Introduction Do you really know your customers? In recent years, managers have come to realize the importance of measuring and maximizing the lifetime value of individual customers – and with good reason. After all, why spend valuable marketing dollars to attract and retain minimally profitable customers when you can spend the same amount – or less – to capture and cultivate more profitable ones? The new model is customer lifetime value. This customer -centric strategy holds tremendous implications for managing customers for profitability.
By understanding the principals, optimizing the use of databases, implementing best industry practices, and deploying the right marketing tools, you can make significant changes that will maximize your customer value, now and into the future. Through a dynamic combination of real-world case studies, hands-on individual and group exercises, and facilitated discussion, you will get the tools and techniques you need to implement cutting-edge marketing methodologies in combination with superior customer management strategies – all designed to help your firm maximize growth and profitability.
SITUATION ANALYSIS Brief Summary Ted Katagi, marketing strategy manager of Kansai Digital Phone (KDP), utilizes customer lifetime value as a key metric to prioritize initiatives in an emergency plan to turn around the company. KDP is a regional phone company in Japan with less than stellar performance. Katagi is sent from the U. S. partner, Airtouch (later Vodafone), to assemble a team which was called ”A-sen” to design and implement a plan that improves company to performance. Katagi must quickly prioritize actions and then assess the expected economic impact.
Learning Objective The focal point of our paper is to identify techniques and use of customer lifetime value in Kansai Digital Phone. Subjects covered Change management; Customer relationships; Customer satisfaction; Customers; International management; Priorities; Strategy formulation Settings Industry Setting: Mobile phone Geographic Setting: Japan Gross Revenues: 56 billion yen revenues Distribution All sales of wireless service in Japan were completed via indirect channels. (see Exhibit 1) Distribution channels 1) Small agent branded shops
Wireless providers contracted with small agent retailers to sell their products in small branded shops, which had licenses of use of service and agreement on very loose standards. 2) Volume retailers * Big-box electronic retailers * Small electronic shops Volume retailers sold handsets among their many other products and sold service agreements with wireless providers 3) Trading companies Japan`s specific channels that represented largest proportion of sales. In this case, companies agreed to be responsible for a fixed sales volume and were invested in wireless provider.
In order to fulfill the agreed volume a month, trading companies had their own agent programs which created a third layer of agents. As a matter of fact, complex landscape distribution channel left wireless companies very little influence over the buying experience of customers. Customers Japanese customers in general tended to jump to newer technology sooner than in other nations. Part of the cause of this was demographics of wireless users, who were business users, who searched for better functionality, longer battery lives, and very young segment of users, who were following for a trend and fashion.
BUT first of all, the functionality wasn’t the main reason why people used phones, as their customers were below 35, they cared more about the appearance of the phone, and later about functionality. Competitors (see Exhibit 2) 1994 – DoCoMo, Cellular, Tu-Ka and KDP DoCoMo had 65% of the market, because the government was its primary shareholders, and had monopoly-like advantages. Competition or customers centered on network coverage, the hardware used to access the network. Besides, consumer decisions were growing regarding on the phone’s technology over the networks technology.
Pricing dynamics were characterized by “Follow by leader” or “copycat” strategies. “A-sen” Team KDP initial focuses: (AirTouch had invested in a part of this org. ) * To increase its network capacity even though they had negative cash flows, and were growing the same as their competitors. Continuing the same strategy, KDP had only 5,3% of the market, and the quality was really poor, only 1/5 customers would recommend same services to their friends. The brand name was worst – tacky. Even though AirTouch had their investments in KDP company, they had minority position (13%-15%) they couldn’t make any managerial influence to straighten up the company. * Japanese consortium partners tried to help for struggling company – they sent people with expertise in cost management, the person named Kuroda, who was very focused on channel management. * The AirTouch sent a Katagi to KDP to form a team to “change the overall strategy of the company”. One of the things in Japan is that it’s a market share-oriented, quantity-oriented market and NOT a quality-oriented market.
They are very customer service-oriented, but the marketing organization is not a customer-centric organization. It’s centered on the product – in this case – a handset. It was offered for various KDP members of different departments to participate in the teams. It would give great things, such as data from different areas, and would increase credibility of the group. The expanded group was known as “A-sen”. Katagi proved that KDP needed a change and the perfect time for that is now. It was told that if employees don’t believe in the company, why their customers should believe in it?
There was made a 100 days plan and the group was divided in subgroups, to analyze different areas. PROBLEMS 1. Competitive market * The market is very competitive. Docomo is the biggest competitor, which dictated ‘‘game rules’’, at that moment imposable for KDP to make some strong moves, because prices are set by copycat strategies. 2. Cash flow statement * KDP had major difficulties on cash flow statement, because they were focusing only in strengthening additional coverage and system capacity to accommodate future subscriber growth and deliver additional services. 3. Low Customer satisfaction Customer satisfaction was very low. Only one in five of its customers would recommend it to a friend. This is one of the reasons why KDP was capturing on average only 5,3% of net gains. 4. Worst Brand * The brand is worst in the industry. It was so bad that Japanese consumers nicknamed it tacky‘. 5. Product orientation issues * The company is market-oriented, quantity-oriented not a quality-oriented. They are very customer service-oriented, but the marketing organization is not a customer-centric organization. It’s centered on a product around the handset. 6. Short customer lifetime The main problem is short customer lifetime Customers stayed with the company 15 months, 50% of the customers leaved the company less than one year. CURRENT RESEARCH EVIDENCE First challenge A-sen team faced is difficulties to convince company to call new unit from “Office to promote Sales Strategy” to marketing department. The name and concept were not accepted. As it is essential for Japan market, vast majority of companies are mostly market-share oriented, quantity-oriented, but not quality-oriented market. Consequently, this culture reflected in KDP conception. Company was very customer ervice-oriented, as long as marketing is not a customer centric organization, but centered about the product, marketing was unacceptable and recognized as a waste of time. Considering these issues arises one of the major problems in the company, resistance to change. Kadagi had to adopt Change Management issues to this problem. Come up with a practical guide to implementing, managing, and communicating change in organization. Learn how to approach change with an open mind and use it as a stimulus to encourage new ideas and harness enthusiasm for further progress among employers and employees in KDP.
Overcoming changes includes steps to help become change-ready and planning tools to address resistance to change efforts. Change Management issues KDP 1. Communication. Kadagi reported to CEO Kondo, major investors Japan Railways, and Japan Telecom. In addition to the AirTouch representatives, members of various KDP departments were invited by KDP senior management to participate on team. 2. Resistance to change As long as marketing is not a customer centric organization, but centered about the product marketing was unacceptable and recognized as a waste of time. 3.
Managing workplace stress Organized various meetings with inspirational speeches, encouraging meetings, in which was explained the importance of not being afraid of changes to challenge existing methods of doing things if the analysis showed that is was all in best interest of KDP. Later this speeches and meetings were recalled during lunch meetings by company’s workers. 4. Execution Kadagi stressed and explained the importance of use of data and analyses to prove the path company should take. Firstly, team split into subgroups that analyzed each area of operations of management.
When three main constraints raised to the idea-generation process: 1) Limited budget 2) Solutions have to fit Japanese market experience (giving clear value of the change) 3) U. S experience showed that contracts were the way to reduce churn, Japan not. Kadagi soon made it clear that it the A-sen team was to succeed in its mission, it would have to transform KDP into customer-centric organization and be creative in the initiatives it was implement. Therefore, they had to succeed in Customer Focus, Customer relationship management. Maximizing customer Life Time value 1.
Theory: Correlate customer acquisition and retention costs to customer profitability. Correlate customer acquisition and retention costs to customer profitability. A-sen practice: ? 2000 registration fee at the beginning and three months free airtime 2. Theory: Determine the strength of individual customer relationships A-sen practice: Personal contacts with client. Practice of “welcome calls” 3. Theory: Know how much they should invest in building their brand to maximize customer profitability A-sen practice: New brand strategy. Involving young virtue persons. New brand name “J-phone”.
Estimated cost ? 400 mln. 4. Theory: Manage the merchandise return process for maximum profitability A-sen practice: ? 55 mln. Investment on new handset-upgrade mailing. 5. Theory:Identify whether your most profitable customers are also your best customers in providing the maximum referral. A-sen practice: Referral discount program ( 50% discount on the fixed monthly base fees for one year if a customer’s family member subscribed to a KDP calling plan) to increase WOM 6. Theory: Determine the strength of individual customer relationships A-sen practice: Expanded Direct sales.
KDP did not have any direct sales practice, but if above mentioned practices 2 and 4 went well , then company might be able to build on the close tie with customers, consequently increase customer loyalty. 7. Theory: Offer the right product to the right customer at the right time A-sen practice:Channel incentive structure for agents to evaluate high value customer before enrolling. SOLUTIONS PRIORITIZING METHODS After discovering problem solving initiatives and theoretical survey it is necessary to choose the best solution (or the mix of solutions) with the information available, which will bring the most benefit to the company.
These tools help figuring out the most likely consequences of decisions, balance different factors and choose the best actions to take. The team came up with a large list of ideas (8 Initiatives ) by which they tried to change destiny of KDP. The challenge was to prioritize among them and come up with the detailed design of the measures. Some of the ideas have to be considered as important ones, some as less. 1. Grid Analysis Grid Analysis technique is used for decision making when there are a number of alternatives to choose from and many different factors to consider Use: List all the options as the row labels on the table; the factors that have to be considered, should be listed as the column headings. * Each option must be scored for the factors in the decision from 0 (poor) to 5 (very good). * The importance of the factors in the decision must be ranked from 0 to 5, where 0 means that the factor is absolutely unimportant in the final decision, and 5 means that it is very important. It is acceptable to have factors with the same importance. Factors:| Long-term relations| Service quality| Image| Customer trust| Relationship quality| Total| Weights:| | | | | | |
Zutto| 3| 4| 3| 2| 5| | Welcome calls| 5| 5| 3| 5| 4| | J-phone brand| 3| 4| 3| 3| 2| | Handset-Upgrade| 2| 5| 5| 3| 3| | Referral Program| 4| 3| 4| 3| 5| | Direct Sales| 5| 5| 4| 5| 5| | Incentive Structure| 5| 5| 5| 4| 4| | Subsidized Calling| 2| 4| 5| 4| 4| | Let’s say that our Factors are those weights which create emotional satisfaction towards customer loyalty and our options are 8 initiatives. Below example provided on KDP case. Grid Analysis work after listing all the options as columns on a table, and the factors needed to consider as rows.
Each option must be scored, weighted by the importance of the factor and added up to give an overall score for each option. * Multiply each of the scores from step 2 by the values of relative importance (step 3). This gives the weighted scores for each option. * Add up the weighted scores for each option. Take the option that has the highest score. We have decided that the most important factors are relationships with the customers (both quality and duration) and the quality of service. The results show that Expanded Direct Sales and Channel Incentive Structure Based on Customer Value would be the most beneficial projects.
Choosing Direct Sales initiative, the company would build up long-term qualitative relationship with the customer which is the best predictor for customer loyalty and satisfaction. Another project, Channel Incentive Structure Based on Customer Value, would allow the company to recognize the customers who bring the highest value and save money on those who do not. 2. Paired Comparison Analysis Paired Comparison Analysis is used to frame the importance of a number of options relative to each other. It is useful to choose the most important roblem to solve or the solution that gives the greatest advantage if there is no objective data based on this. It is used to compare each option with another. For each comparison, the decision will be made which of the two options is more important and the score assigned to show the level of importance. Use: * Make a list of the options and assign a letter to each option. * Block out the cells where the option is compared with itself and the comparison will be duplicated; * Compare the option in the row with the option in the column.
Write down the letter of the more important option, score the importance from 0 (no difference) to 3 (major difference). * Add up the values for each option. | Welcome Calls| J-phone brand| Handset-upgrade| Referral program| Direct sales| Incentive structure| Subsidized calling| | (B)| (C)| (D)| (E)| (F)| (G)| (H)| Zutto| B,3| A,2| D,1| E,1| F,3| G,3| H,1| (A)| | | | | | | | Welcome Calls| | B,3| B,2| B,2| F,1| G,1| B,2| (B)| | | | | | | | J-phone brand| | | D,2| E,2| F,3| G,3| H,2| (C)| | | | | | | | Handset-upgrade| | | | E,1| F,3| G,3| H,1| (D)| | | | | | | | Referral program| | | | | F,3| G,3| 0| E)| | | | | | | | Direct sales| | | | | | F,1| F,3| (F)| | | | | | | | Incentive structure| | | | | | | G,3| (G)| | | | | | | | * Convert these scores into a percentage. Zutto = 4% Welcome Calls = 22% J-phone brand = 0% Handset-Upgrade = 5% Referral Program = 7% Direct Sales = 32% Incentive Structure = 30% After comparing all the projects one-by-one, again, we would suggest the A-sen team to choose Expanded Direct Sales and Channel Incentive Structure Based on Customer Value initiatives. Whereas J-Phone Brand Launch seems to be the least important project because it seemed to be the least valuable project. . Quantitative Strategic Planning Matrix (QSPM) Quantitative Strategic Planning Matrix is a high-level strategic management planning method which enables managers to evaluate possible strategies. It provides an analytical method for comparing alternative projects. Use: * Identify key internal factors – strengths and weaknesses; * Identify key external factors – opportunities and threats; * Using internal and external factors, establish strategy alternatives (in KDP case, strategies had been already provided); * Add weight to the key internal and external factors. Define the Attractiveness Score by examining external and internal factors separately and ranking them according to the difference the factor makes in the decision. 0 – does not affect; 4- highly affects; * Calculate Total Attractiveness Score by multiplying Attractiveness Score by the weights. * Sum all the TA Scores. This figure provides the result which strategy is the most attractive. The higher the score, the more attractive the project is. Example: Let’s say that these are KDP’s key internal and external factors and the company has to choose between Direct Sales and Channel Incentive Structure:
Key Factors| Incentive Structure| Expanded Direct Sales| | Weight| Attractiveness score| Total| Weight| Attractiveness score| Total| Strenghts| | | | | | | Location of the business| 0,1| 2| 0,2| 0,05| 1| 0,05| Worker’s unique skills| 0,15| 4| 0,6| 0,3| 4| 1,2| Technology| 0,1| 1| 0,1| 0,15| 3| 0,45| Weaknesses| | | | | | | Lack of quality| 0,25| 4| 1| 0,15| 4| 0,6| Poor customer service| 0,3| 4| 1,2| 0,2| 4| 0,8| Bad brand image| 0,1| 2| 0,2| 0,15| 2| 0,3| Sum Weights| 100%| | | 100%| | | Opportunities| | | | | | | A developing market| 0,2| 4| 0,8| 0,2| 4| 0,8|
Increased system capacity| 0,3| 3| 0,9| 0,25| 4| 1| New technology| 0,1| 3| 0,3| 0,3| 4| 1,2| Threats| | | | | | | Quantity-oriented market| 0,2| 3| 0,6| 0,05| 2| 0,1| Increasing competition| 0,15| 3| 0,45| 0,1| 2| 0,2| Price war| 0,05| 1| 0,05| 0,1| 1| 0,1| Sum Weights| 100%| | | 1| | | TOTAL| | | 6,4| | | 6,8| Even though there is only a slight difference between total scores, according to these measures and factors, A-sen team would have to choose Expanded Direct Sales project. REFERENCES 1. John R. Harrald, Ph. D. ,Irmak Renda-Tanali, D. Sc. ,Greg L. Shaw, M. S. ,Claire B. Rubin, M. A. ,Sarp Yeletaysi, B. S. REVIEW OF RISK BASED PRIORITIZATION/DECISION MAKING METHODOLOGIES FOR DAMS, pp 24-29. Looked: 2011. 10. 13 2. Amy Wong, Managing Service Quality, The role of emotional satisfaction in customer service, Volume 14, Number 5, 2004, pp 365-376. Looked: 2011. 07. 13 3. CEO online. Change Management: Three Essential Ingredients For Success Thursday 21 September, 2006 http://www. ceoonline. com. au/pages/id17502. aspx 4. Jaffe, D. T ; Scott, C. D, Mastering the Change Curve, 2nd Ed. 2003. Appendix Exhibit 1. Distribution channels in the mobile phone industry in Japan Exhibit 2. Major players in the Kansai phone industry, Kansai 1997