Marketing

BA ZC411/ MBA ZC411

BITS Pilani Dr. Mridula S. Mishra
Pilani|Dubai|Goa|Hyderabad

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 BITS Pilani
Pilani|Dubai|Goa|Hyderabad

Session - 5

2
Session Plan

1. Continuation of Customer value metrics

2. Analyzing Consumer Market

BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956

Customer Lifecycle
Relationship Management

Acquisition Activation Voluntary

High Value
Established Churn
Prospect New Customer Customer
Former
Customer

Target New Initial High

Market Customer Customer Potential

Low Value Forced Churn

Rest of
the World

WIN BACK

BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956

Market Share
Inferences ?
Company Market No of
Share Customers
A 55% 240
• It is a typical measure of a product focused
B 20% 350
marketing approach
C 45% 826 • It does not provide any information about
how the sales are distributed across
customers-it only gives an aggregate notion
of category performance.
• Market Share could be a result of selling
large amounts to a small percentage of
customer base or by making small sales to a
large proportion of the market!
Sales Growth
Year Growth

2015 3%
Inferences ?
2016 4%

2017 7%

• Is a quick indicator of the current health of the firm

• If compared with the sales growth of other players in the market, it also
provides a relative measure of performance
• It does not tell us which customer have grown and which have not
Acquisition Rate

• A bank sent out communication to two million leads

pan India for promoting a new credit card.
• The bank issued a total of 60,000 new credit cards.
• Acquisition rate =
• (60,000/2,000,000)*100=3%

Historical in nature?
What could be the use of this metric?
Citibank- Shoppers Stop Card

Acquisition vs. Activity

Acquisition Rate
• No of Credit cards issued = 60,000
• No of customers showed activity =55,000
• What is the acquisition rate?
• Thus the level to acquisition rate is=
2.75%
• Inferences?
Acquisition Rate: Inferences
• It measures the responsiveness of the
customers
• Should be used for campaign wise
analysis
• Should be used for determining the
effectiveness of each format of acquisition
used.
Acquisition Cost

• Acquisition Campaign Spending divided by the

number of acquired customers.
• Campaign Budget = Rs.5,00,000
• No of acquired customer=60,000
• Acquisition cost per customer=Rs.8.33

What are the drawbacks?

Acquisition Cost Inferences
• While success or failure could be
assessed at campaign level – it also gives
an opportunity to see which medium
delivered better result.
• Could aid in better media planning /buying
• Gives a clear indication about how
effective a customer acquisition
investment is.
Average Inter-Purchase Time
• Average Inter-Purchase Time (AIT) is the
average time elapsing between
purchases.
• It is measured in terms of specific time
periods (days, weeks, months, etc)
• It is computed by taking the inverse of the
number of purchase incidences per time
period
Example

• If a supermarket customer buys, on average, six times at the

supermarket during a month, then the AIT for that customer will
be
AIT of a customer= 1/(number of purchases during a pre specified
period)
=1/6=0.1667 months or approximately 5 days
=0.1667*30

AIT is an easy-to-calculate indicator which can be an important statistic of

the customer activity status, especially for those industries where
customer buy on frequent basis.
Retention and Defection Rate

100*(# of customers in cohort buying in (t)/#customer in (t-1)

Rrt (%) =
Total # of customers in cohort buying in (t-1)

• Retention rate in a period t (Rrt) is defined as the average

likelihood that a customer purchases from the focal firm in a
period (t), given that this customer has also purchased in the
period before (t-1).
• Defection rate is defined as the average likelihood that a
customer defects from the focal firm in a period (t), the that the
customer was purchasing up to period (t-1)
Q1 Q2 Q3 Q4
2000 2500 2600 5000

Rrt 192.3077
7%

BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956

Average Life time Duration

• Assuming that retention rate is constant over time i.e., Rrt= Rr

(for all time) allows a simple calculation of the average lifetime
duration.

Average Lifetime 1
=
Duration 1-Rr
If the average customer lifetime duration of a group of customers is 4 years, then the average retention rate is 1-
(1/4) =0.75 or 75% per year
Retention Rate: Cohort of Customers

• Assuming constant retention rates, the number of retained

customers in any arbitrary period (t+1) can be calculated using:
• #of retained customers in period (t+n)= # of acquired customer in
cohort at time (t) *Rr
– Where
• n= Number of periods elapsed

Customer starting at the beginning of year 100

1
Customers remaining at end of year 1 75 0.75*100
Customers remaining at end of year 2 56.25 0.75*75
Customers remaining at end of year 3 42.18 0.75*56.25
Customers remaining at end of year 4 31.64 0.75*42.18
Evaluation:
• A key assumption of retention rate concept is that
once customers leave the relationship, they are
gone forever.
• The concept of retention rate does not allow for
temporary dormancies.
• Managers have to make a judgment whether the
dormancy phenomenon plays a major or minor
role in their business.
• Using the retention rate is fine if it plays a minor
role.
• If dormancy plays a major role, other concepts
have to be used to access customer activity.
Is Retention only about
buying?
Sometimes- customer-firm relationship is not primarily about
monetary transactions, it is important to define an appropriate basis in
order to measure retention.
How is Retention different
from Loyalty?
Loyalty
• Retention is not same as customer loyalty.
• Retention is measured on a period-by-period basis and indicates
whether customers are coming back.
• Loyalty construct has much stronger theoretical meaning.
• If someone is loyal toward a store or a brand, this person has
positive emotional or psychological disposition toward this brand.
• People might continue to purchase a particular brand or might
patronize a particular store, but this may be purely out of
convenience or inertia.
• In this case, someone might be retained, but the person in not
loyal.
Life Time Duration
Evaluation
• The average lifetime duration of a cohort of
customers gives an indication of how fast the
company needs to replace the customer base.
• Average Life Time duration must be evaluated
taking into account the type of product/service
we are offering to our customers and the
relationship
– Contractual relationship
– Non Contractual relationship
– One off-purchases relationship
Estimating Lifetime Value

• Annual customer revenue: Rs.500

• Average number of loyal years: 20
• Company profit margin: 10%
• Customer lifetime value: Rs.1000
The Non-Contractual Case
In a non contractual case, given a particular customer, it may be useful to
know whether the customer is likely to transact in a particular time period.
We would like to know the probability of the customer being active.
P(Active)

N=number of purchases in a given period

T=Number of years or period/(t+1)
P(Active)
To compute the P(Active) of each
of the two customers in the
twelfth month of activity, there is
customer A bought four times
within the first 8 month and
customer B bought only two
times within the first 8 month so
for 12th month the probability
that the customer would be
active is

Inferences ?
P(Active)
• It is interesting to observe that a customer
who has bought four time in the first 8 months
but has not bought in the last 4 months has a
lower probability of buying in the 12 month
over a customer who had bought only twice
in the same window of 8 months.
• This is due to the assumption that customers
do not change the frequency of buying.
Evaluations of P(Active)

• The probability of a customer being active in time t is a

function of the duration since the last purchase and
applicable in non-contractual cases
• When calculating P(Active) it is assumed that customers
pertain to their usual purchase patterns with respect to the
frequency of buying.
NET PROMOTER SCORE

BITS Pilani, Deemed to be University under Section 3 of UGC Act, 1956