Time flies so fast! I barely notice that we are almost at the end of the class until the last breeze session last Thursday. It has been an enjoyable learning journey and I wish there were more fun classes like this.
In Week 10, we studied customer relationship management (CRM) which involves marketing activities to enhance long term profitable relationship with customers. Loyalty is not necessary profitable. The key is to manage both loyalty and profitability simultaneously. To get successful returns on the relationship programs, the company needs to measure the relationship between loyalty and profitability so that they can better identify which customers to focus and which to ignore.
Continuing from Week 10, this week we focus on the customer lifetime value (CLV) which is about managing customers to optimize the profitability for the company over the term of customers’ engagement of the company. Learning that the value of a company comes from the customers not its products reminds me of what we’ve learned since Week 1 - the purpose of a business is to serve the customers, not to make products. It all makes complete sense now. We focus marketing effort on satisfying the customers and we measure the company’s value based on contribution of the customers.
Both CRM and CLV consider each customer segment independently. As we learned in Week 10, the customers can be segmented into butterflies, true friends, strangers, and barnacles. The number of segments to consider depends on how fine we can parse the internal data and how well we can differentiate the marketing approaches.
I don’t think that my company explicitly knows the value of its customers. But the CLV concept can be utilized, even though the CLV expression may not be directly applicable. My company is a wireless telecommunications company owned by four Class 1 railroads. Currently about 90% of our customers are our owners and the less comprises other small railroads. The owners fund the R&D of the radios and get to purchase the radios at the production cost. Others will have to buy at higher price. The radios are expected to last for twenty years.
I would classify the Class 1 railroad owners as true friends and the smaller railroads as butterflies. Both have good fit between company’s offerings and customers’ needs. The owners are steady purchasers but the company does not gain profit from selling them the radios. Smaller railroads, on the other hand, are profitable but transient.
For the smaller railroads, the acquisition cost could be obtained from the cost of new customer marketing (e.g. trade shows and direct marketing). For the owners who fund the product development, it seems to me that the acquisition cost should be zero (since there is no marketing cost to acquire the customers in this segment) but I am not sure if we should count any product development funding in the acquisition cost. For both segments, the cost of retaining customers would include the cost of call center and customer services. The retention rate is somewhat related to the deployment plan of each railroad which may not be the same every year. The cost of serving customers, ca, is not the same over the lifetime of the customer either. It is likely to be higher at the beginning when the customers are not familiar with the products.
For the smaller railroads, the acquisition cost could be obtained from the cost of new customer marketing (e.g. trade shows and direct marketing). For the owners who fund the product development, it seems to me that the acquisition cost should be zero (since there is no marketing cost to acquire the customers in this segment) but I am not sure if we should count any product development funding in the acquisition cost. For both segments, the cost of retaining customers would include the cost of call center and customer services. The retention rate is somewhat related to the deployment plan of each railroad which may not be the same every year. The cost of serving customers, ca, is not the same over the lifetime of the customer either. It is likely to be higher at the beginning when the customers are not familiar with the products.
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