MKTG 4110 Class 3

Quantify the Economic Value of a Customer

 How can we use customer value to guide marketing and product decision
 Throughout the customer lifecycle
o Acquisition
o Development
o Retention

Alternative Approaches to Customer Value

 Revenues and Profits are based on past data
 Life time value also capture future value

Example: Berekeley

 They run a “SaverCard” program, consumers earn credits for free home improvement classes
o (1 hour per $200 spent)
 They have determined from customer information file the average SaverCard carrier:
o Revenue is $200 per year after sign-up
o Cost of goods sold (COGS) is 60% of gross revenue
o Marketing costs: Cost of attended home improvement seminars is $25 per year

Customer Value Calculations

 However the biggest issue of using this to calculate custome life time value is the time value of
money and the churn rate of cusotomers, some dead and some quit
 Total Customer Value 5*$55 = 275

Time Value of Money

Projecting to the Future Value: PV + PV*(1+int rate)^1 + … + PV*(1+int rate)^n

Discounting to the Present Value: FV = FV/(1+int rate) +… + FV/(1+int rate)^n

Start of
  the LTV
Calc. Yr 1 Yr 2 Yr 3 Yr 4 Yr 5
$ $ $ $ $
Revenue $ -
200.00 200.00 200.00 200.00 200.00
Product/Service $ $ $ $ $
$ -
Costs 120.00 120.00 120.00 120.00 120.00
Marketing $ $ $ $ $
$ -
Costs 25.00 25.00 25.00 25.00 25.00
$ $ $ $ $
Customer Profit $ - Revenue - Cost
55.00 55.00 55.00 55.00 55.00
Probability
Active at end of 100% 70% 49% 34.30% 24.01% 16.81% Previous Period * (1-0.30)
Period
* 30% of SaverCard customers become inactive each year

Average
Probability of (Prev Period + Current Period)
100% 85% 59.50% 41.65% 29.16% 20.41%
Being Active in /2
Period
Profit
Profit Expected
$0 $ 47 $ 33 $ 23 $ 16 $ 11 * Avg Prob. of being
on Average
active in period

* adjust profits to account for the fact that a customer may become inactive in the future

Present Value of
$0 $ 42.50 $27.05 $17.21 $ 10.95 $6.67
Expected Profits
Customer Life $
         
Time Value 104.68

* We have to discount profits that arise in the future

Why do we care about the LTV of customers?

Acquisition:

 Should we extend a gift of appreciation to first-time customers?

 How much can we pay a salesperson to acquire a customer?
 Should we lower the upfront fee for customers?
Development

 What features will most appeal to existing customers?

 Which incentives should we offer customers to increase order size?
Retention

 Does it pay to reduce the average call center response time from 8 to 2 minutes?
 Should we proactively lower service fees for at-risk customer or keeping customers
How far into the future should we calculate the LTV?

 Depends on inter-purchase time (auto vs. cell-phone)

 Depends on churn rate
 Depends on confidence to predict far out
What cost should we account for in the LTV?

 Costs of the marketing program we are evaluating

 Acquisition decision: need to include acquisition cost
 Direct cost that vary with the number of customers or how much they purchase / which
service they purchase
 It should be measured conservatively

Customer value = income + network

 Increasing marketing CLV models are trying to incorporate the Value of a Customer’s
Network such as families friends