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Example Cases
Learn valuable lessons from these organisations:
US West Inc
Customer Profitability Management
As a result of analysing its customer base several times a year, US West Inc. (Now merged with Qwest), a diversified US communications company, was able to identify unprofitable customers and those who had the potential to become profitable. By examining customer behaviours and profiles US West could also estimate potential spending, what share of total spending it was capturing, and what market resources were to be allocated to invest in the customer. (Wyner, 1999)
Federal Express
Customer profitability analysis measures alternative strategic initiatives
Federal Express, a US supplier of transportation, e-commerce, and supply chain solutions, analysed and grouped customers into three categories. The company focused its retention efforts on high spenders who required little service, focused its re-pricing efforts on spenders who required a lot of service, and spent little or no marketing effort on low spenders who showed little indication of spending more in the future. (Wyner, 1999)
Marshall & Ilsley (M&I) Corporation
Implementing a CPM strategy
To enhance their ability to maximise client profit potential while staying focused on client needs Marshall & Ilsley Corporation (M&I), a financial services company, implemented a (CPM) strategy which included a comprehensive data warehouse system. Beginning in 1995 the company:
- Developed and gained senior management commitment to 5 strategic project goals and set up an executive steering committee for the project;
- Communicated the strategic project goals and conducted information meetings with affiliate bank presidents;
- Reviewed the strategic information needed to meet the corporate objectives;
- Established a data warehouse to capture the information needed to analyse customer profitability within 28 affiliates, and the affiliate’s 243 offices;
- Introduced management information initiatives including Activity-Based Costing, Product Profitability Reporting, Delivery Channel Performance and Retail Customer Profitability;
- Identified product activity and product activity costs, and analysed and translated data into customised reports for employees at all levels.
With the CPM system in place M&I management was able to identify the profit and financial drivers of products and product mixes improving the decision-making process. (Hutt 2000)
Australian Health Insurance Company
Customer Equity calculations change a company’s perceptions
An Australian health insurance company divided its customer base into 5 age bands and by Customer Lifetime Valuation (CLV). A form of discounted cash flow analysis,was used to calculate customer equity. Calculations were based on the present value of lifecycle net contributions, and once these were completed a deeper examination of customer equity became possible.
Members were identified whose value to the organisation was significantly different from the average. This led to the formulation of strategies for concentrating investment on those sub segments that represented the greatest value.
Perceptions of customers changed within the organisation and older customers were found, on average, to be valuable; they were more loyal and more likely to purchase additional products. Consequently, the pricing structure was changed to reflect the varying profitability of five-year age bands. (Andon et al, 2001)
Domain Home Fashions
Customer Lifetime Value
US Domain Home Fashions employed both technological and psychological methods to enhance customer lifetime value. Technology based solutions involved assigning a score to customers based on their:
- Average market basket size,
- Frequency of purchase. (points were subtracted for cancelled orders or returned goods.)
This information added strength to targeted promotions and customer loyalty programmes. The information guided marketing efforts and made the best use Domain’s advertising budget - which was limited to 2.6% of annual sales. Technology was used to provide enhanced customer experience through a “state of the art” tracking/communication system that provided timely information concerning the whereabouts of goods. A merchandise allocation system also enabled Domain to reduce annual inventory write-offs from US$800,000 to US$82,000. Domain also used psychological approaches by giving individualised attention/recommendations to customers based on their personalities and requirements. (Anonymous, 2003)
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