Customer Relationship Management: A Database Approach

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Customer Relationship ManagementA Database
Approach
MARK 7397 Spring 2007
Class 6
James D. Hess C.T. Bauer Professor of Marketing
Science 375H Melcher Hall jhess_at_uh.edu 713
743-4175
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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 customers 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

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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
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Lifetime Value metrics (Net Present Value
models)

• Multi-period evaluation of a customers value to
  the firm

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Calculation of Lifetime Value Simple Definition
CM2
CM1
Rrt
1/(1d)t
0

• where LTV lifetime value of an individual
  customer in , CM contribution margin, ?
  interest rate, Rr retention rate, so
  Rrtsurvival rate for t periods
• LTV is a measure of a single customers worth to
  the firm
• Used for pedagogical and conceptual purposes

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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 ? 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,
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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.

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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

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Recall the Cell2Cell data from last week
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CMi(67.58.595Monthsi-7.615Marriedi-.046EqpDay
si)ContribRate
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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
0.7
0.0
T
After
S-1
0.3
1.0
Pt(Pt,0,1-Pt,0) Probability that at time t
you are in the two states
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Abandonment versus Churn (continued)
Before
S0
S-1
S0
0.7
0.0
After
S-1
0.3
1.0
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.
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Abandonment versus Churn just Missing in Action
Before
S-2
S0
S-1
S0
0.7
0.1
0.0
S-1
0.3
0.0
0.0
After
0.0
0.9
S-2
1.0
If you havent bought in two periods, you are
gone, but you could appear and disappear from one
period to the next.
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Abandonment versus Churn just Missing in Action
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