The Custome r Centricit y Simulation

Overview of the Simulation

This document includes information about learning objectives, key concepts, and grading.

Overview: Learning Objectives, Key Concepts, and

Grading
Synopsis
This highly interactive simulation begins with students being welcomed to their new role
as Chief Marketing Officer (CMO) at Hartnow, a 3D printing company that rode its
product-centric strategy into a sales rut within the first five years. Hartnow operates in a
business-to-business marketplace, servicing three sectors: Aerospace, Automotive and
Defense. Guided with a highly interactive Customer Relationship Manager (CRM)
system, the CMO commences the job of driving business back into the black and
sustaining growth amid an ongoing flurry of challenges, opportunities, and fiscal
feedback affecting the bottom line. A powerful difference about this simulation when
compared to others in the space is that the underlying model generates individual
customers, each with their own specific attributes. This unique capability allows students
to develop and query their customer data based on actual customers that are acquired
and leave each period. This capability provides a tremendous learning opportunity for
students to think deeply about how to make their customer data work for them.

The goal of the simulation is two-fold, reflecting the core tenets of a customer-centric
MO:

1. Identify the most valuable customers and maximize their Customer Lifetime Value
(CLV).
2. Find and attract new customers with similar qualities.

Those who do well learn to embrace and further develop their customer data through
various investment choices over the course of the simulation. The resulting accrual of
CRM data offers students the ability to deeply analyze various performance metrics in
order to inform future strategic decisions, and invariably proves to be a determining
factor in their success (or failure).

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Learning Objectives
The learning objectives of the simulation can vary depending upon the goals of the
instructor and the nature of the class.

We identify the following key learning objectives:

Acquiring the Right Customers

In Customer Centricity, the caliber of a customer, referred to here as customer

goodness, is measured in terms of their propensity to be (a) retained, (b) purchase more
and higher valued goods and services, and (c) to refer others of a similar or higher caliber
to become a customer. To best understand individual customer goodness, the
organization must gather data about their customers around these propensities.
Mirroring the real world, this simulation allows students to invest in their organization’s
CRM system in order to gain insight about these and a myriad of other aspects about
their customers.

On the Decision screen, in the first period students can choose to direct budget spend
towards the following two acquisition channels, in whatever proportions desired:

a. Internal Sales and Marketing: Investment here is to support Hartnow sales and
marketing staff in developing special projects and programs to attract new
customers. These efforts can be thought of as more precise, or using a spear, as
the staff have better insight about their own customers. Sales and Marketing staff
salaries are not included in this spend.

b. External Sales and Marketing: Investment here is with outside agencies on

developing broader sales and marketing campaigns. This is akin to acquiring
customers using a net.

A third form of customer acquisition is Referral.

If students choose to invest in the Sector strategic decision, which becomes available in
period 1, they will be able to direct budget to internal and external sales and marketing
efforts at the sector level. This decision also unlocks sector specific CRM reports, which
students can also choose to purchase.

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The three sectors represented in the simulation are significantly different in almost every
way and learning how to analyze these differences is core to the experience of the
learner. During the final debrief I ask my students what CRM reports / detailed customer
data they found particularly useful, which were a waste of money, and most importantly,
why.

With respect to acquiring the highest valued customers, through this experience
students will become aware of:

• Sector size differences

• Customer acquisition costs per sector

• Churn rates of customers within the sector, and effectiveness of retention efforts
(i.e., through the customer service investments).

• Propensity to purchase premium products and services

• Propensity to refer other customers

In addition, there is a further dimension for students to consider. On average, the referral
and internal channels are drawing in fewer customers, but when you take a closer look,
these channels are more likely to acquire higher valued customers.

Celebrating Heterogeneity

This simulation gives students key insights into how and why individual customers,
market sectors and customer segments differ from each other over time.

2.1 Customer Heterogeneity

At the moment a customer is acquired, their lifecycle begins. But not all customers share
the same trajectory, both in length of time as a customer or in the various attributes that
make up their level of customer goodness. Furthermore, customer goodness should not
be confused with other forces at work. A customer may have low overall goodness, but
perhaps they have remained your customer due to a lack of good alternatives or high
costs to switch to a competitor.

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A customer’s goodness isn’t set in stone at the moment they are acquired, and can be
impacted over the course of their lifecycle by the following:

Investment in Retention and Development:

When done right, investment in retention and development will have the largest positive
impact on customer goodness over time. In the simulation, this is achieved in several
ways:

• Customer Service Investment (All Periods): students can direct budget

towards special customer service programs that will encourage customers to
stay and to purchase higher valued offerings, thus increasing customer
goodness. The effect of this investment is not equal for all customers, and can
be better understood by developing the CRM further.

• Brand Awareness Investment (All Periods): students can direct budget

towards the overall brand awareness of Hartnow.

• Strategic Account Manager Positions Investment (Period 2): roles specifically

aligned with each customer sector and serve to bridge gaps between customer
service, sales and marketing. As this is an organizational change, electing to
make this investment is not necessarily wise early on in the simulation as the
strategic account managers become more effective as the Hartnow
organization matures with respect to customer centricity.

• Creating Hartnow’s Elite Loyalty Program (HELP) (Period 3): If students invest
in this program and have also invested in the sector specific decision (Period
1), they will be able to target their investment to the loyalty programs for each
of the three sectors differently. By purchasing the CRM reports that provide
insight about retention rates within specific sectors, students will discover that
certain sectors have a higher propensity to churn, or leave, thus helping them
to decide where best to direct loyalty budget.

• Adding a Premium Service (Round 5): This service offers students with a way
to develop customers by charging extra in return for special benefits. Once
students have invested in this service, any new customers might opt to
immediately become a Premium customer. These customers are more
profitable, but don’t necessarily have a higher lifetime value. As before, to

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understand which customers are more likely to be Premium and also a higher
lifetime value, students must develop and analyze the CRM data available to
them.

Competition:

In the simulation, the attractiveness of a market to competition is a function of the

market health index. Whether a competitor decides to enter or exit each period depends
upon:

a. Market Saturation: higher saturation will impact the market health index
negatively.

b. Current Customer Asset Value (CCAV) (formerly known as Customer Equity): higher
CCAV will impact the market health index positively

In general, an attractive market to competitors (high market health index), has low
market saturation and high CCAV. The simulation will determine whether competitors
will enter or exit into a sector, and depending on how particular students are doing, the
number of competitors may be different across students/student teams.

2.2 Market Sector Heterogeneity

This simulation gives students key insights into how and why one market sector might
differ from another. The underlying simulation model tracks a complex set of attributes
and propensities about each individual customer acquired from a particular sector, in a
particular period. All customers acquired during the same period are known as a cohort.

Market Sector Lifecycle:

When a sector is born, it is at the beginning of it’s lifecycle, and like individual customers,
has an overall mean goodness. Mean goodness of a sector may get better initially with
more customers appearing in the marketspace, but it will degrade over time as the sector
matures. When the simulation begins, there are three sectors that Hartnow services:
Aerospace, Automotive and Defense. Each of these sectors are at different stages of
their lifecycle. In order to delve into these differences, and make optimal targeted
investments in these sectors, students must first choose to invest in the Sector Specific
CRM package (Period 1, $500,000 investment). Early on, students are likely to be

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analyzing the number of customers in terms of revenue and profit they are deriving from
each sector. But the successful teams will quickly broaden their scope to look at the
other attributes that impact a sector’s mean goodness.

Market Sector Attributes Impacting Mean Goodness:

When a new customer is born in the simulation, several dozen attributes about the
customer are generated and available to be revealed to the students by investing in and
doing careful analysis of the associated reports in the CRM. From a Customer Centricity
standpoint, and keeping in mind that these attributes will change over time and can be
affected differently by investment spend within the simulation decisions, the attributes
for a sector that are wise places for students to spend time understanding:

• Referred Customers

• Premium Customers

• Retention/Churn Rates

• Cohort that customer is acquired

• Competition

• Measure the effect that specific investment spend is having on the

associated behaviors of the customers in a specific sector (e.g. Is an
increase in retention spend for a sector causing fewer customers to leave
than in previous periods? Is an increase in referral spend for a sector
causing more customers to be acquired through referral?)

When customers are acquired each period, it is still possible for an individual customer to
have attributes that are not exactly true to the nature of the sector it belongs to. For
example, a sector may be characterized with having a high churn rate. But when a
customer is acquired from this sector, the statistical coin flip that happens during the
acquisition process may have landed on a customer who has a low likelihood to leave.
The same can be said for any of the attributes that are generated when a new customer
is born in the simulation. It is up to the students to build their CRM to provide the best
insights about their customers based on the types of propensities bulleted above, and
then figure out where best to invest their limited budget.

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Understanding Current Customer Asset Value in Relation to Market Valuation

The simulation calculates:

• Market Valuation: the Net Present Value of Future Cashflows (discounted

by the Weighted Average Cost of Capital) less the Debt.

• Customer Lifetime Value (CLV): the revenue of each current customer

over 10 future periods, and using this as the net present value, applies a
discount rate to generate the CLV.

• Current Customer Asset Value (CCAV): the sum of the CLVs. We referred
to this metric as Customer Equity in earlier versions of the simulation, but
have adjusted the simulation to use the term Current Customer Asset
Value (CCAV) as it is more accurate. Customer Equity refers to the CLVs of
current and future customers, and should also consider costs. The
simulation is simpler, only referring to existing customers and does not
reflect any overhead. Thus CCAV is a more accurate term.

A key difference between market valuation and how CLV/CCAV are calculated is that
the latter do not consider costs to the organization. In this regard, CLV/CCAV can be
thought of as future revenue. Given this core difference in how the values are calculated,
there may be a delay in a firm’s market valuation compared to its CCAV.

When a firm’s CCAV diverges completely from its market valuation, this behavior can
provide useful insights. See my paper for more information about this dynamic:
https://papers.ssrn.com/sol3/Papers.cfm?abstract_id=2701093

Incentives and Grading

For my MBA and Executive MBA classes I grade the simulation as I believe this is an
important incentive.

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