Welcome.

Week 5

Strategic Relationship Marketing (CRM): MARK 4014

Professor John Paulo Cardoso
john.cardoso@georgebrown.ca
focus.
www.EcoDirectKoffie.com
Learning Objectives:

§ CRM strategy
§ Business Goals and CRM Objectives
§ Organizational Dynamics & CRM Player
§ Sales Channels & Internal Requirements
Understanding
Relationships
Defining ‘relationship’

§ A relationship is composed of a series of interactive episodes

between parties over time.
§ Episodes are time bound (they have a beginning and an end)
and are nameable.
§ Episodes are composed of a series of interactions. Interaction
consists of action, and response to that action.
§ Is a relationship more than interaction-over-time?
– What about emotional content? Do relationships have some type of
affective connection, attachment or bond?
 Woodburn & McDonald’s hierarchy of
relationship levels
§ Exploratory,
§ Basic
§ Cooperative
§ Interdependent
§ Integrated
Dwyer, Schurr & Oh’s model of relationship change

1. Awareness
2. Exploration
3. Expansion
4. Commitment
5. Dissolution
What are some relationship attributes?
COMMITMENT
Major relationship attributes

§ Trust
§ Commitment
Types of trust

A party in a relationship may trust the others..

§ Benevolence. A belief that one party acts in the

interests of the other.
§ Honesty. A belief that the other party’s word is reliable
or credible.
§ Competence. A belief that the other party has the
necessary expertise to perform as required.
How trust emerges

§ Trust emerges as parties share experiences and interpret and

assess each other’s motives.
§ As they learn more about each other, risk and doubt are reduced.
§ For these reasons, trust has been described as the glue that
holds a relationship together across time and different episodes
Commitment defined

§ Commitment is shown by “an exchange partner believing that an

ongoing relationship with another is so important as to warrant
maximum effort to maintain it; that is, the committed party
believes the relationship is worth working on to ensure that it
endures indefinitely”.
Characteristics of commitment

§ Commitment arises from trust, shared values, and the belief that
partners will be difficult to replace.
§ Commitment motivates partners to co-operate in order to preserve
relationship investments.
§ Commitment means partners forgo short-term alternatives in
favour of more stable, long-term benefits associated with current
partners.
§ Commitment entails vulnerability, leaving partners open to
opportunism.
Evidence of commitment

§ Evidence of commitment is found in the investments that one party makes in the other.
§ One party makes investments in the promising relationship and if the other responds, the
relationship evolves, and the partners become increasingly committed to doing business with
each other.
§ Investments can include time, money, and the sidelining of current or alternative
relationships.
§ A partner’s commitment to a relationship is directly represented in the size of the investment
in the relationship, since these represent termination costs.
Attributes of high quality relationships

§ Core attributes
– Trust
– Commitment

§ Additional attributes
– Relationship satisfaction
– Mutual goals
– Cooperative norms
 Companies want relationships with customers
§ Why?
– because companies that manage their customer base in order to identify,
satisfy and retain profitable customers enjoy better business results
– reduced customer churn creates
• A larger customer base
• Longer average customer tenure
• Reduced marketing costs to replace defected customers
• Better understanding of customer requirements
• More cross-selling opportunities
Impact of churn on customer numbers
Company A (5% churn) Company B (10% churn)
Year
Existing New Total Existing New Total
customers customers customer customers customers customer
base base

1 1000 100 1100 1000 100 1100

2 1045 100 1145 990 100 1090

3 1088 100 1188 981 100 1081

4 1129 100 1229 973 100 1073

5 1168 100 1268 966 100 1066

Impact of churn on customer numbers
Company A (5% churn) Company B (10% churn)
Year
Existing New Total Existing New Total
customers customers customer customers customers customer
base base

1 1000 100 1100 1000 100 1100

2 1045 100 1145 990 100 1090

3 1088 100 1188 981 100 1081

4 1129 100 1229 973 100 1073

5 1168 100 1268 966 100 1066

Impact of churn on customer numbers
Company A (5% churn) Company B (10% churn)
Year
Existing New Total Existing New Total
customers customers customer customers customers customer
base base

1 1000 100 1100 1000 100 1100

2 1045 100 1145 990 100 1090

3 1088 100 1188 981 100 1081

4 1129 100 1229 973 100 1073

5 1168 100 1268 966 100 1066

Impact of churn on customer numbers
Company A (5% churn) Company B (10% churn)
Year
Existing New Total Existing New Total
customers customers customer customers customers customer
base base

1 1000 100 1100 1000 100 1100

2 1045 100 1145 990 100 1090

3 1088 100 1188 981 100 1081

4 1129 100 1229 973 100 1073

5 1168 100 1268 966 100 1066

Connecting customer retention to
customer tenure

Customer retention rate Average customer tenure

(%)
50 2 years
67 3 years
75 4 years
80 5 years
90 10 years
92 12.5 years
95 20 years
96 25 years
97 33.3 years
98 50 years
99 100 years
Organisational benefits from managing
customer retention
§ Reduced marketing costs
– Fewer dollars need to be spent replacing churned customers

§ Better customer insight

– Suppliers are able to develop a better understanding of customer requirements and
expectations. Customers also come to understand what a supplier can do for them.
– Consequently, suppliers become better placed to identify and satisfy customer
requirements profitably, selling more product and service to the retained customer.
– Over time, as relationships deepen, trust and commitment between the parties is likely to
grow, and revenue and profit streams from customers become more secure.
The Customer Journey
Suspect Does the potential customer fit your target market
profile?
Prospect The customer fits the target market profile and is
being approached for the first time.

First-time The customer makes a first purchase.

customer
Repeat The customer makes additional purchases. Your
customer offer plays a minor role in the customer’s portfolio.

Majority The customer selects your company as supplier of

customer choice. You occupy a significant place in the
customer’s portfolio.
Loyal customer The customer is resistant to switching suppliers,
and has a strong positive attitude to your company
or offer.
Advocate The customer generates additional referral dollars
through positive word-of-mouth.
Customer life-time value (CLV) defined

§ CLV is the present-day value of all net margins earned from a

relationship with a customer, customer segment or cohort.
– To compute LTV, all historic net margins are compounded up to today’s
value and all future net margins are discounted back to today’s value.
– Estimates of LTV potential look to the future only, and ignore the past.
– A customer that appears to be valuable on the basis of the gross margins
generated will most likely be less profitable once cost-to-serve the
customer is taken into account.
Four causes of profit margin growth over time

1. Revenues grow over time, as customers buy more.

2. Cost-to-serve is lower for existing customers, because both
supplier and customer understand the other.
3. Higher prices are paid by existing customers than new
customers.
4. Value-generating referrals are made by existing, satisfied
customers through their unpaid advocacy.
Profit from customers over time

Figure 2.3
Customers are potential income streams

§ A core CRM idea is that a customer should not be viewed as a set

of independent transactions but as a life-time income stream.
Customer life-time value

§ The total present day value of a customer is the sum of

– all past net margins compounded to today’s value, and
– all future net margins discounted to today’s value

§ The potential value of a customer is

– all future net margins discounted to today’s value
What you need to compute LTV

§ insight into future buying behaviour

– probabilities of buying products 1-n over the next x time periods
§ margins earned from those products
§ periodic costs of customer management

Plus, for new customers

§ costs of customer acquisition

And finally
§ Discount rate
The effect of discounting on customer
value

Figure 2.4
Customer relationship value at US Bancorp

§ top tier, 11% of customers

§ threshold, next 22%
§ fence sitters, next 39%
§ value destroyers, bottom 28%
Cohort value: the impact of customer
retention rate

Figure 2.5
Core strategies to improve cohort profitability
1. Improve customer retention rate in the early years of the relationship.
2. Increase the profit earned per customer by
– Reducing cost-to-serve
– Cross-selling or up-selling additional products and services
3. Become better at customer acquisition by
– Using more cost-effective recruitment channels
– Better qualification of prospects.
– Careful nurturing of prospects with high CLV potential.
– Recruiting new customers matched to the profiles of current customers
having a high CLV
When do B2B companies not want
relationships?
§ When they fear loss of control. Relationships are bi-lateral
arrangements, which involve giving up unilateral control over
resources.
§ When exits costs are high. Not all relationships survive. It is
not necessarily easy or cost-effective to exit a relationship.
§ Resource commitment. Relationships require the
commitment of scarce resources such as people, time and
money.
§ When opportunity costs are high. If resources are committed
to one customer realtionship, they cannot be used for another
Business customers want relationships when …..
1. the product or its applications are complex, for example, networking infrastructure
2. the product is strategically important or mission-critical, for example, core raw materials
supply for a manufacturer
3. there are down-stream service requirements, for example, for machine tools
4. financial risk is high, for example, in buying large pieces of capital equipment
5. reciprocity is expected. A financial audit practice may want a close relationship with a
management consultancy, so that each party may benefit from referrals by the other.
When do customers want relationships
with suppliers?
In the B2C context, customers may value relationships for
several reasons:

§ Recognition. Customers may feel more valued when

recognised and addressed by name.
§ Personalisation. Products or services can be customized.
§ Power. Relationships with suppliers can be empowering.
§ Risk reduction. A relationship can reduce, or even perhaps,
eliminate perceived risk.
§ Status. Customers may feel that their status is enhanced by a
relationship with a supplier.
§ Affiliation. People’s social needs can be met through
commercially based, or non-commercially based, relationships.
 Why B2B customers do NOT want
relationships with suppliers
§ Fear of dependency
§ Lack of perceived value in the relationship
§ Lack of confidence in the supplier.
§ Customer lacks relational orientation
§ Rapid technological changes
In-Class Activity 1: Group Exercise
In-Class Activity 1: Group Exercise
• Why are RFM metrics important?

Group 1: These RFM metrics are important indicators of a customer’s behavior because
frequency and monetary value affects a customer’s lifetime value, and recency affects
retention, a measure of engagement.

Group 2: To track the CLV

Group 3: It's data-driven and has no presumption for any market segments. It treats all
customers as a homogenous group.

Group 4: Helps us understand customer’s behavior to identify those we can retain and
target for personalized marketing.
In-Class Activity 1: Group Exercise
• What facts do RFM factors illustrate?

Group 1:
These facts are shown by RFM factors:
• R: the more recent the purchase, the more responsive the customer is to promotions
• F: the more frequently the customer buys, the more engaged and satisfied they are
• M: monetary value differentiates heavy spenders from low-value purchasers

Group 3:
• the more recent the purchase, the more responsive the customer is to promotions
• the more frequently the customer buys, the more engaged and satisfied they are
• monetary value differentiates heavy spenders from low-value purchasers

Group 4:
• The more recent the purchase, the more customer will respond to promotions
• More frequent buyer, more satisfied and engaged
• Money spent identifies the heavy spenders from low-value buyers
In-Class Activity 1: Group Exercise
• How does RFM analysis help marketers?

Group 1: RFM help us finding insight of customers such as which customers is more valuable
than the other and which to retain or let go, which customers is potential.

From the data and insights, it helps marketers make advertising budget. We can make budget
and create promotion campaigns specifically for each group of customers.

Group 3: To get rid of the presumption of all customers and see the data themselves. It's
especially useful for e-commerce where lots of data are available.
In-Class Activity 1: Group Exercise
• How does CleverTap arrive at an aggregate score of Recency, Frequency
and Monetary?

Group 1:
They use recency and frequency scores to visualize RFM analysis on a 2-dimensional graph.
They combine a few segments to arrive at more manageable and intuitive segments.
• Champions
• Potential Loyalists
• New Customers
• At Risk Customers
• Can’t Lose Them

Group 3: They utilize interactive dashboards to create a 2-dimensional graph.

In-Class Activity 1: Group Exercise
• Is it fair to average out the individual R, F, and M scores for each customer?
When does it make sense to do so? When does it not?

Group 1: Using RFM modeling can provide valuable insights about customers, but it does not
take into account many other factors about the customer including customer demographics
such as age, sex and ethnicity.
RFM only uses historical data about customers and may not predict future customer activity.
Predictive methods may be able to identify future customer behavior that RFM analysis
cannot.

Group 3: Not really. The most recent customers may not be the most loyal, and the most
frequent customers do not necessarily spend the most so the company may not profit from
them the most. It's important to get an aggregate score depending on your business nature.
For example, for Shoppers Drug Mart as a retail business, maybe they tend to value the "F" &
"R" more than "M".
The satisfaction-profit chain

Figure 2.6
Customer satisfaction defined

§ Customer satisfaction is the customer’s fulfilment response to a

customer experience, or some part thereof.
Two dimensions of customer loyalty

§ Behavioral loyalty § Attitudinal loyalty

– Is the customer active? – Beliefs
– What is our share of customer spend? – Commitment
– RFM variables – Preference
• Recency – Intention to buy
• Frequency
• Monetary value
RFM measures behavioural loyalty

§ R = time elapsed since last purchase

§ F = number of purchases in a given time period
§ M = monetary value of purchases in a given time period
Loyalty squares (Dick and Basu)

Figure 2.7
Share of market vs. share of customer

Figure 2.8
Researching the satisfaction-profit chain

§ International data
§ National data
§ Industry data
§ Corporate data
§ Individual customer data
The American Customer Satisfaction
Index (ACSI) model

Figure 2.9
Industry studies

§ Telecommunications
§ Banking
§ Airlines
§ Car distribution
§ Multi-industry
Returns from investments in customer
satisfaction

Figure 2.10
 Relationship management theory: 5
schools of thought
§ Industrial Marketing and Purchasing (IMP) school
§ Nordic school
§ Anglo-Australian school
§ North American school
§ Asian (guanxi) school
IMP school

§ Focuses on B2B context

§ Argues that B2B transactions occur within the context of broader,
long-term relationships, which are, in turn, situated within a
broader network of relationships.
§ Any single B2B relationship between supplier and customer is
composed of activity links, actor bonds and resource ties
Actor bonds, activity links and resource ties

§ Actor bonds are interpersonal contacts between actors in partner

firms that result in trust, commitment and adaptation between
actors
§ Activity links are the commercial, technical, financial,
administrative and other connections that are formed between
companies in interaction
§ Resources are the human, financial, legal, physical, managerial,
intellectual and other strengths or weaknesses of an organization
Nordic school

§ Emphasises the role of service in supplier-customer relationships

§ Identifies 3 major characteristics of commercial relationships -
interaction, dialogue and value – known collectively as the “Triplet
of Relationship Marketing”.
The Triplet of Marketing

§ Interaction
– Inter-firm exchanges occur in a broader context of ongoing interactions.

§ Dialogue
– Suppliers and customers are in dialogue with each other.

§ Value
– Value in relationships is mutual. To generate value from customers,
companies need to generate customer-perceived value, that is, create and
deliver something that is perceived to be of value to customers.
Anglo-Australian school 6-markets model

Figure 2.11
North American school

§ Links successful inter-firm relationships to excellent business

performance.
§ Relationships reduce transaction costs
§ Focus on trust and commitment
§ View r elationships as tools that a well-run company can
manipulate for competitive advantage.
§ Focus on dyadic relationships rather than networks.
Asian (Guanxi) School

§ The foundations of Guanxi are Buddhist and Confucian teachings

regarding the conduct of inter-personal interactions.
§ Guanxi refers to the informal social bonds and reciprocal
obligations between various actors that result from some common
social context, for example families, friendships and clan
memberships.
§ These are special types of relationship which impose reciprocal
obligations to obtain resources through a continual cooperation
and exchange of favours
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.
How B2B customers differ from B2C customers
• Fewer in number
• Bigger in size
• Closer relationships with suppliers
• Derived demand
• Professional buying
• Direct purchase
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

Figure 5.1
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 attributes Demographic attributes: age, gender, occupational 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, recency-frequency-
attributes volume, share of category spend
ACORN

ACORN Categories % of UK households

1. Affluent achievers 21.3
2. Rising prosperity 9.4
3. Comfortable communities 27.0
4. Financially stretched 24.2
5. Urban adversity 17.9
6. Not private households 0.2
Bivariate segmentation of the chocolate market

Figure 5.2
Criteria for segmenting business markets
Business market
segmentation criteria Illustration
International Standard An internationally agreed standard for
Industrial Classification classifying 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
Current share of customer Sole supplier, majority supplier, minority
spend in the category supplier, non-supplier
Geography City, region, country, trading bloc (ASEAN,
EU)
Buying style Risk averse, innovator
Examples of ISIC codes

ISIC 4-digit code Activity

1200 Manufacture of tobacco products
2511 Manufacture of structural metal products
5520 Camping grounds, recreational vehicle parks and trailer
parks
8530 Higher education
Account-based segmentation variables
• account value
• share of category (share of wallet) spend
• propensity to switch
Evaluation of segmentation opportunities
SEGMENT VALUE AND ATTRACTIVENESS
Size of segment, segment growth rate, price sensitivity of customers,
bargaining power of customers, customersʼ relationships with current
suppliers, barriers to segment entry, barriers to segment exit, number and
power of competitors, prospect of new entrants, potential for differentiation,
propensity for customer switching
COMPANY AND NETWORK FIT
Does the opportunity fit the companyʼs objectives, mission and values? Does
the company and its network possess the operational, technological,
marketing, people and other competencies, and the liquidity to exploit the
opportunity?
McKinsey/GE customer portfolio matrix

Figure 5.3
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
In-Class Activity 2: Group Exercise
In-Class Activity 2: Group Exercise
• When is Opportunity Stage Forecasting ideal? When is it not so ideal?

Group 2: Opportunity Stage Forecasting ideal when the various stages of the
sales process each deal is in. It is not ideal when the age of opportunity in the
system is not the same.

Group 3: Inaccurate data can lead to inaccurate forecasts. Its calculations

don't consider the size or age of each opportunity.

Group 4: Since it does not take into consideration the “age of an opportunity”
or the length of a stage in the pipeline and relies on historical data, this is not
ideal when you changed your messaging, products, sales process, or any
other variable.
In-Class Activity 2: Group Exercise
• How can you get accurate results for Length of Sales Cycle Forecasting?

Group 2: You'll need to carefully track how and when prospects enter your
salespeople's pipelines.

Group 3: You'll need to carefully track how and when prospects enter your
salespeople's pipelines. If your CRM doesn't integrate with your marketing
software as well as automatically log interactions, your reps will be spending a
lot of time manually entering data.

Group 4: To obtain accurate results, you must closely monitor how and when
prospects enter your salespeople's pipelines.
In-Class Activity 2: Group Exercise
• What issues do you run into Intuitive and Historical Sales Forecasting?

Group 2: Inaccurate predictions in Intuitive Forecasting. Historical - It doesn’t consider

seasonality, Market changes or current buyer demand.

Group 3: Intuitive: Calculations are subjective, and each sales rep can forecast differently.
You can't scale or replicate this method. Yet, it's good for verification as you should believe in
your team's intuition sometimes. Historical: It doesn't consider seasonality or market changes.
It doesn't consider buyer demand.

Group 4: It doesn't consider seasonality. Second, it assumes that buyer demand is constant.
The forecast may lack consistency and be too optimistic.
In-Class Activity 2: Group Exercise
• Multivariate Sales and Pipeline Forecasting tend to be the most
accurate. What does it require to do so?

Group 2: It requires good and clean data advanced

analytics.

Group 3: It requires an analytics solution and/or

forecasting tool.

Group 4: Bigger budget to acquire advanced

analytics solution. High-quality, clean data.
Sales forecasting using moving averages
Sales 2-year moving 4-year moving
Year volumes average average
2013 4830
2014 4930
2015 4870 4880
2016 5210 4900
2017 5330 5040 4960
2018 5660 5270 5085
2019 5440 5495 5267
2020 5550 5410
Activity based costing 1
Costs do vary from customer-to-customer. Some customers
are very costly to acquire and serve, others are not.
vCustomer 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.
Activity based costing 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

Figure 5.4
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
CLV formula
Margin multiples

RETENTION RATE DISCOUNT RATE

10% 12% 14% 16%
60% 1.20 1.15 1.11 1.07
70% 1.75 1.67 1.59 1.52
80% 2.67 2.50 2.35 2.22
90% 4.50 4.09 3.75 3.46

Table 5.7
Preparation for data-mining
1. Define the business problem you are trying to solve.
2. Create a data mart that can be subjected to data mining.
3. Develop a model that solves the problem. This is an iterative process of
developing a hypothetical solution to the problem (also known as model
building), testing and refinement.
4. Improve the model. As new data is loaded into the data warehouse, further
subsets can be extracted to the data mining data mart and the model
enhanced.
Data-mining for CPM
• Clustering techniques
• CART
• CHAID
• Decision trees
• Neural networks
Credit risk training set

Name Debt Income Married? Risk

Joe High High Yes Good
Sue Low High Yes Good
John Low High No Poor
Mary High Low Yes Poor
Fred Low Low Yes Poor
Cross-tab of dependent and independent variables

Table 5.9
Decision tree output

Figure 5.5
Neural networks

• Neural networks, also known as machine–based

learning, are another way of fitting a model to existing
data for prediction purposes.
• Neural networks can produce excellent predictions
from large and complex datasets containing hundreds
of interactive predictor variables, but the neural
networks are neither easy to understand nor
straightforward to use.
• Neural networks are represented by complex
mathematical equations, with many summations,
exponential functions and parameters.
The 80:20 rule or Pareto principle

Figure 5.6
Customer profitability by sales volume quintile

Figure 5.7
Shapiro et al’s customer classification matrix

Figure 5.8
How costs vary between customers
Pre-sale costs Production costs Distribution costs Post-sale costs
Geographic location: Order size Shipment consolidation Training
close v. distant
Prospecting Set-up time Preferred transportation Installation
mode
Sampling Scrap rate Back-haul opportunity Technical
support
Human resource: Customization Location: close v. distant Repairs and
management v. reps maintenance
Service: design Order timing Logistics support e.g.
support, applications field inventory
engineering

Table 5.10
Fiocca step 1

Figure 5.9
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: 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

Figure 5.10
Additional CPA tools
• SWOT analysis
• BCG matrix analysis
BCG matrix

Figure 5.11
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.
SSC’s at a Scandinavian timber processor
This company considers 5 attributes in identifying their
strategically significant customers

1 Economic return
2 Future business potential
3 Learning value
4 Reference value
5 Strategic value by
● providing access to new markets
● strengthening incumbent positions
● building barriers to new entrants
Seven core customer management strategies
1. Protect the relationship
2. Re-engineer the relationship
3. Grow the relationship
4. Harvest the relationship
5. End the relationship
6. Win-back the customer
7. Start a relationship
Online workshop part 3:
This Week & Next Week
• TODAY: Workshop #3. (2% final mark)

• Next Week:

• Client Project Q&A: Michael McLaughlin —

https://ca.linkedin.com/in/michael-mclaughlin-368b18206

• We will review the list of questions that you

have for Michael.
• CRM Case Study is Due Oct. 12th before class.