Title: Modelling a CRM Markov chain process using system dynamics

Authors: W.H. Ip, Bocheng Chen, Henry C.W. Lau, K.L. Choy, S.L. Chan

Addresses: Department of Industrial and Systems Engineering, The Hong Kong Polytechnic University, Hong Kong, PR China. ' School of Economics and Management, Tsinghua University, Beijing 100084, PR China. ' Department of Industrial and Systems Engineering, The Hong Kong Polytechnic University, Hong Kong, PR China. ' Department of Industrial and Systems Engineering, The Hong Kong Polytechnic University, Hong Kong, PR China. ' Department of Industrial and Systems Engineering, The Hong Kong Polytechnic University, Hong Kong, PR China

Abstract: Improvement in customer relationships within an organisation is a strategic target that commercial organisations try to achieve. Research has shown that 80% of the profits of most companies are generated from 20% of their loyal customers. The cost of achieving successful sales with new customers is also higher than that with existing customers. The capability to retain loyal customers and keep a close relationship with them is the key to surviving in the present one-to-one marketing environment. An excellent CRM system that has Online Analytical Processing (OLAP) capable of analysing the relationship level with the direct customers and downstream customers provides a definite marketing advantage in the customer share campaign. In this paper, a system dynamics model to analyse direct and downstream customer relationships is presented. The theory of the Markov chain model in computing customer lifetime value is applied in the model presented for customer supply chain decision support.

Keywords: customer relationship management; CRM; customer lifetime value; CLV; system dynamics; Markov chains; recency; frequency; monetary; modelling; supply chain management; SCM decision support.

DOI: 10.1504/IJVCM.2008.019849

International Journal of Value Chain Management, 2008 Vol.2 No.4, pp.420 - 435

Published online: 10 Aug 2008 *

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