CRM and Information Visualization

Grdal Ertek, Ph.D. Tue Gizem Martaan

Customer Relationship Management (CRM)

Traditional Marketing CRM Goal: Expand customer base, Goal: Establish a profitable, increase market share by long-term, one-to-one mass marketing relationship with customers; understanding their needs, preferences, expectations Product oriented view Mass marketing / mass production Standardization of customer needs Transactional relationship Customer oriented view Mass customization, one-to-one marketing Customer-supplier relationship Relational approach

What is CRM?
The approach of identifying, establishing, maintaining, and enhancing lasting relationships with customers.

The formation of bonds between a company and its customers.

Strategies in CRM for Mass Customization

Prospecting (of first-time consumers) Loyalty Cross-selling / Up-selling Win back or Save

The Marketing Perspective

CAMPAIGN MANAGEMENT

RECENCY FREQUENCY MONETARY VALUE METHOD

CUSTOMER VALUE METRICS

Campaign Management: The Marketing Perspective

Developing effective campaigns Effectively predicting the future Retaining existing customers Acquiring new customers

Campaign Management: The Cap Gemini Model

KNOW
Understand market and consumers needs and preferences Exploit customer intelligence, Use channel integration

TARGET
( Offer is developed ) Define market strategies

Perform segmentation

SERVICE
Retain customers by: Loyalty programs Communication Service forces

SELL
Acquire customers Use sales force effectively Develop marketing programs 9

Campaign Management: The Marketing Perspective

The marketing manager... 1. Defines objectives 2. Identifies customers 3. Defines communication strategies 4. Designs/improves products/offers/services/promotions 5. Tests the impacts of her decisions 6. Revises her decisions for maximum effectiveness
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Campaign Management Step 1: Define Objectives

Targeting Existing Customers Retention Strategy Creating Loyalty?

Increasing the satisfaction level?

Cross-selling or Up-selling?

Targeting New Customers Acquisition Strategy

Target customers that show characterstics similar to existing groups of customers

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Campaign Management Step 2: Identify Customers

Perform SEGMENTATION Define the right customers Use information of past transactions as key for making predicting future ones Define the segments and their characteristics Develop customized marketing strategies for the different segments

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Campaign Management Step 3: Communication Strategies

Which message should be transmitted? Which channel should be used?

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Campaign Management Step 4: Design the Products, Offers, Services and Promotions
Analyze the price, time period, risks, marketing costs Define the product / offer / service / promotion and its general structure Identify effective use of sales and communication channels

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Campaign Management Step 5: Test the Impacts

Impacts of the decisions have to be tested and and assessed on a sample

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Campaign Management Step 6: Revise the Decisions

Make revisions to the targeted offer / service / promotions Finally apply the decisions to the whole segment or population

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RFM Method (Recency, Frequency, Monetary Value )

Recency When was the last customer interaction? Frequency How frequent was the customer in its interactions with the business? Monetary value of the interactions

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RFM Method (Recency, Frequency, Monetary Value )

Marketing Problem: A firm has sent e-mail to 30,000 of its existing customers, announcing a promotion of $100. 458 of them responded (1.52% of the customers)

Is there any relation between the responding customers and their historical purchasing behaviours?
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RFM Method: Recency Coding

30,000 customers are sorted in descending order with respect to their most recent purchases Sorted data is divided into 5 equal groups, each of them containing 6,000 people
Recency codes are assigned: Top group has code 5, bottom group has code 1
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RFM Method: Recency Coding

Recency Results
Response %

4.00
3.1

3.00
2

According to analysis based on customer recency, the group having the highest recency group has also the highest response rate
1.5 0.62 0.38

2.00 1.00 0.00 5 4

Remark: (3.10% + 2.00% + 1.50% + 0.62% + 0.38) / 5= 1,52% which is the response rate Strict Rule: Ones who have purchased recently are much more willing to buy new products than others 22 purchasing in the past

Recency code R

RFM Method: Frequency Coding

Sort the 30,000 customers with respect to frequency metrics.
Frequency metrics: Average number of purchases made by customer in a time period t Sort customers in descending order with respect to their purchase frequency.

Assign them to 5 groups, top %20 in the first frequency group. Assign frequency codes such that the top group has code 5 and the bottom group has code 1. 23

RFM Method: Frequency Coding

Frequency Results
3 2.5
Response %
2.8 2.1

2 1.5 1 0.5 0 5 4 3 2 1 Frequency code F

1.3 0.8 0.9

It is observed that highest response rate is from the customers having highest frequency Frequent people respond better than less frequent ones but differences between groups are less than the ones in the recency The lowest frequency group always contains new customers 24 That is why it is named RFM

RFM Method: Monetary Value Coding

The same process as recency and frequency coding Sorting is done with respect to monetary value metric
Monetary value metric is the average amount purchased in a time period t

At the end of the monetary value coding, assign monetary value codes M = 1,...,5 to groups according to their groups.
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RFM Method: Monetary Value Coding

2.5
2.1

Frequency Results
1.8 1.4 1.2 1.1

Response %

2 1.5 1 0.5 0 5

It is observed that highest response rate is from the customers having highest monetary value Unlike the recency case, there are not big differences between groups

Monetary value code M

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RFM Method: Putting the Codes Together

At the end of the monetary coding firm obtain R F M metrics for customers. Each customer belongs to one of 125 possible combinations of the RFM values:
Database

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24

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231

232

233

234

235

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RFM Method: STEPS

Create 3 digits RFM codes cells All cells having the same number of customers in them RFM values are used to define group of customers that marketing campaign should target or should avoid Used for identifying customers having high probability to respond to campaigns: 555s response rate > 552s > 543s >541.... Increase the response rate Increase profitability

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Customer Value Metrics

Critical measures used to define customer worth in knowledge-driven and customerfocused marketing

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Customer Value Metrics: Size of Wallet

Size of wallet =

S
j 1

Sj

Sales to focal customer by firm j

Assumption: Firms prefer customers with large size of wallet in order to retain large revenues and profits

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Customer Value Metrics: Individual Share of Wallet (SW)

A proportion expressed in terms of percentage, calculated among buyers Measured at individual level A measure of loyalty Can be used in future predictions Different from the market share, which also considers customers with no purchase
Individual share of wallet % =

Sj

S
j 1

j
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Sj

Sales to focal customer by firm j

Customer Value Metrics

Share of wallet and size of wallet should be analyzed together because...
Size of Wallet Customer 1 $500 Customer 2 $100 Share of Wallet 50% 50% Purchases $250 $50

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Customer Value Metrics: Transition Matrix

Shows expected share of wallet from multiple brands Depicts consumers willingness to buy over time Transition probability from B to A, than from A to C: 10%*20% = 2% Brand A Brand A Brand B Brand C 60% 10% 20% Brand B 30% 80% 15% Brand C 20% 15% 70%
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The Engineering Perspective DATA MINING

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Data Mining
Collection, storage, and analysis of typically huge amounts of- data Data readily resides in the companys data warehouse Data cleaning is almost inevitable

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Data Mining
Goals of Data Mining Developing deeper understanding of the data Discovering hidden patterns Coming up with actionable insights Identifying relations between variables, inputs and outputs Predicting future patterns
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Data Mining: Steps

Data selection Data cleaning Sampling Dimensionality reduction Data mining methods

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Data Mining: Methods

Exploratory Data Analysis Segmentation
Cluster Analysis Decision Trees

Market Basket Analysis Association rules Information Visualization Prediction

Regression Neural Network Time Series Analysis

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Information Visualization
Data mining algorithms... Can only detect certain types of patterns and insights Are too complex for end users to understand

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Information Visualization
A field of Computer Science which has evolved since the 1990s.

Before 1990s: Graphical methods for data analysis to pave the way for statistical methods After 1990s: Computer hardware has advanced with respect to memory, computational power, graphics calculations Software has advanced with respect to user interfaces Data collection systems have advanced (barcodes, RFID, ERP)

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Information Visualization
The analyst does not have to understand complex algorithms. Almost no training required. There are no limits to the types of insights that can be discovered.
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Case Studies Analysis of Supermarket Sales Data

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The Data
Field Name Desciption

TRANSACTION_ID
PRODUCT_NO

Transaction ID
Product Number

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Frequent Itemsets

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Frequent Itemsets

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Association Rules

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Case Studies Analysis of Spare Parts Sales Data

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The Data
Field Name
DEPOT SKU_NO

Desciption
Depot ID SKU (Stock Keeping Unit) Number

VENDOR
DAY MONTH YEAR QUANTITY

Vendor (Customer) Number

Day of the month (1,...,31) Month of the year (1,...,12) Year (ex: 2002) Quantity required

UNIT_PRICE
REVENUE

Price of one unit of product in YTL*

Revenue from the order line
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Assumption: Each customer gives at most one order each day.

Determining Top Products: Pivot Table for Determining REVENUE_SUM

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Determining Top Products: Pivot Table for Determining COUNT (Frequency)

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Determining Top Products: Scatter Plot

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Seasonality of Top Products

...

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Seasonality of Top Customers: Pivot Table

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Determining Top Customers: Pareto Curve (ABC Analysis)

100 90 80 70 60 50 40 30 20 10 0 0 10 20 30 40 50 60 70 80 90 100
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Cumulative % Revenue

Cumulative % Customers
Revenue

Seasonality of Top Customers: Starfield Visualization

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Case Studies Analysis of SS 2004 Data

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The Data
Field Name HS_NAME HS_TYPE_TEXT
UNIV_NAME UNIV_DEPT RANK_SAY

Desciption High School Name High School Type

University Name University Department Rank According to Saysal Score
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Pareto Squares
L Y(L)

s T

Y5(H)

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Pareto Squares: Model Definitions

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Pareto Squares: Optimization Model

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General Insights

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Benchmarking Highschools

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Benchmarking Departments

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Relationship Management

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References
Berry, M. J. A., Linoff, G. S. (2004) Data Mining Techniques. Wiley Publishing. Ertek, G. Visual Data Mining with Pareto Squares for Customer Relationship Management (CRM) (working paper, Sabanc University, Istanbul, Turkey) Ertek, G., Demiriz, A. A framework for visualizing association mining results (accepted for LNCS) Hughes, A. M. Quick profits with RFM analysis. http://www.dbmarketing.com/articles/Art149.htm Kumar, V., Reinartz, W. J. (2006) Customer Relationship Management, A Databased Approach. John Wiley & Sons Inc. Spence, R. (2001) Information Visualization. ACM Press.
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