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Customer Relationship Management: A Database Approach

MARK 7397 Spring 2007. Customer Relationship Management: A Database Approach. Class 6. James D. Hess C.T. Bauer Professor of Marketing Science 375H Melcher Hall jhess@uh.edu 713 743-4175. Past Customer Value. Computation of Customer Profitability Past Customer Value of a customer

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Customer Relationship Management: A Database Approach

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  1. MARK 7397 Spring 2007 Customer Relationship Management:A Database Approach Class 6 James D. Hess C.T. Bauer Professor of Marketing Science 375H Melcher Hall jhess@uh.edu 713 743-4175

  2. Past Customer Value • 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

  3. Jan Feb March April May = ´ Gross Contribution (GC) Purchase Amount X 0.3 $ Amount 800 50 50 30 20 GC 240 15 15 9 6 = Past Customer Value Scoring 2 3 + + + + + 6 ( 1 0 . 0125 ) 9 ( 1 0 . 0125 ) 15 ( 1 0 . 0125 ) 4 5 + + + + = 15 ( 1 0 . 0125 ) 240 ( 1 0 . 0125 ) 302.01486 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

  4. Recurring Revenues Contribution margin Recurring costs Lifetime of a customer Lifetime Profit LTV Discount rate Acquisition cost Lifetime Value metrics (Net Present Value models) • Multi-period evaluation of a customer’s value to the firm

  5. t T æ ö Rr å = ç ÷ LTV CM t + d 1 è ø = t 1 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 CM2 CM1 Rrt 1/(1+d)t 0

  6. t T t æ ö æ ö 1 å Õ = ç ÷ - ç ÷ LTV Rr CM AC ç ÷ it + d k 1 è ø è ø = = 1 t 1 k CMi Rr = - LTV AC i - + d 1 Rr LTV: Definition Accounting for Acquisition Cost and Retention Probabilities Note: many typos on page 127 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,

  7. To Calculate Customer Lifetime Value • You must be able to forecast profit contributions • You must understand the cost of marketing • You must be able to forecast retention rates of customers • (since if the customer has abandoned the firm no profits • will flow.) • It is possible that customers will “churn.” That is, they may leave • and then return later. • The contribution of a customer may be causally tied to churn and • abandonment, making this trickier than it looks. • You need to understand NPV calculations.

  8. 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

  9. Recall the Cell2Cell data from last week

  10. CMi=(67.58+.595*Monthsi-7.615*Marriedi-.046*EqpDaysi)*ContribRateCMi=(67.58+.595*Monthsi-7.615*Marriedi-.046*EqpDaysi)*ContribRate

  11. 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 Lost for Good S0 S-1 S0 0.0 0.7 = T After 0.3 1.0 S-1 Pt=(Pt,0,1-Pt,0)’ Probability that at time t you are in the two states

  12. Abandonment versus Churn (continued) Before S0 S-1 S0 0.7 0.0 After 0.3 1.0 S-1 Pt= T Pt-1 = T T Pt-2 = T T …T P0 0.7k 0.0 Tk = 1-0.7k 1.0 This is the type of calculation we did above with a retention rate of 70%. However, once gone the customer never returns.

  13. Abandonment versus Churn: just “Missing in Action” Before S-2 S0 S-1 S0 0.1 0.7 0.0 S-1 0.3 0.0 0.0 After 0.0 0.9 S-2 1.0 If you haven’t bought in two periods, you are gone, but you could appear and disappear from one period to the next.

  14. .05 .07 .52 .38 0.0 0.0 T2= T3= .16 .21 .03 .02 0.0 0.0 .27 .48 0.9 .93 1.0 1.0 Abandonment versus Churn: just “Missing in Action”

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