Customer Behavior & Branding - Dr V Kumar...Customer Behavior & Branding Course 21 B PGPpro 2018-19 V. Kumar, PhD Regents’ Professor, Richard and Susan Lenny Distinguished Chair

www.drvkumar.com© Dr. V Kumar

Customer Behavior & Branding Course 21 B

PGPpro 2018-19

V. Kumar, PhDRegents’ Professor,

Richard and Susan Lenny Distinguished Chair & Professor of Marketing, Executive Director, Center for Excellence in Brand & Customer Management,

and Director of the Ph.D. Program in MarketingJ. Mack Robinson College of Business, Georgia State University, Atlanta GA

andChang Jiang Scholar, HUST, Wuhan China.

Fellow, Hagler Institute for Advanced Study, TAMU, College Station, TX Senior Fellow, Indian School of Business, India

Customer Engagement Value and Customer Lifetime ValueDay 1 – Session 2

April 13, 2019 Hyderabad April 20, 2019 Delhi

1


Customer Lifetime Value (CLV)

How can you measure the future profitability of your customers?

2

www.drvkumar.com© Dr. V Kumar 3


All Customers are important, but….some are more important than others

297

921

1690

(16) (29) (104)(6)22.356

-200

0

200

400

600

800

1000

1200

1400

1600

1 2 3 4 5 6 7 8 9 10

Value ($)

($)

4


How to identify ‘these’ privileged customers?

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Customer Lifetime Value (CLV)

6

Recurring Revenues

Recurring Costs-

Gross Contribution Margin

Marketing Costs

-

Net Margin for Single Event

Expected Number of Purchases/Events over next

3 years

X

Accumulated Margin

Acquisition Costs

-

Customer Lifetime Value

Adjusted for Present Value


Understanding the different components of CLV

7


When is a customer still a customer?

8

Customer 1: t = (8/12) = 0.6667 and n = 4Thus: Prob. (Alive) = (0.6667)4 = 0.197

Customer 2: t = (8/12) = 0.6667 and n = 2Thus: Prob. (Alive) = (0.6667)2 = 0.444

Customer 1

Customer 2

x x x

x x

x

Month 1 Month 12 Month 18Observation period Holdout period

?

Month 8

Probability (Alive) = tnwhere n is the number of months in which the customer has made purchases for the

given period;t is the time of the last purchase (expressed as a fraction).


Issues at hand• Based on the probability estimates, Customer 2 seems to be more

promising

• What else do we need to know?

Customer 1 Customer 2

Average Monthly Gross Margin $100 $50

Prob (Alive) 0.2 0.4

Therefore, Expected Gross Margin = Avg. Monthly Gross Margin * Prob (Alive)

$20 $20

Now, which customer is more profitable?

9


Issues at hand (contd.)• Consider the marketing communication cost for each of the

customers:

Customer 1 Customer 2

Expected Monthly Gross Margin $20 $20

Marketing communication cost $10 $15

Therefore, Expected Net Margin = Expected Monthly Gross Margin – Marketing Cost

$10 $5

Thus, Customer 1 is more profitable than Customer 2after accounting for future customer revenue and cost

10


Calculation of CLV

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CLV = NPV of GC ‐NPV of MC

tT

ditACMt itAlivePiGCofNPV

1

1*1

)(

average monthly gross contribution margin for month t based on all prior purchases

discount rate for month t (assume 12% on a yearly basis)

probability that customer i is alive in month t

T

tt

m tmitmii d

xcofMCNPV

1

,,,,

)1(* number of contacts to customer i in month t

unit cost of marketing to customer i in month t

Where NPV = Net Present ValueGCi = estimated expected gross contribution margin for a given month mi = customert = the month for which NPV is being estimatedT =the number of months ahead that are included in the forecast


24.127$81.5543.71

)12.1/1(*100*7.0)12.1/1(*100*8.01

1*1

)( of NPV

21

2

t

ditACMt itAlivePiGC

t

ditACMt itAlivePiGC

1

1*1

)( ofNPV2

ACMit = 100 for Year 1 and 100 for year 2

d = discount rate (12% on a yearly basis)

i = customer

Number of years = 2

P(Alive) is the probability that agent i is active = 0.8 for year 1 and 0.7 for year 2

Computation of NPV of GC

12


cit = unit cost of marketing to customer i in month txit = number of contacts to customer i in month tNumber of years = 2

n

tt

tmitmimi

d

xcofMCNPV

1

,,,,

)1(

*

Marketing InformationCost of email = $0.05No of email contacts = 20 per yearCost of direct mail = $1No of direct mail contacts = 3 per year

76.6$12.14

12.14

)12.1(3*120*05.0

)1(

*21

2

11

,,,,

t

t

n

tt

tmitmimi d

xcofMCNPV

Computation of NPV of MC

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CLV = NPV of GC ‐ NPV of MC = $127.24 ‐ $6.76= $120.48

• Since purchases can occur multiple times within a year, the gross contribution from sale is discounted to present value as is occurs.

• Similarly, as the marketing cost gets expended, it is discounted to PV.

• The costs are computed for each channel using the frequency of contacts in each channel and the unit cost of contact in each channel.

• The future periods considered, say three years, could include multiple purchase occasions.

Measuring Customer Lifetime Value

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Where do we go from here?

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Case Study

Implementing the CLV metric

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Background• Fashion retailer having retail stores across USA

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Develop a suitable metric to measure and manage customer level

profitability

Identify the right metric to manage customer loyalty

Challenges


Step 1: Identifying the Drivers of Loyalty

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The retailer used several measures to identify loyal customers:‐ Regularity of Purchase‐ Frequency of Purchase‐ Tenure

Regularity Frequency RFM Tenure

CLV r = ‐0.09 r = 0.17 r = 0.19 r = 0.44

N 172,688 470,932 470,932 470,932

Question: Do these measures of loyalty drive profitability?

Result:

Except for tenure, the traditional metrics of loyalty showed poor correlation with profitability.


Step 2: Measuring CLV

19

The lifetime value is computed for each customer using this formula:

NPV of Gross Contribution

NPV of Marketing Cost

CLV


Step 3: Scoring & Segmenting the Customers

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Customers are rank‐ordered into deciles and segmented based on the distribution of CLV across the deciles

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Decile based on CLV

($)

High CLV

Medium CLV Low CLV


Step 4: Identifying the drivers of CLV

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Top Drivers of CLV

$ Spent in other channels (Multi-channel shopping) (+) Tenure (+) $ Spent in Product A (+) Cross-Buying (+) $ Spent in Product B (+) Lifetime Returns (∩)

Amount of Returns ($)

CLV Score ($

)

XB


Step 5: Profile Analyses

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Develop profile analyses for the High and Low CLV Customers

Gender: FemaleAge: 35-54 yearsMarital Status: Married

Presence of ChildrenEstimated Household Income: $125,000+

Stays closer to retailer

Loyalty Card Member

Mail Order Shopper

Shops frequently in upscale stores

Typical High CLV Customer

Gender: Male

Age: 25-34 yearsMarital Status: Single Presence of no children

Estimated Household Income: < $50,000 Stays further away from retailerNot necessarily a Loyalty Card MemberSingle Channel Shopper

Typical Low CLV Customer


Measuring and Maximizing Customer Lifetime Value (CLV)

23


The Wheel of Fortune Strategies Used for Maximizing CLV

Acquiring Profitable Customers

Customer Selection

Preventing Attrition of Customers

Referral Marketing Strategy

Linking Investments in

Branding to Customer Profitability

Pitching the Right Product,to the Right Customer, at the Right Time

Managing Loyalty and Profitability

SimultaneouslyMEASURING& MAXIMIZING CUSTOMER

LIFETIME VALUE

Linking CLV to Shareholder Value

Product Returns

Future of Customer

Management

Cross ‐ Buy

Source: Kumar, V., “Managing Customers for Profits”, Reprinted 2009, The Wharton School Publishing

Optimal Allocation of Resources

Managing Multi‐channel Shoppers

Interaction Orientation

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Managing Loyalty and Profitability Simultaneously

Segmentation based approach to guide marketing

actions to loyal customers/distributors

Efficient allocation of resources resulting in increase in profitability

Objective: Marketing Metric Outcome:

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Managing Loyalty & ProfitabilityRethink Customer Segmentation

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BUTTERFLIES•Good fit of company offering and customer needs•High profit potential•Action:

–Aim to achieve transactional satisfaction, not attitudinal loyalty –Milk the accounts as long as they are active–Key challenge: cease investment once inflection point is reached

STRANGERS•Little fit of company offering and customer needs•Lowest profit potential•Action:

–No relationship investment –Profitize every transaction

BARNACLES•Limited fit of company offering and customer needs•Low profit potential•Action:

–Measure size and share‐of‐wallet–If share‐of‐wallet is low, specific up and cross‐selling–If size of wallet is small, strict cost control

TRUE FRIENDS•Good fit of company offering and customer needs•Highest profit potential•Actions:

–Consistent intermittently spaced communication–Achieve attitudinal and behavioural loyalty–Delight to nurture/defend/retain

HighProfitability

LowProfitability

Short‐termCustomers

Long‐termCustomers

www.drvkumar.com© Dr. V Kumar 27

Customer Behavior & Branding - Dr V Kumar...Customer Behavior & Branding Course 21 B PGPpro 2018-19 V. Kumar, PhD Regents’ Professor, Richard and Susan Lenny Distinguished Chair

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