Page 58 - DMGT308_CUSTOMER_RELATIONSHIP_MANAGEMENT

Unit 3: Analysing Profitability of Customers

3. Total loans; Notes
4. Date first account opened;
5. Total account;
6. Total services; and
7. Various demographics.

By assigning weights to variables, an econometric formula can be constructed allowing the
effective grading of customers. It is then possible to determine who the best customers are e.g.
those that have been with the organisation the longest; those that purchase a variety of profitable
services, or those that maintain the highest balances. Grades can be used to identify those
customers that have the potential to be shifted for example from the B to the A quartiles through
cross-selling. These categories may also be intelligently used on a day-to-day basis by sales
representatives and other staff as they interact with customers. Special attention can be given to
“A” level customers, whilst “D” level customers may be treated courteously although not given
the same privileges as the bank’s most valuable clients.

Total Cost of Ownership
Customers are becoming more interested in the lifetime costs associated with their intended
purchases. The total cost of ownership, particularly for high priced items, may have a significant
bearing upon the value that a buyer perceives concerning that item. Robert Hall, group executive
for Enact (2004), says that customers are becoming increasingly aware of costs e.g. shipping,
hidden fees, poor service, unanticipated maintenance and low resale value. All of these drive up
the cost of ownership.

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Caution Customers search the internet for factual information, which they can trust, and
which is devoid of sales hype. Important decisions are made using this information; hence
the provision of good comparative metrics can form an important key for managing
customer profitability.

Customer Equity

CPM has an impact upon:
(a) customer relationship management

(b) product promotion
(c) pricing
In addition CPM embeds a greater degree of customer behaviour modelling and metric analysis
which can lead to a better ability to make informed customer service decisions. Customer
lifetime value (CLV), customer equity (CE), and activity based management (ABM) are relevant
tools used in association with customer profitability management practices.
Roland Rust, director of the Centre for E-Service at the University of Maryland, Katherine
Lemon, assistant professor at the Wallace E. Carroll School of Business, and Valarie Zeithaml,
professor of marketing at the University of North Carolina, wrote (2001) that an understanding
of customer profitability is an essential component of modern business marketing. In this
regard customer lifetime value (CLV) and customer equity are two key metrics which enable
organisations to calculate the expected ROI of their marketing initiatives. CLV is defined as the
total net income a company can expect from a given customer, and customer equity is the total

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