Customer Relationship Management: A Database Approach

1. MARK 7397 Spring 2007 Customer Relationship Management:A Database Approach Class 8 James D. Hess C.T. Bauer Professor of Marketing Science 375H Melcher Hall jhess@uh.edu 713 743-4175

2. Up-Sell and Cross-Sell An upsell is simply convincing the buyer that he or she should purchase a more expensive (and higher quality or more versatile) product than the one under consideration. “Do you want to super-size that?” A cross-sell is an effort to encourage the committed buyer to add auxiliary items to the purchase, such as accessories or related items. “Do you want fries with that?

3. Product Classes Competing products. These are products the user could purchase instead of the current product. For instance, if the user is looking at a Sony DVD player, a list of competing products might include the models above and below the current product in Sony's complete DVD line or comparable DVD players from another manufacturer. Complementary products. These products are intended to be sold with the current product and can be used together. They don't compete with each other. Rather, they can be used in tandem to solve a problem or make the product more robust. A complementary product to the DVD player might be a receiver/speaker system, a hi-definition TV, or another component that would be part of a home theater system. These products are not necessarily from the same manufacturer. Family products. These products are from the same manufacturer and part of the same line (in the same "family") as the current product. A pair of shoes in a specific color might be sold alongside a belt that exactly matches the color and texture of the shoes. These products are in the manufacturer's same family and meant to be bought as a set. Another example would be a furniture set (chairs, coffee table, couch, loveseat, ottoman, end table) that are all the same style but sold separately. Accessory products. These products can't really be used on their own to any great extent. They're accessories to the main product but sold separately. Sometimes they're required to operate the product, and sometimes they're optional. If a watch takes a certain kind of battery that isn't included, the battery is an accessory. Similarly, a pump that blows up a water raft is an accessory. A warrantee for the product is also part of this category.

4. Rules for Up-Selling • Offer the alternate before the customer has added the item to his shopping cart. • Use text that's brief but makes it clear exactly what features the upsell item has that are lacking in the main item. • List more expensive items with the same brand name, or higher quality but similar items in other brands. • The upsell item should always be more expensive than the main item. • Decide whether you'll offer sale items when upselling. If so, select items whose sale price is higher than the main item. • Use the opportunity to offer new releases or new inventory. Clearly label the photograph of the upsell item with "Just released!" or "New Item."

5. Rules for Cross-Selling • Let nature take its course. Many cross selling opportunities arise naturally. If you are selling tennis racquets, for example, you can also offer a bag, balls, lessons and accessories. To gain the extra sale, you might simply have to mention the other products or services are available. • Stay relevant. If you overload customers with too many unrelated cross-selling suggestions, you may blow it. Offering socks with shoes is certainly a good fit. But if your attempts to cross sell are not closely related to the original purchase they are far less likely to succeed. • Train employees in cross-selling techniques. The approach must be built around serving the customer, not just selling more stuff. For example, you might describe how the additional products or services would complement the original purchase and further solve the customer's problem. • Timing is important. Cross-selling and up-selling can occur at different times, depending on the products and services you are selling. In some cases, the best time is while a customer is trying something out. If they are looking at a low priced digital camera, for example, but seem disappointed in a lack of features or performance, they may really want a higher priced model. Or you could suggest a belt to go with a pair of pants while the customer is trying them on. Other items are more appropriately offered once the initial buying decision has been made, such as an extended warranty. • Leverage the cross-selling potential of your Web site. Position cross-sell and up-sell items throughout your site in places where they can help educate shoppers on the depth and variety of what your business offers. Try mixing and matching different items to see what works best. • Offer a range of prices. If you suggest three items to complement a product, try to offer a mix of price points. The lowest cost items are most likely to be picked up as impulse buys. But other items that meet the customer's need can also sell at higher levels. • Post expert recommendations. One way to facilitate cross-selling and up-selling success is to state specific recommendations from professionals, experts or other customers. This could be a chef's recommendation on a menu, a doctor's recommendation on mailer or lists of related items that other customers have purchased on a Web site. When you buy a book at Amazon.com, for example, the site automatically lists other books purchased by people who bought the same book you just ordered. • Try product or service bundles. Bundling has long been used as a way to entice shoppers to buy not just a single item, but an entire group of items that go together. Offering a price break on package deals will help close the sale.

6. Predicting Success in Cross-Selling Logit Model: bought j after buying k

7. Bundle Pricing Willingness-to-Pay Customer Fax Computer Bundle Fax/Computer Ike 100 800 900 Jack 600 300 900 Kate 700 800 1500 Lisa 300 500 800 Independent Pricing Fax: Price Total Revenue 700 1*700=700 600 2*600=1200<-- Profit Max 300 3*300=900 100 4*100=400 Computer: Price Total Revenue 800 2*800=1600<-- Profit Max 500 3*500=1500 300 4*300=1200 pF + pC = $2800

8. Bundle Pricing (Continued) Pure Bundle Pricing Bundle: Price Total Revenue 1500 1*1500=1500 900 3*900=2700 800 4*800=3200<-- Profit Max pB = $3200 > pF + pC = $2800

9. Mixed Bundling the bundle is sold, but so are some of the components. Customer Fax Computer Fax/Computer Ike 100 800 900 Jack 600 300 900 Kate 700 800 1500 Lisa 300 500 800 Mike 625 0 625 pF = 1800, pC = 1600, pB = 3200. Suppose that PB=$800 and fax is also sold at PF = $625. Mike who was the only non-buyer of the bundle, will buy the fax at $625. pMB = $3825 Notice that the computer ought not to be unbundled.

10. Bundle Pricing via Linear Programming b= 1 2 3 4 5 6 7 i= {1} {2} {3} {12} {13} {23} {123} A 400 450 350 850 750 800 1200 B 350 200 375 550 725 575 925 C 200 500 200 700 400 700 900 b= 1 2 3 4 5 6 7 {1} {2} {3} {12} {13} {23} {123} Cost 100 100 100 200 200 200 300

11. Objective: Maximize profits defined by SCi=AS7b=l Ni(Pib-CbTib) Constraints: Consumer don't build their own bundles. P(b,b) < P(b)+P(b), Anticipating Consumers' Behavior SiºS7b=1 (RibTib-Pib) Consumer Surplus Si³ Rib-Pb Maximize Consumer Surplus RibTib-Pib³ 0. Non-negative Consumer Surplus Buy one bundle:Tib integer and S7b=1 Tib£ 1. Consumers pay the same price Pb - 1200(1-Tib) £ Pib£ Pb Switch to LINDO/EXCEL for solution

12. Bundle Pricing Computer Software* Cost Structure Royalty Packing Support Total Internal $ 0 $35 $30 $ 65 External $175 $35 $55 $265 Current Pricing System $395/module & 15% off for more than $1,000. *Eppen, Gary, Ward Hanson, and Kipp Martin, "Bundling - New Products, New Markets, Low Risk," Sloan Management Review, Summer 1991, 7-14

13. Demand Structure B A G De Db Basic Adv. Graph- Data Data- Segment Segment Stats. Stats.ics Entry Base Size Market 400 450 350 125 225 30% Research Brand 350 200 375 75 295 18 Manager Market 350 400 275 50 200 10 Expert Data 375 100 300 350 220 17 Clerk Academic 200 500 200 100 175 25 SourceIntern.Inter.Extern.Intern.Exten.

14. Problem:customers who pay the same price contribute dramatically different amounts to profits 3 Internal 2 Internal 1 Internal No External 1 External 2 External Modules Modules Modules List Price 1185 1185 1185 After Discount 1007 1007 1007 Increm. Cost 195 395 595 Contribution $812 $612 $412 (percentage) (81%) (61%) (41%)

15. Demand Under Current Pricing System Items Price Package Per Person Segment Segment Bought Paid Cost Contri Contribu. Market Research BAG 1007 395 612 $18,360 Brand Manager BGDB 1007 595 412 $ 7,416 Market Expert BAG 1007 395 612 $ 6,120 Data Clerk BGDE 1007 395 612 $10,404 Academic --- --- --- 0 $0 Total$42,300/hundred Notice: "academics" are the second largest segment, and they are frozen out of the market by the current pricing system. Even among buyers, the contribution/person varies almost 50%.

16. New Bundle Pricing System $395/module (no volume discount) Bundle 1: Basic+Advanced Stat. for $745 & $320/additional module Bundle 2: Basic + Adv. Stat. + Data Entry for $ 800 & $320/ “ Demand Under New Pricing System Items Price Packg Per Person Segment Segment Bought Paid Cost Contribu. Contribu. Market Res. BADEG 1120 460 660 (+48) $19,800 Brand Manager BADeDb 1220 660 560 (+148) $10,080 Market Expert BA 745 130 615 (+3) $ 6,150 Data Clerk BADE 800 195 605 (-7) $10,285 Academic BADE 800 195 605 (+605) $15,125 Total$61,440/hundred (Up 45%)