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University of Washington EMBA Program Regional 20

University of Washington EMBA Program Regional 20. “Lifetime Value Analysis” T.A.: Rory McLeod. Lifetime Value of a Customer.

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University of Washington EMBA Program Regional 20

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  1. University of Washington EMBA ProgramRegional 20 “Lifetime Value Analysis” T.A.: Rory McLeod

  2. Lifetime Value of a Customer • The net present value (less the cost of customer acquisition) that you will receive from transactions with a given customer during the time that you expect this customer to continue to buy from you. • Can help you make marketing strategy decisions: • If an investment increases lifetime value, do it! • If an investment decreases lifetime value, don’t! • Often the benefits of a marketing investment do not come in the first year. This does not make it a bad investment!

  3. Lifetime Value of a Customer • Sophisticated corporations today look further than NPV when trying to assess a customer or customer segments’ Lifetime Value. • In fact, a substantial portion of the customer’s “true” value to the organization can stem from referrals, network effects, and reduced service costs that are not part of “ basic” LTV calculations. • Through the use of relational databases, marketers can append to an individual’s file the value of profit from referrals. This therefore gives a truer picture of the value of a customer and gives permission to spend accordingly to protect this asset.

  4. Ways to Increase Lifetime Value • Increase the retention rate • Increase the referral rate • Increase the spending rate • Decrease the direct costs • Decrease the marketing costs

  5. What is the proper computation period? • Which is the correct lifetime value? 1, 2, 3, 4, 5 or more years? • They are all correct. Which you use depends on your product or service. • Long lifetimes: banks, insurance, utilities, automobiles • Short lifetimes: discount houses, package goods, catalogers

  6. Example: Mary Anne’s Closet • Mary Anne’s Closet is a small chain of stores offering children’s clothing to 100,000 customers. They decide to track 10,000 customers. • The following information is provided: • Retention Rate = 30% • Average customer spends $120 / year • Cost of goods sold (COGS) is 70% of revenue • Current market rate of interest is 8%. They decide to double this number to 16% to account for risk.

  7. Table 10-1. Mary Anne’s Closet

  8. The Discount Rate • A dollar today is worth more than a dollar in the future. • To convert future profits into today’s money, a discount rate is used. • The discount rate is based on the market rate of interest, plus risk. D = (1 + i)n, where i = interest rate (inc. risk) n = number of years (or periods) • To find the present value of a profit, simply divide that profit by the discount rate.

  9. Table 10-1. Mary Anne’s Closet

  10. Table 10-1. Mary Anne’s Closet 1. $360,000 + $93,103 2. (1) / 10,000 3. 3,000 * .3 4. $120 * (3) 5. 0.7 * (4) 6. (4) – (5) 7. (6) / 1.35 8. (1) + (7) 9. (8) / 10,000

  11. Mary Anne’s Closet’s Birthday Club • Mary Anne’s Closet has decided to try to increase customer lifetime value by starting a birthday club, which will include: • A 20% discount coupon for any card-carrying-customer buying a present for a child with a birthday that month • “Happy Birthday” balloons as a gift for any birthday child that comes into the store • A small gift to reward referrals • Following are revised assumptions: • Retention Rate = 50% • Referral Rate = 8% • Average customer spending rate = $150 / year

  12. Table 10-2. Mary Anne’s Closet with the Birthday Club Assumptions: 1. Assume referrals buy in Year 2. 2. $5 per customer: mailing & balloons. 3. Average of $4 discount per customer 4. No referrals in Year 1. 5. Referral rate of 8 percent times Year 1 total customers. 6. Retained customers plus referred customers.

  13. Table 10-2. Mary Anne’s Closet with the Birthday Club Assumptions: 1. Assume referrals buy in Year 2. 2. $5 per customer: mailing & balloons. 3. Average of $4 discount per customer 4. No referrals in Year 1. 5. Referral rate of 8 percent times Year 1 total customers. 6. Retained customers plus referred customers.

  14. Net Change in Customer Lifetime Value (Assume half of the store’s 100,000 customers participate.)

  15. Thank You!

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