Customer Relationship

Management
Financial Metrics

Submitted to: Submitted by:

Dr. Akanksha Singhi Ankit Jain
R Balasubramanian Iyer
Pushpendra Yadav
Rajvardhan Parmar
 CRM : Financial Metrics

CRM
Metrics

Popular Strategic

Size Share of Past

Share of Transition LTV Customer
Of Category RFM Customer
Wallet Matrix Metrics Equity
Wallet Reqt. Value
 Size-of-Wallet
J

Size-of-wallet ($) of customer in a category = Sj

j 1

Where: Sj = sales to the focal customer by the firm j

J

j = firm, = summation of value of sales made by all the J firms that

j 1

sell a category of products to the focal customer

Information source:

Primary market research

Evaluation:
Critical measure for customer-centric organizations based on the assumption
that a large wallet size indicates more revenues and profits

Example:
A consumer might spend an average of $400 every month on groceries
across the supermarkets she shops at. Her size-of-wallet is $400
 Share of Category Requirement (SCR)
I I J
SCR (%) of firm or brand in category = Vij / Vij
i 1
i 1 j 1

j = firm, V = purchase volume, i = those customers who buy brand

I

= summation of volume purchased by all the I customers from a

i 1
firm j,
J

= summation of volume purchased by all I customers from all j firms

j 1 i 1

Information source:
Numerator: volumetric sales of the focal firm - from internal records

Denominator: total volumetric purchases of the focal firms buyer base- through market and
distribution panels, or primary market research (surveys) and extrapolated to the entire buyer base

Evaluation:
Accepted measure of customer loyalty for FMCG categories, controls for the total volume of
segments/individuals category requirements; however, does not indicate if a high SCR customer will
generate substantial revenues or profits
 Computation of SCR Ratio - Example
Total requirement of Total number of Share of category
Notebook computers Notebook Computers requirement for
per customer purchased from ABC computers per
ABC Computers per customer per period
customer per period
A B B/A

Customer 1 100 20 .20

Customer 2 1000 200 .20

Customer 3 1000 500 .25

Customer 3 has the highest SCR. Therefore, ABC Computers should identify customer 3
and target more of their marketing efforts (mailers, advertisements etc.) towards customer 3
Also, customer 3s size-of-wallet (column A), is the largest
 Share-of-Wallet (SW)
Individual Share-of-Wallet
J
Individual Share-of-Wallet of firm to customer (%) = Sj / Sj
j 1

Where: S = sales to the focal customer, j = firm, = summation of

j 1
value of sales made by all
the J firms that sell a category of products to a buyer

Information source:

Numerator: From internal records

Denominator: From primary market research (surveys), administered to individual customers,

often collected for a representative sample and then extrapolated to the entire buyer base

Evaluation:

Important measure of customer loyalty; however, SW is unable to provide a clear indication of

future revenues and profits that can be expected from a customer
 Aggregate Share-of-Wallet (ASW) (brand or firm level)
Aggregate Share-of-Wallet of firm (%)
I
= Individual Share-of-Walletji / number of customers
i 1
I J I

= Si / Sij
i 1 j 1 i 1

Where: S = sales to the focal customer, j = firm, i = customers who buy brand

Information source:
Numerator: From internal records
Denominator: Through market and distribution panels, or primary market research (surveys)
and extrapolated to the entire buyer

Evaluation:
Important measure of customer loyalty
 Applications of SCR and SW
SCR -for categories where the variance of customer expenditures is relatively small
SW - if the variance of consumer expenditures is relatively high
Share-of-wallet and Size-of-wallet simultaneously with same share-of-wallet,
different attractiveness as customers:
Example:

Share-of-Wallet Size-of-Wallet Absolute expenses

with firm
Buyer 1 50% $400 $200
Buyer 2 50% $50 $25

Absolute attractiveness of Buyer 1 eight times higher than buyer 2

 Segmenting Customers Along
Share of Wallet and Size of Wallet

High Maintain and guard

Hold on

Share-of-wallet

Target for
Do nothing additional selling

Low

Small Large
Size-of-wallet

The matrix shows that the recommended strategies for different segments differ
substantively. The firm makes optimal resource allocation decisions only by
segmenting customers along the two dimensions simultaneously
 Share of Wallet and Market Share (MS)
I J

MS of firm = (Share-of-walleti * Size of wallet) / Sj

i 1 j 1

Where: S = sales to the focal customer, j = firm, i = customers who buy the brand

Difference between share-of-wallet and market share:

MS is calculated across buyers and non-buyers whereas SW is calculated only
among buyers

MS is measured on a percent basis and can be computed based on unit volume, $

volume or equivalent unit volumes (grams, ounces)

Example:
BINGO has 5,000 customers with an average expense at BINGO of $150 per
month (=share-of-wallet * size of wallet)

The total grocery sales in BINGOs trade area are $5,000,000 per month
BINGOs market share is (5,000 * $150) / $5,000,000 = 15%
 Transition Matrix
Brand Purchased next time

A B C

Brand Currently
A 70% 20% 10%
Purchased
B 10% 80% 10%

C 25% 15% 60%

Characterizes a customers likelihood to buy over time or a brands likelihood to be bought.

Example:
-The probability that a consumer of Brand A will transition to Brand B and then come back
to Brand A in the next two purchase occasions is 20% * 10% = 2%.
- If , on an average, a customer purchases twice per period, the two purchases could be
AA, AB, AC, BA, BB, BC, CA, CB, or CC.
-We can compute the probability of each of these outcomes if we know the brand that the customer
bought last
 RFM
Recency, Frequency and Monetary Value-applied on historical data

Recency -how long it has been since a customer last placed an order
with the company

Frequency-how often a customer orders from the company in a

certain defined period

Monetary value- the amount that a customer spends on an average

transaction

Tracks customer behavior over time in a state-space

 Computation of RFM

Two common methods:

Method 1: Sorting customer data based on RFM, grouping and

analyzing results

Method 2: Computing relative weights for R,F and M using

regression techniques
 Limitations of RFM

RFM method independently links customer response data with R, F and M

values and then groups customers, belonging to specific RFM codes

May not produce equal number of customers under each RFM cell since
individual metrics R, F, and M are likely to be somewhat correlated
For example, a person spending more (high M) is also likely, on average,
to buy more frequently (high F)

For practical purposes, it is desirable to have exactly the same number of

individuals in each RFM cell
 Past Customer Value
Past customer value (PCV) is a metric which assumes the results of
past transactions are an indicator of the customers future
contributions

The value of a customer is determined based on the total

contribution (toward profits) provided by the customer in the past

This modeling technique assumes that the past performance of the

customer indicates the future level of profitability

Since products or services are bought at different points in time

during the customers lifetime, all transactions must be adjusted for
the time value of money
 Computation of Customer Profitability

n
Past Customer Value of a customer GCin * (1 r ) n
n 1

Where I = number representing the customer, r = applicable discount rate

n = number of time periods prior to current period when purchase was made

GCin = Gross Contribution of transaction of the ith customer in the nth time period

Since products/services are bought at different points in time during the customers
lifetime, all transactions have to be adjusted for the time value of money

Limitations: Does not consider whether a customer is going to be active in the future.
Also does not incorporate the expected cost of maintaining the customer in the future
Lifetime Value Metric
 Customer Equity

Sum of the lifetime value of all the customers of a firm

t
I T
1
Customer Equity, CE CM it
i 1 t 1 1

Indicator of how much the firm is worth at a particular point in time as a

result of the firms customer management efforts

Can be seen as a link to the shareholder value of a firm

Customer Equity Share, CESj = CEj / CE k,

k

where, CE = customer equity , j = focal brand, k = all brands

 Brand Equity & Customer Equity

Brand Equity is defined as value and strength of the Brand that

decides its worth whereas Customer Equity is defined in terms of
lifetime values of all customers.

Brand Equity and Customer Equity have two things in common-

Both stress on significance of customer loyalty to the brand

Both stress upon the fact that value is created by having as many
customers as possible paying as high price as possible.
But conceptually both brand equity and customer equity differ-

While customer equity puts too much emphasis on lower line

financial value got from the customers, brand equity attempts to put
more emphasis on strategic issues in managing brands.

Just as customer equity can persist without brand equity, brand

equity may also exist without customer equity. For instance I may
have positive attitude towards brands - McDonald and Burger King,
but I may only purchase from McDonalds brand consistently.
Thank You