehousing
Customer Profile Database
February 27, 2010 12
CRM and Related Systems Architectural Elements
General User Acquisition
General Use Interface
Targeted User Content and
Offers
Fulfilment
Management
Customer Acquisition
Systems
Operational Systems
Financial Systems
Business Functions
Call Centre Systems
General Use Interface
Order Entry, Tracking
Financial Reporting
Call Centres
User Analysis
Search Engines
Targeted Mail/Email
Advertising
Call Centre Applications
Web Applications
Web Systems
Business Activities Architectural Elements
External Trends
Call Centre Scripts
Banner Ads Web Content
February 27, 2010 13
Why CRM
• Greater competition
• Economics of customer retention
• Available technology
• Options to increase customer profitability:
− Get more customers
− Optimise value of existing customers
− Retain right customers longer
− Implement at lower cost
• Costs of options:
− Customer acquisition 5-10 greater than retention
− Loyal customers spend more and pay premium
− Loyal customers must like and trust companies
February 27, 2010 14
Customer Management Trends
• Recognise customer heterogenity
• Companies want to get “up close and personal” with their customers
• Transact with customers individually
• “Joined up” customer interaction
February 27, 2010 15
CRM Process
• CRM is about:− Integration of customer contact points
− Synchronisation of customer information and
−management assets
− Identification highest (and lowest) value customers
− Servicing those with greatest actual or potential value
• CRM enables:− Reduction of marketing costs through effective
− targeted campaigns
− Increase in customer satisfaction and retention
− Increase in sales
− Improvement in profitability by customer and sale
February 27, 2010 16
Characteristics of Service Leaders
• Grow twice as fast as competitors
• 6% annual market share growth vs. 1% market loss
• Charge 10% more
• 12% average return on sales vs. 1%
• Market changes - speed to react determines success or failure
−US - 60% in Fortune 500 in 1970 are no longer on list
February 27, 2010 17
Which Customers?
• 20% of customers generate 80% of profit
• 5% increase in customer retention means 25%-95% increase in profitability
• New customers take 8-10 contacts before sale
• Existing customers take 2-3 contacts before sale
February 27, 2010 18
Customer Service
• 95% of customers who have had problems will continue to do business if problems are resolved
• For every complaint you receive there are another 20 potential complaints that have not been articulated but still represent
• Good customers tell about 3 others of their experience
• Bad customers tell about 8 of their experience
• 68% of former customers left because of poor customer service
February 27, 2010 19
Customer Earnings Over Time (Service Industry Example)
• Continually acquiring new customers and losing existing customers costs money
• Customer retention through increased customer satisfaction is financially worthwhile
• Better customer service makes long-term sense
• Need a balance between customer retention and new customer acquisition
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7
Acquisition Cost Base Profit
Profit from Increased Purchases Cost Savings
Referrals Price Premium
February 27, 2010 20
Customer Retention and Profitability
• Leaky Bucket Effect
Acquire Customers
Customers Defect to Other Suppliers
(“Churn”)
50-60% (or More) Every
Five Years
February 27, 2010 21
Example of Profit Contribution by Customer Type
200%
25%
-125%
High Value Loyal Low Value
• Not all customers have the same value
• Can you identify your customers?
February 27, 2010 22
Example of Profit Contribution by Customer Type for All Customers - 1
• Customer profile is balanced that results in net profit
-150% -100% -50% 0% 50% 100% 150% 200% 250%
High Value
Loyal
Low Value
Total
Individual Customer Profit Contribution Percentage of Total Customers
Weighted Contribution
February 27, 2010 23
Example of Profit Contribution by Customer Type for All Customers - 2
• In this example, there is a high percentage of low value customers (perhaps due to high rates of customer churn and cost of new customer acquisition)
• Net result is an overall loss
-150% -100% -50% 0% 50% 100% 150% 200% 250%
High Value
Loyal
Low Value
Total
Individual Customer Profit Contribution Percentage of Total Customers
Weighted Contribution
February 27, 2010 24
Role of Data Warehouse in CRM
• Technology/infrastructure core of architecture
• Allow marketers to make decisions on customer segmentations and profiles and match products/offers
• Data Warehouse enables CRM processes
• CRM elements depend on quality of information in
• Data Warehouse and accuracy of derived results
• Central common repository or all relevant allows effective data sharing and reduces latency
• “Joined-up” approach to CRM
• CRM assumes good information
February 27, 2010 25
Integrated CRM
Service Calls
Campaigns/Special Offers
Self Service
Mailing Lists
Sales Data
CustomerData
Warehouse
CustomerInteractionDatabase
CustomerService
CallCentre
Internet
DirectMail
SalesForce
Customer
February 27, 2010 26
Customer Lifetime Value
• LTV = net present value of all future contributions to overhead and profit expected from a new customer
• How much a customer is worth to you today, given the expected profit in the future
February 27, 2010 27
Customer Value
• Retail - lose one customer per day every day for a year (7 days per week) that spends €50 per week = annual loss of €482,000
• Car manufacturer - increase customer retention by 1% for 4 years = €160 million increase in profit
• Fast food = each customer is worth €10,000 over lifetime
February 27, 2010 28
Marketing Objectives
• Objectives:
−Acquire new customers
− Retain existing (profitable) customers
• How much money should be allocated to these?
• How will this affect long-term profitability?
• Does every customer deserve the same investment?
February 27, 2010 29
LTV Answers
• How much you can afford to spend to acquire a new customer?
• Which new customer sources generate the most profitable long-term customers?
• How much you can spend to retain/reactivate an existing customer?
February 27, 2010 30
Sample Customer LTV Calculation
• This example shows the calculation of the long-term value of a customer
• This is just a simple example to illustrate the concept
Year 1 Year 2 Year 3 Year 4 Year 5
Revenues
Customers 100,000 60,000 37,200 24,180 16,926
Retention
Rate
60% 62% 65% 70% 75%
Spending Per
Customer Per
Year
€75 €100 €125 €140 €140
Total €7,500,000 €6,000,000 €4,650,000 €3,385,200 €2,369,640
Costs
Cost Percent 40% 40% 40% 40% 40%
Total Costs €3,000,000 €2,400,000 €1,860,000 €1,354,080 €947,856
Profits
Gross Profit €4,500,000 €3,600,000 €2,790,000 €2,031,120 €1,421,784
Discount
Rate Yearly
NPV
1.00 1.04 1.08 1.12 1.17
Profit NPV €4,500,000 €3,461,538 €2,579,512 €1,805,658 €1,215,347
Cumulative
NPV Profit
€4,500,000 €7,961,538 €10,541,050 €12,346,709 €13,562,056
Customer
LTV
€45 €80 €105 €123 €136
February 27, 2010 31
Sample Customer LTV Calculation
• A customer retained for five years is worth €136 expressed in current year money
• Increasing the retention rate and increasing the amount spent by customer by upselling and cross-selling will increase LTV
Number of customers each year
based on the customer retention
rate
Total revenue for all customers each
year
LTV of individual customer if
retained for that number of years
NPV of profit expressed in
current year values, based on NPV rate
Year 1 Year 2 Year 3 Year 4 Year 5
Revenues
Customers 100,000 60,000 37,200 24,180 16,926
Retention
Rate
60% 62% 65% 70% 75%
Spending Per
Customer Per
Year
€75 €100 €125 €140 €140
Total €7,500,000 €6,000,000 €4,650,000 €3,385,200 €2,369,640
Costs
Cost Percent 40% 40% 40% 40% 40%
Total Costs €3,000,000 €2,400,000 €1,860,000 €1,354,080 €947,856
Profits
Gross Profit €4,500,000 €3,600,000 €2,790,000 €2,031,120 €1,421,784
Discount
Rate Yearly
NPV
1.00 1.04 1.08 1.12 1.17
Profit NPV €4,500,000 €3,461,538 €2,579,512 €1,805,658 €1,215,347
Cumulative
NPV Profit
€4,500,000 €7,961,538 €10,541,050 €12,346,709 €13,562,056
Customer
LTV
€45 €80 €105 €123 €136
February 27, 2010 32
Sample Customer LTV Calculation With Increased Retention Rate
• An increased customer retention rate increases the LTV of customers
Year 1 Year 2 Year 3 Year 4 Year 5
Revenues
Customers 100,000 80,000 64,000 51,200 40,960
Retention
Rate
80% 80% 80% 80% 80%
Spending Per
Customer Per
Year
€75 €100 €125 €140 €140
Total
Revenue
€7,500,000 €8,000,000 €8,000,000 €7,168,000 €5,734,400
Costs
Cost Percent 40% 40% 40% 40% 40%
Total Costs €3,000,000 €3,200,000 €3,200,000 €2,867,200 €2,293,760
Profits
Gross Profit €4,500,000 €4,800,000 €4,800,000 €4,300,800 €3,440,640
Discount
Rate Yearly
NPV
1.00 1.04 1.08 1.12 1.17
Profit NPV €4,500,000 €4,615,385 €4,437,870 €3,823,396 €2,941,073
Cumulative
NPV Profit
€4,500,000 €9,115,385 €13,553,254 €17,376,650 €20,317,723
Customer
LTV
€45 €91 €136 €174 €203
February 27, 2010 33
Measuring LTV
• Customer Transaction History
• What they have purchased (preferably item level detail)
• How much they have spent
• When they have purchased
• How many returned / cancelled items
• Where they have purchased
• Potential indicators of why they have purchased: special offers, holiday promotion, etc.
• Financial Measures
• Cost of Goods (preferably at the item level)
• Fixed, Variable and Fulfillment costs
• Gross/Net Sales Ratios
• Promotion History
• How many promotions/contacts they received
• When they received the promotions
• Special offers and other promotion characteristics
• Promotional costs
February 27, 2010 34
Customer Segments
• Useful simple starting point
• Easy to match to campaigns
• Analyse movement between segments
• Sample segment types for a campaign:
− Cold prospect - no history
− Warm prospect - some response to previous campaigns
− New customer - bought item
− Confirmed customer - bought two items
− Regular, including last campaign - buys frequently
− including last campaign
− Regular but not last campaign
− Regular but not last two campaign
− Lapsed regular
February 27, 2010 35
Segmentation
• Identifying and classifying groups based on buying characteristics and profile
• Telecommunications example:
− Tariff 1
− Tariff 2
− Tariff 3
− Pre-Pay
−Migrate to Competitor 1
−Migrate to Competitor 2
−Migrate from Competitor 1 to Tariff 1
−Migrate from Competitor 1 to Tariff 2
February 27, 2010 36
Sales Campaign Effects on LTV
• Customers move between segments
− “Regular but not last campaign” moves to “Regular, including last campaign”
−Migration changes customer value
• The campaign has costs
• Estimate net long-term benefit of campaign to organisation
February 27, 2010 37
LTV and Campaign Example – Initial Status
Segment
Classification
Number of
Customers
Projected
Lifetime Sales
Projected
Lifetime Profit
Segment Value
New Customer 10,000 €2,000 €300 €3,000,000
Confirmed
Customer
30,000 €3,000 €450 €13,500,000
Regular Including
Last Campaign
60,000 €5,500 €825 €49,500,000
Regular But Not
Last Campaign
35,000 €4,500 €650 €22,750,000
Regular But Not
Last Two
Campaigns
25,000 €3,500 €525 €13,125,000
Lapsed Regular 55,000 €500 €75 €4,125,000
TOTAL 215,000 €106,000,000
February 27, 2010 38
LTV and Campaign Example - Campaign Results
Segment
Classification
Number of
Customers
Percent
Responded
Number
Responded
Average
Amount Spent
Total Amount
for Segment
Cold Prospect 60,000 3% 1,800 €50 €90,000
Warm Prospect 30,000 5% 1,500 €60 €90,000
New Customer 10,000 8% 800 €70 €56,000
Confirmed
Customer
30,000 10% 3,000 €80
€240,000
Regular Including
Last Campaign
60,000 65% 39,000 €100
€3,900,000
Regular But Not
Last Campaign
35,000 50% 17,500 €90
€1,575,000
Regular But Not
Last Two
Campaigns
25,000 30% 7,500 €80
€600,000
Lapsed Regular 55,000 15% 8,250 €70 €577,500
TOTAL 305,000 79,350 €7,128,500
Gross Profit €1,069,275
Campaign Costs €610,000
Net Profit €459,275
February 27, 2010 39
LTV and Campaign Example - Changes to LTV
Segment
Classification
Number of
Customers
Before
Campaign
Projected
Lifetime Sales
Projected
Lifetime Profit
Segment Value
Before
Campaign
Number of
Customers
After Campaign
Segment Value
After Campaign
Change in
Lifetime Value
New Customer 10,000 €2,000 €300 €3,000,000 13,300 €3,990,000 €990,000
Confirmed
Customer
30,000 €3,000 €450 €13,500,000 33,800 €15,210,000 €1,710,000
Regular Including
Last Campaign
60,000 €5,500 €825 €49,500,000 72,750 €60,018,750 €10,518,750
Regular But Not
Last Campaign
35,000 €4,500 €650 €22,750,000 21,000 €13,650,000 -€9,100,000
Regular But Not
Last Two
Campaigns
25,000 €3,500 €525 €13,125,000 17,500 €9,187,500 -€3,937,500
Lapsed Regular 55,000 €500 €75 €4,125,000 72,500 €5,437,500 €1,312,500
TOTAL 215,000 €106,000,000 230,850 €107,493,750 €1,493,750
February 27, 2010 40
LTV and Campaign Example - Migration Between Segments
TO
FROM
Cold Prospect Warm Prospect New Customer Confirmed
Customer
Regular
Including Last
Campaign
Regular But
Not Last
Campaign
Regular But
Not Last Two
Campaigns
Lapsed Regular
Cold Prospect 1,800
Warm Prospect 1,500
New Customer 800
Confirmed
Customer
Regular
Including Last
Campaign
39,000 21,000
Regular But
Not Last
Campaign
17,500 17,500
Regular But
Not Last Two
Campaigns
17,500
Lapsed Regular 8,250
February 27, 2010 41
CRM Solution Implementation Approach
• How to align organisation and customer objectives
• Audit of company business processes, technology, communications and structure
• Gaps between current and future
• Plan for change
Vision Creation and Confirmation
Enterprise Assessment
Gap AnalysisRoadmap for
Change
February 27, 2010 42
Vision Creation and Confirmation
• Company Objectives
−Who is our ideal customer
−How should we do business “value discipline”
• Customer Objectives
− Identify and understand expectations
−Marketing from customer rather than company perspective
February 27, 2010 43
Identifying the Ideal Customer(s)
• Behaviour
− Spending habits - amounts, number and type of items
− Payment preferences - cash, cheque, credit/debit card
− Visit frequency - regular, need, promotion
− Incentives redeemed - avail of loyalty schemes
• Customer Value
− Total amount spent and profit
− Frequency
− Incentives redeemed - avail of loyalty schemes
• Channels
− Branches
− Call centre
− Web
February 27, 2010 44
Defining Value Discipline
• Defines how to do business and why customer chooses
• Product/Service Leadership
− Best product or service available
• Operational Excellence
− Best value and convenience
• Customer Intimacy
− Pursue long-term relationship, customer attentive
• Reflects types of customers
−Different people like different ways of buying
February 27, 2010 45
Enterprise Assessment
• Purpose
−Audit of company business processes, technology, communications and structure
• Elements
− Identifying all customer interaction points
−Activity-based costing analysis
−Quantifying market trends and drivers
− Identifying and profiling competitors
− Identifying customer and company “pains”
February 27, 2010 46
Activity Costs
• Costs and revenue of interactions
• Fixed costs− Cost per mail/e-mail item
− Costs of good/services sold
− Cost per order entry
− Infrastructure costs
−Variable costs
− Service call times
− Billing/collection
− Incentives
• Calculate customer value
• Generate insights into operation of organisation
February 27, 2010 47
Identify Company and Customer “Pains”
• Pain = problem, business issue or missed opportunity
• Customer pains = annoyance, discontent, dissatisfaction
• Company pains = profit erosion, increases in costs, competition, errors, returns, employee turnover
• Results = lack of brand/company loyalty, customer defection, reduction in market share, reduction in profits
February 27, 2010 48
Gap Analysis
• Barriers that must be overcome to allow organisation to evolve from current to future state
• Assess hazards and difficulties of transition
• Categories of gaps:
− People
− Process
− Technology
February 27, 2010 49
People Gaps
• Impair ability to do job or reduce desire to work effectively
• Stringent policies mean inflexibility and slow response to urgent problems
• Change to customer-centric operation requires learning, training and management
− “I’m not in sales/marketing. Why are you talking to me?”
− “I’ve been here for 20 years and I don’t see why we should change now.”
− “I am willing to support the project 100% as long as it does not affect me.”
− “This is the way it’s always been done and it’s worked well up to now.”
− “I’ve got 15 minutes to talk to you. I’m very busy with important things.”
February 27, 2010 50
Process Gaps
• Breakdowns/bottlenecks in a process intended to produce a result
• Occur at handoffs between stages/sections, incorrectly routed requests
• Process should handle all (reasonable) eventualities and provide information at all stages
• Process can be rigid (rules for all events) or flexible (allow devolved decision making)
February 27, 2010 51
Technology Gaps
• Limitations in technology infrastructure to support CRM process
• Examples:
− Campaign management
− Call Centre automation
− Sales Force automation
− Customer Data Warehouse/OLAP facility
− Sufficient Internet presence
−Data Mining
February 27, 2010 52
Gap Resolution
• “Gap map” shows number and severity of gaps between current and future states
• Overlapping gaps should get highest priority
• Address gaps in parallel
• May not be possible to identify all gaps
February 27, 2010 53
Roadmap for Change
• Customer value alignment
• Market positions and competitive directions
• Business model
• Success metrics and critical success factors
February 27, 2010 54
Customer Value Alignment
Customer:The Right Customer
Who is your ideal customer and what are his/her needs?
Cost:The Right Offer
What is the value to the customer?
Communication:The Right Time
When is the right time to communicate
an offer?
Convenience:The Right Channel
How does your customer prefer to interact with you?
February 27, 2010 55
Customer Value Alignment
• Segmentation of customer base – identify types
• Implementation of customer marketing strategies
• Allow development of right time/offer/channel based on customer knowledge
• Improve customer service, reputation, loyalty
February 27, 2010 56
CRM Success Metrics
• Increase retention in top n% of customers by x%
• Increase bottom-line profitability by x%
• Reduce negative value customers by x%
• Increase customers in high value segment by x%
• Improve customer satisfaction index by n%
February 27, 2010 57
Knowing Your Costs: Activity Based Costing for CRM Analysis
February 27, 2010 58
Ways to Determine Cost
• Organisational Element Accounting
Direct Costs Overhead
Accounting System
February 27, 2010 59
Ways to Determine Cost
• Budgetary Cost Distribution / Commitment Accounting
Commitments and Obligations
Accounting System
February 27, 2010 60
Ways to Determine Cost
• Traditional Cost Accounting
Direct Labour
Direct Materials
Activities Output Cost
Overhead
February 27, 2010 61
Ways to Determine Cost
• Activity Based Costing
Direct Labour and Overhead
Direct Materials
Activities Output Cost
February 27, 2010 62
Activity Based Costing
• Activity-based costing (ABC) is a costing model that identifies activities in an organisation and assigns the cost of each activity to all products and services according to the actual consumption of those activities by each products or services
• Used as a tool for understanding product and service and customer cost and profitability
• ABC supports strategic decisions such as pricing, investments, outsourcing and identification and measurement of process improvement initiatives
• Fallen out of favour but a very useful tool to understand costs
February 27, 2010 63
Activity Based Costing
• Establishing a cross-functional view of your organisation and understanding what drives your costs
• Pulling apart indirect or hidden costs and attributing them correctly to products and services
Activities
Resources
Products and Customers
Cost DriversPerformance
Measures
February 27, 2010 64
ABC Relationship to CRM
• CRM is about retaining your most profitable customers
• In order to determine profit, you need to know a lot about your costs
• To work out your costs, you need to work out what your organisation actually does
• Which processes are consuming your resources?
February 27, 2010 65
Benefits of ABC
• Go beyond understanding your customers
−What drives costs?
−More informed macro and micro decision making
− Staff planning
−How your organisation interacts with customers - face-to-face, web, call centre and other channels
February 27, 2010 66
Steps to Implementing ABC
General Ledger and Other Sources
Departments
Activities
Cost Objects
Calculate Profitability
February 27, 2010 67
Defining Activities
• Most organisations use the cost centre structure
• Recast cost centre structure into activities
• Usually a hierarchy of activities
−Direct identification with product or service
− Process support
−Organisation and facility support
− Customer/market support
• Map from cost centre into activity hierarchy
February 27, 2010 68
Process Mapping
February 27, 2010 69
Cost Calculation
• Direct Costs + Overheads = Total Cost
February 27, 2010 70
Traditional Cost Accounting View - Direct Costs
• Product A
− 100 units
− 1 hour direct labour @ €20/hour
− €20/unit direct cost
• Product B
− 950 units
− 2 hours direct labour @ €20/hour
− €40/unit direct cost
• Total amount of effort for 100 units of Product A and 950 units of Product B is 2000 hours
• Assume the overheads total is €100,000
February 27, 2010 71
Traditional Cost Accounting View - Overheads
• Traditional Cost Accounting Overhead Costs
− = €100,000 / 2000 hours
− = €50 per hour
• Product A
− = €50 x 1 hour
− = €50
• Product B
− = €50 x 2 hours
− = €100
February 27, 2010 72
Traditional Cost Accounting View - Total Cost
• Product A
• Direct Costs = €20
• + Overhead = €50
• Total Cost = €70
• Product B
• Direct Costs = €40
• + Overhead = €100
• Total Cost = €140
February 27, 2010 73
ABC View - Overheads
• Activity Total Cost Cost Driver
• Setup €10,000 Number of setups
• Machining €40,000 Number of hours
• Receiving €10,000 Number of receipts
• Packaging €10,000 Number of deliveries
• Engineering €30,000 Number of hours
• Total €100,000
February 27, 2010 74
ABC View - Overheads
€100,000€75,500€24,500Total
€30,000€15,000500€15,000500Engineering
€10,000€7,5003€2,5001Packing
€10,000€7,5003€2,5001Receiving
€40,000€38,0001,900€2,000100Machining
€10,000€7,5003€2,5001Setup
TotalsCostProduct BCostProduct A
February 27, 2010 75
ABC View - Overheads
• Apportioning total overheads for each product according to their demand
• Product A
− €24,500 / 100 = €245
• Product B
− €75,500 / 950 = €79.47
February 27, 2010 76
ABC - A Different Picture
• Product A
• Direct Costs = €20
• + ABC Overhead = €245
• Total Cost = €265
• Product B
• Direct Costs = €40
• + ABC Overhead = €79.47
• Total Cost = €119.47
February 27, 2010 77
Comparison Between Traditional Cost Accounting and ABC
€119.47€140€265€70Total
€79.47€100€245€50Overhead
€40€40€20€20Direct
ABCTCAABCTCA
Product BProduct A
February 27, 2010 78
Which is the Right Actual Cost?
• ABC provides a better understanding of consumption of resources
February 27, 2010 79
Products or Customers
• Your least profitable customers might be caused by products that appear inexpensive but actually are not
• One bank in the US found that 100% of its profits came from only 20% of its customers
• Customer Needs, Customer Cost, Convenience, Communication
February 27, 2010 80
The CRM Challenge
• If I know who the customers are, can someone tell me why they are profitable, can I then identify or profile others that could become profitable and tell me how I can actually do this ?
February 27, 2010 81
The CRM Challenge
• Who
−A data warehouse can identify customers
• Why
−Activity Based Costing will help show why some customers are more profitable than others
• How
−ABC, product design and development, campaign development and management
February 27, 2010 82
Understanding and Profiling your Customers
February 27, 2010 83
CRM Marketing Requires
• The one to one enterprise forms learning relationships with its customers
• In a learning relationship, customers teach the organisation about themselves
• The organisation uses what it learns to make the customers’ lives easier
• Customers find it easier to do business with the one to one enterprise because of what they have taught it.
−Address, language, size, seat preference, allergies, taste in music, contact preferences - method, time
February 27, 2010 84
CRM Marketing Requires
• To form a learning relationship with your customers
• Notice their needs
−On-Line Transaction Processing systems are the corporate eyes and ears
• Remember their activities and preferences
−A Decision Support Data Warehouse is the corporate memory
• Learn from past interactions how to serve them better in the future
−Data analysis tools provides the intelligence you need to turn memories into plans
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Data and Information Gap
• Within most organisations, there is a noticeable information gap
− Timely access to information
− Access to accurate and complete information
− Access to information at an appropriate level of detail
− Inconsistent and patchy information from various business systems and units
• Which of these statements apply to you?
− The data is there but getting access to it is complicated or not possible
− Finding and collating data across different information sources is often very difficult
− Performance data is not available quickly enough to act on it effectively
− There is excessive information that conceals what is really needed or important
− Some of the information required is simply not being captured
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Customer Data Problem
• Today most companies have multiple repositories for customer data
• Inaccurate and incomplete view of the customer relationship
• Inability to understand the value of the customer
• Difficult to determine the correct product offer based on inaccurate customer data
• Inefficient customer service
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Closing the Information Gap
• Closing the information gap is an essential pre-requisite of implementing effective and usable business process management
• Responsibility of both the business and IT working collaboratively.
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Data, Information/Knowledge and Action
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Data, Information/Knowledge and Action Cycle
• Data refers to the source figures and numbers. It is the raw material for analysis
− Data gap is the absence of the tools and operational processes to consistently collect, store, manage the data and make available tools to perform analyses.
• Information/Knowledge is the value extracted from the raw data
− Information gap is the absence of insight caused by the lack of defined metrics and indicators and their timely and accurate availability and usability.
• Action is the need for operational business processes to ensure that the information presented is used and acted upon
• The Data, Information/Knowledge, Action cycle means that there must be a continuum from collecting the raw data to using it effectively
• Process to achieve this must be embedded in the organisation
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Key Measures
• Overall financial performance
• Performance of partnerships and alliances
• Product and service line profitability
• Client profitability
• Client acquisition and retention
• Overall operational performance
• Performance relative to competition
• Delivery of profit and value to clients
• Client satisfaction
• Staff performance
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Data Mining
• Exploration and analysis, by automatic or semi-automatic means, of large quantities of data in order to discover meaningful patterns and rules
• In order to develop new products and services that are demanded by the customer, that can be delivered profitably by the organisation and to remove unwanted customers and/or products
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Data Mining Styles
• Using the past to predict the future
− Prediction
− Classification
− Estimation
• Finding customer segments and other interesting things in the data
− Clustering
−Market basket
−Description
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Why Data Mining
• Segment customers into groups with similar buying patterns
• Increase response rate from campaigns
• Identify loyal customers
• Identify profitable customers
• Identify campaigns that will generate responses
• Understand why customers leave
• Understand purchasing patterns
• Identify fraud
• Predict customers who will leave
• Predict future outcomes
• Assess impact of changes
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The Data Mining Spiral
Data
ActionKnowledge
Information
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Data Mining Methodology
Assess usefulness, reliability and repeatability of models. Apply to another sample. Test against data with known results.
Assess
Construct models that explain patterns in data.Model
Change the data – combine, transform, derive variables.
Modify
Look for inherent trends, clusters and groups. Look for and eliminate extreme values. Reduce number of important variables. Data visualisation and statistical techniques.
Explore
Identify and collect data. Sample or entire dataset. Sample size and sampling technique.
Sample
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Summary and Next Steps
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Business Drivers
• Greater competition is the norm
• Difficult economic conditions
• Price cuts and reduced investment
• Customer have (and know they have) a choice - capture and retain customers
• Customer-services oriented
• Cost cutting by large/corporate users
• Flattening of price disparities
• New services/markets - customers outside
• current services
• Cross-sell to existing customers
• Disintermediation
• Understand customer behaviour
• React to changes quickly
• Become and stay competitive
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Customer Management Dilemma
• Customer acquisition and retention against
• competition
• Improved customer service - loyalty bonus, privileges, affiliation programs, discounts
• Cost of programmes vs. benefits
• Good customers vs. bad
• Need to direct customer service investment
• Intelligent CRM investment can yield benefits
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CRM Building Blocks
• Two fundamental pre-requisites to effective CRM implementation and operation
• Data warehouse that contains a unified view of customers for other applications to query and analyse
− Provides accurate and complete customer data to all operational business processes that require customer data
− Improved and differentiated customer service
− Increased revenue via improved cross-selling
• Cost analysis exercise
−Understand where your costs really arise