Spring+2010+Section09-SS+Week+3

=**Week 3: Satisfaction, Loyalty and Customer Lifetime Value (CLV)**=

**Segmentation with Homophily**
Definition: The tendency of people to associate with others having similar interests, activities, and goals.
 * NETFLIX
 * Amazon.com
 * Facebook

As you can see from the examples above, this segmentation technique is more effective when it is applied to products with a high number of transactions. These companies further expand on the idea of segmentation by actually producing recommendations based on the genre and qualities of the specific purchased media.
 * iTunes
 * Pandora - Music Genome Project

**Consumer Segmentation**
__//**Why Satisfied Customers Defect?**//__ Company Perspective
 * Referral Value + Lifetime Value - Cost

Consumer Perspective
 * Expectations
 * GAP
 * Experience

Customer Satisfaction
 * Defector/Terrorist ( x < ?) - are either leaving as a customer or have already left and are unhappy
 * Mercenary/Hostage (? < x < 100%)
 * mercenaries come and go in regards to purchase habits with a company & generally have low commitment
 * hostages are forced to use a company's product(s), such as utilities customers
 * Loyalist/Apostle (100%) - these people will stay with a company and are supportive of it

Segmentation with Homophily: The tendency of people to associate with others like themselves.


 * Customer Lifetime Value (CLV)**
 * Used to calculate different campaigns
 * Estimate future purchasing behavior
 * Calculate costs generated per customer per period
 * Estimate each customers discounted profit contribution over the time horizon
 * Determine whether the expected future profit contribution for that customer might be negative
 * Calculate the CLV that includes the "option value" (e.g. the value of abandoning that customer)

==

Firing a customer: A company shouldn't "fire" a customer, but rather change the incentives such that good customers come and stay, while bad customers self-select out.

**Case: Brita**
Problem: How to take the brand forward in the current competitve market and figure out what consumers want from a water purification system.

-Is taste more important to consumers than protection in regards to health and safety?

Three Options: Focus on base of Customers who bought pitchers and encourage to buy more filters. Expand the pitcher base. Use resources to build a whole new customer base around faucet mounts.

= Value of Customers who Joined Because of Referral / Discount Rate + Value of Customers that Would Join Anyway / Discount Rate
 * Customer Referral Value**

From: "How Valuable is Word of Mouth?"

Every customer in a segment adds value to a business when they tell others of the business. Whether they are paying or non-paying customers, they can be of extreme use to the growing of the business. They can help create value through word of mouth if their perception of the quality of services and/or products is positive which can help enhance the reputation of these. Companies must consider the influence of indirect network effects as much as direct network effects. //" The degree in which a non-paying customer influences a business depends on how they attract other customers, paying or non-paying and how those customers will attract others, thus increasing the lifetime value of a customer" -// Gupta and Mela's "What is a free customer's worth?" 2008, www.hbr.org

Word of mouth can be very helpful to a business if the customer is satisfied, or extremely detrimental if a customer is disatisfied.

__**Segmenting on Value - Customer Value Matrix**__
 * Affluents
 * Champions
 * Misers
 * Advocates

**Harrah's CRM**

 * Test Insight
 * discovered best customers were not high rollers but those with extra time and discretionary income
 * this concept can be applied to many other markets and businesses, who often assume the best customers are the ones that spend large chunks of money at once
 * sometimes the best customers are those who continuously spend smaller amounts of money because of their loyalty and positive experiences (i.e. provide good word of mouth)
 * these customers would gamble for the intense anticipation & thrill
 * testing of market hypothesis revealed a very happy customer would increase their spending at Harrah's by 24% a year
 * Pavlovian Marketing

Direct and Indirect Network Effects

 * From "What Is a Free Customer Worth?" by Sunil Gupta and Carl F. Mela

A free customer = a customer that pays little of nothing to use a product or service (Example: Ebay buyers).

but...

they can be valuable because their existence can draw in another set of customers; the __**paying**__ kind (Example: Ebay Sellers).

Direct Network Effect: This is when buyers attract additional buyers and sellers attract additional sellers. A product is more valuable, the more people are using it.
 * Massively Multiplayer Online Role Playing Games (MMORPG - World of Warcraft) - The more users that connect to the game servers, the more users that will likely join the game.

Indirect Network Effect: An increasing number of buyers attracts more sellers and vice versa. Early customers are more valuable, so they attract other customers earlier.
 * Buyers: More game console (PS3, Xbox, Wii) purchasers = Sellers: More game developers for that platform
 * Sellers: More games for that gaming platform = Buyers: More purchasers of that game console

Case: The Customer's Revenge
The Atida Motors case brought to light the importance of having a clear purpose in the corporate strategy, and what the consequences of looking at symptoms versus root problems can be. While the strategy was to be a "service organization that sells cars" in reality there was very little service beyond getting "those customers off the line!". Symptomatically, there were too many calls to answer to provide premium service, and the problem became how to deal with customer complaints instead of the real issue: quality. The result...dissatisfied customers. The very thing that was supposed to increase business, service, became the focal point of what the customers liked least about the company. Ironic.

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