Managing Customers for Profit

1. Managing Customers for Profit V. Kumar Chapter – 12 Acquiring Profitable Customers Instructor’s Presentation Slides

2. Relevant Issues

3. Optimizing Direct Marketing Source: Thomas J., W. Reinartz and V. Kumar (2004), “Getting the Most out of All Your Customers,” Harvard Business Review, (July-August 2004), pp. 116-123

4. The Manager’s Folly

5. Pitfall 1: Law of Diminishing Returns

6. High Maintenance Customers 25% of Customers 15% of Profits Royal Customers 28% of Customers 25% of Profits High Retention Cost Casual Customers 32% of Customers 20% of Profits Low Maintenance Customers 15% of Customers 40% of Profits Low Retention Cost Low Acquisition Cost High Acquisition Cost Pitfall 2: Short-Term vs. Long-Term Outlook

7. Pitfall 3: Treating Acquisition and Retention Strategies as Independent

8. Pitfall 4: Relying Too Much on Current Customers

9. ARPRO (Allocating Resources for Profit) 1 2 3

10. Relationship Duration Customer Profitability Acquired Customers Prospects Non-acquired Customers Offensive Process Defensive Process -Firm actions -Customer actions -Competitor actions -Customer characteristics ARPRO (Cont’d) ARPRO Conceptually Figure 12.3: Linking Acquisition, Retention, and Profitability: A Framework Source: Reinartz, Werner, Jacquelyn S. Thomas, and V. Kumar (2005), "Balancing Acquisition and Retention Resources to Maximize Customer Profitability," Journal of Marketing, 69 (1), 63-79.

11. Acquisition Likelihood Relationship Duration Customer Profitability Firm actions -retention expenditures -contact mix Customer actions -customer initiated contacts -cross buying -frequency Competitor actions -Share-of-wallet (SOW) Firm actions -acquisition expenditures -contact mix Customer actions -customer-initiated contacts Customer characteristics -Industry type -Annual revenue -Firm size (Employees) Firm actions -acquisition expenditures -retention expenditures -contact mix Customer actions -customer initiated contacts -cross buying -frequency Competitor actions -Share-of-wallet (SOW) ARPRO Drivers Figure 12.4: Drivers of Acquisition, Retention, and Profitability Source: Reinartz, Werner, Jacquelyn S. Thomas, and V. Kumar (2005), "Balancing Acquisition and Retention Resources to Maximize Customer Profitability," Journal of Marketing, 69 (1), 63-79. ARPRO Regression Model

12. The Profit-Maximizing ARPO Strategy Table 12.2: Average Customer Profitability

13. For example, if the same firm only tried to maximize relationship duration (retention) by itself, then the optimum spending level would be at $70 per customer (See Table 12.3). • However, the previous example showed that the optimum spending was actually $70 on both acquisition and retention - $10 on acquisition and $60 on retention per customer. • By optimizing the relationship duration by spending $70 instead of splitting the $70 on acquisition ($10) and retention ($60), the profitability would decrease from $1,603 to about $1,543 – a drop in 3.7% (See Table 12.2 for values). The Profit-Maximizing ARPO Strategy Table 12.3: Average Customer Relationship Duration Source: Thomas J., W. Reinartz and V. Kumar (2004), “Getting the Most out of All Your Customers,” Harvard Business Review, (July-August 2004), pp. 116-123.

14. Conclusion • It is not only necessary to consider acquisition spending and retention spending at the same time, but also that profitability is based on how the two interact. This means that it is not necessarily important to consider exactly how much to spend on acquisition or retention alone, but instead on how you balance your acquisition and retention spending together to maximize profitability.

15. End of Chapter 12