Customer Profitability Metrics

Customer Profitability Metrics Andrew Manuel

Metrics That Measure the Performance of Individual Customer Relationships
Customers, Recency, and Retention
Count of customers the firm serves
People or businesses buying
Customer Profit
Summarizes the past financial performance of a customer relationship
Customer Lifetime Value
Forward looking attempt to value existing customer relationships
Used to inform prospecting decisions
Prospect Value Versus Customer Value
Compares immediate sales to future cash flows from newly acquired customer relationships
Acquisition Versus Retention Spending
Monitors performance of acquisition and retention spending

Part 1: Customers, Recency, and Retention Purpose: To monitor firm performance in attracting and retaining customers

Definitions
A customer is a person or business that buys from the firm.
Customer Counts
Number of customers of a firm for a specified time period
Recency
Length of time since a customer’s last purchase
Retention Rate
Ratio of number of retained customers to number at risk

Customer Counts
Contractual situations
Count how many customers are currently under contract at any point in time
Contracts may cover two or more individuals (e.g., mobile phone contract with multiple individuals or phones)
Firm must standardize and implement consistently
Customers may have multiple contracts with a single firm
Non-contractual situations
Depends on whether individuals are identifiable
Count visits or transactions if individuals are not identifiable (e.g., retail store counts number of transactions that go through the cash registers in a day, week, or year)
Even when customers are identifiable, a complication may occur when purchase activity is sporadic (e.g., catalog customers)
Count how many customers have bought within a certain period of time

Recency
The length of time since a customer’s last purchase
For example
eBay reported 60.5M active users in Q1 2005
Active users were number of users who bid, bought, or listed an item within previous 12-month period
Active (12-month) users increased from 45.1M to 60.5M
Number of active customers increased due in part due to customer acquisition
Get percentage of the 45.1M active customers one year ago who were active the previous 12 months to measure how well the firm maintained existing customer relationships

Retention
Applies to contractual situations in which customers are either retained or not
For example
Magazine subscriptions
Checking account with a bank
Renters pay rent until they move out
Retention Rate: Ratio of the number of customers retained to the number at risk
For example
40,000 magazine subscriptions are set to expire in July
26,000 renewed retaining 65% of customers
Note that new subscribers obtained during July are not included nor customers whose subscriptions were to run out in later months
Sometimes better to measure retention in “customer time” rather than “calendar time” (e.g., what percentage of customers surviving for three years retained throughout year four)

Source
Farris, Paul W., Bendle, Neil T., Pfeifer, Phillip E., and David J. Reibstein (2006). Marketing Metrics: 50+ Metrics Every Executive Should Master , New Jersey: Wharton School Publishing

Customer Profitability Metrics

by Andrew Manuel on Dec 31, 2010

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Customer Profitability Metrics — Presentation Transcript

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