Lifetime Value

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Lifetime Value
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How a modern database system works
Mail, Email, Phone
Access on the web
Updated several times per day
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Two Kinds of Database People

• Constructors
• People who build databases
• Merge/Purge, Hardware, Software
• Creators
• People who understand strategy
• Build loyalty and repeat sales
• You need both kinds!

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Retention is the way to measure loyalty
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Compared with newcomers, Long term customers

• Buy more per year
• Buy higher priced options
• Buy more often
• Are less price sensitive
• Are less costly to serve
• Are more loyal
• Have a higher lifetime value

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Retention pays better than acquisition
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Building Customer Value in four words...
Treat different customers differently
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Lifetime Value

• Net profit you will receive from the transactions
  with a given customer during the time that he/she
  continues to buy from you.
• Lifetime value is Good Will
• To compute it, you must be able to track
  customers from year to year
• Main use To evaluate strategy

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Model Assumptions

• There is only one customer segment
• Acquisition of new customers only happens in year
  1
• Lapsed customers

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Revenue Side of the Equation
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Cost Side of the Equation
Year 1 Year 2 Year 3
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Profit Side of the Equation

• Gross Profit Total Revenues Total Costs
• Discount Rate 1(i rf) n
• where n no of years to be discounted
• rf risk factor
• Net Present Value (NPV) Profit Gross Profit /
  Discount Rate
• Cumulative Profit Sum of all NPV Profit till
  current year
• Lifetime Value Cumulative Profit for the year /
  Total Number of customers N

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Profit Side of the Equation
Year 1 Year 2 Year 3
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Compare with Another Segment
Year 1 Year 2 Year 3
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Scoring Customers

• Create a customer database. Include prospects.
• All customers are not equal. Some customers are
  more equal than others.
• Use past customer behaviors to predict future
  behaviors.

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Using RFM to find best customers

• Recency, Frequency, Monetary (RFM) analysis can
  be used to categorize customers.
• Best Customers are those who
• Bought from you recently
• Buy from you frequently
• Spend a lot of money on your products and
  services.

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Recency

• Recency is the time that has elapsed since the
  customer made his most recent purchase.
• A customer who made his most recent purchase last
  month will receive a higher recency score than a
  customer who made his most recent purchase three
  years ago.
• Example of a Scoring system
• 1 Customers who made a purchase more than 9
  months ago2 Customers who made a purchase more
  than 3 months ago but fewer than 9 months ago3
  Customers who made a purchase in the last 3
  months

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Frequency

• Frequency is the total number of purchases that a
  customer has made within a designated period of
  time.
• A customer who made six purchases in the last
  three years would receive a higher frequency
  score than a customer who made one purchase in
  the last three years.
• Example of a Scoring system
• 1 Customers who made a single purchase in the
  past 12 months2 Customers who made between two
  12 purchases in the past year.3 Customers
  who made more than 12 purchases in the past year.

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Monetary

• Monetary is each customer's average purchase
  amount.
• A customer who averages a 100 purchase amount
  would receive a higher monetary score than a
  customer who averages a 20 purchase amount.
• Example of a Scoring system
• 1 Customers with an average purchase amount up
  to 15.2 Customers with an average purchase
  amount from 15 to 50.3 Customers with an
  average purchase amount greater than 50.

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Calculating RFM

• Rank customers in your database based on time
  since last purchase - Divide into 3 EQUAL groups
  with 3 being the 33 of customers who bought most
  recently
• Do the same thing again for frequency.
• Repeat the same exercise for total dollars spent.
• These three codes give us 27 different categories
  of customers ranging from 333 111.

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ANALYZE your Customers Highest Monetary Cells
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ANALYZE your Customers Lowest Monetary Cells
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Benefits of RFM Analysis (TRANSACTION or ONE-TIME
CUSTOMERS?)

• RFM Analysis can provide answers to the following
  questions
• Can I identify my best customers?
• Who do I e-mail offers to?  When do I e-mail
  them?  How often?
• Should I promote to some customers more often
  than others?  YES.
• How much incentive should I provide to get a
  customer to do something?
• How can I tell when Im losing a customer?
• Can I refine my marketing mix variables?