Statistical Methods in Customer Relationship Management PDF
Preview Statistical Methods in Customer Relationship Management
Statistical Methods in Customer Relationship Management Statistical Methods in Customer Relationship Management V. Kumar GeorgiaStateUniversity,USA J. Andrew Petersen UniversityofNorthCarolinaatChapelHill,USA Thiseditionfirstpublished2012 #2012JohnWiley&Sons,Ltd Registeredoffice JohnWiley&SonsLtd,TheAtrium,SouthernGate,Chichester,WestSussex,PO198SQ, UnitedKingdom Fordetailsofourglobaleditorialoffices,forcustomerservicesandforinformationabouthowtoapplyfor permissiontoreusethecopyrightmaterialinthisbookpleaseseeourwebsiteatwww.wiley.com. Therightoftheauthortobeidentifiedastheauthorofthisworkhasbeenassertedinaccordancewiththe Copyright,DesignsandPatentsAct1988. Allrightsreserved.Nopartofthispublicationmaybereproduced,storedinaretrievalsystem,ortransmitted,in anyformorbyanymeans,electronic,mechanical,photocopying,recordingorotherwise,exceptaspermitted bytheUKCopyright,DesignsandPatentsAct1988,withoutthepriorpermissionofthepublisher. Wileyalsopublishesitsbooksinavarietyofelectronicformats. Somecontentthatappearsinprintmaynotbe availableinelectronicbooks. Designationsusedbycompaniestodistinguishtheirproductsareoftenclaimedastrademarks.Allbrandnames andproductnamesusedinthisbookaretradenames,servicemarks,trademarksorregisteredtrademarksof theirrespectiveowners.Thepublisherisnotassociatedwithanyproductorvendormentionedinthisbook.This publicationisdesignedtoprovideaccurateandauthoritativeinformationinregardtothesubjectmattercovered. Itissoldontheunderstandingthatthepublisherisnotengagedinrenderingprofessionalservices.If professionaladviceorotherexpertassistanceisrequired,theservicesofacompetentprofessionalshouldbe sought. LibraryofCongressCataloging-in-PublicationData: Kumar,V.,1957– Statisticalmethodsincustomerrelationshipmanagement/V.Kumar,J.AndrewPetersen. p.cm. Includesbibliographicalreferencesandindex. ISBN978-1-119-99320-9(cloth) 1. Customerrelations–Management. 2. Customerrelations–Management—Statisticalmodels. I. Petersen,J.Andrew.II. Title. HF5415.5.K8642012 658.8012015195—dc23 2012012175 AcataloguerecordforthisbookisavailablefromtheBritishLibrary. ISBN:978-1-119-99320-9 Setin10/12ptTimesRomanbyThomsonDigital,Noida,India DedicatedwithLove Tomyparents,Patta&ViswanathananduncleKannan, Otherfamilymembers–Prita,Anita,RohanandAparna,and Myin-lawsDr.LalithaandRamamurthy –V.Kumar DedicatedwithLove ToKatie:mywife,sweetheart,andthemotherofourtwo wonderfulchildrenAlexaandWilliam –J.AndrewPetersen Contents Preface xi 1 Customerrelationshipmanagement 1 1.1 Introduction 1 1.2 WhatisCRM? 2 1.3 WhatisneededtoimplementCRMstrategies? 3 1.3.1 Database 3 1.3.2 Technology 6 1.3.3 Metrics 7 1.4 Analyticalmethods 9 1.5 Conclusion 9 References 10 2 CRMinaction 11 2.1 Introduction 11 2.2 Theimportanceofcustomeracquisition 13 2.3 Thesignificanceofcustomerretention 15 2.4 Theimpactofcustomerchurn 17 2.5 Thebenefitsofcustomerwin-back 18 2.6 Conclusion 20 References 20 3 Customeracquisition 22 3.1 Introduction 22 3.1.1 Dataforempiricalexamples 27 3.2 Responseprobability 28 3.2.1 Empiricalexample:Responseprobability 32 3.2.2 Howdoyouimplementit? 34 3.3 Numberofnewlyacquiredcustomersandinitialorderquantity 35 3.3.1 Empiricalexample:Numberofnewlyacquiredcustomers 37 3.3.2 Howdoyouimplementit? 38 3.3.3 Empiricalexample:Initialorderquantity 39 3.3.4 Howdoyouimplementit? 42 3.4 Duration/time 42 3.4.1 Empiricalexample:Duration/time 44 viii CONTENTS 3.4.2 Howdoyouimplementit? 46 3.5 Firm’sperformance(LTV,CLV,andCE) 47 3.5.1 Empiricalexample:Firm’sperformance 49 3.5.2 Howdoyouimplementit? 52 3.6 Chaptersummary 52 Customeracquisition–SAScode 53 Customeracquisition–SASoutput 55 References 61 4 Customerretention 63 4.1 Introduction 63 4.1.1 Dataforempiricalexamples 66 4.2 Repurchaseornot(stayorleave) 69 4.2.1 Willacustomerrepurchase? 69 4.2.2 Whenwillacustomernolongerrepurchase? 71 4.2.3 Empiricalexample:Repurchaseornot(stayorleave) 73 4.2.4 Howdoyouimplementit? 78 4.3 Lifetimeduration 78 4.3.1 Empiricalexample:Lifetimeduration 83 4.3.2 Howdoyouimplementit? 85 4.4 Orderquantityandordersize 85 4.4.1 Howmuch(in$)willacustomerorder? 85 4.4.2 Howmanyitemswillacustomerorder? 86 4.4.3 Whatistheaverageordersize? 87 4.4.4 Empiricalexample:Orderquantity 87 4.4.5 Howdoyouimplementit? 91 4.5 Cross-buying 91 4.5.1 Empiricalexample:Cross-buying 92 4.5.2 Howdoyouimplementit? 97 4.6 SOW 97 4.6.1 Empiricalexample:SOW 98 4.6.2 Howdoyouimplementit? 101 4.7 Profitability(CLV) 102 4.7.1 Empiricalexample:Profitability(CLV) 103 4.7.2 Howdoyouimplementit? 105 4.8 Chaptersummary 105 Customerretention–SAScode 106 Customerretention–SASoutput 111 References 119 5 Balancingacquisitionandretention 121 5.1 Introduction 121 5.1.1 Dataforempiricalexamples 122 5.2 Acquisitionandretention 124 CONTENTS ix 5.2.1 Empiricalexample:Balancingacquisitionandretention 128 5.3 Optimalresourceallocation 137 5.3.1 Howdoyouimplementit? 140 5.4 Chaptersummary 141 Balancingacquisitionandretention–SAScode 142 Balancingacquisitionandretention–SASoutput 144 References 147 6 Customerchurn 149 6.1 Introduction 149 6.1.1 Dataforempiricalexamples 150 6.2 Customerchurn 151 6.2.1 Empiricalexample:Customerchurn 156 6.2.2 Howdoyouimplementit? 161 6.3 Chaptersummary 161 Customerchurn–SAScode 162 Customerchurn–SASoutput 163 References 164 7 Customerwin-back 166 7.1 Introduction 166 7.1.1 Dataforempiricalexamples 167 7.2 Customerwin-back 168 7.2.1 Empiricalexample:Customerwin-back 169 7.2.2 Howdoyouimplementit? 178 7.3 Chaptersummary 179 Customerwin-back–SAScode 180 Customerwin-back–SASoutput 182 References 185 8 ImplementingCRMmodels 186 8.1 Introduction 186 8.2 CLVmeasurementapproach 187 8.3 CRMimplementationatIBM 190 8.3.1 IBMbackground 190 8.3.2 ImplementingaCLVmanagementframeworkatIBM 191 8.4 CRMimplementationataB2Cfirm 202 8.4.1 Thefocalfirmbackground 202 8.4.2 ImplementingtheCLVmanagementframework atafashionretailer 202 8.4.3 ProcesstoimplementtheCLVmanagementframework atafashionretailer 203 8.5 ChallengesinimplementingtheCLVmanagementframework 219 x CONTENTS 8.5.1 Challengesindatacollectionandinternalcollaboration 219 8.5.2 Challengesinimplementingthecustomer-centricapproach 220 References 222 9 ThefutureofCRM 223 9.1 Introduction 223 9.2 Socialmedia 223 9.3 Mobilemarketing 226 9.4 Customizedmarketingcampaigns 227 9.5 Conclusion 229 References 229 AppendixA: Maximumlikelihoodestimation 230 AppendixB: Log-linearmodel—anintroduction 232 AppendixC: Vectorautoregressionmodeling 235 AppendixD: Acceleratedlifetimemodel 241 AppendixE: Type-1Tobitmodel 244 AppendixF: Multinomiallogitmodel 246 AppendixG: Survivalanalysis–anintroduction 249 AppendixH: Discrete-timehazard 252 AppendixI: Proportionalhazardsmodel 254 AppendixJ: Randominterceptmodel 257 AppendixK: Poissonregressionmodel 260 AppendixL: Negativebinomialregression 262 AppendixM: EstimationofTobitmodelwithselection 265 Index 267 Preface Companies invest millions of dollars in Customer Relationship Management (CRM) systems and strategies. The primary objectives of these systems are to (a) acquire profitable customers, (b) retain profitable customers, (c) prevent profitable customers from migrating to competition, and (d) winning back ‘lost’ profitable customers. These four objectives collectively lead to increasing the profitability of an organization. While most firms recognize the benefits of establishing CRM systems and strategies, not all firms have been successful in their CRM implementations.So, why did they fail? Traditional marketing theory and practice have always recommended that a companyfocusonexpandingthecustomerbasewillleadtoincreasedprofitability. But, what about retaining the customers? Additionally, what about preventing customersfromchurningandwinningback‘lost’customers?Thisbook,atitscore, exploresthesetopicsthatareanintegralpartofthecustomermanagementprocess. Information and understanding these topics will contribute towards an enhanced financialperformanceofcompanies.CompaniessuchasIBM,Zappos,Continental Airlines, Henkel, and Hewlett-Packard have understood the importance and relevance of all these four customer management topics as they apply to their organizations, thereby becoming leaders in their respective domains through the implementationofCRMprograms.Inordertounderstandthemanagerialrelevance of these four customer management topics and successfully implement CRM systems, it is important to understand the engines that drive these systems – the quantitativemodels. This book focuses on the quantitative and modeling aspects of customer management strategies that lead to future firm profitability. The book stresses on developinganunderstandingofthestatisticalmodelsusedinCRMapplicationsas the guiding concept for profitable customer management. To understand and explore the functioning of models used in CRM applications, this book traces the management strategies throughout a customer’s tenure with a firm. Specifically, the book will review five sets of models that will facilitate effective customer managementstrategydevelopmentandCRMimplementation.Theyare: 1. Models for customer acquisition. A customer’s tenure with a firm starts with his/her acquisition by the firm. Here, the firm’s decisions include identifying the right customers to acquire, forecasting the number of new customers, and the response of promotional campaigns, among others. xii PREFACE 2. Modelsforcustomerretention. During the customer’s tenurewith the firm, the firm would be interested in retaining this customer for a longer period of time. This calls for investigating the role of trust and commitment with the firm, metrics for customer satisfaction, and the role of loyalty and reward programs, among others. Additionally, decisions on who will buy, what the customers will buy, when they will buy, and how much they will buy are explored through a discussion of the various models used in the literature. 3. Integrated models for acquiring and retaining customers. This set of models focuses on the small subset of the literature that has linked customer acquisition and retention. Establishing this link is crucial as it has important implications for customer profitability and optimal allocation ofmarketingresourcesbetweenacquisitionandretention. 4. Models for customer churn. In modeling customer attrition, some of the importantdecisionsmadebyafirmincludeidentifyingwhetherthecustomer will churn or not, and if so what will be the probability of the customer churning,andwhen. 5. Models for customer win-back. Customer win-back refers to ‘reacquiring’ customers after the customer has terminated the relationship with the firm. Here, it is important to understand what CRM models and strategies can do tobringthecustomerbacktothefirminbothB2CandB2Bsettings. The above-mentioned five sets of models – customer acquisition, customer retention, customer acquisition and retention, customer churn, and customer win-back–formthecoreofthisbook.Apartfromcoveringthesemodels,thebook will also investigate the need for such CRM models, review the implementation ofthesemodels,andlookintothefutureofthesemodels. 1 Need for this book A review of the literature on CRM thus far shows the sheer volume, variety, and range of models and the research problems addressed. For academics and practitioners interested and/or involved in the area of CRM, this range becomes too wide to cover and may therefore lead to the development of ineffective CRM systems. The foremost objective of this book is to serve as a guide to all the models in the CRM literature by classifying them into four sections: customer acquisition, customer retention, customer churn, and customer win-back. These four sections also happen to be the stages a customer goes through during his/her tenure with a firm. By traversing the path of a customer’s lifetime with a firm, this book will enlightenandeducatethereadersonallthemodelsinvolvedinthefourstagesand helpthembuildeffectiveCRMsystems.
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