Customer Value Management

Introduction

Customer value management is the technique of company’s management which is focused on increasing the profitable relationship with the customer base and tailoring the products that best fits the customer’s need. Here, in this report, I will focus on customer value management and it will seem from the perspective of Amazon. This business has tremendous success in its life. It is one of the largest E-commerce retailers that have the customer base all over the world. Although the company starts with a single business e.g. online bookshop, the company expands into many other businesses such as electronics product, food items, baby toys, online software etc. The number of the employees of Amazon.com inc. is 541900 as of 2017 data becoming one of the largest public companies in the world. The revenue of the company in 2016 is £95 billion. In this report, I will discuss customer lifetime value, how customer value is calculated and factors that affect the customer lifetime value. Then I will evaluate the different segments of customer base and find out the ways that create customer value appropriately.

LO1: Demonstrating an understanding of the concept of customer lifetime value, how to calculate it and the different factors that influence it

P1 Explaining and analyzing the various components that enable an organization to determine and calculate a customer’s lifetime value

There are some important components that are followed by Amazon.com inc. in order to calculate the value of a customer. The components are customer retention rate, customer acquisition cost, customer churn rate, customer profit, and customer lifetime value. All of these components will be described in detail below:

Customers’ retention rate: Customers’ retention rate gives the idea to the company about how much customers the company can retain for a long-lasting relationship. Retention rate is the difference between 1 and attrition rate. Here, the attrition rate is the rate that measures how many customers are already moved out from the existed customer base. In simple words, the attrition rate is the number of customers that already been lost by the company. Amazon.com inc. always tries to keep its customer base stable by giving innovative products and services to the customers.

Customers’ acquisition cost: Customers’ acquisition cost is the cost that a company bears in order to attract new customers. In order to persuade the customers, the company has to follow some techniques that have some cost. There are different types of acquisition cost followed by different organizations. Major used acquisition cost includes market research, advertising, personal selling and other marketing approaches. Like every company, Amazon.com inc. at first calculates the marginal value of a single customer and then decides how much cost will bear for that customer. So, there is a trade-off between customer value and spending amount for the customer.

Customers’ profits: The customers’ profit is calculated by deducting the total revenue generated from the customer and the cost of retaining that customer. This concept is very important for the manager because it helps the manager to think about spending money for any individual customer before taking the action. Amazon.com gives the priority to the customers’ profit option before deciding how much money will be incurred for retaining that customer.

Customer churn rate: Customer churn rate is the rate that shows how many customers are being lost by the business for a specified period of time. The concept of churn rate and the attrition rate is the same. If the churn rate is higher it is giving the negative signal to the company that it has lost its customer base. There is a perfect negative trade-off between customers’ rate of retention and customers’ churn rate. Higher churn rate means the company is losing the higher amount of customer and having the lower rate of retention. Amazon.com tries to keep churn rate at a minimum level by giving different product and service offering to its customer in order to capture a long-term relationship with the customer.

Customers’ lifetime value: Customers’ lifetime value is the amount of net cash flow that is the summation of all future cash flow by maintaining a relationship with the customer. Generally, if the customer is loyal to the company the customer will purchase products and services from the company for a longer period of time and so, the customer lifetime value will be higher. Customer’s lifetime value can be calculated by the following way:

Customer Lifetime Value = Average Customer Profit Per Year * Average Lifetime in Years

P2: Explaining and justifying the benefits of customer lifetime value to an organization

As already discussed customers’ lifetime value is the amount of net cash flow that is the summation of all future cash flow by maintaining a relationship with the customer. Two things are important for calculating customers’ lifetime value. One is customers per year profits or CP and the other is average acquisition cost of the customers or CAC. Amazon.com keeps the necessary information for its customer in its database. Some key information is customers’ acquisition cost data, customers’ profit data etc.

The customer lifetime value is calculated in a table based on given data. The following table shows the calculation:

We should follow these three steps two calculate the customers’ lifetime value:

Step 1: Churn rate = 1- Retention rate

= 1- 0.75

= 0.25

Step 2: Average lifetime in years = 1/ Churn rate

= 1/0.25

= 4

Step 3: Simple CLV= Average lifetime in years*Average CP- Average CAC

= 4*£2000-£1000

= £8000-£1000

= £7000

So customers’ lifetime value is £7000.

Customers’ lifetime value ensures some benefit to the company. The benefits that Amazon.com gets from customers’ lifetime value are given below in short detail:

Saving money: Amazon.com Inc. can keep its money save by retaining customers rather than acquiring new customers as acquiring a new customer is more costly than retaining the old customer. If we express the relationship between numbers, new customer acquisition cost is 4 times costly than retaining old customers.

Encourage brand loyalty: The more a customer is loyal to the brand the more he/she will purchase the product or services from the company. So any company always makes some initiatives in order to increase the loyalty status of the customer. Amazon.com also tries to increase the loyalty status of the customer to the company by following some ways. Such as: offering gift cards, offering a deep discount, ensuring better customer service and satisfaction, charging a low price for the high amount of purchase order and have a personal contract in order to boost up the sales.

Delighted customers: As the company is focusing on its existing customers, the customer becomes delighted and it ensures that the customer will become eager to purchase any products and services from the company as much as they want.

More profits: Not all customers contribute equally to the company to generate profits. Some customers are more profitable than others. So, Amazon.com tries to keep a long-lasting relationship with those customers that are more profitable and try to delight them enough so that they will keep a long-lasting relationship with the company.

Save Time: As existing customers already know about the current status of the business and product qualities and services, the company will need little time to make them purchase the product or services from the company. So in that case, it saves the time for the company and the company then can focus on other functions.

P3: Evaluating the factors that influence the customer lifetime value

There are two different ways to calculate the Customers’ lifetime value or CLV. The first one way of calculating customers’ lifetime value is by using historical data and the second approach is by using estimated data. These two ways are described below:

Historical CLV: Historical information like past spending can give the information which is required for calculating the lifetime value of a customer. The historical information can be used for getting a sense of spending pattern for acquiring a new customer.

Predictive CLV: In this case, the company calculates the lifetime value of a customer by estimating some information like the estimated profit from the customer and so on. When Amazon calculates the value of the customer by using estimated information it is called as predictive customer value.

The factors that contribute to the change of customer lifetime value are given below. Like other companies, Amazon.com also concerned with these factors. Their impact related to B2B and B2C are given below with short details:

Business to Business

The business to business market of Amazon is huge as the company most of the time deals with business to business transaction. Most of the cases Amazon inc. sells products to those customers who are a business buyer that means they purchased the products for their business. These products include electronics equipment, industrial products, machinery item to different business units. As the order size of those businesses is very huge, Amazon.com always takes more steps to keep the business buyers as their profitable customer. The factors of business customer lifetime value are somewhat different from other types of business. Some of these factors are given below:

Number of customers: The number of customer in case of business market is very low compared to the number of customer in case of consumer buyer. So, Amazon.com always keep more focus on this issue. The company always tries to make effective decisions so that the number of the business market remains same.

Size of purchase: As the business markets purchase those products for their business purpose, the size of order and purchase is very high compared to other. So, the company can get a huge amount of profit from them. If the company can retain those customers more, the profit figure will be very huge.

Selling cycle: The selling cycle shows the processes or stages of how the company makes a sell to the prospective customer. Of Course, the selling cycle of the B2B market will be large as the number of participants is larger than that of the B2C market. As the process is long, the company has to keep the focus on every stage so that the process becomes smooth and the transaction becomes completed without any delay.

The selling cycle of Amazon is given as follows:

Figure: B2B selling cycle of Amazon

Source: (Hughes, 2013)

Decision makers: The number and size of participants in case of the B2B market are larger compared to the B2C market. As the purchase amount is high, more decision makers are involved with a single purchase. So, the company has to keep close contact with those decision makers so that it can attract those decision makers to come to this company.

Importance of emotion: The importance of emotion here is less as the numbers of participants are larger. Their psychological motive also differs. So, if the company wants to sell the products to those markets, the company should offer high-quality products to those buyers with minimum cost.

These are the main factors that influence the B2B market more of the company.

Business to customers:

If we consider the factors that affect the customer lifetime value in the B2C market, the number of factors are huge. But we will describe some factors that influence all the cases:

Number of customers: Businesses have to make marketing decisions based on the number of customers. As the number of the consumer market is very large, Amazon.com depends on mass advertising, pull strategy and like these in order to keep a large proportion of the total customers.

Selling cycle: As we have already discussed the selling cycle shows the processes or stages of how the company makes a sell to the prospective customer. Of Course, the selling cycle of the B2C market will be small as the number of participants is fewer than that of the B2C market. As the process is short, the company doesn’t face any hassle when selling the products to the market.

The Amazon Company’s selling cycle in the perspective of the B2C market is as follows:

Figure: Amazon selling cycle

Source: (Manning and Manning, 2015)

Decision makers: The number and size of participants in case of the B2C market are few compared to the B2B market. As the purchase amount is low, the number of the decision maker is single. So, the company can easily influence the decision maker by using their creative sales representative efforts.

Emotion: The importance of emotion here is high as the number of participants is very few. If any customer is emotionally attached to the brand, he/she will purchase every product from the company on a long-term basis.

These are the main factors that influence the B2C market more of the company.

LO2 Evaluating the different segments in a customer base and the appropriate opportunities for customer value creation

P4 Determining and explaining the types of market segmentation strategies that can be applied to a customer base

Market segmentation is the technique that segment the market with different groups based on their characteristics. Amazon.com segments the market in different groups and serves those groups that are best suitable for them. As the company serves only those customers in which it has a good profitable position, the company can have a competitive advantage over its competitors. Amazon.com bases its customer segment into four types. These are described below with short details:

Demographic segmentation: Demographic segmentation is very popular segmentation method as it segments the market with demographic characteristics of the customers. This approach helps the organization to segment the market more accurately. The types of the characteristics under demographic segmentation are age, gender, race, and occupation and education level of the customer. For example, Amazon segments the market of USA customer based on their age as follows:

• Baby boomers
• Generation X
• Generation Y
• iGen

Behavioural segmentation: The customer segment can be created by based on the behavior of the customer. In that case, it is called behavioral customer segment. The characteristics of the customers are different. Some significant characteristics are benefit sought, price sensitivity and usage of products, loyalty to the brand etc.

Psychographic segmentation: The market can be characterized by based on psychological characteristics of the customer. The psychological characteristics of the customers include the following things: personality, lifestyle, attitude, culture, beliefs and so on. The choices of every customer are different because of their personal characteristics.

Geographic segmentation: The geographical segmentation is an important phenomenon for Amazon.com Company as its customer base is distributed to all the countries of the world. The market is segmented based on geographical location in this category. As we know well that the product choice is different for different countries, Amazon.com follows a different strategy to attract different market segments.

Among other segmentation strategies, these are the most used strategies for segmenting the market by Amazon.com

P5: Evaluating B2C and B2B decision-making models and demonstrate how opportunities for customer value creation can be applied

Now I evaluate B2B and B2C decision-making model used by Amazon.com inc. that help them make accurate decisions regarding customer lifetime value:

B2B decision-making model of Amazon:

B2B marketing focuses on the needs of the business customer and designs and creates products and services based on those businesses’ needs. In this case, the company has to make a long relationship with the business customer in order to get the idea about their preferences.

Figure: Amazon B2B marketing decision-making model

In case of B2B marketing, Amazon focuses on smaller target market in order to get the better idea about their needs and then they try to figure out multiple purchasers in those smaller categories. The company also focuses on multiple step buying process and longer sales cycle as the B2B purchasing decision is more complex.

B2C decision-making model of Amazon:

In B2C marketing, the approach of Amazon regarding the creation of customer lifetime value is different. Here, the company focuses on the following things. Such as product differentiation, creating a strong brand image, the large target number of customer etc. The buying process here is relatively small in comparison to B2B marketing. As the company’s interaction with the customer is direct, the company always focuses on strong personal communication to create a strong brand image of the customer to the company.

The decision-making process in case of Business to Customer is shown below:

Figure: Amazon B2C marketing decision-making model

Here, we can see that the company is focused on large target market as the customer size is significantly larger than the B2B market. And the company focuses on single purchaser as the customer purchases from the company directly. In B2C marketing decision, the company uses single step buying process and focuses on shorter sales cycle.

Identifying and diagnosing the value creation opportunities:

The value creation activities followed by Amazon.com are as follows:

Customer perceptions: Customers’ perception is an important thing as it explains what the customers are a thing about the products and services of the company. Then the company designs and creates those products that are strongly needed by the customer group. The company follows this process to keep the customer group becomes loyal to the company on a longtime basis.

Consumer imagery: Consumers’ better imagination about the product of the company plays a vital role in selecting the company among many other competitive firms and purchasing the products from the company. The company always tries to keep a good balance between products quality and prices so that they attract the customer group very quickly.

Consumer learning: Consumer learning is an important term for the company as it ensures that the consumers are well known about the purchasing system of the company and also they are using the products properly. The following theories help Amazon.com to learn about its customers:

Behavioral theory: Behavioral theory suggests that if any customer makes a purchase of any product from the company, the customer will become prone to make further purchases. And so, Amazon.com sell the products at a deep discount rate for first purchase of the new customer.

Cognitive theory: Cognitive theory states that the customers do not necessarily store the information about the product all the time. So the company makes advertisement in order to make a reminder about the product to the customer for a longer period of time.

Constructivism theory: Amazon.com also facilitate the learning process of the customer through group collaboration.

Information processing: Information processing system also helps the customer to know about the products for the very first time easily.

Involvement theory: In this system, the company tries to communicate its products to the customer group by using both direct and indirect methods. Such as Newspaper advertising, billboard advertising, TV advertising, Event advertising and so on.

Conclusion

So, we already know that customer lifetime value is an important element of a company like Amazon as the company can make a huge amount of profit and remain in an advanced position compared to other competitors. So, in order to achieve the company’s goals and objectives the company should keep close eyes on customer lifetime value.

References

Albrecht, K. (2015). Delivering customer value. Portland, OR: Productivity Press.

Auge-Dickhut, S. and Liebetrau, A. (2011). Customer value generation in banking.

Barlow, J. and Maul, D. (2010). Emotional value. San Francisco, Calif.: Berrett-Koehler Publishers.

Bejou, D. and Aksoy, L. (2014). Customer lifetime value.

Best, R. (2010). Market-based management. Upper Saddle River, N.J [u.a.]: Prentice Hall.

Clark, P. and Neill, S. (2011). The value mandate. New York [u.a.]: AMACOM.

DeBonis, J. and Allen, P. (2013). Value-based marketing for bottom-line success. New York: McGraw-Hill.

Doligalski, T. (2015). Internet-based customer value management. Cham: Springer.

Duchessi, P. (2012). Crafting customer value. West Lafayette, Ind.: Purdue University Press.

E-Business. (2017). Lilburn, Ga.: Fairmont Press.

Eliot, G. (2016). The mill on the Floss. New York: Open Road Integrated Media.

Faulkner, M. (2013). Customer management excellence. Chichester: Wiley.

Hanna, M. and Newman, W. (2011). Integrated operations management. Upper Saddle River, NJ: Prentice Hall.

Hughes, A. (2013). The customer loyalty solution. New York: McGraw-Hill.

Lemon, K. and Rust, R. (2014). Driving customer equity. [Place of publication not identified]: Free Press.

Malthouse, E. (2013). Segmentation and lifetime value models using SAS. Cary, N.C.: SAS Institute.

Manning, G. and Manning, G. (2015). Selling today. Toronto: Pearson Prentice-Hall.

Murphy, J. (2016). Converting customer value. Chichester, England: Wiley.

Peppers, D. and Rogers, M. (2015). Return on customer. New York: Doubleday/Currency.

Prahalad, C. and Ramaswamy, V. (2015). The future of competition. Boston, Mass.: Harvard Business School Press.