...eissn 1526-548X 08 2704 0585 informs ® doi 10.1287/mksc.1070.0319 © 2008 INFORMS Practice Prize Report The Power of CLV: Managing Customer Lifetime Value at IBM J. Mack Robinson College of Business, Georgia State University, Atlanta, Georgia 30303, dr_vk@hotmail.com Darden Graduate School of Business, University of Virginia, Charlottesville, Virginia 22904, venkatesanr@darden.virginia.edu Americas Market Intelligence, IBM Corporation, New York, New York 10589, tbohling@us.ibm.com Americas Market Intelligence, IBM Corporation, Atlanta, Georgia 30327, dmbeck@us.ibm.com V. Kumar Rajkumar Venkatesan Tim Bohling Denise Beckmann C ustomer management activities at firms involve making consistent decisions over time, about: (a) which customers to select for targeting, (b) determining the level of resources to be allocated to the selected customers, and (c) selecting customers to be nurtured to increase future profitability. Measurement of customer profitability and a deep understanding of the link between firm actions and customer profitability are critical for ensuring the success of the above decisions. We present the case study of how IBM used customer lifetime value (CLV) as an indicator of customer profitability and allocated marketing resources based on CLV. CLV was used as a criterion for determining the level of marketing contacts through direct mail, telesales, e-mail, and catalogs for each customer. In a pilot study implemented for about 35,000 customers...
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...NAME ------------------------------------------------- Marketing 741 SECTION 8am/9:30am/11am/2pm Target Market Selection Should HubSpot cast a wide net or narrow their focus? Effectively argue that HubSpot should narrow their focus using frameworks we have discussed, as well as points from the case. The company is now facing with customers with diverse needs and preferences. In fact there are customers with different preferences and also competitors that provide services to different segments. These segments can be categorized as small companies, large companies, business to business and business to customers. The services that must be offered to each of these segments should be different considering their different needs. For example, the price should also be different to comply with the offered services and the degree of required interaction between the company and its customers. The channel of approaching could also be different. For example, Should HubSpot target B2B or B2C customers? -Use a mix of qualitative (strategic) and quantitative (CLV, market potential) facts to argue your point. Do not restate points from the case, but use them to support your decision. -Will this group be receptive to the product? I.e., is HubSpot providing value to these segments? Is there competition in this market? Is HubSpot well positioned to serve these customers? Are there any other outside forces we should consider? Based on the facts that presented in the case the company...
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...Customer Lifetime Value (SMALL BOOK 167-177) * Customer lifetime value (CLV), is the net present value of the cash flows attributed to the relationship with a customer. * The use of customer lifetime value as a marketing metric tends to place greater emphasis on customer service and long-term customer satisfaction, rather than on maximizing short-term sales. * Two approaches to CLV: * Disaggregate (“spreadsheet”)– Complex and cumbersome, but allows you to build in any assumptions you want and see how they affect the result. * Aggregate (“analytic”) – Makes (often strong) assumptions, hard to see the mechanism. Easy to remember and compute, allows you to focus on the big factors. BASIC CLV MODEL: ( a.k.a Margin Multiple ) It reflects the proportion of one’s per-customer profit margin you expect to recoup over time. m: profit margin per period r: retention rate i: discount rate Key Insights | Assumptions | * Retention and loyalty are key to long-term value. * Other factors (e.g., discount rate) only have an impact when retention is high. All the handwringing about what discount rate to use is irrelevant in many real-world situations. * Margin matters, but it is independent of the other factors. * Customer-based costing is important, and often absent. | * Profit margins are constant * Defection rates are stable over time * Discount rates are stable over time * The customer’s lifetime is infinite | * | Implications...
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...properties that are individually branded with the purpose of capturing what is unique about a given location. This strategy has been successful but now management believes that branding the hotels as a collective will increase customer visits between properties. Question #1- Why is Rosewood considering a new branding strategy? In your answer consider the characteristics of the company, its competitive environment, customer base and its current marketing/branding strategy. Rosewood Hotels is considering a new branding strategy to increase its revenue. They recognize that the even subtle increases in customer lifetime value (CLV) can mean significant increases in the bottom line. They also realize that an investment in retaining a customer to increase the CLV is more cost effective than attracting new customers due to the long term benefits. Management believes that moving from marketing the properties individually to corporate branding will increase customer repeat visits between hotels and that will consequently increase revenue by increasing CLV. This individual “brand positioning substantially limits our market,” as chairman of the board Maritz states, “I think we are underestimating the power of corporate brands, such as the Four Seasons, as status symbols. At this time, we are after only a subset of the luxury market-the sophisticated customers who value the distinctive, exclusive „collection hotel‟ when in fact the vast majority of the luxury market seem to value the corporate-branded...
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...HubSpot Case By December 2008, Hubspot was a highly growing start-up in the inbound marketing sector; it had a very competitive product and ~1,000 customers. The goal of Halligan and Shah, founders of HubSpot, was both to accelerate the Hubspot’s growth rate and increase its overall profitability in the following months. However, in order to do so, the company faced various issues that needed to be addressed. 1.Develop clear customer segmentation. HubSpot did not segment the market based on real customer needs, it “divided” the market using mainly demographic variables (# employees) and customer profile into Owner Ollies and Marketing Marys. 2.Target specific most promising/high-value customer segments considering attractiveness and company strengths. HubSpot did not target a specific type of customer; instead it was investing its resources in capturing customers of the two profiles determined, not considering which customers were more valuable for the company (CLV). 3.Develop a customized value proposition for the selected segments that accelerates growth and maximizes CLV. Hubspot started to differentiate Owner Ollies and Marketing Mary’s value proposition through price and features (4Ps) however more customization was required. After thorough analysis if the company’s current situation (3C’s), possible for customer segmentations, targeting and positioning strategies and assessment of CLV, I believe HubSpot has an opportunity to both accelerate its growth rate to achieve...
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...Customer management strategies are aimed at addressing the needs of every customer and by developing a one-on-one relationship with them Companies’ outlook can be broadly categorized into two types namely, Product-centric and Customer-centric. Product-centric firms concentrate more on their product line and therefore on increasing the product line for customers. In marketing, the economic value of a customer during the life of the customer's association with a business. An estimate of customer lifetime value allows a business to determine the amount of money that can be spent on acquiring and retaining a customer .The shareholder value and the customer lifetime value approach are conceptually and methodically analogous. Both concepts calculate the value of a particular decision unit by discounting the forecasted net cash flows by the risk-adjusted cost of capital at first we have to know comprehensive calculation method for estimating both the individual Lifetime value of a customer and the customer equity. Concept Customer Life time value is defined as: “The net value of all net payments from the moment the marketing efforts start towards a potential customer and until the...
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...Overview Hubspot provides an inbound marketing content management system (CMS) to help businesses get found on the Internet and convert leads into customers for maximum ROI. Have a successful track record for a startup. Hubspot has new reached crucial stage, where in order to accelerate the growth rate and to increase their profit, Hotspot need to decide the following: (1) target segment of their customers, (2) how to channel their product development resource, (3) reduce the churn rate with a new pricing strategy and (4) determine to use inbound marketing or outbound marketing or mix of both. Hubspot Analysis: Hubspot has a unique software tool that enabled its customers to market their products and services like Search Engine Optimization (SEO), Social Media, Blogs, Podcasts and social networking websites like Twitter, Facebook. Hubspot became popular for its inbound marketing strategies that pulled prospective customers toward a business. The software tools that it offered were also created also based on the same principle of inbound marketing. Hubspot provides three type of services: (1) content design, (2) Exposure optimization and (3) Lead tracking and Intelligence. In the Content design, Hubspot offer predesigned templates to companies build their own website. Exposure optimization consist of Search Engine Optimization (SEO) tools and Link grader, which helps customer website identifiable via search engines. Lead tracking which offers marketing intelligence analytics. Hubspot...
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...HubSpot: Inbound Marketing and Web 2.0 By Ashna Bali 1) According to HubSpot, the rules of marketing have changed in the sense of the way that businesses approach or reach out to their customers. HubSpot believes in tapping into technology and Internet for marketing businesses and products by using Web 2.0 tools and methods such as blogging software, social media and search engine optimization. The CEO of HubSpot, Brian Halligan, believes that the traditional “outward” methods of marketing are seen by potential customers as an interruption in their lives (For example, advertisements on TV while watching your favorite show) and society is getting better at blocking out such interruptions. Therefore, the impact of such marketing is obviously reducing. On the other hand, “inbound marketing” is on the rise. Google has become such an important part of our lives today and people like to read blogs and reviews online before purchasing products or services. Hence, businesses should direct their attention to social media, blogging and search engine optimization. David Meerman Scott (2010) recommends that marketers "earn their way in" (via publishing helpful information on a blog etc.) in contrast to outbound marketing where they "buy, beg, or bug their way in" (via paid advertisements, issuing press releases, or paying commissioned sales people, respectively). Yes, I agree that the rules of marketing have changed and that these days the internet and social media plays a very important...
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...Case Presentation : The Brita Products Company Group 8 Prepared by Ashish Gauba 11P070 Gunjeet Singh 11P078 Himanshu Sehgal 11P080 Ishan Agrawal 11P081 Srinivas R R 11P112 Vignesh K 11P119 Table of Contents Background: 3 ACNielsen Market Simulation Study: 5 Problem Analysis: 6 Customer Lifetime Value Analysis: 8 Ten scenarios of Brita’s marketing investment: 9 Recommendations: 10 Background: The Clorox Company was a major manufacturer and marketer of laundry additives, household cleaners, charcoal, auto care products, cat litter and home water purifiers. In 1987, Charlie Couric , a marketing executive, charged with finding new business ideas, discovered Brita’s home water pitcher and filter system in health food store. Optimistic of its capability to be profitable, Clorox acquired the right to market the home water filteration system in the United States from Brita GmbH. Brita GmbH, a family owned corporation headquartered in Tanusstein, Germany, made a variety of industrial and consumer water filtration products. It was struggling to sell its home filtration system in the US. After various negotiations, in September 1988 it agreed to let Clorox form a subsidiary, Brita USA, to be the sole distributor of Brita products. Clorox would buy filters from Brita GmbH and design and make its own pitchers. Clorox supported Couric’s deficit spending proposal...
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...Customer portfolio concept 3 2.1 Concept of customer portfolio and its application in company 3 2.1.1 Customer Lifetime Value (CLV) 3 2.1.2 Market segmentation 4 2.1.3 Sales forecasting methods 5 2.1.4 Activity based costing 6 2.2 Customer portfolio application of “CDNow” 6 2.3. Concept application for e-tailer companies 8 III. Conclusion 10 References 11 Introduction In business, customers are always considered as the basis of a company’s profitability (Gupta et al., 2004; Hogan et al., 2002; Rappaport, 1998; Wayland and Cole, 1994). It leads to a customer – centric view in practice in general as well as in marketing in particular. According to Rust et al., (2005), the limited resources allocated efficiently for maximizing value requires a relationship – oriented customers and strong, long – lasting customer retention. Focusing on current customers is the right strategy, especially offering a positive lifetime profitability relationship when acquiring new customers is more expensive than retaining existing ones (Morgan and Hunt, 1994; Reichheld and Teal, 1996; Bitran & Mondschein, 1997). However, there is not only lifetime profitability relationship, but also different treatments of customers in marketing tools are advisable. Determining the right strategic balance between acquisition and retention efforts as well as add-on selling is an...
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...Ques : Which is the right segment for hub-spot ? Why ? Characteristics of Segments: Owner Ollies | Marketer Mary | Low Cost of acquisition | High cost of acquisition | High Churn rate | Low churn rate | Not very technical and want simple solutions | Know their business; More sophisticated | Fairly easy to sell to | Time consuming | Scarce time and resources | Special marketing team at customer’s office | Wanted to increase the top funnel number of their business | Focus more on the bottom line | Normal CLV : Given the drop out/ churn rate of Owner Ollie and Marketer Mary , the lifetime value of Owner Ollie is less than the lifetime value of Marketer Mary. Assuming that Hubspot has the potential to acquire the complete market , we can see from Exhibit 1 attached that the number of Owner Ollie customer is 5 times that number of marketing Mary customer. Hence the net potential revenue that can be generated from owner Ollie is greater than that of marketing Mary. Hence Hubspot should focus on Owner Ollie in Long term If the Hubspot is able to convert the market into CMS At the present rate given in the case where 13% of Owner Ollie customer can be converted to CMS model and 2 % of the Market Mary convert to CMS model with $500 of additional fee the churn rate drops significantly As can be seen in exhibit 2 , that even though the number of customer in the Owner Ollie segment is large the net revenue generated from Marketer mary is large . So Hubspot...
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...OOs and MMs. From a quantitative perspective we conducted the customer lifetime value calculations. In order to derive the MM and OO lifetime values, we separated both the MMs and OOs into CMS vs. non-CMS users, and also segmented the OOs into “small business” and “very small business” based on different churn rates. Based on our market share assumptions (Exhibit 1) we determined the total potential market in each segment, and used the CMS usage statistics to determine how many of each would be CMS users. We then multiplied the size of each segment by the customer lifetime value of each segment (Exhibit 3 shows the CLV calculation for one segment, Exhibit 2 shows the different inputs used for all 5 segments). Our preliminary analysis favored OOs with over $101 million in potential profits versus $87 million from the MMs (Exhibit 4). Also, based on our CLV analysis the OOs have the additional benefit of becoming profitable in month 6 (Exhibit 3), where the MMs don’t become profitable until month 13 due to high acquisition costs. Although our baseline quantitative analysis supports the OO segment, a combination of sensitivity and qualitative analyses indicated that HubSpot should not focus exclusively on OOs. From a qualitative standpoint there are several risk factors that arise when considering OOs. While OOs are an ideal customer in many...
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...expectations. 3. Losing profitable customers can dramatically affect a firm’s profits. The cost of attracting a new customer is estimated to be five times the cost of keeping a current customer happy. The key to retaining customers is relationship marketing. 4. Quality is the totality of features and characteristics of a product or service that bear on its ability to satisfy stated or implied needs. Marketers play a key role in achieving high levels of total quality so that firms remain solvent and profitable. 5. Marketing managers must calculate customer lifetime values of their customer base to understand their profit implications. They must also determine ways to increase the value of the customer base. 6. Companies are also becoming skilled in customer relationship management (CRM), which focuses on developing programs to attract and retain the right customers and meeting the individual needs of those valued customers. 7. Customer relationship management often requires building a customer database and data mining to detect trends, segments, and individual needs. A number of significant risks also exist, so marketers must proceed thoughtfully. Applications Marketing Debate Online versus Offline Privacy As more firms practice relationship marketing and develop customer databases, privacy issues are emerging as...
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...as well. It also makes it easy for HubSpot to standardize its processes across all customers. The narrow focus also eliminates some of the pricing challenges that come with targeting clients from multiple industries and segments. Should HubSpot target B2B or B2C customers? -Use a mix of qualitative (strategic) and quantitative (CLV, market potential) facts to argue your point. Do not restate points from the case, but use them to support your decision. -Will this group be receptive to the product? I.e., is HubSpot providing value to these segments? Is there competition in this market? Is HubSpot well positioned to serve these customers? Are there any other outside forces we should consider? HubSpot could target the B2B segment for a couple of reasons. Firstly, customers within this segment generate a lifetime value of $7368.4 for HubSpot, over two times that of a B2C customer. Secondly, most B2B companies have higher budget allocations for inbound marketing compared to the B2C companies. Since B2B’s typically sold complex products that required buyers to undergo in-depth training, they derived more value from HubSpot’s inbound marketing tools. This is also reason to believe that B2Bs have much lower churn rates that B2Cs. Data shows average churn rates for B2B segment has been much lower (3.3%) than the B2C segment (6%)....
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...Break Even (Unit Sales Price-Variable Costs) Fixed Costs = Break Even (Unit Sales Price-Variable Costs) Fixed Costs = Principles of Marketing – MKTG 3010 – Fall 2014 Final Exam Study Guide –this guide is illustrative rather than exhaustive Topics from overall course themes (about 30-35% of the exam) * Brief definition of marketing: Managing profitable customer relationships * SWOT analysis * Break-even analysis Break Even | = | Fixed Costs | | | (Unit Sales Price-Variable Costs) | | | | * Consumer Behavior: describe the 5 steps, high vs. low involvement 1. Need Recognition 2. Information Search 3. Evaluation of Alternatives 4. Purchase 5. Post-purchase behavior * Diffusion of innovation: describe each group on the adoption curve * Marketing Research: primary vs. secondary data, qualitative vs. quantitative methods Primary Data: Information that is collected for the first time; used for solving the particular problem under investigation. Secondary Data: Data previously collected for any purpose other than the one at hand. Qualitative Methods: * Depth Interviews * Focus Groups * Projective Tests * Observational Methods * Metaphor Elicitation Quantitative Methods: Experimental & control/comparison groups. Manipulate independent variable across groups. •Independent & dependent variables, control/comparison conditions •Not casual...
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