HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
Customer Lifetime Value
Can a Customer Be Worth...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
A few years back, I was living in
the UK when m...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
I went to the store to get a
replacement.
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
I got to the store at 8:55 am to
find there was...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
I was politely but firmly told that
I had to wa...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
I tried to explain that I really
needed a phone...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
“But sir, all of these people are
ahead of you;...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
I had been a loyal customer for
many years and ...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
While the customer service rep
in the store had...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
What went wrong?
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
Egalitarian – those who believe
every customer ...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
We once consulted for a Fortune
500 B2B company...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
The sales force had just done an
analysis that ...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
But the sales force treated every
B2B customer ...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
What would happen if one of the
8% were to defe...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
A better approach is to realize
that all custom...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
Customer Profitability
Calculating the Value of...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
Companies look at their performance in
the aggr...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
A common phrase within a company is
something l...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
When customers are considered, it is
often an a...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
Although these can be useful metrics,
they some...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
Rather than measuring the “average
customer,” w...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
Customer Profitability
The difference between t...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
The overall profitability of the company
can be...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
So when we think about customers, we
need to th...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
Tier One – Reward
Your most valuable customers ...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
Tier One – Reward
Look for ways to reward them ...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
Tier Two – Grow
The customers is the middle – w...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
Tier Three – Fire
The company loses money on se...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
Tier Three – Fire
If you can recognize this gro...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
How do we calculate Customer
Profitability?
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
(Revenue from a customer)
- (Cost to serve each...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
Now doing this for every customer may
not make ...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
After you calculate the value, you sort
the cus...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
Once you have the sorted list, you plot
the per...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
Here we have a clear illustration that if they ...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
Customer Lifetime Value
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
This metric is the most advanced that
we will c...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
As a first step, most organizations often
start...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
The problem is that this does not include
the c...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
Customer Lifetime Value (CLTV)
addresses both o...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
Even if you don’t use CLTV, everyone in
marketi...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
One of the biggest mistakes marketers
make is c...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
Customer Profit measures the past while
CLTV lo...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
CLTV shapes managers’ decision but is
much more...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
Customer profit is calculated through
careful r...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
CLTV is the present value of the future
cash fl...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
CLTV – The Math
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
AC = Acquisition Cost
Mn = Margin Produced by t...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
To best understand this metric, think of
CLTV a...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
Time Period 1 Time Period 2
Time Period 3 Time ...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
So how does this work?
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
Margin is easy to calculate –
how much profit d...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
Cost, on the other hand, is a bit more
difficult
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
On the cost side, we need to understand
all tou...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
Time Period 1 Time Period 2
Time Period 3 Time ...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
Time Period 1 Time Period 2
Time Period 3 Time ...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
Time Period 1 Time Period 2
Time Period 3 Time ...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
Looks really complicated doesn’t it?
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
CLTV = Margin * Retention Rate (%)
1 + Discount...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
Let’s try an example
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
An Internet Service Provider (ISP)
charges $19....
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
Margin = $19.95
Cost = $1.50
AC = $6/12
Churn R...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
CLTV =
Margin = ($19.95 - $1.50 – 6) = $17.95
R...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
CLTV =
$17.95 * [0.995/(1 + 0.01 – 0.995)]
$17....
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
Remember – we are just taking the
profit in eac...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
Now, I am sure you are all asking 1
question –
...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
I have seen company’s calculate CLTV
over 85 ye...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
Customer Lifetime Value is not about the
life o...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
The best practice is 3 – 5 years.
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
While a customer may stay with a brand
much lon...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
Cohort & Incubate
Which Customer is More Valuab...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
One way to project the value of future
customer...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
To prove that, we go back and collect
data on a...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
The next step is to discount the cash
flows for...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
We call this the “cohort and incubate”
approach.
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
How do we calculate
Cohort & Incubate?
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
(Total Cash Flows from the Cohort)
/ (Number of...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
If the value of customer relationships is
stabl...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
An Example
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
In 1993, 6,094 customers of a cruise ship
line ...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
The total net present value of the cash
flows f...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
These flows included revenues from the
cruises ...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
The total 5-year net present value of the
cohor...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
Cohort and Incubate works best when
customers a...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
When the value of relationships changes
slowly,...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
Value Based Marketing
Marketing Based on the Va...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
Value-Based Marketing drives significant
perfor...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
An Example of Direct Mail Offers
Low to Medium ...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
An Example of Direct Mail Offers
High CLTV + Lo...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
An Example of Direct Mail Offers
Notice
Highest...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
Why do you think that is?
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
Those that have the lowest CLTV are
coming anyw...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
By focusing this single strategy on a
value-bas...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
What Makes a High-Value Customer?
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
This is one of the most important
questions to ...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
In banking, a high-value customer has a
portfol...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
To best manage this customer, you have
to ensur...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
Secondly, up-sell and cross-sell
additional pro...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
Selling bundles of services to high-value
custo...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
What is lock-in?
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
Lock in means that there is a significant
switc...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
But you need to be careful of customer
lock in ...
HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
Customer Service and Service Recovery
are extre...
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Customer Lifetime Value

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Calculating the value of a customer

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Customer Lifetime Value

  1. 1. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Customer Lifetime Value Can a Customer Be Worthless to Your Brand?
  2. 2. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED A few years back, I was living in the UK when my cell phone stopped working.
  3. 3. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED I went to the store to get a replacement.
  4. 4. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED I got to the store at 8:55 am to find there was already a long line, and when the store opened at 9, I told them that I had a flight to catch to Madrid and needed a phone.
  5. 5. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED I was politely but firmly told that I had to wait my turn and it would be 45 minutes before I could see a representative.
  6. 6. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED I tried to explain that I really needed a phone and had to leave for a flight, but was told -
  7. 7. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED “But sir, all of these people are ahead of you; they are just as important.”
  8. 8. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED I had been a loyal customer for many years and as a result of this interaction, when I got back from Madrid, I canceled my cell service, data plan and other services with the same company.
  9. 9. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED While the customer service rep in the store had given the “right” answer, the result was the loss of a high-value customer who defected to a competitor.
  10. 10. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED What went wrong?
  11. 11. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Egalitarian – those who believe every customer is equal – marketing & sales are not limited to B2C companies.
  12. 12. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED We once consulted for a Fortune 500 B2B company with a massive sales force.
  13. 13. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED The sales force had just done an analysis that showed that 8% of the company’s B2B customers were 93% of its revenues
  14. 14. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED But the sales force treated every B2B customer equally.
  15. 15. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED What would happen if one of the 8% were to defect to another company?
  16. 16. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED A better approach is to realize that all customers are not equal and develop a marketing and sales strategy grounded in this reality.
  17. 17. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Customer Profitability Calculating the Value of the Customer
  18. 18. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Companies look at their performance in the aggregate – in other words, past activity.
  19. 19. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED A common phrase within a company is something like “We had a good year, and the business units delivered $400,000 in profits.”
  20. 20. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED When customers are considered, it is often an average such as “We made a profit of $2.50 per customer.”
  21. 21. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Although these can be useful metrics, they sometimes disguise an important fact that not all customers are equal and worse yet, some are unprofitable.
  22. 22. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Rather than measuring the “average customer,” we can learn a lot by finding out what each customer contributes to our bottom line.
  23. 23. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Customer Profitability The difference between the revenues earned from and the costs associated with the customer relationship during a specified period
  24. 24. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED The overall profitability of the company can be improved by treating dissimilar customers differently.
  25. 25. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED So when we think about customers, we need to think in three different tiers
  26. 26. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Tier One – Reward Your most valuable customers are the one you most want to retain. They get more attention.
  27. 27. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Tier One – Reward Look for ways to reward them in ways other than simply lowering your price. These customers probably value what you do the most and may not be price sensitive.
  28. 28. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Tier Two – Grow The customers is the middle – with middle to low profits associated with them – might be targeted for growth.
  29. 29. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Tier Three – Fire The company loses money on servicing these people. If you cannot easily promote them to the higher tier of profitability, you should consider charging them more for the services they currently consume.
  30. 30. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Tier Three – Fire If you can recognize this group beforehand, it may be best not to acquire them in the first place.
  31. 31. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED How do we calculate Customer Profitability?
  32. 32. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED (Revenue from a customer) - (Cost to serve each customer) Profitability for the Customer
  33. 33. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Now doing this for every customer may not make sense, so you may have to abandon the notion of individual customers and work with meaningful groups of customers instead.
  34. 34. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED After you calculate the value, you sort the customers based on profits.
  35. 35. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Once you have the sorted list, you plot the percentages of total profits vs total percentage of total customers.
  36. 36. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Here we have a clear illustration that if they were no longer to serve the least profitable 20% of customers, they would be $28 million better off.
  37. 37. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Customer Lifetime Value
  38. 38. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED This metric is the most advanced that we will cover in this course and value- based marketing strategies often require industrial-strength infrastructure to achieve the strategy.
  39. 39. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED As a first step, most organizations often start by looking at plain sales revenues so that marketing effort and the sales force are directed at the customers with the most revenues.
  40. 40. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED The problem is that this does not include the cost of serving the customer, which might be considerable, and the customer’s revenues today do not accurately tell us about the value of the customer in the future.
  41. 41. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Customer Lifetime Value (CLTV) addresses both of these issues and is probably the most important metric to learn in marketing.
  42. 42. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Even if you don’t use CLTV, everyone in marketing should understand the concepts of value-based marketing.
  43. 43. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED One of the biggest mistakes marketers make is confusing customer profit with CLTV.
  44. 44. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Customer Profit measures the past while CLTV looks forward.
  45. 45. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED CLTV shapes managers’ decision but is much more difficult to quantify than customer profit.
  46. 46. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Customer profit is calculated through careful reporting and summarizing the results of past activity; CLTV involves forecasting future activity.
  47. 47. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED CLTV is the present value of the future cash flows attributed to the customer relationship.
  48. 48. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED CLTV – The Math
  49. 49. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  50. 50. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED AC = Acquisition Cost Mn = Margin Produced by the Customer in each time period Cn = Cost of marketing & serving the customer p = Probability the customer will not defect in a year N = Total number of years or time periods (1 – r) = Discount rate (because money is worth less in the future)
  51. 51. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED To best understand this metric, think of CLTV as the Net Present Value of a customer.
  52. 52. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  53. 53. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Time Period 1 Time Period 2 Time Period 3 Time Period 4 (M – C) = Margin – Cost in a Specific Time Period (Profit) x (1 – c) = Probability that the Customer Will Stay (c = Churn Rate) (1 + r) = Discount Rate (Profit in the future is worth less) Time Period0
  54. 54. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED So how does this work?
  55. 55. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Margin is easy to calculate – how much profit do you make on each product/service you sell?
  56. 56. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Cost, on the other hand, is a bit more difficult
  57. 57. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED On the cost side, we need to understand all touches of the customer with the call centers, web site, customer service, marketing communications, maintenance, and so on…
  58. 58. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Time Period 1 Time Period 2 Time Period 3 Time Period 4 The Cost of the Customer to the Company in Time Period 0 is the Acquisition Cost. Since they are not a customer yet, there are no margins or service costs – so no profits to calculate. Time Period0
  59. 59. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Time Period 1 Time Period 2 Time Period 3 Time Period 4 Once the customer becomes a customer, we start calculating their value to the company. We take the profit generated from the customer (M) and subtract it from the cost of maintaining/serving the customer (C). We multiply it by the probability of the customer leaving within a year (1 – c). Time Period0
  60. 60. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Time Period 1 Time Period 2 Time Period 3 Time Period 4 Once we have the top side of the equation, we take the amount that money will devalue over the life of the customer, or discount rate – (1 + r) Time Period0
  61. 61. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Looks really complicated doesn’t it?
  62. 62. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED CLTV = Margin * Retention Rate (%) 1 + Discount Rate – Retention Rate (%)
  63. 63. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Let’s try an example
  64. 64. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED An Internet Service Provider (ISP) charges $19.95 per month. Variable costs are about $1.50 per account per month. With marketing spending of $6 per year, their attrition is only 0.5% per month. At a monthly discount rate of 1%, what is the CLV of a customer?
  65. 65. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Margin = $19.95 Cost = $1.50 AC = $6/12 Churn Rate = 0.995% Discount Rate = 0.01
  66. 66. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED CLTV = Margin = ($19.95 - $1.50 – 6) = $17.95 Retention Rate = 0.995 Discount Rate = 0.01
  67. 67. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED CLTV = $17.95 * [0.995/(1 + 0.01 – 0.995)] $17.95 * [66.33] $1,191
  68. 68. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Remember – we are just taking the profit in each time period for the value of the money.
  69. 69. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Now, I am sure you are all asking 1 question – “What is the correct length of time to use for calculating CLTV?”
  70. 70. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED I have seen company’s calculate CLTV over 85 years – the natural “lifetime” of a customer, which is wrong.
  71. 71. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Customer Lifetime Value is not about the life of the customer, but the length of time that a customer will stay with your brand.
  72. 72. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED The best practice is 3 – 5 years.
  73. 73. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED While a customer may stay with a brand much longer than that, it is better to focus on a shorter time period for decision making so that you have reliability, not incredibility.
  74. 74. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Cohort & Incubate Which Customer is More Valuable – New or Existing?
  75. 75. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED One way to project the value of future customer cash flows is to make the assumption that the customers acquired several periods ago are no better or worse that new customers.
  76. 76. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED To prove that, we go back and collect data on a cohort of customers all acquired at the same time and break down their cash flows over specific periods.
  77. 77. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED The next step is to discount the cash flows for each customer back to the time of acquisition to calculate the CLTV and then average the CLTVs together to produce an estimate CLTV of each new customer.
  78. 78. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED We call this the “cohort and incubate” approach.
  79. 79. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED How do we calculate Cohort & Incubate?
  80. 80. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED (Total Cash Flows from the Cohort) / (Number of Customers) Average CLTV for the Cohort
  81. 81. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED If the value of customer relationships is stable across time, the average CLTV of the cohort sample is an appropriate estimator of the CLTV of newly acquired customers.
  82. 82. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED An Example
  83. 83. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED In 1993, 6,094 customers of a cruise ship line were tracked (incubated) for a period of 5 years.
  84. 84. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED The total net present value of the cash flows from these customers was $ 27,916,614.
  85. 85. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED These flows included revenues from the cruises taken (6,094 customers took 8,660 cruises over 5 years), variable cost of the cruises and promotional costs.
  86. 86. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED The total 5-year net present value of the cohort on a per customer basis was $4,581 per customer. $27,916,614/6,094 = $4,581
  87. 87. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Cohort and Incubate works best when customers are stationary – changing slowly over time.
  88. 88. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED When the value of relationships changes slowly, we can use the value of incubated past relationships as the predictive value of new relationships.
  89. 89. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Value Based Marketing Marketing Based on the Value of the Customer
  90. 90. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Value-Based Marketing drives significant performance gains and firms that bridge the marketing divide focus on customer value in all marketing activities.
  91. 91. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED
  92. 92. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED An Example of Direct Mail Offers Low to Medium CLTV + Low to Medium Response Rates are not sent a mailing From a ROMI point of view, these customers are slow on the take rate, so why waste marketing dollars here?
  93. 93. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED An Example of Direct Mail Offers High CLTV + Low Response Rates are also not sent a mailing The cost of the mailing is not justified Our focus, as marketers, must be on the medium to high CLTV + Medium to High Response Rate customers
  94. 94. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED An Example of Direct Mail Offers Notice Highest Expected Response Rate + the Highest CLTV get the 2nd most expensive offer Highest Expected Response Rate + Medium CLTV get the 3rd most expensive offer While the Lowest CLTV don’t get an offer at all
  95. 95. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Why do you think that is?
  96. 96. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Those that have the lowest CLTV are coming anyway so they get the lowest, most cost effective offer. They are coming because they value your product but don’t respond to the “offers”; so it would be a waste targeting them.
  97. 97. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED By focusing this single strategy on a value-basis, we cut our marketing costs in half – since we now focus on less than 50% of the potential customer base, but the impact is significantly higher because we are focusing on profitability.
  98. 98. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED What Makes a High-Value Customer?
  99. 99. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED This is one of the most important questions to ask your business and you may need focus groups, surveys and analysis to answer it.
  100. 100. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED In banking, a high-value customer has a portfolio of services – cash deposits, credit cards, auto loans, and perhaps a mortgage.
  101. 101. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED To best manage this customer, you have to ensure – first and foremost – that they don’t leave
  102. 102. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Secondly, up-sell and cross-sell additional products and services. Sell deep to high-value customers.
  103. 103. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Selling bundles of services to high-value customers has the advantage of creating lock-in
  104. 104. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED What is lock-in?
  105. 105. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Lock in means that there is a significant switching cost to the customer if they want to change to a competitor.
  106. 106. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED But you need to be careful of customer lock in backlash – poor service can result in negative customer satisfaction (CSAT) that results in mass defections when a competitor enters with a low-switching cost alternative.
  107. 107. HTTP://EMAGINE-GROUP.COM BRAND FOCUSED, SOCIALLY ACTIVE, DIGITALLY ENABLED Customer Service and Service Recovery are extremely important to retain high- value customers.

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