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LTV. They believe in the 80-20 rule- 80
percent of the sales or profits come from
20 percent of the customers.
* A commonly used segmentation scheme
divides customers into four segments:
1. Platinum Segment – this segment is
composed of the retailer’s customers with
2. Gold Segment – The next 25 percent of
customers in terms of LTV still shop a
3. Iron Segment – Customers in this third tier
4. Lead Segment – Customers in the lowest
segment cost the company money. They
often demand a lot of attention but do not
buy much from the retailer or they buy a
lot of sale merchandise and abuse return
privileges.
every month. Which segment(s) of the
customer pyramid should it target? Why?
Converting Good Customers into Best
Customers
• Increasing the sales made to good
customers is referred to as customer
alchemy – converting iron and gold
• Add-on selling is selling additional new
products or services to existing
customers, such as a bank encouraging a
customer with a checking account to also
apply for a home improvement loan from
the bank.
See PPT 11-29
Chapter 11 – Customer Relationship Management
Dealing with Unprofitable Customers
• In many cases, the bottom tier of
customers actually has negative LTV.
Retailers actually lose money on every
sale they make to these customers.
See PPT 11-30
When dealing with unprofitable customers, a
retailer may be consciously providing lower
levels of benefits or service to such customers.
Evaluate the ethical issues involved.
VI. Summary
• This chapter focuses on activities that
retailers are undertaking now and will
undertake in the future to increase the
sales and profits they get from their better
customers.
ANSWERS TO “GET OUT AND DO ITS”
2. INTERNET EXERCISE Go to the homepage of a retailer that you frequent and review their
privacy policy. How is this retailer protecting their customer’s information? Which policies, or
lack of policies, raise your concern? Why? Which policies give you comfort that your private
information is being protected? Why?
Student responses will vary depending on the web site visited. Most should consider:
3. INTERNET EXERCISE Go to the Web site for the Electronic Privacy Information Center
organization feel are the most important retailer to consumer privacy issues? How will these
issues evolve in the future?
Top Ten Consumer Privacy Resolutions – Protect Your Privacy in The New Year!
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Chapter 11 – Customer Relationship Management
6. Choose Supermarkets that Don’t Use Loyalty Cards. Be loyal to supermarkets that offer
discounts without requiring enrollment in a loyalty club. If you have to use a supermarket
shopping card, be sure to exchange it with your friends or with strangers.
7. Opt out of financial, insurance, and brokerage information sharing. Be sure to call all of your
banks, insurance companies, and brokerage companies and ask to opt out of having your
financial information shared. This will cut down on the telemarketing and junk mail that you
receive.
10. File a complaint. If you believe a company has violated your privacy, contact the Federal
Trade Commission, your state Attorney General, and the Better Business Bureau. Successful
investigations improve privacy protections for all consumers.
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and read about the Fresh Rewards program. How does this company’s CRM program help it to
track its best customers, grow its business and increase customer loyalty?
Fresh Rewards is a three tier CRM program that rewards loyal customers with savings, a
ANSWERS TO DISCUSSION QUESTIONS AND PROBLEMS
1. What is a Customer Relationship Management (CRM) program? Describe one CRM
that you have participated in as a customer.
Customer relationship management (CRM) is a business philosophy and a set of strategies,
programs, and systems that focuses on identifying and building loyalty with a retailer’s most
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2. Why do retailers want to determine the lifetime value of their customers? How does
past customer behavior help retailers anticipate future customer retention?
Retailers have realized that it costs significantly more to sell products and services to new
customers than existing customers and that small increases in customer retention can lead to
3. Why do some customers have a low or negative LTV value? What approach can
retailers take with these customers to minimize their impact on the bottom line?
Customers with the lowest LTV can cost the company money. They often demand a lot of
4. Why do customers have privacy concerns about frequent shopper programs that
supermarkets offer, and what can supermarkets do to minimize these concerns?
Frequent shopper programs often collect a customer’s descriptive information when they sign
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5. Why are most frequent-shopper programs ineffective in terms of building loyalty?
What can be done to make them more effective?
Most frequent-shopper programs are ineffective because consumers don’t perceive much
difference between programs from competing retailers. Most frequent-shopper programs offer
6. Which of the following types of retailers do you think would benefit most from
instituting CRM: (a) supermarkets, (b) banks, (c) automobile dealers, or (d) consumer
electronic retailers? Why?
All of the types of retailers would benefit from instituting CRM. However, for some the
benefits of CRM may be far greater than others.
Chapter 11 – Customer Relationship Management
Automobile dealers benefit from CRM, especially since automobile servicing at the
dealership is a highly profitable business. The dealer’s goals should not simply be to sell a
car to a customer, but also ensure that the customer brings the car back to the dealership
every time some service is needed. For this, they would need to devise programs that would
enhance dealer repair services as well as special targeted promotions that would encourage
customers to use the dealer’s repair service not only more often, but also beyond the warranty
period.
In general, while all retailers benefit from CRM, banks are better positioned than others to
take advantage of the benefits from CRM programs. For one, these firms are much larger
than the others being compared and are better placed to make the necessary investments in
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7. Develop a CRM program for a local store that sells apparel and gifts with your college’s
or university’s logo. What type of information would you collect about your customers,
and how would you use this information to increase the sales and profits of the store?
The various activities in the CRM program include: (1) collecting customer data, (2)
analyzing data and identifying target customers, (3) developing CRM programs, and (4)
phone number as an identifier each time a purchase is made.
After matching all sources of information in the database and deleting redundant or repetitive
entries, the information collected would have the following features: (1) it would show a
history of purchases made by the customer, including whether the customer has bought logo
apparel in the past, the price paid, and whether or not the customer paid a sale or promotion
price for the product; (2) it would have a record of all interactions with the store, including
the timing of the transactions (e.g., during the college football season, etc.); (3) it would also
be grouped according to customer preferences, such as the types of apparel sought, sizes, etc.
; (4) it would have descriptive information, at least in terms of the contact information, and;
(5) it would record the customer responses to marketing activities, such as mailing, special
event promotions, alumni discounts, etc.
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8. What are the different approaches retailers can use to identify customers by their
transactions? What are the advantages and disadvantages of each approach?
There are three approaches that retailers can use to identify customers by their transactions.
They can: (1) ask customers for the identifying information, (2) offer frequent shopper
programs, and (3) connect Internet purchasing data with stores.
Advantages
Disadvantages
1. Customers do not have
to carry a card.
1. Customers may be
reluctant to provide
1. Transaction
information could be
better linked to
descriptive customer
information.
2. Rewards offered
would motivate
customers to use the
card every time they
purchase.
1. Customers already
carry too many cards
and may not want to
carry another one.
2. Customers may forget
to bring the card or
decide not to use it if
they are in a hurry.
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9. A CRM program focuses on building relationships with a retailer’s better
customers. Some customers who do not receive the same benefits as the retailer‘s best
customers may be upset because they are treated differently. What can retailers do to
minimize this negative reaction?
On one hand, retailers may feel that the minimum negative reaction from customers would be
to not patronize the retailer again. If this segment of customers is the one most costly to
serve and the least profitable to the retailer, the unprofitable customers are weeded out
Another way is the exact opposite: publicize the differences in benefits more clearly.
Customers then make their own decision as to the level and quality of interactions they want
with the retailer. For example, some banks clearly promote various types of checking and
savings accounts customers could enroll in as well as the interest rates for various levels of
balances. Customers can then decide, for example, if they want an account with higher
minimum balances and free checking or lower minimum balances and a charge for checks
above a low minimum limit per month.
10. Think of one of your favorite places to shop. How does this retailer create customer
loyalty and satisfaction, encourage repeat visits, establish an emotional bond between
the customer and the retailer, and provide personal attention and memorable
experiences to its “best customers”?
Chapter 11 – Customer Relationship Management
Retailers have any number of practices in place to create these positive relationships with
customers. One effort toward building these relationships is establishing a truly valued
frequent shopper program. A truly valued program is one the retailer’s consumers understand