Overview of Effective CRM Implementation and Operation

1. Overview of Effective CRM
Implementation and
Operation
Alan McSweeney

2. Objectives
• To provide an overview of effective CRM system
implementation and operation
February 27, 2010 2

3. Agenda
• Introduction to CRM
• Customer Analysis and Segmentation
• CRM Implementation Approach
• Activity Based Costing for CRM Analysis
• Data Mining
• Summary
February 27, 2010 3

4. What is CRM?
• End-to-end customer management
• Process enabled by set of technologies
• Process designed to integrate all customer interactions
through all channels
• Like all processes organisational change is needed
• CRM systems need information and applications support
• CRM processes should be consistent and repeatable
February 27, 2010 4

5. Illusion of Customer Relationship Management
• Myth of CRM
• Customers are not outsiders
• We are all customers – of utilities, service providers,
financial institutions, government agencies
• CRM is about how WE want to be treated by our service
providers
• When we talk about customers (THEM), we mean us
• How do you want to be treated by your service providers?
• That is exactly how your customers want to be treated by
you
February 27, 2010 5

6. Customer Service and Customer Satisfaction
• Poor customer service is still pervasive despite awareness
of the need for and benefits of improved customer service
• Many organisations have not changed their business
processes to deliver improved customer service and
provide what customers want
• Improved customer service means optimising end-to-end
processes from the customer viewpoint
− Involves linking multiple internal processes to get cross-functional
view from customer perspective
February 27, 2010 6

7. What Customers Really Want – More For Less
• More Of • Less Of
− Value − Aggravation
− Responsiveness − Time to Complete Transaction
− Involvement − Rigidity
− Consideration − Cost
− Dependability − Bureaucracy
− Flexibility − Excuses
− Lack of Integration
February 27, 2010 7

8. What Organisations Try to Do – More With Less
• More Of • Less Of
− Work − Personnel
− Customers − Facilities
− Sales − Cost
− Revenue
− Margin
February 27, 2010 8

9. Balance Between Internal and External
• Need to balance management focus between “more with
less” and “most for less”
• More with less focuses on internal reductions: cost, staff
• More for less focuses on external improvements
• Only a cross-functional customer-oriented view of
business processes can achieve this balance
− Internal processes focus on operational functions
− Cross-functional view links internal processes to get end-to-end
customer view of organisation
• Cross-functional processes are those that really affect
customers – from start to end
February 27, 2010 9

10. Overall CRM Solution Architecture
Continuous dialogue across
all customer
channels/touch points
Personalised
Consistent user experience products/services based on
across all contact points customer needs and
expectations
Real-time access to all
customer information
across the enterprise
February 27, 2010 10

11. Technology and Application Components of a CRM
Strategy
Sales Force Campaign Document Call Centre
Automation Management Management Automation
Data Customer Profile
Warehousing CRM Strategy Database
Workflow and Data Mining/ Telesales Internet/
Process Modelling Automation Intranet/
Extranet
February 27, 2010 11

12. CRM and Related Systems Architectural Elements
Business Functions Business Activities Architectural Elements
Search Engines
General User Targeted Customer
Acquisition Mail/Email Advertising Acquisition
Systems
General Use General Use Call Centres Web Systems
Interface Interface Call Centre
Systems
Targeted User
Content and Banner Ads Web Content Web Applications
Offers Call Centre
Call Centre Scripts Applications
Fulfilment Order Entry, Operational
Tracking Systems
Management Financial User Analysis
Reporting Financial Systems
External Trends
February 27, 2010 12

13. Why CRM
• Greater competition
• Economics of customer retention
• Available technology
• Options to increase customer profitability:
− Get more customers
− Optimise value of existing customers
− Retain right customers longer
− Implement at lower cost
• Costs of options:
− Customer acquisition 5-10 greater than retention
− Loyal customers spend more and pay premium
− Loyal customers must like and trust companies
February 27, 2010 13

14. Customer Management Trends
• Recognise customer heterogenity
• Companies want to get “up close and personal” with their
customers
• Transact with customers individually
• “Joined up” customer interaction
February 27, 2010 14

15. CRM Process
• CRM is about:
− Integration of customer contact points
− Synchronisation of customer information and
− management assets
− Identification highest (and lowest) value customers
− Servicing those with greatest actual or potential value
• CRM enables:
− Reduction of marketing costs through effective
− targeted campaigns
− Increase in customer satisfaction and retention
− Increase in sales
− Improvement in profitability by customer and sale
February 27, 2010 15

16. Characteristics of Service Leaders
• Grow twice as fast as competitors
• 6% annual market share growth vs. 1% market loss
• Charge 10% more
• 12% average return on sales vs. 1%
• Market changes - speed to react determines success or
failure
− US - 60% in Fortune 500 in 1970 are no longer on list
February 27, 2010 16

17. Which Customers?
• 20% of customers generate 80% of profit
• 5% increase in customer retention means 25%-95%
increase in profitability
• New customers take 8-10 contacts before sale
• Existing customers take 2-3 contacts before sale
February 27, 2010 17

18. Customer Service
• 95% of customers who have had problems will continue to
do business if problems are resolved
• For every complaint you receive there are another 20
potential complaints that have not been articulated but
still represent
• Good customers tell about 3 others of their experience
• Bad customers tell about 8 of their experience
• 68% of former customers left because of poor customer
service
February 27, 2010 18

19. Customer Earnings Over Time (Service Industry
Example)
• Continually acquiring
new customers and
losing existing
customers costs
money
• Customer retention
through increased
customer
satisfaction is
financially
worthwhile
• Better customer
service makes long-
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7
term sense
• Need a balance
Acquisition Cost Base Profit between customer
Profit from Increased Purchases Cost Savings retention and new
Referrals Price Premium customer acquisition
February 27, 2010 19

20. Customer Retention and Profitability
• Leaky Bucket Effect
Acquire Customers
50-60% (or
More) Every
Five Years
Customers Defect to
Other Suppliers
(“Churn”)
February 27, 2010 20

21. Example of Profit Contribution by Customer Type
200%
25%
High Value Loyal Low Value
-125%
• Not all customers have the same value
• Can you identify your customers?
February 27, 2010 21

22. Example of Profit Contribution by Customer Type for
All Customers - 1
• Customer
Total
profile is
balanced
that results
Low Value in net profit
Loyal
High Value
-150% -100% -50% 0% 50% 100% 150% 200% 250%
Individual Customer Profit Contribution Percentage of Total Customers
Weighted Contribution
February 27, 2010 22

23. Example of Profit Contribution by Customer Type for
All Customers - 2
• In this example,
Total there is a high
percentage of
low value
customers
Low Value
(perhaps due to
high rates of
customer churn
Loyal and cost of new
customer
acquisition)
• Net result is an
High Value
overall loss
-150% -100% -50% 0% 50% 100% 150% 200% 250%
Individual Customer Profit Contribution Percentage of Total Customers
Weighted Contribution
February 27, 2010 23

24. Role of Data Warehouse in CRM
• Technology/infrastructure core of architecture
• Allow marketers to make decisions on customer
segmentations and profiles and match products/offers
• Data Warehouse enables CRM processes
• CRM elements depend on quality of information in
• Data Warehouse and accuracy of derived results
• Central common repository or all relevant allows effective
data sharing and reduces latency
• “Joined-up” approach to CRM
• CRM assumes good information
February 27, 2010 24

25. Integrated CRM
Sales Data Sales
Force
Service Calls Customer Customer
Data Service
Warehouse
Campaigns/ Call Customer
Special Offers Customer Centre
Interaction
Self Service Database Internet
Mailing Lists Direct
Mail
February 27, 2010 25

26. Customer Lifetime Value
• LTV = net present value of all future contributions to
overhead and profit expected from a new customer
• How much a customer is worth to you today, given the
expected profit in the future
February 27, 2010 26

27. Customer Value
• Retail - lose one customer per day every day for a year (7
days per week) that spends €50 per week = annual loss of
€482,000
• Car manufacturer - increase customer retention by 1% for
4 years = €160 million increase in profit
• Fast food = each customer is worth €10,000 over lifetime
February 27, 2010 27

28. Marketing Objectives
• Objectives:
− Acquire new customers
− Retain existing (profitable) customers
• How much money should be allocated to these?
• How will this affect long-term profitability?
• Does every customer deserve the same investment?
February 27, 2010 28

29. LTV Answers
• How much you can afford to spend to acquire a new
customer?
• Which new customer sources generate the most profitable
long-term customers?
• How much you can spend to retain/reactivate an existing
customer?
February 27, 2010 29

30. Sample Customer LTV Calculation
Year 1 Year 2 Year 3 Year 4 Year 5
Revenues
Customers 100,000 60,000 37,200 24,180 16,926
Retention 60% 62% 65% 70% 75%
Rate
Spending Per €75 €100 €125 €140 €140
Customer Per
Year
Total €7,500,000 €6,000,000 €4,650,000 €3,385,200 €2,369,640
Costs
Cost Percent 40% 40% 40% 40% 40%
Total Costs €3,000,000 €2,400,000 €1,860,000 €1,354,080 €947,856
Profits
Gross Profit €4,500,000 €3,600,000 €2,790,000 €2,031,120 €1,421,784
Discount 1.00 1.04 1.08 1.12 1.17
Rate Yearly
NPV
Profit NPV €4,500,000 €3,461,538 €2,579,512 €1,805,658 €1,215,347
Cumulative €4,500,000 €7,961,538 €10,541,050 €12,346,709 €13,562,056
NPV Profit
Customer €45 €80 €105 €123 €136
LTV
• This example shows the calculation of the long-term value of a customer
• This is just a simple example to illustrate the concept
February 27, 2010 30

31. Sample Customer LTV Calculation
Number of
customers each year
based on the • A customer
customer retention
rate Year 1 Year 2 Year 3 Year 4 Year 5 retained for
Revenues
Customers 100,000 60,000 37,200 24,180 16,926
five years is
Total revenue for all
Retention 60% 62% 65% 70% 75% worth €136
Rate
customers each Spending Per €75 €100 €125 €140 €140 expressed in
year Customer Per current year
Year
Total €7,500,000 €6,000,000 €4,650,000 €3,385,200 €2,369,640 money
Costs
Cost Percent 40% 40% 40% 40% 40% • Increasing the
Total Costs €3,000,000 €2,400,000 €1,860,000 €1,354,080 €947,856
NPV of profit Profits retention rate
expressed in
current year values,
Gross Profit
Discount
€4,500,000
1.00
€3,600,000
1.04
€2,790,000
1.08
€2,031,120
1.12
€1,421,784
1.17
and
based on NPV rate Rate Yearly increasing the
NPV
Profit NPV €4,500,000 €3,461,538 €2,579,512 €1,805,658 €1,215,347
amount spent
Cumulative €4,500,000 €7,961,538 €10,541,050 €12,346,709 €13,562,056 by customer
NPV Profit
LTV of individual Customer €45 €80 €105 €123 €136 by upselling
customer if LTV and cross-
retained for that selling will
number of years
increase LTV
February 27, 2010 31

32. Sample Customer LTV Calculation With Increased
Retention Rate
Year 1 Year 2 Year 3 Year 4 Year 5
Revenues
Customers 100,000 80,000 64,000 51,200 40,960
Retention 80% 80% 80% 80% 80%
Rate
Spending Per €75 €100 €125 €140 €140
Customer Per
Year
Total €7,500,000 €8,000,000 €8,000,000 €7,168,000 €5,734,400
Revenue
Costs
Cost Percent 40% 40% 40% 40% 40%
Total Costs €3,000,000 €3,200,000 €3,200,000 €2,867,200 €2,293,760
Profits
Gross Profit €4,500,000 €4,800,000 €4,800,000 €4,300,800 €3,440,640
Discount 1.00 1.04 1.08 1.12 1.17
Rate Yearly
NPV
Profit NPV €4,500,000 €4,615,385 €4,437,870 €3,823,396 €2,941,073
Cumulative €4,500,000 €9,115,385 €13,553,254 €17,376,650 €20,317,723
NPV Profit
Customer €45 €91 €136 €174 €203
LTV
• An increased customer retention rate increases the LTV of
customers
February 27, 2010 32

33. Measuring LTV
• Customer Transaction History
• What they have purchased (preferably item level detail)
• How much they have spent
• When they have purchased
• How many returned / cancelled items
• Where they have purchased
• Potential indicators of why they have purchased: special offers, holiday promotion, etc.
• Financial Measures
• Cost of Goods (preferably at the item level)
• Fixed, Variable and Fulfillment costs
• Gross/Net Sales Ratios
• Promotion History
• How many promotions/contacts they received
• When they received the promotions
• Special offers and other promotion characteristics
• Promotional costs
February 27, 2010 33

34. Customer Segments
• Useful simple starting point
• Easy to match to campaigns
• Analyse movement between segments
• Sample segment types for a campaign:
− Cold prospect - no history
− Warm prospect - some response to previous campaigns
− New customer - bought item
− Confirmed customer - bought two items
− Regular, including last campaign - buys frequently
− including last campaign
− Regular but not last campaign
− Regular but not last two campaign
− Lapsed regular
February 27, 2010 34

35. Segmentation
• Identifying and classifying groups based on buying
characteristics and profile
• Telecommunications example:
− Tariff 1
− Tariff 2
− Tariff 3
− Pre-Pay
− Migrate to Competitor 1
− Migrate to Competitor 2
− Migrate from Competitor 1 to Tariff 1
− Migrate from Competitor 1 to Tariff 2
February 27, 2010 35

36. Sales Campaign Effects on LTV
• Customers move between segments
− “Regular but not last campaign” moves to “Regular, including last
campaign”
− Migration changes customer value
• The campaign has costs
• Estimate net long-term benefit of campaign to
organisation
February 27, 2010 36

37. LTV and Campaign Example – Initial Status
Segment Number of Projected Projected Segment Value
Classification Customers Lifetime Sales Lifetime Profit
New Customer 10,000 €2,000 €300 €3,000,000
Confirmed 30,000 €3,000 €450 €13,500,000
Customer
Regular Including 60,000 €5,500 €825 €49,500,000
Last Campaign
Regular But Not 35,000 €4,500 €650 €22,750,000
Last Campaign
Regular But Not 25,000 €3,500 €525 €13,125,000
Last Two
Campaigns
Lapsed Regular 55,000 €500 €75 €4,125,000
TOTAL 215,000 €106,000,000
February 27, 2010 37

38. LTV and Campaign Example - Campaign Results
Segment Number of Percent Number Average Total Amount
Classification Customers Responded Responded Amount Spent for Segment
Cold Prospect 60,000 3% 1,800 €50 €90,000
Warm Prospect 30,000 5% 1,500 €60 €90,000
New Customer 10,000 8% 800 €70 €56,000
Confirmed 30,000 10% 3,000 €80
Customer €240,000
Regular Including 60,000 65% 39,000 €100
Last Campaign
€3,900,000
Regular But Not 35,000 50% 17,500 €90
Last Campaign
€1,575,000
Regular But Not 25,000 30% 7,500 €80
Last Two
Campaigns €600,000
Lapsed Regular 55,000 15% 8,250 €70 €577,500
TOTAL 305,000 79,350 €7,128,500
Gross Profit €1,069,275
Campaign Costs €610,000
Net Profit €459,275
February 27, 2010 38

39. LTV and Campaign Example - Changes to LTV
Segment Number of Projected Projected Segment Value Number of Segment Value Change in
Classification Customers Lifetime Sales Lifetime Profit Before Customers After Campaign Lifetime Value
Before Campaign After Campaign
Campaign
New Customer 10,000 €2,000 €300 €3,000,000 13,300 €3,990,000 €990,000
Confirmed 30,000 €3,000 €450 €13,500,000 33,800 €15,210,000 €1,710,000
Customer
Regular Including 60,000 €5,500 €825 €49,500,000 72,750 €60,018,750 €10,518,750
Last Campaign
Regular But Not 35,000 €4,500 €650 €22,750,000 21,000 €13,650,000 -€9,100,000
Last Campaign
Regular But Not 25,000 €3,500 €525 €13,125,000 17,500 €9,187,500 -€3,937,500
Last Two
Campaigns
Lapsed Regular 55,000 €500 €75 €4,125,000 72,500 €5,437,500 €1,312,500
TOTAL 215,000 €106,000,000 230,850 €107,493,750 €1,493,750
February 27, 2010 39

40. LTV and Campaign Example - Migration Between
Segments
Cold Prospect Warm Prospect New Customer Confirmed Regular Regular But Regular But Lapsed Regular
TO Customer Including Last Not Last Not Last Two
FROM Campaign Campaign Campaigns
Cold Prospect 1,800
Warm Prospect 1,500
New Customer 800
Confirmed
Customer
Regular 39,000 21,000
Including Last
Campaign
Regular But 17,500 17,500
Not Last
Campaign
Regular But 17,500
Not Last Two
Campaigns
Lapsed Regular 8,250
February 27, 2010 40

41. CRM Solution Implementation Approach
Vision Creation Enterprise Gap Analysis Roadmap for
and Confirmation Assessment Change
• How to align organisation and customer objectives
• Audit of company business processes, technology,
communications and structure
• Gaps between current and future
• Plan for change
February 27, 2010 41

42. Vision Creation and Confirmation
• Company Objectives
− Who is our ideal customer
− How should we do business “value discipline”
• Customer Objectives
− Identify and understand expectations
− Marketing from customer rather than company perspective
February 27, 2010 42

43. Identifying the Ideal Customer(s)
• Behaviour
− Spending habits - amounts, number and type of items
− Payment preferences - cash, cheque, credit/debit card
− Visit frequency - regular, need, promotion
− Incentives redeemed - avail of loyalty schemes
• Customer Value
− Total amount spent and profit
− Frequency
− Incentives redeemed - avail of loyalty schemes
• Channels
− Branches
− Call centre
− Web
February 27, 2010 43

44. Defining Value Discipline
• Defines how to do business and why customer chooses
• Product/Service Leadership
− Best product or service available
• Operational Excellence
− Best value and convenience
• Customer Intimacy
− Pursue long-term relationship, customer attentive
• Reflects types of customers
− Different people like different ways of buying
February 27, 2010 44

45. Enterprise Assessment
• Purpose
− Audit of company business processes, technology,
communications and structure
• Elements
− Identifying all customer interaction points
− Activity-based costing analysis
− Quantifying market trends and drivers
− Identifying and profiling competitors
− Identifying customer and company “pains”
February 27, 2010 45

46. Activity Costs
• Costs and revenue of interactions
• Fixed costs
− Cost per mail/e-mail item
− Costs of good/services sold
− Cost per order entry
− Infrastructure costs
− Variable costs
− Service call times
− Billing/collection
− Incentives
• Calculate customer value
• Generate insights into operation of organisation
February 27, 2010 46

47. Identify Company and Customer “Pains”
• Pain = problem, business issue or missed opportunity
• Customer pains = annoyance, discontent, dissatisfaction
• Company pains = profit erosion, increases in costs,
competition, errors, returns, employee turnover
• Results = lack of brand/company loyalty, customer
defection, reduction in market share, reduction in profits
February 27, 2010 47

48. Gap Analysis
• Barriers that must be overcome to allow organisation to
evolve from current to future state
• Assess hazards and difficulties of transition
• Categories of gaps:
− People
− Process
− Technology
February 27, 2010 48

49. People Gaps
• Impair ability to do job or reduce desire to work effectively
• Stringent policies mean inflexibility and slow response to urgent
problems
• Change to customer-centric operation requires learning, training and
management
− “I’m not in sales/marketing. Why are you talking to me?”
− “I’ve been here for 20 years and I don’t see why we should change now.”
− “I am willing to support the project 100% as long as it does not affect me.”
− “This is the way it’s always been done and it’s worked well up to now.”
− “I’ve got 15 minutes to talk to you. I’m very busy with important things.”
February 27, 2010 49

50. Process Gaps
• Breakdowns/bottlenecks in a process intended to produce
a result
• Occur at handoffs between stages/sections, incorrectly
routed requests
• Process should handle all (reasonable) eventualities and
provide information at all stages
• Process can be rigid (rules for all events) or flexible (allow
devolved decision making)
February 27, 2010 50

51. Technology Gaps
• Limitations in technology infrastructure to support CRM
process
• Examples:
− Campaign management
− Call Centre automation
− Sales Force automation
− Customer Data Warehouse/OLAP facility
− Sufficient Internet presence
− Data Mining
February 27, 2010 51

52. Gap Resolution
• “Gap map” shows number and severity of gaps between
current and future states
• Overlapping gaps should get highest priority
• Address gaps in parallel
• May not be possible to identify all gaps
February 27, 2010 52

53. Roadmap for Change
• Customer value alignment
• Market positions and competitive directions
• Business model
• Success metrics and critical success factors
February 27, 2010 53

54. Customer Value Alignment
Customer: Who is your ideal
The Right Customer customer and what
are his/her needs?
Cost: What is the value to
The Right Offer the customer?
Communication: When is the right
The Right Time time to communicate
an offer?
Convenience: How does your
The Right Channel customer prefer to
interact with you?
February 27, 2010 54

55. Customer Value Alignment
• Segmentation of customer base – identify types
• Implementation of customer marketing strategies
• Allow development of right time/offer/channel based on
customer knowledge
• Improve customer service, reputation, loyalty
February 27, 2010 55

56. CRM Success Metrics
• Increase retention in top n% of customers by x%
• Increase bottom-line profitability by x%
• Reduce negative value customers by x%
• Increase customers in high value segment by x%
• Improve customer satisfaction index by n%
February 27, 2010 56

57. Knowing Your Costs: Activity Based Costing for CRM
Analysis
February 27, 2010 57

58. Ways to Determine Cost
• Organisational Element Accounting
Accounting System
Direct Costs Overhead
February 27, 2010 58

59. Ways to Determine Cost
• Budgetary Cost Distribution / Commitment Accounting
Accounting System
Commitments and Obligations
February 27, 2010 59

60. Ways to Determine Cost
• Traditional Cost Accounting
Direct Labour Overhead
Output
Activities Cost
Direct Materials
February 27, 2010 60

61. Ways to Determine Cost
• Activity Based Costing
Direct Labour and
Overhead
Output
Activities Cost
Direct Materials
February 27, 2010 61

62. Activity Based Costing
• Activity-based costing (ABC) is a costing model that
identifies activities in an organisation and assigns the cost
of each activity to all products and services according to
the actual consumption of those activities by each
products or services
• Used as a tool for understanding product and service and
customer cost and profitability
• ABC supports strategic decisions such as pricing,
investments, outsourcing and identification and
measurement of process improvement initiatives
• Fallen out of favour but a very useful tool to understand
costs
February 27, 2010 62

63. Activity Based Costing
• Establishing a cross-functional view of your organisation
and understanding what drives your costs
• Pulling apart indirect or hidden costs and attributing them
correctly to products and services
Resources
Cost Drivers Activities Performance
Measures
Products and
Customers
February 27, 2010 63

64. ABC Relationship to CRM
• CRM is about retaining your most profitable customers
• In order to determine profit, you need to know a lot about
your costs
• To work out your costs, you need to work out what your
organisation actually does
• Which processes are consuming your resources?
February 27, 2010 64

65. Benefits of ABC
• Go beyond understanding your customers
− What drives costs?
− More informed macro and micro decision making
− Staff planning
− How your organisation interacts with customers - face-to-face,
web, call centre and other channels
February 27, 2010 65

66. Steps to Implementing ABC
General Ledger and
Other Sources
Departments
Activities
Cost Objects
Calculate Profitability
February 27, 2010 66

67. Defining Activities
• Most organisations use the cost centre structure
• Recast cost centre structure into activities
• Usually a hierarchy of activities
− Direct identification with product or service
− Process support
− Organisation and facility support
− Customer/market support
• Map from cost centre into activity hierarchy
February 27, 2010 67

68. Process Mapping
February 27, 2010 68

69. Cost Calculation
• Direct Costs + Overheads = Total Cost
February 27, 2010 69

70. Traditional Cost Accounting View - Direct Costs
• Product A • Product B
− 100 units − 950 units
− 1 hour direct labour @ €20/hour − 2 hours direct labour @ €20/hour
− €20/unit direct cost − €40/unit direct cost
• Total amount of effort for 100 units of Product A and 950
units of Product B is 2000 hours
• Assume the overheads total is €100,000
February 27, 2010 70

71. Traditional Cost Accounting View - Overheads
• Traditional Cost Accounting Overhead Costs
− = €100,000 / 2000 hours
− = €50 per hour
• Product A
− = €50 x 1 hour
− = €50
• Product B
− = €50 x 2 hours
− = €100
February 27, 2010 71

72. Traditional Cost Accounting View - Total Cost
• Product A • Product B
• Direct Costs = €20 • Direct Costs = €40
• + Overhead = €50 • + Overhead = €100
• Total Cost = €70 • Total Cost = €140
February 27, 2010 72

73. ABC View - Overheads
• Activity Total Cost Cost Driver
• Setup €10,000 Number of setups
• Machining €40,000 Number of hours
• Receiving €10,000 Number of receipts
• Packaging €10,000 Number of deliveries
• Engineering €30,000 Number of hours
• Total €100,000
February 27, 2010 73

74. ABC View - Overheads
Product A Cost Product B Cost Totals
Setup 1 €2,500 3 €7,500 €10,000
Machining 100 €2,000 1,900 €38,000 €40,000
Receiving 1 €2,500 3 €7,500 €10,000
Packing 1 €2,500 3 €7,500 €10,000
Engineering 500 €15,000 500 €15,000 €30,000
Total €24,500 €75,500 €100,000
February 27, 2010 74

75. ABC View - Overheads
• Apportioning total overheads for each product according
to their demand
• Product A
− €24,500 / 100 = €245
• Product B
− €75,500 / 950 = €79.47
February 27, 2010 75

76. ABC - A Different Picture
• Product A • Product B
• Direct Costs = €20 • Direct Costs = €40
• + ABC Overhead = €245 • + ABC Overhead = €79.47
• Total Cost = €265 • Total Cost = €119.47
February 27, 2010 76

77. Comparison Between Traditional Cost Accounting
and ABC
Product A Product B
TCA ABC TCA ABC
Direct €20 €20 €40 €40
Overhead €50 €245 €100 €79.47
Total €70 €265 €140 €119.47
February 27, 2010 77

78. Which is the Right Actual Cost?
• ABC provides a better understanding of consumption of
resources
February 27, 2010 78

79. Products or Customers
• Your least profitable customers might be caused by
products that appear inexpensive but actually are not
• One bank in the US found that 100% of its profits came
from only 20% of its customers
• Customer Needs, Customer Cost, Convenience,
Communication
February 27, 2010 79

80. The CRM Challenge
• If I know who the customers are, can someone tell me why
they are profitable, can I then identify or profile others
that could become profitable and tell me how I can
actually do this ?
February 27, 2010 80

81. The CRM Challenge
• Who
− A data warehouse can identify customers
• Why
− Activity Based Costing will help show why some customers are
more profitable than others
• How
− ABC, product design and development, campaign development
and management
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82. Understanding and Profiling your Customers
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83. CRM Marketing Requires
• The one to one enterprise forms learning relationships
with its customers
• In a learning relationship, customers teach the
organisation about themselves
• The organisation uses what it learns to make the
customers’ lives easier
• Customers find it easier to do business with the one to one
enterprise because of what they have taught it.
− Address, language, size, seat preference, allergies, taste in music,
contact preferences - method, time
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84. CRM Marketing Requires
• To form a learning relationship with your customers
• Notice their needs
− On-Line Transaction Processing systems are the corporate eyes
and ears
• Remember their activities and preferences
− A Decision Support Data Warehouse is the corporate memory
• Learn from past interactions how to serve them better in
the future
− Data analysis tools provides the intelligence you need to turn
memories into plans
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85. Data and Information Gap
• Within most organisations, there is a noticeable information gap
− Timely access to information
− Access to accurate and complete information
− Access to information at an appropriate level of detail
− Inconsistent and patchy information from various business systems and units
• Which of these statements apply to you?
− The data is there but getting access to it is complicated or not possible
− Finding and collating data across different information sources is often very
difficult
− Performance data is not available quickly enough to act on it effectively
− There is excessive information that conceals what is really needed or important
− Some of the information required is simply not being captured
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86. Customer Data Problem
• Today most companies have multiple repositories for
customer data
• Inaccurate and incomplete view of the customer
relationship
• Inability to understand the value of the customer
• Difficult to determine the correct product offer based on
inaccurate customer data
• Inefficient customer service
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87. Closing the Information Gap
• Closing the information
gap is an essential pre-
requisite of
implementing effective
and usable business
process management
• Responsibility of both the
business and IT working
collaboratively.
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88. Data, Information/Knowledge and Action
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89. Data, Information/Knowledge and Action Cycle
• Data refers to the source figures and numbers. It is the raw material
for analysis
− Data gap is the absence of the tools and operational processes to consistently
collect, store, manage the data and make available tools to perform analyses.
• Information/Knowledge is the value extracted from the raw data
− Information gap is the absence of insight caused by the lack of defined metrics
and indicators and their timely and accurate availability and usability.
• Action is the need for operational business processes to ensure that
the information presented is used and acted upon
• The Data, Information/Knowledge, Action cycle means that there
must be a continuum from collecting the raw data to using it
effectively
• Process to achieve this must be embedded in the organisation
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90. Key Measures
• Overall financial performance • Overall operational
• Performance of partnerships performance
and alliances • Performance relative to
• Product and service line competition
profitability • Delivery of profit and value to
• Client profitability clients
• Client acquisition and retention • Client satisfaction
• Staff performance
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91. Data Mining
• Exploration and analysis, by automatic or semi-automatic
means, of large quantities of data in order to discover
meaningful patterns and rules
• In order to develop new products and services that are
demanded by the customer, that can be delivered
profitably by the organisation and to remove unwanted
customers and/or products
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92. Data Mining Styles
• Using the past to predict the future
− Prediction
− Classification
− Estimation
• Finding customer segments and other interesting things in
the data
− Clustering
− Market basket
− Description
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93. Why Data Mining
• Segment customers into groups with similar buying patterns
• Increase response rate from campaigns
• Identify loyal customers
• Identify profitable customers
• Identify campaigns that will generate responses
• Understand why customers leave
• Understand purchasing patterns
• Identify fraud
• Predict customers who will leave
• Predict future outcomes
• Assess impact of changes
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94. The Data Mining Spiral
Knowledge Action
Information
Data
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95. Data Mining Methodology
Sample Identify and collect data. Sample or entire dataset.
Sample size and sampling technique.
Explore Look for inherent trends, clusters and groups. Look for
and eliminate extreme values. Reduce number of
important variables. Data visualisation and statistical
techniques.
Modify Change the data – combine, transform, derive
variables.
Model Construct models that explain patterns in data.
Assess Assess usefulness, reliability and repeatability of
models. Apply to another sample. Test against data
with known results.
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96. Summary and Next Steps
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97. Business Drivers
• Greater competition is the norm
• Difficult economic conditions
• Price cuts and reduced investment
• Customer have (and know they have) a choice - capture and retain customers
• Customer-services oriented
• Cost cutting by large/corporate users
• Flattening of price disparities
• New services/markets - customers outside
• current services
• Cross-sell to existing customers
• Disintermediation
• Understand customer behaviour
• React to changes quickly
• Become and stay competitive
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98. Customer Management Dilemma
• Customer acquisition and retention against
• competition
• Improved customer service - loyalty bonus, privileges,
affiliation programs, discounts
• Cost of programmes vs. benefits
• Good customers vs. bad
• Need to direct customer service investment
• Intelligent CRM investment can yield benefits
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99. CRM Building Blocks
• Two fundamental pre-requisites to effective CRM
implementation and operation
• Data warehouse that contains a unified view of customers
for other applications to query and analyse
− Provides accurate and complete customer data to all operational
business processes that require customer data
− Improved and differentiated customer service
− Increased revenue via improved cross-selling
• Cost analysis exercise
− Understand where your costs really arise
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100. More Information
Alan McSweeney
alan@alanmcsweeney.com
February 27, 2010 100