by Dr. V. Kumar* | Georgia State University
In the last column, we discussed the resource allocation strategies available to managers when adopting The Wheel of Fortune Strategy@ to maximize CLV. In this column, we will focus on the decision to pitch the right product, to the right customer, and at the right time.
Why follow this strategy? Most firms offer an array of products/services. It would be useful for a firm to predict the relative probabilities of different product/service categories being bought at different times from a given firm, given the varying purchase patterns of each of its customers. This would enable firms to send out sales and promotion messages to their customers that are relevant to the products that are more likely to be purchased next. This way the firm does not waste or duplicate its sales and marketing efforts.
How does this strategy work? The timing of a customer’s next purchase is predicted first, and given this information, the product most likely to be purchased by the customer next is identified. We would need historical data on customer-level purchases on the products bought and the time of each purchase. Using this data, we can estimate the probability a customer will choose a particular product (essential to build a choice model), and the probability that a customer will make a purchase at a particular time (essential to build a timing model). Then, customers are divided into two groups – test and control groups. For the control group, all the customers are contacted with the pitch to sell all the products in all the time periods (Status Quo). For the test group, only those customers who are expected to purchase in a given quarter are contacted (Proposed). The test group customers are pitched only with those products they are expected to purchase based on the predictions of the purchase sequence model. Then, the returns on investment for the marketing efforts are calculated separately for the test and control groups and compared to ascertain the effectiveness of marketing campaigns.
What are the benefits of implementing this strategy? When this strategy was implemented in a B2B high-technology firm, 85% of the customers predicted by this model to make a purchase actually went on to do so! This indicates the robustness of the model used. Additionally, such a strategy was also able to improve the firm’s profits by an average of $1,600 per customer, representing an increase in ROI of 100%. This strategy was also implemented in a financial services firm that resulted in an increase in the firm’s profits by $450 per customer (on average), representing an ROI increase of 200%. Therefore, by understanding the purchase sequence, firms can target the right product to the right customer at the right time. It helps in increasing cross-buy and revenue apart from decreasing marketing costs, thus leading to an incremental ROI. This also helps firms devise effective cross-sell and up-sell strategies. This, when integrated with CLV measure, can help companies design the most optimal marketing strategy directed towards offering the right product to the right customer at the right time through the most cost-effective channel.
*V. Kumar (VK) is the Richard and Susan Lenny Distinguished Chair Professor in Marketing, Executive Director of the Center for Excellence in Brand & Customer Management, and the Director of the Ph.D. program, J. Mack Robinson College of Business, Georgia State University, Atlanta, GA. firstname.lastname@example.org
@ Managing Customers For Profit (Wharton School Publishing) – V. Kumar
 For additional reading please refer Kumar, V., R. Venkatesan, & W. Reinartz, (2006), “Knowing What to Sell, When, and to Whom,” Harvard Business Review, 84, 131-137 and; Kumar, V., R. Venkatesan, & W. Reinartz, (2008), “Performance Implications of Adopting a Customer-Focused Sales Campaign,” Journal of Marketing, 72, 50-68.