Transcript Lifetime Value Calculation

Why Start with a Customer
For a company to be successful, it must :
• Understand the customer
– All customers are not alike!
• Identify their preferences
– Customers have different needs!
• Deliver value
- Today,s customer is in the driver’s seat !
If you don’t know where you are
going you probably aren't going to get there
The fundamental principle of Crossing the
Chasm is:
to target a specific niche market
as your point of attack and focus all
your resources on achieving the
dominant leadership position in that
segment
High risk low data decision
By definition the market we will
enter will not have experienced our
type of product before.
 We are in high risk low data state.
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Lack of Data
Acknowledge the lack of data as a
condition of the process.
 To be sure you can fight back
against this ignorance by gathering
highly focused data yourself.
 You can not expect to transform a
low data situation to high data
situation quickly.
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Memorable Images
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Only work with memorable images.
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Please note that we are not focusing on
target market characterization. But
target customer.
Let Them Guide Us
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Markets are impersonal abstract things
like the PC market,
Neither the names nor the descriptions of
markets evoke any memorable images.
We need something that feels a lot more
like real people.
We are just going to have to make them
up.
We can let them guide us to developing a
truly responsive approach to their needs.
Target Customer
Characterization
A formal process for making up
these images, getting them out of
individual heads and in front of a
marketing decision making group.
Create as many characterizations as
possible
 Built a basic library of possible
target customer profiles
 Apply techniques to reduce these
data into a prioritized list of
desirable target market segment
opportunities.
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Sample Scenario for a Pen
based Laptop Customer
Personal profile and job description
 Technical resources (environment)
 A day in life (before)
 The problem your product solves
 A day in life (after)
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We are still operating in a low data
situation
 We just have a better set of material
to work with.
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Value Triad
Customer
Value
Proposition
Product
Application
Lifetime Value Calculation
Empty
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empty
Why Lifetime Value
Analysis?
• We need to know the value of our customers, so as to
properly target our sales and retention efforts.
• We need to discriminate among our customers to acquire
and retain the best.
The Importance of Measurements
• Measures determine vision and strategy deciding what to
measure and how to link measures to incentives are
the most important DBM decisions.
• NPV of customer base should be at the top of the
measurement hierarchy.
LTV Analysis Goal:
Determine…
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Where to put your retention dollars
The value of each retention strategy
Where to put your acquisition dollars
How much to spend on acquisition
What is Life Time Value
• NPV of the profit to be realized on the average new
customer during a given number of years.
• Life time value is goodwill
• To compute it you must be able to track customers from
year to year
• Main use: To evaluate strategy
Birthday Club Strategy
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We will examine NineEast before and
after it adopted the new strategy of
writing letters to husbands before their
wives birthdays.
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While this is a retail example the
principles apply to any kind of industry.
Financial,Telecommunications, B2B
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Variable Costs
Include any variable cost.
 Do not include fix costs rent long
term debt overhead. These costs do
not vary with number of customers.
 The costs of servicing a customer
tend to decrease with the number of
years that the customer has been
buying from you.
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Acquisition Cost
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Advertising + Marketing+Sales
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money you spend during the year.
Than
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Advertising + Marketing+Sales/the number
of new customers who actually
make purchases from you each
year.
The Discount Rate
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The profits you receive from your
customers come in over several years.
Money received in future years is not
worth as much as money received today.
We must discount it by a certain
percentage so we can equate it to the
present money.
Use the market rate of interest to
discount the future revenue
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And include the risk factor
How to figure the Discount
Rate
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Market rate of interest …. 8 %
Assume risk ( Double rate ) …16 %
Years = n Interest = I
Formula :D = ( 1 + I)n
Calculation of rate after 3 years
D= (1+ .16 )3 = ( 1.16 ) 3 = 1.56
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NPV Profits : Gross Profits / Discount rate
Cumulative NPV profits
NPV year 1 + NPV year 2 + NPV year 3
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LTV :
Cumulative NPV profits in each year / original
group of customers
The LTV of the average new customer for Nine
West in the 3rd year is 60.05
1,201,057 / 20,000 = $60.05
NineEast
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Assumption: The birthday club will
be successful and there will be a 5
% referral rate.
Recency, Frequency, Monetary
Analysis
Direct Marketers have been using
RFM Analysis to predict customer
behavior for more than 50 years.
 It is the basis for any model of
customer behavior
 You only need your Customer
database with purchase history. You
don’t need to hire a statistician.
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The predictor of future behavior is
past behavior
 RFM is pure behavior, it only works
with customer files
 It requires knowledge of the
customer purchase history.
 It works with any industry.
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How to code your
customers by Recency
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03/20/2001
You need the most
recent purchase date.
Divide the database
into 5 exactly equal
parts.
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Number 5 ( the most
recent )
Down to 1 ( the most
ancient )
5
4
3
2
1
11/20/1998
Response by Recency Quintile
The customers were offered a video package that cost them about $100
including S&H charges.The graph represents the responses to a test
mailing to 30 000 of 2.1 million names.
How to code your
customers by Frequency
You need
the total
number of
times that
the customer
has made a
purchase
from you.
3.254
5
4
Average
products
purchased
per month
1
3
2
1
Average number of telephone calls
made per month
 Total number of checks and deposits
made during a month
 This is a measure of how important
is doing business with you is in the
minds of your customers.
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Response by Frequency Quintile
Lowest quintile contains
an abnormal number of
recent buyers. Joined
yesterday.This customer
did not have the chance
to become a frequent
buyer yet
Frequency is also a good predictor of behavior but much less so than
Recency.
How to code your
customers by Monetary
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We need the
total amount
spent on our
products or
services,per
month,per year
or in some
other way.
$12,456
Average
amount
purchased
per month
$10
5
4
3
2
1
Response by Monetary Quintile
Monetary response to $100
product
1.61%
Monetary coding is far less predictive of behavior than either
recency or frequency.
Putting It All Together
Creating an Nth
300 000 Records
Results of test mailing $100 offer
to 30 000 customers
34 of 125 cells better than
breakeven
RFM Cell
Profit from Test Mailing
For a net cost of $420 the company learned how 30,000 customer,
an Nth of it s 2.1 million customer database would respond to this offer.
Test Full File & RFM Selects Compared
Test v.s. Response Rates
Market
Assumption: People will respond better to promotions,products tailored
to their needs
Segmented Market
Objective: Find homogenous groups of people
-so each group can be sent a different promotion
-tailored to its needs.
Segmentation
Segmentation Techniques
Behavioral
Enterprise
Value
Lifecycle
Other
Other
Segmentation Segmentation Segmentation Segmentation Segmentations
Segmentations
RFM
Geographic
Demographic
Psychographic
Customers
How valuable
expectations and
the customers
Are and can be to the needs change
over the course
Company LTV
Of the Lifecycle
Businessweek March 26
Businessweek March 26
Businessweek March 26