8. CLV, Retention, Acquisition

7/28/2019 8. CLV, Retention, Acquisition

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Strategic Marketing Management

Naveed Ilyas

[email protected]


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CUSTOMER COUNTS: Number of customers of a firm for aspecified time period.

A firm must be able to count its customers

In contractual situations, it should be fairly easy to counthow many customers are currently under contract at anypoint in time.

Ex: Mobilink, Ufone etc

In non contractual situations, the ability of the firm tocount customers depends on whether individual customersare identifiable. If customers are not identifiable, firmscan only count visits or transactions.


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RECENCY: The length of time since a customerslast purchase

Example : eBay reported 60.5 million active

users in the first quarter of 2005. Active userswere defined as the number of users of the eBayplatform who bid, bought, or listed an itemwithin the previous 12-month period. They go onto report that 45.1 million active users werereported in the same period a year ago.

Notice that eBay counts active users ratherthan customers and uses the concept ofrecency to track its number of active usersacross time.


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RETENTION RATE: This is the ratio of the number ofretained customers to the number at risk

Retention applies to the contractual situations in

which customers are either retained or not.

Example: If 40,000 subscriptions to Fortune magazineare set to expire in July and the publisher convinces26,000 of those customers to renew, we would say

that the publisher retained 65% of its subscribers.

The complement of retention is attrition or churn.The attrition or churn rate for the 40,000 Fortunesubscribers was 35%.


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Customer profit is the profit the firm makes from serving acustomer or customer group over a specified period of time

The overall profitability of the company can be improved bytreating dissimilar customers differently.

In essence, think of three different tiers of customer: Top Tier customersREWARD

Second Tier customersGROW

Third Tier customersFIRE: The company loses money on servicingthese people. Consider charging them more for the services they currently consume. If you can recognize this group beforehand, it may be best not to acquire

these customers in the first place.


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Assigning revenues to customer is often the easypart; assigning your costs to customers is muchharder

Most things change over time. Customer whowere profitable last year may not be profitablethis year.

When capturing customer information to decidewhich customers to serve, it is important toconsider the legal environment in which thecompany operates. For example: PIA


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Assigning revenues to customer is often the easypart; assigning your costs to customers is muchharder

Most things change over time. Customer whowere profitable last year may not be profitablethis year.

When capturing customer information to decidewhich customers to serve, it is important toconsider the legal environment in which thecompany operates. For example: PIA


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Sometimes there are sound financial reasons forcontinuing to serve unprofitable customers.

For example some companies rely on network

effects.

United States Postal Servicepart of its strength isthe ability to deliver to the whole country. It maysuperficially seem profitable to stop deliveries toremote areas. But when that happens, the servicebecomes less valuable for all customers. In short,sometimes unprofitable customer relationships arenecessary for the firm to maintain their profitableones.


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Abandoning customer is a very sensitivepractice and a business should alwaysconsider the public relations consequences of

such actions.

When you get rid of a customer, you cannotexpect to attract them back very easily

should they migrate into your profitablesegment.


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Customer life time value is the rupee value of acustomer relationship based on present value ofthe projected future cash flows from thecustomer relationship

Customer lifetime value (CLV) is an importantconcept in that it encourages firms to shift theirfocus from quarterly profits to the long-termhealth of their customer relationships.

Customer lifetime value is an important numberbecause it represents an upper limit on spendingto acquire new customers.


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The central difference between CP and customerlifetime value (CLV) is that CP measures the pastand CLV looks forward. As such,

CLV can be more useful in shaping managers

decisions but is much more difficult to quantify. Quantifying CP is a matter of carefully reporting and

summarizing the results of past activity, whereasquantifying CLV involves forecasting future activity

The concept of CLV is nothing more than theconcept of present value applied to cash flowsattributed to the customer relationship.


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As an example of this cohort and incubate approach,Berger, Weinberg, and Hanna(2003) followed all thecustomers acquired by a cruise-ship line in 1993.

The 6,094 customers in the cohort of 1993 were

tracked (incubated) for five years. The total netpresent value of the cash flows from these customerswas $27,916,614. These flows included revenues fromthe cruises taken (the 6,094 customers took 8,660cruisesover the five-year horizon), variable cost ofthe cruises, and promotional costs.

The total five-year net present value of the cohortexpressed on a per-customer basis came out to be$27,916,614/6,094 or $4,581 per customer. This isthe average five-year CLV for the cohort.


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Prior to this analysis, [cruise-line]management would never spend more than$3,314 to acquire a passenger . . . Now,

aware of CLV (both the concept and theactual numerical results), anadvertisement that [resulted in a cost peracquisition of $3 to $4 thousand] was

welcomedespecially because the CLVnumbers are conservative (again, as noted,the CLV does not include any residualbusiness after five years.)


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The cohort and incubate approach works wellwhen customer relationships are stationary changing slowly over time.

In situations where the value of customerrelationships changes more rapidly, firmsoften use a simple model to forecast the

value of those relationships.


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The model for customer cash flows treats the firmscustomer relationships as something of a leakybucket

Parameters & Assumptions Constant margin Constant retention (probability per period) Discount Rate Customers are lost for good First margin will be received at the end of the first

period


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Prospect lifetime value is the expected value of a prospect

Only if the prospect lifetime value is positive should thefirm proceed with the planned acquisition spending

If PLV is positive, the acquisition spending is a wise

investment.

PLV may be a small number


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Acquisition and Retention metrics help the firmmonitor the effectiveness of two importantcategories of marketing spending


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Kansai Digital Phone

Objective

Assessment of different ways of using CLV to

improve decision making, including its potentialuse in classifying and analyzing options, andmeasuring and managing the value of specificdecisions

8. CLV, Retention, Acquisition

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