CUSTOMER RELATIONSHIP MANAGEMENT

CONCEPTS AND TECHNOLOGIES

Chapter 5
Customer Portfolio Management
Customer Portfolio definition

 A customer portfolio is the collection of mutually

exclusive customer groups that comprise a
business’s entire customer base.
Objectives of Customer Portfolio Management (CPM)

 CPM aims to optimise business performance –

whether that means sales growth, enhanced
customer profitability, or something else - across the
entire customer base.
 It does this by offering differentiated value
propositions to different segments of customers.
Basic disciplines for CPM

 market segmentation
 sales forecasting
 activity-based costing
 customer life-time value estimation
 data-mining
Market segmentation definition

 Market segmentation is the process of dividing up a

market into more-or-less homogenous subsets for
which it is possible to create different value
propositions.
Intuitive vs. data-based segmentation

 Intuitive  Data-based
• brain-storm segmentation • Obtain customer data
variables • Internal and external
• age, gender, life-style • analyse customer data
• SIC, size, location • identify high/medium/low
• produce word-profiles value customer segments
• compute sizes of segments • profile customers within
• assess company/segment fit segments
• make targeting decision • age, gender, life-style
• one/several/all segments? • SIC, size, location
• assess company/segment fit
• make targeting decision
• one/several/all segments?
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)

 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
the same benefit.
 Geographic competitors
● these are benefit and product competitors operating in the
same geographic territory
Criteria for segmenting consumer markets

User Demographic attributes: age, gender, occupational

attributes status, household size, marital status, terminal
educational age, household income, stage of family
life-cycle, religion, ethnic origin, nationality
Geographic attributes: country, region, TV region,
city, city size, post-code, residential neighbourhood
Psychographic attributes: life-style, personality

Usage Benefits sought, volume consumed, share of

attributes category spend
Bivariate segmentation of the chocolate market

Gifts Planned
10%

Family
sharing
Usage

Later
sharing
30%
Take
home Emotion
Functional al need
40% 20%
Eat now
Hunger Light snacking Indulgence

Source: Mintel 1998 Satisfaction

Criteria for segmenting business markets
Business market
segmentation criteria Illustration
International Standard Industrial An internationally agreed standard for classifying
Classification goods and service producers
Dispersion Geographically concentrated or dispersed
Size Large, medium, small businesses: classified by
number of employees, number of customers, profit
or turnover
Account status Global account, National account, Regional
account, A or B or C class accounts
Account value <$50,000, <$100,000, <$200,000, <$500,000
Buying processes Open tender, sealed bid, internet auction,
centralized, decentralized
Buying criteria Continuity of supply (reliability), product quality,
price, customisation, just-in-time, service support
before or after sale
Propensity to switch Satisfied with current suppliers, Dissatisfied
Share of customer spend in the Sole supplier, majority supplier, minority supplier,
category non-supplier
Geography City, region, country, trading bloc (ASEAN, EU)
Buying style Risk averse, innovator
McKinsey/GE customer portfolio matrix

High

Attractiveness of
market segment Medium

Low
Strong Average Weak
Fit to company and network competencies

Attractive Medium-priority Unattractive

markets markets markets
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

Sales 2-year moving 4-year moving

Year volumes average average
2002 4830
2003 4930
2004 4870 4880
2005 5210 4900
2006 5330 5040 4960
2007 5660 5270 5085
2008 5440 5495 5267
2009 5550 5410
Costs vary over the customer base 1

 Customer acquisition costs.

● Some customers require considerable sales effort to shift
them from prospect to first-time customer status: more sales
calls, visits to reference customer sites, free samples,
engineering advice, guarantees that switching costs will be
met by the vendor.
 Terms of trade.
● Price discounts, advertising and promotion support, slotting
allowances (cash paid to retailers for shelf-space), extended
invoice due-dates.
Costs vary over the customer base 2

 Customer service costs.

● Handling queries, claims and complaints, demands on sales-
person 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.
ABC in a claims processing department

General ledger: claims processing department ABC view: claims processing dept.

$ $ $ $
Actual Plan Variance Key/scan claims 31,500
Salaries 620,400 600,000 (21,400) Analyse claims 121,000
Suspend claims 32,500
Equipment 161,200 150,000 (11,200) Receive provider enquiries 101,500
Resolve member problems 83,400
Travel expenses 58,000 60,000 2,000
Process batches 45,000
Supplies 43,900 40,000 (3,900) Determine eligibility 119,000
Make copies 145,500
Use & Occupancy 30,000 30,000 ----- Write correspondence 77,100
Attend training 158,000
Total 914,500 880,000 (34,500)
Total 914,500
How ABC helps CPM

 When combined with revenue figures, it tells you the

absolute and relative levels of profit generated by
each customer, segment or cohort
 It guides you towards actions that can be taken to
return customers to profit.
 It helps prioritise and direct customer acquisition,
retention and development strategies
 It helps establish whether customisation, and other
forms of value creation for customers, pays off
The 80:20 rule or Pareto principle
Customer profitability by sales volume quintile
Shapiro et al’s customer classification matrix

High

Carriage
Passive trade

Received
price

Bargain
basement Aggressive

Low
Low High
Cost-to-serve
How costs vary between customers
Pre-sale costs Production Distribution costs Post-sale
costs costs
Geographic Order size Shipment Training
location: close v. consolidation
distant
Prospecting Set-up time Preferred Installation
transportation
mode
Sampling Scrap rate Back-haul Technical
opportunity support
Human resource: Customization Location: close v. Repairs and
management v. distant maintenance
reps
Service: design Order timing Logistics support
support, e.g. field inventory
applications
engineering
Fiocca step 1

High Key Non-key

difficult difficult
Difficulty in
managing account
Low Key easy Non-key
easy

High Low

Strategic importance of account

Fiocca step 1: Strategic importance

 Strategic importance is related to

● value/volume of the customer’s purchases
● potential and prestige of the customer
● customer market leadership
● general desirability in terms of diversification of the supplier’s
markets, providing access to new markets, improving
technological expertise, and the impact on other
relationships
Fiocca step 1: Difficulty of managing relationship

 Difficulty of managing the customer relationship is

related to:
● product characteristics such as novelty and complexity
● account characteristics such as the customer’s needs and
requirements, customer’s buying behaviour , customer’s
power, customer’s technical and commercial competence
and the customer’s preference to do business with a number
of suppliers
● competition for the account which is assessed by
considering the number of competitors, the strength and
weaknesses of competitors and competitors’ position vis à
vis the customer
Fiocca step 2

 Assess key easy and key difficult accounts:

● The customer’s business attractiveness
● The strength of the buyer/seller relationship
Fiocca step 2: customer attractiveness
Market factors Financial and economic factors
Size of key segments served by Customer’s margins
customer
Customer’s share of key segments Customer’s scale and experience
Customer’s growth rate Barriers to customer’s entry or exit
Customer’s influence on the market Customer’s capacity utilisation

Competition in the customer’s Technological factors

market
Customer’s position and strength Customer’s ability to cope with
change
Customer’s vulnerability to Depth of customer’s skills
substitutes
Customer’s level of integration Types of technological know-how
Level of customer patent protection
Socio-political factors
Customer’s ability to adapt and fit
Fiocca step 2: strength of relationship

 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
 co-operation in product development
 management distance (language and culture)
 geographical distance
Fiocca step 2: strategic options
Additional CPA tools

 SWOT analysis
 PESTE analysis
 5-forces analysis
 BCG matrix analysis
PESTE analysis 1

 Political environment
● Demand for international air travel contracted as worldwide
political stability was reduced after September 11, 2001
 Economic environment.
● Demand for mortgages falls when the economy enters
recession
 Social environment.
● As a population ages, demand for health care and residential
homes increase
PESTE analysis 1

 Technological environment.
● As more households become owners of computers, demand
for internet banking increases
 Environmental conditions.
● As customers become more concerned about environmental
quality, demand for more energy efficient products increases
5-forces analysis

 The profitability of an industry– as measured by its

return on capital employed relative to its cost of
capital – is determined by 5 sources of competitive
pressure.
1. competition within the established businesses in the market
2. competition from potential new entrants
3. competition from potential substitutes
4. the bargaining power of buyers
5. the bargaining power of suppliers.
BCG matrix

High
STAR QUESTION MARK
Cash use equals
Heavy cash users
cash generation
Strategy: Aggressive
Strategy: Grow and growth or divest
Market build
growth CASH COW DOG

Cash generators Cash users

Strategy: Maintain and Strategy: Divest

milk
Low
10x 1x 0.1x
Relative market share
Product evolution Direction of cash movement
Strategically significant customers 1

 High future life-time 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 2

 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.
Strategically significant customers 3

 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. Enhance the relationship
4. Harvest the relationship
5. End the relationship
6. Win-back the customer
7. Start a relationship