Session 1 - Gamechangers in CEM-CRM.ppt
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Customer Experience Management Customer Relationship Management
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Session 1 - Gamechangers in CEM-CRM.ppt
- 1. By – Dr. Rohita Dwivedi SESSION 1
- 2. CUSTOMER LIFETIME VALUE AND CUSTOMER EQUITY …..THE GAME CHANGERS
- 3. CUSTOMER LIFETIME VALUE • In marketing, customer lifetime value (CLV or often CLTV), lifetime customer value (LCV), or life-time value (LTV) is a prediction of the net profit attributed to the entire future relationship with a customer. • CLV is the total worth to a business of a customer over the whole period of their relationship. • Customer lifetime value can also be defined as the monetary value of a customer relationship, based on the present value of the projected future cash flows from the customer relationship • CLV is a dynamic concept, not a static model
- 4. ADVANTAGES OF CLV • Management of customer relationship as an asset • Monitoring the impact of management strategies and marketing investments on the value of customer assets • determination of the optimal level of investments in marketing and sales activities • Encourages marketers to focus on the long-term value of customers instead of investing resources in acquiring "cheap" customers with low total revenue value • Measurement of customer loyalty
- 5. A STEP-BY-STEP GUIDE TO CALCULATING CUSTOMER LIFETIME VALUE (CLV)
- 8. THE SIMPLE CLV FORMULA THE FORMULA Annual profit contribution per customer X Average number of years that they remain a customer Less the initial cost of customer acquisition WHAT INFORMATION DO WE NEED? 1. Initial cost of customer acquisition 2. Annual profit contribution per customer 3. Average customer retention rate
- 9. THE CLV CALCULATION We start with this information We need to calculate this information
- 10. CLV CALCULATION: STEP ONE Average Acquisition Cost 500 Average Customer Profit pa 1000 Customer Retention Rate 75% Customer Churn Rate 25% Average Lifetime in Years ??? Simple CLV ??? Churn rate is 1 – retention rate NOTE: Retention rate and churn (loss) rate always add to 100%
- 11. CLV CALCULATION: STEP TWO SIMPLE CLV Average Acquisition Cost 500 Average Customer Profit pa 1000 Customer Retention Rate 75% Customer Churn Rate 25% Average Lifetime in Years 4 Simple CLV ??? Average lifetime in years is 1 / churn rate That is, the number of times the churn rate goes into 100%
- 12. CLV CALCULATION: STEP THREE CLV is time/years X annual profit – acquisition cost SIMPLE CLV Average Acquisition Cost 500 Average Customer Profit pa 1000 Customer Retention Rate 75% Customer Churn Rate 25% Average Lifetime in Years 4 Simple CLV 3,500 EXAMPLE: 4 X $1,000 - $500
- 13. THE COMPLETE CLV FORMULA THE FORMULA Annual profit contribution per customer (for each year) X The customer retention rate (for each year) less The initial cost of customer acquisition With each year adjusted by an appropriate discount rate WHAT INFORMATION DO WE NEED? 1. Initial cost of customer acquisition 2. Annual revenue contribution per customer 3. Annual direct costs per customer 4. Annual customer retention rate 5. The discount rate to be used
- 14. FULL CLV CALCULATION: START COMPLETE CLV Year 0 1 2 3 4 5 Average Acquisition Cost 500 Average Customer Revenue 500 1,000 1,500 2,000 2,500 Average Customer Costs 300 600 900 1,200 1,500 Average Customer Profit ??? ??? ??? ??? ??? Customer Retention Rate 100% 60% 65% 70% 75% Cumulative Retention Rate ??? ??? ??? ??? ??? Likely Customer Profit ??? ??? ??? ??? ??? Discount Rate 1 1.10 ??? ??? ??? ??? CLV - per year ??? ??? ??? ??? ??? ??? Cumulative CLV ??? ??? ??? ??? ??? ??? We need to START with the figures in BLUE and we need to CALCULATE the figures in YELLOW Customer Lifetime Value will be in the bottom-right GOLD
- 15. FULL CLV CALCULATION: STEP ONE Average customer profit each year is simply average customer REVENUE less average customer COSTS COMPLETE CLV Year 0 1 2 3 4 5 Average Acquisition Cost 500 Average Customer Revenue 500 1,000 1,500 2,000 2,500 Average Customer Costs 300 600 900 1,200 1,500 Average Customer Profit 200 400 600 800 1,000 Customer Retention Rate 100% 60% 65% 70% 75% Cumulative Retention Rate ??? ??? ??? ??? ??? Likely Customer Profit ??? ??? ??? ??? ??? Discount Rate 1 1.10 ??? ??? ??? ??? CLV - per year ??? ??? ??? ??? ??? ??? Cumulative CLV ??? ??? ??? ??? ??? ???
- 16. FULL CLV CALCULATION: STEP TWO COMPLETE CLV Year 0 1 2 3 4 5 Average Acquisition Cost 500 Average Customer Revenue 500 1,000 1,500 2,000 2,500 Average Customer Costs 300 600 900 1,200 1,500 Average Customer Profit 200 400 600 800 1,000 Customer Retention Rate 100% 60% 65% 70% 75% Cumulative Retention Rate 100% 60% 39% 27% 20% Likely Customer Profit ??? ??? ??? ??? ??? Discount Rate 1 1.10 ??? ??? ??? ??? CLV - per year ??? ??? ??? ??? ??? ??? Cumulative CLV ??? ??? ??? ??? ??? ??? Cumulative retention rate indicates the % probability of receiving the customer’s business (revenues and costs) in future years Cumulative retention rate is the compounding effect of losing customers We start with 100% of customers and we keep 60% in year 2. In year 3 we keep 65% of those remaining, which is 65% of the 60% = 39%
- 17. FULL CLV CALCULATION: STEP THREE Likely customer profit each year = Average Customer Profit (in row 3) X Cumulative Retention Rate (% probability of the customer still buying from our firm) Example for Year 3: 600 X 39% = 234 COMPLETE CLV Year 0 1 2 3 4 5 Average Acquisition Cost 500 Average Customer Revenue 500 1,000 1,500 2,000 2,500 Average Customer Costs 300 600 900 1,200 1,500 Average Customer Profit 200 400 600 800 1,000 Customer Retention Rate 100% 60% 65% 70% 75% Cumulative Retention Rate 100% 60% 39% 27% 20% Likely Customer Profit 200 240 234 218 205 Discount Rate 1 1.10 ??? ??? ??? ??? CLV - per year ??? ??? ??? ??? ??? ??? Cumulative CLV ??? ??? ??? ??? ??? ???
- 18. FULL CLV CALCULATION: STEP FOUR Future discount rates are compounded on a yearly basis In this case, the discount rate is 10% Future years are 1.1 X 1.1 = 1.21 X 1.1 = 1.33, and so on COMPLETE CLV Year 0 1 2 3 4 5 Average Acquisition Cost 500 Average Customer Revenue 500 1,000 1,500 2,000 2,500 Average Customer Costs 300 600 900 1,200 1,500 Average Customer Profit 200 400 600 800 1,000 Customer Retention Rate 100% 60% 65% 70% 75% Cumulative Retention Rate 100% 60% 39% 27% 20% Likely Customer Profit 200 240 234 218 205 Discount Rate 1 1.10 1.21 1.33 1.46 1.61 CLV - per year ??? ??? ??? ??? ??? ??? Cumulative CLV ??? ??? ??? ??? ??? ???
- 19. FULL CLV CALCULATION: STEP FIVE Contribution to CLV on a yearly basis is the “likely customer profit” divided by the discount rate For example, in year 3: profit = 234 / 1.33 = 176 COMPLETE CLV Year 0 1 2 3 4 5 Average Acquisition Cost 500 Average Customer Revenue 500 1,000 1,500 2,000 2,500 Average Customer Costs 300 600 900 1,200 1,500 Average Customer Profit 200 400 600 800 1,000 Customer Retention Rate 100% 60% 65% 70% 75% Cumulative Retention Rate 100% 60% 39% 27% 20% Likely Customer Profit 200 240 234 218 205 Discount Rate 1 1.10 1.21 1.33 1.46 1.61 CLV - per year -500 182 198 176 149 127 Cumulative CLV ??? ??? ??? ??? ??? ???
- 20. FULL CLV CALCULATION: STEP SIX Cumulative CLV is the running total of CLV per year Our key CLV figure is in the GOLD cell = 332 COMPLETE CLV Year 0 1 2 3 4 5 Average Acquisition Cost 500 Average Customer Revenue 500 1,000 1,500 2,000 2,500 Average Customer Costs 300 600 900 1,200 1,500 Average Customer Profit 200 400 600 800 1,000 Customer Retention Rate 100% 60% 65% 70% 75% Cumulative Retention Rate 100% 60% 39% 27% 20% Likely Customer Profit 200 240 234 218 205 Discount Rate 1 1.10 1.21 1.33 1.46 1.61 CLV - per year -500 182 198 176 149 127 Cumulative CLV -500 -318 -120 56 205 332
- 21. FULL CLV CALCULATION: OUTCOMES CLV = $332 – which is a positive number – which is great This means that the 500 acquisition cost has generated good profits for the firm As a 10% discount rate has been used, the ROI on the marketing investment is MORE than a 10% return Payback on customer acquisition costs is delivered in Year 3 COMPLETE CLV Year 0 1 2 3 4 5 Average Acquisition Cost 500 Average Customer Revenue 500 1,000 1,500 2,000 2,500 Average Customer Costs 300 600 900 1,200 1,500 Average Customer Profit 200 400 600 800 1,000 Customer Retention Rate 100% 60% 65% 70% 75% Cumulative Retention Rate 100% 60% 39% 27% 20% Likely Customer Profit 200 240 234 218 205 Discount Rate 1 1.10 1.21 1.33 1.46 1.61 CLV - per year -500 182 198 176 149 127 Cumulative CLV -500 -318 -120 56 205 332
- 22. CUSTOMER EQUITY • Customer equity is the total combined customer lifetime values of all of the company's customers. • The enterprise views the value of a customer in terms of his current profitability and also with respect to the net discounted contribution stream that the enterprise could realize from the customer over time.
- 23. SHARE OF WALLET….ANOTHER GAME CHANGER
- 24. SOW • Share of wallet represents how much a consumer regularly spends on a specific brand as opposed to its competitors. • If a customer has allocated a portion of their budget to spend on a specific kind of product or service, share of wallet is the percentage of money that goes to that brand instead of its competitors.