Angels and Devils Case Reflections

Having been part of the Best Buy Angels and Devils case debate last Monday, I have some follow-up thoughts on Customer Relationship Management (CRM), specifically in the evolution of this marketing concept through the research of Dr. V. Kumar and his colleagues.

Dr. Kumar is the ING Chair Professor of Marketing, as well as the Executive Director of the ING Center for Financial Services, at the University of Connecticut’s School of Business. He is considered a pioneer in customer loyalty and customer lifetime value (CLV) research. (www.drvkumar.com) In the October 2000 issue of the Journal of Marketing, V. Kumar and Werner Reinartz conducted studies that contradicted such commonly held marketing beliefs as long-term customers are more profitable, a customer’s profits increase over time, it costs less to service long-term customers, and long-term customers are less price-sensitive. Therefore, marketing managers cannot assume that long-term customers are always more profitable than short-term customers. The authors also discussed the concept of “barnacles” and “butterflies”, which was then expanded upon in their article “The Mismanagement of Customer Loyalty” published in Harvard Business Review in July 2002. This article also noted “loyal” customers do not always generate positive word of mouth, which was a topic that came up a lot during the discussion last week. Kumar and Reinartz wrote, “To identify the true apostles, companies need to judge customers by more than just their actions” (page 4); however, CRM systems are based on just that, past actions. In the summer of 2004, the Journal of Interactive Marketing published an article by V. Kumar, Girish Ramani and Timothy Bohling entitled “Customer Lifetime Value Approaches and Best Practice Applications.” The article outlines formulas to calculate the average CLV of a group, as well as an individual. The authors considered CLV superior to the traditional Recency, Frequency, and Monetary Value (RFM) model because it “anticipates and models future customer behavior” (page 65). Then in October 2004, Kumar published “A Customer Lifetime Value Framework for Customer Selection and Resource Allocation Strategy” in the Journal of Marketing with Rajkumar Venkatesan which presented a CLV formula that takes into account the time between purchases. The authors tested the formula against three other metrics and found CLV to be a better predictor of customer profitability. However, this study did not explain the potential impact of various marketing mix strategies on CLV. In January of 2005, the Journal of Marketing contained “Balancing Acquisition and Retention Resources to Maximize Customer Profitability” by Werner Reinartz, Jacquelyn Thomas, and V. Kumar in which the authors provide a framework to help the marketer determine how to best allocate marketing resources. Using a statistical model, they found underspending on retention of current customers has a greater negative impact on profits than underspending on acquisition of new customers. In their studies, approximately 75-80% of the marketing budget spent on retention and 20-25% of the marketing budget spent on acquisition was found to be optimal.

A recurring theme of the class discussion on Monday was all the factors that statistical models cannot account for – word of mouth (negative or positive), potential earning changes that will impact future profitability, etc. Without a method to easily collect such information, what is a marketer to do? As my team argued last Monday, we believe it is better to use the information available than not to use information, but we must remember the numbers do not convey the entire story. As Professor Fournier mentioned in class, it is up to us as future marketers to figure out how to fuse art, science, and technology, since marketing involves all three: CRM systems are the technology and V. Kumar’s research is part of the science, but art is open to interpretation.