Customer Relationship Management: A Database Approach MARK 7397 Spring 2007 James D. Hess C.T. Bauer Professor of Marketing Science 375H Melcher Hall [email protected] 713 743-4175 Class 6
Mar 19, 2016
Customer Relationship Management:A Database Approach
MARK 7397Spring 2007
James D. HessC.T. Bauer Professor of Marketing Science
375H Melcher Hall [email protected] 743-4175
Class 6
• Computation of Customer Profitability
• Past Customer Value of a customer
Where i = number representing the customer, r = applicable discount rate
n = number of time periods prior to current period when purchase was made
GCin = Gross Contribution of transaction of the ith customer in the nth time period
• Since products/services are bought at different points in time during the customer’s lifetime, all
transactions have to be adjusted for the time value of money
• Limitations: Does not consider whether a customer is going to be active in the future. Also
does not incorporate the expected cost of maintaining the customer in the future
Past Customer Value
N
1n
nin )r1(*GC
Spending Pattern of a Customer
The above customer is worth $302.01 in contribution margin, expressed in net present
value in May dollars. By comparing this score among a set of customers a prioritization
is arrived at for directing future marketing efforts
Jan Feb March April May$ Amount 800 50 50 30 20
GC 240 15 15 9 6
302.01486 5)0125.01(2404)0125.01(15
3)0125.01(152)0125.01(9)0125.01(6
Scoring ValueCustomer Past
0.3 Amount X Purchase (GC) Contribution Gross
=++++
+++++
=
´=
Lifetime Value metrics (Net Present Value models)
• Multi-period evaluation of a customer’s value to the firm
RecurringRevenues
Recurring costs
Contribution margin
Lifetime of a customer
Lifetime Profit
Acquisition cost
LTV
Discount rate
Calculation of Lifetime Value: Simple Definition
where LTV = lifetime value of an individual customer in $, CM = contribution margin, = interest rate, Rr = retention rate, so Rrt=survival rate for t periods
• LTV is a measure of a single customer’s worth to the firm • Used for pedagogical and conceptual purposes
tT
1tt 1
RrCMLTV
CM1CM2
Rrt
1/(1+)t
0
LTV: Definition Accounting for Acquisition Cost and Retention Probabilities
Where, LTV = lifetime value of an individual customer in $
Rrk = retention rate
П = Product of retention rates for each time period from 1 to T,
AC = acquisition cost
T = total time horizon under consideration
Assuming that T and that the contribution margin CM does not vary over time,
ACCMRrLTVT
tit
t
k
1 1 1
1
t
k
ACRrCMiLTV i
1Rr
Note: many typos on page 127
To Calculate Customer Lifetime Value
1. You must be able to forecast profit contributions
2. You must understand the cost of marketing
3. You must be able to forecast retention rates of customers (since if the customer has abandoned the firm no profits will flow.)
4. It is possible that customers will “churn.” That is, they may leave and then return later.
5. The contribution of a customer may be causally tied to churn andabandonment, making this trickier than it looks.
6. You need to understand NPV calculations.
LTV: Definition Accounting for Varying Levels of Contribution Margin
Where, LTV = lifetime value of an individual customer i in $, S = Sales to customer i, DC = direct cost of products purchased by customer i, MC = marketing cost of customer i
tT
1tititit 1
1MCDCSLTV
Recall the Cell2Cell data from last week
CMi=(67.58+.595*Monthsi-7.615*Marriedi-.046*EqpDaysi)*ContribRate
Abandonment versus Churn:Lost for Good or Missing in Action
States of Customer: S0 = bought this period S-1 = last bought one period before
State Transition (Markov Matrix)Before
S0 S-1
S-1
S0
After0.7
0.3 1.0
0.0= T
Pt=(Pt,0,1-Pt,0)’ Probability that at time t you are in the two states
Lost for Good
Abandonment versus Churn(continued)
BeforeS0 S-1
S-1
S0After
0.7
0.3 1.0
0.0
Pt= T Pt-1
= T T Pt-2
= T T …T P0
Tk =0.7k
1.0
0.0
1-0.7k
This is the type of calculation we did abovewith a retention rate of 70%. However, once gonethe customer never returns.
Abandonment versus Churn:just “Missing in Action”
Before
S0 S-1
S-1
S0
After
0.7
0.3 0.0
0.1
S-2
S-2
0.0
1.0
0.0
0.90.0
If you haven’t bought in two periods, you are gone, but you couldappear and disappear from one period to the next.
Abandonment versus Churn:just “Missing in Action”
.52
.21 .03
.07
0.0
1.0
0.0
0.9.27
T2 =
.38
.16 .02
.05
0.0
1.0
0.0
.93.48
T3 =